Foreign Direct Investment in India in retail sector

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1

PREFACE

While searching for a suitable topic for the Mba Dissertation, I happened to

meet a person from the Retail Sector, who suggested to me the topic on the Retail

Sector of India. During the course of the discussion, it transpired that the

problems that this sector faces is with respect to Foreign Direct Investment, and

the intense competitive scenario in future say !"! tr !"#.

$he topics having aroused my curiosity, discussions were held with several

people in the retail sector to understand the veracity of the above thought

process and also understand the real issues plaguing the industry.

%ll these aspects then resulted in the development of the pro&ect report titled

'Foreign Direct Investment, and the (ompetitive Scenario of the Retail Sector in

India ) %n %nalysis of *roblems, Implications and *erspectives with a case

study of.+

It is strongly hoped that this pro&ect covers not only the various reuirements of

the *ro&ect Study but also of the Industry.

Signature of the Student



2

TABLE OF CONTENTS

Chapter No Title Page No1 EXECUTIVE SUMMARY 91!

" OB#ECTIVES OF T$E STU%Y 111"

& RESEARC$ MET$O%OLO'Y 1&1(

3.1 Primary data

3.2 Secondary data

) LITERATURE REVIE* 1+19

, INTRO%UCTION OF F%I "!+&

5.1 Overall view

5.2 Inter country /industry studies

5.3 Trends and patterns of fdi

5.4 Sorces of fdi

5.5 istri!ution of fdi

- F%I IN IN%IAN RETAIL SECTOR +)9,

".1 Indian scenario

( IN%IA.S POLICY ON F%I 9-11,

#.1 evolution

+ CASES OF F%I IN IN%IAN RETAIL SECTOR 11-1",

$.1 %orei&n retail re&roup in india

$.2 India to ease rules for forei&n companies



3

CONT//00

Chapter No Title Page No

$.3 India suspends plan to let in forei&n retail

India opens retail sector to forei&n

$.4 companies

F%I IN%IAN RETAIL BI%S FOR

9 BRI'$T FUTURE 1"-1&!

'.1 (volution of Indian retail

'.2 Policy framewor)

'.3 Impact on retail sector

'.4 *oad a+ead

1! ANALYSIS OF 2UESTIONNAIRE 1&11&-

11 CONCLUSION 1&(1&+

1" SU''ESTION 1&91)1

1& BIBLIO'RAP$Y 1)"1)&

1) ANNEXURE 1))1)-



4

LIST OF ABBREVIATIONS

%I %O*(I,- I*(T I-(ST0(-T

%PI %O*(I,- PO*T%OIO I-(ST0(-T

%TS %*(( T*( O-(S

IP I-(ST0(-T P*O0OTIO-

0-S 0TI-TIO- O*PO*TIO-S

%(0 %O*(I,- (6-,( 0-,(0(-T T

*7I *(S(*( 7-8 O% I-I

%IP7 %O*(I,- I-(ST0(-T P*O0OTIO- 7O*

(P*T0(-T O% I-ST*I POI9 -IPP P*O0OTIO-

7ITS 7IT(* I-(ST0(-T T*(TI(S

S(7I S(*ITI(S - (6-,( 7O* O% I-I

%II %O*(I,- I-STITTIO- I-(STO*S

IP* I-ST*I POI9 *(SOTIO-



LIST OF C$ARTS

1 AMOUNT OF F%I INFLO*

" F%I INFLO*S IN T$E *ORL%

& S$ARE OF IN%IA IN *ORL% F%I

) %ISTRIBUTION OF RETAIL SECTOR.S S$ARE



C$APTER 1

EXECUTIVE SUMMARY



%e3i4itio4 o3 Retail

In 2::4; T+e 6i&+ ourt of el+i defined t+e term <retail= as a sale for finalconsumption in contrast to a sale for furt+er sale or processin& >i.e.

w+olesale?. sale to t+e ultimate consumer.T+us; retailin& can !e said to!e t+e interface !etween t+e producer and t+e individual consumer !uyin&for personal consumption. T+is e@cludes direct interface !etween t+emanufacturer and institutional !uyers suc+ as t+e &overnment and ot+er !ul) customers retailin& is t+e last lin) t+at connects t+e individualconsumer wit+ t+e manufacturin& and distri!ution c+ain. retailer isinvolved in t+e act of sellin& &oods to t+e individual consumer at a mar&inof profit.

F%I Poli56 i4 I47ia

%I is defined as investment in a forei&n country t+rou&+ t+e acAuisition of a local company or t+e esta!lis+ment t+ere of an operation on a new site.To put in simple words; %I refers to capital inflows from a!road t+at isinvested in or to en+ance t+e production capacity of t+e economy.%orei&nInvestment in India is &overned !y t+e %I policy announced !y t+e,overnment of India and t+e provision of t+e %orei&n (@c+an&e

0ana&ement ct >%(0? 1'''. T+e *eserve 7an) of India ><*7I=? in t+isre&ard +ad issued a notification;B4C w+ic+ contains t+e %orei&n (@c+an&e0ana&ement >Transfer or issue of security !y a person resident outsideIndia? *e&ulations; 2:::. T+is notification +as !een amended from time totime.T+e 0inistry of ommerce and Industry; ,overnment of India is t+enodal a&ency for motorin& and reviewin& t+e %I policy on continued !asisand c+an&es in sectoral policy/ sectoral eAuity cap. T+e %I policy isnotified t+rou&+ Press -otes !y t+e Secretariat for Industrial ssistance>SI?; epartment of Industrial Policy and Promotion >IPP?.T+e forei&n

investors are free to invest in India; e@cept few sectors/activities; w+ereprior approval from t+e *7I or %orei&n Investment Promotion 7oard><%IP7=? would !e reAuired.



F%I Poli56 8ith Regar7 to Retaili4g i4 I47ia

It will !e prudent to loo) into Press -ote 4 of 2::" issued !y IPP andconsolidated %I Policy issued in Octo!er 2:1: w+ic+ provide t+e sector

specific &uidelines for %I wit+ re&ard to t+e conduct of tradin& activities.a? p to 1::D for cas+ and carry w+olesale tradin& and e@port tradin&

allowed under t+e automatic route.

!? %I up to 51 D wit+ prior ,overnment approval >i.e. %IP7? for retail tradeof <Sin&le 7rand= products; su!Eect to Press -ote 3 >2::" Series?.

c? %I is not permitted in 0ulti 7rand *etailin& in India.



C$APTER "

OB#ECTIVE OF T$E STU%Y



10TO STU%Y T$E TREN%S AN% PATTERNS OF FLO* OF F%I ININ%IAN RETAIL SECTOR 0

"0 TO ASSESS T$E %ETERMINANTS OF F%I INFLO*S IN IN%IAN RETAILSECTOR 0

&0 TO EVALUATE T$E IMPACT OF F%I ON T$E IN%IAN ECONOMY AN%RETAIL SECTOR0



C$APTER &

RESEARC$ MET$O%OLO'Y



&01PRIMARY %ATA

T+e primary data is collected t+rou&+ personaliFed interview andt+e Auestionnaire from t+e respondents w+o is t+e common pu!lic.

&0"SECON%ARY %ATA

T+e researc+ done on t+e des)top researc+ !y visitin& various we! sitesand referrin& some of t+e !oo)s for understandin& various concepts in fdiw+ic+ is very important for t+is proEect. T+e consideration on some annualfdi inflow in India .s mentioned in !i!lio&rap+y.



C$APTER )

LITERATURE REVIE*



1? %orei&n irect Investment in India

!y ata 0 +a)ravart+y:;;ar6< Foreig4 %ire5t I4=et;e4t i4 I47ia

%orei&n direct investment is t+e catalyst to economic &rowt+ in developin&countries. ountries s+ould attract %I for t+ose areas in w+ic+ t+ey +ave acompetitive ed&e. T+is !oo) is a lively compilation of articles; dealin& wit+t+is concept; trends and strate&ies in t+is area. *ead a!out %I in t+e printmedia; power sector; !an)s; retail and real estate in India.

2? %orei&n irect Investment

in India 1'4# to 2::# G

Policies; Trends and

Outloo)

Boo>%etail ut+orG ,a)+ar; 8amles+

ontents G Preface / %orei&n irect Investment >%I?G nature and Scope /0otives and determinants of %IG T+eoretical Survey / %I in IndiaGPolicies and trends since Independence / eterminants and eterrents of %I Inflow in India / %I Inflow in IndiaG Sectoral and %irm eveldeterminants and 0otives / %I Policy Implications and %uture Outloo) /SectorHwise %I Policy and 7usiness Opportunities in India / oncludin&O!servations /

3? Foreig4 %ire5t I4=et;e4t < Co4te;porar6 I:e

s+a 7+ati; eep

Co4te4t< Preface. 1. %orei&n irect InvestmentG a t+eoretical and policyframewor). 2. Studies on %orei&n irect Investment. 3. Pro!lem andresearc+. 4. (mer&in& trends in %IG Indian evidence. 5. (mer&in& trendsin %IG &lo!al evidence. ". eterminants of %orei&n irect Investment. #.

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n appraisal for %orei&n Investment climate in India. onclusions.7i!lio&rap+y. [email protected]+is !oo) provides a compre+ensive description andinHdept+ analysis of various contemporary issues in %orei&n irectInvestment >%I? in India. ivided into ei&+t parts; t+e !oo) discusses t+e

followin& issuesGPrevailin& %I policy framewor) in India sinceindependence and +ow it is placed in terms of openness; competitivenessand ot+er important aspectsJ (mer&in& dimensions of %I inflows in IndiaJ(mer&in& scenario of %I at t+e &lo!al levelJ Performance of India incomparison to developed ;developin& ;sian and S* countries wit+respect to %I in IndiaJ%actors +avin& !earin& on %I flowsJe&al; procedural; socioHeconomic and ot+er important aspects influencin&%I in IndiaJ %orei&n !usiness investorsK perceptions a!out India as aninvestment destiny. T+e !oo) proves to !e invalua!le to t+e students of

International !usiness. %urt+er it will !e !eneficial to t+e multiple &roup of people li)e t+e economic policyHma)ers related to institutions economy andre&ulatory !odies and t+e corporates willin& to ta)e advanta&e of forei&nfinancial inflows. >Eac)et?



C$APTER ,

INTRO%UCTION OF F%I



INTRO%UCTION

One of t+e most stri)in& developments durin& t+e last two decades is t+e

spectacular &rowt+ of %I in t+e &lo!al economic landscape. T+isunprecedented &rowt+ of &lo!al %I in 1'': around t+e world ma)e %I animportant and vital component of development strate&y in !ot+ developedand developin& nations and policies are desi&ned in order to stimulateinward flows. Infact; %I provides a win L win situation to t+e +ost and t+e+ome countries. 7ot+ countries are directly interested in invitin& %I;!ecause t+ey !enefit a lot from suc+ type of investment. T+e <+ome=countries want to ta)e t+e advanta&e of t+e vast mar)ets opened !yindustrial &rowt+. On t+e ot+er +and t+e <+ost= countries want to acAuiretec+nolo&ical and mana&erial s)ills and supplement domestic savin&s and

forei&n e@c+an&e. 0oreover; t+e paucity of all types of resourcesviF.financial; capital; entrepreneurs+ip; tec+nolo&ical )nowH +ow; s)ills andpractices; access to mar)etsH a!roadH in t+eir economic development;developin& nations accepted %I as a sole visi!le panacea for all t+eir scarcities. %urt+er; t+e inte&ration of &lo!al financial mar)ets paves ways tot+is e@plosive &rowt+ of %I around t+e &lo!e.

,01 AN OVERALL VIE*

T+e +istorical !ac)&round of %I in India can !e traced !ac) wit+ t+eesta!lis+ment of (ast India ompany of 7ritain. 7ritis+ capital came to

India durin& t+e colonial era of 7ritain in India. 6owever; researc+ers couldnot portray t+e complete +istory of %I pourin& in India due to lac) of a!undant and aut+entic data. 7efore independence maEor amount of %Icame from t+e 7ritis+ companies. 7ritis+ companies setup t+eir units inminin& sector and in t+ose sectors t+at suits t+eir own economic and!usiness interest. fter Second Morld Mar; Napanese companies enteredIndian mar)et and en+anced t+eir trade wit+ India; yet .8. remained t+emost dominant investor in India.%urt+er; after Independence issues relatin&to forei&n capital; operations of 0-s; &ained attention of t+e policyma)ers. 8eepin& in mind t+e national interests t+e policy ma)ers desi&nedt+e %I policy w+ic+ aims %I as a medium for acAuirin& advancedtec+nolo&y and to mo!iliFe forei&n e@c+an&e resources. T+e first Prime0inister of India considered forei&n investment as necessary not only to‖supplement domestic capital !ut also to secure scientific; tec+nical; andindustrial )nowled&e and capital eAuipments. Mit+ time and as per economic and political re&imes t+ere +ave !een c+an&es in t+e %I policy



too. T+e industrial policy of 1'"5; allowed 0-s to venture t+rou&+tec+nical colla!oration in India. 6owever; t+e country faced two severecrisis in t+e form of forei&n e@c+an&e and financial resource mo!iliFationdurin& t+e second five year plan >1'5" H"1?.T+erefore; t+e &overnment

adopted a li!eral attitude !y allowin& more freAuent eAuity participation toforei&n enterprises; and to accept eAuity capital in tec+nical colla!orations.T+e &overnment also provides many incentives suc+ as ta@ concessions;simplification of licensin& procedures and deH reservin& some industriessuc+ as dru&s; aluminum; +eavy electrical eAuipments; fertiliFers; etc inorder to furt+er !oost t+e %I inflows in t+e country. T+is li!eral attitude of &overnment towards forei&n capital lures investors from ot+er advancedcountries li)e S; Napan; and ,ermany; etc. 7ut due to si&nificant outflowof forei&n reserves in t+e form of remittances of dividends; profits; royaltiesetc; t+e &overnment +as to adopt strin&ent forei&n policy in 1'#:s. urin&

t+is period t+e &overnment adopted a selective and +i&+ly restrictiveforei&n policy as far as forei&n capital; type of %I and owners+ips of forei&n companies was concerned. ,overnment setup %orei&n Investment7oard and enacted %orei&n (@c+an&e *e&ulation ct in order to re&ulateflow of forei&n capital and %I flow to India. T+e soarin& oil pricescontinued low e@ports and deterioration in 7alance of Payment positiondurin& 1'$:s forced t+e &overnment to ma)e necessary c+an&es in t+eforei&n policy. It is durin& t+is period t+e &overnment encoura&es %I; allow0-s to operate in India. T+us; resultin& in t+e partial li!eraliFation of Indian (conomy. T+e &overnment introduces reforms in t+e industrial

sector; aimed at increasin& competency; efficiency and &rowt+ in industryt+rou&+ a sta!le; pra&matic and nonHdiscriminatory policy for %I flow.Infact; in t+e early nineties; Indian economy faced severe 7alance of payment crisis. (@ports !e&an to e@perience serious difficulties. T+ere wasa mar)ed increase in petroleum prices !ecause of t+e &ulf war. T+ecripplin& e@ternal de!ts were de!ilitatin& t+e economy. India was left wit+t+at muc+ amount of forei&n e@c+an&e reserves w+ic+ can finance its t+reewee)s of imports. T+e outflowin& of forei&n currency w+ic+ was deposited!y t+e Indian -*I=s &ave a furt+er Eolt to Indian economy. T+e overall

7alance of Payment reac+ed at *s.> H? 44#1 crores. Inflation reac+ed at its+i&+est level of 13D. %orei&n reserves of t+e country stood at *s.1141"crores. T+e continued political uncertainty in t+e country durin& t+is periodadds furt+er to worsen t+e situation. s a result; India=s credit ratin& fell int+e international mar)et for !ot+ s+ortH term and lon& term !orrowin&. llt+ese developments put t+e economy at t+at time on t+e ver&e of default inrespect of e@ternal payments lia!ility. In t+is critical face of Indian economy



t+e t+en finance 0inister of India r. 0anmo+an Sin&+ wit+ t+e +elp of Morld 7an) and I0% introduced t+e macro L economic sta!iliFation andstructural adEustment pro&ramme. s a result of t+ese reforms India openits door to %I inflows and adopted a more li!eral forei&n policy in order to

restore t+e confidence of forei&n investors.%urt+er; under t+e new forei&ninvestment policy ,overnment of India constituted %IP7 >%orei&nInvestment Promotion 7oard? w+ose main function was to invite andfacilitate forei&n investment t+rou&+ sin&le window system from t+e Prime0inister=s Office. T+e forei&n eAuity cap was raised to 51 percent for t+ee@istin& companies. ,overnment +ad allowed t+e use of forei&n !randnames for domestically produced products w+ic+ was restricted earlier.India also !ecame t+e mem!er of 0I,>0ultilateral Investment ,uarantee

&ency? for protection of forei&n investments.,overnment lifted restrictionson t+e operations of 0-s !y revisin& t+e %(* ct 1'#3. -ew sectors

suc+ as minin&; !an)in&; telecommunications; +i&+way construction andmana&ement were open to forei&n investors as well as to private sector.

C$ART 1?A;o:4t Mi7 Mar5h Mar5h Mar5h Mar5h Mar5h Mar5ho3 F%I 19)+ 19-) 19() 19+! 199! "!!! "!1!In ",- ,-,0, 91- 9&&0" "(!, 1+)+- 1@"&@&(+crores

SourceG 8umar3' 1''5; various issues of SI Pu!lication.T+ere is a considera!le decrease in t+e tariff rates on various importa!le&oods. s+ows %I inflows in India from 1'4$ L 2:1:.%I inflows durin&1''1H'2 to 0arc+ 2:1: in India increased manifold as compared to durin&mid 1'4$ to marc+ 1'': >+artH1?. T+e measures introduced !y t+e&overnment to li!eraliFe provisions relatin& to %I in 1''1 lure investorsfrom every corner of t+e world. T+ere were Eust few >.8; S; Napan;,ermany; etc.? maEor countries investin& in India durin& t+e period mid1'4$ to marc+ 1'': and t+is num!er +as increased to fifteen in 1''1. India

emer&ed as a stron& economic player on t+e &lo!al front after its first&eneration of economic reforms. s a result of t+is; t+e list of investin&countries to India reac+ed to ma@imum num!er of 12: in 2::$. lt+ou&+;India is receivin& %I inflows from a num!er of sources !ut lar&epercenta&e of %I inflows is vested wit+ few maEor countries. 0auritius;S; 8; Napan; Sin&apore; -et+erlands constitute "" percent of t+e



entire %I inflows to India.%I inflows are welcomed in "3 sectors in 2::$as compared to 1" sectors in 1''1.

F%I INFLO*S IN IN%IA IN POST REFORM ERA

India=s economic reforms way !ac) in 1''1 +as &enerated stron& interestin forei&n investors and turnin& India into one of t+e favorite destinations for &lo!al %I flows. ccordin& to .T. 8earney1; India ran)s second in t+eMorld in terms of attractiveness for %I. .T. 8earney=s 2::# ,lo!alServices ocations Inde@ ran)s India as t+e most preferred destination interms of financial attractiveness; people and s)ills availa!ility and !usinessenvironment. Similarly; -T=s#" Morld Investment *eport; 2::5considers India t+e 2nd most attractive destination amon& t+e T-S. T+epositive perceptions amon& investors as a result of stron& economicfundamentals driven !y 1$ years of reforms +ave +elped %I inflows &row

si&nificantly in India. T+e %I inflows &row at a!out 2: times since t+eopenin& up of t+e economy to forei&n investment. India received ma@imumamount of %I from developin& economies >+art L 1.2?. -et %I flow inIndia was valued at S 33:2'.32 million in 2::$. It is found t+at t+ere is a+u&e &ap in %I approved and %I realiFed >+artH 1.3?. It is o!served t+att+e realiFation of approved %I into actual dis!ursements +as !een Auiteslow. T+e reason of t+is slow realiFation may !e t+e nature and type ofinvestment proEects involved. 7eside t+is increased %I +as stimulated!ot+ e@ports and imports; contri!utin& to risin& levels of international trade.India=s merc+andise trade turnover increased from S '5 !n in %9:2 to

S3'1 !n in %9:$ >,* of 2#.$D?. US Millio4 amount of %Irealised amount of %I approved -o. of %I approved realised to approvedratio.

