FDI & Economic Growth
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Transcript of FDI & Economic Growth
FDI & Economic Growth
: AN INDIAN CASE STUDY
Presented By:Chinmay Jagga (91013)
Cejil Diclause (91014)Darrick Arora (91015)
Deepinder Singh (91016)Divanshu Kapoor (91017)
Gaurav Sharma (91018)
Agenda
Overview of FDI Inflows
1992
-93
1993
-94
1994
-95
1995
-96
1996
-97
1997
-98
1998
-99
1999
-00
2000
-01
2001
-02
2002
-03
2003
-04
2004
-05
2005
-06
2006
-07
2007
-08
0
1000
2000
3000
4000
5000
6000
US
$ m
illi
on
Top Investing Countries
53%
11%
9%
7%
5%4% 4%
3%2% 2% Mauritius
Singapore
USA
UK
Netherlands
Japan
Cyprus
Germany
UAE
France
Sector-wise Distribution
31%
13%
12%
11%
10%
6%
6%4% 4%
3% Services Sector
Computer Software & hardware
Telecommunications
Housing & real Estate
Construction Activities
Power
Automobile Industry
Metallurgical Industries
Petroleum & Natural Gas
Chemicals
Relationship b/w FDI and Growth
indicators: GDP & Exports
Regression Analysis: GDP vs FDI
Log of GDP = 4.12 + 0.466 Log of FDI
2 2.2 2.4 2.6 2.8 3 3.2 3.4 3.6 3.8 45
5.2
5.4
5.6
5.8
6
6.2
Log of FDI
Log
of
GD
P
Regression Analysis: Exports vs FDI
Log of Exports = 2.40 + 0.676 Log of FDI
2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.94
4.2
4.4
4.6
4.8
5
5.2
5.4
Log of FDI
Log
of
Exp
ort
s
Economic Growth
Trade
Employment and skill
levels
Technology diffusion
and knowledge
transfer
Linkages and
spillover to domestic
firms
FDI Benefits
FDI ChallengesCrowding out domestic investment
Technology transferred
SECTORAL ANALYSIS
MANUFACTURING SECTOR
Europeans enter into India
in 15th century
What attracted them ?
Our prosperity in the areas
of food and crop
production, textiles, glass
etc
Our per capita income was
at a satisfactory level.
Portuguese establish there control over the west coast of Goa
Battle of Plassey is fought between Portuguese and British
British Rule established in India
Union Jack Flutters in India
What Happened then?
The policies were formed which favored imports instead of exports. The Britain got richer.
Due to the lack of skills raw materials were exported from India and finished goods were imported.
We developed the 4th largest Railway network in world with a history of 60 years in 1920.
However, actual development started post independence
Current Scenario
Ranked 2nd most favored destination for foreign
investments after China
India ranks among the top 12 producers of manufacturing value
added (MVA).
In textiles, the country is ranked 4th after China, USA and Italy.
In electrical machinery and apparatus, it is ranked 5th.
According to a United Nations Industrial Development Organization (UNIDO) analysis based on 2007 figures mentioned in the International Yearbook of Industrial Statistics 2009
Current Scenario
6th position in the basic metals category
7th in chemicals and chemical products
10th in leather, leather products, refined petroleum products and
nuclear fuel
12th in machinery and equipment and motor vehicles.
According to a United Nations Industrial Development Organization (UNIDO) analysis based on 2007 figures mentioned in the International Yearbook of Industrial Statistics 2009
Foreign Direct Investment (FDI) up to 100% is permitted in all manufacturing
activities except:-
Defense Industry
Cigars & Cigarette
manufacturing
Where the foreign investor has an
existing joint
venture in India in
the same field.
