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Introduction

IntroductionForeign Direct Investment is an investment made by a company or entity based in one country, into a company or entity based in another country. Foreign direct investments differ substantially from indirect investments such as portfolio flows, wherein overseas institutions invest in equities listed on a nation's stock exchange. Entities making direct investments typically have a significant degree of influence and control over the company into which the investment is made. Open economies with skilled workforces and good growth prospects tend to attract larger amounts of foreign direct investment than closed, highly regulated economies. 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 direct or indirect ownership of 10% or more of the voting power of an enterprise resident in one economy by an investor resident in another economy is evidence of such a relationship. It is clear that the central aspect of the operational FDI definition is lasting interest to be captured through a foreign investors ownership of minimum 10 per cent voting power in the invested company. As the OECD definition explains, The lasting interest implies the existence of a long-term relationship between the direct investor and the direct invested enterprise and a significant degree of influence on the management of the enterprise. Evidently, this is how the foreign direct investor can maintain his ownership advantages over his proprietary assets. Given that it is not possible to do detailed industry and firm-level studies at all times, the most immediate measure of the contribution of FDI in a host country is given by the absolute amount of recorded FDI inflows. In this context it came to be recognised that direct investment is not solely limited to equity investment (to be captured by a minimum 10% equity share) but also relates to reinvested earnings and inter-company debt. In the context of many countries, the concern has been that the ratios of FDI inflows to total capital inflows as well as those to gross domestic investment tend to understate the financial importance of FDI for a host economy, because recorded FDI flows do not capture even the complete financial contribution of foreign affiliates in many countries. This was true for several developed and developing countries like India, Thailand, etc., which did not include either reinvested earnings or inter-company debt or both in the reported FDI data until a few years ago. But, given that we now live in a different world of proliferating Free Trade Agreements (FTAs) and Bilateral Investment Treaties (BITs) involving investment liberalisation that make privileges and treatment accorded to foreign direct investors legally binding, it may be important to recognise that beyond the concerns of being able to capture the real financial and economic contribution of FDI inflows, developing country governments promoting FDI need to be aware that FDI definitions are also about protecting the rights of the so-defined investors in the host country.

Foreign Direct Investment Policy in India

Foreign Direct Investment policy in IndiaIt is in this context that it is pertinent looking at what the current FDI policy in India points to. Recently, the Department of Industrial Policy and Promotion (DIPP) under Indias Ministry of Commerce and Industry released the Draft Press Note on FDI Regulatory Framework consolidating all prior regulations on FDI into one document for comments. It reflects the current regulatory framework on FDI in India. While the Draft Note confirms that: The motivation of the direct investor is a strategic long term relationship with the direct investment enterprise to ensure the significant degree of influence by the direct investor in the management of the direct investment enterprise, it goes on clarify that in India the lasting interest is not evinced by any minimum holding of percentage of equity capital/shares/voting rights in the investment enterprise.Clearly, India is not following the international best practice. The attempt seems to be to try and capture the broad influence of FDI inflows in our economies by including all kinds of foreign capital into the definition of FDI. This can serve two purposes. Clearly, such a catch-all definition that treats all foreign investments in Indian companies equity capital as FDI irrespective of the extent of their share will inflate the FDI inflow figures. This is surely helpful in cheering up free market advocates who have been lamenting the smaller amounts of FDI received by India in comparison to those received by China and have constantly been pushing for greater policy liberalization for attracting larger amounts of FDI into India. Analysts and academicians have already pointed to the increasing role of private equity in the observed sharp increase in FDI figures and the increased routing of inflows through the tax havens in the years since 2005. Through a pioneering analysis of the officially largest 1832 individual cases of FDI inflows into India during the period 2004-2008, Rao and Dhar (2010) have just come out with empirical evidence on how FDI figures in India are indeed an overestimate if one were to consider the normal Dunning type of FDI. Separating out private equity (PE) investors and portfolio investors as well as those controlled by Indians from the FDI category and considering only Typical FDI that would add to the existing facilities, they found that only a little less than half of the inflows could be categorised under the FDI category. They have considered as FDI only those inflows from foreign investors operating in the same sectors in their home countries and can be expected to be long term players and can be expected to bring in not only capital but also associated benefits and on their own strength.

Attractive Location in Global FDI

Attractive Location in Global FDIIt is a well-known fact that due to infrastructural facilities, less bureaucratic structure and conducive business environment China tops the chart of major emerging destination of global FDI inflows. The other most preferred destinations of global FDI flows apart fromChina and Brazil are Mexico, Russia, and India. The annual growth rate registered by China was 15%, Brazil was 84%, Mexico was 28%, Russia was 62%, and India was 17% in 2007 over 2006. During 1991-2007 the compound annual growth rate registered by China was 20%, Brazil was 24%, Mexico was 11%, Russia was 41% (from 1994), and India was 41%. Indias FDI need is stood at US$ 15 bn per year in order to make the country on a 9% growth trajectory (as projected by the Finance Minister of India in the current Budget). Such massive FDI is needed by India in order to achieve the objectives of its second generation economic reforms and to maintain the present growth rate of the economy. Although, Indias share in world FDI inflows has increased from 0.3% to 1.3% (Chart-3.2 & Table 3.2) from 1990-95 to 2007. Though, this is not an attractive share when it is compared with China and other major emerging destinations of global FDI inflows.Table 3.2- Share of India in World FDI:-

Chart-3.2:- (Table-3.3) reveals that during the period under review FDI inflow in India has increased from 11% to 69%. But when it is compared with China, Indias FDI inflows stand nowhere. And when it is compared with rest of the major emerging destinations of global FDI India is found at the bottom of the ladder (Table-3).Table- 3.3- Emerging Economies of the World:-

The reason could be bureaucratic hurdles, infrastructural problems, business environment, or government stability. India has to consider the five point strategy as put forward by the World Bank for India, if India wants to be an attractive location of global FDI in the coming years.

Direct Investment Categories

Direct Investment Categories

Clearly, adding more investor/asset classes to the direct investment category will make this overestimation of actual FDI even worse. As already mentioned, the problems of dealing with assessing the development implications and macroeconomic consequences of FDI inflows under the prevailing norms already abound.7 Blurring the lines between direct and portfolio investments will also make a proper assessment of the true benefits from and consequences of FDI inflows more and more complicated and difficult. But, in addition to these problems, the consequences of having such broad national FDI definition without a clear distinction between direct and portfolio investments can be dangerous for Indias remaining policy space related to investment policies and capital controls. This is because, treating all foreign investments in Indian companies equity capital as FDI irrespective of the extent of their share will also make all these categories of foreign investors (or/and assets) eligible for the privileges and treatment accorded to FDI, such as freedom for capital repatriation and investment/investor protection including investor-state dispute settlement mechanism. Further, lack of clarity in national FDI definitions can take away any leverage we have in investment negotiations with developed countries in Free Trade Agreements (FTAs), Economic Partnership Agreements (EPAs), etc. and will contribute to a wider process of multi-lateralisation of investment rules, as we shall discuss later on. As shown by Rao and Dhar (2010), in inflows recorded as FDI in India, there are investments by banks and other financial intermediaries. However, going by the basic characteristics of FDI, these investments seeking purely capital gains cannot be considered FDI, unless they are in their own sectors (that is, in the financial sector itself). In the second category are investments by Private Equity (PE) funds, which are also generally not known to contribute anything more than risk capital. While venture capital is a form of private equity typically provided for early-stage, high-potential, growth companies, by definition VCs also take a role in managing these entrepreneurial companies, thus adding skills as well as capital. In this sense, they are differentiated from buy out private equity which typically invests in more mature companies. However, both investments are in the interest of realising a return through an initial public offer (IPO) or sale of the company, unlike the lasting interest entailed in typical FDI. In a third category are investments by foreign investors who have base in India and who have expanded out of India, which have been identified as Round Tripping. It is contended that irrespective of whether the money brought in by them is raised abroad or might have been taken out by them at some point in the past, this category is also kept out of the consideration of FDI given that control over the investee company remains with Indians who have strong base in India. In particular, these investments also do not bring in any assets other than financial capital.