SourceG compiled and computed from t+e various issues SI 7ulletin;0inistry of ommerce; ,OI India=s e@ports increased from S 44 !n in%9:2 to S 1"3 !n in %9:$ >,* of 24.5D?. India=s imports increasedfrom S 51 !n in %9:2 to S 251 !n in %9:$>,* of 3:.3D?. Indiaran)ed at 2"t+ in world merc+andise e@ports in 2::# wit+ a s+are of 1.:4percent.%urt+er; t+e e@plosive &rowt+ of %I &ives opportunities to Indian

industry for tec+nolo&ical up&radation; &ainin& access to &lo!al mana&erials)ills and practices; optimiFin& utiliFation of +uman and natural resourcesand competin& internationally wit+ +i&+er efficiency. 0ost importantly %I iscentral for India=s inte&ration into &lo!al production c+ains w+ic+ involvesproduction !y 0-s spread across locations all over t+e world. >(conomicSurvey 2::3H:4?.1"



IMPORTANCE OF T$E STU%Y

It is apparent from t+e a!ove discussion t+at %I is a predominant and vitalfactor in influencin& t+e contemporary process of &lo!al economic

development. T+e study attempts to analyFe t+e important dimensions of %I in India. T+e study wor)s out t+e trends and patterns; maindeterminants and investment flows to India. T+e study also e@amines t+erole of %I on economic &rowt+ in India for t+e period 1''1H2::$. T+eperiod under study is important for a variety of reasons. %irst of all; it wasdurin& Nuly 1''1 India opened its doors to private sector and li!eraliFed itseconomy. Secondly; t+e e@periences of Sout+H(ast sian countries !yli!eraliFin& t+eir economies in 1'$:s !ecame stars of economic &rowt+ anddevelopment in early 1'':s. T+irdly; India=s e@perience wit+ its first&eneration economic reforms and t+e country=s economic &rowt+

performance were considered safe +avens for %I w+ic+ led to second&eneration of economic reforms in India in first decade of t+is century.%ourt+ly; t+ere is a considera!le c+an&e in t+e attitude of !ot+ t+edevelopin& and developed countries towards %I. T+ey !ot+ consider %Ias t+e most suita!le form of e@ternal finance. %ift+ly; increase incompetition for %I inflows particularly amon& t+e developin& nations.T+es+ift of t+e power center from t+e western countries to t+e sia su! Lcontinent is yet anot+er reason to ta)e up t+is study. %I incentives;removal of restrictions; !ilateral and re&ional investment a&reementsamon& t+e sian countries and emer&ence of sia as an economic

power+ouse >wit+ +ina and India emer&in& as t+e two most promisin&economies of t+e world? develops new economics in t+e world of industralised nations. T+e study is important from t+e view point of t+emacroeconomic varia!les included in t+e study as no ot+er study +asincluded t+e e@planatory varia!les w+ic+ are included in t+is study. T+estudy is appropriate in understandin& inflows durin& 1''1H 2::$.

LIMITATIONS OF T$E STU%Y

ll t+e economic / scientific studies are faced wit+ various limitations andt+is study is no e@ception to t+e p+enomena. T+e various limitations of t+estudy areG1. t various sta&es; t+e !asic o!Eective of t+e study is suffered due toinadeAuacy of time series data from related a&encies. T+ere +as also !eena pro!lem of sufficient +omo&enous data from different sources. %ore@ample; t+e time series used for different varia!les; t+e avera&es are usedat certain occasions. T+erefore; t+e trends; &rowt+ rates and estimatedre&ression coefficients may deviate from t+e true ones.



2. T+e assumption t+at %I was t+e only cause for development of Indianeconomy in t+e post li!eralised period is de!ata!le. -o proper met+odswere availa!le to se&re&ate t+e effect of %I to support t+e validity of t+isassumption.

3. !ove all; since it is a P+.. proEect and t+e researc+ was faced wit+t+e pro!lem of various resources li)e time and money.

unnin& No+n 6.14 >2::4? in +is study Institutional *eform; %I and(uropean Transition (conomics studied t+e si&nificance of institutional‖infrastructure and development as a determinant of %I inflows into t+e(uropean Transition (conomies. T+e study e@amines t+e critical role of t+einstitutional environment >comprisin& !ot+ institutions and t+e strate&ies

and policies of or&aniFations relatin& to t+ese institutions? in reducin& t+etransaction costs of !ot+ domestic and cross !order !usiness activity. 7ysettin& up an analytical framewor) t+e study identifies t+e determinants of %I; and +ow t+ese +ad c+an&ed over recent years.TomsaF 0ic)iewicF;Slavo *asosevic and rmas ar!lane#3 >2::5?; in t+eir study; T+e alueof iversityG %orei&n irect Investment and (mployment in entral (uropedurin& (conomic *ecovery ; e@amine t+e role of %I in Eo! creation and‖

Eo! preservation as well as t+eir role in c+an&in& t+e structure of employment. T+eir analysis refers to Fec+ *epu!lic; 6un&ary; Slova)iaand (stonia. T+ey present descriptive sta&e model of %I pro&ression into

Transition economy. T+ey analyFed t+e employment aspects of t+e model.T+e study concluded t+at t+e role of %I in employment creation/preservation +as !een most successful in 6un&ary t+an in (stonia. T+epaper also find out t+at t+e increasin& differences in sectoral distri!ution of %I employment across countries are closely relates to %I inflows per capita. T+e !i&&er diversity of types of %I is more favora!le for t+e +osteconomy. T+ere is +i&+er li)eli+ood t+at it will lead to more diverse types of spillovers and s)ill transfers. If policy is una!le to ma@imiFe t+e scale of %Iinflows t+en policy ma)ers s+ould focus muc+ more on attractin& diversetypes of %I. Iyare Sunday O; 7+aumi) Pradip 8; 7ani) rindam2$ >2::4?;

in t+eir wor)(@plainin& %I Inflows to India; +ina and t+e ari!!eanG n (@tended-ei&+!or+ood pproac+ find out t+at %I flows are &enerally !elieved to‖!e influenced !y economic indicators li)e mar)et siFe; e@port intensity;



institutions; etc; irrespective of t+e source and destination countries. T+ispaper loo)s at %I inflows in an alternative approac+ !ased on t+econcepts of nei&+!or+ood and e@tended nei&+!or+ood. T+e study s+owst+at t+e nei&+!or+ood concepts are widely applica!le in different conte@ts

particularly for +ina and India; and partly in t+e case of t+e ari!!ean.T+ere are si&nificant common factors in e@plainin& %I inflows in selectre&ions. M+ile a su!stantial fraction of %I inflows may !e e@plained !yselect economic varia!les; country L specific factors and t+e idiosyncraticcomponent account for more of t+e investment inflows in (urope;+ina;and India.ndersen P.S and 6ainaut P.3 >2::4? in t+eir paper %orei&n irect Investment and (mployment in t+e Industrial ountries‖point out t+at w+ile loo)in& for evidence re&ardin& a possi!le relations+ip!etween forei&n direct investment and employment; in particular !etweenoutflows and employment in t+e source countries in response to outflows.

T+ey also find t+at +i&+ la!our costs encoura&e outflows and discoura&einflows and t+at suc+ effect can !e reinforced !y e@c+an&e ratemovements. T+e distri!ution of %I towards services also su&&ests t+at alar&e proportion of forei&n investment is underta)en wit+ t+e purpose of e@pandin& sales and improvin& t+e distri!ution of e@ports produced in t+esource countries. ccordin& to t+is study t+e principle determinants of %Iflows are prior trade patterns; IT related investments and t+e scopes for cross L !order mer&ers and acAuisitions. %inally; t+e aut+ors find clear evidence t+at outflows complement rat+er t+an su!stitute for e@ports andt+us +elp to protect rat+er t+an destroy Eo!s.No+n ndreas32 >2::4? in +is

wor) T+e (ffects of %I Inflows on 6ost ountry (conomic ,rowt+‖discusses t+e potential of %I inflows to affect +ost country economic&rowt+. T+e paper ar&ues t+at %I s+ould +ave a positive effect oneconomic &rowt+ as a result of tec+nolo&y spillovers and p+ysical capitalinflows. Performin& !ot+ cross L section and panel data analysis on adataset coverin& ': countries durin& t+e period 1'$: to 2::2; t+e empiricalpart of t+e paper finds indications t+at %I inflows en+ance economic,rowt+ in developin& economies !ut not in developed economies.T+ispaper +as assumed t+at t+e direction of causality &oes from inflow of %I to

+ost country economic &rowt+. 6owever; economic &rowt+ could itself cause an increase in %I inflows. (conomic &rowt+ increases t+e siFe of t+e +ost country mar)et and stren&t+ens t+e incentives for mar)et see)in&%I. T+is could result in a situation w+ere %I and economic &rowt+ aremutually supportin&. 6owever; for t+e ease of most of t+e developin&economies &rowt+ is unli)ely to result in mar)et L see)in& %I due to t+elow income levels. T+erefore; causality is primarily e@pected to run from



%I inflows to economic &rowt+ for t+ese economies. 8laus ( 0eyer34>2::3? in +is paper %orei&n irect investment in (mer&in& (conomies‖focuses on t+e impact of %I on +ost economies and on policy andmana&erial implications arisin& from t+is >potential? impact. T+e study finds

out t+at as emer&in& economies inte&rate into t+e &lo!al economiesinternational trade and investment will continue to accelerate. 0-(s willcontinue to act as pivotal interface !etween domestic and internationalmar)ets and t+eir relative importance may even increase furt+er. T+ee@tensive and variety interaction of 0-(s wit+ t+eir +ost societies maytempt policy ma)ers to micro L mana&e inwards forei&n investment and totar&et t+eir instruments at attractin& very specific types of proEects. 9et; t+epotential impact is +ard to evaluate e@ ante >or even e@ post? and it is notclear if policy instruments would !e effective in attractin& specifically t+einvestors t+at would &enerate t+e desired impact. T+e study concluded t+at

t+e first priority s+ould !e on en+ancin& t+e &eneral institutional framewor)suc+ as to en+ance t+e efficiency of mar)ets; t+e effectiveness of t+e pu!licsector administration and t+e availa!ility of infrastructure. On t+at !asis;t+en; carefully desi&ned !ut fle@i!le sc+emes of promotin& new industriesmay furt+er en+ance t+e c+ances of developin& internationally competitive!usiness clusters.8laus ( 0eyer; Saul (strin; Sumon 7+aumi); Step+en,el!; 6e!a 6andoussa; 0aryse ouis; Su!ir ,o)arn; avees+ 7+andari;-&uyen; T+an 6a -&uyen; o 6un&35 >2::5? in t+eir paper

%orei&n irect Investment in (mer&in& 0ar)etsG omparative Study in(&ypt; India; Sout+ frica and ietnam s+ow considera!le variations of ‖

t+e c+aracteristics of %I across t+e four countries; all +ave +ad restrictivepolicy re&imes; and +ave &one t+rou&+ li!eraliFation in t+e early 1'':. 9ett+e effects of t+is li!eraliFation policy on c+aracteristics of inwardinvestment vary across countries. 6ence; t+e causality !etween t+einstitutional framewor); includin& informal institutions; and entry strate&iesmerits furt+er investi&ation. T+is analysis +as to find appropriate ways tocontrol for t+e determinants of mode c+oice; w+en analyFin& itsconseAuences. T+e study concludes t+at t+e policy ma)ers need tounderstand +ow institutional arran&ements may &enerate favoura!leoutcomes for !ot+ t+e +ome company and t+e +ost economy. 6ence; we

need to !etter understand +ow t+e mode c+oice and t+e su!seAuentdynamics affect corporate performance and +ow it influences e@ternalities&enerated in favour of t+e local economy. ittorio aniele and &o0arani#$ >2::#? in t+eir study; o institutions matter for %IQ omparative analysis for t+e 0(- countries analyse t+e underpinnin&‖factors of forei&n irect Investments towards t+e 0(- countries. T+e



main interpretative +ypot+esis of t+e study is !ased on t+e si&nificant roleof t+e Auality of institutions to attract %I. In 0(- e@perience t+e &rowt+of %I flows proved to !e nota!ly inferior to t+at recorded in t+e ( or in

sian economies; suc+ as +ina and India. T+e study su&&ests as

institutional and le&al reform are fundamental steps to improve t+eattractiveness of 0(- in terms of %I.It is concluded from t+e a!ovestudies t+at mar)et siFe; fiscal incentives; lower tariff rates; e@port intensity;availa!ility of infrastructure; institutional environment; IT relatedinvestments and cross L !order mer&ers and acAuisitions are t+e maindeterminants of %I flows at temporal level. %I +elps increation/preservation of employment. It also facilitates e@ports. iversetypes of %I lead to diverse types of spillovers; s)ill transfers and p+ysicalcapital flows. It en+ances t+e c+ances of developin& internationallycompetitive !usiness clusters >e.&. S(-; SPT; -PT etc.?. T+e

increasin& num!ers of 7ITs >7ilateral Investment Treaties amon& nations;w+ic+ emp+asiFes non L discriminatory treatment of %I? !etween nationsare found to +ave a si&nificant impact on attractin& a&&re&ate %I flow ast+e concepts of nei&+!our+ood and e@tended nei&+!our+ood are widelyapplica!le in different conte@ts for different countries. It is concluded t+at%I plays a positive role in en+ancin& t+e economic &rowt+ of t+e +ostcountry.

,0" INTER COUNTRY STU%IES

7+a&wati N.-.# >1'#$?; in +is study natomy and onseAuences of (@c+an&e ontrol *e&imes analyFed t+e impact of %I on international‖trade. 6e concluded t+at countries actively pursuin& e@port led &rowt+strate&y can reap enormous !enefits from %I.respo -uno and %ontouraPaula 0aria11 >2::#? in t+eir paper eterminant %actors of %I Spillovers

L M+at o Me *ally 8nowQ analyFe t+e factors determinin& t+e‖e@istence; dimensions and si&n of %I spillovers. T+ey identify t+at %Ispillovers depend on many factors li)e a!sorptive capacities of domesticfirms and re&ions; t+e tec+nolo&ical ≈ or t+e e@port capacity. ,aFio&louS. and

0causland M..21 >2:::?; in t+eir study n International (conomic nalysis of %I and International Inde!tedness developed a micro‖foundations framewor) of analysis of %I and inte&rated it into a macrolevel analysis. T+ey +i&+li&+ted t+e importance of profit repatriation in&eneratin& different effects of %I on net international de!t; trade and reale@c+an&e rate in developed economies compared to less developedeconomies.+en 8unH 0in&; *au 6siu L6ua and in +ia L +in&1:



>2::5? in t+eir paper T+e impact of e@c+an&e rate movements on %orei&n

irect InvestmentG 0ar)et LOriented versus ost L Oriented ; e@amine t+e‖impact of e@c+an&e rate movements on %orei&n irect Investment. T+eir empirical findin&s indicate t+at t+e e@c+an&e rate level and its volatility inaddition to t+e relative wa&e rate +ave +ad a si&nificant impact onTaiwanese firms= outward %I into +ina. T+ey concluded t+at t+erelations+ip !etween e@c+an&e rates and %I is crucially dependent on t+emotives of t+e investin& firms. Salisu . fees5" >2::4? in +is study T+eeterminants and Impact of %orei&n irect Investment on economic,rowt+ in evelopin& ountriesG study of -i&eria e@amines t+e‖determinants and impact of %orei&n irect Investment on economic ,rowt+in evelopin& ountries usin& -i&eria as a case study. T+e study o!servedt+at inflation; de!t !urden; and e@c+an&e rate si&nificantly influence %Iflows into -i&eria. T+e study su&&ests t+e &overnment to pursue prudent

fiscal and monetary policies t+at will !e&eared towards attractin& more %Iand en+ancin& overall domestic productivity; ensure improvements ininfrastructural facilities and to put a stop to t+e incessant social unrest int+e country. T+e study concluded t+at t+e contri!ution of %I to economic&rowt+ in -i&eria was very low even t+ou&+ it was perceived to !e asi&nificant factor influencin& t+e level of economic &rowt+ in -i&eria. isae Propis and -i&el riffield4: >2::"? in t+eir study T+e Importance of luster for Spillovers from %orei&n irect Investment and Tec+nolo&ySourcin& ; e@amine t+e lin) !etween cluster development and inward‖forei&n direct investment. T+ey concluded t+at firms in clusters &ain

si&nificantly from %I in t+eir re&ion; !ot+ wit+in t+e industry of t+edomestic firm and across ot+er industries in t+e re&ion.0i&uel .*amireF42 >2::"? in +is study Is %orei&n irect Investment 7eneficial for 0e@icoQ n (mpirical nalysis e@amines t+e impact of %orei&n irect‖Investment on la!our productivity function for t+e 1'":H 2::1 period isestimated t+at includes t+e impact of c+an&es in t+e stoc) of private andforei&n capital per wor)er. T+e error correction model estimates su&&estt+at increase in !ot+ private and forei&n investment per wor)er +ave apositive and economically si&nificant effect on t+e rate of la!our productivity&rowt+. 6owever; after ta)in& into account t+e &rowin& remittances of

profits and dividends; t+ere is a mar)ed decrease in t+e economic effect of forei&n capital per wor)er on t+e rate of la!our productivity &rowt+. T+estudy assesses t+e s+ort L term interactions of t+e relevant varia!les viaimpulse response functions and variance decompositions !ased on adecomposition process t+at does not depend on t+e orderin& of t+evaria!les. O)uda Satoru4$ >1''4? in +is study Taiwan=s Trade and %I



policies and t+eir effect on Productivity ,rowt+ reviewed t+e course of ‖Taiwan=s trade and %I policies.T+e purpose of t+e study was to e@amine+ow t+ese policies affected productivity of Taiwan=s manufacturin& sector.

s an indicator of productivity; T(P indices of t+e Taiwan manufacturin&

were calculated at t+e su!sector level. It is find out t+at t+e T(P &rowt+ for manufacturin& as a w+ole was 2." per cent per annum t+e electronics andmac+inery maintained +i&+ productivity performance w+ile e@aminin& t+erelations+ip !etween T(P and trade and %I li!eraliFation policies wase@amined. T+e study concludes t+at t+e policies of t+e Taiwan &overnment+ave &enerally !een relevant.*+ys Nen)ins53 >2::"? in +is study,lo!aliFation; %I and (mployment in ietnam ; e@amines t+e impact of ‖

%I on employment in ietnam; a country t+at received considera!le inflowof forei&n capital in t+e 1'':s as part of its increased inte&ration wit+ t+e&lo!al economy. T+e study s+ows t+at t+e indirect employment effects

+ave !een minimal and possi!ly even ne&ative !ecause of t+e limitedlin)a&es w+ic+ forei&n investors create and t+e possi!ility of crowdin&out of domestic investment . T+us; t+e study finds out t+at despite t+e‖si&nificant s+are of forei&n firms in industrial output and e@ports; t+e directemployment &enerated +as !een limited !ecause of t+e +i&+ la!our productivity and low ratio of value added to output of muc+ of t+isinvestment. (mra+ 7il&ic1$ >2::"? in +er study ausal *elations+ip!etween %orei&n irect Investment and (conomic ,rowt+ in tur)ey ;‖e@amines t+e possi!le causal relations+ip !etween %I and (conomic,rowt+ in Tur)ey. T+e study finds out t+at t+ere is neit+er a lon& run nor a

s+ort run effect of %I on economic &rowt+ of Tur)ey. T+us t+e study couldnot find any patterns for eac+ +ypot+esis of %I led ,rowt+ and‖,rowt+ driven%I in Tur)ey. T+e main reason of t+is result is t+at t+e‖country +ad unsta!le &rowt+ performances and very low %I inflows for t+eperiod under analysis. T+e study su&&ests t+at in order to +ave a sustainedeconomic development t+e &overnment s+ould improve t+e investmentenvironment wit+ t+e ensured political and economic sta!ility in t+e country.

