final fdi 2

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Introduction

Foreign investment refers to investments made by the residents of a country

in the financial assets and production processes of another country. The

effect of foreign investment, however, varies from country to country. It can

affect the factor productivity of the recipient country and can also affect the

balance of payments. Foreign investment provides a channel through which

countries can gain access to foreign capital. It can come in two forms:

foreign direct investment (FDI) and foreign institutional investment (FII).

Foreign direct investment involves in direct production activities and is also

of a medium- to long-term nature. But foreign institutional investment is a

short-term investment, mostly in the financial markets. FII, given its short-

term nature, can have bidirectional causation with the returns of other

domestic financial markets such as money markets, stock markets, andforeign exchange markets. Hence, understanding the determinants of FII is

very important for any emerging economy as FII exerts a larger impact on

the domestic financial markets in the short run and a real impact in the long

run. India, being a capital scarce country, has taken many measures to attract

foreign investment since the beginning of reforms in 1991.

India is the second largest country in the world, with a population of over 1

billion people. As a developing country, Indias economy is characterized by

wage rates that are significantly lower than those in most developed

countries. These two traits combine to make India a natural destination for

foreign direct investment (FDI) and foreign institutional investment (FII).

Until recently, however, India has attracted only a small share of global

foreign direct investment (FDI) and foreign institutional investment (FII),

primarily due to government restrictions on foreign involvement in the

economy. But beginning in 1991 and accelerating rapidly since 2000, India

has liberalized its investment regulations and actively encouraged new

foreign investment, a sharp reversal from decades of discouraging economic

integration with the global economy.

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Objectives of Study

The Term Paper is conducted with the following objectives:

To Examine the growth of FDI inflows to India in pre and post liberalizationperiod.

To Examine the trends and patterns in the FDI across different sectors & from

different countries in India

Foreign Direct Investment In India

Foreign Direct Investment (FDI) is considered as an important agent in the process of

accelerated economic growth in the developing countries. FDI is more attractive incompare to other forms of external finance since it is non-debt creating, non-volatile and

the returns depend on the performances of the projects financed by the investors(Planning Commission, 2003). With the introduction of new economic policy in 1991 and

subsequent reform process, India has witnessed a change in the flow and direction of FDI

into the country. This is mainly due to the removal of restrictive and regulated practices.

In Indian context, the importance of FDI was realized way back in 1948 when emphasis

was given on creating domestic base. However, since access to finance was quite limited,the attitude towards FDI was receptive (Kumar, 2004). Since then there was a debate over

the necessity of FDI and Government of India in the 1980s cautiously went on

deregulation of industries. However, after the adoption of liberal investment policy undereconomic reforms in 1991 resulted in attraction of more FDI inflow to the country. Inrecent times, FDI inflow to India increased by 17.1 percent in 2005, which is 5.8 percent

of GDP of the country. It is evident that FDI stock in India has been increasing and

foreign direct investment policy is becoming liberal for attracting more foreign investors(Government of India, 2006). Keeping in view the liberal economic and FDI policy along

with a set of economic practice and infrastructure, the present paper attempts to examine

the trends of FDI inflow to India since 1991, analyze the distribution of FDI in terms ofsectoral and regional context and over viewing challenges and future prospects of FDI to

India.

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Growth of FDI inflows in Pre and Post Liberalization

Period

Growth of FDI inflows in India in Pre-Liberalization Period

Table - 1

The investment coming to the country had to seek prior approval. The data of FDI availablefor this period is of the amount received. However, the amount increased manifold during

this period. The data on FDI inflows in India from the year 1981 to the year 1990. Duringthe decade of 1981-90 there has been an absolute in increase of more than 12 times from

rupees 105.71 million in 1981 to rupees 1283.21 million in 1990. The compound annual

growth rate for the period comes to 29.46.

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Growth of FDI inflows in Post -Liberalisation Period

Table-2

The Table 2 above exhibits the FDI inflows coming to India during the period 1991 to2010. The two decades of 1991 to 2000 and 2001 to 2010 experienced a phenomenal rise

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in FDI inflows. In absolute sense the FDI inflows jumped nearly 34 times from rupees

3534.8 million the year 1991 to Rs.123537.5 million in the year 2000. Since the quantum

of FDI had already risen high till the year 2000, the growth of FDI inflows during theperiod 2001-2010 does not appear high, as it is nearly 8 times from Rupees 167777.5

million in the year 2001 to Rupees 1309798.53 million in the year 2010. A close

appraisal of the table indicates that the magnitude of FDI inflows has escalated manifoldover the two decades. The overall compound annual growth rate (CAGR) for the period

1991 to 2010 is calculated to be 29.58 percent.

Analysis of share of top ten investing countries FDI

equity in flows From April 2010 to January 2011

S.No. Country Amount of FDI

Inflows (million

Rs.)

% As To

Total FDI

Inflow

1 Mauritius 19,18,633.61 44.01

2 Singapore 380151.89 8.723 U.S.A. 3,32,935.60 7.644 U.K. 2,40,974.98 5.535 Netherlands 1,78,047.76 4.086 Japan 1,50,129.05 3.447 Cyprus 1,32,448.04 3.048 Germany 1,12,242.06 2.579 France 61,686.39 1.4210 U.A.E. 50,915.59 1.17

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Mauritius

Mauritius invested Rs.19,18,633 million in India Up to the January 2011, equal to44.01 percent of total FDI inflows. Many companies based outside of India utilize

Mauritian holding companies to take advantage of the India - Mauritius DoubleTaxation Avoidance Agreement (DTAA). The DTAA allows foreign firms to bypassIndian capital gains taxes, and may allow some India-based firms to avoid paying

certain taxes through a process known as round tripping.

