Role of FDI in India

GLS UNIVERSITYFACULTY OF COMMERCE

PROJECTB-COM(SEM-4)

INTERNATIONAL TRADETOPIC

ROLE OF FDI IN INDIA.

Foreign direct investment refers to , ‘ investment in a foreign country where the foreign investor control over the investment. It typically takes the form of starting a

subsidiary, acquiring a stake in the existing firm or start a joint venture in the foreign country. Direct investment and management of the firm concerned normally go

together.Foreign direct investment can play a very important role in rapid economic

development of developing countries like India.

What is FDI ?

Equity Capital It is the value of the multinational corporations(MNCs) invested in shares of an enterprise in a foreign country. An equity capital stake of 10% or more of the ordinary shares or voting power in a incorporated enterprise or its equivalent in an unincorporated enterprise is normally considered a threshold for the control of assets. This category includes both mergers & acquisitions, and green field investment. Reinvested Earnings These are the MNCs share of affiliate earnings not disturbed as dividends or remitted to the MNCs. Such retained profits by affiliates are assumed to be reinvested in the affiliate. Other CapitalIt refers to short-term or long-term borrowings and lending's of funds between MNCs & affiliate.

Categories of FDI

Market Seeking These are attracted by the size of the local market which depends on the income of the country and its growth rate. Efficiency Seeking In developing countries where capital is relatively scarce the marginal efficiency of capital tends to be higher than in the developed world where it is abundant. Assuming that interest rates broadly reflect marginal efficiency of capital(MEC), it follows that lending rates in western financial centers are below MECs in developing countries. Hence economic efficiency & commercial logic dictate that capital should flow from relatively less profitable developed worlds to relatively more profitable developing countries. Other location Advantages These include the technological status of a country, brand name and goodwill enjoyed by local firms , openness of the economy , trade and macro policies pursued by the govt. and the intellectual property protection granted by the govt. MNCs have become a major carriers of foreign capital and technical know-how.

Types of FDI

FOREIGN DIRECT INVESTMENT IN INDIAThere are two ways by which India gets FDI :-

1) Automatic Route :- By this route FDI is allowed without prior approval by government and RBI.

2) Government Route :- By this route prior approval of government is necessary.

GOVT. INITATIVEs

Government of India has amended its FDI policy and made it more investment friendly.

In 2014 govt. increased FDI upper limit from 26 % to 49% in insurance sector.

FDI inflow in India increased by 48% since the launch of “Make in India ” Initiative.

In 2015 India became top destination for FDI.

India has replaced China as top destination for FDI by attracting $ 63 billion.

India was the highest ranked country by capital investment in 2015.

Also there where 8 % increase in project numbers to 697.

India’s greenfield investment tripled.

In 2015, India was for the first time the leading country in the world for FDI, overtaking the US (which had $59.6 billion of greenfield FDI ) and china ($56.6 billion).

According to DIPP (Department of industrial policy and promotion) FDI in INDIA during April-September 2016 raise 30% an year to us $ 21.6 billion.

INDIA has moved up to 16 position to rank 55 on global index of the worlds most competitive economy.

Indicating governments efforts towards opening vast sectors , it is also a success of India's policy initiative.

on top 10 destination state for FDI in 2015, India claim five places ,with the top place going to Gujarat , which attracted $12.4 billion . Maharashtra has been one of the strong performer across the years attracting $8.4 billion , respectively in 2015.

The Make in India campaign and the resultant boost in FDI has resulted in a whopping increase in FDI job creation from 1.16 lakh new job in 2013 to 2.25 lakh in 2015 – the highest number in the world.

Investment in the sectors which are not under the automatic route requires FIPB (Foreign investment promotion board) approval. Currently 98% FDI into India comes through automatic route.

India is emerging as a key destination for renewable energy projects, helped by a wider government policy of incentives , infrastructure and programmes designed to attract investment. Success breeds success and to attract high volume of FDI, location need to create the condition for strong economic growth and development to take place.

Report is based on a survey of more then 1700 executives in 45 top countries that was conducted by EY’s economists intelligence unit (EIU) in Aug. & sept. Along with the facts on official govt. website.

FDI INFLOW IN INDIA

GDP GROWTH IN INDIA

Impact investments in India is expected to grow at a compound annual growth rate (CAGR) of 20-24 per cent to touch US$ 6-8 billion by 2025, from US$ 1 billion in 2015.

Source :- IBEF –(Indian brand equity foundation.)

40%

32%

19%

10%

Top 4 Investing Countries in India (2016)

Mauritius

Singapore

Japan

USA

Sectors FDI Limit Route

Agriculture & Animal Husbandry. 100% AutomaticPlantation Sector 100% AutomaticMining 100% AutomaticMining (coal & Lignite) 100% AutomaticMining (Mining & minerals separation of titanium bearing minerals & ores , its value addition & integrated activities)

100%  Government

Petroleum & Natural Gas 100% AutomaticPetroleum & Natural Gas(Petroleum refining by the public sector undertaking (PSU), without any disinvestment or dilution of domestic equity in the existing PSUs.