8or+onen 8ristina3" >2::5? in +er study %orei&n irect Investment in ac+an&in& Political (nvironment compares %innis+ Investment durin& t+e‖restrictive period in 1'$4H 1''#; wit+ t+e li!eral period in 1''$H2::2. T+estudy reveals t+at t+e political environment of t+e firm in t+e +ost countrymay +ave a special role amon& t+e ot+er parts of t+e firm=s environment!ecause of t+e supremacy of t+e +ost &overnment to use its political power in order to intervene in %I. T+e study states t+at T- may not need to!ar&ain alone !ut may lo!!y from its +ome &overnment. T+erefore; t+estudy adds t+e concept of aut+ority services to t+e list of T-=s !ar&ainin&



tec+niAues. T+e empirical results of t+e study su&&est t+at t+e c+an&e in t+epolitical environment in 8orea in 1''$ +ad a clear impact on %innis+investment in 8orea. T+e findin&s indicate t+at repeat investments +ad !eenen&a&ed re&ardless of t+e investment policy li!eraliFation; !ut t+e acAuisitions

+ad not ta)en place wit+out t+e c+an&e in 8orea=s investment policy. T+eresults also su&&est t+at t+e modified strate&y performance model can !esuccessfully used to assess t+e impact of c+an&e in t+e firm=s e@ternalenvironment. T+e results indicate t+at firms scan t+eir political environmentcontinuously in order to anticipate and respond to possi!le c+an&es. *ydAvistNo+an55 >2::5?; in +is wor) %I and urrency risisG urrency risis andt+e inflow of %orei&n irect Investment analyse if t+ere are any c+an&es in‖t+e flow of %I !efore; durin& and after a currency crisis. T+e study found t+atno similarities in re&ions or year of occurrence of t+e currency crisis. T+edept+; len&t+ and structure of eac+ currency crisis to&et+er wit+ usin& t+e

ri&+t definition of a currency crisis are two important factors relatin& to t+eoutcomes in t+is study. +arlotta

nden' >2::#? in +is study 0ultinational orporations and Spillovers inietnamH ddin& orporate Social *esponsi!ility focuses t+e presence of ‖

0-s and +ow t+ey +ave influenced t+e ietnamese economy ise@amined. Specifically; 0-s spillover effects on domestic enterprises arediscussed. T+e paper also discussed t+e c+allen&es and o!stacles toimplementation and development of corporate social responsi!ility policies.It s+ows t+at t+ere is potential for positive spillover effects; suc+ as

production met+ods and information spread from 0-s to domesticsuppliers. 6owever; t+e company must !e lar&e enou&+ to !e contractedand t+ere is a ris) t+at t+e &ap will widen !etween t+e few lar&e stron&suppliers and t+e +u&e num!er of small Land medium L siFed companiest+at operate in ietnam. T+e paper also s+ows t+at 0-s can wor) ascatalysts !y transferrin& S* &uidelines and a lon& L term way of t+in)in&to domestic companies. T+ai Tri o#2 >2::5? in +is study; T+e impact of %orei&n irect Investment and openness on ietnamese economy‖e@amines t+e impact of %I on ietnamese economy !y usin& Partial

dEustment 0odel and time series data from 1'#" to 2::4. %I is s+own to

+ave not only s+ort run !ut also lon& run effect on ,P of ietnam. T+estudy also e@amines t+e impact of trade openness on ,P and it is foundt+at trade is stron&er t+an t+at of %I. l+iEaFi; Ta+ya .2 >1'''? in +iswor); evelopin& ountries and %orei&n irect Investment analysed t+e‖pros and cons of %I for developin& countries and ot+er interested parties.T+is t+esis scrutiniFes t+e re&ulation of %I as a means to !alance t+einterests of t+e concerned parties; &ivin& an assessment of t+e !alance of



interests in some e@istin& and potential %I re&ulations. T+e study also+i&+li&+ts t+e case a&ainst t+e dere&ulation of %I and its conseAuencesfor developin& countries. T+e study concludes !y formulatin& re&ulatory%I &uidelines for developin& countries.No+annes ornelius Nordaan31

>2::5? in +is study; %orei&n irect investment and nei&+!ourin&influences evaluates t+e influences of a num!er of economic and socio L‖political influences of nei&+!ourin& countries on t+e +ost country=s %Iattractiveness.T+ree &roups; consistin& of developed; emer&in& and fricancountries are evaluated; wit+ t+e main emp+asis on frican countries.*esults of t+e study indicate t+at an improvement in civil li!erties andpolitical ri&+ts; improved infrastructure; +i&+er &rowt+ rate and a +i&+er de&ree of openness of t+e +ost country; +i&+er levels of +uman capitalattract %I to t+e developed countries !ut deter %I in emer&in& and

frican countriesindicatin& c+eap la!our as a determinant of %I inflows to

t+ese countries. %urt+er; Oil LOwned countries in frica=s attract more %It+an non L oil endowed countries Lemp+asin& t+e importance of naturalresources in frica. Pawin Talern&sri5: >2::1? in +is study; T+eeterminants of %I istri!ution across 0anufacturin& ctivities in an sianIndustrialiFin& ountryG ase of Napanese %I in T+ailand identifies and‖investi&ates t+e <industry L level eterminants= of %I in t+e conte@t of

sian industrialiFin& countries !y usin& t+e data on Napanese %I inT+ailand. T+e study e@amines t+e influences of location L specificc+aracteristics of +ost industries suc+ as factor endowments; trade costs;and policy factors. 0ore distinctively; it e@amines t+e effect of vertical

>inputHoutput? lin)a&es amon& Napanese firms. T+e study finds out t+atNapanese %I in T+ailand was not evenly distri!uted across manufacturin&activities. Some capital / tec+nolo&ical L intensive industries li)e raileAuipments and air crafts did not receive any %I durin& a specified period.On t+e ot+er +and; ot+er relatively la!our L intensive industries li)e T*adio; and communications eAuipment industry and motor ve+icle industryreceived disproportionately lar&e values of %I.Nainta +omtoranin2'

>2::4? in +er study; omparative nalysis of Napanese and merican%orei&n irect Investment in T+ailand assesses t+e determinants of ‖

Napanese and merican %I in T+ailand durin& 1'#:H2:::. In t+is analysis;t+e s+ort and lon&Hterm determinants of !ot+ %I are estimated. T+is studyconcludes t+at; in t+e s+ort and t+e lon& run; Napanese %I is found to !edriven !y trade factors and t+e yen appreciation. M+ile t+e merican %I isdriven !y mar)et factor; specifically t+e income level of T+ai people.Napanese %I is trade L oriented; w+ereas t+e merican %I is mar)et Lsee)in& oriented. 8+or +ia 7oon33 >2::1? in +is study; %orei&n irect



Investment and (conomic,rowt+ investi&ates t+e casual relations+ip‖!etween %I and economic &rowt+. T+e findin&s of t+is t+esis are t+at!idirectional causality e@ist; !etween %I and economic &rowt+ in 0alaysiai.e. w+ile &rowt+ in ,P attracts %I; %I also contri!utes to an increase in

output. %I +as played a )ey role in t+e diversification of t+e 0alaysianeconomy; as a result of w+ic+ t+e economy is no lon&er precariouslydependent on a few primarily commodities; wit+ t+e manufacturin& sector as t+e main en&ine of &rowt+.Taton&a ,ardner *usi)e#1 >2::#? in +isstudy; Trends and determinants of inward %orei&n irect Investment toSout+ frica analyses Trends and determinants of inward %orei&n irect‖Investment to Sout+ frica for t+e period 1'#5H2::5. T+e analysis indicatedt+at openness; e@c+an&e rate and financial development are important inlon& run determinants of %I. Increased openness and financialdevelopment attract %I. M+ile an increase >depreciation? in t+e e@c+an&e

rate deters %I to Sout+ frica. 0ar)et siFe emer&es as a s+ort rundeterminant of %I alt+ou&+ it is declinin& in importance. T+e analysis alsos+owed t+at %I itself; imports and e@c+an&e rate e@plain a si&nificantamount of t+e forecast error variance. T+e influence of mar)et siFe varia!leis small and declinin& over time.7elem Iliana asAueF ,alan" >2::"? in +isstudy; T+e effect of Trade i!eraliFation and %orei&n irect Investment in0e@ico analyses t+e importance of li!eraliFation and %I on 0e@ico=s‖economy. T+e maEor findin&s of t+e study demonstrated t+at t+e maindeterminants of ,P are capital accumulation; la!our productivity and %I.%urt+er; findin&s confirm t+at e@ports; differences in relative wa&es and

currency depreciation are e@plicative of %I. (@ports are +i&+ly dependenton t+e world economy and e@c+an&e rate fluctuations. a!our productivityand %I improve +uman capital. Similarly ,P and +uman capital induceproductivity &ains and capital accumulations improve due to tec+nolo&ytransfers; infrastructure; personal income and peso appreciation. T+e studys+owed t+at an e@pansionary monetary policy +as t+e capacity todecelerate t+e interest rate and t+ere!y to en+ance %I and its spillovers.Nin& +an&3: >2::$? in +is wor); %orei&n irect Investment; ,overnance;and t+e (nvironment in +inaG *e&ional imensions includes four empirical‖

studies related to %I; ,overnance; economic &rowt+ and t+e environment.T+e results of t+e t+esis are; first; an intraHcountry pollution +aven effect doese@ist in +ina. Second; %I is attracted to re&ions t+at +ave made more efforton fi&+tin& a&ainst corruption and t+at +ave more efficient &overnment. T+ird;&overnment varia!les do not +ave a si&nificant impact on environmentalre&ulation. %ourt+; economic &rowt+ +as a ne&ative effect on environmentalAuality at current income level in +ina.



astly; forei&n investment +as positive effects on water pollutants and aneutral effect on air pollutants Swapna S. Sin+a"' >2::#? in +is t+esis;‖omparative nalysis of %I in +ina and IndiaG an a&&ards earn fromeadersQ focuses on w+at lessons emer&in& mar)ets t+at are la&&ards in‖

attractin& %I; suc+ as India; can learn from leader countries in attractin&%I; suc+ as +ina in &lo!al economy. T+e study compares %I inflows in+ina and India. It is found t+at India +as &rown due to its +uman capital;siFe of mar)et; rate of &rowt+ of t+e mar)et and political sta!ility. %or c+ina;con&enial !usiness climatefactors comprisin& of ma)in& structural c+an&es;creatin& strate&ic infrastructure at S(s and ta)in& strate&ic policyinitiatives of providin& economic freedom; openin& up its economy;attractin& diasporas and creatin& fle@i!le la!our law were identified asdrivers for attractin& %I.Samuel dams5# >2::'? in +is paper; an%orei&n irect Investment +elp topromote &rowt+ in frica provides a‖

review of %orei&n irect Investment and economic &rowt+ literature in t+econte@t of developin& countries and particularly Su!H Sa+aran frica. T+emain findin&s of t+e study are as follows; first; %I contri!ution to economicdevelopment of t+e +ost country in two main ways; au&mentation of domestic capital and en+ancement of efficiency t+rou&+ t+e transfer of newtec+nolo&y; mar)etin& and mana&erial s)ills; innovation and !est practices.Secondly; %I +as !ot+ !enefits and costs and its impact is determined !yt+e country specific conditions in &eneral and t+e policy environment inparticular in terms of t+e a!ility to diversify; t+e level of a!sorption capacity;tar&etin& of %I and opportunities for lin)a&es !etween %I and domestic

investment.9ew Siew 9ou&$5 >2::#? in +is study; (conomic Inte&ration;%orei&n irect Investment and ,rowt+ in S(- five mem!ers e@amines‖t+e effects of economic inte&ration on %I flows and t+e effects of %I flowson economic &rowt+ in S(- 5 countries. T+e study found t+at mar)etsiFe; economic inte&ration; +uman capital; infrastructure and e@istin& %Istoc) are t+e important determinants of %I for SI- countries. T+e studyalso found t+at %I; economic inte&ration and +uman capital are ro!ustlysi&nificant to economic &rowt+; manufacturin& sector &rowt+ and +i&+tec+nolo&y sector &rowt+ for S(- countries. T+e %I flow into S(-countries was found to !e inversely proportional to t+e per capita income of t+e five countries.It is concluded t+at t+e effect of %I on economic &rowt+of S(-S countries was found to !e +i&+er for countries wit+ +i&+er per capita income. oupled wit+ stron& intra L industry trade in t+emanufacturin& sector of S(- countries an inte&rated approac+ to drawin %I and promote manufacturin& and +i&+ tec+nolo&y &rowt+ s+ould !eaccelerated. T+e mac+inery and electrical



appliances industry contri!utes t+e +i&+est trade in t+e re&ion and is +i&+lyinte&rated in intra L industry trade wit+in t+e re&ion. T+e )ey +u!s of t+eindustry wit+in t+e re&ion are 0alaysia and Sin&apore. Sasid+aran Su!as+and *amanat+an .5' >2::#?; study on %orei&n irect Investment and

SpilloversG (vidence from Indian 0anufacturin& . It is an attempt to‖

empirically e@amine t+e spillover effects from t+e entry of forei&n firmsusin& a firm level data of Indian manufacturin& industries. %irm L level dataof Indian manufacturin& industries are used for t+e period 1''4H2::2. T+eyconsider !ot+ +oriFontal and vertical spillover effects of %I. onsistentwit+ t+e results of t+e previous studies; t+e study finds no evidence of +oriFontal spillover effects. 6owever; t+e study finds ne&ative verticalspillover effects.iana iorela 0atei13 >2::#? in +er study; %orei&n irectInvestment location determinants in entral and (astern (uropeanountries focuses on central and (astern (uropean former state L‖

planned economies and investi&ates w+y multinationals c+ose to locatet+eir investments in t+ese countries. T+e main findin&s of t+e study are t+atmar)et potential; privatiFation and a&&lomeration factors +ave si&nificanteffects upon %I location c+oice; +elpin& to e@plain t+e attractiveness for %I of t+ese +ost countries. 8ostevc rt; TEasa *ede); ndreE SusEan3#>2::#? in t+eir study %orei&n irect Investment and institutional(nvironment in Transition (conomies analysed t+e relation !etween %I‖and t+e Auality of t+e institutional environment in transition economies. T+eanalysis confirmed a si&nificant impact of various institutional aspects ont+e inflow of forei&n capital. To isolate t+e importance of t+e institutional

environment from t+e impact of ot+er factors; a panel data analysis wasperformed usin& t+e data of 24 transition economies in t+e period 1''5H2::2. T+e findin&s s+owed t+at in t+e o!served period t+e Auality of t+einstitutional environment si&nificantly influenced t+e level of %I intransition economies. Ot+er varia!les t+at proved to +ave a statisticallysi&nificant influence were !ud&et deficit; insider privatiFation and la!our cost per +our.*udi 7eiEnen54 >2::#? in +is study; %I in +inaG (ffects on*e&ional (@ports investi&ates t+e e@istence of a si&nificant %I L (@port‖lin)a&e in +ina; usin& panel data at t+e provincial level over t+e 1''5 to2::3. T+e t+eory of %I proposes t+e possi!ility of an e@port creatin&

effect. 6owever; t+e results s+ow t+at if t+e model is correctly specified;t+ere is no evidence for t+e e@istence of a si&nificant %IHe@port lin)a&e.T+e study concluded t+at t+e claims of t+e reference studies concernin&t+e presence of a %IL e@port lin)a&e are not valid. Taewon Su+; Omar N.

8+an#: >2::3? in t+eir study; T+e effects of %I inflows and ITinfrastructure on e@portin& in S(-/TT countriesG comparison wit+



ot+er re&ional !locs in emer&in& mar)ets ; e@plores t+e impact of !ot+ t+e‖increase in %I inflows and t+e increase in information and communicationtec+nolo&y infrastructure investments on e@portin& in S(- nations >t+etrade !loc of w+ic+ is )nown as %T? compared wit+ two ot+er maEor trade

!locsG (%T and I. T+e analysis is !ased on data from cross L sectionof countries >2" emer&in& mar)ets from t+ree trade !locs? over time >from1''5 to 2:::?. T+e results s+ow t+at t+e increase of investment in ITinfrastructure yields positive and si&nificant returns in t+e national e@portin&level only for t+e S(- / %T and (%T sample. T+e impact of t+eincrease of %I inflows on e@port is si&nificant only in t+e (%T and Isamples. ,arric) 7laloc)2: >2::"? in +is wor); Tec+nolo&y adoption from%orei&n irect Investment and (@plorin&G (vidence from Indonesian0anufacturin& contains t+ree essays on tec+nolo&y adoption from forei&n‖direct investment and e@plorin&. T+e first essay investi&ates +ow

tec+nolo&y t+at accompanies %I diffuses in t+e +ost economy and findst+at multinationals wis+ to limit tec+nolo&y lea)a&e to domestic rivals; t+ey!enefits from deli!erate tec+nolo&y transfer to suppliers t+at may lower input prices or raise input Auality. T+e second essay e@amines +ow firmattri!utes affect innovation !y investin& t+e adoption of tec+nolo&y !rou&+twit+ %I. T+e findin&s su&&est t+at t+e more competent firms +ave alreadyadopted tec+nolo&ies wit+ +i&+ returns and low costs;w+ereas lesscompetent firms +ave room to catc+ up and can still !enefit from t+eadoption of <low +an&in& fruit tec+nolo&y= t+e t+ird essay as)s w+et+er firms acAuire tec+nolo&y t+ou&+ e@portin& and find stron& evidence t+at

firms !enefits from a one time Eump in productivity upon enterin& e@portmar)ets.e@in 9an&12 >2::3? in +is study; %orei&n irect Investmentfrom evelopin& ountriesG case study of +ina=s Outward Investment‖presents an interpretation of %I !y +inese firms. T+e researc+ ismotivated !y t+e p+enomenon t+at compared wit+ forei&n investment in+inaJ direct investment from +ina +as so far attracted relatively littleattention from researc+ers. ,iven t+e difficulties in providin& a convincin&e@planation of t+e patterns of +ina=s outward %I !y usin& mainstreamt+eories; t+is t+esis develops a networ) model of %I !y formaliFin&networ) ideas from !usiness analysis for application to economic analysis;and interprets +ina=s outward %I in terms of networ) model. T+is t+esis+olds t+at +inese firms were en&a&ed in %I for various networ) !enefits.

ccordin&ly; t+e &eo&rap+ic distri!ution of +ina=s outward %I reflectedt+e distri!ution of networ) !enefits reAuired !y +inese firms and t+erelevant cost savin& effects for containin& suc+ !enefits. s t+e functionin&of networ)s relies on elements of mar)et economies; t+e development of



+ina=s outward %I was affected !y t+e pro&ress of mar)etisation in +ina.0inAuan liu; uodan u; iu iu43 >2::4? in t+eir study; Ma&e relateda!our standards and %I in +inaG Some survey findin&s from ,uan&don&Province presents findin&s from a Survey of %orei&n Invested (nterprises‖

>%I(s? in ,uan&don& +ina; on t+e relations+ip !etween %orei&n irectInvestment and wa&e L related la!our standards >re&ular wa&es; andcompliance wit+ official overtime and minimum wa&e? w+ic+ s+ow t+at wa&e Lrelated standards are statistically +i&+ in %I(s w+ose +ome countries=standards are +i&+er; after controllin& for ot+er influences. 6owever; a cost Lreduction %I( is more li)ely to !e associated wit+ inferior standards..-,+os+22 >2::5? in +is paper <%I and *eformG Si&nificance and *elevance of +inese (@perience finds t+at if India s+ed its in+i!itions a!out %I and‖follow in t+e footsteps of +ina; t+an India would !e in a position to realiFe itsfull potential. +ina=s %I sa&a +as !een a te@t!oo) replay of w+at institutional

economics would call adaptive efficiency on t+e part of its political re&ime.‖T+e country made coura&eous !ut careful c+oices in difficult circumstances;si&nalin& radical departure from t+e !elief system it +as !een accustomed tofor decades. T+e study concluded t+at !ot+ c+ina and India +avedemonstrated t+at for a late industrialiFin& country t+e Mas+in&ton consensusis not necessarily a &ood model to follow. It mi&+t !e appropriate for countrieswit+ a &ood institutional infrastructure and efficient private sector; !ut for ot+ers it can !e a recipe for disaster. +ina seems to +ave discovered its ownreform model wit+

+inese +aracteristics . western o!server calls it t+e 7eiEin&‖onsensus . India is currently fum!lin& to validate a different )ind of model‖

L call it t+e India onsensus H for democratin& country in a &lo!ally‖interdependent world. It is concluded from t+e analysis of t+e a!ove studiest+at political environment; de!t !urden; e@c+an&e rate; %I spilloverssi&nificantly influence %I flow to t+e developin& countries. It is alsoo!served t+at countries pursuin& e@port led &rowt+ strate&y and firms inclusters &ain more !enefits from %I. It is also found t+at improveinfrastructure; +i&+er &rowt+ rate; +i&+er de&ree of openness of t+e +osteconomy and +i&+er levels of +uman capital attract %I to t+e developed

as well as developin& nations. It au&ments domestic savin&s and en+ancesefficiency of +uman capital >t+rou&+ transfer of new tec+nolo&y; mar)etin&and mana&erial s)ills; innovation and !est practices?

INTER IN%USTRY STU%IES

,uruswamy 0o+an; S+arma 8amal; 0o+anty Neevan Pra)as+; 8ora+T+omas N.2" >2::5? in t+eir paper; %I in India=s *etail SectorG 0ore 7ad‖



t+an ,ood ; find t+at retail in India is severely constrained !y limited‖availa!ility of !an) finance; dislocation of la!or. T+e study su&&ests suita!lemeasures li)e need for settin& up of national commission to study t+epro!lems of t+e retail sector and to evolve policies t+at will ena!le it to cope

wit+ %I. T+e study concludes t+at t+e entry of %I in India=s retailin& sector isinevita!le. 6owever; wit+ t+e instruments of pu!lic policy in its +ands; t+e&overnment can slow down t+e process. T+e &overnment can try to ensuret+at t+e domestic and forei&n players are more or less on an eAual footin& andt+at t+e domestic traders are not at a special disadvanta&e. T+e small retailersmust !e &iven t+e opportunity to provide more personaliFed service; so t+att+eir +i&+er costs are ta)en advanta&e of !y lar&e supermar)ets and+ypermar)ets. Par) Non&soo4' >2::4? conducted a study on 8oreanPerspective on %I in IndiaG 6yundai 0otors= Industrial luster indicates t+at‖industrial clusters are playin& an important role in economic activity. T+e )ey

to promotin& %I inflows into India may lie in industries and products t+at aretec+nolo&y L intensive and +ave economies of scale and si&nificant domesticcontent.Sarma (S5$ >2::5? in +is paper <-eed for aution in *etail %I‖e@amines t+e constraints faced !y traditional retailers in t+e supply c+ain and&ive an emp+asis on esta!lis+ment of a pac)a&e of safety nets as T+ailand+as done. India s+ould also draw lessons from restrictions placed on t+ee@pansion of or&aniFed retailin&; in terms of sourcin&; capital reAuirement;Fonin& etc; in ot+er sian countries. T+e article comments on t+e retail %Ireport t+at as commissioned !y t+e epartment of onsumer ffairs and

su&&ests t+e need for a more compre+ensive study. ,onFaleF N.,25 >1'$$? in+is study

(ffect of %orei&n irect Investment in t+e presence of sector specificunemployment e@tends t+e wor) done !y Srinivasan"$‖>1'$3?International factor movements; commodity trade and commercialpolicy in a specific factor model ; !y ma)in& an analysis of t+e welfare‖effects of forei&n investment. T+e study s+ows t+at if t+ere are nodistortions; forei&n investment en+ances t+e social uplift of t+e people. T+estudy stron&ly favours import su!stitution policies since suc+ a strate&yprovides &reater Eo! opportunities to t+e people and conseAuently improves

t+eir standards of livin&. 7ut t+e study finds t+at welfare effects of forei&nInvestment do not e@plain t+e pattern of trade in t+e economy. T+us; !ot+Srinivasan >1'$3? and ,onFaleF >1''$? concluded t+at forei&n directinvestment and distortions of t+e la!our mar)et results in social uplift of t+epeople.S+arma *aEes+ 8umar"# >2::"? in +is article %I in 6i&+er (ducationG Official ision -eeds orrections ; e@amines t+e issues and‖financial compulsions presented in t+e consultation paper prepared !y t+e



ommerce 0inistry; w+ic+ is mar)ed !y S+oddy ar&uments; perverse lo&icand forced conclusions. T+is article raises four issues w+ic+ need criticalattentionG t+e o!Eectives of +i&+er education; its conte@tual relevance; t+eprevailin& financial situation and t+e via!ility of alternatives to %I. T+e

conclusion of t+e article is t+at +i&+er education needs lon& L termo!Eectives and a !road vision in tune wit+ t+e proEected future of t+ecountry and t+e world. 6i&+er education will reAuire an investment of *s.2:;::: to 25;::: crore over t+e ne@t five or more years to e@pand capacityand improve access. %or suc+ a +u&e amount t+e paper ar&ues; we canloo) to %I.To sum up; it can !e said t+at industrial clusters are playin& asi&nificant role in attractin& %I at Inter L industry level. It is ar&ued t+atindustries and products t+at are tec+nolo&y L intensive and +aveeconomies of scale and si&nificant domestic content attract %I at industriallevel.

