FDI & FII india

Symbiosis Centre for Management Studies, Noida Kanishka Mehrotra

Fundamentals of Business Environment

(FDI AND FII IMPACT ON INDIAN ECONOMY)

SUBMITTED BY : Kanishka Mehrotra

PRN NUMBER : 14021021049

BATCH : 2014-17 (B)

SUBMITTED TO: Ms. Khushboo Tyagi

FDI & FII Impact on Indian Economy 1


ACKNOWLEDGEMENT

I would like to thank Ms Khushboo Tyagi,

Symbiosis Centre For Management Studies, Noida and my

fellow batchmates who advised me in the making of this

project without their cooperation I woud not have

completed the project.

Kanishka Mehrotra

Symbiosis Centre for Management Studies, Noida



EXECUTIVE SUMMARY

Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII)

flows are usually preferred over other forms of external finance because they are non-

debt creating, non-volatile and their returns depend on the performance of the projects

financed by the investors. FDI and FII also facilitates international trade and transfer

of knowledge, skills and technology. In a world of increased competition and rapid

technological change, their complimentary and catalytic role can be very valuable.

Over the years, FDI and FII inflow in the country is increasing. However,

India has tremendous potential for absorbing greater flow of FDI and FII in the

coming years. Serious efforts are being made to attract greater inflow of FDI and FII

in the country by taking several actions both on policy and implementation front. An

essential requirement of the foreign investing community in making their investment

decision is availability of timely and reliable information about the policies and

procedures governing FDI and FII in India.

Foreign direct investment (FDI) and FII in India has played an important role

in the development of the Indian economy. FDI and FII in India has - in a lot of ways

- enabled India to achieve a certain degree of financial stability, growth and

development. This money has allowed India to focus on the areas that may have

needed economic Attention, and address the various problems that continue to

challenge the country. India has continually sought to attract FDI from the world’s

major investors. In 1998 and 1999, the Indian national government announced a

number of reforms designed to encourage FDI and present a favorable scenario for

investors. FDI and FII are permitted through financial collaborations, through private

equity or preferential allotments, by way of capital markets through Euro issues, and

in joint ventures.



INTRODUCTION

The Government of India has recognized the key role of the foreign direct investment

(FDI) and foreign institutional investment (FII) in its process of economic development,

not only as an addition to its own domestic capital but also as an important source of

technology and other global trade practices. In order to attract the required amount of FDI

and FII, it has bought about a number of changes in its economic policies and has put in

its practice a liberal and more transparent FDI and FII policy with a view to attract more

foreign direct institutional investment inflows into its economy. These changes have

heralded the liberalization era of the foreign investment policy regime into India and have

brought about a structural breakthrough in the volume of FDI and FII inflows in the

economy.

The influx of FIIs has indeed influenced the secondary market segment of the Indian

stock market. But the supposed linkage effects with the real economy have not worked.

Instead there has been an increased uncertainty and skepticism about the stock market in

this country. On the other hand, the surge in foreign portfolio investment in the Indian

economy has introduced some serious problems of macroeconomic management for the

policymakers like inflation, currency appreciation etc.

On the other hand FDI is what the government really needs to attract in various sectors

like infrastructure, education etc. it is much more stable than the foreign institutional

investment which comes via the stock market route, and has more accountability and

brings fundamental and tangible benefits to the economy.

In this context, this report is going to analyze the trends and patterns of foreign direct

investment (FDI) and foreign institutional investment (FII) flows into India during the

post liberalization period.



FOREIGN DIRECT INVESTMENT

INTRODUCTION

Is the process whereby residents of one country (the source 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). The international monetary fund’s balance of

payment manual defines FDI as an investment that is made to acquire a lasting interest in

an enterprise operating in an economy other than that of the investor. The investors

purpose being to have an effective voice in the management of the enterprise. The united

nations 1999 world investment report defines FDI as ‘an investment involving a long term

relationship and reflecting a lasting interest and control of a resident entity in one economy

(foreign direct investor or parent enterprise) in an enterprise resident in an economy other

than that of the foreign direct investor ( FDI enterprise, affiliate enterprise or foreign

affiliate).

