Foreign Direct Investment & its impact on India

8/14/2019 Foreign Direct Investment & its impact on India

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Title Page for Project Management Group Project

Program & Batch: PGDM 2012-14

Term: V

Course Name: EPRE

Name of the faculty: Dr. Sujoy Chakraborty

Topic/ Title : FDI and its Impact on India

Original or

Revised Write-up:

Original

Group Number: 6

Contact No. and email ofGroup Coordinator:

Contact no: 7503139677

Email id: [email protected]

Group Members: Sl. Roll No. Name1 12DM-012 Aditi Gupta

2 12DM-083 Maryne Ann James

3 12DM-171 Vriti

4 12FN-074 Mayank Swarup5 12FN-066 Kunal Parekh

6 12HR-008 Divya Aggarwal

7 12HR-022 Ramya Krishnan

8 12HR-031 Sweta Rani


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FDI and itsImpact on IndiaSubject: EPRE

Under the guidance of Dr. SujoyChakraborty

Group 6, Section E

12DM-012

Aditi Gupta12DM-083Maryne Ann James

12DM-171 Vriti

12FN-074Mayank Swarup

12FN-066 - Kunal Parekh

12HR-008Divya Aggarwal

12HR-022Ramya Krishnan

12HR-031Sweta Rani

/10/2013


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Contents

List of Tables.......................................................................................................................................... 4

List of Figures......................................................................................................................................... 4

Introduction............................................................................................................................................. 5

Why FDI................................................................................................................................................. 5

Trade and Investment ......................................................................................................................... 6

Technology Transfers .......................................................................................................................... 6

Human Capital Enhancement ............................................................................................................. 6

Competition ........................................................................................................................................ 7

Enterprise Development ..................................................................................................................... 8

Types of FDI........................................................................................................................................... 8

By Direction........................................................................................................................................ 8

By Target............................................................................................................................................ 8

By Motive........................................................................................................................................... 9

Entry Routes for FDI in India................................................................................................................. 9

Instruments for receiving FDI............................................................................................................... 10

Mode of Payment.............................................................................................................................. 11

FDI Policy in India................................................................................................................................ 11

FDI Prohibited Sectors in India........................................................................................................ 12

FDI Permitted Sectors in India.......................................................................................................... 12

The FDI Confidence Index................................................................................................................... 16

FDI Inflow............................................................................................................................................ 17

Country-wise FDI inflows in India................................................................................................... 18

Mauritius: ...................................................................................................................................... 19

Singapore: ..................................................................................................................................... 19

USA: ............................................................................................................................................... 19

European Union: ........................................................................................................................... 19

Japan: ............................................................................................................................................ 20

Sector-wise FDI inflows in India...................................................................................................... 21

Rupee Decline presages FDI flight....................................................................................................... 23

Can FDI prove instrumental in cutting Current Account Deficit.......................................................... 26

Bibliography .......................................................................................................................................... 28


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List of Tables

Table 1: Sector-wise FDI caps................................................................................................................ 15

Table 2: FDI Inflows Year Wise in India ................................................................................................. 18

Table 3: Country-wise Inflows Received in India (2013-2014-upto May 2013) .................................... 19Table 4: Country-wise FDI Inflows (April 2000 to June 2013) ............................................................... 21

Table 5:Sector-wise FDI Inflows (April 2000 to June 2013) .................................................................. 22

List of Figures

Figure 1: FDI Confidence Index 2013 .................................................................................................... 16

Figure 2: Country-wise FDI flow ............................................................................................................ 20

Figure 3: Financial Year-Wise Equity Inflows ........................................................................................ 26
http://c/Users/Aditi/Desktop/FDI%20in%20India.docx%23_Toc366603992http://c/Users/Aditi/Desktop/FDI%20in%20India.docx%23_Toc366603992


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Introduction

In terms of Economics FDI constitutes Capital Account. Foreign Direct Investment, simply

put, is an investment made by an entity or a company in one country into an entity or a

company in another country to leverage the host countrys advantage, in the form of cheap

resources or to access consumer markets. It is a direct investment into the business either by

buying a company or by expanding an existing business in the target country. Both the

countries gain from this long term relationship the investor in terms of getting a higher

return on his investments and the investee gaining by the way of increased know how,

technology transfer and industry improvement. FDI is different from passive investments like

portfolio investment i.e. investing in stocks and bonds of another country. The threshold as

defined by the OECD is that the investor must own at least 10% of the voting stock or

ordinary shares of the company in which investment has been made. The investment can be

made through any of the following methods:

By establishing a wholly owned subsidiary By acquiring shares in the foreign company Through a merger or an acquisition of an enterprise

By participating in a joint venture with a company

Particularly in India FDI was opened post liberalization of economy in 1991. Post 1993, FDI

was a significant contributor to positive BOP. Over a span of 10 years post liberalization

Current Account was constantly running negative chiefly because of imports surpassing

exports. This was the time when Capital Account was consistently positive because of

considerable contribution made by FDI.