STU%IES IN IN%IAN CONTEXT

-aya) .-4" >2::4? in +is paper anadian %orei&n irect Investment inIndiaG Some O!servations ; analyse t+e patterns and trends of anadian‖

%I in India. 6e finds out t+at India does not fi&ure very muc+ in t+einvestment plans of anadian firms. T+e reasons for t+e same is t+eindifferent attitude of anadians towards India and lac) of information of investment opportunities in India are t+e important contri!utin& factor for

suc+ an un+ealt+y trends in economic relation !etween India and anada.6e su&&ested some measures suc+ as pu!lis+in& of re&ular documentsli)e newsletter t+at would +i&+li&+t opportunities in India and a detailedfocus on India=s area of stren&t+ so t+at anadian firms could comeforward and discuss t+eir areas of e@pertise would &ot lon& way inen+ancin& anadian %I in India.7alasu!ramanyam .- Sapsford avid4>2::#? in t+eir article oes India need a lot more %I compares t+e levels‖of %I inflows in India and +ina; and found t+at %I in India is one tent+ of t+at of c+ina. T+e paper also finds t+at India may not reAuire increased %I

!ecause of t+e structure and composition of India=s manufacturin&; servicesectors and +er endowments of +uman capital. T+e reAuirements of mana&erial and or&aniFational s)ills of t+ese industries are muc+ lower t+ant+at of la!our intensive industries suc+ as t+ose in +ina. lso; India +as alar&e pool of well L Trained en&ineers and scientists capa!le of adaptin& andrestructurin& imported )now L +ow to suit local factor and product mar)etcondition all of t+ese factors promote effective spillovers of



tec+nolo&y and )nowH +ow from forei&n firms to locally own firms. T+eoptimum level of %I; w+ic+ &enerates su!stantial spillovers; en+anceslearnin& on t+e Eo!; and contri!utes to t+e &rowt+ of productivity; is li)ely to!e muc+ lower in India t+an in ot+er developin& countries includin& +ina.

T+e country may need muc+ lar&er volumes of %I t+an it currently attractsif it were to attain &rowt+ rates in e@cess of 1: per cent per annum. %inally;t+ey conclude t+at t+e country is now in a position to un!undle t+e %Ipac)a&e effectively and rely on sources ot+er t+an %I for its reAuirementsof capital. -a&a *aE *45 >2::3? in +is article %orei&n irect Investment inIndia in t+e1'':sG Trends and Issues discusses t+e trends in %I in India‖in t+e 1'':s and compare t+em wit+ +ina. T+e study raises some issueson t+e effects of t+e recent investments on t+e domestic economy. 7asedon t+e analytical discussion and comparative e@perience; t+e studyconcludes !y su&&estin& a realistic forei&n investment policy. 0orris

Se!astian44 >1'''? in +is study %orei&n irect Investment fromIndiaG1'"4H$3 studied t+e features of Indian %I and t+e nature and mode‖of control e@ercised !y Indians and firms a!road; t+e causal factors t+atunderlie Indian %I and t+eir specific stren&t+s and wea)nesses usin& datafrom &overnment files. To t+is effect; 14 case studies of firms in t+e te@tiles;paper; li&+t mac+inery; consumer dura!les and oil industry in 8enya andSout+ (ast sia are presented. T+is study concludes t+at t+e indi&enousprivate corporate sector is t+e maEor source of investments. T+e currentre&ime of tariff and narrow e@port policy are ot+er reasons t+at +avemotivated mar)et see)in& %I.*esources see)in& %I +as started to

constitute a su!stantial portion of %I from India.-eit+er t+e advanta&econcept of 8indle!r&er; nor t+e concept of lar&e oli&opolies tryin& to retain‖t+eir tec+nolo&ical and monopoly power internationally of 6ymer andaitsos are relevant in understandin& Indian %I; and +ence are not truly&eneral forces t+at underlie %I. T+e only truly &eneral force is t+eine@ora!le pus+ of capital to see) mar)ets; w+et+er t+rou&+ e@ports or w+en conditions at +ome put a !ra)e on accumulation and conditiona!road permit its continuation.-irupam 7aEpai and Neffrey . Sac+s4#

>2::"? in t+eir paper %orei&n irect Investment in IndiaG Issues andPro!lems ; attempted to identify t+e issues and pro!lems associated wit+‖

India=s current %I re&imes; and more importantly t+e ot+er associatedfactors responsi!le for India=s unattractiveness as an investment location.espite India offerin& a lar&e domestic mar)et; rule of law; low la!our costs; and a well wor)in& democracy; +er performance in attractin& %Iflows +ave !een far from satisfactory. T+e conclusion of t+e study is t+at arestricted %I re&ime; +i&+ import tariffs; e@it !arriers for firms; strin&ent

4

0



la!or laws; poor Auality infrastructure; centraliFed decision ma)in&processes; and a very limited scale of e@port processin& Fones ma)e Indiaan unattractive investment location.8ulwinder Sin&+3$ >2::5? in +is study%orei&n irect Investment in IndiaG ritical analysis of %I from 1''1H

2::5 e@plores t+e uneven !e&innin&s of %I; in India and e@amines t+e‖

developments >economic and political? relatin& to t+e trends in two sectorsGindustry and infrastructure.T+e study concludes t+at t+e impact of t+ereforms in India on t+e policy environment for %I presents a mi@ed picture.T+e industrial reforms +ave &one far; t+ou&+ t+ey need to !e supplemented!y more infrastructure reforms; w+ic+ are a critical missin& lin). +andan+a)ra!orty; Peter -unnen)amp$ >2::4? in t+eir study (conomic*eforms; %I and its (conomic (ffects in India assess t+e &rowt+‖implications of %I in India !y su!Eectin& industry L specific %I and outputdata to ,ran&er causality tests wit+in a panel co Hinte&ration framewor). It

turns out t+at t+e &rowt+ effects of %I vary widely across sectors. %Istoc)s and output are mutually reinforcin& in t+e manufacturin& sector. Ins+arp contrast; any causal relations+ip is a!sent in t+e primary sector. 0oststri)in&ly; t+e study finds only transitory effects of %I on output in t+eservice sector; w+ic+ attracted t+e !ul) of %I in t+e post L reform era.T+ese differences in t+e %I L ,rowt+ relations+ip su&&est t+at %I isunli)ely to wor) wonders in India if only remainin& re&ulations were rela@edand still more industries opened up o %I.7asu P.; -aya) -.; ani

rc+ana5 >2::#? in t+eir paper %orei&n irect Investment in IndiaG(mer&in& 6oriFon ; intends to study t+e Aualitative s+ift in t+e %I inflows‖

in India in L dept+ in t+e last fourteen odd years as t+e !old new policy oneconomic front ma)es t+e country pro&ress in !ot+ Auantity and t+e waycountry attracted %I. It reveals t+at t+e country is not only cost L effective!ut also +ot destination for *R activities. T+e study also finds out t+at*R as a si&nificant determinin& factor for %I inflows for most of t+eindustries in India. T+e software industry is s+owin& intensive *R activity;w+ic+ +as to !e c+anneliFed in t+e form of e@port promotion for penetrationin t+e new mar)ets. T+e study also reveals stron& ne&ative influence of corporate ta@ on %I inflows.To sum up; it can !e said t+at lar&e domesticmar)et; c+eap la!our; +uman capital;are t+e main determinants of %I

inflows to India; +owever; its strin&ent la!our laws; poor Aualityinfrastructure; centraliFe decision ma)in& processes; and a vary limitednum!ers of S(s ma)e India an unattractive investment location.



CONCLUSIONS

T+e a!ove review of literature +elps in identifyin& t+e researc+ issues and&aps for t+e present study. T+e fore&oin& review of empirical literatureconfirms/+i&+li&+ts t+e followin& facts

1? Institutional infrastructure and development are t+e main determinants of %I inflows in t+e (uropean transition economies. Institutional environment>comprisin& !ot+ institutional strate&ies and policies of or&aniFationsrelatin& to t+ese institutions? plays critical role in reducin& t+e transactioncosts of !ot+ domestic and cross !order !usiness activity.

2? %I plays a crucial role in employment &eneration/ preservation in entral(urope. It is found t+at !i&&er diversity of types of %I lead to more diversetypes spillovers and s)ill transfers w+ic+ proves more favoura!le for t+e+ost economy.

3?It is also found t+at apart from mar)et siFe; e@ports; infrastructurefacilities;institutions; source and destination countries; t+e concept of nei&+!or+ood and e@tended nei&+!or+ood is also &ainin& importanceespecially in (urope; +ina and India.4?In industrial countries +i&+ la!our costs encoura&e outflows anddiscoura&e inflows of %I. T+e principle determinants of %I in t+esecountries are IT Lrelated investments; trade and cross L !order mer&ersand acAuisitions.5?Studies w+ic+ underlie t+e effects of %I on t+e +ost countries economic&rowt+ s+ows t+at %I en+ance economic &rowt+ in developin& economies

!ut not in developed economies. It is found t+at in developin& economies%I and economic &rowt+ are mutually supportin&. In ot+er wordseconomic &rowt+ increases t+e siFe of t+e +ost country mar)et andstren&t+ens t+e incentives for mar)et see)in& %I. It is also o!served t+at!idirectional causality e@ist !etween %I and economic &rowt+ i.e. &rowt+in ,P attracts %I and %I also contri!utes to an increase in output.

"? Studies on developin& countries of Sout+; (ast and Sout+ (ast sia s+owst+at fiscal incentives; low tariffs; 7ITs >7ilateral Investment Treaties? wit+developed countries +ave a profound impact on t+e inflows of a&&re&ate%I to developin& countries.

#? Studies on role of %I in emer&in& economies s+ows t+at &eneralinstitutional framewor); effectiveness of pu!lic sector administration andt+e availa!ility of infrastructural facilities en+ance %I inflows to t+esenations. %I also en+ance t+e c+ances of developin& internationallycompetitive !usiness clusters



$?It is o!served t+at countries pursuin& e@port L led &rowt+ strate&ies reapsenormous !enefits from %I.'?T+e main determinants of %I in developin& countries are inflation;infrastructural facilities; de!ts; !urden; e@c+an&e rate; %I spillovers; sta!lepolitical environment etc.1:? It is found t+at firms in cluster &ain si&nificantly from %I in t+eir re&ion;wit+in industry and across ot+er industries in t+e re&ion.11?It is also o!served t+at %I +ave !ot+ s+ort L run and lon& L run effecton t+e economy. So; re&ulatory %I &uidelines must !e formulated in order to protect developin& economies from t+e conseAuences of %I flows.

RESEARC$ ISSUES AN% RESEARC$ 'APS

T+e a!ove review of literature proves !eneficial in identifyin& t+e researc+issues and t+e researc+ &aps; w+ic+ are mainly t+e edifices on w+ic+ t+eo!Eectives of t+e present study are !ased on. T+ere is +ardly any study inIndia w+ic+ +as ta)en macroeconomic varia!les li)e forei&n e@c+an&ereserves; total trade; financial position; researc+ and developmente@penditure w+ile assessin& t+e determinants and impact of %I on Indianeconomy. T+e present study tries to include t+ese a!ove said varia!les inassessin& t+e determinants and impact of %I in India at t+e macro L level.%urt+er; t+ere is +ardly any study in India; w+ic+ documents t+e trends andpatterns of %I at world level; sian level and Indian level. T+us; t+e

present study is an endeavor to discuss t+e trends and patterns of %I; itsdeterminants and its impact on Indian economy. T+e present study differsfrom t+e early studies in many ways and enric+es t+e e@istin& literature int+e followin& waysG %irstly; it +as included varia!les ot+er t+an t+e varia!lesincluded !y ot+er sc+olars. Secondly; t+e present study documents t+etrends and patterns of %I at Morld; sian and Indian level. T+irdly; t+epresent study tries to +i&+li&+t t+e c+an&in& attitude of developin& countriestowards %I and attitude c+an&e of developed countries towardsdevelopin& countries in understandin& t+eir contri!ution in contemporaryinternational relations and development process. %ourt+ly; t+e study

presents t+e e@periences of first and second &eneration of economicreforms on Indian economy.



,0&TREN%S AN% PATTERENS OF F%I INFLO*S

One of t+e most prominent and stri)in& feature of today=s &lo!alised worldis t+e e@ponential &rowt+ of %I in !ot+ developed and developin&

countries. In t+e last two decades t+e pace of %I flows are risin& faster t+an almost all ot+er indicators of economic activity worldwide. evelopin&countries; in particular; considered %I as t+e safest type of e@ternalfinance as it not only supplement domestic savin&s; forei&n reserves !utpromotes &rowt+ even more t+rou&+ spillovers of tec+nolo&y; s)ills;increased innovative capacity; and domestic competition. -ow a days; %I+as !ecome an instrument of international economic inte&ration.ocated inSout+ sia; India is t+e #t+ lar&est; and t+e 2nd most populated country int+e world. India +as lon& !een )nown for t+e diversity of its culture; for t+einclusiveness of its people and for t+e conver&ence of &eo&rap+y. Today;

t+e world=s lar&est democracy +as come to t+e forefront as a &lo!alresource for industry in manufacturin& and services. Its pool of tec+nicals)ills; its !ase of an (n&lis+ L spea)in& Populace wit+ an increasin&disposa!le income and its !ur&eonin& mar)et +as all com!ined to ena!leIndia emer&e as a via!le partner to &lo!al industry. *ecently; investmentopportunities in India are at a pea).T+is c+apter covers t+e trends andpatterns of %I inflows at Morld; sian and Indian level durin& 1''1H2::$.

TREN%S AN% PATTERNS OF F%I FLO* IN T$E *ORL%

T+e li!eraliFation of trade; capital mar)ets; !rea)in& of !usiness !arriers;

tec+nolo&ical advancements; and t+e &rowin& internationaliFation of &oods;services; or ideas over t+e past two decades ma)es t+e world economiest+e &lo!alised one. onseAuently; wit+ lar&e domestic mar)et; low la!our costs; c+eap and s)illed la!our; +i&+ returns to investment; developin&countries now +ave a si&nificant impact on t+e &lo!al economy; particularlyin t+e economics of t+e industrialiFed states. Trends in Morld %I flowsdepict t+at developin& countries ma)es t+eir presence felt !y receivin& aconsidera!le c+un) of %I inflows. evelopin& economies s+are in total%I inflows rose from 2"D in 1'$: to 4:D in 1''#.



C$ART "?F%I INFLO*S IN T$E *ORL%

9ears/ 1' '" '# '$ '' 2: 2: 2: 2: 2: 2: 2: 2::

ountr ':H :: :1 :2 :3 :4 :5 :" #ies '5Morld 22 3$ 4# "' 1:$ 14 #3 #1 "3 "4 '5 14 1$3%I 5.3 ".1 $.1 4.5 $.3 '2 5.1 ".1 2." $.1 $.# 11 3.3evel "4. 5#. 5" "'. ##. $2 "$. #". "'. 5$. "3. "" "$oped 4 1 # 1 .2 4 5 ' " $ .#(conomiess+arein

world%Ievel 33 3'. 3'. 2# 2:. 15 2#. 21. 2". 3" 33 2' 2#.opin& 5 ' # .' ' # 3 .3 3(conomiess+areinworld

%ISourceG compiled from t+e various issues of MI*; -T; Morld 7an)6owever; t+e s+are durin& 1''$ to 2::3 fell considera!ly !ut rose in 2::4;a&ain in 2::" and 2::# it reduces to 2'D to 2#D due to &lo!al economicmeltdown. Specifically; developin& sia received 1" D; atin merica andt+e ari!!ean $.# D; and frica 2 D.On t+e ot+er +and; developedeconomies s+ow an increasin& upward trend of %I inflows; w+iledevelopin& economies s+ow a downward trend of %I inflows after1''5.eveloped (conomiesKs s+are in world %I evelopin& (conomiesKss+are in world %I

SourceG compiled from t+e various issues of MI*; -T; Morld 7an)6owever; India s+ows a steady pattern of %I inflows durin& 1''1H2::#>+artH 2?.T+e annual &rowt+ rate of developed economies was 33D;developin& economies was 21D and India was 1#D in 2::# over 2::".urin& 1''1H2::# t+e compound annual &rowt+ rate re&istered !ydeveloped economies was 1"D; developin& economies was merely 2D;and t+at of India was 41D.



MOST ATTRACTIVE LOCATION OF 'LOBAL F%I

It is a wellH)nown fact t+at due to infrastructural facilities; less !ureaucraticstructure and conducive !usiness environment +ina tops t+e c+art of maEor emer&in& destination of &lo!al %I inflows. T+e ot+er most preferred

destinations of &lo!al %I flows apart from +ina are 7raFil; 0e@ico;*ussia; and India. T+e annual &rowt+ rate re&istered !y +ina was 15D;7raFil was $4D; 0e@ico was 2$D; *ussia was "2D; and India was 1#D in2::# over 2::". urin& 1''1H2::# t+e compound annual &rowt+ ratere&istered !y +ina was 2:D; 7raFil was 24D; 0e@ico was 11D; *ussiawas 41D >from 1''4?; and India was 41D. India=s %I need is stood at S15 !n per year in order to ma)e t+e country on a 'D &rowt+ traEectory >asproEected !y t+e %inance 0inister of India in t+e current 7ud&et#4?. Suc+massive %I is needed !y India in order to ac+ieve t+e o!Eectives of itssecond &eneration economic reforms and to maintain t+e present &rowt+

rate of t+e economy. lt+ou&+; India=s s+are in world %I inflows +asincreased from :.3D to 1.3D from 1'':H'5 to 2::#. T+ou&+; t+is is not anattractive s+are w+en it is compared wit+ +ina and ot+er maEor emer&in&destinations of &lo!al %I inflows.

C$ART &?S$ARE OF IN%IA IN *ORL% F%I

9ears 1' '" '# '$ '' 2: 2: 2: 2: 2: 2: 2: 2::

/ ':H :: :1 :2 :3 :4 :5 :" #ount '5riesMorld 22 3$ 4# "' 1: 14 #3 #1 "3 "4 '5 14 1$3%I 5.3 ".1 $.1 4.5 $$ '2 5 ".1 2." $.1 $.# 11 3.3India= :.3 :.# :.$ :.4 :.2 :.2 :.5 :.5 :.# :.$ :.$ 1.4 1.3ss+arein

world%I

indiaKs s+are in world %ISourceG compiled from t+e various issues of MI*; -T; Morld 7an)>Ta!leH3.3? reveals t+at durin& t+e period under review %I inflow in India+as increased from 11D to "'D. 7ut w+en it is compared wit+ +ina;



India=s %I inflows stand no w+ere. nd w+en it is compared wit+ rest of t+e maEor emer&in& destinations of &lo!al %I India is found at t+e !ottomof t+e ladder.

SourceG compiled from t+e various issues of MI*; -T; Morld 7an)T+e reason could !e !ureaucratic +urdles; infrastructural pro!lems;!usiness environment; or &overnment sta!ility. India +as to consider t+efive point strate&y as put forward !y t+e Morld 7an) for India; if India wantsto !e an attractive location of &lo!al %I in t+e comin& years.

TREN%S AN% PATTERNS OF F%I FLO* IN ASIA

In t+e Sout+; (ast; and Sout+ L (ast sia !loc) India is at 3rd place after +ina and Sin&apore Sout+; (ast; Sout+ L (ast sia !loc) re&istered an

annual &rowt+ rate of 1'D in 2::# over 2::" and compound annual &rowt+rate of 1#D on an annualiFed !asis durin& 1''1H2::#. India=s s+are +asincreased from 1.5D in 1'':H '5 to '.2D in 2::# w+ile +ina=s s+are wasdecreased to 33 per cent in 2::# from 43.4 per cent in 1'':H'5. It is foundt+at t+ere is an increment of 5.$D in case of India w+ile t+ere is adecrement of '.$D in case of +ina. It is evident from t+at India=s s+areamon& developin& countries in %I inflow was 1.4D in t+e last decade and2.$D in

SourceG oin& !usiness in IndiaG 2::'; Morld 7an).

