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FOREIGN DIRECT INVESTMENT IN INDIA-A GLOBAL PERSPECTIVE Foreign Direct Investment is any form of investment that earns interest

in enterprises which function outside the domestic territory of the investor. Foreign Direct Investment can be classified into Outward- bound FDI. This is backed by the government against all types of associated risk. This form of FDI is subject to tax incentives and as well as disincentives of various forms. Inward FDI is encouraged by interest loans, tax breaks, grants, subsidies and the removal of restrictions and limitations. Foreign Direct Investment is guided by different motives. i) FDIs that are undertaken to strengthen the existing market structure or explore the opportunities of the new markets can be calledarketseeking FDIs. ii) FDIs that are aimed at factors of production which have more operational efficiency than those available in the home country of the investor are known as Resource-seeking FDIs. Determinants of FDI One of the most important determinants of FDI is the size and the growth prospects of the country in which FDI is proposed to be made. A bigger market is assumed to grow more quickly from the economic point of view. Population also plays an important role in attracting FDI as the investors are lured by huge customer base. If the people have good

spending capabilities, it can help the investors with a wider scope of excellent performance. Quality of labor is another important determinant of FDI. For example, China has made it compulsory for every citizen to receive at least nine years of education. This enhances the standard of the laborers in China. Inexpensive labor force is also an important determinant of FDI. World class IT education, coupled with cheap labour,paved the way for BPO revolution and boon in IT companies in India. Infrastructure facilities and availability of natural resources also play a vital role in attracting FDI. Above all, investor-friendly economic policy of a country encourages FDI to a greater extent. Historical Background of FDI in India. Banking sector attracted the first ever FDI way back in 1786, which brought into existence The General Bank of India, being the first banking organization in India. India has sought to increase FDI with a much liberal policy since 1991.British Airways(BA) and General Electric(GE)were the first to avail the opportunity of liberalized FDI policy and moved their IT and back-office operations to India. These multinationals trained thousands of local workers and successfully transferred their skills to their business operations. This sent positive signals to the world at large that India is a reliable and credible offshoring destination. As a result, FDI in India started growing rapidly.

Foreign Direct Investment in India permits the following forms of investments. Through financial collaborations. Through joint ventures and technical collaborations. Through Capital Markets. Through private placements or preferential allotments. A private placement (non-public offering) is funding of securities and its sale to a few buyers, usually institutional, in large amounts, without registering with Securities and Exchange Commission. Foreign Direct Investment is not permitted in the following sectors. Arms and ammunition Atomic Energy Railway Transport Coal and Lignite, Mining of iron, manganese, gypsum, sulphur, gold, diamonds, copper and zinc. FDI-Budgetary Support 2010-2011 The total retail market in India is estimated to be $350 billion and likely to reach $573 billion by 2012-13. The organized retail industry accounts for 5.5% of total retail industry and expected to reach 10% by 2012-13.India currently allows 51% FDI in single- brand retail, but none in multi-brand.

Present scenario of FDI in India. FDI in India declined by 25% to in January 2010, though there was positive growth in the previous three months. The FDI inflow in January 2010 was $ 2.04 billion. A comparative statement of FDI January 2009 December 2008 November 2008 $ 2.73 billion $1.36 billion $1.08 billion January 2010 December 2009 November 2009 $ 2.04 billion $ 1.54 billion $1.74 billion

The overall FDI inflows in 2008-09 amounted to $ 27.3 billion, but, received only $ 22.96 billion from April- January 2009-10.At the end of the fiscal, the overall inflow will be less than that of last year, with no specific reason attached to such decline. It may not be possible to reach the expected flow of $30 billion. The major sectors that attracted FDI during this fiscal include: Services- $3.54 billion Computer hardware and software-$595 million Telecommunicatio-2.36 billion Construction and Real estate-5.6 billion A survey by the global service office business, Regus, indicate that Indias corporate recovery has surpassed international recovery. An estimated 45% of Indian firms increased profits last year compared to global average of 40%.Among India-based business that experienced a decrease in revenue, 56% of them expect revenue rise in 2010. The survey also states that the recovery of US and Germany are likely to witness economic recovery by August 2011, UK by September, Australia, Belgium and Canada in June 2011.