Permission Routes

Permission RoutesWhy has this anomaly come about? This has to do with the range of instruments through which FDI is allowed in India. Under the FDI scheme in India, an Indian entity/enterprise can issue equity shares/fully convertible preference shares/fully convertible debentures to raise FDI and after such issuance the company has to submit details about the above mentioned instruments in the prescribed (FCGPR) form to the Reserve Bank of India (RBI). However, a company can also issue only fully convertible preference shares/fully convertible debentures, without any equity participation from the foreign investor. So, if a foreign investor invests in fully convertible preference shares/debentures without any equity participation (or with equity participation below 10%), even then it is included as part of FDI. Only non-convertible, optionally convertible or partially convertible preference shares for issue of which funds have been received on or after May 1, 2007 are considered as debt (and accordingly, all norms applicable to external commercial borrowings or ECBs apply). Fully convertible preference shares are not only considered as equity, but they are also included when calculating the foreign direct investment (FDI) cap in sectors where foreign equity limits apply. While the finance ministry had made this differentiation in April 2007 in order to reduce the large amount of foreign capital (especially private equity) flowing into the real estate sector through the route of preference shares without adhering to any regulation on interest rates offered on these shares, sectoral equity caps, etc., considering foreign investment in fully convertible preference shares without any equity participation as FDI is problematic for two reasons at least. Most such investments are by international banks, other financial intermediaries and PE funds that not only do not have any lasting interest in the investee company, but these investors also do not own any proprietary assets in the area of operation of the investee company. Thus, in no way do these foreign investments conform to the understanding of what FDI entails. They are simply portfolio investments seeking capital gains. In fact, IMFs BOP Manual 6 considers even fully convertible preference shares/debentures as debt instruments. Similarly, in India, Depository Receipts (DRs) and Foreign Currency Convertible Bonds (FCCBs) are also considered as FDI. Again, an FII can invest in a particular share issue of an Indian company either under the FDI Scheme or the Portfolio Investment Scheme. The Indian company which has issued shares to FIIs under the FDI Regulation for which the payment has been received directly into companys account has to report these figures separately to the RBI in the FC-GPR Form (Annex) (Post issue pattern of shareholding). However, it is not clear why institutional investors should be allowed under the FDI route at all. It should be noted that from June 1998 onwards, registered FIIs can individually hold up to a maximum of 10% of a companys total issued capital and aggregate FII limit for a sector was raised to the sectoral cap for foreign investment as of September 2001. But, an FII can also invest in the equity shares of a company on behalf of his sub-accounts, wherein the investment on behalf of each such sub-account, in case of foreign corporates or individuals, can be up to a maximum 5% of the total issued capital of that company. We already know that the Participatory Notes (PNs) that are Offshore Derivate Instruments [ODI] in nature are used by investors or hedge funds, which are not registered with the Securities and Exchange Board of India (SEBI), to invest in Indian securities market through these sub-accounts. Thus, for calculating both direct foreign investment (i.e. non-resident investment) in an Indian company and indirect foreign investment in an Indian company (wherein an Indian company having foreign investment in turn invests in another company), all kinds of foreign investment, namely, investment by FIIs (holding as of March 31), NRIs, ADRs, GDRs, FCCBs and convertible preference shares/debentures are considered in addition to FDI. Indian experience shows these new types of investors already account for a significant proportion of the total inflows coming in as FDI, especially through the tax havens. Rao and Dhar (2010) found that just less than three-fourths of the inflows during 2004-2008 under the Round Tripping and PE/VC categories of investors entered through the Automatic route that does not require any prior approval from the government. They also found that typically thesePE/VC and Round Tripping categories of inflows passed through the tax havens. These investors do not even profess to contribute anything more than a short-term financial contribution to the invested company.