T+e doin& !usiness$4 conducted !y Morld 7an) put forward certain‖indicators >Ta!le H 3.5? w+ere +ina !eats India in attractin& +i&+ %Iinflows. 6i&+ trade and transaction costs are mainly due to t+e country=slac) of Auality infrastructure. T+is lac) of infrastructure discoura&esresource L see)in& and e@port L oriented investment. T+e reason for t+elow level of %I in India as compared to +ina could !e any !ut t+e fact ist+at +ina opened its door to forei&n investment in 1'#$ w+ile India in1''1.T+ere is an apprecia!le increase in t+e level of %I inflows in t+eSout+ sian *e&ion. sia re&istered an annual &rowt+ rate of 1#D in 2::#over 2::" and compound annual &rowt+ rate of 1$D on an annualiFed!asis durin& 1''1H2::#. India; Pa)istan;7an&lades+ are receivin& +i&+er volume of inflows since 1'':. ccordin& to Morld Investment *eport##2::# >MI*?; India +as emer&ed as maEor recipient of %I in Sout+ sia. Itss+are is nearly #5D of total %I flow to Sout+ sia. Infact; t+eompre+ensive (conomic ooperation &reement >(? wit+ Sin&apore;%ree Trade &reements >%Ts? wit+ Sin&apore and T+ailand



and !y !ecomin& t+e mem!er of S(- *e&ional %orum India +as madeits presence felt in (ast sia re&ion. India; is tryin& +ard so t+at t+e lar&estfree Trade rea; even lar&er t+an t+e e@istin& (H-%T com!ined area;could come up in t+e (ast sia re&ion. T+is su&&ested lar&est %T would

ma)e t+e !ilateral trade to t+e new +ei&+ts in t+e comin& years.ue to( and %Ts wit+ Sin&apore; it emer&ed as t+e t+ird !i&&est investin&country in India. Its ran)in& improved !y 4t+ place. nd if t+is pace of investment continued from Sin&apore it is +oped t+at it will !ecome t+elar&est investin& country in India in t+e comin& years and Sin&apore mayprove to !e a 6on& 8on& or Taiwan to India.

TREN%S AN% PATTERNS OF F%I FLO* IN IN%IA

(conomic reforms ta)en !y Indian &overnment in 1''1 ma)es t+e country

as one of t+e prominent performer of &lo!al economies !y placin& t+ecountry as t+e 4t+ lar&est and t+e 2nd fastest &rowin& economy in t+eworld. India also ran)s as t+e 11t+ lar&est economy in terms of industrialoutput and +as t+e 3rd lar&est pool of scientific and tec+nical manpower.ontinued economic li!eraliFation since 1''1 and its overall directionremained t+e same over t+e years irrespective of t+e rulin& party movedt+e economy towards a mar)et L !ased system from a closed economyc+aracteriFed !y e@tensive re&ulation; protectionism; pu!lic owners+ipw+ic+ leads to pervasive corruption and slow &rowt+ from 1'5:s until1'':s.In fact; India=s economy +as !een &rowin& at a rate of more t+an 'Dfor t+ree runnin& years and +as seen a decade of # plus per cent &rowt+.T+e e@ports in 2::$ were 1#5.# !n and imports were 2$#.5 !n. India=se@port +as !een consistently risin&; coverin& $1.3D of its imports in 2::$;up from "".2D in 1'':H'1. Since independence;India=s 7OP on its currentaccount +as !een ne&ative. Since 1''"H'#; its overall 7OP +as !eenpositive; lar&ely on account of increased %I and deposits from -on L*esident Indians >-*Is?; and commercial !orrowin&s. T+e fiscal deficit +ascome down from 4.5 per cent in 2::3H:4 to 2.# per cent in 2::#H:$ andrevenue deficit from 3." per cent to 1.1 per cent in 2::#H:$.s a result;

India=s forei&n e@c+an&e reserves s+ot up 55 per cent in 2::#H:$ to closeat S 3:'.1" !illion L an increase of nearly S 11: !illion from S1''.1$ !illion at t+e end of 2::"H:#. omestic savin& ratio to ,P s+otup from 2'.$D in 2::4H:5 to 3#.#D in 2::#H:$. %or t+e first time India=s,P crossed one trillion dollars mar) in 2::#. s a conseAuence of policymeasures >ta)en way !ac) in 1''1? %I in India +as increased manifoldsince 1''1 irrespective of t+e rulin& party over t+e years; as t+ere is a



&rowin& consensus and commitments amon& political parties to followli!eral forei&n investment policy t+at invite steady flow of %I in India sot+at sustained economic &rowt+ can !e ac+ieved. %urt+er; in order to studyt+e impact of economic reforms and %I policy on t+e ma&nitude of %I

inflows; Auantitative information is needed on !road dimensions of %I andits distri!ution across sectors and re&ions.SourceG compiled R computedfrom t+e various issues of (conomic Survey; *7I 7ulletin; 0inistry of ommerce T+e actual %I inflows in India is welcomed under five !road+eadsG > i ? %orei&n Investment Promotion 7oard=s >%IP7? discretionaryapproval route for lar&er proEects;>ii? *eserve 7an) of India=s >*7I?automatic approval route; >iii? acAuisition of s+ares route >since 1''"?; >iv?*7I=s non L resident Indian >-*I=s? sc+eme; and >v? e@ternal commercial!orrowin&s >*/,*? route. n analysis of t+e last ei&+teen years of trends in %I inflows >+artH3.5 and +artH3."? s+ows t+at t+ere +as !een a

steady flow of %I in t+e country upto 2::4; !ut t+ere is an e@ponential risein t+e %I inflows from 2::5 onwards.

SourceG compiled R computed from t+e various issues of (conomic Survey;*7I 7ulletin; 0inistry of ommerce %urt+er; t+e actual inflows of %It+rou&+ various routes in India are descri!ed in +artH 3.". T+e %IP7 route

L represents lar&er proEects w+ic+ reAuire !ul) of inflows and account for &overnment=s discretionary approval. lt+ou&+; t+e s+are of %IP7 route isdeclinin& somew+at as compared to *7I=s automatic route and acAuisitionof e@istin& s+ares route. utomatic approval route via *7I s+ows an

upward trend of %I inflows since 1''5. T+is route is meant for smaller siFed investment proEects. cAuisition of e@istin& s+ares route and e@ternalcommercial !orrowin& route &ained prominence >in 1''' and 2::3? ands+ows an upward increasin& trend. 6owever; %I inflows t+rou&+ -*I=sroute s+ow a s+arp declinin& trend. It is found t+at India was not a!le toattract su!stantial amount of %I inflow from 1''1H''. %I inflows wereS 144.45 million in1''1 after t+at t+e inflows reac+ed to its pea) to S3"21.34 million in 1''#.Su!seAuently; t+ese inflows touc+ed a low of S22:5."4 million in 1''' !ut t+en s+ot up in 2::1. (@cept in 2::3; w+ic+s+ows a sli&+t decline in %I inflows; %I +as !een pic)in& up since 2::4

and rose to an apprecia!le level of S 33:2'.32 million in 2::$. T+eannual &rowt+ rate was 1:#D in 2::$ over 2::#; and compound annual&rowt+ rate re&istered was 4:D on an annualiFed !asis durin& 1''1H2::$.T+e increase in %I inflows durin& 2::$ is due to increased economic&rowt+ and sustained developmental process of t+e country w+ic+ restoreforei&n investor=s confidence in Indian economy despite &lo!al economic



crisis. 6owever; t+e pace of %I inflows in India +as definitely !een slower t+an +ina; Sin&apore; *ussian %ederation; and 7raFil. comparativeanalysis of %I approvals and inflows reveals t+at t+ere is a +u&e &ap!etween t+e amount of %I approved and its realiFation into actual

dis!ursements. difference of almost 4: per cent is o!served !etweeninvestment committed and actual inflows durin& t+e year 2::5H:". ll t+isdepends on various factors; namely re&ulatory; procedural; &overnmentclearances; lac) of sufficient infrastructural facilities; delay inimplementation of proEects; and nonH cooperation from t+e state&overnment etc.SourceG compiled R computed from t+e various issues of (conomic Survey;*7I 7ulletin; 0inistry of ommerce Infact; many lon& term proEects under forei&n colla!orations &et delayed considera!ly; or in some cases; t+eymay even !e denied in t+e a!sence of proper and sufficient infrastructural

support and facilities. T+ese are per+aps some reasons t+at could !eattri!uted to t+is low ratio of approvals vs. actual inflows.SourceG compiled R computed from t+e various issues of (conomic Survey;*7I 7ulletin; 0inistry of ommerce lt+ou&+; total num!er of forei&ncolla!orations +as increased since 1''1. It is evident from t+at financialcolla!orations +ave &radually outnum!ered t+e tec+nical colla!orationsw+ic+ indicate t+at investors are more interested in financial colla!orationsrat+er t+an tec+nical ones. T+e increase in financial colla!oration could !e!ecause of t+e rela@ation &iven !y &overnment in t+e investment norms for financial colla!orations.

SourceG compiled R computed from t+e various issues of (conomic Survey;*7I 7ulletin; 0inistry of ommerceT+e maEor sectors attractin& %I inflowsin India +ave !een Services and (lectrical R electronics amountin& S3:;421millions or 32 D of total %I. Service sector tops t+e c+art of %Iinflows in 2::$ wit+ India emer&ed as a top destination for %I in servicessector. Services e@ports are t+e maEor drivin& force in promotin& [email protected]& in mind t+e risin& service sector India s+ould open doors to forei&ncompanies in t+e e@port L oriented services w+ic+ could increase t+edemand of uns)illed wor)ers and low s)illed services and also increasest+e wa&e level in t+ese services. ata in reveal t+at t+e top 5 sectors in

a&&re&ate for %I inflows constitute S 5:;4#' millions durin& u&ust1''1 to ec. 2::$ w+ic+ accounts for 53.2D of total %I inflow. Out of t+is;nearly 4:.$D of %I inflows are in +i&+ priority areas li)e Services;(lectrical (Auipments; Telecommunication; etc.



SOURCES OF F%I IN IN%IA

India +as !roadened t+e sources of %I in t+e period of reforms. T+erewere 12: countries investin& in India in 2::$ as compared to 15 countriesin 1''1. T+us t+e num!er of countries investin& in India increased after

reforms. fter li!eraliFation of economy 0auritius; Sout+ 8orea; 0alaysia;ayman Islands and many more countries predominantly appears on t+elist of maEor investors apart from .S.; .8.; ,ermany; Napan; Italy; and%rance w+ic+ are not only t+e maEor investor now !ut durin&

MA#OR SOURCES OF F%I IN IN%IA

0auritius;S; Sin&apore ;8 ;-et+erlands; Napan ;,ermany ;yprus;%rance ;SwitFerlandSourceG compiled R computed from t+e various issues of (conomic Survey;*7I 7ulletin; 0inistry of ommerce preH li!eraliFations era also. T+e

analysis in >Ta!leH3."? presents t+e maEor investin& countries in India durin&1''1H2::$. 0auritius >+artH 3.11? is t+e lar&est investor in India durin&1''1H2::$. %I inflows from 0auritius constitute a!out 3'.'D of t+e total%I in India and enEoyin& t+e top position on India=s %I map from1''5. T+is dominance of 0auritius is !ecause of t+e ou!le Ta@ationTreaty i.e. TH ou!le Ta@ation voidance &reement !etween t+e twocountries; w+ic+ favours routin& of investment t+rou&+ t+is country. T+is>T? type of ta@ation treaty +as !een made out wit+ Sin&apore also.SourceG compiled R computed from t+e various issues of (conomic Survey;*7I 7ulletin; 0inistry of ommerce T+e S is t+e second lar&est investin&

country in India. M+ile comparin& t+e investment made !y !ot+ >0auritiusand S? countries one interestin& fact comes up w+ic+ s+ows t+at t+ere isa +u&e difference >!etween %I inflows to India from 0auritius and t+e S?in t+e volume of %I received from 0auritius and t+e S. %I inflow from0auritius is more t+an dou!le t+en t+at from t+e S. T+e ot+er maEor countries are Sin&apore wit+ a relative s+are of #.2D followed !y 8;-et+erlands; Napan; ,ermany; yprus; %rance; and SwitFerland.T+us; ananalysis of last ei&+teen years of %I inflows s+ows t+at only five countriesaccounted for nearly ""D of t+e total %I inflows in India. India needsenormous amount of financial resources to carry forward t+e a&enda of

transformation >i.e. from a plannedeconomy to an open mar)et?; to tac)leim!alance in 7OP; to accelerate t+e rate of economic &rowt+ and +ave asustained economic &rowt+.



,0, %ISTRIBUTION OF F%I *IT$IN IN%IA

%I inflows in India are +eavily concentrated around two cities; 0um!ai>S 2"$''.5#million? and el+i >S 12"$3.24 million?. 7an&alore;

+meda!ad and +ennai are also receivin& si&nificant amount of %I

inflows. T+ese five cities to&et+er account for "' per cent of total %Iinflows to India. 0um!ai and el+i to&et+er received 5: per cent of total%I inflows to India durin& 2::: to 2::$.

SourceG compiled and computed from t+e various issues SI 7ulletin;0inistry of ommerce; ,OI 0um!ai received +eavy investment from0auritius >2'D?; apart from .8. >1#D?; S>1:D?; Sin&apore >'D? and,ermany >4D?.T+e )ey sectors attractin& %I inflows to 0um!ai areservices >3:D?; computer software and +ardware >12D?; power >#D?;metallur&ical industry >5D? and automo!ile industry >4D?. 0um!ai

received 13#1num!ers of tec+nical colla!orations durin& 1''1H2::$. el+ireceived ma@imum investment from 0auritius >5$D?; apart from Napan>1:D?; -et+erlands >'D?; and 8 >3D?.M+ile t+e )ey industries attractin&%I inflows to el+i re&ion are telecommunications >1'D?; services >1$D?;+ousin& and real estate >11D?; automo!ile industry >$D? and computer software and +ardware >"D?. s far as tec+nical colla!orations areconcerned el+i received 315 num!ers of tec+nical colla!orations durin&1''1H 2::$. 6eavy investment in 7an&alore came from 0auritius >4:D?alone. T+e ot+er maEor investin& countries in 7an&alore are S >15D?;-et+erlands >1:D?; ,ermany >"D?; and 8 >5D?. Top sectors reported t+e

%I inflows are computer software and +ardware >22D?; services >11D?;+ousin& and real estate >1:D?; telecommunications >5D?; and fermentationindustries >4D?. 7an&alore received 51" num!ers of tec+nicalcolla!orations durin& 1''1H2::$. +ennai received %I inflows from0auritius >3#D?; 7ermuda >14D?; S >13D?; Sin&apore >'D? and,ermany >4D?. T+e )ey sectors attractin& %I inflows are constructionactivities >21D?; telecommunications >1:D?;services >1:D?; computer software and +ardware >#D?; automo!ile industry >#D?; s far as tec+nicalcolla!orations are concerned; +ennai received "": num!ers of tec+nicalcolla!orations durin& 1''1H2::$.

TREN%S AN% PATTERNS OF F%I FLO* AT SECTORAL LEVELI43ratr:5t:re Se5tor

%I up to 4'D is allowed for investin& companies in infrastructure/ servicessector >e@cept telecom sector? t+rou&+ %IP7 route. T+e infrastructuresector constitutes Power; -onHconventional ener&y; Petroleum and natural



&as; Telecommunication; ir Transport; Ports; onstruction activities and>includin& roads and +i&+ways?; real estate. T+e infrastructure sector accounted for 2$."2D of total %I inflows from 2::: to 2::$.Initially t+einflows were low !ut t+ere is a s+arp rise in investment flow from 2::5

onwards Telecommunication received t+e +i&+est percenta&e >$.:5D?followed !y construction activities >".15D?; real estate >5.#$D?; and power >3.1"D?. T+e maEor investment comes from 0auritius >5".3:D? andSin&apore >$.54D?. In order to attract t+e investment; -ew el+i >23.2D?and 0um!ai >2:.4#D? enEoy t+e top two positions in India. Infrastructuresector received 252$ num!ers of forei&n colla!orations wit+ an eAuityparticipation of S 111.: !nJ 41.15D of t+e total investment. Out of 252$forei&n colla!orations "33 were tec+nical and 2#'5 are financialcolla!orations durin& 1''1H 2::$. T+e top Indian companies w+ic+received %I inflows in Infrastructure sector durin& 2::: to 2::$ are I(;

ellule td; 7+ai) Infotel P.td; a!+ol Power ompany td; ircel td;*elo&istics Infrastructure P.td.

ctual values Trend lineSourceG compiled and computed from t+e various issues SI 7ulletin;0inistry of ommerce; ,OI India +as encoura&ed %I in infrastructuresector from t+e very initiation of its economic reforms; !ut t+e demand for itis still not !ein& fulfilled. In fact; investment is +eavily concentrated inconsumer dura!les sector rat+er t+an in lon& L term investment proEectssuc+ as power &eneration; maintainin& roads; water mana&ement and on

moderniFin& t+e !asic infrastructure. 0aitra41 >2::3? reveals t+at t+es+orta&e of power is estimated at a!out 1:D of t+e total electrical ener&yand appro@imately 2:D of pea) capacity reAuirement. 6owever; insufficientand poor conditions of India=s infrastructure are t+e maEor factors to t+eslowdown in &rowt+ w+ic+ reduces t+e trust and ent+usiasm for %I frominvestors and economic &rowt+ of t+e country. %urt+er; insufficient power supply; inadeAuate and unmaintained roads; an overH !urdened railwaysystem; severely con&ested ur!an areas; may continue to pla&ue t+eIndian economy in t+e comin& years.

Ser=i5e Se5tor Services sector puts t+e economy on a proper &lide pat+. It is amon& t+emain drivers of sustained economic &rowt+ and development !ycontri!utin& 55D to ,P. T+ere is a continuously increasin& trend of %Iinflows in services sector wit+ a steep rise in t+e inflows from 2::5onwards Service sector received an investment of S 1'.2 !n w+ic+ is



1'.34D of t+e total %I inflows from 1''1H2::$ from %IP7/SI;acAuisitionof e@istin& s+ares and *7I=s automatic routes only. 6owever; t+is amountdoes not include %I inflows received t+rou&+ acAuisition route prior to Nan.2:::.

mon& t+e su!sectors of services sectors; financial services attract 1:.25Dof total %I inflows followed !y !an)in& services >2.22D?; insurance>1.":D? and nonH financial services >1."2D? respectively. Outsourcin&;!an)in&; financial; information tec+nolo&y oriented services ma)e intensiveuse of +uman capital. %I would !e muc+ more efficient and result orientedin t+ese services visH aHvis services w+ic+ ma)e intensive use of semis)illed and uns)illed la!our.

ctual alues Trend ineSourceG compiled and computed from t+e various issues SI 7ulletin;0inistry of ommerce; ,OI In India; %I inflows in services sector are

+eavily concentrated around two maEor citiesH 0um!ai >33.##D? and el+i>1".14D?. 0auritius top t+e c+art !y investin& 42.52D in services sectorfollowed !y 8 >14.""D?; Sin&apore >11.1$D?. T+e total num!er ofapprovals for services sector >financial nonHfinancial? +ave !een of t+eorder of 1"2" >5.#$D of t+e total approvals? wit+ an eAuity participation ofS $.# !n; 1:.2$D of t+e total investment. Services sector ran)s 3rd int+e list of sectors in terms of cumulative %I approved from u&ust 1''1 toec 2::$. Out of 1"2" num!ers of forei&n colla!orations; ## are tec+nicaland 154' are financial in nature. 0aEority of colla!orations in tec+nolo&ytransfers are from S >3:? and 8 >$?.t+e leadin& Indian companies

w+ic+ received %I inflows in services sector areG airn >I? td; SP 0errillync+ td; ,lo!al entures Pvt. td.; 8appa Industries td; iti%inancial onsumer %inance >I? td; 7lue art (@press td; yasa 7an)td; *ISI td; ssociates India 6oldin& o. Pvt. td; 6ousin&evelopment %inance orp. td.

Tra7i4g Se5tor

Tradin& sector received 1."#D of t+e total %I inflows from 1''1H2::$.Tradin&>w+olesale cas+ and carry? received +i&+est percenta&e >$4.25D?of total %I inflow to t+is sector from 2:::H2::$ followed !y tradin& >for e@ports? wit+ '.:4D; eHcommerce wit+ >2.3$D?. Tradin& sector s+ows atrailin& investment pattern upto 2::5 !ut t+ere is an e@ponential rise ininflows from 2::" onwards %urt+er; maEor investment inflows came from0auritius >24."'D?; Napan >14.$1D?; and ayman Island >14.":D?respectively from 2:::H2::$. Investment in India is +eavily concentrated in



t+ree cities viF. 0um!ai >4:.#"D?; 7an&alore >15.'#D?; and -ew el+i>12.:5D?. s far as ctual alues Trend ineSourceG compiled and computed from t+e various issues SI 7ulletin;0inistry of ommerce; ,OI tec+nolo&y transfers are concerned; total

num!ers of 2: tec+nical and 1111 financial colla!orations +ave !eenapproved for Tradin& sector from 1''1H2::$. 0a@imum num!ers of tec+nolo&y transfers are approved from S >5?; Napan >3? and-et+erlands.T+e top five Indian companies w+ic+ received %I inflows are0ulti ommodity (@c+an&es of India td; nc+or (lectricals; 0ultiommodity (@c+an&es of India td; 0etro as+ and arry India Pvt. td;(ssilor India Pvt. td.