Foreign direct investment (FDI) plays an extraordinary and growing role in global

business. It can provide a firm with new markets and marketing channels, cheaper

production facilities, access to new technology, products, skills and financing. For a host

country or the foreign firm which receives the investment, it can provide a source of new

technologies, capital, processes, products, organizational technologies and management

skills, and as such can provide a strong impetus to economic development.

Foreign direct investment, in its classic definition, is defined as a company from one

country making a physical investment into building a factory in another country. The

direct investment in buildings, machinery and equipment is in contrast with making a

portfolio investment, which is considered an indirect investment. In recent years, given

rapid growth and change in global investment patterns, the definition has been broadened

to include the acquisition of a lasting management interest in a company or enterprise

outside the investing firm’s home country. As such, it may take many forms, such as a

direct acquisition of a foreign firm, construction of a facility, or investment in a joint

venture or strategic alliance with a local firm with attendant input of technology, licensing



of intellectual property, In the past decade, FDI has come to play a major role in the

internationalization of business.

One of the most striking developments during the last two decades is the spectacular

growth of FDI in the global economic landscape. This unprecedented growth of global

FDI in 1990 around the world make FDI an important and vital component of

development strategy in both developed and developing nations and policies are designed

in order to stimulate inward flows. Infact, FDI provides a win – win situation to the host

and the home countries. Both countries are directly interested in inviting FDI, because they

benefit a lot from such type of investment. The ‘home’ countries want to take the

advantage of the vast markets opened by industrial growth. On the other hand the ‘host’

countries want to acquire technological and managerial skills and supplement domestic

savings and foreign exchange. Moreover, the paucity of all types of resources viz.

financial, capital, entrepreneurship, technological know- how, skills and practices, access

to markets- abroad- in their economic development, developing nations accepted FDI as a

sole visible panacea for all their scarcities. Further, the integration of global financial

markets paves ways to this explosive growth of FDI around the globe.

The year 1991 marks a new growth phase of FDI in India with an all time high flow

of FDI. Following the Industrial Policy (1991) , a large number of foreign companies

from different parts of the world rushed into India. In this period, in addition to

thousands of foreign collaborations in India, as many as 145 foreign companies

registered in India within a span of 10 years from 1991-2000. Companies like General

Motors, Ford Motors, and IBM that divested from India in the 1950s and 1970s

reentered India during this period. A large number of Asian companies like Daewoo

Motors, Hyundai Motors and LG Electronics from S. Korea, Matsushita Television

and Honda Motors from Japan invested in India during this period.

With the legislation of the Industrial Licensing Policy, 1991, industrial licensing was

abolished except for 18 industries. FDI up to 51% equity was allowed in 34 formerly high

priority industries and the concept of phased manufacturing requirement on foreign

companies was removed. Further, the tariffs on imports have been steadily reduced in

every budget since 1991.



ADVANTAGES OF FDI

1. Raising the Level of Investment : Foreign investment can fill the gap between

desired investment and locally mobilized savings. Local capital markets are often

not well developed. Thus, they cannot meet the capital requirements for large

investment projects. Besides, access to the hard currency needed to purchase

investment goods not available locally can be difficult. FDI solves both these

problems at once as it is a direct source of external capital. It can fill the gap

between desired foreign exchange requirements and those derived from net export

earnings.

2. Up gradation of Technology : Foreign investment brings with it technological

knowledge while transferring machinery and equipment to developing countries.

Production units in developing countries use out-dated equipment and techniques

that can reduce the productivity of workers and lead to the production of goods of

a lower standard.

3. Improvement in Export Competitiveness : FDI can help the host country

improve its export performance. By raising the level of efficiency and the

standards of product quality, FDI makes a positive impact on the host country’s

export competitiveness. Further, because of the international linkages of MNCs,

FDI provides to the host country better access to foreign markets. Enhanced

export possibility contributes to the growth of the host economies by relaxing

demand side constraints on growth. This is important for those countries which

have a small domestic market and must increase exports vigorously to maintain

their tempo of economic growth.