Dangers Involved

Dangers Involved

What is the problem with the classification of an asset class that is primarily portfolio investment as FDI in the national FDI definition? First, the country is extending the preferential conditions of entry and operations that are offered to FDI to a class of investors whose actual identity is often unknown and some of whom are not regulated in their own home countries. Secondly, despite the fact that these investors cannot be argued to be either bringing in any intangible ownership advantages to the host companies or contributing to national investments in the medium term (since they are known to sell and move out), it is clear that they enjoy the freedom for capital repatriation enjoyed by foreign direct investors. Thus, the countrys ability to control inward and outward capital movements are being hampered, which can have detrimental consequences as we have seen in the recent global financial crisis. These lead us to a more far reaching consequence. By defining FDI to include all sorts of foreign investment, the government could unwittingly contribute to a process that has been warned to be of serious consequences for the policy space of developing countries. It is important not to forget that in 1998, the OECDs attempt to implement a Multilateral Agreement on Investment (MAI) was rejected because of the very fact that developed and developing countries could not agree on the extent of flexibility required by the latter in investment policies within a multilateral framework. With strong opposition from developing countries, investment was thus excluded from negotiations in the 2003 WTO Cancun Ministerial when a Multilateral Framework on Investment (MFI) was sought to be incorporated. Apart from GATS that brought in FDI in services under the WTO by defining trade in services through four modes including commercial presence of the foreign provider, the only major FDI-related regulation at the WTO level remained the agreement on Trade Related Investment Measures (TRIMS). The latter abolished a number of legitimate performance requirements that several governments (most successfully Japan and the East Asian newly industrialised countries) used to impose on direct investors in order to ensure that their investments contributed to meeting development objectives of the host countries. But unsatisfied with TRIMS, developed nations like the EU, US and Japan have been introducing the so-called Singapore Issues in bilateral FTAs and in particular, deepening investment liberalisation using bilateral and pluri-lateral negotiations (FTAs, EPAs, etc.) as a means to eventually re-introduce investment at the multilateral level negotiations. Analysts studying investment issues in Bilateral Investment Treaties (BITs), RTAs and Comprehensive Economic Partnership Agreements (CEPA) have in the recent years been warning of the dangers involved in a broad definition of investment while negotiating standards for entry and operation of foreign enterprises in developing countries. Why exactly has a broad definition of investment been opposed in trade negotiations? It has been found that North- South FTAs and BITs often have provisions (typically under a Current Payments and Capital Movements section) requiring all transfers relating to the investment from the contracting parties to be allowed without delay into and out of their territories. Typically, these transfers cover contributions to capital, profits, capital gains, dividends, interest, loan repayments, etc. Use of capital controls as a policy measure is allowed only as defined under the safeguard measures in each agreement. In most investment agreements with developed countries, safeguard measures through restriction on capital flows are by definition to be used only under an emergency situations in case of serious difficulties with monetary or exchange rate policy or balance of payments and can only be used temporarily. Clearly, this prevents countries from utilising different capital control measures in order to prevent a BoP crisis. In this context, it is interesting to note that some years back, the IMF staff report for the 2003 Article IV consultation for the United States had questioned whether the investment provisions in US preferential trade agreements (PTAs) could leave the partner countries too vulnerable to surges in capital inflows. Apart from the US FTAs, the EU FTAs and Japans Economic Partnership Arrangements (EPAs) also increasingly include broad definitions of investment. Japans EPA with Malaysia is a case in point. Most EU FTAs with developing countries such as EU-CARIFORUM and EU-South Africa also include portfolio investment as a way to rule out host country controls over capital flows. A study on investment provisions in EU FTAs found that only in the case of the EU-Chile FTA, the developing country preserved the right of its 6 central bank to exert control over capital flows as stated by its constitutional law. During 1991- 1998, Chile had imposed a 30% deposit over a period of one year for all incoming capital, which had great success in limiting short-term flows, currency volatility and contagion of external crises. Chiles agreement with the EU allows it to impose restrictions up to one year which can be renewed indefinitely, but on the other hand established limits to the amount of reserves to be deposited in the central bank as a requirement for capital moving in or out the country of up to 30% and for only two years. As for other existing EU agreements, the case of EUCARIFORUM agreement, the most recent to be signed by the EU is revealing. Restrictions on capital flows can only be imposed as strictly necessary and for a maximum period of six months. It should be noted that Thailands central bank had also imposed a 30% withholding tax on inward investments to slow speculation on the Thai baht in 2006 and kept this in place for two years. It is clear that if we define investment to include investments other than FDI, these provisions seriously reduce the ability of developing country members to regulate the flows linked with speculative capital market transactions and hot money inflows. Thirdly, the investment chapter in FTAs generally accords national treatment and most-favoured nation treatment to foreign investors. Both these provisions grant equality of treatment to national and foreign investors in like circumstances. This can create unforeseen problems as in the current crisis wherein a countrys ability to carry out stimulus measures and carry out bailouts aimed at ensuring systemic stability of the financial sector can also be challenged on grounds that they deny a foreign investors right to fair and equitable treatment. Gallagher (2010) points out that such an argument was made against the Czech Republic, when a foreign firm said the Czech Republic had violated its rights by excluding a small bank in which it had invested from a bailout program made available to larger too big to fail Czech banks. Another controversial provision in the investment chapters in US agreements in the context of investor-state disputes are those related to the issues of expropriation and compensation. For example, the investment chapter in the US-Chile FTA is practically identical to the controversial Chapter 11 of the NAFTA. NAFTA includes a list of rights for multinational corporations, which allow, among other benefits, for businesses to sue central Governments if they feel that actions which violate their rights have been taken. Similarly, the US-CAFTA FTA also prohibits direct and indirect expropriation (or nationalization). Direct expropriation is a well-defined term, which refers to the nationalization, transfer of title or seizure of private property by the host government. The legal texts mention the phrase indirect expropriation by measures equivalent (or tantamount) to expropriation or nationalization. Thus the actions of the State measures are broadly defined, which permit a range of interpretations of these actions by which legitimate regulations on the part of the State can be brought under litigation for affecting the profits of the investor. This can include regulations at the sub-federal and local government levels. These have been some of the most controversial issues under which broad investment definitions have been warned against by several analysts. By having such a broad national FDI definition and moving away from the international best practice (which has maintained a critical minimum qualifying share of 10% in equity capital of a domestic entity by a non-national investor for it to be included as FDI), India is not only going against the stand it took in the investment negotiations at the WTO and making a mockery of developing countries successful fight against MAI-type multilateral rules, but it will also be doing a great disservice to developing countries in this ongoing battle. This is because if we retain such a broad definition of FDI, this will do away the need for developed country negotiators to define investment broadly! We would have already lost most of the leverage in investment negotiations by way of increasing engagement in RTAs. There is continuing pressure on developing countries to enter into more bilateral FTAs on the often unjustified premise that they could otherwise lose market access in developed country markets to competitors. But, once several groups of developing countries have made similar investment agreements under the framework of North-South FTAs, there is a clear danger that these become the benchmark in the future for extending liberalisation at the MFN level in multi-lateral negotiations. But, what is even more alarming is that South-South FTAs are also seeking to introduce such investment provisions. This is in fact linked to the fact that many developing countries such as India, China and Brazil have seen the emergence of outward investors. For example, if India pushes ahead with inclusion of such investment provisions in its proposed agreement with ASEAN, this can undermine the efforts put in by developing country negotiators over the years to resist multi-lateralisation of investment rules. This is because some of the ASEAN members already have deep investment liberalisation commitments under EPAs with Japan and are in the process of negotiations with the EU, apart from Australia, the US and many other countries. India is also negotiating with the EU on a proposed FTA. If the European Commission obtains non-discrimination rules in its FTAs with ASEAN and India in a manner similar to that it incorporated in its FTA with CARIFORUM, then, ASEAN and India will have to provide EU investors the same treatment that they may agree in more flexible bilateral agreements with third countries each of them sign even in the future. Thus, if both India and ASEAN agree to EU-CARIFORUM type MFN treatment to EU investors and if India and ASEAN include more flexible rules on investment in the ASEAN-India investment/services chapters in the name of South-South cooperation, all these countries will need to treat EU investors in a similar manner. While detailed analysis is required to understand the inter-connectedness of the investment provisions as well as service sector liberalisation commitments in each of the existing and proposed FTAs and their implications for a countrys ability to maintain financial stability, it seems logical to conclude that if developing countries fail to arrest this trend of including other kinds of investments and instruments into FDI definitions at the national and regional levels, the next level of multilateral investment liberalization would have been achieved through these various FTAs without even mentioning it at the WTO!Thus, if we define FDI within our national regulatory frameworks so broadly and allow instruments and flexibility that was earlier resisted, we would have already lost most of the leverage in investment negotiations at the regional and multilateral levels. This may well become the proverbial last nail in the coffin in the context of developing countries struggle to keep out investment from liberalization at the multilateral level. Given that many of the consequences of the recent global financial crisis (that originated in the developed world and transmitted to the developing world) are yet to be understood, it does not hurt to reiterate that developing country policy makers would be wiser to err on the side of caution and avoid the entry of capital account liberalisation through broad FDI concepts.

Indias Foreign Direct Investment Trends and Analysis

Indias Foreign Direct Investment Trends and AnalysisIndia has emerged as the preferred destination for many foreign international enterprises due to constructive factors such as high economic growth, fast population growth, English speaking people, and lower costs for workers.Location determinants of foreign direct investment:-Location-specific rewards are further classified by three types of FDI motives:1. Market-seeking investment is undertaken to uphold existing markets or to exploit new markets. For example, due to tariffs and other forms of barriers, the firm has to relocate production to the host country where it had previously served by exporting.2. When firms invest abroad to obtain resources not available in the home country, the investment is called resource- or asset-seeking. Resources may be natural resources, raw materials, or low-cost inputs such as labour.3. The investment is streamlined or efficiency-seeking when the firm can gain from the general governance of organically dispersed activities in the presence of economies of scale and scope.The host country factors or fundamentals can be grouped in two categories:The first group comprises of natural resources, most kinds of labour, and proximity to markets. The second group include of a range of environmental variables that act as a function of political, economic, legal, and infra-structural factors of a host country.Indias inward investment rule went through a series of changes since economic reforms were escorted in two decades back. The expectation of the policy-makers was that an investor friendly command will help India establish itself as a preferred destination of foreign investors. These expectations remained largely unfulfilled despite the consistent attempts by the policy makers to increase the attractiveness of India by further changes in policies that included opening up of individual sectors, raising the hitherto existing caps on foreign holding and improving investment procedures. But after 200506, official statistics started reporting steep increases in FDI inflows. Portfolio investors and round-tripping investments have been important contributors to Indias reported FDI inflows thus blurring the distinction between direct and portfolio investors on one hand and foreign and domestic investors on the other. These investors were also the ones which have exploited the tax haven route most.Inward investments have been constantly rising since the sharp drop witnessed in 2009, following the global financial crisis. Hiccups apart, foreign investors see huge long-term growth potential in the country. As much as 75 percent of global businesses already present in the country are looking to considerably expand their operations going forward according to the Indian attractive survey by Ernst & Young. This also confirms that India is undergoing a changeover, both in terms of investor perception of its market potential, and in reality.With GDP growth anticipated to surpass 8 percent yearly and the number of people in the Indian middle class set to triple over the next 15 years, with an equivalent impact on disposable income, domestic demand is expected to grow exponentially. Indias young demographic profile also helps it in providing an increasingly well-educated and cost-competitive labor force. These factors put India in a good position to attract an increasing proportion of global FDI.As project numbers and jobs created are still some way off highs reached in 2008, which saw 971 projects, the trend over the last decade has shown a steady, if not dramatic, upward movement. Generally project numbers in 2010 were up 60 percent over 2003 and the number of jobs created up 30 percent.The strong domestic market enabled India to deliver a flexible performance during the global economic slowdown. India today is rising as a manufacturing destination, both for the domestic and global markets. As business leaders battle for growth in the new economy, there is a sense of urgency among leading players to grab the prospects offered by the Indian market.With the liberty of the simplified compendium on foreign direct investment, numerous processes on FDI and associated routes of investment too are being ratified with a view to speed up the process of inflows into India.The out of the country Indian investors too would find it simpler to entry nodal bodies and invest in India. Though, a note of caution the Reserve Bank of India too is attempting to legalize certain sections in Foreign Exchange Management Act (FEMA) which also allow NRIs, routes to invest in India. Its argument is that NRIs tend to invest much more than the cap allowed in the sectors through these other routes, thereby exceeding allowed limits for FDI. The government may also remove the liberties provided to NRIs in sectors such as aviation, real estate etc.More reforms to make investing in India a simpler process, such as FDI in multi-brand retail, defence production, and agriculture, are in the discussion stage and the government intends to bring out tangible policies in this direction. Proposals can also be sent to DIPP online. This facility will allow all abroad investors to speed up their investment proposals.