Co4:lta456 Se5tor

onsultancy Sector received S 1.1 !n w+ic+ is 1.14D of total inflows

received from 2:::H2::$ t+rou&+ %IP7/SI route; acAuisition of e@istin&s+ares and *7I=s automatic route. 0ana&ement services received aninvestment of S #3#." million; mar)etin& S13$."5 million and esi&nand (n&ineerin& services constitute an investment of S11:.43.

SourceG compiled and computed from t+e various issues SI 7ulletin;0inistry of ommerce; ,OI 0aEor s+are of investment in consultancyservices comes from 0auritius wit+ 3#.2D; S >25.4#D? and -et+erlands"."3D respectively. %I inflows in consultancy sector re&istered a

continuous increasin& trend of %I inflows from 2::5 onwards %urt+er; inIndia 0um!ai >3$.#"D? and -ew el+i >13.:1D? received maEor percenta&es of %I inflow for consultancy sector from 2:::H2::$. Totalnum!ers of tec+nolo&y transfers in consultancy services are 125; out of w+ic+ 4: tec+nical colla!orations are approved wit+ S; 21 wit+ 8; and14 wit+ ,ermany from 1''1H2::$.

E7:5atio4 Se5tor

%I up to 1::D is allowed in education sector under t+e automatic route.(ducation sector received S 3:$.2$ million of %I inflow from 2::4H2::$. (ducation sector s+ows a steep rise in %I inflows from 2::5onwards 6eavy investment in education sector came from 0auritius wit+$#.'5D; followed !y -et+erlands >3.#"D?; S >2.'3D? respectively.SourceG compiled and computed from t+e various issues SI 7ulletin;0inistry of ommerce; ,OI In India; 7an&alore received $:.14D of total



%I inflow followed !y el+i >".45D?;0um!ai >5.5$D? respectively. s far as tec+nolo&y transfer and financial colla!orations are concerned; totalnum!er of 2 tec+nical and 112 financial colla!oration are approved for education sector. Out of 2 tec+nical colla!orations; S and Napan !e&&ed

one eac+ durin& 1''1H2::$. %urt+er; India is endowed wit+ a lar&e pool of s)illed people wit+ secondary and tertiary level of education. India wit+ t+islevel of education attracts forei&n firms in science; * R ; and +i&+tec+nolo&y products and services. T+e endowment of science; en&ineerin&;and tec+nolo&y oriented people facilitate t+e spillovers of tec+nolo&y and)now L +ow. 0oreover; t+e medium of instruction at t+ese education levelsis (n&lis+ L t+e lin&ua franca of !usiness. India wit+ t+is added advanta&e!enefits in attractin& forei&n firms in education sector.

$o:i4g a47 Real Etate e5tor 6ousin& and *eal (state sector accounts S 4.# !n of %I inflows w+ic+is 5.#$D of t+e total inflows received t+rou&+ %IP7/SI route; acAuisition of e@istin& s+ares and *7I=s automatic route durin& 2::: L 2::$. T+ere is ane@ponential rise in t+e amount of %I inflows to t+is sector after 2::5.SourceG compiled and computed from t+e various issues SI 7ulletin;0inistry of ommerce; ,OI 6eavy investment i.e. "1.'"D came from0auritius. In terms of most attractive locations in India -ew el+i and0um!ai wit+ 34.#D and 2'.$D s+ares are on t+e first and secondpositions. T+e total num!ers of forei&n colla!orations in 6ousin& and *eal

(state sector is 1$ wit+ an eAuity participation of S1.: !n durin& 1''1H2::$. 0a@imum num!ers of forei&n colla!orations in 6ousin& and *eal(state sector is wit+ 0auritius >#?; Sin&apore >2?; and .8 >2?. T+e top fiveIndian companies w+ic+ received ma@imum %I inflows in t+is sector areG(maar 0,% and P. td; (maar 0,% and P. td; S+ivaEi 0ar& Properities;S+yamaraEu R ompany >India? Pvt. td; and India 7ulls Infrastructureevelopment.

Co4tr:5tio4 a5ti=itie e5tor

onstruction activities Sector includes construction development proEectsviF. +ousin&;commercial premises; resorts; educational institutions;recreational facilities; city and re&ional level infrastructure; towns+ip. T+eamount of %I in construction activities durin& Nan 2::: to ec. 2::$ isS 4.' !n w+ic+ is ".15D of t+e total inflows received t+rou&+ %IP7/SIroute; acAuisition of e@istin& s+ares and *7I=s automatic route. T+e



construction activities sector s+ows a steep rise in %I inflows from 2::5onwards 0aEor investment in construction activities is received from0auritius w+ic+ is accounted nearly 5$."1D of total %I inflows durin&2:::H2::$. In India el+i;0um!ai; and 6ydera!ad receives ma@imum

amount >viF. S 1245."1; 1:::.5; and '43.22 !n? of investment. s far astec+nolo&y transfers are concerned; total num!ers of ' tec+nical and 223num!ers of financial colla!orations +ave !een approved for constructionactivities; w+ic+ accounts for :.11D of t+e total colla!orations approveddurin& u&ust 1''1 to ecem!er 2::$.SourceG compiled and computed from t+e various issues SI 7ulletin;0inistry of ommerce; ,OI 0a@imum num!ers of tec+nical colla!orationsare approved wit+ %rance >3? and S>2?. T+e top five Indian companies=w+ic+ received %I inflows in t+is sector areG M.S (lectric td; armen7uilders R onstruction Pvt. td; aitlin 7uilders R evelopers Pvt. td;

M.S. (lectric td; and PP entures Pvt. td.A:to;oile I47:tr6

utomo!ile Industry Sector comprises Passen&er cars; auto ancillaries etc.%I inflows in t+e automo!ile Industry sector; durin& Nan 2::: to ec. 2::$is S 3.2 !n w+ic+ is 4.:'D of t+e total inflows received t+rou&+ %IP7/SIroute; acAuisition of e@istin& s+ares and *7I= automatic route. T+e trends inautomo!ile sector s+ow t+at t+ere is acontinuous increase of investment int+is sector after 2::5 onwards 0aEor investment came from Napan>2#.5'D?; Italy >14.""D?; S >13.$$D? followed !y 0auritius>#.##D? and

-et+erlands >".'1D?. in India 0um!ai; -ew el+i and +meda!adreceived maEor c+un)s of investment i.e. 3".'$D; 2"."3D and '.4#D?. T+etotal num!ers of approvals for automo!ile industry +ave !een of t+e order of 1"11 wit+ an eAuity participation of S ".1 !n; w+ic+ is #.:1D of t+etotal investment. utomo!ile industry sector ran)s 5t+ in t+e list of sectorsin terms of cumulative %I approved from u&ust 1''1 to ec 2::$. Out of 1"11 num!ers of forei&n colla!orations approved #34 are tec+nical and$## are financial in nature.SourceG compiled and computed from t+e various issues SI 7ulletin;0inistry of ommerce; ,OI 6i&+est num!ers of tec+nical colla!orationswit+ Napan in automo!ile Industry.0aEor Indian companies w+ic+ received+i&+est percenta&e of %I inflows in automo!ile industry are (scorts9ama+a 0otor td; 9ama+a 0otors India Pvt. td; PunEa! Tractors td.;9ama+a 0otor (scorts td; (ndurance Tec+nolo&ies P. td; ,eneral0otors India td; and %iat India utomo!ile P. td.



Co;p:ter So3t8are a47 $ar78are Se5tor

omputer Software and 6ardware sector received S $.' !n w+ic+constitute 11.43D of t+e total %I inflows durin& t+e period Nan 2::: to ec2::#. omputer Software and 6ardware sector s+ows a continuous

increasin& trend of %I inflows 0auritius wit+ an investment of S 4#$'!n remained at t+e top amon& t+e investin& countries in India in t+is Sector.Ot+er maEor investin& countries in t+is sector are S>12.$$D?; Sin&apore>1:.:#D? etc. mon& Indian locations 0um!ai received 22.44D of investment followed !y 7an&alore >1:.$D?; and +ennai >'.':D?. actualdata trend lineSourceG compiled and computed from t+e various issues SI 7ulletin;0inistry of ommerce; ,OI omputer Software and 6ardware industryfetc+ed 3"3" num!ers of forei&n colla!orations. Out of 3"3"; 125 aretec+nical and 3511 are financial in nature wit+ an eAuity participation of

S 3.:!n. 0aEor tec+nolo&ical transfers come from S >43.2D? andNapan >1:.4D?. T+e top Indian companies w+ic+ received %I inflows int+is sector areG I %lie@ Solutions td; I %le@ Solutions ltd; Tata onsultancyServices td;Infrasoft Tec+nolo&ies td; 0p+asis 7% td; IH %le@ Solutionstd; i&ital ,lo!al Soft td; India 7ulls %inancials Services P. td; I%(Solutions td; nitec+ *eality ProEects td.

Tele5o;;:4i5atio4 Se5tor

Telecommunications Sector comprises Telecommunications; *adio Pa&in&;ellular 0o!ile/ 7asic Telep+one Services etc. India received cumulative%I inflows of S 1::.4 !n durin& 1''1H2::$. Out of t+is;Telecommunications Sector received an inflow of S $.2 !n; w+ic+ is$.4D of t+e total %I inflows durin& u&ust 1''1 to ecem!er 2::$. T+ere+as !een a steady flow of %I in telecommunications from 1''1 to 2::5;!ut t+ere is an e@ponential rise in %I inflows after 2::5 0auritius wit+$2.22D of investment remains on t+e top amon& t+e investin& countries int+is sector. Ot+er investin& countries in t+e telecom sector are *ussia>5.41D? and S >2D?. -ew el+i attracts +i&+est percenta&e >32.5$D? of %I inflows durin& Nan 2::: to ec 2::$. T+e total num!ers of approvalsfor telecommunications Industry +ave !een of t+e order of 1:'' wit+ aneAuity participation of S 13.3 !n; 14.34D of t+e totalinvestment.Telecommunication sector ran)s 2nd in t+e list of sectors interms of cumulative %I approved from u&ust 1''1 to ec 2::$.SourceG compiled and computed from t+e various issues SI 7ulletin;0inistry of ommerce; ,OI Out of 1:'' forei&n colla!orations; 13' aretec+nical and '": are financial in nature. 6i&+est num!ers >32? of tec+nical



colla!orations are approved wit+ S followed !y Napan >1'?; .8. >12?;anada >12? and ,ermany >12?. T+e leadin& Indian companies w+ic+received %I inflows in t+is sector areG 7+ai) Infotel p. td; ircel td; 7+artiTele entures td; 7+arti Telecom ltd; %le@tronics Software Systems td;6at+way a!le R ata om. Pvt. td; nitec+ evelopers R ProEects td;6utc+ison (ssar Sout+ td. (tc.

INTERNATIONAL INVESTMENT A'REEMENTS

India is t+e foundin& mem!er of ,TT >,eneral &reement on Trade andTariffs?. India is also a si&natory mem!er of Sout+ sian %ree Trade

&reement >S%T?. India +as si&ned 7ITs >7ilateral Investment Treaties?wit+ !ot+ developed and developin& nations. India +as concluded 5#num!ers >upto 2::"? of 7ITs; out of w+ic+ 2# are wit+ developed nationsand maEority of t+em; are wit+ developin& countries of sia >1"?; t+e 0iddle

(ast >'?; frica >4?; and atin merica >1?. India also maintains dou!le ta@avoidance a&reements >ta@ treaties? wit+ #: countries >upto 2::"?. partfrom 7ITs and ta@ treaties India is t+e mem!er of many %Ts >%ree Trade

rea; nearly 1# in num!ers; upto 2::"??.

CONCLUSIONS

T+e a!ove analysis of Trends and Patterns of %I inflows reveals t+efollowin& factsGH

1? %I +as &ained momentum in t+e economic landscape of world economiesin t+e last t+ree decades. It +ad outpaced almost all ot+er economic

indicators of economic transactions worldwide.2? %I is considered as t+e safest type of e@ternal finance !ot+ !y t+e

developed and developin& nations. So; t+ere is &rowin& competition amon&t+e countries in receivin& ma@imum inward %I.3?Trends in world %I inflows s+ows t+at ma@imum percenta&e of &lo!al%I is vested wit+ t+e developed nation. 7ut in t+e last two decades;developin& countries !y receivin& 4:D of &lo!al %I in 1''# as a&ainst2"D in 1'$: ma)e waves in t+e economics of developed nations.

4? mon& developin& nations of t+e world; t+e emer&in& economies of t+e sian continent are receivin& ma@imum s+are >1"D? of %I inflows as

a&ainst ot+er emer&in& countries of atin merica >$.#D? and frica >2D?.5? In t+e last two decades; India +as si&nificantly increased its s+are of world

%I from :.#D in 1''" to 1.3D in 2::#."? +ina is t+e maEor recipient of &lo!al %I flows amon& t+e emer&in&

economies of t+e world. It is also t+e most preferred destination of &lo!al



%I flow. India is at 5t+ position in t+e cate&ory of most attractive location of &lo!al %I.#? It is found t+at %I flows to India +ave increased from 11D in 1''1H'' to"'D in2:::H2::#.

$?In t+e Sout+; (ast and Sout+H(ast sia !loc) India is at 3rd place after+ina and Sin&apore in receivin& %I inflows.'?India is t+e maEor recipient of %I inflows in Sout+Hsia re&ion. Itconstitutes #5D of total %I inflows to t+is re&ion.1:?In order to +ave a &enerous flow of %I; India +as maintained ou!leTa@ voidance &reements >T? wit+ nearly #: countries of t+e world.

11? India is t+e si&natory mem!er of sout+ sian %ree Trade &reement>S%T?. part from S%T; India is also t+e mem!er of many >of nearly1#? %ree Trade &reements >%Ts?.12? It is found t+at +ina=s s+are is 21.#D and India=s s+are is miniscule

>i.e. 2.$D? amon& t+e emer&in& economies of t+e world in t+e presentdecade.13?India +as considera!ly decreased its fiscal deficit from 4.5 percent in2::3H:4 to 2.# percent in 2::#H:$ and revenue deficit from 3." percent to1.1 percent in 2::#H:$.

14? India +as received increased -*I=s deposits and commercial!orrowin&s lar&ely !ecause of its rate of economic &rowt+ and sta!ility int+e political environment of t+e country.

15? (conomic reform process since 1''1 +ave paves way for increasin&forei&n e@c+an&e reserves to S 251'$5 millions as a&ainst S '22:millions in 1''1H '2.

1"? urin& t+e period under study it is found t+at India=s ,P crossed onetrillion dollar mar) in 2::#. Its domestic savin& ratio to ,P also increasesfrom 2'.$ percent in 2::4H:5 to 3# percent in 2::#H:$.

1#? %I in India +as increased manifold since 1''1. %I inflows in India+ave increased from S 144.45 millions in 1''1to S 33:2'.32 millionsin 2::$.

1$? n analysis of last ei&+teen years of trends in %I inflows in Indias+ows t+at initially t+e inflows were low !ut t+ere is a s+arp rise ininvestment flows from 2::5 onwards.

1'? lt+ou&+ t+ere +as !een a &enerous flow of %I in India !ut t+e pace of %I inflows +as !een slower in India w+en it is compared wit+ +ina;*ussian federation; 7raFil and Sin&apore.

2:? T+e study reveals t+at t+ere is a +u&e &ap >almost 4:D? !etween t+eamount of %I approved R its realiFation into actual dis!ursement in India.



21?It is also found t+at investors in India are inclined toward +avin& morefinancial colla!orations rat+er t+an tec+nical ones.22?mon& sectors; Services sector tops t+e c+art of %I inflows in India in2::$. -early; 41D of %I inflows are in +i&+ priority areas li)e services;electrical eAuipments; telecommunication etc.23? T+e sources of %I inflows are also increased to 12: countries in 2::$as compared to 15 countries in 1''1 and a few countries >8; S;,ermany; Napan; Italy; and %rance etc.? !efore 1''1. 0auritius; Sout+8orea; 0alaysia; ayman Islands and many more countries appears for t+e first time in t+e source list of %I inflows after 1''1.24?0auritius is t+e maEor investin& country in India durin& 1''1H2::$.-early 4:D of %I inflows came from 0auritius alone.25?T+e ot+er maEor investin& countries are S; Sin&apore; 8;-et+erlands; Napan; ,ermany; ypress; %rance and SwitFerland.

2"? n analysis of last ei&+teen years of %I inflows in t+e country s+owst+at nearly""D of %I inflows came from only five countries viF. 0auritius;S; Sin&apore; 8; and -et+erlands.

2#? 0auritius and nited states are t+e two maEor countries +oldin& firstand t+e second position in t+e investor=s list of %I in India. M+ilecomparin& t+e investment made !y !ot+ countries; one interestin& factcomes up w+ic+ s+ows t+at t+ere is +u&e difference in t+e volume of %Ireceived from 0auritius and t+e .S. It is found t+at %I inflows from0auritius are more t+an dou!le from t+at of .S.

2$? %I inflows in India are concentrated around two cities i.e. 0um!ai and

-ew el+i. -early 5: percent of total %I inflows to India are concentratedin t+ese two cities. part from 0um!ai and el+i 7an&alore; +emda!ad;and +ennai also received si&nificant amount of %I inflows in t+e country.

2'? It is o!served t+at amon& Indian cities ma@imum >13#1? forei&ncolla!orations were received 0um!ai.3:?T+e Infrastructure sector received 2$."2D of total %I inflows in t+epresent decade. T+is sector received ma@imum mem!er >252$? of forei&ncolla!oration amon& sectors. lt+ou&+ t+is sector received t+e ma@imumamount of %I Inflows; !ut t+e demand of t+is sector are still unfulfilled. So;investment opportunities in t+is sector are at its pea). Trend in

infrastructure s+ows t+at %I inflows were low initially !ut t+ere is a s+arprise in investment flow from 2::5 onwards.31? Services sector received 1'.34D of total %I inflows from 1''1H2::$.

T+is sector is t+e main driver of economic &rowt+ !y contri!utin& 55D to,P. Services sector s+ows a continuously increasin& trend of %I inflowswit+ a steep rise in t+e inflows from 2::5 onwards.



32?Tradin& sector received 1."#D of total %I inflows from 1''1H2::$.0aEor investment >25D? in t+is sector came from 0auritius. Tradin& sector s+ows a trailin& investment pattern up to 2::5 !ut t+ere is an e@ponentialrise in %I inflows from 2::" onwards.

33? onsultancy Sector received 1.14D of total inflows from 2:::H2::$.%I inflows in consultancy sector re&istered a continuous increasin& trendof %I inflows from 2::5 onwards.

34? (ducation sector received S 3:$.2$ million of %I inflows from 2::4H2::$. T+e sector s+ows a steep rise in %I inflows from 2::5 onwards.

35? 6ousin& and *eal (state Sector accounts for 5.#$D of total %I inflowsdurin& 2:::H2::$. T+ere is an e@ponential rise in t+e amount of %I inflowsto t+is sector after 2::5.

3"? onstruction ctivities Sector received ".15D of t+e total inflows durin&2::: to ec. 2::$. T+e onstruction ctivities Sector s+ows a steep rise in%I inflows from 2::5 onwards.3#?utomo!ile Industry received S 3.2 !illion of total %I inflows to t+ecountry durin& 2::: to 2::$. T+e trends in automo!ile sector s+ow t+att+ere is a continuous increase of investment in t+is sector after 2::5onwards.

3$? omputer Software and 6ardware sector received S $.' !illion of total %I inflows durin& 2::: to ec. 2::#. T+is sector s+ows a continuousincreasin& trend of %I inflows.

3'? Telecommunications Sector received an inflow of S $.2 !illion durin&1''1 to 2::$. T+ere +as !een a steady flow of %I in t+etelecommunication from 1''1 to 2::5; !ut t+ere is an e@ponential rise in%I inflows after 2::5.4:?It is o!served t+at maEor investment in t+e a!ove sectors came from0auritius and investments in t+ese sectors in India are primarilyconcentrated in 0um!ai and -ew el+i.

41? 0a@imum num!ers >3"3"? of forei&n colla!orations durin& 1''1H2::$are concluded in t+e computer software and +ardware sector.

42? It is found t+at ma@imum >i.e. #34? tec+nical colla!orations areconcluded in automo!ile sector w+ile computer software and +ardwaresector fetc+ed ma@imum >3511? financial colla!orations durin& 1''1H2::$.

43? It is o!served t+at maEor %I inflows in India are concluded t+rou&+automatic route and acAuisition of e@istin& s+ares route t+an t+rou&+ %IP7;SI route durin& 1''1H2::$.

44? It is found t+at India +as si&ned 5# mem!ers of 7ilateral InvestmentTreaties up to 2::". 0a@imum num!ers of 7ITS are si&ned wit+ developin&



countries of sia >1"?; t+e 0iddle (ast >'?; frica >4? and atin merica >1?apart from t+e developed nation >i.e. 2# in num!ers?.