4. Employment Generation/Development : Foreign investment can create

employment in the modern sectors of developing countries. Recipients of FDI



gain training of employees in the course of operating new enterprises, which

contributes to human capital formation in the host country.

5. Benefits to Consumers : Consumers in developing countries stand to gain from

FDI through new products, and improved quality of goods at competitive prices.

6. Revenue to Government : Profits generated by FDI contribute to corporate tax

revenues in the host country.

DISADVANTAGES OF FDI

FDI is not an unmixed blessing. Governments in developing countries have to be very

careful while deciding the magnitude, pattern and conditions of private foreign

investment. Possible adverse implications of foreign investment are the following:

1. When foreign investment is competitive with home investment, profits in

domestic industries fall, leading to fall in domestic savings.

2. Contribution of foreign firms to public revenue through corporate taxes is

comparatively less because of liberal tax concessions, investment allowances,

disguised public subsidies and tariff protection provided by the host government.

3. Foreign firms reinforce dualistic socio-economic structure and increase income

inequalities. They create a small number of highly paid modern sector executives.

They divert resources away from priority sectors to the manufacture of

sophisticated products for the consumption of the local elite. As they are located

in urban areas, they create imbalances between rural and urban opportunities,

accelerating flow of rural population to urban areas.



4. Foreign firms stimulate inappropriate consumption patterns through excessive

advertising and monopolistic market power. The products made by multinationals

for the domestic market are not necessarily low in price and high in quality. Their

technology is generally capital-intensive which does not suit the needs of a labour-

surplus economy.

DETERMINANTS OF FDI

To understand the scale and direction of FDI flows, it is necessary to identify their

major determinants. The relative importance of FDI determinants varies not only

between countries but also between different types of FDI. Traditionally, the

determinants of FDI include the following.

1. Size of the Market : Large developing countries provide substantial markets

where the consumers demand for certain goods far exceed the available supplies.

This demand potential is a big draw for many foreign-owned enterprises. In many

cases, the establishment of a low cost marketing operation represents the first step

by a multinational into the market of the country. This establishes a presence in

the market and provides important insights into the ways of doing business and

possible opportunities in the country.

2. Political stability : In many countries, the institutions of government are still

evolving and there are unsettled political questions. Companies are unwilling to

contribute large amounts of capital into an environment where some of the basics

political questions have not yet been resolved.

3. Macro-economic Environment : Instability in the level of prices and exchange

rate enhance the level of uncertainty, making business planning difficult. This

increases the perceived risk of making investments and therefore adversely

affects the inflow of FDI.

4. Legal and Regulatory Framework : The transition to a market economy entails

the establishment of a legal and regulatory framework that is compatible with

private sector activities and the operation of foreign owned companies. The



relevant areas in this field include protection of property rights, ability to

repatriate profits, and a free market for currency exchange. It is important that

these rules and their administrative procedures are transparent and easily

comprehensive.

FDI Approval Route in India

Foreign direct investments in India are approved through two routes :

1. Automatic approval by RBI –

The Reserve Bank of India accords automatic approval within a period of two weeks

(subject to compliance of norms) to all proposals and permits foreign equity up to

24%; 50%; 51%; 74% and 100% is allowed depending on the category of industries

and the sectoral caps applicable. The lists are comprehensive and cover most

industries of interest to foreign companies. Investments in high priority industries or

for trading companies primarily engaged in exporting are given almost automatic

approval by the RBI.

2. The FIPB Route – Processing of non-automatic approval cases –

FDI in activities not covered under the automatic route requires prior approval of the

Government which are considered by the Foreign Investment Promotion Board

(FIPB), Department of Economic Affairs, Ministry of Finance. Indian companies

having foreign investment approval through FIPB route do not require any further

clearance from the Reserve Bank of India for receiving inward remittance and for the

issue of shares to the non-resident investors.

