Understanding FDI: What it means for India?
Foreign Direct Investment or FDI is any investment made by a foreign country in the domestic assets such as companies, organizations, buildings and factories. It provides foreign capital, funds, expertise and job opportunities to the host nation.
FDI flows to developing countries stood at $354 billion in 2009. UNCTAD’s FDI prediction for 2011 is between $1.3 trillion and $1.5 trillion. India not Happy about FDI:Foreign Direct Investment into India totaled only $23.7 billion during 2010-11 (according to UNCTAD). India is not much enthusiastic about FDI investments. At present, the country only allows 100% FDI in single-brand retail trade like Fendi, Jimmy Choo etc.
It was also reluctant to FDI in multi-brand retailers like Wal Mart, Carrefour etc. until recently. Currently, the government has allowed a 51% FDI in this sector.
India fears such FDIs could harm the domestic economy rather than uplift it. The main argument against multi-brand retailers is that it could destroy small retailers and manufacturers. Experts predict about 4 crore people will lose their employment once FDI in retail sector is allowed. Benefiting from FDI
Those who support FDI claim that the country which accepts FDI will benefit economically; increased job opportunities, higher standards of living and better infra structure are some of the positive that flows from FDI. A visible impact of FDI on the growing economy is that it gets a quick supply of money.
To back their claim they site the example of “The Asian Tiger” economies such as China, South Korea, Singapore and the Philippines that benefited from FDI in to their economy. In the case of China FDI has really been a better step for improving the
it is estimated that Indian will soon be the source of outward FDI to other countries. Outward FDI by Indian companies was $43 billion in 2010-2011.
Furthermore. And that result in transfer of strategic assets.
Companies look for optimizing the available opportunities and economies. Auto.e. Some of the tax benefits or concessions like low corporate tax and income tax rates could invariably boost the company’s profit.6 billion in 2010 (according to UNCTAD). Big retail companies will find direct purchasing profitable thus farmers will get a better deal for their products.
Though the inward FDI is showing a decline in India. This form of FDI aims at improving the overall efficiency. Some of them enjoy free land for setting up company and easy loans for renovations. Different Types of FDI
. the investing company could get hold on special economic zones and enjoy special tariffs.economy. Most of the outward investments are in the areas where India is successful i. IT. Consumers also stands to gain as prices will go down due to direct purchase and competition. This resource seeking FDIs eventually makes huge profit by moving their entire production line to the new country.
There are positives that India can benefit from by more FDI flows. telecom to name a few. They could gather financial subsidies to improve the working environment. Chinese economy has welcomed FDI since 1970 and the investment rose to a whopping $274.
A company that goes for Foreign Direct Investment could possibly enjoy many incentives in the new country. Why Companies Opt to Invest in Foreign Countries?
Companies go for FDI looking for cheaper resources and better operational benefits for production. Farmers tend to get higher prices for their products by direct purchase by these retail houses. Middlemen are notorious for keeping the prices given to farmers low.
A few others happen by enrolling in an equity joint venture with other investors or companies.There are generally two types of FDI. outward FDI and inward FDI.These two forms account for the net FDI of the country.
When the MNCs kick off similar business operations in different countries it becomes horizontal Foreign Direct Investment. It is actually a cloning that is happening here. It could be either positive or negative. Both the countries enjoy the same share of growth.
The FDIs are categorized into vertical and horizontal based on how the subsidiary company works in par with the parent investor. The subsidiary here helps the parent company to grow more. Overall the aim of these is to grab a quick 10% voting power. Both inward and outward FDIs are regulated by the governments of respective countries. An investment made by a country can be regarded as FDI is the company acquires 10% of the voting shares of the domestic company.
Government Imposes Riders on FDI
. Where as. all the FDIs invested by other countries in that country is called inward FDI. How FDI is done?
A foreign country may carry out FDI in different ways depending on the requirement.
Some companies go for a merger or acquisition of a completely different company. Any investment made by a country in other countries will account for outward FDI. Or it could be done by acquiring majority of shares of an associated company.
This could be achieved by incorporating an existing subsidiary or a wholly owned company. The local enterprise could either be supplying the input or selling finished goods to the parent corporation.
Vertical FDIs happen when a corporation owns some share of the foreign enterprise.
jointventure. The decision by the government to allow FDI into the retail sector brought sharp criticism from the opposition. Till the meantime we can only hope this decision will generate jobs and find alternatives employment opportunities for those who have lost because of this.
However the government has subjected foreign companies to some restrictions to protect the neighborhood stores.
The impact of these policies will take time to show. and short-term capital as shown in the balance of payments.other long-term capital. FDI is one example of international factor movement. resulting in a net FDI inflow (positive or negative) and "stock of foreign direct investment".
A foreign direct investor may be classified in any sector of the economy and could be any one of the following:
. transfer of technology and expertise. The question of losing jobs and break down of small business is a sensitive issue and needs to be addressed.India is divided when it comes to the question of FDI in retail. It is the sum of equity capital. These include a minimum investment of $100 million of which 50% investment done in back-end infrastructure. )
Foreign direct investment (FDI) or foreign investment refers to the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. the companies can set up shop only in cities with a population of 1 million. There are two types of FDI: inward foreign direct investment and outward foreign direct investment. Direct investment excludes investment through purchase of shares.
(A detailed review of the growth of FDI in India can be found at Department Of Industrial Policy & Promotion website. The companies must also procure 30% of materials from small domestic industries. which is the cumulative number for a given period. It usually involves participation in management. In addition.
trust or other social institution. an estate (law).an individual. a government body.
