Foreign Direct Investments in India

Presented By: Vivekkumar.S Bharani Ramakrishnan.SI-Year, MBABSMEDBharathiar University

Introduction World is perceived as a global village

Globalization is the integration of economies of world through uninhibited trade and financial flows, as also through mutual exchange of technology and knowledge

Globalisation has made markets highly competitive and there is remarkable growth of new service products

In context to India,

Globalization implies opening up of the economy to Foreign Direct Investment by providing facilities to foreign companies to invest in different fields of economic activity

Foreign Direct Investments India offers greater incentives to encourage the

foreign direct investments (FDI) inflows into its economy

FDI has become a significant part of capital formation in the country

FDI usually flows as a bundle of resources and skills into the economy

These skills tend to spill over to domestic enterprises in the host country

Therefore,

FDI can be expected to contribute to growth more than proportionately compared to domestic investments in the host country.

Benefits of Foreign Direct Investment

FDI ensures a huge amount of domestic capital, production level, and employment opportunities which is a major step towards the economic growth of the country

FDI has been a booming factor that has bolstered the economic life of India

FDI policy in India FDI is not allowed in the sectors of arms and

ammunitions, atomic energy, railway system, extraction of coal and lignite and mining industry

In infra-structure development, FDI is allowed up to 100% equity participation, with the capping amount as Rs.1500 crores

In finance sector, FDI is allowed up to 40% In telecom industry, FDI is allowed up to 49%

Table-1 Cumulative FDI equity Inflows (Equity Capital Components only)

Trends in India since 1991

Cumulative amount of FDI inflow (from 1991-June 2010)

Rs.6,03,526crore US $ 1,38,235million

Amount of FDI equity inflow during financial year 2010-11 (from April 2010-June 2010)

Rs.26,418crore US $ 5,807million

Note: FDI inflows include amount received on account of advances pending for issue of shares for the years 1999-04.

1991-92

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

2008-09

2009-10

2010-11

(Upto June '10)

0

5000

10000

15000

20000

25000

30000

165 393 654 1374 2141 27703682 3083 2439 2908

42223134 2634

3754

5975

15725

24573

2732925609

5772

The trends in FDI inflow to India since 1991

US $

21%

9%

8%

8%

7%

4%

4%

3%2% 2%

Sectors attracting highest FDI equity inflows

SERVICES SECTOR

COMPUTER SOFTWARE& HARDWARE

TELE- COMMUNICATIONS

HOUSING & REAL ESTATES

CONSTRUCTION ACTIVITIES

POWER

AUTOMOBILE INDUSTRY*

METALLURGICAL INDUSTRIES

PETROLEUM & NATURAL GAS

CHEMICALS

Regional disparities in FDI equity inflows

Mumbai

New delhi

Banglore

Ahemadabad

Chennai

Hyderabad

Kolkatta

Chandigargh

Panaji

Jaipur

Cochi

Bhopal

Bhubaneshwar

Kanpur

Guwhati

Patna

Regions not indicated

0% 5% 10% 15% 20% 25% 30% 35%

Mauriti

us

Singa

pore

U.S.A.

U.K.

Netherl

ands

Japan

Cyprus

German

y

U.A.E.

France

42%

10%7%

5%4% 4% 4%

2%1% 1%

Top investing countries FDI Equity inflows

It should be noted that, Mauritius is the top investor in India. These investments are nothing but U.S. based investments

They are routed through Mauritius because of the double taxation treaty advantage

The tax advantage emanates from double tax avoidance agreement that India has with Mauritius

It means that, any foreign investor has the option of paying tax either in India or in Mauritius

Advantages of FDI FDI usually flows as a bundle of

resources including, besides capital, production technology, organisational and managerial skills

These skills tend to spill over to domestic enterprises in the host country

FDI contributes more to the growth of the economy than that of the domestic investments

Disadvantages of FDI Loss of ownership rights to a foreign

company makes it a cautious decision

The increased liquidity and the consequent inflation is due to the excessive FDI inflow

It is being blamed for ousting the domestic inflows

It is also claimed to have lowered few regulatory standards in terms of investment patterns

The effects of globalization on Indian industry through FDI has proved to be positive as well as negative

The government of India must try to make economic policies with regard to Indian Industries globalization that are beneficial and not harmful