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CHAPTER - 3

FOREIGN DIRECT INVESTMENT IN INDIA:

CONCEPT, REGULATORY FRAMEWORK AND GROWTH

3.1 INTRODUCTION:

India is considered as the largest democracy in the world. It is ranked

as the 4th largest economy and the 10th industrialized country world-

wide. Since the beginning of the economic reforms in India, major reform

initiatives took place in the fields of investment international trade,

financial sector and amendments in the intellectual property rights laws etc.

Many studies in the recent times have revealed the growing

importance and attractiveness of India towards international investment.

[(Goldman Sachs (2007), Kearney A.T.(2007) and World Investment

Report (2007)] .

3.2 CONCEPT OF FDI:

Foreign Direct Investment has two facets as explained by different

theories. One of the facets is the macro view or international finance and

the other is micro view or industrial organization. The macro view terms

FDI as the flow of capital across the nations, from home countries to host

country, measured in Balance of Payment (BoP) Statistics. The micro

view tries to explain the motivations for investment in controlled foreign

operations from investor point of view.

3.2.1 Inclusion of ADR/GDR under FDI:

According to Balance of Payment Manual fifth edition (BPM5), foreign

portfolio investment includes, in addition to equity securities and debt

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securities in the form of bonds and notes, money market instruments

and financial derivatives such as options. Equity securities cover all

instruments and records acknowledging, after the claims of all creditors

have been met, claims to the residual values of incorporated enterprises.

Shares, stocks, participation, or similar documents – such as ADRs –

usually denote ownership of equity.

Following the above definition, notwithstanding the treatment of

ADR/GDR as FDI under FEMA, RBI publishes ADRs/GDRs as portfolio

investment but Department of Industrial Policy and Promotion (DIPP)

treats this as FDI (Sudershan K,2007)

3.2.2 Balance of Payments Effect:

At a conceptual level, it is important to recognize that the flow of FDI

in terms of reinvested earnings has no effect on the total balance of

payment position. The amount recorded under reinvested earnings

included in the capital account has a contra entry under the investment

income in the current account. It means that depending on

inflow/outflow in the capital account there will be an offsetting entry in

the current account. For example, if the reinvested earnings recorded an

inflow under capital account, it will be an outflow under the current

account and vice versa.

3.2.3 Grants:

At present the grants given by the parent company to the subsidiaries

in India do not get reported under FC-GPR. However, this should form

part of FDI, as it is a financial assistance from the parent company to its

Indian subsidiary without any repayment obligation.

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3.2.4 Investments In Unincorporated Entity:

It may be noted that more and more unincorporated entities are

getting registered. In unincorporated entities like branches, project

offices, liaison offices, etc.substantial foreign interest is involved. But the

data on this category are not captured in the present FDI data.

3.2.5 Foreign Currency Convertible Bonds:

In India as per the present practice, foreign currency convertible

bonds are included in FDI only when it is converted into equity.

Otherwise an FCCB is treated as European Convertible Bonds(ECB).

3.2.6 Control Premium, Non-Competition Fee:

The reporting format for FDI prescribed under FEMA 1999 by RBI

does not capture control premium / non-competition fee, etc. paid by the

foreigner and as a result the FDI data is underestimated to that extent.

3.3 FDI DEFINITIONS: FDI is the process whereby residents of one country (the home

country) acquire ownership of assets for the purpose of controlling the

production, distribution and other activities of a firm in another country

(the host country).

‘FDI’ means investment by non-resident entity/person resident

outside India in the capital of the Indian company under Schedule 1 of

FEMA(Transfer or Issue of Security by a Person Resident Outside India)

Regulations 2000. (Para 2.1.12 of FDI Policy 2010)

3.3.1 IMF BoP and International Investment Position Manual(BPM6):

According to the Balance of Payments and International Investment

Position Manual, Sixth Edition (BPM6) of the International Monetary

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Fund (IMF), Foreign Direct Investment (FDI) is a ‘type of cross-border

investment which is associated with a resident in one country having

control or a significant degree of influence on the management of an

enterprise that is resident in another country.’ Further, in case of FDI,

the investor’s purpose is to gain an effective voice in the management of

the enterprise. Some degree of equity ownership is almost always

considered to be associated with an effective voice in the management of

an enterprise; the BPM6 suggests that ‘immediate direct investment

relationships arise when a direct investor directly owns equity that

entitles it to 10 per cent or more of the voting power in the direct

investment enterprise.’

3.3.2 IMF BPM5:

According to the fifth edition of the IMF’s Balance of Payments Manual

(BPM5), foreign direct investment is the category of international

investment that reflects the objective of obtaining a lasting interest by a

resident entity in one economy in an enterprise resident in another

economy. The lasting interest implies the existence of a long-term

relationship between the direct investor and the enterprise and a

significant degree of influence by the investor on the management of the

enterprise.