FDI is one of the measures of economic globalisation and a solution to long term stability

with minimum exposure to international shocks.

Why FDI

FDI has countless benefits for both the investor and the beneficiary. One of the major one is

that it allows money to move freely to businesses that have the best prospects for growth

anywhere in the world. Investors aggressively seek the best return for their money with the

least risk.


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Trade and Investment

Inward FDI contributes to integration of developing countries into the global economy by

stimulating and enhancing foreign capital flows. Several factors such as expansion and

establishment of international networks of enterprises and an increasing importance offoreign subsidiaries in foreign companies strategies for distribution, sales and marketing are

at play. A developing countrys ability to attract FDI is influenced by the participant's

approach to involve in importing and exporting activities.

Would-be host countries of FDI must consider a policy of openness to international trade

since it is vital to their development. Host countries can attract FDI by raising the size of the

relevant market by pursuing policies of regional trade liberalisation and integration. Inward

investment helps host countries that are financially constrained make use of their resource

endowment (minerals) or their geographical location.

Targeted measures to harness the benefits of FDI such as establishing export-processing

zones (EPZs) aid in development. They contribute in raising imports as well as exports of

developing countries. FDI leads to an upsurge in imports, which is gradually reduces as local

companies acquire the skills to serve as subcontractors to the entrant Foreign companies.

Technology Transfers

Technology transfer and transmission work by four correlated conduits: vertical linkages with

suppliers or purchasers in the host countries; horizontal linkages with competing or

complementary companies in the same industry; migration of skilled labour; and the

internationalisation of R&D.

Vertical linkages or backward linkages with local suppliers in developing countries have the

most positive effects. Foreign companies provide technical assistance, training and other

information to raise the quality of the suppliers products. Foreign companies support local

suppliers to purchase raw materials and intermediate goods and in modernizing and

upgrading production facilities.

Human Capital Enhancement

The advantageous effects of training provided by FDI complement a generic increase in skill

levels. The existence of MNEs provide a useful demonstration effect, as the demand for

skilled labour by these enterprises provides host-country authorities with an early indication


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of what skills are in demand. The task for the host country is to meet this demand in a timely

manner and provide education and training to the work force.

MNEs provide more training and upgrading of human capital than do domestic enterprises.

The human capital thus created spills over to the rest of the host economy. Policies to

improve labour-market flexibility and encourage entrepreneurship, among other strategies,

could help bolster such spillovers.

Human capital levels and spillovers are closely interrelated with technology transfers. In

particular, technologically advanced sectors and host countries are more likely to see human

capital spillovers and, conversely, economies with a high human capital component lend

themselves more easily to technology spillovers. The consequence of this is that efforts to

reap the benefits of technology and human capital spillovers could gain effectiveness when

policies of technological and educational improvement are undertaken conjointly.

Competition

A surge in the number of strategic alliances has changed the way in which formally

independent corporate entities interact. Alliances limit direct competition while creating

efficiency gains. There has also been a wave of privatizations that attract considerable foreign

direct investment (mainly in developing and emerging countries), and this has significant

effects on competition.

The effect of FDI on host-country concentration is stronger in developing countries than in

more mature economies. The magnitude and dispersion of their effects are linked positively

to prevailing levels of competition.

The direct impact of competition varies by sector and host country. There are very few

industries where global concentration has reached levels causing real concern for

competition, especially if relevant markets are global in scope. In addition, high levels of

concentration in properly defined markets doesnt result in reduced competition if barriers to

entry and exit are low or buyers are in good position to protect themselves from higher prices.

It is economically appropriate for strong foreign competitors to replace less productive

domestic enterprises but stringent policies should be in place to safeguard a healthy degree of

competition. The best way to attain this is by expanding the relevant market by increasing the

host countrys openness to international trade.


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Enterprise Development

International mergers and acquisitions lead to changes in management and corporate

governance. Such firms impose their own company policies, internal reporting systems and

principles of information disclosure on acquired firms. Their corporate practices are superiorto the ones prevalent in the host economy and this boosts corporate efficiency.

The effects of FDI on enterprise restructuring are positive, because investors pick their targets

among enterprises with a potential for achieving efficiency gains. Countries aiming to

improve the economic efficiency of their domestic business sectors have to encourage FDI as

a vehicle for enterprise restructuring.