Tax incentives to SEZ developers:-Income tax:1. Deduction from profits and gains from export of goods/services as follows (Section 10AA).2. 100 percent income tax exemption for first five years.3. 50 percent income tax exemption for next five years.4. Income tax exemption for next five years to the extent of profits.5. Capital gains tax exemption on relocation to SEZ (Section 54GA): This is a controversial issue as to be eligible for income tax exemption; the unit should be a new unit. Further, a press statement from Hon. Minister for Commerce and Industry, Mr. Kamal Nath, mentions that SEZs are basically for fresh investments.6. No TDS by overseas banking units on interest on deposits/borrowings from non-resident or person not ordinarily resident.7. No minimum alternate tax.8. Transferee developer enjoys 100 percent income tax exemption for balance period of 10 assessment years.Indirect tax:1. SEZ units may import or procure from domestic sources duty free, all their requirements of capital goods, raw materials, consumables, spares, packaging materials, office equipment, DG sets for implementation of their project in the zone without any license or specific approval.2. No import duty on these goods imported.3. No excise duty on these goods procured from domestic tariff area.4. No service tax on services availed from domestic tariff area.5. No value added tax and central sales tax on goods procured from domestic tariff area.6. On goods procured from DTA, drawback under section 75 allowed to SEZ unit.7. Goods imported/procured locally duty free could be utilized over the approval period of five years.Other Incentives:A foreign institutional investor investing in shares and securities in India would be accountable to tax at 10 percent on its long-term capital gains and 30 percent on short-term capital gains. The least amount period of investment in the case of equity shares would be more than one year to be considered long term, and three years in the case of other securities. Dividends, interest or long-term capital gains of an infrastructure capital fund or infrastructure Capital Company that earns from investments made on or after June 1, 1998 in any venture engaged in the business of developing, maintaining and working any infrastructure facility, and which has been permitted by the central Government, is not liable from tax. Dividends paid by local players to their shareholders are excused from tax. Though, the domestic corporation would have to pay an extra tax termed as tax on circulated profits which is computed at the rate of 10 percent of the amounts spread as dividends by the local company.Current Statistics:-Indian has been attracting foreign direct investment for a long period. The sectors like telecommunication, construction activities and computer software and hardware have been the major sectors for FDI inflows in India. As per the fact sheet on FDI, there was Rs. 6,30,336 crore FDI equity inflows between the period of August 1991 to January 2011.Top 10 investing FDI investing countries in India are Mauritius, Singapore, United States, UK, Netherlands, Japan, Cyprus, Germany, France and UAE. According to media reports, the decline in the FDI inflows would be a major concern for the economy, as the Indian economy is heading to reach the 9 percent growth rate.The trend of declining FDI tells us very little about statistics of FDI as it refers to FDI equity inflows. Though, equity inflow is a better indicator of portfolio investment (also known as FII inflows) than of FDI. To understand this, it is essential to define FDI.Definition of FDI is complex. The main reason is that unlike portfolio investment, FDI involves a bunch of activities like managerial inputs, technology infusion etc which are not measured in the equity definition of FDI.For developing countries like India, the most important reason to attract FDI is the availability of better technology. This does not mean that overseas companies transfer technology. All studies stated that the presence of foreign companies which positively impacts productivity of domestic firms through learning the use of new technologies. This is really important than obtaining technology through purchases of drawings and designs. If we accept this, then a better indicator of FDI interest is the long term trends of FDI in India.Real FDI is Increasing in India:-An annual FDI inflow indicates that FDI went up from around negligible amounts in 1991-92 to around US$9 billion in 2006-07. It then hiked to around US$22 billion in 2007-08, rising to around US$37 billion by 2009-10. It is now clear that FDI was related to the recessionary conditions in the western economies. In other words, the stock of FDI has jumped by almost US$100 billion since 2006-07. The recent flattening of monthly FDI flows is a sign more of recovery in the western economies than any loss of long term interest in the Indian economy. The monthly figure only shows that the incremental FDI is going back to the prerecession years rather than indicating decline of FDI into India. In fact, a monthly inflow of US$1.1 billion is about 30 percent higher than pre-recession years.Also, FDI is all about long term investment. Companies have already invested in to India and are unlikely to move elsewhere. Unless any dramatic negative changes in policy, FDI will continue to inch upwards.The crucial test for India is how to move from US$10-12 billion FDI economy to one where investment levels are US$30-40 billion.

Foreign Direct Investment in Indian Retail Sector

Foreign Direct Investment In Indian Retail SectorAs per the current regulatory regime, retail trading (except under single-brand product retailing FDI up to 51 per cent, under the Government route) is prohibited in India. Simply put, for a company to be able to get foreign funding, products sold by it to the general public should only be of a single-brand; this condition being in addition to a few other conditions to be adhered to. India being a signatory to World Trade Organizations General Agreement on Trade in Services, which include wholesale and retailing services, had to open up the retail trade sector to foreign investment. There were initial reservations towards opening up of retail sector arising from fear of job losses, procurement from international market, competition and loss of entrepreneurial opportunities. However, the government in a series of moves has opened up the retail sector slowly to Foreign Direct Investment (FDI). In 1997, FDI in cash and carry (wholesale) with 100 percent ownership was allowed under the Government approval route. It was brought under the automatic route in 2006. 51 percent investment in a single brand retail outlet was also permitted in 2006. FDI in Multi-Brand retailing is prohibited in India.In 2004, The High Court of Delhi defined the term retail as a sale for final consumption in contrast to a sale for further sale or processing (i.e. wholesale). A sale to the ultimate consumer. Thus, retailing can be said to be the interface between the producer and the individual consumer buying for personal consumption. This excludes direct interface between the manufacturer and institutional buyers such as the government and other bulk customers Retailing is the last link that connects the individual consumer with the manufacturing and distribution chain. A retailer is involved in the act of selling goods to the individual consumer at a margin of profit.Division of Retail Industry- Organised and Unorganised Retailing:-The retail industry is mainly divided into- 1. Organized, and 2. Unorganized Retailing.Organized retailing refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. These include the corporate-backed hypermarkets and retail chains, and also the privately owned large retail businesses.Unorganized retailing, on the other hand, refers to the traditional formats of low-cost retailing, for example, the local kirana shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart and pavement vendors, etc.The Indian retail sector is highly fragmented with 97 per cent of its business being run by the unorganized retailers. The organized retail however is at a very nascent stage. The sector is the largest source of employment after agriculture, and has deep penetration into rural India generating more than 10 per cent of Indias GDP.FDI Policy with Regard to retailing in India:-It will be prudent to look into Press Note 4 of 2006 issued by DIPP and consolidated FDI Policy issued in October 2010 which provide the sector specific guidelines for FDI with regard to the conduct of trading activities.1. FDI up to 100% for cash and carry wholesale trading and export trading allowed under the automatic route.2. FDI up to 51 % with prior Government approval (i.e. FIPB) for retail trade of Single Brand products, subject to Press Note 3 (2006 Series)3. FDI is not permitted in Multi Brand Retailing in IndiaEntry Options for Foreign Players prior to FDI Policy:-Although prior to Jan 24, 2006, FDI was not authorised in retailing, most general players had been operating in the country. Some of entrance routes used by them have been discussed in sum as below:-1. Franchise Agreements: It is an easiest track to come in the Indian market. In franchising and commission agents services, FDI (unless otherwise prohibited) is allowed with the approval of the Reserve Bank of India (RBI) under the Foreign Exchange Management Act. This is a most usual mode for entrance of quick food bondage opposite a world. Apart from quick food bondage identical to Pizza Hut, players such as Lacoste, Mango, Nike as good as Marks as good as Spencers, have entered Indian marketplace by this route.