3.3.3 UNCTAD Definition:

The World Investment Report 2002 (WIR02),UNCTAD defines FDI as

‘an investment involving a long-term relationship and reflecting a lasting

interest and control by a resident entity in one economy (foreign direct

investor or parent enterprise) in an enterprise resident in an economy

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other than that of the FDI enterprise, affiliate enterprise or foreign

affiliate. FDI implies that the investor exerts a significant degree of

influence on the management of the enterprise resident in the other

economy. Such investment involves both the initial transaction between

the two entities and all subsequent transactions between them and

among foreign affiliates, both incorporated and unincorporated.

Flows of Foreign Direct Investment comprises of capital provided (

directly or through other related enterprises) by a foreign direct investor

to an FDI enterprise, or capital received from an FDI enterprise by a

foreign direct investor. FDI has three components, viz., equity capital,

reinvested earnings and intra-company loans.

• Equity capital is the foreign direct investor’s purchase of share of an

enterprise in a country other than its own.

• Reinvested earnings comprise the direct investors’ share (in proportion

to direct equity participation) of earnings not distributed as dividends

by affiliates, or earnings not remitted to the direct investor. Such

retained profits by affiliates are reinvested.

• Intra-company loans or intra-company debt transactions refer to

short- or long-term borrowing and lending of funds between direct

investors (parent enterprises) and affiliate enterprises.

3.3.4 OECD Benchmark Definition of FDI, 4th Edition:

Foreign direct investment reflects the objective of establishing a

lasting interest by a resident enterprise in one economy (direct investor)

in an enterprise (direct investment enterprise) that is resident in an

economy other than that of the direct investor. The lasting interest

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implies to the existence of a long-term relationship between the direct

investor and the direct investment enterprise and a significant degree of

influence on the management of the enterprise. The direct or indirect

ownership of 10% or more of the voting power (in general ordinary shares

are the same as voting power. However, there may be instances that the

voting power is not represented by ordinary shares. In such cases,

compilers must determine the voting power.) of an enterprise resident in

one economy by an investor resident in another economy is evidence of

such a relationship (OECD, April 2008).

Some compilers may argue that in some cases an ownership of as

little as 10% of the voting power may not lead to the exercise of any

significant influence while on the other hand, an investor may own less

than 10% but have an effective voice in the management. Nevertheless,

the recommended methodology does not allow any qualification of the

10% threshold and recommends its strict application to ensure statistical

consistency across countries.

a. Foreign Direct Investor :

A foreign direct investor is an entity (an institutional unit) resident in

one economy that has acquired, either directly or indirectly, at least 10%

of the voting power of a corporation (enterprise), or equivalent for an

unincorporated enterprise, resident in another economy. A direct investor

could be classified to any sector of the economy and could be any of the

following:

i. an individual;

ii. a group of related individuals;

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iii. an incorporated or unincorporated enterprise;

iv. a public or private enterprise;

v. a group of related enterprises;

vi. a government body;

vii. an estate, trust or other societal organisation; or

viii. any combination of the above.

In the case where two enterprises each own 10% or more of each

other‘s voting power, each is a direct investor in the other.

b. Foreign Direct Investment Enterprise

A direct investment enterprise is an enterprise resident in one

economy and in which an investor resident in another economy owns,

either directly or indirectly 10% or more of its voting power if it is

incorporated or the equivalent for an unincorporated enterprise.

The numerical threshold of ownership of 10% of the voting power

determines the existence of a direct investment relationship between the

direct investor and the direct investment enterprise. An ownership of at

least 10% of the voting power of the enterprise is regarded as the

necessary evidence that the investor has sufficient influence to have an

effective voice in its management. In contrast to some other statistical

measures such as those on the Activities of MNEs, direct investment does

not require control by the investor (i.e. more than 50% owned by the

investor and/or its related enterprises). Direct investors may have direct

investment enterprises in one economy or in several economies.

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3.3.5 OECD Benchmark Definition of FDI (Third Edition):

FDI reflects the objective of obtaining a lasting interest by a resident

entity in one economy (direct investor) in an entity resident in an

economy other than that of the investor (direct investment enterprise).

The lasting interest implies the existence of a long-term relationship

between the direct investor and the enterprise and a significant degree of

influence on the management of the enterprise. Direct investment

involves both the initial transaction between the two entities and all

subsequent capital transactions between them and among affiliated

enterprises, both incorporated and unincorporated.

As is evident from the above definitions, there is a large degree of

commonality between the IMF, UNCTAD and OECD definitions of FDI.