Types of FDI

By Direction

Horizontal FDI It is an investment in the same industry in the host country as afirm operates in at the home country.

Platform FDIIt is an investment from a source country to a destination country forthe purpose of exporting to a third country.

Vertical FDIIt takes two forms:o Forward Vertical FDIWhere an industry abroad provides inputs for a firms

domestic production process

o Backward Vertical FDIWhen an industry abroad sells the output of a firmsdomestic production.

By Target

Greenfield Investment It is an investment in setting up new facilities or furtherexpansion of existing facilities. Greenfield investments are of great importance to the

host country as they create new production capacity, generate employment often at

higher wages than the domestic firms, lead to increase in technological know-how and

knowledge transfer, increase in R&D investment and an increase in worldwide

linkages. However, the downside is that it sometimes also leads to crowding out of

domestic industries. Also, the profits obtained do not feed the host nation but flow

back to the multinationals economy while the profits from the local industries flow

back entirely into the domestic economy.


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Mergers & Acquisitions - It is a primary type of FDI which entails the transfer ofexisting assets and operations from a local firm to a foreign firm.

o Cross border merger - the assets of both the countries are combined to form anew legal entity.

o Cross border acquisition - the control of assets is transferred from a local to aforeign company, wherein the local company becomes an affiliate of the

foreign company.

By Motive

Market Seeking These investments aim mainly at penetrating newer markets oremployed as a defensive strategy to maintain existing markets out of fear of losing it

rather than discovering a new one. Resource Seeking These are investments with a motive to harness the factors of

production of the destination country which are either not available or prove to be

more efficient and profitable than those obtainable at the home country. Examples can

be the cheap labour in Southeast Asia and natural resources in Africa

Efficiency SeekingThis type of FDI usually comes after the benefits from marketseeking and resource seeking investments have been realised. To further increase the

profitability, these are investments with which firms hope to increase their efficiencyby exploiting the benefits of scope and scale.

Entry Routes for FDI in India

In accordance with the Foreign Direct Investment Scheme, non-residents can make

investments in mandatorily fully convertible debentures and fully convertible preference

shares of an Indian company through two routes:

Automatic Routeo 100% FDI is allowed in all sectors except where the provisions of the

consolidated FDI policy on Entry routes for Investment are attracted

o FDI allowed under this route does not require any prior approval of the IndianGovt or RBI


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Government Routeo FDI in sectors and activities not covered in Automatic route requires prior

approval of the Govt which are considered by the Foreign Investment Promotion

Board, Ministry of Finance, Deptt. of economic affairs.

o Indian companies that have FDI approval through FIPB do not require anysubsequent clearance from the RBI for receiving inward remittance and for issue

of shares to NRI

Eligibility for Investment in India

Person resident or Entity incorporated outside Indiao Anybody but a citizen or entity incorporated in Pakistano Person or entity based in Bangladesh cannot enter via automatic routeo It mandatorily requires FIPB permit

NRIs in or Citizen of Nepal and Bhutano Can invest on repatriation basis onlyo Amount of consideration to be paid only by way of inward remittance in free

foreign exchange Overseas Corporate Bodies (OCBs) de-recognized wef Sep 16,2013

Instruments for receiving FDI

Foreign investment is considered as FDI only if the investment is made in equity shares, fully

and mandatorily convertible debentures and preference shares with the pricing decided

upfront as a figure or based on the formula that is decided upfront. The price at the time of

conversion should not be less than the fair value worked out.

Any foreign investment made in any instrument issued by an Indian company will be

considered as ECB and will be treated as per the ECB guidelines if:

a) Give an option to the investor to convert or not to convert it into equityb) Does not involve upfront pricing of the instrument


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Mode of Payment

Now that we have discussed the possible instruments via which foreign investments can enter

into FDI in India we will discuss the mode of payment under the same.

The Indian company can receive the amount of consideration for shares /debentures

/preference shares via any of the following modes:

a) Inward remittanceb) Debit to NRE/FCNR account of a person concerned maintained with an AD category

I bank

c) Conversion of royalty/lump sum/ technical knowhow fee due for payment orconversion of ECB

d) Conversion of import payables / pre incorporation expenses / share swape) Debit to non-interest bearing Escrow account in Indian Rupees in India which is

opened with the approval from AD Category I bank and is maintained with the AD

Category I bank on behalf of residents and non-residents

The shares/debentures are required to be issued within 180 days of the payment made via

any of the above modes or else the amount would be refunded. However in certain cases,

on submission of an application to RBI, Indian companies can get to issueshares/debentures for the consideration received even post 180 days from the date of

receipt.

