Foreign direct investment in india

FOREIGN DIRECT INVESTMENT IN INDIA

-Mayank rajgor

- Krunal zaveri

FOREIGN DIRECT INVESTMENT

A Foreign direct investment (FDI) is a controlling

ownership in a business enterprise in one country

by an entity based in another country.

It is direct investment of company in production

located in another country either by buying a

company in the country or by expanding operations

of an existing business in the country.

WHY FDI ?!?

To take advantages of cheaper wages in the

country.

Special investment privilege such as tax

exemptions offered by the country.

To gain tariff-free access to the markets of the

country or the region.

TYPES OF FDI

Horizontal FDI arises when a firm duplicates its

home country-based activities at the same value

chain stage in a host country through FDI.

Platform FDI Foreign direct investment from a

source country into a destination country for the

purpose of exporting to a third country.

Vertical FDI takes place when a firm through FDI

moves upstream or downstream in different value

chains i.e., when firms perform value-adding

activities stage by stage in a vertical fashion in a

host country.

REGULATED BY

Reserve bank of india

FIPB ( foreign investment promotion board) of the

department of commerce under ministry of finance.

ADVANTAGES AND DISADVANTAGES

Inflow of equipment and technology.

competitive advantage and innovation.

Financial resources for expansion.

Employment generation.

Contribution to exports to growth.

Improved consumer welfare through reduced cost, wider choice & improved quality.

Crowding of local industry.

Conflicts of laws.

Loss of control.

Effect on natural

environment.

Effect on local culture.

Advantages Disadvantages

FDI IN INDIA

Foreign investment was introduced in 1991 under Foreign Exchange Management Act (FEMA), driven by then finance minister Manmohan Singh.

India is not a country but a real subcontinent: 22 official languages, 28 states (and seven territorial unions), more than five religions … there is a great diversity that makes the country complex to understand.

Economically, India is an attractive country with a GDP of 1946.77 billion dollars in 2013, and ranks among the top three of the Asian power after China and Japan, and eighth in the world.

The country has recorded strong growth the last ten years, thanks to the liberalization of its economy in 1991, even if it begins to decline (5.3% in 2011 against 8-10% in the 2000s).

WHY DO WE NEED IT

We are second highest producer of fruits and

vegetables in the world but still we are not able to

utilize it properly because of inadequate

infrastructure facilities.

It will reduce pre-harvest wastage and thus helps to

control the food inflation.

It will create 1.5 million jobs in five years and the

huge no. of indirect employment also.

It will remove middleman from the equation. It will

reduce cost which turns to reduce prices.

…

Foreign investments are allowed to detain 100% of the capital in some sectors such as IT services, automotive industry, hospitality …This helped to boost the country by creating jobs, develop infrastructure and to foreign companies to benefit: the Indian labor quality and at a lower cost, access to an unlimited resources (50% of the population is under 25 years).

However, FDI is limited in other sectors such as in the retail market, where the company has sometimes no other choice than to associate with an Indian partner to enter in the market.

Today India is at the 14th position in the world ranking of FDI receiving countries.By its population, the country attracted many investors but the crisis has slowed it. Cases of corruption and “political paralysis” have also contributed to the decline until 2011. But FDI started to increase in 2013 thanks to the measures taken by the government (retail sector).

SOURCE: OFFICE OF THE ECONOMIC ADVISOR, DIPP.

NOTE: TOTAL EXCLUDES INFLOWS TO THE SERVICES SECTOR AND OTHER NON-RESIDENT INDIAN (NRI) SCHEMES.

*INCLUDES NON-CONVENTIONAL ENERGY

During April-November 2012-13, FDI inflow (including equity

inflows, reinvested earnings and other capital) was US$ 24.65

billion. FDI equity inflows were US$ 15.85 billion showing a

decline of 43 percent as compared to the corresponding

period of the previous year.

Cumulative FDI inflow from April 2000 to November 2012

stood at US$ 277.86 billion.

During April-October 2012, services, hotels and tourism,

metallurgical industries, automobile industry, construction,

drugs and pharmaceuticals, industrial machinery were the

sectors that attracted maximum FDI inflows.

The United Nations Conference on Trade and Development

(UNCTAD) World Investment Report, 2012 in its analysis of

the global trends and sustained growth of FDI inflows

continues to report India as the third most attractive location

for 2012-14.

SOURCE: OFFICE OF THE ECONOMIC ADVISOR, DIPP.

NOTE: TOTAL EXCLUDES INFLOWS TO THE SERVICES SECTOR AND OTHER NON-RESIDENT INDIAN (NRI) SCHEMES.

*INCLUDES NON-CONVENTIONAL ENERGY

The finance ministry said India received $19.52 billion in FDI

from 1999 to 2004. This increased to $114.55 billion in the

period between 2004 and 2009 and climbed another $172.82

billion by September last year.

According to the report, FDI flowing into India rose 17% to $28

billion in 2013. But the country’s ranking based on the FDI

received during the year slipped one notch to 16th position.

China retained its rank and number two, bagging a far higher

$127 billion in FDI during the year.

THE TOP FDI COUNTRIES IN INDIA

…

Mauritius is the country that invests the more in India (38%),

mainly in the oil, telecommunications or electric sectors. The

United States formerly invested heavily in the

country, especially in the service sector (call centers, data

entry …) but it decreases in favor of others emerging

countries such as Philippines or Vietnam.

Thus India is facing the same situation as China a few years

ago, when foreign investors relocated their activities in

countries where the labor is cheaper. Indeed FDI allowed

China to grow massively and increase the standard of living of

the population (through higher wages).