Since the IMF definition is followed internationally, the Reserve Bank of

India (RBI) is in favor of following the IMF definition.

3.3.6 Standard Statistical Requirements (IMF, UNCTAD and OECD)

Countries are expected to compile and disseminate FDI data according to

the standard components of balance of payments (BoP). These

components are

(a) Direct investment income: It is divided into two categories i.e, Income

on equity and income on debt.

(b) Direct investment transactions: They are sub-classified into Equity,

Reinvested earnings, Other capital (inter-company transactions) and

Financial derivatives.

Equity capital is the foreign direct investors’ purchase of shares of an

enterprise in a country other than its own. Equity capital comprises

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equity in branches, all shares in subsidiaries and associates (except

nonparticipating, preferred shares that are treated as debt securities and

included under direct investment in other capital category) and other

capital contributions.

Reinvested earnings comprise the direct investors’ share (in

proportion to direct equity participation) of earnings not distributed as

dividends by affiliates or earnings not remitted to the direct investor.

Such retained profits by affiliates are reinvested. Because undistributed

(reinvested) earnings result in additions to direct investors’ equity in

subsidiaries and branches, these earnings are included as direct

investment capital transactions in amounts equal to the corresponding

entries recorded under direct investment income.

Other capital covers the borrowing and lending of funds, including

debt securities and suppliers’ credits between direct investors and

subsidiaries, branches and associates.

(c) Direct investment position: This data is also divided into four categories

such as equity capital, reinvested earnings, other capital and financial

derivatives.

3.4 FDI ENTRY ROUTES AND CAPS

The entry routes for FDI inflows in India and the entry CAPS are

discussed below:

3.4.1 Entry Routes for FDI Inflows

Foreign Direct Investment in India is subject to policy guidelines

framed by the Government of India from time to time in accordance with

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its Industrial Policy through either of the two routes; the Automatic

Route and the Government Route. Under the Automatic Route, the

foreign investor or the Indian company does not require any approval

from the RBI or Government of India for the investment. Under the

Government Route, prior approval of the Government of India through

Foreign Investment Promotion Board (FIPB) is required. Proposals for

foreign investment under Government route as laid down in the FDI

policy from time to time, are considered by the Foreign Investment

Promotion Board (FIPB) in Department of Economic Affairs (DEA),

Ministry of Finance.

The year 1991 saw a major liberalisation in the policy by way of the

Automatic Route in terms of which cases concerning foreign collaboration

in respect of certain priority industries and involving not exceeding fifty

one percent of foreign equity were allowed by the RBI without a reference

to the Government of India. After 1991, certain more areas of foreign

investments were opened up such as issuance of global depository

receipts (GDRs) and investment by foreign institutional investors (FIIs).

FDI comes through

A. Automatic Route

FDI in sectors/activities to the extent permitted under automatic

route does not require any approval before investment by the

Government and RBI. The investors are only required to notify the

Regional office concerned of RBI within 30 days of receipt of inward

remittances and file the required documents with that office within 30

days of issue of shares to foreign investors.

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B. Govt. Route (Approvals by SIA/FIPB)

FDI in activities not covered under the automatic route according to

FDI Policy, requires prior Government approval. Such proposals are

considered by the Foreign Investment Promotion Board (FIPB).

The following approval levels shall operate for proposals involving FDI

under the Government route i.e. requiring prior Government approval:

� The Minister of Finance who is in-charge of FIPB would consider the

recommendations of FIPB on proposals with total foreign equity inflow

of and below Rs.1200 crore.

� The recommendations of FIPB on proposals with total foreign equity

inflow of more than Rs.1200 crore would be placed for consideration

of Cabinet Committee on Economic Affairs (CCEA). The FIPB

Secretariat in DEA will process the recommendations of FIPB to obtain

the approval of Minister of Finance and CCEA.

� The CCEA would also consider the proposals which may be referred to

it by the FIPB/ the Minister of Finance (in-charge of FIPB).

3.4.2 Foreign Investment Promotion Board (FIPB):

The Foreign Investment Promotion Board is especially empowered to

engage in purposive negotiation and also consider proposals in

completely free from predetermined parameters on procedures.

• FIPB comprises of the following Core Group of Secretaries to the

Government of India:

• Secretary to Government, Department of Economic Affairs, Ministry of

Finance –Chairperson

• Secretary to Government, Department of Industrial Policy &

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Promotion, Ministry of Commerce & Industry

• Secretary to Government, Department of Commerce, Ministry of

Commerce & Industry

• Secretary to Government, Economic Relations, Ministry of External

Affairs

• Secretary to Government, Ministry of Overseas Indian Affairs.