SECTOR SPECIFIC CONDITIONS ON FDI

PROHIBITED SECTORS.

1. Retail Trading (except single brand product retailing)

2. Lottery Business including Government /private lottery, online lotteries, etc.

3. Gambling and Betting including casinos etc.

4. Chit funds



5. Nidhi company

6. Trading in Transferable Development Rights (TDRs)

7. Real Estate Business or Construction of Farm Houses

8. Manufacturing of Cigars, cheroots, cigarillos and cigarettes substitutes

9. Activities / sectors not open to private sector investment e.g. Atomic Energy

10. Railway Transport (other than Mass Rapid Transport System

PERMITTED SECTORS

Sr.

No.

Sector/Activity FDI cap/Equity Entry/Route

1. Hotel & Tourism 100% Automatic

2. NBFC 49% Automatic

3. Insurance 26% Automatic

4. Telecommunication:

cellular, value added services

ISPs with gateways, radio-paging

Electronic Mail & Voice Mail

49%

74%

100%

Automatic

Above 49% need

Govt. licence

5. Trading companies:

primarily export activities

bulk imports, cash and carry

wholesale trading

51%

100%

Automatic

Automatic

6. Power(other than atomic reactor

power plants)100% Automatic

7. Drugs & Pharmaceuticals 100% Automatic



8. Roads, Highways, Ports and Harbors 100% Automatic

9. Pollution Control and Management 100% Automatic

10 Call Centers 100% Automatic

11. BPO 100% Automatic

13. Airports:

Greenfield projects

Existing projects

100%

100%

Automatic

Beyond 74% FIPB

14 Assets reconstruction company 49% FIPB

15. Cigars and cigarettes 100% FIPB

16. Courier services 100% FIPB

17. Investing companies in infrastructure

(other than telecom sector)

49% FIPB

SECTORS ATTRACTING HIGHEST FDI EQUITY INFLOWS



Note: Cumulative Sector- wise FDI equity inflows (from April 2000 to January 2012)

Source: Department of Industrial Policy & Promotion

Foreign Direct Investment in India in the last 10 Years


http://dipp.nic.in/


It can be seen that the flow of FDI has consistent and gradually increasing over the

years. There has been an increase of 129% i.e. Rs. 13851 Crores from the year 2000-

01 to 2005-06 while the increase from 2005-06 to 2011-12 has been a phenomenal

607% i.e. from Rs. 24584 Cr to Rs. 173947 Cr which can be attributed to relaxation of

foreign investment rules. Despite the global financial credit squeeze brought by the

recession India continues to be an attractive destination for investment as there is

tremendous potential for growth in the vast and diverse markets of our country.

The bars from 2000-01 to 2004-05 have been almost hovering the same levels but

importantly haven’t gone down which is because the foreign investors saw immense

potential but were not getting enough incentives to enter with huge business

propositions. The breakout came from the year 2005-06 when the investment nearly

doubled as compared to 2000-01, after which there was no looking back as consistent

economic growth, de-regulation, liberal investment rules, and operational flexibility

helped increase the inflow of Foreign Direct Investment or FDI. So much so that even

during the year 2008-09 when the recession had taken its toll on the western countries

there was no indication of falling investment via the FDI route as can be seen from the

chart. In fact during 2008-09 the chart shows that FDI breached the Rs. 1 lakh crore

marks. In percentage terms FDI inflow increased by 28% from 2007-08 to 2008-09.

FOREIGN INSTITUTIONAL INVESTMENT (FII)

As defined by the European Union Foreign Institutional Investment is an investment

in a foreign stock market by the specialized financial intermediaries managing savings

collectively on behalf of investors, especially small investors, towards specific

objectives in term of risk, return and maturity of claims.

SEBI’s Definition of FIIs presently includes foreign pension funds, mutual funds,

charitable/endowment/university funds, asset management companies and other

money managers operating on their behalf in a foreign stock market. Foreign

institutional investment is liquid nature investment, which is motivated by

international portfolio diversification benefits for individuals and institutional

investors in industrial country.