FDI Policy in India

The FDI policy is very liberal and is being further revised and liberalized. This is to attract

fresh investments and boost the economy. The Department of Industrial Policy and

Promotion is compiling a document that contains all the various regulations. This document

will form a reflection of the regulatory framework. The department organizes events like

Destination India and Invest India to promote investment. Efforts are been made to improve

the business environment in India too. This includes computerization of information, single

window system, reduction of documents, online registrations etc. The department also

interacts with investors in international meets. The department has a chat forum in their

website for information.


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FDI Prohibited Sectors in India

FDI is prohibited in:

(a) Lottery Business

(b) Gambling and Betting

(c) Chit funds

(d) Nidhi company

(e) Trading in Transferable Development Rights (TDRs)

(f) Real Estate Business or Construction of Farm Houses

(g) Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobaccosubstitutes

(h) Activities / sectors not open to private sector investment

FDI Permitted Sectors in India

FDI is permitted in the below mentioned sectors subject to laws, rules and regulations.

Sector Name & Description Investment Cap Entry Route

Agriculture & Animal HusbandryFloriculture, Horticulture, Development of Seeds,

Animal Husbandry, Pisciculture, Aquaculture,

Cultivation of vegetables & mushrooms and services

related to agro and allied sectors

100% Automatic

Plantation

Tea Plantation 100% FIPB

Mining

a) Metals and Non Metal Ores

Explorations of Diamonds and precious stones 74% Automatic

Gold, Silver excluding titanium bearing minerals and

its ores

100% Automatic

b) Coal and Lignite

Coal and Lignite mining for power projects and ironand steel cement units

100% Automatic


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To set up coal processing plants 100% Automatic

c)Titanium bearing minerals and its ores 100% FIPB

Petroleum and Natural Gas

Exploration activities of petroleum and natural gas,

infrastructure related to the marketing of petroleum

products and natural gas

100% Automatic

Petroleum refining by PSU 49% FIPB

DefenceDefence industry subject to Industrial License 26% FIPB

Drugs and Pharmaceuticals 100% Automatic

Power

Power generation, transmission, distribution and

trading

100% Automatic

Insurance 26% Automatic

Telecommunications 49% Automatic

100% FIPB

Housing and Real Estate

Infrastructure of residential and commercial

premises including business centre and office,

townships, roads and bridges

100% Automatic

Broadcasting

FM Radio 49% FIPB

Cable Network 49% FIPB

Headend-in-the-sky(HITS) 49% Automatic

74% FIBP

Hardware Facilities


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Private Sector 74% Automatic

Public Sector 20% FIPB

NBFCs

Underwriting, portfolio management services,investment advisory services, financial consultancy,

stock broking, asset management, venture capital,

custodian, factoring, leasing and finance, housing

finance, forex broking, etc.

100% Automatic

Asset Reconstruction 100% FIPB

Satellites

Establishment and Operations 74% FIPB

Private security agencies 49% FIPB

Trading 100% Automatic

E-commerce activities 100% Automatic

Hotel and Tourism 100% Automatic

Advertising 100% Automatic

Films 100% Automatic

Mass rapid transport systems 100% Automatic

Pollution control and management 100% Automatic

Special Economic Zones 100% Automatic

Credit Information companies 74% FIPB

Commodity Exchange 49% FIPB

Infra companies in Securities market 49% FIPB

Table 1: Sector-wise FDI caps (FDI_Circular_01_2013 n.d.)


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The FDI Confidence Index

The FDI Confidence Index ranks nations on how political, economic and regulatory changes

will affect FDI in these nations. It provides a sense of investor attitudes about the future. It is

constructed from a survey of more than 300 executives from 28 countries to examine where

the global investment dollars are likely to be headed. It has been observed that on an average,

the top five nations account for almost 35% of the total FDI inflows.

Figure 1: FDI Confidence Index 2013

United States leads for the first time since 2001 as it makes progress towards sustainable

growth even in the face of policy uncertainties of debt issues and fiscal challenges. Emerging

markets continue to charge ahead with China, Brazil and India in the top five again. Other

developed nation in the top ten are Canada and Australia for their minerals and fossil fuels

and UK and Germany for the investment opportunities they provide.


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India, in the last decade, has seen rapid economic growth and has a young and fast growing

population. The country saw FDI inflow of $25.5 billion in 2012 with investors still exuding

confidence in Indias potential. Citing some examples, British beverage company Diageo

bought a stake for $2 billion in United Spirits, the Indian liquor company in November 2012.

In the same year, Starbucks opened its first store in India and currently has more than 20

stores in India.