2. Cash And Carry Wholesale Trading: 100% FDI is allowed in wholesale trading which involves building of a large distribution infrastructure to assist local manufacturers. The wholesaler deals only with smaller retailers and not Consumers. Metro AG of Germany was the first significant global player to enter India through this route.

3. Strategic Licensing Agreements: Some foreign brands give exclusive licences and distribution rights to Indian companies. Through these rights, Indian companies can either sell it through their own stores, or enter into shop-in-shop arrangements or distribute the brands to franchisees. Mango, the Spanish apparel brand has entered India through this route with an agreement with Piramyd, Mumbai, SPAR entered into a similar agreement with Radhakrishna Foodlands Pvt. Ltd

4. Manufacturing and Wholly Owned Subsidiaries:The foreign brands such as Nike, Reebok, Adidas, etc. that have wholly-owned subsidiaries in manufacturing are treated as Indian companies and are, therefore, allowed to do retail. These companies have been authorized to sell products to Indian consumers by franchising, internal distributors, existent Indian retailers, own outlets, etc. For instance, Nike entered through an exclusive licensing agreement with Sierra Enterprises but now has a wholly owned subsidiary, Nike India Private Limited.FDI in Single Brand Retail:-The Government has not categorically defined the meaning of Single Brand anywhere neither in any of its circulars nor any notifications.In single-brand retail, FDI up to 51 per cent is allowed, subject to Foreign Investment Promotion Board (FIPB) approval and subject to the conditions mentioned in Press Note 3 that: 1. Only single brand products would be sold (i.e., retail of goods of multi-brand even if produced by the same manufacturer would not be allowed), 2. Products should be sold under the same brand internationally, (c) single-brand product retail would only cover products which are branded during manufacturing and 3. Any addition to product categories to be sold under single-brand would require fresh approval from the government.While the phrase single brand has not been defined, it implies that foreign companies would be allowed to sell goods sold internationally under a single brand, viz., Reebok, Nokia, Adidas. Retailing of goods of multiple brands, even if such products were produced by the same manufacturer, would not be allowed. Going a step further, we examine the concept of single brand and the associated conditions:FDI in Single brand retail implies that a retail store with foreign investment can only sell one brand. For example, if Adidas were to obtain permission to retail its flagship brand in India, those retail outlets could only sell products under the Adidas brand and not the Reebok brand, for which separate permission is required. If granted permission, Adidas could sell products under the Reebok brand in separate outlets.Brands could be classified as products and multiple products, or could be manufacturer brands and own-label brands. Assume that a company owns two leading international brands in the footwear industry say A and R. If the corporate were to obtain permission to retail its brand in India with a local partner, it would need to specify which of the brands it would sell. A reading of the government release indicates that A and R would need separate approvals, separate legal entities, and may be even separate stores in which to operate in India. However, it should be noted that the retailers would be able to sell multiple products under the same brand, e.g., a product range under brand A Further, it appears that the same joint venture partners could operate various brands, but under separate legal entities.Now, taking an example of a large departmental grocery chain, prima facie it appears that it would not be able to enter India. These chains would, typically, source products and, thereafter, brand it under their private labels. Since the regulations require the products to be branded at the manufacturing stage, this model may not work. The regulations appear to discourage own-label products and appear to be tilted heavily towards the foreign manufacturer brands. There is ambiguity in the interpretation of the term single brand. The existing policy does not clearly codify whether retailing of goods with sub-brands bunched under a major parent brand can be considered as single-brand retailing and, accordingly, eligible for 51 per cent FDI. Additionally, the question on whether co-branded goods (specifically branded as such at the time of manufacturing) would qualify as single brand retail trading remains unanswered.FDI in Multi Brand Retail:- The government has also not defined the term Multi Brand. FDI in Multi Brand retail implies that a retail store with a foreign investment can sell multiple brands under one roof.In July 2010, Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce circulated a discussion paper on allowing FDI in multi-brand retail. The paper doesnt suggest any upper limit on FDI in multi-brand retail. If implemented, it would open the doors for global retail giants to enter and establish their footprints on the retail landscape of India. Opening up FDI in multi-brand retail will mean that global retailers including Wal-Mart, Carrefour and Tesco can open stores offering a range of household items and grocery directly to consumers in the same way as the ubiquitous kirana store.Foreign Investors Concern regarding FDI Policy in India:-For those brands which adopt the franchising route as a matter of policy, the current FDI Policy will not make any difference. They would have preferred that the Government liberalize rules for maximizing their royalty and franchise fees. They must still rely on innovative structuring of franchise arrangements to maximize their returns. Consumer durable majors such as LG and Samsung, which have exclusive franchisee owned stores, are unlikely to shift from the preferred route right away.For those companies which choose to adopt the route of 51% partnership, they must tie up with a local partner. The key is finding a partner which is reliable and who can also teach a trick or two about the domestic market and the Indian consumer. Currently, the organized retail sector is dominated by the likes of large business groups which decided to diversify into retail to cash in on the boom in the sector corporates such as Tata through its brand Westside, RPG Group through Food world, Pantaloons of the Raheja Group and Shoppers Stop. Do foreign investors look to tie up with an existing retailer or look to others not necessarily in the business but looking to diversify, as many business groups are doing?An arrangement in the short to medium term may work wonders but what happens if the Government decides to further liberalize the regulations as it is currently contemplating? Will the foreign investor terminate the agreement with Indian partner and trade in market without him? Either way, the foreign investor must negotiate its joint venture agreements carefully, with an option for a buy-out of the Indian partners share if and when regulations so permit. They must also be aware of the regulation which states that once a foreign company enters into a technical or financial collaboration with an Indian partner, it cannot enter into another joint venture with another Indian company or set up its own subsidiary in the same field without the first partners consent if the joint venture agreement does not provide for a conflict of interest clause. In effect, it means that foreign brand owners must be extremely careful whom they choose as partners and the brand they introduce in India. The first brand could also be their last if they do not negotiate the strategic arrangement diligently.Concerns for the Government for only partially allowing FDI in Retail Sector:-A number of concerns were expressed with regard to partial opening of the retail sector for FDI. The Honble Department Related Parliamentary Standing Committee on Commerce, in its 90th Report, on Foreign and Domestic Investment in Retail Sector, laid in the Lok Sabha and the Rajya Sabha on 8 June, 2009, had made an in-depth study on the subject and identified a number of issues related to FDI in the retail sector. These included:It would lead to unfair competition and ultimately result in large-scale exit of domestic retailers, especially the small family managed outlets, leading to large scale displacement of persons employed in the retail sector. Further, as the manufacturing sector has not been growing fast enough, the persons displaced from the retail sector would not be absorbed there.Another concern is that the Indian retail sector, particularly organized retail, is still under-developed and in a nascent stage and that, therefore, it is important that the domestic retail sector is allowed to grow and consolidate first, before opening this sector to foreign investors. Antagonists of FDI in retail sector oppose the same on various grounds, like, that the entry of large global retailers such as Wal-Mart would kill local shops and millions of jobs, since the unorganized retail sector employs an enormous percentage of Indian population after the agriculture sector; secondly that the global retailers would conspire and exercise monopolistic power to raise prices and monopolistic (big buying) power to reduce the prices received by the suppliers; thirdly, it would lead to asymmetrical growth in cities, causing discontent and social tension elsewhere. Hence, both the consumers and the suppliers would lose, while the profit margins of such retail chains would go up.Limitations of the Present Setup:-Infrastructure:There has been a lack of investment in the logistics of the retail chain, leading to an inefficient market mechanism. Though India is the second largest producer of fruits and vegetables (about 180 million MT), it has a very limited integrated cold-chain infrastructure, with only 5386 stand-alone cold storages, having a total capacity of 23.6 million MT. , 80% of this is used only for