F%I AN% IN%IAN ECONOMYINTRO%UCTION

-ations= pro&ress and prosperity is reflected !y t+e pace of its sustainedeconomic &rowt+ and development. Investment provides t+e !ase and preHreAuisite for economic &rowt+ and development. part from a nation=sforei&n e@c+an&e reserves; e@ports; &overnment=s revenue; financialposition; availa!le supply of domestic savin&s; ma&nitude and Auality offorei&n investment is necessary for t+e well !ein& of a country. evelopin&nations; in particular; consider %I as t+e safest type of international capitalflows out of all t+e availa!le sources of e@ternal finance availa!le to t+em. It

is durin& 1'':s t+at %I inflows rose faster t+an almost all ot+er indicatorsof economic activity worldwide. ccordin& to MTO$3; t+e total world %Ioutflows +ave increased nine L fold durin& 1'$2 to 1''3; world trade ofmerc+andise and services +as only dou!led in t+e same. Since 1'':virtually every countryH developed or developin&; lar&e or small ali)e +avesou&+t %I to facilitate t+eir development process. T+us; a nation canimprove its economic fortunes !y adoptin& li!eral policies visHHvis !ycreatin& conditions conducive to investment as t+ese t+in&s positivelyinfluence t+e inputs and determinants of t+e investment process. T+isc+apter +i&+li&+ts t+e role of %I on economic &rowt+ of t+e country.

F%I AN% IN%IAN ECONOMY

eveloped economies consider %I as an en&ine of mar)et access indevelopin& and less developed countries visHHvis for t+eir owntec+nolo&ical pro&ress and in maintainin& t+eir own economic &rowt+ anddevelopment. evelopin& nations loo)s at %I as a source of fillin& t+esavin&s; forei&n e@c+an&e reserves; revenue; trade deficit; mana&ementand tec+nolo&ical &aps. %I is considered as an instrument of internationaleconomic inte&ration as it !rin&s a pac)a&e of assets includin& capital;tec+nolo&y; mana&erial s)ills and capacity and access to forei&n mar)ets.T+e impact of %I depends on t+e country=s domestic policy and forei&npolicy. s a result %I +as a wide ran&e of impact on t+e country=seconomic policy. In order to study t+e impact of forei&n direct investment oneconomic &rowt+; two models were framed and fitted. T+e forei&n directinvestment model s+ows t+e factors influencin& t+e forei&n direct



FOREI'N %IRECT INVESTMENT F%I?G It refers to forei&n directinvestment.(conomic &rowt+ +as a profound effect on t+e domestic mar)etas countries wit+ e@pandin& domestic mar)ets s+ould attract +i&+er levelsof %I inflows. T+e &enerous flow of %I is playin& a si&nificant andcontri!utory role in t+e economic &rowt+ of t+e country. In 2::$H:'; India=s%I touc+ed *s. 123:25 crores up 5"D a&ainst *s. '$""4 crores in 2::#H:$ and t+e country=s forei&n e@c+an&e reserves touc+ed a new +i&+ of *s.12$3$"5 crores in 2::'H1:. s a result of India=s economic reforms; t+ecountry=s annual &rowt+ rate +as avera&ed 5.'D durin& 1''2H'3 to 2::2H:3.%I %lowSource: various issues of SI 7ulletin.-otwit+standin& some concerns a!out t+e lar&e fiscal deficit; Indiarepresents a promisin& macroeconomic story; wit+ potential to sustain +i&+economic &rowt+ rates. ccordin& to a survey conducted !y (rnst and9oun&1' in Nune 2::$ India +as !een rated as t+e fourt+ most attractiveinvestment destination in t+e world after +ina; entral (urope andMestern (urope. Similarly; -T=s Morld Investment *eport#" 2::5considers India t+e 2nd most attractive investment destination amon& t+eTransnational orporations >T-s?. ll t+is could !e attri!uted to t+e rapid&rowt+ of t+e economy and favoura!le investment process; li!eral policyc+an&es and procedural rela@ation made !y t+e &overnment from time totime.'ROSS %OMESTIC PRO%UCT '%P?< ,ross omestic Product is used

as one of t+e independent varia!le. T+e tremendous &rowt+ in ,P since

1''1 put t+e economy in t+e elite &roup of 12 countries wit+ trillion dollar economy. India ma)es its presence felt !y ma)in& remar)a!le pro&ress ininformation tec+nolo&y; +i&+ end services and )nowled&e process services.7y ac+ievin& a &rowt+ rate of 'D in t+ree consecutive years opens newavenues to forei&n investors from 2::4 until 2:1:;India=s ,P &rowt+ was$.3# percent reac+in& an +istorical +i&+ of 1:.1: percent in2::".India=sdiverse economy attracts +i&+ %I inflows due to its +u&e mar)et siFe; lowwa&e rate; lar&e +uman capital >w+ic+ +as !enefited immensely fromoutsourcin& of wor) from developed countries?. In t+e present decade India+as witnessed unprecedented levels of economic e@pansion and also seen

+ealt+y &rowt+ of trade. ,P reflects t+e potential mar)et siFe of Indianeconomy. Potential mar)et siFe of an economy can !e measured wit+ two



varia!les i.e. ,P >t+e &ross domestic product? and ,-P >t+e &rossnational product?.,-P refers to t+e final value of all t+e &oods and servicesproduced plus t+e net factor income earned from a!road. T+e word <&ross=is used to indicate t+e valuation of t+e national product includin&

depreciation. ,P is an unduplicated total of monetary values of product&enerated in various )inds of economic activities durin& a &iven period; i.e.one year. It is called as domestic product !ecause it is t+e value of final&oods and services produced domestically wit+in t+e country durin& a&iven period i.e. one year.6ence in functional form ,P ,-PH-et factor income from a!road. In India ,P is calculated at mar)et price and atfactor cost. ,P at mar)et price is t+e sum of mar)et values of all t+e final&oods and services produced in t+e domestic territory of a country in a&iven year. Similarly; ,P at factor cost is eAual to t+e ,P at mar)etprices minus indirect ta@es plus su!sidies. It is called ,P at factor cost

!ecause it is t+e summation of t+e income of t+e factors of production%urt+er; ,P can !e estimated wit+ t+e +elp of eit+er >a? urrent prices or >!? constant prices. If domestic product is estimated on t+e !asis of mar)etprices; it is )nown as ,P at current prices. On t+e ot+er +and; if it iscalculated on t+e !asis of !ase year prices prevailin& at some point of time;it is )nown as ,P at constant prices. Infact; in a dynamic economy; pricesare Auite sensitive due to t+e fluctuations in t+e domestic as well asinternational mar)et. In order to isolate t+e fluctuations; t+e estimates of domestic product at current prices need to !e converted into t+e domesticproduct at constant prices. ny increase in domestic product t+at ta)es

place on account of increase in prices cannot !e called as t+e real increasein ,P. *eal ,P is estimated !y convertin& t+e ,P at current prices into,P at constant prices; wit+ a fi@ed !ase year. In t+is conte@t; a ,Pdeflator is used to convert t+e ,P at current prices to ,P at constantprices. T+e present study uses ,P at factor cost >,P%? wit+ constantprices as one of t+e e@planatory varia!le to t+e %I inflows into India for t+ea&&re&ate analysis. ,ross omestic Product at %actor cost >,P%? ast+e macroeconomic varia!le of t+e Indian economy is one of t+e pullfactors of %I inflows into India at national level. It is conventionallyaccepted as realistic indicator of t+e mar)et siFe and t+e level of output.T+ere is direct relations+ip !etween t+e mar)et siFe and %I inflows. If mar)et siFe of an economy is lar&e t+an it will attract +i&+er %I inflows andvice versa i.e. an economy wit+ +i&+er ,P% will attract more %Iinflows. T+e relevant data on ,P% +ave !een collected from t+e variousissues of *eserve !an) of India >*7I? !ulletin and (conomic Survey of India.



TOTAL TRA%E TRA%E'%P?< It refers to t+e total trade as percenta&e of ,P. Total trade implies sum of total e@ports and total imports. Trade;anot+er e@planatory varia!le in t+e study also affects t+e economic &rowt+of t+e country. T+e values of e@ports and imports are ta)en at constant

prices. T+e relations+ip !etween trade; %I and &rowt+ is well )nown. %Iand trade are en&ines of &rowt+ as tec+nolo&ical diffusion t+rou&+international trade and inward %I stimulates economic &rowt+. 8nowled&eand tec+nolo&ical spillovers >!etween firms; wit+in industries and !etweenindustries etc.? contri!utes to &rowt+ via increasin& productivity level.(conomic &rowt+; w+et+er in t+e form of e@port promotin& or importsu!stitutin& strate&y; can si&nificantly affect trade flows. (@port led &rowt+leads to e@pansion of e@ports w+ic+ in turn promote economic &rowt+ !ye@pandin& t+e mar)et siFe for developin& countries.SourceG various issues of *7I 7ulletin India prefers e@port stimulatin& %I

inflows; t+at is; %I inflows w+ic+ !oost t+e demand of e@port in t+einternational mar)et are preferred !y t+e country as it nullifies t+e &ap!etween e@ports and imports. Since li!eraliFation; t+e value of India=sinternational trade +as risen to *s. 2:#243$ crores in 2::$H:' from *s.'1$'2 crores in 1''1H'2. s e@ports from t+e country +ave increasedmanifolds after t+e initiation of economic reforms since 1''1 India=s maEor tradin& partners are +ina; nited States of merica; nited ra!(mirates; nited 8in&dom; Napan; and (uropean nion. Since 1''1;India=s e@ports +ave !een consistently risin& alt+ou&+ India is still a netimporter. In 2::$H:' imports were *s. 13:55:3 crores and e@ports were

*s. #""'35 crores. India accounted for 1.45 per cent of &lo!al merc+andisetrade and 2.$ per cent of &lo!al commercial services e@port. (conomic&rowt+ and %I are closely lin)ed wit+ international trade. ountries t+atare more open are more li)ely to attract %I inflows in many waysG %orei&ninvestor !rin&s mac+ines and eAuipment from outside t+e +ost country inorder to reduce t+eir cost of production. T+is can increase e@ports of t+e+ost country. ,rowt+ and trade are mutually dependent on one anot+er.Trade is a complement to %I; suc+ t+at countries tendin& to !e more opento trade attract +i&+er levels of %I.

FOREI'N EXC$AN'E RSERVES RES'%P?< *(S,P represents%orei&n (@c+an&e *eserves as percenta&e of ,P. India=s forei&ne@c+an&e reserves comprise forei&n currency assets >%?; &old; specialdrawin& ri&+ts >S*? and *eserve Tranc+e Position >*TP? in t+eInternational 0onetary %und. T+e emer&in& economic &iants; t+e 7*I>7raFil; *ussian %ederation; India; and +ina? countries; +old t+e lar&est



forei&n e@c+an&e reserves &lo!ally and India is amon& t+e top 1: nationsin t+e world in terms of forei&n e@c+an&e reserves. India is also t+e world=s1:t+ lar&est &old +oldin& country >(conomic Survey 2::'H1:?1#. Stoc) of forei&n e@c+an&e reserves s+ows a country=s financial stren&t+. India=s

forei&n e@c+an&e reserves +ave &rown si&nificantly since 1''1. T+ereserves; w+ic+ stood at *s. 23$5: crores at end marc+ 1''1; increased&radually to *s. 3"14#: crores !y t+e end of 0arc+ 2::2; after w+ic+ rosesteadily reac+in& a level of *s. 123#'$5 crores in 0arc+ 2::#. T+ereserves stood at *s. 12$3$"5 crores as on 0arc+ 2::$ .SourceG various issues of *7I 7ulletin %urt+er; an adeAuate %I inflow addsforei&n reserves !y e@c+an&e reserves w+ic+ put t+e economy in !etter position in international mar)et. It not only allows t+e Indian &overnment tomanipulate e@c+an&e rates; commodity prices; credit ris)s; mar)et ris)s;liAuidity ris)s and operational ris)s !ut it also +elps t+e country to defend

itself from speculative attac)s on t+e domestic currency. deAuate forei&nreserves of India indicates its a!ility to repay forei&n de!t w+ic+ in turnincreases t+e credit ratin& of India in international mar)et and t+is +elps inattractin& more %I inflows in t+e country. n analysis of t+e sources of reserves accretion durin& t+e entire reform period from 1''1 onwardsreveals t+at increase in net %I from *s. 4:' crores in 1''1H'2 to *s.1;23;3#$ crores !y 0arc+ 2:1:. -*I deposits increased from *s.2#4::crores in 1''1H'2 to *s.1#4"23 !y t+e end of 0arc+ 2::$. s at t+e end of 0arc+ 2::'; t+e outstandin& -*I deposits stood at *s. 21:11$ crores. Ont+e current account; India=s e@ports; w+ic+ were *s. 44:41 crore durin&

1''1H'2 increased to *s. #""'35 crores in 2::#H:$. India=s imports w+ic+were *s. 4#$51 crore in 1''1H'2 increased to *s. 13:55:3 crores in 2::$H:'. India=s current account !alance w+ic+ was in deficit at 3.: percent of ,P in 1'':H'1 turned into a surplus durin& t+e period 2::1H:2 to 2::3H:4. 6owever; t+is could not !e sustained in t+e su!seAuent years. In t+eaftermat+ of t+e &lo!al financial crisis; t+e current account deficit increasedfrom 1.3 percent of ,P in 2::#H:$ to 2.4 percent of ,P in 2::$H:' andfurt+er to 2.' percent in 2::'H1:. Invisi!les; suc+ as private remittances+ave also contri!uted si&nificantly to t+e current account. (nou&+ stoc)s of forei&n reserves ena!led India in prepayment of certain +i&+ L cost forei&n

currency loans of ,overnment of India from sian evelopment 7an)>7? and Morld 7an) >I7*? Infact; adeAuate forei&n reserves are animportant parameter of Indian economy in &au&in& its a!ility to a!sor!e@ternal s+oc)s. T+e import cover of reserves; w+ic+ fell to a low of t+reewee)s of imports at t+e end of ec 1'':; reac+ed a pea) of 1".' mont+s of imports at t+e end of 0arc+ 2::4. t t+e end of 0arc+ 2:1:; t+e import



cover stands at 11.2 mont+s. T+e ratio of s+ort L term de!t to t+e forei&ne@c+an&e reserves declined from 14".5 percent at t+e end of 0arc+ 1''1to 12.5 percent as at t+e end of 0arc+ 2::5; !ut increased sli&+tly to 12.'percent as at t+e end of 0arc+ 2::". It furt+er increased from 14.$ percent

at t+e end of 0arc+ 2::$ to 1#.2 percent at t+e end of 0arc+ 2::' and1$.$ percent !y t+e end of 0arc+ 2:1:. %I +elps in fillin& t+e &ap !etweentar&eted forei&n e@c+an&e reAuirements and t+ose derived from net e@portearnin&s plus net pu!lic forei&n aid. T+e !asic ar&ument !e+ind t+is &ap ist+at most developin& countries face eit+er a s+orta&e of domestic savin&sto matc+ investment opportunities or a s+orta&e of forei&n e@c+an&ereserves to finance needed imports of capital and intermediate &oods.

RESEARC$ D %EVELOPMENT EXPEN%IYURE RD%'%P?< It refers tot+e researc+ and development e@penditure as percenta&e of ,P . India

+as lar&e pool of +uman resources and +uman capital is )nown as t+eprime mover of economic activity. India +as t+e t+ird lar&est +i&+er education system in t+e world and a tradition of over 5::: year old of science and tec+nolo&y. India can stren&t+en t+e Auality and afforda!ility of its +ealt+ care; education system; a&riculture; trade; industry and services!y investin& in *R activities. India +as emer&ed as a &lo!al *R +u!since t+e last two decades. T+ere +as !een a si&nificant rise in t+ee@penditure of *R activities as %I flows in t+is sector and in servicessector is increasin& in t+e present decade. *R activities >in com!inationwit+ ot+er +i&+ L end services? &enerally )nown as 8nowled&e Process

Outsourcin& or 8PO are &ainin& muc+ attention wit+ services sector ‖leadin& amon& all sectors of Indian economy in receivin& / attractin& +i&+er percenta&e of %I flows. It is clear from t+at t+e e@penditure on *Ractivities is risin& si&nificantly in t+e present decade. India +as !een acentre for many researc+ and development activities !y many T-s.Today; companies li)e ,eneral (lectric; 0icrosoft; Oracle; SP and I70 toname a few are all pursuin& *R in India. *R activities in India demands+u&e funds t+us providin& &reater opportunities for forei&n investors.

FINANCIAL POSITION FIN0 Poitio4?< %I-. Position stands for %inancialPosition. %inancial Position is t+e ratio of e@ternal de!ts to e@ports. It is astron& indicator of t+e soundness of any economy. It s+ows t+at e@ternalde!ts are covered from t+e e@ports earnin& of a country.(@ternal de!t of India refers to t+e total amount of e@ternal de!ts ta)en !y India in aparticular year; its repayments as well as t+e outstandin& de!ts amounts; if any. India=s e@ternal de!ts; as of marc+ 2::$ was *s. $'#'55; recordin&



an increase of *s.11"'5#5 crores in marc+ 2::' mainly due to t+eincrease in trade credits. mon& t+e composition of e@ternal de!t; t+es+are of commercial !orrowin&s was t+e +i&+est at 2#.3D on 0arc+ 2::';followed !y s+ort L term de!t >21.5D?; -*I deposits >1$D? and multilateral

de!t >1#D?.ue to arise in s+ort L term trade credits; t+e s+are of s+ort Lterm de!t in t+e total de!t increased to 21.5D in marc+ 2::'; from 2:.'Din marc+ 2::$. s a result t+e s+ort L term de!t accounted for 4:."D of t+etotal e@ternal de!t on 0arc+ 2::'. In 2::# India was rated t+e 5t+ mostinde!ted country accordin& to an international comparison of e@ternal de!tof t+e twenty most inde!ted countries. T+e ratio of s+ort L term de!t toforei&n e@c+an&e reserves stood at 1'."D in 0arc+ 2::'; +i&+er t+an t+e15.2D in t+e previous year. India=s forei&n e@c+an&e reserves provided acover of 1:'."D of t+e e@ternal de!t stoc) at t+e end of 0arc+ 2::'; ascompared to 13#.'D at t+e end of 0arc+ 2::$. n assessment of

sustaina!ility of e@ternal de!t is &enerally underta)en !ased on t+e trendsin certain )ey ratios suc+ as de!t to ,P ratio; de!t service ratio; s+ort Lterm de!t to total de!t and total de!t to forei&n e@c+an&e reserves. T+eratio of e@ternal de!t to ,P increased to 22D as at end marc+ 2::' from1'.:D as at end L 0arc+ 2::$. T+e de!t service ratio +as declined steadilyover t+e year; and stood at 4.$ D as at t+e end of 0arc+ 2::'.6owever;t+e s+are of concessional de!t in total e@ternal de!t declined to 1$.2D in2::$H2::' from 1'.# D in 2::#H2::$.oncessional e!t as D of Totale!t S+ort H Term e!t as D of Total e!tSourceG various issues of *7I 7ulletin ar&e fiscal deficit +as variety ofadverse effectsG reducin& &rowt+; lowerin& real incomes; increasin& t+eris)s of financial and economic crises and in some circumstances it canalso leads to +i&+ inflation.*ecently t+e finance minister of India +adpromised to cut its !ud&et deficit to 5.5D of t+e ,P in 2:1: from ".'D of,P in 2::'. s a result t+e credit L ratin& outloo) was raised to sta!lefrom ne&ative !y standard and poor=s !ased on t+e optimism t+at faster&rowt+ in sia=s t+ird lar&est and world second fastest &rowin& economywill +elp t+e &overnment cut its !ud&et deficit. T+e &overnment also plansto cut its de!t to "$D of t+e ,P !y 2:15; from its current levels of $:D. Inorder to reduce t+e ratio of de!t to ,P t+ere must !e eit+er a primarysurplus >i.e. revenue must e@ceed non interest outlays? or t+e economymust &row faster t+an t+e rate of interest; or !ot+; so t+at one mustoutwei&+ t+e adverse effect of t+e ot+er.

EXC$AN'E RATES EXR?< It refers to t+e e@c+an&e rate varia!le. (@c+an&e rate is a )ey determinant of international finance as t+e world



economies are &lo!alised ones. T+ere are a num!er of factor w+ic+ affectt+e e@c+an&e rate viF. &overnment policy; competitive advanta&es; mar)etsiFe; international trade; domestic financial mar)et; rate of inflation; interestrate etc. (@c+an&e rate touc+ed a +i&+ of *s. 4$.4 in 2::2H:3 Since 1''1

Indian economy +as &one t+rou&+ a sea c+an&e and t+at c+an&es arereflected on t+e Indian Industry too. T+ere is +i&+ volatility in t+e value of I-*/S. T+ere is +i&+ appreciation in t+e value of I-* from 2::1H:2w+ic+ +as swept away +u&e c+un) of profits of t+e companies.

'ROSS %OMESTIC PRO%UCT 'RO*T$ '%P'?< It refers to t+e &rowt+rate of &ross domestic product. (conomic &rowt+ rate +ave an effect on t+edomestic mar)et; suc+ t+at countries wit+ e@pandin& domestic mar)etss+ould attract +i&+er levels of %I. India is t+e 2nd fastest &rowin&economy amon& t+e emer&in& nations of t+e world. It +as t+e t+ird lar&est

,P in t+e continent of sia. Since 1''1 India +as emer&ed as one of t+ewealt+iest economies in t+e developin& world. urin& t+is period; t+eeconomy +as &rown constantly and t+is +as !een accompanied !yincrease in life e@pectancy; literacy rates; and food security. It is also t+eworld most populous democracy. T+e Indian middle class is lar&e and&rowin&J wa&es are lowJ many wor)ers are well educated and spea)(n&lis+. ll t+ese factors lure forei&n investors to India. India is also amaEor e@porter of +i&+ly L s)illed wor)ers in software and financial servicesand provide an important <!ac) office destination= for &lo!al outsourcin& of customer services and tec+nical support. T+e Indian mar)et is widely

diverse. T+e country +as 1# official lan&ua&es; " maEor reli&ion and et+nicdiversity. T+us; tastes and preferences differ &reatly amon& sections of consumers.

