7 pradeep kr research communication may 2011

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VSRD-IJBMR, Vol. 1 (3), 2011, 185-196

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1Reseearch Scholar, MBA Department, Singhania University, Jaipur, Rajasthan, INDIA.*Correspondence : [email protected]

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FDI in India andIts Impact A Critical Evaluation

1Pradeep Kr.*

ABSTRACT

Foreign Direct investment in India is a crucial factor for the economic growth. The pre economic liberalization

period was challenge for the Indian economy to grow because there were many constraints to overcome. The

draconian act like FERA causes many companies to withdraw from the India market. Even for the giants like

Coca Cola were not able to survive in the market, as the economy was isolated. But the post liberalization periodwas very fruitful for the India economy to head with a swift pace. Now India is moving along very nicely with

around 9% GDP rate. In this research paper the trend of FDI equity inflow from 1991 to 2010 has been analyzed

and the future trend has been depicted. The areas where equity inflow was more been emphasized also the major

countries which invested in India heavily have been undermined. Further in this research paper sectors which

are deprived from the FDI are also been discovered as follows:

Atomic Energy

Gambling and betting

Retail Trading

Lottery Business

Agricultural or plantation activities of Agriculture

India foreign investment policy makers need to look back and access the impact of FDI on India and on its

economic growth. In this connection it seems that government has become more aware and making investment

friendly atmosphere in India with adopting new models like Public Private Participation model etc.

Keywords:FDI, GDP, Territorial Marketing, Tariff, M&A, Foreign Affiliate.


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Pradeep Kr. et. al/ VSRD International Journal of Business & Management Research Vol. 1 (3), 2011

Page 186 of 196

1. INTRODUCTION

When a firm controls (or have a strong say in) another firm located abroad, e.g. by owing more than 10% of its

equity, the former is said "parent enterprise" (or "investor") and the latter "foreign affiliate".

Foreign Direct Investment (FDI) is the financial investment giving rise and sustaining over time the investor'ssignificant degree of influence on the management of the affiliate.

The initial investment can be the purchase of an existing firm (by acquisition or by merger, the so-called

"M&A") as well as the foundation of a new legal entity who usually - but not necessarily - makes a green-field

real investment (e.g. building a factory) in the foreign country .

In a broader definition, FDI consists of the acquisition or creation of assets (e.g. firm equity, land, houses, oil-

drilling rigs...) undertaken by foreigners. If in these enterprises they are not alone but act together with local

firms and/or governments, one talk of "joint ventures".

A country outflows of FDI means that it is "exporting money" to "buy" or "build" foreign productive capacity,

whose ownership will remain in the first country's hands.

For a country, attracting an inflow of FDI strengthen the connection to world trade networks and finance its

development path. However, unilateral massive FDI to a country can make it dependent on the external pressure

that foreign owners might exert on it.

Since it is through FDI that a firm becomes a multinational, one could say that the it's the FDI process that

generates MNC (multinational companies). The reverse is also true: firms that are already multinational generate

the majority of FDI flows.

2. KEY FACTORS ATTRACTING FDI

Inflow of Foreign Direct Investments increases with the attractiveness of the country, due to the following

factors in different proportions depending on the industry and the country:

large GDP and market potential;

advanced know-how;

skilled work-force;

low labour cost and wages;

low taxation;

lower environmental protection;

high tariff protection;

favourable laws and public incentives;


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Intentional and professional territorial marketing.

3. DETERMINANTS

At investor's level, a firm can decide to make a foreign investment because of many factors, including:

Upstream integration, by purchasing a provider, whose input will now be sold cheaper (or exclusively) to

it or be differentiated along particular features;

Horizontal integration, by purchasing a firm making the same product, to expand its production, reduce

costs, improving logistics;

Downstream integration, by purchasing a firm using or distributing its products, to get higher value added

along the chain and to aggressively push distribution;

Diversification, by purchasing a firm doing somewhat different activities than the purchaser, to seize new

opportunities.