49% Automatic

Defense Manufacturing 100% Automatic up to 49% & Above 49% under govt. route in cases resulting in access to modern technology in the country.

Broadcasting 100% AutomaticWhite label ATM operations 100% AutomaticNon-Banking Financial companies(NBFC) 100% Automatic Pharmaceuticals (Green Field) 100% Automatic Pharmaceuticals (Brown Field) 100% Automatic up to 74% Above 74% under Govt. route.Food products manufactured or produced in India 100% GovernmentCivil Aviation 100% Automatic Construction Development(Township, housing build-up infrastructure)

100% Automatic

Satellite (ISRO) 100% GovernmentTelecom services 100% Automatic up to 49% Above 49% under Govt. route.Duty free shops 100% AutomaticRailway Infrastructure 100% AutomaticAssets Reconstruction 100% AutomaticCIC-(credit information companies) 100% AutomaticInsurance -Insurance company-Insurance Brokers -Third Party Admin.-surveyors &Loss Assessors-other Insurance Intermediaries  

49%

Automatic

Indian Sectors / FDI Limit & Route

Note:- Data is taken from the official govt. website (DIPP) / It does not include all sectors.

Prohibited Sectors

• Lottery business including government/private lottery ,online lotteries , etc.

• Gambling and betting including casinos etc.

• Chit funds.

• Nidhi company.

• Trading in transferable development rights(TDRs)

• Real Estate business or construction of farm houses (It does not include development of townships, construction of residential/commercial premises , roads or bridges)

• Manufacturing of cigars, cheroots ,cigarillos , of tobacco or of tobacco substitutes.

• Activities / sectors not open to private sector investment e.g. :- Atomic energy & railway operations (other than permitted activities)

Benefits of FDI with the retreat of socialism ,MNCs have become a powerful force in the world

economy. Potential benefits that a developing country can hope to get from MNCs operations.

  Impact Area Potential Benefits 1. Capital Provision of scare capital resources

Internally generated Externally generated (privileged access to global capital

markets).2. Technology Provision for sophisticated technology and

other technology not available in the host country.

3. Exports and balance of payments

Access to superior global distribution of marketing systems. MNCs may increase exports and

create positive balance of payment effects.

4. Diversification MNCs command technology and skills required for diversification of the industrial base and for creation of backward and forward linkages.

• Foreign direct investment helps in raising the level of investment in the country and acts as a supplement to domestic savings.

• It helps in generating new avenues of employment and income , thereby increase the country’s exports through new line of production.

• FDI brings with it technical , managerial , & administrative skills and thereby helps in modernizing the industrial sector.

• FDI removes the lack of entrepreneurship and helps in utilizing the untapped resources.

• FDI brings new techniques of production , new ideas , new thinking , and various types of innovation.

• FDI possesses vast experience of the global standards and through an appropriate and aggressive marketing strategy.

• Helps in accelerating the rate of capital formation in the recipient country.• FDI facilitates transfer of technology to the recipient country and brings ‘Marginal Revolution’

through professional management and the use of highly sophisticated management techniques.• FDI leads to increase competition and brakes the hold of domestic monopolies.• FDI shifts the burden of risk of an investment from domestic to foreign investor. • FDI increase the GDP growth.

Points of Criticism

  Impact Area Potential Benefits

1. Capital Insignificant net flow, Large dividend remittances. Large technical payments. Progressive fall of foreign participation in

corporate capital formation.

2. Technology Costly ‘over-import’. Problem with advance technology and

updating problems. Problem with technical support.

3. Export and balance of payments

Export performance at par with domestic companies.

Higher import propensity than domestic companies.

Some import substitution but negative BDP effects.

4. Diversification Preemption of growth opportunities & substitution of domestic capital in several promisive areas,

Increased foreign influence in key sectors.

Experience with MNCs have been a unmixed blessing.

• FDI tends to flow towards high profit areas rather then towards the priority sector. • Imported technology may not be suitable or adjust the local conditions , which will result

in wastage of resources and time along it will also hamper the development of indigenous technology.

• It will increase the dependence on the foreign technology.

• FDI will reduce the competition.

• Large scale drain of wealth by the way of royalty, dividend , profit, repartition etc. And it will have a deleterious effect in the balance of payment of the country.

• Sometimes the investors indulge in unfair & unethical trade practices beside interfering in the national politics of the country.

• Through their manpower , the MNCs try to evade and undermine the economic autonomy and control of the concerned authorities. It will be prejudicial to the national interest of the country.

Factors Influencing Foreign Direct Investment

Political stability.

Government economic policy.

Industrial and trade policy.

Cost of production.

Behavioral pattern of the rate of interest.

Speculation.

Bibliography

Microsoft powerpoint 2013. Source :- Official Govt. website. Internet for pictures and extra information. Magazines & Newspapers. Survey from EIU & IBEF. Make In India

Note :- Best viewed in Power point 2013 version.

NAME ROLL.NOJayesh sharma 15757Ishan sharma 15755Herik varneshiya 15882Kunal varneshiya 15881Harshvardhan sharma 15754Ajay Ranwani 15920

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