potatoes. The chain is highly fragmented and hence, perishable horticultural commodities find it difficult to link to distant markets, including overseas markets, round the year. Storage infrastructure is necessary for carrying over the agricultural produce from production periods to the rest of the year and to prevent distress sales. Lack of adequate storage facilities cause heavy losses to farmers in terms of wastage in quality and quantity of produce in general. Though FDI is permitted in cold-chain to the extent of 100%, through the automatic route, in the absence of FDI in retailing; FDI flow to the sector has not been significant.Intermediaries Dominate the Value Chain:Intermediaries often flout mandi norms and their pricing lacks transparency. Wholesale regulated markets, governed by State APMC Acts, have developed a monopolistic and non-transparent character. According to some reports, Indian farmers realize only 1/3rd of the total price paid by the final consumer, as against 2/3rd by farmers in nations with a higher share of organized retail.Improper Public Distribution System:There is a big question mark on the efficacy of the public procurement and PDS set-up and the bill on food subsidies is rising. In spite of such heavy subsidies, overall food based inflation has been a matter of great concern. The absence of a farm-to-fork retail supply system has led to the ultimate customers paying a premium for shortages and a charge for wastages.No Global Reach:The Micro Small & Medium Enterprises (MSME) sector has also suffered due to lack of branding and lack of avenues to reach out to the vast world markets. While India has continued to provide emphasis on the development of MSME sector, the share of unorganized sector in overall manufacturing has declined from 34.5% in 1999-2000 to 30.3% in 2007-08. This has largely been due to the inability of this sector to access latest technology and improve its marketing interface.Rationale behind Allowing FDI in Retail Sector:FDI can be a powerful catalyst to spur competition in the retail industry, due to the current scenario of low competition and poor productivity.The policy of single-brand retail was adopted to allow Indian consumers access to foreign brands. Since Indians spend a lot of money shopping abroad, this policy enables them to spend the same money on the same goods in India. FDI in single-brand retailing was permitted in 2006, up to 51 per cent of ownership. Between then and May 2010, a total of 94 proposals have been received. Of these, 57 proposals have been approved. An FDI inflow of US$196.46 million under the category of single brand retailing was received between April 2006 and September 2010, comprising 0.16 per cent of the total FDI inflows during the period. Retail stocks rose by as much as 5%. Shares of Pantaloon Retail (India) Ltd ended 4.84% up at Rs 441 on the Bombay Stock Exchange. Shares of Shoppers Stop Ltd rose 2.02% and Trent Ltd, 3.19%. The exchanges key index rose 173.04 points, or 0.99%, to 17,614.48. But this is very less as compared to what it would have been had FDI upto 100% been allowed in India for single brand. The policy of allowing 100% FDI in single brand retail can benefit both the foreign retailer and the Indian partner foreign players get local market knowledge, while Indian companies can access global best management practices, designs and technological knowhow. By partially opening this sector, the government was able to reduce the pressure from its trading partners in bilateral/ multilateral negotiations and could demonstrate Indias intentions in liberalising this sector in a phased manner. Permitting foreign investment in food-based retailing is likely to ensure adequate flow of capital into the country & its productive use, in a manner likely to promote the welfare of all sections of society, particularly farmers and consumers. It would also help bring about improvements in farmer income & agricultural growth and assist in lowering consumer prices inflation. Apart from this, by allowing FDI in retail trade, India will significantly flourish in terms of quality standards and consumer expectations, since the inflow of FDI in retail sector is bound to pull up the quality standards and cost-competitiveness of Indian producers in all the segments. It is therefore obvious that we should not only permit but encourage FDI in retail trade.Lastly, it is to be noted that the Indian Council of Research in International Economic Relations (ICRIER), a premier economic think tank of the country, which was appointed to look into the impact of BIG capital in the retail sector, has projected the worth of Indian retail sector to reach $496 billion by 2011-12 and ICRIER has also come to conclusion that investment of big money (large corporates and FDI) in the retail sector would in the long run not harm interests of small, traditional, retailers. In light of the above, it can be safely concluded that allowing healthy FDI in the retail sector would not only lead to a substantial surge in the countrys GDP and overall economic development, but would inter alia also help in integrating the Indian retail market with that of the global retail market in addition to providing not just employment but a better paying employment, which the unorganized sector (kirana and other small time retailing shops) have undoubtedly failed to provide to the masses employed in them. Industrial organizations such as CII, FICCI, US-India Business Council (USIBC), the American Chamber of Commerce in India, The Retail Association of India (RAI) and Shopping Centers Association of India (a 44 member association of Indian multi-brand retailers and shopping malls) favour a phased approach toward liberalizing FDI in multi-brand retailing, and most of them agree with considering a cap of 49-51 per cent to start with.The international retail players such as Walmart, Carrefour, Metro, IKEA, and TESCO share the same view and insist on a clear path towards 100 per cent opening up in near future. Large multinational retailers such as US-based Walmart, Germanys Metro AG and Woolworths Ltd, the largest Australian retailer that operates in wholesale cash-and-carry ventures in India, have been demanding liberalization of FDI rules on multi-brand retail for some time. Thus, as a matter of fact FDI in the buzzing Indian retail sector should not just be freely allowed but per contra should be significantly encouraged. Allowing FDI in multi brand retail can bring about Supply Chain Improvement, Investment in Technology, Manpower and Skill development, Tourism Development, Greater Sourcing From India, Up gradation in Agriculture, Efficient Small and Medium Scale Industries, Growth in market size and Benefits to government through greater GDP, tax income and employment generation.Prerequisites before allowing FDI in Multi Brand Retail and Lifting Cap of Single Brand Retail:FDI in multi-brand retailing must be dealt cautiously as it has direct impact on a large chunk of population. Left alone foreign capital will seek ways through which it can only multiply itself, and unthinking application of capital for profit, given our peculiar socio-economic conditions, may spell doom and deepen the gap between the rich and the poor. Thus the proliferation of foreign capital into multi-brand retailing needs to be anchored in such a way that it results in a win-win situation for India. This can be done by integrating into the rules and regulations for FDI in multi-brand retailing certain inbuilt safety valves. For example FDI in multi brand retailing can be allowed in a calibrated manner with social safeguards so that the effect of possible labor dislocation can be analyzed and policy fine tuned accordingly. To ensure that the foreign investors make a genuine contribution to the development of infrastructure and logistics, it can be stipulated that a percentage of FDI should be spent towards building up of back end infrastructure, logistics or agro processing units. Reconstituting the poverty stricken and stagnating rural sphere into a forward moving and prosperous rural sphere can be one of the justifications for introducing FDI in multi-brand retailing. To actualize this goal it can be stipulated that at least 50% of the jobs in the retail outlet should be reserved for rural youth and that a certain amount of farm produce be procured from the poor farmers. Similarly to develop our small and medium enterprise (SME), it can also be stipulated that a minimum percentage of manufactured products be sourced from the SME sector in India. PDS is still in many ways the life line of the people living below the poverty line. To ensure that the system is not weakened the government may reserve the right to procure a certain amount of food grains for replenishing the buffer. To protect the interest of small retailers the government may also put in place an exclusive regulatory framework. It will ensure that the retailing giants do resort to predatory pricing or acquire monopolistic tendencies. Besides, the government and RBI need to evolve suitable policies to enable the retailers in the unorganized sector to expand and improve their efficiencies. If Government is allowing FDI, it must do it in a calibrated fashion because it is politically sensitive and link it (with) up some caveat from creating some back-end infrastructure.Further, To take care of the concerns of the Government before allowing 100% FDI in Single Brand Retail and Multi- Brand Retail, the following recommendations are being proposed:-1. Preparation of a legal and regulatory framework and enforcement mechanism to ensure that large retailers are not able to dislocate small retailers by unfair means.2. Extension of institutional credit, at lower rates, by public sector banks, to help improve efficiencies of small retailers; undertaking of proactive programme for assisting small retailers to upgrade themselves.3. Enactment of a National Shopping Mall Regulation Act to regulate the fiscal and social aspects of the entire retail sector.4. Formulation of a Model Central Law regarding FDI of Retail Sector.