The chief executives of the companies in India tend to postpone the investment decisions in the current economic climate as the economic turnaround is not expected to happen to its full potential even in 2010-11. Government of India is taking all initiatives to attract FDI. In February 2009, it announced the historical amendment in the regulatory measures of FDI. The amendment focuses on the most sensitive sectors, such as, retail, banking, telecommunication, media, aviation, defense and insurance. For instance, the FDI cap in telecommunication is no longer 74% but a whopping 98 %. FDI up to 100% is allowed in all sectors and activities except for a few such as gambling and betting, lotteries, atomic energy, multi-brand retail, real estate trading and agriculture. FDI in the banking sector has been liberalized by raising FDI limit in private sector banks to 74 per cent under automatic root including investment by foreign investment in India. The aggregate foreign investment in a private bank from all sources will be 74 per cent of paid-up capital of the bank. The primary source of FDI finance is borrowings in Japanese Yen where the interest rates have been low for the past decade. Money has also originated from the US with interest at near- zero rates. The near-zero interest rate in the US may not remain at that level, but, the interest rate in Japan is likely to remain at zero level. Hence, there is not going to be any cash crunch affecting FDI inflow into India. The FDI into India is routed through countries that offer tax exemptions or those that have signed Double Tax avoidance agreement with India. Reports reveal that 43% of money is routed through Mauritius, with which, India

continues to have cordial relationship. India being a Non-aligned nation, it does not have any political rival who can maneuver and stop flow of investment in the country. In India, FDI is focused on industries which are recession-resistant. Primarily, most of the FDIs were used for establishing Business Process Outsourcing (BPO) units. During recession, the loss of revenue in the BPO units was marginal and kept the investments in BPO reasonably active. The number of job losses, during recession, in India was lesser compared to other countries. This is in contrast to FDI in China, where most of the investments were made in manufacturing sector which resulted in excess capacity during recession and many units had to be shut down. FDI has also contributed for the development of rural population. The telecom sector, the third highest receiver of FDI in India, has expanded its operation in rural areas and has improved the life of farmers by improving the communication net-work. Further, 3.5% of the FDI was diverted to setting up of Agro-services, Food Processing Industries, Fermentation Industries, Agricultural Machinery, etc. However, the FDI investment to agricultural sector needs more attention of policy makers. Recently, the Union cabinet cleared the Foreign Educational

Institutions(regulation of entry and operation)Bill.The Bill is expected to be introduced in Parliament after the budget session. If cleared, this would widen the definition of FDI in higher education and would bring revolutionary changes in the field of education. The Atlanta- based Georgia Tech University has already acquired 250 acres of land in Hyderabad showing signs of the Bill being cleared without any serious obstacle. Many

top-ranking foreign universities, like Yale University, have welcomed this move by Government of India. FDI in India a global view. In 2010-11, India will be pushed to the THIRD place, in terms of favorable destination for Foreign Direct Investment. USA will retake its second position, which, it lost to India in 2005. China, as usual, wil be the top-ranking destination for FDI. India, Brazil and Germany, along with China and the USA will remain at the top five positions with strong investors confidence index. Reasonable performance of the corporate sector in India and a positive GDP growth of 6-7% in the current fiscal, notwithstanding the global recession, is a positive signal to the foreign investor. At present, the foreign investors, who have survived the wrath of economic crisis at home and are still looking for avenues of investment, view India as a safe haven for investment .This is because of the fact that like China, India too has a huge domestic market driven by domestic demand and consumption, which can ensure safety and profitability of their investment. Indian retail market has 300 million middle-class customers and it grows at the rate of 12% every year. There has been a considerable increase in their surplus income too. Indian retail market, which is the fifth largest retail destination globally, has been ranked the most attractive destination for FDI, by global investors. India could have attracted more FDI but for the global perception of it being the most corrupt county Transparency International (TI) has rated India with its Corrupt Perception Index(CPI)score of 3.4 on a scale of 0-10.

Concluding Remark It is a well known fact that the Indian economy is FDI-driven. The world at large, after experiencing the worst phase of the recession in the past two years, has come to a conclusion that India, a knowledge based economy, tend to move forward with utmost care and caution .As revealed by survey reports that the investors confidence about investment in India ranks three, is an encouraging result. Though, currently, there may be decline in FDI in the backdrop of post-recovery scenario, there is no reason for any decline in FDI in India at least for a decade to come.

Paper presented by: Dr.Charles Suresh David Head, Department of Commerce Madras Christian College Tambaram