Where more than
24% foreign
equity is proposed
to be inducted
for manufactu
re of items reser
ved for Small
Scale sector
FICCI Study in Indian Manufacturing Sector: Salient Points
Attracted only $3.4 billion of FDI in
manufacturing on an average every year from 2000 to 2008
67% of China’s total FDI comes in the
manufacturing sector compared to 37% in case of India (even 100% FDI in most
manufacturing sectors)
Acc to FICCI Action plan, India can
attract $12billion of FDI in the
manufacturing sector per annum
Sub-Sectors where FDI is negligibleIndia’s share in outward FDI stock is
negligible (Chemicals, Automobiles, Food Processing, Electrical & Electronic Equipment, Metals and Machinery Equipment)
Sectors like Industrial Machinery, Agricultural Machinery, Ship Building, Medical & Surgical Devices and Computer Hardware
Rather India import these items
FDI Inflows for Selected Sectors in India (Jan 2000 to September 2008)
Sector FDI Inflows ($ million)
Ship Building 59.15
Industrial Machinery 283.77
Agricultural Machinery 148.37
Earth Moving Machinery 134.51
Medical and Surgical Appliances
140.77
Computer hardware 99.7
Defence 0.15
FICCI’s Suggestions
A concrete and
comprehensive Action plan FDI Policy
should aim at incentivizing
maximum value
addition
Incentivize technology transfer by adopting
‘Swap Technology for Market’
policy
Rationalizing complex
regulatory procedures
and reducing delays in the
project approvals.
FDI IN SERVICE SECTOR (WITH FOCUS ON INSURANCE
SECTOR)
India's large service industry accounts for more than 50% of the country's GDP
It makes up more than 25% Employment
Service sectors like telecommunication, IT enabled services, insurance, air transport are becoming prominent
Reasons for growth in Services SectorIntroduction of ‘Manmohanomics’ in 1991
Growing presence of transnational corporations and the technological progress
Liberalization of many service sectors activities (telecom, transport, finance etc.)
FDI contribution to Services Sector
Attracted $3.12 billion FDI in the first seven months of 2009-10
22 per cent of the total FDI inflows of $17.64 billion in the April-October for service sector
In 2008-09, attracted the maximum FDI worth USD 6.11 billion.
FDI Policy in Services Sector
100% FDI is permitted for many service sectors
(Real estate, construction, hotels, tourism, films, IT and IT - enabled services, consultancy, renting, medical,
education, advertising etc)
Phased manner: to allow domestic companies to prepare for global competition (Banking, Insurance, Media, Retail Trade,
Restricted sectors in ServicesAtomic Energy, Lottery Business,
Gambling and Betting, Business of Chit Fund, and any activity/sector that is not opened to private sector investment.
Besides the above, FDI is not allowed in plantations.
Current issues with FDI in Services Sector
Very weak linkages of service sector with the Indian economy (only few cities)
Requires highly skilled workers Employee Welfare in time of crisis
Sub Sector Analysis: Insurance Sector
Fifth largest life insurance market in the emerging insurance economies globally
Insurance laws (amendment) bil l 2008:
• To increase FDI cap from 26% to 49%• For Life/General insurance minimum paid
up capital to Rs 50 crore(from 100 crore).
Why increasing FDI Cap in Insurance Sector is required?
Boost to the insurance sector Infuse liquidity in the financial system
with increase in FDI inflowIncreasing Insurance penetration
(specially to rural areas)Increase in employment, tertiary sectors
like IT/ITeS,
Boost to Health insurance (1 percent of the country’s population is presently covered under health insurance policies. )
Insurance Law ‘08 gives provision to companies exclusively into the business of health insurance
Micro insurance (accounts for just .1 % of total insurance premium
Flip Side of increasing Cap
Many foreign companies have to be rescued by their own governments.For eg: AIG
Road ahead for Insurance companies depend heavily on FDI cap.
Allowed up to 100%
Contributes 19% to the
GDP
Pilot programme
for delivering
subsidy directly to
farmer
FDI in Agriculture
FDI in Agriculture….Developments
To connect 66,800 habitations To construct 1,46,000Km of new rural roads To Upgrade and modernize 1,94,000Km of
existing rural roadsTo provide corpus of Rs. 8000 crore RIDF
FDI in Retail….WHY INDIA?Low share of organized retailing Increase in disposable income and
customer aspirationIncrease in expenditure for luxury items
FDI in Retail….Benefits Generate huge employment
Increased investment in technology
The huge tax revenue generated.