4. VARIOUS ROUTES OF FDI APPROVAL IN INDIA

The proposals for foreign direct investment in India get their approval through two routes that are the Reserve

Bank of India and the Foreign Investment Promotion Board. Automatic approval is given by the Reserve Bank

of India to the proposals for foreign direct investment in India. The Reserve Bank of India gives approval within

the time period of two weeks. It gives approval to the proposals for foreign direct investment in India that

involve FDI up to 74% in the nine categories that are included in List four, FDI up to 50% in the three

categories that are included in List two, and FDI up to 51% in the forty eight industries that are included in List

3.

FDI Approval in India is also done by the Foreign Investment Promotion Board (FIPB), which processes cases

of non- automatic approval. The time taken by Foreign Investment Promotion Board for approving the proposals

for foreign direct investment in India is between four to six weeks. The approach of FIPB is liberal as a result of

which it accepts most of the proposals and rejects very few.

The Policy on FDI in India has been most liberal and transparent among all other developing countries,

receiving FDI Inflows for economic development. India receives up to 100 percent Foreign Direct Investments

under the automatic route in almost all the activities and industrial sectors except those which require

Government approval for the execution of activities.

5. FDI POLICY UNDER AUTOMATIC ROUTE

Sectors working under automatic route do not require any prior approval of the Central Government of RBI to

attract Foreign Direct Investment. The foreign investors are only required to inform the Regional Office

concerned of RBI within thirty days receiving of inward payments and submit the required documents in that

office again within thirty days of the issuing of the shares of foreign institutional investors.


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6. FDI POLICY UNDER GOVERNMENT APPROVAL

The proposals which involve foreign investment or foreign technical collaboration are granted permission by the

Foreign Investment Promotion Board (FIPB). All the proposals for FDI are to be submitted to the FIPB Unit and

those of Non-Resident Indian (NRI) investments and 100% Export Oriented Units (EOUs) should be submitted

to SIA in Department of Industrial Policy and Promotion.

7. OBJECTIVE OF THE RESEARCH

To determine the trend of FDI in India for the coming years.

To determine the critical factors contributed in Increase FDI Flow in India.

To analyze the sectors attracting FDI mostly.

8. RESEARCH DESIGN

This research design is based on historical data collected from various sources which can be regarded as

secondary data further this research has been divided into various part to maintain its clarity. Many statistical

tools have been used for concrete analysis of data and their interpretation in this research which are as follows:

1. Average

Sum of observation / Number of observation

2. Least Square Method for trend analysis

Y = a + bx

y = na + bx

xy = ax + bx2

3. Tables

4. Bar Charts

5. Line Charts

6. Correlation

9. DATA ANALYSIS & INTERPRETATION

Top Investing Countries FDI Inflows in India has registered significant growth over the last few years due to the

several incentives that have been provided by the Indian government. The increase in the Top Investing

Countries FDI Inflows in India has helped in the growth of the country's economy.

Countries sending FDI to India are:

Mauritius


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U.K

U.S.A

Sweden

France

Switzerland

Malaysia

Singapore

Japan

Germany

Netherlands

Sectors in India attracting FDI from foreign countries are:

Telecommunications that includes services of cellular mobile, radio paging, and basic telephone

Chemicals

Metallurgical industries

Food processing industries

Transportation industry

Pharmaceuticals and drugs

Fuels

Electrical equipments that includes electronics and computer software

Services sector that includes non- financial and financial

Gypsum and cement products

Table 1 : Showing FDI Equity Inflow from 1991-2010 Year by Year

PeriodEquity Inflow in

Millions $

1991-1992 165


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1992-1993 393

1993-1994 654

1994-1995 1374

1995-1996 2141

1996-1997 2770

1997-1998 3682

1998-1999 3083

1999-2000 2439

2000-2001 2908

2001-2002 4222

2002-2003 3134

2003-2004 2776

2004-2005 2549

2005-2006 5,546

2006-2007 6,081

2007-2008 9,277

2008-2009 18,708

2009-2010 17,604


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Interpretation : This graph shows FDI equity inflow from 1991 to 2010 year by year. It indicate that the equity

inflow in 1991 was very nominal it increases slightly from thereafter to 1997 then it started declining and again

its started increasing in the year 2001 and again decreases until 2003 from there it started increasing

exponentially towards the end.