The Board would be able to co-opt other Secretaries to the Central

Government and top officials of financial institutions, banks and

professional experts of Industry and Commerce, as and when

necessary.The approvals of FIPB is liberal for all sectors and all types of

proposals.

The Reserve Bank of India has granted general permission under

Foreign Exchange Regulation Act (FERA) in respect of proposals approved

by the government . Indian companies getting foreign investment

approvals through FIPB route do not require any clearance from RBI for

the purpose of receiving inward remittance and issue of shares to the

foreign investors. Such companies are however required to notify the

regional office concerned of the RBI of receipt of inward remittances

within 30 days of such receipt and to file the required document with the

concerned regional offices of RBI within 30 days after issue of shares to

the foreign investors.

3.4.3 Foreign Investment Promotion Council (FIPC):

The government has recently constituted a Foreign Investment

Promotion Council (FIPC) in the Ministry of Industry. It has been set up

to have more target oriented approach towards Foreign Direct Investment

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promotion. Its function is to identify the sector or industry or project

within the country that require FDI and target specific regions and

countries of the world from where FDI can be brought.

3.4.4 FDI CAPS:

Investments can be made by non-residents in the capital of a resident

entity only to the extent of the percentage of the total capital as

provided/permitted in the FDI policy. Thus while investment are

prohibited in some sectors/activities, there are

restrictions/conditions/caps on the investment in certain other

sector/activities.

3.5 FDI POLICY IN INDIA:

The role of Foreign Direct Investment (FDI) in the upgradation of

technology, skills and managerial capabilities is now well accepted.

Additional investments, over and above the investments possible with the

available domestic resources, help in providing much needed employment

opportunities.

To a great extent, the trends and pattern of FDI inflows has been the

result of policy framework affecting FDI, is not restricted to the incentives

and disincentives directly offered to the foreign firms but also the

framework affecting FDI includes foreign trade, technology, foreign

currency and general industrial policy aspects. The FDI policy and

attitude of transnational companies have had a varied history. During

the colonial era the British capital dominated dominated india with major

concentration in mining and extraction industry. British investments had

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an exploitative motive and were directly or indirectly interested in British

economy.

Since independence, the legacy of foreign capital in the form of FDI

was given a new edge and was introduced with a slight new character

that it is invited in the absence or dearth of domestic capital and

technology in permitted areas. But for a long time India have had a

restrictive policy in terms of inward FDI inflows. One of the major reasons

as to why governments were not interested in attracting FDI in India in

the post independence period was a strong nation wide agitation towards

colonialism. This was evident from the statement of Advisory Planning

Board of the Interim government in 1946-47 that “Foreign vested

interests once created would be difficult to dislodge” (Chaudhry,1884;

cited in Chandra1991).

However, the restrictive policies has been changed recently and the

government is making considerable efforts to attract FDI by relaxing

many of its policies and streamlining procedures of entry (Lall, 1999).

3.5.1 FDI Policy Since 1991:

Government has put in place a liberal and investor friendly policy for

FDI, under which FDI, upto 100%, is permitted on the automatic route,

in almost all sectors/activities, except the following:

i. Proposals where more than 24% foreign equity is proposed to be

inducted for manufacture of items reserved for small scale sector;

ii. Proposals where the foreign investor has an existing joint venture/

technical collaboration/ trademark agreement in the ‘same’ field of

activity and attracts the provision of Press Note 1 (2005 Series).

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FDI policy is reviewed on continued basis and changes in sectoral

policy/sectoral equity cap are notified through Press Notes by the

Secretariat for Industrial Assistance (SIA), Department of Industrial

Policy & Promotion (DIPP). All Press Notes are available at DIPP website

(www.dipp.gov.in). FDI Policy is also notified by Reserve Bank of India

(RBI) under Foreign Exchange Management Act (FEMA) 1999

Indian Policy makers and academicians accepted the need to liberalise

the economy through a gradual relaxation of the foreign direct

investment rules, which got strengthened after a severe macroeconomic

crisis in 1990s (Lall, 1999)

In order to give stability to India's external and to review the slumping

credit rating of the country, the government of India reconsidered the

economic policy and as a result, the authorities came out with drastic

changes in trade, investment and industrial policies.

A new foreign trade policy was announced with wide ranging

liberalization of import controls across the board and substantial

reduction in import duties, devaluation of the rupee etc. On 24th

July,1991 a statement of New Industrial Policy(NIP) was presented to the

parliament. It was not basically against the industrial policy resolution of

1956, but only a modification of old policies to meet the new challenges.