Objectives

Objectives To determine the Foreign Direct Investment inflows in India. To understand the Foreign Direct Investment trends and its changes in India. To understand the Foreign Direct Investment policy in India. To understand the government concerns for allowing Foreign Direct Investment in India. To understand the relationship between the Foreign Direct Investment and the Retail sector in India.

Research Methodology

Research MethodologyResearch process consists of series of actions or steps necessary to effectively carryout the study. Knowledge of how to do research will indicate its evaluation and enable the users of the study to use the research results with reasonable confidence. It enables to make intelligent decisions concerning problems facing us in practical life at different stages of time.Data collection Method:-This research is based on secondary data and it examines the trading mechanism of stock market. The results are mainly drawn from the secondary data; sources are:- Publications of the company, Business magazines, Journals, text books, Websites, Annual reports.Research Design:-The Research Design chosen for this study is Descriptive in nature. Research design is needed because it facilitates the smoothness of various research operations, thereby enabling the conduction of the research as efficiently as possible to yield maximum information with minimum efforts of time and money. Research design stands for advance planning of the methods to be adopted for collecting relevant data and techniques to be used in their analysis, keeping in view the objective of research and availability of staff, time and money. Preparation of Research design should be done with great care as any error in it may upset the entire project. Fundamental to the success of any research project is sound research design. Research design is purely and simply the work or plan for a study that guides the collection and analysis of the data. A good research design has the characteristics of analysis, time required for research project and estimate of expenses to be incurred. The function of research design is to ensure that the required data are collected accurately and economically. It is a blue print that is followed in completing a study.Data Analysis:-The data collected from the secondary sources were consolidated, tabulated, analysed, interpreted and presented in the report. For the purpose of analyzing the data, graphs, tables and percentage method have been utilized. On the basis of information generated from the data analysis, conclusions have been drawn and suitable suggestions/recommendations have been made.

Findings and Analysis

Findings and AnalysisThe reported stock of FDI in India increased substantially after opening up of the economy. Table 4 presents the inflows data for the 10year period 200001 to 200910 which does not suffer from comparison problems. The change in the reporting practice which introduced new items, especially reinvested earnings of the already established ones, did contribute significantly to the reported higher total inflows: 44.21% during 200001 200506 and 30.63% during 200506 200910. There is, however, no denying the fact of a dramatic rise in the inflows after 200506 as the reported equity inflows which fluctuated between 200102 and 200405, managed to climb slowly initially and rapidly after 200506. The FDI Equity inflows during the five years 200506 to 2009 10 were almost seven times those of the previous five years 200001 to 200405.Table 4- Reported FDI Inflows into India and their Main Components (As per International Best Practices):-

Chart 1- Average Reported FDI Equity Inflows during Different Periods:-

Incidentally, in March 2005, the government announced a revised FDI policy, an important element of which was the decision to allow FDI up to 100% foreign equity under the automatic route in townships, housing, builtup infrastructure and constructiondevelopment projects. The year 2005 also witnessed the enactment of the Special Economic Zones Act, which entailed a lot of construction and township development that came into force in February 2006.Further, it can be seen from Table 5 that acquisition of existing shares of companies by foreign investors contributed substantially to the FDI Equity Inflows and it peaked in 200506 and 200607 to reach almost twofifths of the total FDI Equity flows. Acquisition of shares together with reinvested earnings (which do not represent actual inflows) account for a substantial proportion of the reported total inflows. (Chart 2) Another notable feature of the inflows is that the proportion of the inflows subject to specific government approvals declined from 62.25% in 200001 to 13.55% in 200910 reflecting the progressively greater freedom enjoyed by the foreign investors in making their investment decisions.Table 5- Entry Routewise Distribution of FDI Equity Inflows in US $ mn:-

Chart 2- Relative Contribution of Reinvested Earnings and Acquisition of Shares to FDI Inflows:-

A development which provides a specific context to the present study is the sharp decline in the reported total FDI Equity inflows during the first eight months of 201011 by 23.88% over the inflows of the corresponding period of 200910. The corresponding fall in FDI Equity inflows was 27.43%. UNCTAD estimated the fall in Indias FDI inflows during the calendar year 2010 at 31%.59 From Table 5 (and Chart 2) it can be seen that even this level of inflow was sustained by a sudden increase in the inflows through the acquisition route. From a share of 12.29% in the FDI Equity inflows of 200910, its share doubled to 24.75% in 201011. Acquisition related inflows in value terms during the first eight months of 201011 already exceeded that for the entire 200910. And it is the inflows through the automatic route which were affected substantially rather than those through the Foreign Investment Promotion Board/Secretariat for Industrial Assistance (FIPB/SIA) approval route suggesting that more than the problems in getting the approvals through; it is the voluntary restraint on part of the foreign investors which was responsible for the slow down. The major fall in FDI inflows has caused concern in policy making circles and has become a subject matter of public comments. RBI in particular is now worried about the fall in FDI inflows in the context of higher level of current account deficit and dominance of volatile portfolio capital flows. The volatile FII inflows which accounted for a substantial proportion of the equity flows have in turn contributed to the volatility in equity prices and the exchange rate. RBI underlined the sustainability risks posed by the composition of capital flows and the need for recovery in FDI which is expected to have longerterm commitments. Besides environmentally sensitive sectors like mining, integrated township projects and construction of ports, it identified the sectors responsible for the slow down as construction, real estate, business and financial services. It does appear that the role of FDI is now being seen more from the point of managing the current account deficit due to its more stable nature, rather than for it being a bundle of assets. The increased inflows have been characterised by a sharp change in their sectoral composition. By 2008, while the share of manufacturing declined to almost half of what it was in 2005, share of services increased the maximum with mining and agriculture related activities receiving marginal amounts. Within services, Construction and Real Estate sector gained the most. The Financial services sector too gained in importance. Major setback was, however, experienced by the IT & ITES sector. While the Energy sector gained relatively, telecommunication services managed to retain its share. Construction & Real Estate and Finance are thus the major gainers in this period. (Table 6 and Chart 3) A further scrutiny of the data suggested that only a few of the Indian investee companies in the former can be categorised as engineering & construction companies like Punj Lloyd, Soma Enterprises and Shriram EPC and the rest are developersa few of these were engaged in setting up IT Parks and SEZs. A similar examination of the inflows to the financial sector suggested that close to 40% of the inflows were into companies that serve the securities market suggesting that they do not directly contribute to the financing needs of the Indian businesses. These could be termed as adjuncts to the foreign portfolio investors. In 2009, the situation changed somewhat.(Table 7) While the manufacturing sector gained marginally, the Construction and Real Estate sector improved its position further to claim more than onefifth of the inflows. IT & ITES slipped even further with a share of just 2.55% of the total.Table 6- Major Sectorwise Distribution of FDI Equity Inflows during 20052008:-