However, Indias slide from the second position to the fifth reflects a cooling off in the

investor sentiments. Increasing inflation and deficits and a decrease in growth indicate a

tough path ahead. To get back their confidence, the reform agenda includes opening

investment in pension firms, reducing red tape and bureaucracy and simplifying approval of

infrastructure projects. But investors are not assured of the promised changes via economic

reforms seeing the string of scandals including telecom licenses, coalfield block allocations

and CWG scam.

FDI Inflow

Foreign direct investment (FDI) has increased by 24.2 % year-on-year in India to US$ 3.95

billion in April-May 2013 with US$ 2.32 billion of FDI in April 2013.

The sectors which had attracted highest levels of FDI include hotels and tourism sector

followed by pharmaceuticals, chemicals and construction sector.

Singapore alone attracted FDI flows worth US$ 1.29 billion in April 2013, which was

followed by Mauritius, the Netherlands and the US with FDI inflows worth US$ 355 million,

US$ 173 million and US$ 149 million respectively. FDI inflows aggregated at Rs.1217926.4

in 2012.

Cumulative inflow of FDI during the first decade after liberalization was US$ 14, 485 million

but the overall growth of FDI over the previous years during the next decade was good except

the years 2002-2003 and 2003-2004. The FDI inflow has started showing the downward

growth after the global crisis of 2008 and the trend is still continuing.

According to experts, the global financial problems which was a worldwide downfall,

particularly in the European markets, had earlier made the investors cautious of taking


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overseas investments and the thus the decline in FDI. Also, the macroeconomic factors such

as a high current account deficit and inflation, as well as the policy paralysis leading to delays

in the approval of large FDI projects has affected the inflow of FDI in India. Currently, the

decline in the value of rupee is resulting in the flight of FDI from India.

Financial Year (April-

March)

Amount (US

million)

% change over previous

year

August 1991- March 2000 14,485

2000-2001 2,463.00

2001-2002 4,065.00 65%

2002-2003 2,705.00 -50%

2003-2004 2,188.00 -19%

2004-2005 3,219.00 47%

2005-2006 5,540.00 72%

2006-2007 12,492.00 125%

2007-2008 24,575.00 97%

2008-2009 27,330.00 11%

2009-2010 25,834.00 -5%

2010-2011 19,427.00 -25%

Total 146319

Table 2: FDI Inflows Year Wise in India (Government Of India n.d.)

Country-wise FDI inflows in India

83% of cumulative FDI in India is contributed by ten countries while the remaining 17% by

the rest of the world. If the earlier history of the country is analyzed, then it indicates that

during 2007-2010, the total amount of Rs 526537 of FDI was received from 113 countries

including NRI investments. Over the years Indias perception abroad has been changing but

the recent macroeconomic factors in the Indian economy has hampered the growth of FDI

inflows in India, especially the degrading Indian economy and the policy paralysis in the

Indian economy.

Country-wise FDI Inflows Received in India (2013-2014-upto May 2013)

Countries Amount of FDI Inflows %age to Total

FDI Inflows (In

terms of US$)In Rs.

(millions)

In US$

(millions)

Singapore 79553.3 1461.07 36.96

Mauritius 44296.42 809.33 20.48

Germany 26047.77 473.8 11.99

Netherlands 12259.17 224.84 5.69


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Table 3: Country-wise Inflows Received in India (2013-2014-upto May 2013) (India Stat n.d.)

Mauritius:

Since 2011, Mauritius has always topped the position for FDI inflows in India with a share of37.63% of total FDI inflows. The tremendously high investment from Mauritius is because of

routing of international funds through the country given the tax advantages because of the

Double Taxation Avoidance Agreement which was signed in 1982 between the two

countries. A large number of FIIs trading on the Indian stock markets operate from Mauritius.

All the major US corporations use the Mauritius offshore financial sector to channel their

investments in India.

Singapore:

Singapore has become a fast growing source of investments funds to India in the recent years.

It has become the highest source of FDI in 2013. It has overtaken even large developed

economies like US, UK and Japan which are the most important destinations for funds.

USA:

The USA is the fifth largest source of FDI in India (5.76% of the total) valued at US$

11436.27 in cumulative inflows between Jan. 2000 to May 2013. According to M&A data,

the two sectors which are attracting the top most FDI inflows are computer systems design

and manufacturing.

European Union:

Within European Union, UK and Netherlands are the largest FDI contributors, followed by

countries like France, Germany, Spain, etc. FDI from EU to India is primarily from centers

like power/energy, telecommunications, and transportation sectors, manufacturing,

information services; and professional, scientific and technical service.