3.5.2 FDI Policy 2006:

In the FDI Policy 2006, FDI was prohibited in the following

activities/sectors

i. Retail trading (except Single Brand Product retailing)

ii. Atomic energy

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iii. Lottery business

iv. Gambling and Betting

FDI Caps, limits, entry routes and other conditions are shown in

Annexure -III

3.5.3 FDI Policy 2010:

The Government of India released the new document on FDI policy on

March 31, 2010 whereby this document now consolidates all existing

regulations related to FDI contained in the Foreign Exchange

Management Act (FEMA), RBI Circulars and various press notes issued at

various points in time. The comprehensive policy document came into

effect from April 1, 2010 and would be replaced every 6 months after

incorporating the changes which have been effected during the said

period. This is a good move considering that this would bring clarity in

understanding the foreign investment rules among investors resulting

ultimately in simplification of the policy. This is also expected to improve

transparency and boost global investors’ confidence.

100% FDI is permitted under the automatic route in most of the

sectors while there are Sectoral caps in the case of Banking (74%),

Insurance (26%), Telecom (49%), Aviation (74%) and Single brand retail

(51%) etc.

The FDI is prohibited in the following activities/sectors:

• Retail Trading (except single brand product retailing)

• Atomic Energy

• Lottery Business including Government/private lottery, online

lotteries etc.

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• Gambling and Betting including casinos etc.

• Business of chit fund

• Nidhi company

• Trading in Transferable Development Rights (TDRs)

• Real Estate Business or Construction of Farm Houses

• Activities / sectors not opened to private sector investment.

Besides foreign investment in any form, foreign technology

collaboration in any form including licensing for franchise, trademark,

brand name, management contract is also completely prohibited for

Lottery Business and Gambling and Betting activities.

The Government is looking to allow FDI in media and also looking to

amend the Press and Registration of Books Act 1867 to facilitate the

entry of foreign newspapers or Indian editions of foreign newspapers

being printed. The present FDI limit is 26% under Government approval.

Currently, 100% FDI is allowed in facsimile publication of foreign

newspapers by an entity incorporated or registered in India. FDI in multi-

brand retail is another sector where FDI is currently not permitted

though the Government says that the current retail infrastructure

including the backend (from the farm to the store) needs to be

strengthened. The entry of large Indian retail chains has in general been

positive allowing farmers to get better prices for their produce and giving

multiple choices to the end user. Banking and Insurance sectors could

also do with a hike in the FDI limits while this is being monitored after

the global meltdown where some of the largest banks and financial

institutions went bust. The Government might encourage investments by

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foreign insurance companies in health and weather (floods, famines) to

farmers and rural residents and for banks to be set up in rural areas

where this is a Greenfield project.

The Economic Survey released by the Finance Ministry for the year

2009-10 indicated impressive growth in sectors like telecom,

infrastructure (power, coal, ports, aviation, roads) and services. Budget

2010 presented by the Government in February 2010 allocated 46% of

the total planned outlay in infrastructure (rural and urban) along with an

additional INR 20,000 tax deduction for individuals in long term

infrastructure bonds helping to garner funds for infrastructure

development. This remains the single biggest sector of focus where the

Government believes that improvements in the sector coupled with

reforms in governance could take India to a double-digit growth rate. The

setting up of National Mission on Enhanced Energy Efficiency (NMEEE)

which aims to create a market for energy efficiency, Clinical

Establishments bill to improve the quality of health standards and

regulate the clinical research establishments in the country are measures

set to improve transparency and boost the overall confidence of the

investors. ( Consolidated-FDI-Policy-2010, DIPP, MCI, GOI)

3.6 FOREIGN INVESTMENT INFLOWS IN INDIA:

The total foreign investment in India is the combination of Direct

Foreign Investment and Portfolio investment (see table 3.1). The

contribution of FDI in the total foreign investment is very high as

compared to portfolio investment in the country. The foreign direct

investment in India though shows a mixed trend contributes with a

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increasing rate over the previous years in most of the years during the

study. A very few years show a declining trend.

The portfolio investment also shows a mixed trend with an increasing

rate of inflows for most of the years and decreasing trend for few years

but shows a negative value during the years 1998-99 and 2008-09.