Ranks Country

Cumulative Inflows in Rs Crore

(April 00 - October 10)

%age to total Inflows

(In terms of US $)

1 MAURITIUS 231,429 42 %

2 SINGAPORE 50,962 9 %

3 U.S.A. 41,357 7 %

4 U.K. 27,569 5 %

5 NETHERLAND 23,614 4 %

6 CYPRUS 19,734 4 %

7 JAPAN 19,547 4 %

8 GERMANY 12,848 2 %

9 FRANCE 8,404 2 %

10 U.A.E. 8,256 1 %

TOTAL FDI INFLOWS * 549,491 -

SHARE OF TOP INVESTING COUNTRIES FDI EQUITY INFLOWS (Financial years)

FDI Equity Inflow From 1991 to Oct, 2010

0

5000

10000

15000

20000

1991-

1992

1993-

1994

1995-

1996

1997-

1998

1999-

2000

2001-

2002

2003-

2004

2005-

2006

2007-

2008

2009-

2010

Period

Series1


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Graph Showing Cumulative inflow in Rs Crores and % age to total Inflows (In terms of US $)

by Top Ten Countrys from April 2000-October2010

Interpretation : From the graph it is pretty clear that Mauritius, Singapore ,USA & UK are the top Countrys

investing heavily India Therefore we can say that most of the western Countrys are investing in INDIA but the

Eastern countrys like China, Russia etc are not much interested which is the worrying factor for India.

This also represent the share of the investing countrys in terms of the percentage from which it is very

transparent that top two Countrys share are equal to the share of the rest of the countrys in aggregate which

reflect more precise analysis.

SECTORS ATTRACTING HIGHEST FDI EQUITY INFLOWS: Amount ` in crores (US$ in millions)

Ranks Sector

Cumulative Inflows

(April 00 -

October 10)

% age to total Inflows (In

terms of US$)

1. SERVICES SECTOR

(financial & non-financial)

115,162 21 %

2. COMPUTER SOFTWARE & HARDWARE 46,371 9 %

3. TELECOMMUNICATIONS

(radio paging, cellular mobile, basic

telephone services)

45,530 8 %

4. HOUSING & REAL ESTATE 40,664 7 %

5. CONSTRUCTION ACTIVITIES

(including roads & highways)

38,932 7 %

6. POWER 25,402 5 %

7. AUTOMOBILE INDUSTRY 22,786 4 %

8. METALLURGICAL INDUSTRIES 17,660 3 %


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9. PETROLEUM & NATURAL GAS 13,925

10. CHEMICALS (other than fertilizers) 12,223 3 %

Graph Showing the share of sectors attracting largest FDI inflow in terms ofRs crore from April 2000-October 2010

Interpretation : From the analysis it is clear that the major share goes to the service sector which is

accompanied by hardware & software industry as well as telecommunication industry. It also represent that the

most booming sector of Indian economy where the job opportunities are also available in abundance.

The worrying factor for the India is following

Atomic Energy

Gambling and betting

Retail Trading

Lottery Business

Agricultural or plantation activities of Agriculture

Where the investment from the investors is quite low.

Trend Analysis of FDI Inflow in India in Next Decade as well as Next five years

Table 2 projected inflow from 2011-2014

Period Inflow in Millions $

2001-2002 4222

2002-2003 3134

2003-2004 2776


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2004-2005 2549

2005-2006 5546

2006-2007 6081

2007-2008 9277

2008-2009 18708

2009-2010 17604

2010-2011 17498.33

2011-2012 19444.73

2012-2013 21391.13

2013-2014 23337.53

Note: (Equity inflows + including data on Re-invested earnings & Other capital, which is available from

April 2000 onwards. These are the estimates on an average basis, based upon data for the previous two years,

published by RBI in their Monthly Bulletin).