U.S.A 11985.94 219.6 5.56

Hong Kong 6098.67 110.97 2.81

South Africa 5500.09 101.15 2.56

Japan 5272.08 96.31 2.44

Spain 5127.34 93.33 2.36Cyprus 3142.57 57.41 1.45

France 2725.34 50.02 1.27

United Kingdom 2245.14 40.92 1.04

Others 11709.98 213.86 5.39

Total 215963.81 3952.61 100


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Japan:

Japan is the fourth largest of cumulative FDI inflows in India between January 2000 and June

2013, i.e. the cumulative flow is US$ 14749.51million and its share is 7.42% of the total

inflow. India is one of the largest recipients of Japanese Official Development Assistance

(ODA), through which it assisted in building infrastructure, including electricity generation,

water supply and transportation. Automobile is the largest recipient of FDI from Japan.

Figure 2: Country-wise FDI flow

Following is the table enumerating the country-wise FDI inflows in India for the term April

2000 to June 2013. It can be deduced that the inflow from Mauritius, United Kingdom and

Singapore have drastically decreased over the years.

Country-wise FDI Inflows in India (April 2000 to June 2013)

Country Amount of FDI Inflows in Rs. (Jan

to Dec)

Cumulative Total

(from April 2000 to

May, 2013)

%age

with

Total FDI

Inflows

(+)2011 (mn)

2012

(mn)

2013$

(mn)

(In Rs.)

(mn)

(In US$)

(mn)

Mauritius 437791.67 491418.84 154970.49 347247.15 74765.29 37.63

Singapore 195969.66 152421.76 115826.88 100418.45 21311.99 10.73

United Kingdom 454283.15 43718.77 27129.97 80740.85 17599.35 8.86

Japan 143486.13 103644.23 38253.71 71222.63 14749.51 7.42

U.S.A 47127.75 33832.89 20065.09 52679.33 11436.27 5.76Netherlands 58889.06 89526.74 40270.15 44672.02 9372.76 4.72

37%

21%

12%

6%

6%

3%

3%

2%

2%

1%

1% 1%

5%

FDI Inflow

Singapore

Mauritius

Germany

Netherlands

U.S.A

Hong Kong

South Africa

Japan

Spain

Cyprus


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Cyprus 61530.75 50102.32 8008.69 32911 6992.74 3.52

Germany 67162.83 38830.57 45451.01 28326.44 5989.97 3.01

France 22555.13 36176.92 12183.03 17425.15 3672.32 1.85

UAE 10418.11 14310.93 4906.3 11584.65 2471.81 1.24

Switzerland 9681.7 14570 5789.27 11268.65 2403.4 1.21Spain 10027.41 22989.85 7908.05 7580.15 1574.8 0.79

Others 80425.86 124370.58 31898.09 120865.21 26459.74 13.26

Total 1601360.21 1217926.4 512660.73 926941.68 198799.95 100

Table 4: Country-wise FDI Inflows (April 2000 to June 2013) (India Stat n.d.)

Sector-wise FDI inflows in India

Sector wise analysis of FDI in India shows that Services Sector including the

telecommunication, information technology, travel and many others, is the largest recipient of

FDI with 19.22% of total FDI inflow. The service sector is followed by the computer

hardware and software in terms of FDI. High volumes of FDI takes place in

telecommunication, automobile, real estate, construction, power, etc.

Sector-wise Foreign Direct Investment (FDI) Inflows in India

(April 2000 to June 2013)

Sectors Amount of FDI

Inflows

%age with

Total FDIInflows (+)In Crore In US$

Services Sector* 177594.62 38179.78 19.22

Construction Development: Townships, Housing,

Built-Up Infrastructure and Construction-Development

Projects

101994.86 22247.5 11.2

Telecommunications 58785.79 12865.83 6.48

Computer Software & Hardware 53757.6 11862.37 5.97

Drugs & Pharmaceuticals 54321.68 11318.32 5.7

Chemicals (Other Than Fertilizers) 41118.29 8993.12 4.53Automobile Industry 42015.28 8810.07 4.43

Power 36805.41 7953.93 4

Metallurgical Industries 35448.07 7620.73 3.84

Hotel & Tourism 33819.35 6731.89 3.39

Petroleum & Natural Gas 24950.25 5406.7 2.72

Trading 19243.58 4063.79 2.05

Information & Broadcasting (Including Print Media) 16163.91 3406.19 1.71

Electrical Equipments 14826.59 3211.43 1.62

Non-Conventional Energy 13425.78 2683.72 1.35Cement and Gypsum Products 11941.58 2656.29 1.34


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Miscellaneous Mechanical & Engineering Industries 11432.46 2477.18 1.25

Industrial Machinery 11504.84 2388.12 1.2

Construction (Infrastructure) Activities 10332.94 2198.77 1.11

Consultancy Services 9928.46 2136.36 1.08

Others 147530.34 31587.84 15.81Total 926941.68 198799.93 100

Table 5:Sector-wise FDI Inflows (April 2000 to June 2013) (India Stat n.d.)