Table: 3.1 Foreign Investment Inflows in India

Year

Direct Investment Portfolio Investment Total Rs. Crore Million USD Rs. Crore Million USD Rs. Crore Million USD

1991-92 316 129 10 4 326 133 1992-93 965 315 748 244 1713 559

1993-94 1838 586 1118 3567 13026 4153 1994-95 4126 1314 12007 3824 16133 5138

1995-96 7172 2144 9192 2784 16364 4892 1996-97 10015 2821 11758 3312 21773 6133

1997-98 13220 3557 6696 1828 19916 5385

1998-99 10358 2462 -257 -61 10101 2401 1999-2000 9338 2155 13112 3026 22450 5181

2000-01 28235 4029 12609 2760 23295 6789 2001-02 29240 6130 9639 2021 38874 8151

2002-03 24367 5035 4738 979 29105 6014 2003-04 19860 4322 52279 11377 72139 15699

2004-05 27188 6051 41854 9315 69092 15366 2005-06 39674 8961 55307 12492 94981 21453

2006-07 103367 22826 31713 7003 135080 29829 2007-08 140180 34835 109741 27271 249921 62106

2008-09 161536 35180 -63618 -13855 97918 21325 2009-10 176305 37182 153511 32375 329815 69557

Source: Handbook of Statistics on the Indian Economy, RBI (2009-10)

3.6.1 FDI Equity Inflows In India Since 1991 :

The FDI inflows in India (see table 3.2) increases from Rs. 409 crores

(USD 165) in the year 1991-92 to Rs.13,548 crores (USD 3682 million) in

the year 1997-98 but slowly declines to 10,311crores (USD 2439 million)

during the year 1999-2000. The inflows of FDI further increases to

Rs.19.361(USD 4222 million) during the year 2001-02, declines to

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Rs12,117 crores( USD 2634 million) during the year 2003-04 and further

increases to Rs.123,378 crores (USD 25888 million) during 2009-10. The

years 1998-99, 1999-2000, 202-03 and 203-04 shows a declining trend

in the inflows of Foreign Direct Investment over the previous years. The

other years during the period of study shows an increasing trend of FDI

inflows in India over the previous years.

Table: 3.2

FDI Equity Inflows in India (1991-92 to 2009-10)

S.No Year Amount of FDI(Rs.Crores) Amount in US$ million

1. 1991-1992 409 165

2. 1992-1993 1,094 393

3. 1993-1994 2,018 654

4. 1994-1995 4,312 1374

5. 1995-1996 6,916 2141

6. 1996-1997 9,654 2770

7. 1997-1998 13,548 3682

8. 1998-1999 12,343 3083

9. 1999-2000 10,311 2439

10. 2000-2001 12,645 2908

11. 2001-2002 19,361 4222

12. 2002-2003 14,932 3134

13. 2003-2004 12,117 2634

14. 2004-2005 17,138 3754

15. 2005-2006 24,613 5546

16. 2006-2007 70,630 15726

17. 2007-2008 98,664 24579

18. 2008-2009 122,919 27329

19. 2009-2010 123,378 25888

(Source: Department of Industrial Policy and Promotion, MCI,GOI)

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3.6.2 Country-Wise FDI Inflows In India Since 1991:

The country-wise FDI inflows in India are highest from Mauritius

which contributes to more than 40% of the total FDI inflows. During the

post-liberalisation period from 1991-1992 to 2009-2010 the trends show

that both year-wise inflows and cumulative inflows of FDI are highest

from Mauritius. The cumulative FDI inflows from Mauritius during 1991-

2010 (see table:3.3) amounts to Rs.22,24,042 crores (USD 86,857

million) which amounts to more than 40% of the total FDI inflows.

Singapore ranks second with Rs.46,372 crores (USD 10,792 million)

followed by USA which ranks third with Rs.46,145 crores (USD.10,533

million). UK and Netherland ranks fourth and fifth with an inflow of Rs.

28,284 crores (USD.6,555 million) and Rs. 22,386 crores (USD.5,115

million) respectively. Japan and Cyprus ranks sixth and seventh with an

FDI inflow of Rs.19,692 Crores (USD.4,496 million) and Rs.17,877

Crores (USD.3,920 million). Germany, France and UAE ranks eight,

nineth and tenth with an inflow of Rs.14,865 Crores

(USD.3,470million),Rs.7,922 Crores(USD.1809 million) and Rs.7,062

Crores (USD.2,480 million) respectively.

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Table : 3.3

Country-wise FDI inflows in India since 1991(Share of Top Countries) Rs.Crores (US$ millions)

S.No Country 1991-2002

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 1991-2010

1. Mauritius 27,446 (6,731)

3,766 (788)

2.609 (567)

5,141 (1,129)

11,411 (2,570)

28,759 (6,363)

44,483 (11,093)

50,794 (10,376)

49,633 (47,240)

22,24,042 (86,857)

2. Singapore 1,997 (515)

180 (38)

172 (37)

822 (184)

1,218 (275)

2,662 (578)

12,319 (3,073)

15,727 (3,454)

11,295 (2,379)

46,372 (10,792)

3. U.S.A 12,248 (3,188)

1,504 (319)

1,658 (360)

3,055 (668)

2,210 (502)