It refers to the purchase of stocks, bonds, debentures or other securities by an FII. FIIs

include pension funds, mutual funds, investment trusts, asset management companies,

nominee companies and incorporated/institutional portfolio managers.

In contrast to FDI, FIIs do not invest with the intention of gaining controlling interest

in a company. They typically make short-term investments. These investments are

made-to- book profits. Compared to FDI, a portfolio investor can enter and exit

countries with relative ease.. Because of the very nature of such investment, FII

money is also called ‘hot money’. The rapid outflow of ‘hot money’, in the recent

past, has created exchange-rate problems in Argentina and in Southeast Asia. Since

FIIs are very sensitive, a mere change in perception about an economy can prompt

them to pull out investments from a country.

Indian Markets have been one of the most attractive investment places for the FII's.

India being a developing nation attracts the foreign flows looking at the growth

potential in the Indian Economy. The FII's contribute a major chunk of volumes on

the Indian bourses and this in turn impacts the market moves. In case of recession in

the world economies, the foreign investors look for saver bets and India with a rising

GDP where other nations GDP / Growth is shrinking has always offered greater

investment avenues. Indian Markets have been the clear outperformers vis-a-vis the

global markets in the past years.

FOREIGN INSTITUTIONAL INVESTMENT IN INDIA

Foreign Institutional Investors means an institution established or incorporated

outside India which proposes to make investment in India in securities. A Working

Group for Streamlining of the Procedures relating to FIIs, constituted in April, 2003,

inter alia, recommended streamlining of SEBI registration procedure, and suggested

that dual approval process of SEBI and RBI be changed to a single approval process

of SEBI. This recommendation was implemented in December 2003.

Currently, entities eligible to invest under the FII route are as follows:

As FII: Overseas pension funds, mutual funds, investment trust, asset management

company, nominee company, bank, institutional portfolio manager, university funds,



endowments, foundations, charitable trusts, charitable societies, a trustee or power of

attorney holder incorporated or established outside India proposing to make

proprietary investments or with no single investor holding more than 10 per cent of

the shares or units of the fund.

As Sub-accounts: The Sub account is generally the underlying fund on whose behalf

the FII invests. The following entities are eligible to be registered as sub-accounts,

viz. partnership firms, private company, public company, pension fund, investment

trust, and individuals. A domestic portfolio manager or a domestic asset management

company shall also be eligible to be registered as FII to manage the funds of sub-

accounts.

The Government guidelines for FII of 1992 allowed, inter-alia, entities such as asset

management companies, nominee companies and incorporated/institutional portfolio

managers or their power of attorney holders (providing discretionary and non-

discretionary portfolio management services) to be registered as FIIs. While the

guidelines did not have a specific provision regarding clients, in the application form

the details of clients on whose behalf investments were being made were sought.

FIIs are eligible to purchase shares and convertible debentures issued by Indian

companies under the Portfolio Investment Scheme.

Who can be registered as an FII ?

The applicant should be any of the following categories:

1. Pension funds

2. Mutual funds

3. Investment trust

4. Insurance or reinsurance companies

5. Endowment funds

6. University funds

7. Foundations or charitable trusts or charitable societies who propose to invest on



their own behalf and

a) Asset management companies

b) Nominee companies

c) Institutional portfolio managers

d) Trustees

e) Power of attorney holders

f) Bank

Prohibitions on Investments

Foreign Institutional Investors are not permitted to invest in equity issued by an Asset

Reconstruction Company. They are also not allowed to invest in any company which

is engaged or proposes to engage in the following activities:

Business of chit fund

Agricultural or plantation activities

Real estate business or construction of farm houses (real estate business does not

include development of townships, construction of residential/commercial premises,

roads or bridges)

Reasons for strong flow of FIIs in India

FIIs attracted by the fast growing economy of India and strong performance of Indian

companies have been attracted towards India to an extent that India has gone on to

become the preferred investment destination.