0

5000

10000

15000

20000

25000

FD

IInflowinMillion$

Period

Projected Equity Inflow in Next four year

Seri

Interpretation : This graph characterizes that the equity inflow decreases from 2001-2005 then it start

increasing from there up to 2009-10 near 2008 to 2010 there was a sharp increment due to heavy inflow. It is

expected to increase in same manner as it was if same condition persists.

It is pretty clear from the analysis is that the future is also very clear for these sectors because these sector are

mostly preferred by the investors to invest in. But there must be some policy initiatives in this regard to manage


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overall growth.

Sectors in India Prohibited For FDI :

Sectors which require industrial license for execution of activities

Proposals by the foreign players who already possess a financial or technical collaboration firm in the

similar field in India

Proposals regulated by Securities and Exchange Board of India for acquisition of shares in an already

existent Indian company in the financial service sector

Proposals which are not included or which do not abide by the recommended sectoral policy or CAPS

under sectors in which Foreign Direct Investment is not permitted

Sectors which are not under automatic route and in which investments in those sectors require prior

approval of Central Government, the approvals for proposals are granted by Foreign Investment Promotion

Board (FIPB)

10.FINDINGS

India is one of the most favorable investment destinations to invest in.

Due to open market condition & post liberalization reforms it is attracting foreign investors.

Both UPA and NDA regime were fruitful for the Indian Economy as there was sharp increment in FDI due

to their market friendly policies which attracted the investors.

Some sectors of the economies are deprived from the investment like Defense, Atomic Energy, retail,

Agriculture there some kind of reforms are required in this regard.

More liberal policies for the investors like increasing FDI cap, demand and supply based exchange rate and

reduction of tariff and decreasing tax attracted most of the investors.

The most dominated area attracting FDI is the service sector so this may be a competitive edge for the

country.

Sectors which are deprived from the FDI are those where large market potential is present but these are

ignored by the policy makers & poor infrastructure as well as due to high concentration on priority sectors

also contributed to the cause.

11.CONCLUSION

From this research we have concluded that India is one of the greatest investing destinations for the investors as

more and more investors are investing in India. The equity inflow is increasing tremendously due to high GDPgrowth, low man power cost, abundance of resources and favorable investment policies of the government.


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India has been the second biggest and fastest growing economy in the world. During the recessionary pressure

the GDP continuous to grow because of equity influx, because the exposure of Indian economy for the world

was very less so it will remain a favorite destination for investment in future also.

12.REFERENCES[1] RBIs Bulletin December 2010 dt. 09.12 .2010 (Table No. 44 FOREIGN INVESTMENT INFLOWS).

[2] Figures for equity capital of unincorporated bodies for 2009-10 are estimates.

[3] All figures are provisional & data in respect of Re-invested earnings & Other capital for the years 2008-

09 & 2009-10 are estimated as average of previous two years.

[4] During December 2006, include Swap of Shares US$ 3.1 billion.

[5] Monthly data on components of FDI as per expend coverage are not available.

[6] RBI has included the amount of US$ 92 million for the month of April 2007 during this Bulletin.

[7] Data on equity capital of unincorporated bodies, reinvested earnings and other capital are pertains to the

period from April 2009 to December 2009.

[8] Updated by RBI up to October 2010.

[9] U.S. Reforms Promote Openness Retrieved on 2010-03-10

[10]Foreign Direct Investment Facts and Myths Retrieved on 2010-03-10

[11]Benefits of FDI The International Trade Administration. Retrieved on 2010-03-10

[12]FDI inflows plunge by about 60% in August Economic Times (India Times) 2010-10-22

[13]Ministry of Commerce Annual Report

[14]Piana Valentino,foreign Direct Investment ,(2005)

7 pradeep kr research communication may 2011

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