Chart 3- Sectoral Composition of Reported FDI Equity Inflows during 20052008:-

Table 7- Major Sectorwise Distribution of FDI Inflows in 2009:-

Another important aspect of the inflows is the substantial shift in the immediate source country for FDI into India (Table 8). While the prominence of Mauritius for routing foreign capital to India has been well known, the more recent period witnessed further strengthening of Mauritius as the source country. For the period 2005 to 2009, the country accounted for practically half of the total reported inflows. Interestingly, Singapore secured the second position with Cyprus and UAE entering the group of top 10 home countries for FDI into India. Overall, countries categorised as tax havens accounted for much higher share of nearly 70% of the total FDI inflows during the more recent period compared to their share of 40% till 2000 or even the 45% in the immediate preceding period.Table 8- Indias FDI Equity Inflows: Top 10 Home Countries Share (in percentage):-

Conclusion

ConclusionA start has been made:-Walmart has a joint venture with Bharti Enterprises for cash-and-carry (wholesale) business, which runs the Best Price stores. It plans to have 15 stores by March and enter new states like Andhra Pradesh, Rajasthan, Madhya Pradesh and Karnataka.Duke, Wallmarts CEO opined that FDI in retail would contain inflation by reducing wastage of farm output as 30% to 40% of the produce does not reach the end-consumer. In India, there is an opportunity to work all the way up to farmers in the back-end chain. Part of inflation is due to the fact that produces do not reach the end-consumer, Duke said, adding, that a similar trend was noticed when organized retail became popular in the US. Many of the foreign brands would come to India if FDI in multi brand retail is permitted which can be a blessing in disguise for the economy.Back End Logistics must for FDI in Multi-Brand Retail:-The government has added an element of social benefit to its latest plan for calibrated opening of the multi-brand retail sector to foreign direct investment (FDI). Only those foreign retailers who first invest in the back-end supply chain and infrastructure would be allowed to set up multi brand retail outlets in the country. The idea is that the firms must have already created jobs for rural India before they venture into multi-brand retailing.It can be said that the advantages of allowing unrestrained FDI in the retail sector evidently outweigh the disadvantages attached to it and the same can be deduced from the examples of successful experiments in countries like Thailand and China; where too the issue of allowing FDI in the retail sector was first met with incessant protests, but later turned out to be one of the most promising political and economical decisions of their governments and led not only to the commendable rise in the level of employment but also led to the enormous development of their countrys GDP.Moreover, in the fierce battle between the advocators and antagonist of unrestrained FDI flows in the Indian retail sector, the interests of the consumers have been blatantly and utterly disregarded. Therefore, one of the arguments which inevitably need to be considered and addressed while deliberating upon the captioned issue is the interests of consumers at large in relation to the interests of retailers.It is also pertinent to note here that it can be safely contended that with the possible advent of unrestrained FDI flows in retail market, the interests of the retailers constituting the unorganized retail sector will not be gravely undermined, since nobody can force a consumer to visit a mega shopping complex or a small retailer/sabji mandi. Consumers will shop in accordance with their utmost convenience, where ever they get the lowest price, max variety, and a good consumer experience.The Industrial policy 1991 had crafted a trajectory of change whereby every sectors of Indian economy at one point of time or the other would be embraced by liberalization, privatization and globalization. FDI in multi-brand retailing and lifting the current cap of 51% on single brand retail is in that sense a steady progression of that trajectory. But the government has by far cushioned the adverse impact of the change that has ensued in the wake of the implementation of Industrial Policy 1991 through safety nets and social safeguards. But the change that the movement of retailing sector into the FDI regime would bring about will require more involved and informed support from the government. One hopes that the government would stand up to its responsibility, because what is at stake is the stability of the vital pillars of the economy- retailing, agriculture, and manufacturing. In short, the socio economic equilibrium of the entire country.

Suggestions

SuggestionsThus, it is found that FDI as a strategic component of investment is needed by India for its sustained economic growth and development. FDI is necessary for creation of jobs, expansion of existing manufacturing industries and development of the new one. Indeed, it is also needed in the healthcare, education, R&D, infrastructure, retailing and in long term financial projects. So, the study recommends the following suggestions:- The study urges the policy makers to focus more on attracting diverse types of FDI. The policy makers should design policies where foreign investment can be utilised as means of enhancing domestic production, savings, and exports; as medium of technological learning and technology diffusion and also in providing access to the external market. It is suggested that the government should push for the speedy improvement of infrastructure sectors requirements which are important for diversification of business activities. Government should ensure the equitable distribution of FDI inflows among states. The central government must give more freedom to states, so that they can attract FDI inflows at their own level. The government should also provide additional incentives to foreign investors to invest in states where the level of FDI inflows is quite low. Government should open doors to foreign companies in the export oriented services which could increase the demand of unskilled workers and low skilled services and also increases the wage level in these services. It is suggested that the government endeavour should be on the type and volume of FDI that will significantly boost domestic competitiveness, enhance skills, technological learning and invariably leading to both social and economic gains. It is also suggested that the government must promote sustainable development through FDI by further strengthening of education, health and R&D system, political involvement of people and by ensuring personal security of the citizens. Finally, it is suggested that the policy makers should ensure optimum utilisation of funds and timely implementation of projects. It is also observed that the realisation of approved FDI into actual disbursement is quite low. It is also suggested that the government while pursuing prudent policies must also exercise strict control over inefficient bureaucracy, red - tapism, and the rampant corruption, so that investors confidence can be maintained for attracting more FDI inflows to India. Last but not least, the study suggests that the government ensures FDI quality rather than its magnitude.

Limitations

Limitations At various stages, the basic objective of the study is suffered due to inadequacy of time series data from related agencies. There has also been a problem of sufficient homogenous data from different sources. For example, the time series used for different variables, the averages are used at certain occasions. Therefore, the trends, growth rates etc may deviate from the true ones. The assumption that FDI was the only cause for development of Indian economy in the post liberalised period is debatable. No proper methods were available to segregate the effect of FDI to support the validity of this assumption. Above all, it is a B.B.A. research project and the research was faced with the problem of various resources like time and money.

Bibliography

BibliographyBooks:- Chandan Chakraborty, Peter Nunnenkamp (2006): Economic Reforms, FDI and its Economic Effects in India. Economic Survey, (1992-93): Ministry of Finance, Government of India, New Delhi. Goldman Sachs (2007): Global Economic Papers No.99. Handbook of Industrial Policy and Statistics (2007-08), Government of India. Nirupam Bajpai and Jeffrey D. Sachs (2006): Foreign Direct Investment in India: Issues and Problems, Harvard Institute of International Development, Development Discussion Paper No. 759, March.Websites:- www.imf.org www.rbi.org www.eximbank.com www.wto.org

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