The fast development of the telecommunication sector was because of the entry of the

international players and the transfer of advanced technologies. With a growth rate of 45%

Indian telecom industry is the fastest growing industry in the world and with the move to

allow 100% FDI in this sector more FDI inflows are expected.

FDI inflows in the real estate sectorhave helped in the growth, development and expansion

of the sector. FDI inflows to Construction Activities have led to a phenomenal economic

growth in the country. India has become one of the most important destinations when it

comes to the choice for FDI in construction activities as well as real estate sector.

The Automobile Industry has alos experienced a phenomenal growth in FDI inflows in the

recent years, especially due to the establishment of operations of many Japanese automobile

firms. The basic advantages provided by India in the automobile industry include advanced

technology, cost effectiveness and efficient workforce. Besides, India has a well-developed

and competent Auto Ancillary Industry along with automobile Testing and R&D centers. The

Automobile sector ranks second in the manufacturing of three wheelers and third in

manufacturing of two wheelers. Opportunities in the Automobile sector exist in establishment

of Engineering centers, Two Wheeler Segments, Export, Establishment of R&D centers,

Heavy Truck segment, and Passenger Car segment.

The increase in inflows to the Metallurgical Industry has helped to bring latest technologiesto the industries in the country and thus furthering the growth, development and expansion of

the industries. All this has helped in improving the quality of the products of the

metallurgical industries in India.

Based upon the data given above and Department of Industrial Policy and Promotion, in India

there are 62 sectors in which FDI inflows are found but it is found that top ten sectors almost

attract 70% of the FDI inflows. The cumulative FDI inflows from the data given above

reveals that services sector in India attracts the maximum FDI inflows worth US$ 38179.78


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million with a 19.2% of the total inflows, followed by the Construction Development

amounting to US$ 22247.5 million with 11.2% of the total inflows. The two sectors

combined together capture more than 30% of the total inflows.

The Construction Industry and the housing and real estate sector are among the new sectors

attracting huge FDI inflows that come under the top ten sectors attracting maximum FDI

inflows. Thus the sector wise inflows of FDI in India show a varying trend and the share of

the all the sectors keep on changing year on year basis except for the services sector which

have always maintained a dominant position. But the FDI inflows act as catalyst for growth,

quality maintenance, and the development of Industries in India to a greater and larger extend

which is not possible in isolation from the world. The technology transfer apart from

managerial efficiency, operational efficiency, employment opportunities and infrastructure

development, is also seen as a part of major change as a result of FDI inflow.

Rupee Decline presages FDI flight

In the present scenario it seems that India is losing all the investor confidence, at a time when

it needs it the most. With a downward spiralling of the rupee value, capital flight is occurring

and the outflows of FDI have increased as the FDI leaves the country.

The efforts put in by the central bank, RBI; to control the depreciating currency values since

July have included measures like restricting currency derivatives, tightening the money

supply, and discouraging gold imports. Gold has always been seen as the safest investment in

India and with safest investment and thus there is a sharp rise in the demand of gold with the

declining value of the rupee.

The decline of the Rupee is resulting in a flight of Foreign Direct Investment (FDI).

The efforts put in by the Reserve Bank of India (RBI) were not so effective and efficient, so

the focus of RBI has shifted to stop the Indian investments as well as the FDIs from going

out of the country, which will have a further damping effect on the demand for dollars. The

entire phenomenon is like a vicious circle, where one event leads to the other and the other

one furthers the first one. With a decline in the value of rupee the investor confidence is

shaken and thus it leads to an FDI exodus in the country which puts a downward pressure on

the currency of the country. The rupee has fallen by more than 25 percent in a period of justlast two years.


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Some industry experts are calling for capital controls in the light of the recent move that has

already been made; however, at this point of time in the economy the outside India

investments are restricted only to Indian investors rather than foreign investors which is

just half the measure.

The decline in the value of the currency is seen as a result of the recent development of local

industries and export of many of its operations. The strategy followed by many big

companies in India to invest outside and tap the untapped markets in the early phases: and

thus investing in terms of setting up of operations and tapping market growth and expansion

has led to flow of currency outside the country (FDI outflow) and a consequent decline in the

currency.