India is rivaled by the Asia Pacific countries, especially in the

service sector and IT.

However, the services sector still represents the 1st sector of

FDI (2012),

FDI IN DIFFERENT SECTOR

FDI IN DIFFERENT SECTOR

Sector/Activity

Before the proposal After the proposal

% of FDI /Equity Entry Route % of FDI / Equity Entry Route

Defence Sector 26% Government Route 49%

Higher limits of foreign

investment in "stateof-the-

art" manufacturing would be

considered by the CCS

Insurance Sector 26% Automatic Route 49% Automatic Route

Telecom Services 74%

Automatic up to 49%

Government route

beyond 49% and up to

74%

100%

Automatic up to 49%

Government route beyond

49% and up to 100%

Tea Plantation 100% Government Route 100%

Automatic up to 49%

Government route beyond

49% and up to 100%

Asset Reconstruction Company74% of paid-up capital of

ARC (FDI+FII)Government Route 100%

Automatic up to 49%

Government route beyond 49%

and up to 100%

Petroleum & Natural Gas 49% Government Route 49% Automatic Route

Commodity Exchanges

49% (FDI & FII) +

[Investment by Registered

FII under Portfolio

Investment Scheme (PIS)

will be limited to 23% and

Investment under FDI

Scheme limited to 26% ]

Government Route (For

FDI)49% Automatic Route

Power Exchanges

49% (FDI &FII) FDI limit of

26 per cent and an FII limit

of 23 per cent of the

paidup capital

Government Route (For

FDI)49% Automatic Route

Stock Exchanges/

ClearingCorporations

49% (FDI &FII) FDI limit

of 26 per cent and an

FII limit of 23 per cent

of the paid-up capital

Government Route(For

FDI)49% Automatic Route

Credit Information Companies 49% (FDI & FII) Government Route 74% Automatic Route

Courier Services 100% Government Route 100% Automatic Route

Single Brand product retail trading 100% Government Route 100%

Automatic up to 49%

Government route beyond

49% and up to 100%

FDI is prohibited under the Government Route as well as the Automatic Route in the following sectors:

i) Atomic Energy

ii) Lottery Business

iii) Gambling and Betting

iv) Business of Chit Fund

v) Nidhi Company

vi) Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled conditions and services related to agro and allied sectors) and Plantations activities (other than Tea Plantations) (c.f. Notification No. FEMA 94/2003-RB dated June 18, 2003).

vii) Housing and Real Estate business (except development of townships, construction of residential/commercial premises, roads or bridges to the extent specified in Notification No. FEMA 136/2005-RB dated July 19, 2005).

viii) Trading in Transferable Development Rights (TDRs).

ix) Manufacture of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes.

…

Despite the competition, investors still have confidence in India by its expertise and its strong system, which inspired the Filipinos.India has thus gradually open to foreign investors since 1991.Unlike the sectors of IT, hospitality, energy or pharmaceutical, many sectors are limited to India:– Insurance Sector: allowed to detain 26% of the capital by foreigners– Banking: 49%– Military: banned

So many companies wanting to establish themselves in India has to alliance with a local firm to enter in the country.It may well include:– The joint venture between Wal-Mart and Bharti,– The alliance between Renault and Mahindra in 2005 at the entrance of the French company in India for the production and the commercialization of the Logan (although the automotive sector is open at 100%).

Recently (end of 2012) the airport (100%) and retail sectors are open to foreign investors. This has led to numerous protests in the country, including farmers and owners of small shops.

The economic liberalisation in India refers to ongoing economic reforms in India that started on 24 July 1991. After Independence in 1947, India adhered to socialist policies. Attempts were made to liberalize economy in 1966 and 1985. The first attempt was reversed in 1967. Thereafter, a stronger version of socialism was adopted. Second major attempt was in 1985 by Prime Minister Rajiv Gandhi. The process came to a halt in 1987, though 1966 style reversal did not take place. In 1991, after India faced a balance of payments crisis, it had to pledge 20 tons of gold to Union Bank of Switzerland and 47 tons to Bank of England as part of a bailout deal with the International Monetary Fund (IMF). In addition, the IMF required India to undertake a series of structural economic reforms. As a result of this requirement, the government of P. V. Narasimha Raoand his finance minister Manmohan Singh (currently the Prime Minister of India) started breakthrough reforms, although they did not implement many of the reforms the IMF wanted. The new neo-liberal policies included opening for international trade and investment, deregulation, initiation of privatization, tax reforms, and inflation-controlling measures. The overall direction of liberalisation has since remained the same, irrespective of the ruling party, although no party has yet tried to take on powerful lobbies such as the trade unions and farmers, or contentious issues such as reforming labour laws and reducing agricultural subsidies.Thus, unlike the reforms of 1966 and 1985 that were carried out by the majority Congress governments, the reforms of 1991 carried out by a minority government proved sustainable.

SOURCES : MINISTRY OF FINANCE , GOVERNMENT OF INDIA

FDI IN UNION BUDGET 2014

Senior government officials told TOI that the department of industrial policy and promotion, which had proposed a graded regime in regime that allowed 74% FDI if a foreign investor transferred technology and 100% for state-of-the-art equipment is now willing to lower the bar a little. So, a fresh plan that seeks to increase the ceiling from 26% to 49% for cases without transfer of technology and 51% with technology transfer is being discussed.

The dilution in stance follows defence ministry's reluctance for a ceiling beyond 49%, a position which is also held by several large Indian corporate houses such as Larsen & Toubro and Bharat Forge. L&T has gone public with its stance against allowing foreign investors to hold over 49% in Indian defenceventures.

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