3,861 (856)

4,377 (1,089)

8,002 (1,802)

9,230 (1,943)

46,145 (10,533)

4. U.K 4,263 (1,106)

1,617 (340)

769 (167)

458 (101)

1,164 (266)

8,389 (1,878)

4,690 (1,176)

3,840 (864)

3,094 (657)

28,284 (6,555)

5. Netherlands 3,856 (986)

836 (176)

2,247 (489)

1,217 (267)

340 (76)

2,905 (644)

2,780 (695)

3,922 (883)

4,283 (899)

22,386 (5,115)

6. Japan 5,099 (1,299)

1,971 (412)

360 (78)

575 (126)

410 (93)

382 (85)

3,336 (815)

1,889 (405)

5,670 (1,183)

19,692 (4,496)

7. Cyprus 515 (118)

266 (58)

3,385 (834)

5,983 (1,287)

7,728 (1,623)

17,877 (3,920)

8. Germany 3,455 (908)

684 (144)

373 (81)

663 (145)

1,345 (303)

540 (120)

2,075 (514)

2,750 (629)

2,980 (626)

14,865 (3,470)

9. France 1.947 (492)

534 (112)

176 (38)

537 (117)

82 (18)

528 (117)

583 (145)

2,098 (467)

1,437 (303)

7,922 (1,809)

10. U.A.E 699 (156)

1,174 (260)

1,039 (258)

1,133 (257)

3,017 (1,549)

7,062 (2,480)

(Source: Department of Industrial Policy and Promotion, Ministry of commerce and Industry, Government of India)

86

3.6.3 Sector-wise FDI Inflows in India since 1991:

The cumulative FDI inflows in various sectors in India reveals that

Service Sector attracts highest cumulative inflows ( see table:3.4) during

1991-92 to 2009-2010 with an amount of Rs.110196 Crores

(USD.24963 million).

The Telecommunications sector attracts Rs. 45859 Crores

(USD.10265 million), where as Housing & Real Estate and Construction

Activities Sector attracts Rs. 37368 Crores(USD.8356 million) and Rs.

35720 Crores(USD.8059 milion).

The Drugs and Pharmaceutical Sector attracts Rs. 8,422 Crores

(USD.2882 million) as cumulative FDI inflows for the years 1991-92 to

2009-10.

During the post-liberalization period the sector-wise FDI inflows in

India showed a varying trend. In the early 1990s, the manufacturing

sector, automobile sector and electrical equipments sector attracted

maximum FDI ininflows but later on the service sector is seen as the top

sector attracting maximum FDI inflows.

The Drugs and Pharmaceutical Sector during the years 1991 till 2005

ranked among the top 10 sectors attracting the highest FDI inflows but

during the years 2007 to 2010, the FDI inflows gradually got reduced and

the Pharmaceutical Sectors’ ranking fall down and declined to 16th

position.

87

Table : 3.4

Sector-wise FDI Inflows in India since 1991[ Amount in Rs.Crores(USD.million)]

S.No Sectors 1991-2007 2007-08 2008-09 2009-10 1991-2010

1. Services Sector (financial & Non-financial)

34,238 (7,840) 26,589(6,615) 28,411(6,116) 20,958(4,392) 110196 (24963)

2. Electrical Equipments (including Computer SW & HW)

36,034 (8,226) 5,623 (1,410)* 7,329 (1,677)* 4,350 (919)* NA

3. Telecommunications 16,691 (3,892) 5,103 (1,261) 11,727(2,558) 12,338(2,554) 45859(10265)

4. Housing & Real Estate 2,412 (532) 8,749(2,179) 12,621(2,801) 13,586(2,844) 37368 (8356)

5. Construction Activities 6,395 (1,420) 6,989(1,743) 8,792(2,028) 13,544(2,868) 35720 (8059)

6. Fuel (Power & Oil

Refinery)

12,105 (2,831) 3,875(967)# 4,382(985)# 6,908(1,437)# NA

7. Automobile Industry NA 2,697(675) 5,212(1,152) 5,609(1,177) NA

8. Metallurgical Industries 3,632 (834) 4,686(1,177) 4,157(961) 1,935 (407) 14410 (3379)

9. Petroleum & Natural Gas NA 5,729(1,427) 1,931(412) 1,328(272) NA

10. Chemicals (other than

fertilizers)

9,510 (2,348) 920( 229) 3,427(749) 1,707(362) 155604 (3688)

11. Drugs and

Pharmaceutical

5,281 (1,222) 1,326(1276) 810(181) 1005(213) 8422 (2882)

(Source: Department of Industrial Policy and Promotion, Ministry of commerce and Industry, Government of India) * - indicates only Computer Software and Hardware # - indicates only Power Sector NA - Data not available

88

3.6.4 FDI Inflows In India in the Post-Liberalisation Period:

Since 1991, the FDI inflows in India is on an increasing trend. The

FDI inflows increases from Rs.409 crores in 1991-92 to Rs.13,548 crores

in 1997-98 but further decreases to Rs.10,311crores during 1999-2000.