The primary reasons for India being a preferred destination for FIIs are:

Global liquidity into the equity markets.

Improved performance and competitiveness of Indian firms.

Opening up of Indian economy.

Cheap labor and other factors of production.

Highly developed stock market and high degree of vigilance over it.

Tax Incentives.

Regulation and Trading Efficiencies



F and O Segment

Role of FIIs

The Indian stock market has come of age and has substantially aligned itself

with the international order.

Market has also witnessed a growing trend of 'institutionalization' that may be

considered as a consequence of globalization.

It is influence of the FIIs which changed the face of the Indian stock markets.

Screen based trading and depository are realities today largely because of FIIs.

FII which based the pressure on the rupee from the balance of payments

position and lowered the cost of capital to Indian business.

FIIs are the trendsetters in any market. They were the first ones to identify the

potential of Indian technology stocks. When the rest of the investors invested

in these scrips, they exited the scrips and booked profits.

Rolling settlement was introduced at the insistence of FIIs as they were

uncomfortable with the badla system.

The FIIs are playing an important role in bringing in funds needed by the

equity market.

The increase in the volume of activity on stock exchanges with the advent of

on screen trading coupled with operational inefficiencies of the former

settlement and clearing system led to the emergence of a new system called

the depository System.

Flow of money into Indian economy via FIIs has been increasing at a rapid

rate. This has forced economist and policy makers to consider impacts of this

inflow on the macro economic factors as well. This has resulted in deeper

analysis of factors like Interest Rate, Inflation Rate, GDP and Exchange Rate

etc. both in short term as well as long term.

Investment Conditions and Restrictions for FIIs

A Foreign Institutional Investor may invest only in the following:-



(a) Securities in the primary and secondary markets including shares, debentures

and warrants of companies, unlisted, listed or to be listed on a recognized stock

exchange in India.

(b) Units of schemes floated by domestic mutual funds including Unit Trust of

India, whether listed or not listed in a recognized stock exchange

(c) Dated Government securities.

(d) Derivatives traded on a recognized stock exchange.

(e) Commercial paper.

(f) Security receipts

Even investments made by FIIs in security receipts issued by securitization companies

or asset reconstruction companies under the Securitization and Reconstruction of

Financial Assets and Enforcement of Security Interest Act, 2002 are not eligible for

the investment limits mentioned above. No foreign institutional investor should invest

in security receipts on behalf of its sub-account.

SEBI Registered FIIs

Year Number of FIIs

2001-02 490

2002-03 502

2003-04 540

2004-05 685

2005-06 882

2006-07 996

2007-08 1219

2008-09 1334

2009-10 1729



2010-11 1767

2011-12 1758

Source: www.sebi.gov.in 2011-12 data till June 2012

The names of some prominent FIIs registered are: United Nations for and on behalf of

the United Nations Joint Staff Pension Fund, Public School Retirement System of

Missouri, Treasurer of the State North Carolina Equity Investment Fund Pooled Trust,

the Growth Fund of America, AIM Funds Management Inc, etc.

NET FII INVESTMENTS OVER THE YEAR’S

FII’s IMPACT ON EXCHANGE RATES

To understand the implications of FII on the exchange rates we have to understand

how the value of one currency goes up (appreciates) or goes down against the other

currency. The simple way of understanding is through Demand and Supply. If say US

imports from India it is creating a demand for Rupee thus the Indian rupee appreciates

w.r.t the dollar. If India imports then the dollar appreciates w.r.t the Indian rupee.

Now considering FII’s for every dollar that they bring into the country, there is a

demand for rupee created and the RBI has to print and release the money in the

country. Since the FII’s are creating a demand for rupee, it appreciates w.r.t the dollar.