The consumer gains from the wide variety of choices and a
more diversified basket.
The indirect benefits like better roads, online marketing,
expansion of telecom sector etc. Will give a ‘big push’ to
other sectors like agriculture, small and medium size
enterprises.
FDI in Retail….Drawbacks Foreign Players would displace the unorganized
retailers because of their superior financial strengths.
The entry of large global retailers such as Wal-Mart would kill local shops and millions of jobs.
Induce unfair trade practices like predatory pricing, in the absence of proper regulatory guidelines.
Increase in real estate prices and marginalize domestic entrepreneurs
FDI in Real Estate Second-most favoured destination for FDI
in the world Norms to allow 100% FDI Mar 2005 100 acre criterion to 25 acre criterion
FDI in Real Estate….Why Invest??
India produces an estimated 2 million new graduates
Presence of a large number of Fortune 500
Real estate investments in India yield huge dividends
TourismRaised to $120mnMajor source of employmentThird largest earner of foreign exchangePrivate investments through public private
partnership
Need for FDI in Tourism Foreign tourist arrivals are expected to
grow to 10 million by 2010-12Estimated that tourism in India could
contribute Rs.8,50,000 crores to the GDP by 2020
Reasons for low FDI Multitude of taxesHigh TaxesHighest import duty on imported liquor
used in hotelsService Tax on Tour OperatorsInland Air Travel Tax
Attract more FDI in Tourism Sector
Rationalize the taxation on the hotel industry
Service Tax should be computed based on the value of service provided
Inland Air Travel Tax should be applied at the rate of 5% of the basic ticket price
FDI Inflow in India Vs China
COMPARATIVE STUDY
Definition of FDI in China
China practices the international systems of recording FDI which consist of three main categories.
-Equity flows
-Reinvested earnings
-Inter-company
debt transactio
ns.
Round-tripping of Chinese capital is common knowledge .
-swelling of
investment from
neighboring
countries(Taiwan and Macao) .
Estimates suggest that round-tripping FDI accounted for one-fourth of China's total FDI.
FDI Policies in China
In 1980, set up four Special
Economic Zones
(SEZs) in Shenzhen,
Zhuhai, Shantou,
and Xiamen.
This concept of SEZs was extended to
another fourteen coastal cities .
Twelve of the fourteen
cities were designated Technology Promotion Zones in 1985 to
expedite the transfer of technology.
The government
also attempted to
guarantee further the
autonomy of joint
ventures from
external bureaucratic interference.
Active promoting through
preferential treatment.
FDI Policies in India
FDI Policy permits FDI up to 100 % from foreign/NRI investor without prior approval in most of the sectors. Known as the automatic route.
The FDI policies in INDIA are formulated on 4 parameters:
-Increased capital flow.
-Improved technology.
-Management expertise.
-Access to international markets. Hence 100% inflow was allowed in sectors like Power,
Renewable energy , Agriculture, mining etc.Also sectors like insurance and defence have a cap of
26% and the banking sector has cap of 49%.
FDI Inflow in India
Some of the Major Investing Countries
FDI Inflow in China
Neighborhood Theory- India and China
• FDI inflow in China and India is based on the concepts of neighborhood and extended neighborhood
Acc to Prof. Arindam, Prof. Pradip K Bhaumik (IMI, New Delhi) .
Regional Flow of FDI in China
Regional Flow of FDI in India
ConclusionsFDI may provide better access to technologies for the local economy.
FDI can also lead to indirect productivity gains through spillovers.
Multinational firms may increase the degree of competition in host-country markets which will force existing inefficient firms to invest more in physical or human capital.
MNCs may also provide training of labor and management which may make them become available to the economy in general.
The increased flow of FDI in a country has given a major boost to the country's economy
Hence measures must be taken in order to ensure that the flow of FDI in both these countries continues to grow.
Attract ‘Quality’ FDI
Attract technology and
localize production
Focus on Export-oriented FDI
Target specific sectors
Increase ease of doing business
Final Recommendations