For the years from 2000-01 to 2009-10, the FDI inflows in India is on an

increasing trend except for the years 2002-03 and 2003-04. The FDI

inflows in India increased from Rs.12,645 crores in 2000-01 to

Rs.19,361crores in 2001-02 but declines to Rs.14,932 crores in 2002-03

and Rs.12,117 crores in 2003-04. The FDI inflows further increased to

Rs.17,138 crores in 2004-05 and Rs.123,378 cores in 2009-10 ( see table

3.5 and graph 3.1).

During the year 2007-2008, FDI inflows are Rs.98,664 crores with

an increase of more than Rs.18000 crores over the previous year, which

reveals that there is no influence of global financial crisis on FDI inflows

in India.

For the years 1992-93, 1994-95 and 2006-07, the increase in FDI

inflows is very high and is recorded more than double over the previous

year. The years 2008-09 and 2009-10 recorded an inflow of more than

One lakh crore rupees. The CAGR of FDI inflows in India is 35.05%.

89

Table : 3.5

Trends of FDI inflows in India (Year –wise)

Financial Year Amount of FDI (Rs.Crores)

1991-1992 409

1992-1993 1,094

1993-1994 2,018

1994-1995 4,312

1995-1996 6,916

1996-1997 9,654

1997-1998 13,548

1998-1999 12,343

1999-2000 10,311

2000-2001 12,645

2001-2002 19,361

2002-2003 14,932

2003-2004 12,117

2004-2005 17,138

2005-2006 24,613

2006-2007 70,630

2007-2008 98,664

2008-2009 122,919

2009-2010 123,378

CAGR 35.05%

1/N 0.1

(Source: Department of Industrial Policy and Promotion, MCI, GOI)

90

Graph: 3.1

Trends of FDI Inflows in India in the Post- liberalisation period

0100002000030000400005000060000700008000090000

100000110000120000130000

1991-19

92

1992-19

93

1993-19

94

1994-19

95

1995-19

96

1996-19

97

1997-19

98

1998-19

99

1999-20

00

2000-20

01

2001-20

02

2002-20

03

2003-20

04

2004-20

05

2005-20

06

2006-20

07

2007-20

08

2008-20

09

2009-20

10

Years

FD

I in

flo

ws(

Rs

Cro

re)

Amount of FDI (Rs.Crores)

3.6.5 Growth Rate of FDI inflows in India :

The growth in FDI decreases from 167.48% in 1992-93 to -16.46% in

1999-2000, but further increases to 53.11% in 2001-02 (see table:3.6

and graph:3.2). The growth in FDI decreased from 53.11% in 2002 to -

22.88% in 2003 and -18.85% in 2004, but further increased to 186.96%

in 2007 and 0.37% in 2010. The growth in FDI inflows recorded is

highest during 2006-07. For the years 1998-99, 1999-2000, 2003-04 and

2004-05, negative growth rate is recorded. For the years 1992-93, 1994-

95 and 2006-07, the growth rate recorded is more than 100% over the

previous years. For the year 2009-10, the growth rate recorded is 0.37%

which is very less and negligible.

91

Table : 3.6

Growth rate of FDI inflows in India (Year –wise)

Financial Year Growth rate of FDI

1991-1992 -

1992-1993 167.48

1993-1994 84.46

1994-1995 113.68

1995-1996 60.39

1996-1997 39.59

1997-1998 40.34

1998-1999 -8.89

1999-2000 -16.46

2000-2001 22.64

2001-2002 53.11

2002-2003 -22.88

2003-2004 -18.85

2004-2005 41.44

2005-2006 43.62

2006-2007 186.96

2007-2008 39.69

2008-2009 24.58

2009-2010 0.37

(Source: Department of Industrial Policy and Promotion, MCI, GOI)

Graph: 3.2

Growth rate of FDI in the post-liberalisation period

-50

0

50

100

150

200

1992

-199

3

1993

-199

4

1994

-199

5

1995

-199

6

1996

-199

7

1997

-199

8

1998

-199

9

1999

-200

0

2000

-200

1

2001

-200

2

2002

-200

3

2003

-200

4

2004

-200

5

2005

-200

6

2006

-200

7

2007

-200

8

2008

-200

9

2009

-201

0

Years

gro

wth

rat

e (%

)

Growth rate of FDI -