Foreign direct investment incentives may take the following forms: low corporate tax and income tax rates tax holidays other types of tax concessions preferential tariffs special economic zones EPZ – Export Processing Zones Bonded Warehouses Maquiladoras
.  Methods
The foreign direct investor may acquire voting power of an enterprise in an economy through any of the following methods: by incorporating a wholly owned subsidiary or company by acquiring shares in an associated enterprise through a merger or an acquisition of an unrelated enterprise participating in an equity joint venture with another investor or enterprise. a group of related individuals.. a group of related enterprises. a public company or private company. or any combination of the above. an incorporated or unincorporated entity..
partly as a result of hectic lobbying by some loss-making players such as Kingfisher Airlines and GoAir.122 billion and in 2009 was $1. foreign carriers such as British Airways.investment financial subsidies soft loan or loan guarantees free land or land subsidies relocation & expatriation subsidies job training & employment subsidies infrastructure subsidies R&D support derogation from regulations (usually for very large projects)  Global foreign direct investment
The United Nations Conference on Trade and Development said that there was no significant growth of Global FDI in 2010.
At present. although financial and other non-airline investors can invest up to 49% in Indian airlines. handing out a possible lifeline to cash-strapped airlines. Singapore Airlines and Emirates are banned from directly pumping money into the aviation sector. In 2010 was $1. There is no difference between 26% and 49% because the rights of the
"We may further relax our stance on allowing foreign carriers to invest in Indian airlines. NEW DELHI: The civil aviation ministry is likely to drop its opposition to higher investment by foreign airlines in the aviation sector and agree to let them hold up to 49% in domestic carriers. After first saying global carriers should not be allowed to hold beyond 24%. the ministry had relented to allow them to pick up to 26% stake. The figure was 25 percent below the pre-crisis average between 2005 to 2007. but had relaxed its opposition.
The aviation ministry had traditionally been opposed to allowing international airlines to invest in local carriers.114 billion.
"Given the financial state of the industry. and after the recent debacle on the retail front. raising concerns about loan repayment defaults.shareholders remain the same at these two different levels of shareholding. and rising nonperforming assets (NPAs) for banks. a higher foreign investment ceiling permits the Indian company to access more funds without any dilution of its rights. with most domestic airlines registering huge losses in the first half of the current financial year and industry association Assocham estimating total losses of the industry for the whole year at as high as Rs 15. if the civil aviation ministry recommends 49%.
Cabinet to Take Final Call
Access to funds is a critical issue for the aviation industry." said Kapil Kaul. The cumulative debt of the industry has risen to Rs 70.
The official added that new Civil Aviation Minister Ajit Singh was of the view that international carriers could be allowed to hold more than 26%." said a senior civil aviation ministry official. an important tool to exercise influence over key corporate decisions. we will impose some restrictions. it remains to be seen whether the government will have the appetite or the inclination to pitch for another set of liberal FDI norms. it should be strongly welcomed.000 crore. an aviation consulting firm. the South Asia CEO of the Centre for Asia Pacific Aviation.000 crore. on condition of anonymity.
But the final decision to allow foreign airlines to invest in local carriers will be taken by the cabinet. But while the rights of the investor do not change unless its shareholding crosses 50%. and was likely to give a clear direction in this regard.
The Department of Industrial Policy and Promotion had in an inter-ministerial note last October proposed that international carriers be allowed to hold a 26% stake in
. albeit in a different sector. But if we do allow 49%.
An investor with 26% and more stake in a company has the power to veto special resolutions of the company.
we will be able to take some of the things forward." he said here. with some tweaking after the Assembly elections.. Prime Minister Manmohan Singh today expressed confidence that "temporary problems" would be overcome. NEW DELHI: Against the backdrop of stiff opposition by Trinamool Congress to various key issues..local airlines." Basu said in an interview. the Working Group on Civil Aviation (WGCA) comprising secretaries of various ministries recommended that the FDI limit be imposed at 49%.
The Assembly elections are scheduled to be held in five states of Uttar Pradesh. said Chief Economic Adviser Kaushik Basu..
He said the government has to go slow on reforms programme because of political compulsion. Uttarakhand. "Life would not be worth living if it were not beset with one problem or the other. Singh said." he said. including FDI in retail. "It is a coalition government and you have to carry a body of opinion. Punjab.Once the rush of politics is over and then with some tweaking.
"The elections are now around the corner. We are a large country with great complexity and great diversity." His statement assumes sigificance as the stiff opposition by Trinamool Congress has led the government to put on hold the decision to allow FDI in retail and scuttled attempts to pass the Lokpal Bill in Rajya Sab NEW DELHI: The government will be able to move ahead with the economic reforms programme. it is basically responsiveness to opinion across the board in the country.
"We have our problems but I am confident that if we have the will and determination... He was responding when asked at a joint press interaction with Trinidad and Tobago Prime Minister Kamla Persad-Bissessar whether the UPA government's development agenda was being affected as its coalition partners appeared to create problems. Goa and Manipur between January 30 and March 3. Recently.
Turning philosophical. we will overcome these temporary problems.
in the Winter Session because of resistance from Trinamool Congress and Opposition parties.The government had to put on hold the Cabinet decision to allow 51 per cent foreign direct investment (FDI) in multi-brand retail due to stiff opposition of UPA ally Trinamool Congress and Opposition parties. to put to rest the prevailing notion about a 'policy paralysis' in certain sections.
The government was keen to introduce a slew of economic reform Bills in the Winter session of Parliament which ended last week.
Earlier even Finance Minister Pranab Mukherjee had said that the FDI in retail was very much on the government's reform agenda and it will try to build a consensus on the issue.
The Department of Industrial Policy and Promotion (DIPP) has already started wider consultations with stakeholders and the Consumer Affairs Ministry is also working to bring all consumer organisations on board. it failed to push the key legislation like PFRDA and Companies Bill.