Thus if for e.g. if prior to the demand the exchange rate was 1 USD = Rs 40, it could

become 1 USD = Rs 39 after they invets. Similarly when FII withdraw the capital


FII Activity for previous years

YearGross Purchase Gross Net

(Cr) Sale Investment(Cr) (Cr)

2012 277,696.30 235,201.50 42,494.702011 611,055.60 613,770.80 -2,714.202010 766,283.20 633,017.10 133,266.802009 624,239.70 540,814.70 83,424.202008 721,607.00 774,594.30 -52,987.402007 814,877.90 743,392.00 71,486.302006 475,624.90 439,084.10 36,540.202005 286,021.40 238,840.90 47,181.902004 185,672.00 146,706.80 38,965.802003 94,412.00 63,953.50 30,459.002002 46,479.10 42,849.80 3,629.60

SOURCE:INDIA INFOLINE Data for 2012 upto may 2012


from the markets, they need to earn back the U.S Dollar so that leads to a demand for

dollars the rupee depreciates. 1 USD goes back to Rs. 40. Thus FII inflows make the

currency of the country invested in appreciate and their selling and disinvestment may

lead to depreciation.

Depreciating currency not favorable to the FII’s: considering a simple hypothetical

example. I invested 1 USD in India at an exchange rate of 1 USD = Rs. 40. If rupee

appreciates the exchange rates become 1 USD = Rs. 20. Now if I disinvest I get 2

dollars, whereas I invested only 1 USD thereby a gain of 1 USD. (Though in real

terms the purchasing power of my dollar might decrease as my import cost would

increase, and cost of living back home may increase, but when I do consider practical

examples there is always a gain for FII whenever the currency of the country invested

in appreciates w.r.t the home currency)

Relationship between FII inflow and Sensex


YEAR NET FII INVESTMENTS

BSE SENSEX CLOSING

2005 47181.9 9397.93

2006 36540.2 13786.91

2007 71486.3 20286.99

2008 -52987.4 9647.31

2009 83424.2 17464.81

2010 133266.8 20509.1

2011 2714.2 15454.9

2012 42263.3 16950


From the above charts it is clear that net FII investments at BSE show a similar

pattern to the Yearly average closings. The net FII started declining from 2007-08 till

the middle of 2008-09 which caused a sharp fall in Sensex also which went below the

10000 level in 2007-08 falling by almost 52% as compared to the previous year. But

the FIIs started pouring in again from the end of 2009 after the governments abroad

started providing bail-out packages, sops and various other incentives to the ailing

companies. The Sensex also rises sharply from 2008-09 after the FIIs turned into net

buyers and hence a similar pattern can be found between these two.

What does India Need - FDI or FII

FDI usually is associated with export growth. It comes only when all the criteria to

set up an export industry are met. That includes, reduced taxes, favorable labor law,

freedom to move money in and out of country, government assistance to acquire land,

full grown infrastructure, reduced bureaucratic involvement etc. IT, BPO, Auto Parts,

Pharmaceuticals, unexplored service sectors including accounting; drug testing,

medical care etc are key sectors for foreign investment. Manufacturing is a brick and

mortar investment. It is permanent and stays in the country for a very long time. Huge

investments are needed to set this industry. It provides employment potential to semi

skilled and skilled labor. On the other hand the service sector requires fewer but



highly skilled workers. Both are needed in India. If India plays its cards right India

may be the hub for the service sector. Still high end manufacturing in auto parts and

pharmaceuticals should be India’s target.

The FII (Foreign Institutional Investor) is monies, which chases the stocks in the

market place. It is not exactly brick and mortar money, but in the long run it may

translate into brick and mortar. Sudden influx of this drives the stock market up as too

much money chases too little stock. Where FDI is a bit of a permanent nature, the FII

flies away at the shortest political or economical disturbance. The Global Recession

of 2008 is a key example of the latter. Once this money leaves, it leaves ruined

economy and ruined lives behind. Hence FII is to be welcomed with strict political

and economical discipline.

BIBLIOGRAPHY

www.dipp.nic.in

www.sebi.gov.in

www.bseindia.com

www.rbi.org.in

www.unctad.org



www.indiainfoline.com

www.thehindu.com

THANK YOU


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FDI & FII india