The rupee has already lost its value in significant percentage terms as compared to the past,

with hitting all time low on August 28, 2013 a value of low near 69 to the dollar. The plunge

started with the withdrawal of investments by many investors in May from equity and bond

markets. Controlling the drop as a result has become the top main concern for the RBI in with

the motive to get back the investors confidence and recent the policy changes that have taken

place in terms of change in FDI limits in many sectors are also signalling the fact that grave

thought is being to control the drop.

The problem being faced in controlling the drop is balancing the forces of free market and

capital controls; if capital control is being imposed then the forces of free market are

constrained which further hampers investors confidence deterring foreign investors from

investing again. The predicament faced by India in such a situation is the classic economic

theory; which states that no country can balance free capital movement, with independent

economic policy and stable currency simultaneously. A country has to choose between two

and let go of the third one.

The interest rates have been increased twice in the recent past in an attempt to increase the

capital flow into the country, which should have resulted in higher demand of the rupee.

Additionally, to curb the rising demand for gold duties were imposed on the import of gold

and gold storage in government owned warehouses was mandated to limit the trading into the

gold market.

Gold is closely connected to the dollar, a rise in the demand of the gold leads to a higher

supply of the rupee which leads to depreciation in the value of the rupee. Most of the experts


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believe that these are all short term measures taken by the government and ultimate solution

for stopping this downward spiral is to make India an attractive destination for foreign

investment. In order to bring back the rupee at its previous value foreign investments need to

be brought back, especially capital investments.

The current catastrophe is similar to the rising current account deficit and budget deficit of

1990s where there was a fall of more than 30% in rupees value between 1991 and 1992. An

emergency loan of US$ 2.2 billion was needed to be taken from the IMF to purchase gold as

collateral for the reserves. The loan came with many conditions, which also included a

condition to open up the Indian economy to foreign investment; as a result of which the

country made significant progress especially in terms of GDP growth after the initial decline

in first two years.

It is expected that Indias economic will slow down in the coming years and the rising

interest rates in recent time will actually weigh profoundly on local industries, further

diminishing the growth potential over the next few years. With the increasing current account

deficit in the country, it can be expected that things can worsen before they get any better and

the country might need to sell its gold reserves again to protract the economy.

In order to sustain the economy and have a longer term development and stability in theeconomy long term growth of foreign investment should be the focus. To encourage more

investment in the country serious measures are required and the recent changes in the FDI

approval system and the limitation fixed for various sectors earlier is just the beginning. Also

the limitation on investments that India does have needs to be abolished to attract more

investments.


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Can FDI prove instrumental in cutting Current Account Deficit

The Law of Balance of Payments suggests that the payments always get balanced. Totalmoney spent or invested must be equal to total money earned which in terms of BoP is that

Current account deficit/surplus must be equalled by Capital account surplus/deficit. In India,

FDI constitutes an integral component of Capital account. FDI has an impact on both

domestic investment climates as well as on foreign trade.

Current account deficit can primarily be for two reason; less exports or heavy imports. In

todays scenario India is badly stricken by heavy import of Gold and fuel. CAD at 4.9% of

GDP Q1, 2013 was the third highest in the world in absolute terms as per Morgan Stanley

report. India stands at the top among the emerging economies. Standing at such a dismal low

we could possibly let the Indian Rupee depreciate even further in order to encourage exports

but this too is hampered due to limited manufacturing base owing to red tapism. To cut down

the adverse effects of CAD it has been a strategic move on the part of Indian government to

liberalize FDI in 12 sectors namely Telecom, Defence, Single Brand Retail, etc. FDI comes

with a long term stability feature which scores over the contrasting nature of FII which hold

the potential of subjecting the host countrys vulnerability to external shocks.

Figure 3: Financial Year-Wise Equity Inflows (Government Of India n.d.)


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As per the calculations done by Kotak securities,

In order to sustain CAD/GDP CAD/GDP of around 3.5 percent (with a neutral BOP), India,

on average, would need capital flows of USD95-100 bn each year. Of this, India needs to aim

to attract USD 25-30 bn of FDI flows each year.

Currently India has allowed 26% FDI in defence, however if it goes beyond 26%, it would be

instrumental in reducing Indias dependence on future defence imports in critical technology

areas. Similarly for telecom where our imports have been high, an increase from 74% to

100% FDI in July,2013 is a smart move though it should have been done long ago.

Also Greenfield FDI is preferred over Mergers and acquisitions in India because of lack of

infrastructure. In order to maximize the benefits of FDI, Indian govt must act proactive inimplementing FDI policies in different sectors so as to cater to the needs of US, UK which

seek investment options in India.


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Foreign Direct Investment & its impact on India