The extent of round tripping by Indian companies through Mauritius is unknown.However, the Indian government is concerned enough about this problem to have

asked the government of Mauritius to set up a joint monitoring mechanism to study

these investment flows. The potential loss of tax revenue is of particular concern to theIndian government. These are the sectors which attracting more FDI from Mauritius

Electrical equipment Gypsum and cement products Telecommunications Services

sector that includes both non- financial and financial Fuels.

Singapore

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Singapore continues to be the single largest investor in India amongst the Singapore with

FDI inflows into Rs. 3,80,142 million up to January 2011. Sector-wise distribution of

FDI inflows received from Singapore the highest inflows have been in the servicessector (financial and non financial), which accounts for about 30% of FDI inflows

from Singapore. Petroleum and natural gas occupies the second place followed by

computer software and hardware, mining and construction.

U.S.A.

The United States is the third largest source of FDI in India (7.64 % of the total),

valued at Rs.3,32,935.60 million in cumulative inflows up to January 2011. According

to the Indian government, the top sectors attracting FDI from the United States to India are

fuel, telecommunications, electrical equipment, food processing, and services.According to the available M&A data, the two top sectors attracting FDI inflows from the

United States are computer systems design and programming and manufacturing

U.K.

The United Kingdom is the fourth largest source of FDI in India (5.53 % of the total),valued at 2,40,974 crores in cumulative inflows up to January 2011 Over 17 UK

companies under the aegis of the Nuclear Industry Association of UK have tied up

with Ficci to identify joint venture and FDI possibilities in the civil nuclear energy sector.UK companies and policy makers the focus sectors for joint ventures, partnerships, and

trade are non -conventional energy, IT, precision engineering, medical equipment,

infrastructure equipment, and creative industries.

NetherlandsFDI from Netherlands to India has increased at a very fast pace over the last few

years. Netherlands ranks fifth among all the countries that make investments in

India. The total flow of FDI from Netherlands to India came to Rs. 1, 78,047 crores between 1991 and 2002. The total percentage of FDI f rom Netherlands to India

stood at 4.08% out of the total foreign direct investment in the country up to August 2010.

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Analysis of sectors attracting highest FDI equity inflows

From April 2000 to March 2010 (Amount in Millions)

Sr. No Sectors Amount of

FDI

% As to Inflows

Total FDIInflow

1 Service Sector (Financial

& Non Financial)

9,65,210.77 22.14

2 Computer Software &

Hardware

4,13,419.03 9.48

3 Telecommunication 3,68,899.62 8.46

4 Housing &Real Estate 3,25,021.36 7.465 Construction Activities 2,65,492.96 6.09

6 Automobile Industry 1,90,172.22 4.36

7 Power 1,79,849.92 4.13

8 Metallurgical Industries 1,25,785.57 2.89

9 Petroleum & Natural Gas 1,11,957.00 2.57

10 Chemical 1,01,680.18 2.33

The sectors receiving the largest shares of total FDI inflows up to march 2010 were theservice sector and computer software and hardware sector, each accounting for 22.14

and 9.48 percent respectively. These were followed by the telecommunications, real

estate, construction and automobile sectors. The top sectors attracting FDI into Indiavia M&A activity were manufacturing; information; and professional, scientific, and

technical services.

These sectors correspond closely with the sectors identified by the Indiangovernment as attracting the largest shares of FDI inflows overall.

The ASSOCHAM has revealed that FDI in Chemicals sector (other than fertilizers)registered maximum growth of 227 per cent during April 2008 March 2009 ascompared to 11.71 per cent during the last fiscal. The sector attracted USD 749 million

FDI in FY 09 as compared to USD 229 million in FY During the year 2009 government

had raised the FDI limit in telecom sector from 49 per cent to 74 per, which hascontributed to the robust growth of FDI. The telecom sector registered a growth of

103 per cent during fiscal 2008-09 as compared to previous fiscal. The sector

attracted USD 2558 million FDI in FY 09 as compared to the USD 1261 million in FY

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08, acquired 9.37 per cent share in total FDI inflow. India automobile sector has b een

able to record 70 per cent growth in foreign investment. The FDI inflow in

automobile sector has increased from USD 675 million to 1,152 million in FY 09 overFY 08. The other sectors which registered growth in highest FDI inflow during April

March 2009 were housing & real estate (28.55 per cent), computer software & hardware

(18.94 per cent), construction activities including road & highways (16.35 per cent) andpower (1.86 per cent).

Analysis & Interpretation

It might be of interest to note that more than 50% of the total FDI inflows

received by India , came from Mauritius, Singapore and the USA.

The main reason for higher levels of investment from Mauritius was that the fact

that India entered into a double taxation avoidance agreement (DTAA) with

Mauritius were protected from taxation in India.

Among the different sectors, the service sector had received the larger

proportion followed by computer software and hardware sector and

telecommunication sector.

A large number of changes that were introduced in the country Is

regulatory economic policies heralded the liberalization era of the FDI policyregime in India and brought about a structural breakthrough in the volume of

the FDI inflows into the economy maintained a fluctuating and unsteady

trend during the study period.

Sector Specific Foreign Direct Investment in India

S.No. Sectors % FDI Allow

1 Hotel & Tourism 100%2 Private Sector Banking 49%

3 Insurance Sector 26%

4 Telecommunication 49%

5 Power Sector 100%

6 Drugs & Pharmaceuticals 100%

7 Roads, Highways, Ports and Harbors 100%

8 Pollution Control and Management 100%

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