FOREI'N %IRECT INVESTMENT 'RO*T$ F%I'?< In t+e last twodecade world +as witnessed unprecedented &rowt+ of %I. T+is &rowt+ of %I provides new avenues of economic e@pansion especially; to t+edevelopin& countries. India due to its +u&e mar)et siFe; diversity; c+eapla!our and lar&e +uman capital received su!stantial amount of %I inflowsdurin& 1''1H2::$. India received cumulative %I inflows of *s. 5##1:$crore durin& 1''1 to marc+ 2:1:. It received %I inflows of *s. 4'23:3crore durin& 2::: to marc+ 2:1: as compared to *s. $4$:" crore durin&1''1 to marc+ ''.urin& 1''4H'5; %I re&istered a 11:D &rowt+ over t+eprevious year and a 1$4D a&e &rowt+ in 2::#H:$ over 2::"H:#. %I as apercenta&e of &ross total investment increased to #.4D in 2::$ as a&ainst2."D in 2::5. T+is increased level of %I contri!utes towards increased



forei&n reserves. T+e steady increase in forei&n reserves provides a s+ielda&ainst e@ternal de!t. T+e &rowt+ in %I also provides adeAuate securitya&ainst any possi!le currency crisis or monetary insta!ility. It also +elps in!oostin& t+e e@ports of t+e country. It en+ances economic &rowt+ !y

increasin& t+e financial position of t+e country. T+e &rowt+ in %Icontri!utes toward t+e sound performance of eac+ sector >especially;services; industry; manufacturin& etc.? w+ic+ ultimately leads to t+e overallro!ust performance of t+e Indian economy.

ROLE OF F%I ON ECONOMIC 'RO*T$

In order to assess t+e role of %I on economic &rowt+; two models wereused. T+e estimation results of t+e two models are supported and furt+er analysed !y usin& t+e relevant econometric tec+niAues viF. oefficient of determination; standard error; fH ratio;tH statistics; HM Statistics etc. In t+e

forei&n direct investment model; t+e main determinants of %I inflows toIndia are assessed. T+e study identified t+e followin& macroeconomicvaria!lesG Trade,P; *R,P; %I-.Position; (*; and *eserves,P ast+e main determinants of %I inflows into India. nd t+e relation of t+esevaria!les wit+ %I is specified and analysed in eAuation 4.1. In order tostudy t+e role of %I on Indian economy it is imperative to assess t+e trendpattern of all t+e varia!les used in t+e determinant analysis. It is o!servedt+at %I inflows into India s+ows a steady trend in early nineties !ut s+owsa s+arp increase after 2::5; t+ou&+ it +ad fluctuated a !it in early 2:::.6owever; ,ross domestic product s+ows an increasin& trend pattern since

1''1H'2 to 2::#H:$ not+er varia!le i.e.trade ,P maintained a steadytrend pattern upto 2::1H:2; after t+at it s+ows a continuous increasin&pattern upto 2::$H:'. *eserves,P; anot+er e@planatory varia!le s+owslow trend pattern upto 2:::H:1 !ut &ained momentum after 2::1H:2 ands+ows an increasin& trend. In addition to t+ese trend patterns of t+evaria!les t+e study also used t+e multiple re&ression analysis to furt+er e@plain t+e variations in %I inflows into India due to t+e variations caused!y t+ese e@planatory varia!les.

)0) CONCLUSIONS

It is o!served from t+e results of a!ove analysis t+at Trade,P;*eserves,P; (@c+an&e rate; %I-. Position; *R,P and %I, are t+emain determinants of %I inflows to t+e country. In ot+er words; t+esemacroeconomic varia!les +ave a profound impact on t+e inflows of %I inIndia. T+e results of forei&n irect Investment 0odel reveal t+at Trade,P;*eserves,P; and %I-. Position varia!les e@+i!it a positive



relations+ip wit+ %I w+ile *R,P and (@c+an&e rate varia!les e@+i!it ane&ative relations+ip wit+ %I inflows. 6ence; Trade,P; *eserves,P;and %I-. Position varia!les are t+e pull factors for %I inflows to t+ecountry and *R,P and (@c+an&e rate are deterrent forces for %I

inflows into t+e country. T+us; it is concluded t+at t+e a!ove analysis issuccessful in identifyin& t+ose varia!les w+ic+ are important in attractin&%I inflows to t+e country. T+e study also reveals t+at %I is a si&nificantfactor influencin& t+e level of economic &rowt+ in India. T+e results of (conomic ,rowt+ 0odel and %orei&n irect Investment 0odel s+ow t+at%I plays a crucial role in en+ancin& t+e level of economic &rowt+ in t+ecountry. It +elps in increasin& t+e trade in t+e international mar)et.6owever;it +as failed in raisin& t+e *R and in sta!iliFin& t+e e@c+an&e rates of t+eeconomy. T+e positive si&n of e@c+an&e rate varia!les depicts t+eappreciation of Indian *upee in t+e international mar)et. T+is appreciation

in t+e value of Indian *upee provides an opportunity to t+e policy ma)ers toattract %I inflows in ,reenfield proEects rat+er t+an attractin& %I inflowsin 7rownfield proEects. %urt+er; t+e a!ove analysis +elps in identifyin& t+emaEor determinants of %I in t+e country. %I plays a si&nificant role inen+ancin& t+e level of economic &rowt+ of t+e country. T+is analysis also+elps t+e future aspirants of researc+ sc+olars to identify t+e maindeterminants of %I at sectoral level !ecause %I is also a sector L specificactivity of forei&n firms= visHHvis an a&&re&ate activity at national level.%inally; t+e study o!serves t+at %I is a si&nificant factor influencin& t+elevel of economic &rowt+ in India. It provides a sound !ase for economic

&rowt+ and development !y en+ancin& t+e financial position of t+e country.It also contri!utes to t+e ,P and forei&n e@c+an&e reserves of t+ecountry.

Tre47 a47 Patter4 o3 F%I 3lo8 at *orl7 le=elG1? It is seen from t+e analysis t+at lar&e amount of %I flows are confined to

t+e developed economies. 7ut t+ere is a mar)ed increase in t+e %Iinflows to developin& economies from 1''# onwards. evelopin&

economies fetc+ a &ood s+are of 4: percent of t+e world %I inflows in1''# as compared to 2" percent in 1'$:s.2? mon& developin& nations; sian countries received ma@imum s+are

>1"D? of %I inflows as compared to ot+er emer&in& developin& countriesof atin merica >$.# D? and frica >2D?.



3? India=s s+are in Morld %I rose to 1.3D in 2::# as compared to :.#D in1''".T+is can !e attri!uted to t+e economic reform process of t+e countryfor t+e last ei&+teen years.

4? +ina is t+e most attractive destination and t+e maEor recipient of &lo!al

%I inflows amon& emer&in& nations. India is at 5t+ position amon& t+emaEor emer&in& destinations of &lo!al %I inflows. T+e ot+er preferreddestinations apart from +ina and a!ove to India are 7raFil; 0e@ico and*ussia. It is found t+at %I inflows to India +ave increased from 11D in1'':H'' to "'D in 2:::H2::#.

Tre47 a47 patter4 o3 F%I 3lo8 at Aia4 le=el G1? India; wit+ a s+are of nearly #5D emer&ed as a maEor recipient of &lo!al

%I inflows in Sout+ sia re&ion in 2::#.2? s far as Sout+; (ast and Sout+ L (ast !loc) is concerned India is at 3rd

place wit+ a s+are of '.2D w+ile +ina is at num!er one position wit+ as+are of 33D in 2::#. Ot+er maEor economies of t+is !loc) are Sin&apore;Sout+ 8orea; 0alaysia;T+ailand and P+ilippines.3?M+ile comparin& t+e s+are of %I inflows of +ina and India durin& t+isdecade>i.e. 2:::H2::#? it is found t+at India=s s+are is !arely 2.$ percentw+ile c+ina=s s+are is 21.# percent.

Tre47 a47 patter4 o3 F%I 3lo8 at I47ia4 le=elG1? lt+ou&+ India=s s+are in &lo!al %I +as increased considera!ly; !ut t+e

pace of %I inflows +as !een slower t+an +ina; Sin&apore; 7raFil; and

*ussia.2? ue to t+e continued economic li!eraliFation since 1''1; India +as seen adecade of # plus percent of economic &rowt+. Infact; India=s economy +as!een &rowin& more t+an ' percent for t+ree consecutive years since 2::"w+ic+ ma)es t+e country a prominent performer amon& &lo!al economies.

t present India is t+e 4t+ lar&est and 2nd fastest &rowin& economy in t+eworld. It is t+e 11t+ lar&est economy in terms of industrial output and +ast+e 3rd lar&est pool of scientific and tec+nical manpower.3?India +as considera!ly decreased its fiscal deficit from 4.5 percent in2::3H:4 to 2.# percent in 2::#H:$ and revenue deficit from 3." percent to

1.1 percent in 2::#H:$.4? T+ere +as !een a &enerous flow of %I in India since 1''1 and its overalldirection also remained t+e same over t+e years irrespective of t+e rulin&party.



5? India +as received increased -*I=s deposits and commercial !orrowin&slar&ely !ecause of its rate of economic &rowt+ and sta!ility in t+e politicalenvironment of t+e country.

"? (conomic reform process since 1''1 +ave paves way for increasin&forei&n e@c+an&e reserves to S 251'$5 millions as a&ainst S '22:millions in 1''1H'2.

#? urin& t+e period under study it is found t+at India=s ,P crossed onetrillion dollar mar) in 2::#. Its domestic savin& ratio to ,P also increasesfrom 2'.$ percent in 2::4H:5 to 3# percent in 2::#H:$.

$? n analysis of last ei&+teen years of trends in %I inflows in India s+owst+at initially t+e inflows were low !ut t+ere is a s+arp rise in investmentflows from 2::5 onwards.

'? It is o!served t+at India received %I inflows of *s.4'23:2 crore durin&2:::H 2:1: as compared to *s. $4$:" crore durin& 1''1H1'''. Indiareceived a cumulative %I flow of *s. 5##1:$ crore durin& 1''1to marc+2:1:.

1:? comparative analysis of %I approvals and inflows reveals t+at t+ereis a +u&e &ap !etween t+e amount of %I approved and its realiFation intoactual dis!ursements. difference of almost 4: percent is o!served!etween investment committed and actual inflows durin& t+e year 2::5H:".

11? It is o!served t+at maEor %I inflows in India are concluded t+rou&+automatic route and acAuisition of e@istin& s+ares route t+an t+rou&+ %IP7;SI route durin& 1''1H2::$.

12? In order to +ave a &enerous flow of %I; India +as maintained ou!leTa@ voidance &reements >T? wit+ nearly #: countries of t+e world.

13? India +as si&ned 5# >upto 2::"? num!ers of 7ilateral InvestmentsTreaties >7ITs?. 0a@imum num!ers of 7ITS are si&ned wit+ developin&countries of sia >1"?; t+e 0iddle (ast >'?; frica >4? and atin merica >1?apart from t+e developed nation >i.e. 2# in num!ers?. India +as also!ecome t+e mem!er of prominent re&ional &roups in sia and si&nednum!ers of %ree Trade rea >nearly 1# in num!er?.

14? mon& t+e sectors; services sector received t+e +i&+est percenta&e of %I inflows in 2::$. Ot+er maEor sectors receivin& t+e lar&e inflows of %Iapart from services sector are electrical and electronics;

telecommunications; transportations and construction activities etc. It isfound t+at nearly 41 percent of %I inflows are in +i&+ priority areas li)eservices; electrical eAuipments; telecommunications etc.

15? India +as received ma@imum num!er of financial colla!orations ascompared to tec+nical colla!orations.



1"? India received lar&e amount of %I from 0auritius >nearly 4: percent of t+e total %I inflows? apart from S >$.$ percent?; Sin&apore >#.2percent?; .8 >".1 percent?; -et+erlands >4.4 percent? and Napan >3.4percent?.

1#? It is found t+at India +as increased its list of sources of %I since 1''1.T+ere were Eust few countries >.8; Napan? !efore Independence. fter Independence from t+e 7ritis+ olonial era India received %I from .8.;.S..; Napan; ,ermany; etc. T+ere were 12: countries investin& in India in2::$ as compared to 15 countries in 1''1. 0auritius; Sout+ 8orea;0alaysia; ayman Islands and many more countries predominantlyappears on t+e list of maEor investors in India after 1''1. T+is !roaden listof sources of %I inflows s+ows t+at India is successful in restorin& t+econfidence of forei&n investors t+rou&+ its economic reforms process.1$?It is also found t+at alt+ou&+ t+e list of sources of %I flows +as reac+ed

to 12: countries !ut t+e lion=s s+are >"" percent? of %I flow is vested wit+ Eust five countries >viF. 0auritius; S; 8; -et+erlands and Sin&apore?.1'? 0auritius and nited states are t+e two maEor countries +oldin& first

and t+e second position in t+e investor=s list of %I in India. M+ilecomparin& t+e investment made !y !ot+ countries; one interestin& factcomes up w+ic+ s+ows t+at t+ere is +u&e difference in t+e volume of %Ireceived from 0auritius and t+e .S. It is found t+at %I inflows from0auritius are more t+an dou!le from t+at of t+e .S.

2:? StateH wise %I inflows s+ow t+at 0a+aras+tra; -ew el+i; 8arnata)a;,uEarat and Tamil -adu received maEor investment from investors !ecause

of t+e infrastructural facilities and favoura!le !usiness environmentprovided !y t+ese states. ll t+ese states to&et+er accounted for nearly"'.3$ percent of inflows durin& 2:::H2::$.

21? It is o!served t+at amon& Indian cities 0um!ai received ma@imumnum!ers >13#1? of forei&n colla!orations durin& 1''1H2::$.Tre47 a47 patter4 o3 F%I 3lo8 at Se5toral le=el o3 I47ia4 E5o4o;6G I43ratr:5t:re Se5tor< Infrastructure sector received 2$." percent of total%I inflows from 2::: to 2::$. Initially; t+e inflows were low !ut t+ere is as+arp rise in %I inflows from 2::5 onwards. mon& t+e su!sectors of Infrastructure sector; telecommunications received t+e +i&+est percenta&e

>$ percent? of %I inflows. Ot+er maEor su!sectors of infrastructure sectorsare construction activities >".15 percent?; real estate >5.#$ percent? andpower >3.1" percent?. 0auritius >wit+ 5".3 percent? and Sin&apore >wit+$.54 percent? are t+e two maEor investors in t+is sector. In India +i&+estpercenta&e of %I inflows for infrastructure sector is wit+ -ew el+i >23.2percent? and 0um!ai >2:.4# percent?. Infrastructure sector received a total



of. 252$ num!ers of forei&n colla!orations in India. Out of 252$ num!ers of forei&n colla!orations "33 were tec+nical and 2#'5 were financialcolla!orations; w+ic+ involves an eAuity participation of S 111.: !n. T+etop five Indian companies w+ic+ received %I inflows in Infrastructuresector durin& 2::: to 2::$ are I(; ellule td.;7+ai) Infotel P. td.;a!+ol power ompany td.; and ircel td.

Ser=i5e e5tor< In recent years Services sector puts t+e economy on aproper &lidin& pat+ !y contri!utin& 55 percent to ,P. T+ere is acontinuously increasin& trend of %I inflows in services sector wit+ a steeprise in t+e inflows from 2::5 onwards. Services sector received aninvestment of 1'.2 !n from 1''1 to 2::$. mon& t+e su!sectors of services sector; financial services attract 1:.2 percent of total %I inflowsfollowed !y !an)in& services >2.22 percent?; insurance >1." percent? and

nonH financial services >1."2 percent?. In India; 0um!ai >wit+ 33.##percent? and el+i >wit+ 1" percent? are t+e two most attractive locationsw+ic+ receives +eavy investment in services sector. It is found t+at amon&t+e maEor investin& countries in India 0auritius tops t+e c+art !y investin&42.5 percent in services sector followed !y .8 >14."" percent? andSin&apore >11.1$ percent?. urin& 1''1 to ec 2::$ services sector received 1"2" num!ers of forei&n colla!orations; out of w+ic+ ## aretec+nical and 154' are financial in nature.

Tra7i4g e5tor< Tradin& sector received 1."# percent of t+e total %I

inflows from 1''1H2::$. T+e sector s+ows a trailin& pattern upto 2::5 !utt+ere is an e@ponential rise in inflows from 2::" onwards. Tradin& sector received 113: >1111 num!ers of financial colla!orations and 2: num!ers of tec+nical colla!orations? num!ers of forei&n colla!orations durin& 1''1H2::$. 0aEor investment in t+is sector came from 0auritius >24."' percent?;Napan >14.$1 percent? and ayman Island >14." percent? respectivelydurin& 2:::H2::$. In India; 0um!ai >4:.#" percent?; 7an&alore >15.'#percent? and -ew el+i >12.:5 percent? are t+e top t+ree cities w+ic+ +avereceived +i&+est investment in tradin& sector upto ec. 2::$. Tradin& of w+olesale cas+ and carry constitute +i&+est percenta&e >$4 percent of total

%I inflows to tradin& sector? amon& t+e su!sectors of tradin& sector .Co4:lta456 Se5tor< onsultancy sector received 1.14D of total %Iinflows durin& 2::: to 2::$. mon& t+e su!sectors of consultancy sector mana&ement services received +i&+est amount of %I inflows apart frommar)etin& and desi&n and en&ineerin& services. 0auritius invest +eavily



>3#D? in t+e consultancy sector. In India 0um!ai received +eavyinvestment in t+e consultancy sector. onsultancy sector s+ows acontinuous increasin& trend of %I inflows from 2::5 onwards.

E7:5atio4 e5tor<(ducation sector attracts forei&n investors in t+epresent decade and received a w+oppin& 3:$.2$ million of %I inflows

durin& 2::4H2::$. It re&istered a steep rise in %I inflows from 2::5.0auritius remains top on t+e c+art of investin& countries investin& ineducation sector. 7an&alore received +i&+est percenta&e of $:.14D of %Iinflows in India.$o:i4g a47 Real Etate Se5tor< 6ousin& and *eal (state sector received 5.#$D of total %I inflows in India upto 2::$. 0aEor investment>"1.'"D? in t+is sector came from 0auritius. -ew el+i and 0um!ai aret+e two top cities w+ic+ received +i&+est percenta&e of >34.#D and 2'.$D?

%I inflows. 6ousin& sector s+ows an e@ponentially increasin& trend after 2::5.Co4tr:5tio4 A5ti=itie Se5tor< onstruction ctivities sector receivedS 4.' !n of t+e total %I inflows. 0auritius is t+e maEor investmentcountry in India. -ew el+i and 0um!ai are t+e most preferred locationsfor construction activities in India.A:to;oile Se5tor< (arlier utomo!ile Industry was t+e part of transportation sector !ut it !ecame an independent sector in 2:::. urin&Nan 2::: to dec. 2::$ t+is industry received an investment of S 3.2 !nw+ic+ is 4.:' D of t+e total %I inflows in t+e country. Napan >2#.5'D?; Italy

>14.""D? and S >13.$$D? are t+e prominent investors in t+is sector. InIndia 0um!ai and -ew el+i wit+ 3".'$ D and 2"."3 percent of investment!ecomes favourite=s destination for t+is sector. 0a@imum num!ers of tec+nical colla!orations in t+is sector are wit+ Napan.Co;p:ter $ar78are a47 So3t8are Se5tor< omputer Software and6ardware sector received an investment of S $.' !n durin& Nan 2::: toec. 2::$. %rom 1''1 to ec. 1''' computer software and +ardware wast+e part of electrical and electronics sector. 6owever; it was se&re&atedfrom electrical and electronics sector in 2:::. T+is sector received +eavyinvestment from 0auritius apart from S and Sin&apore.

It is o!served t+at maEor investment in t+e a!ove sectors came from0auritius and investments in t+ese sectors in India are primarilyconcentrated in 0um!ai and -ew el+i.

0a@imum num!ers >3"3"? of forei&n colla!orations durin& 1''1H2::$are concluded in t+e computer software and +ardware sector.



It is found t+at ma@imum >i.e. #34? tec+nical colla!orations are concludedin automo!ile sector w+ile computer software and +ardware sector fetc+edma@imum >3511? financial colla!orations durin& 1''1H2::$.F%I a47 I47ia4 E5o4o;6

T+e results of %orei&n irect Investment 0odel s+ows t+at all varia!lesincluded in t+e study are statistically si&nificant. (@cept t+e two varia!lesi.e. (@c+an&e *ate and *esearc+ and evelopment e@penditure>*R,P? w+ic+ deviates from t+eir predicted si&ns. ll ot+er varia!less+ow t+e predicted si&ns.

(@c+an&e rate s+ows positive si&n instead of e@pected ne&ative si&n.T+is could !e attri!uted to t+e appreciation of Indian *upee in internationalmar)et w+ic+ +elped t+e forei&n firms to acAuire t+e firm specific assets atc+eap rates and &ain +i&+er profits.

*esearc+ and evelopment e@penditure s+ows une@pected ne&ative

si&n as of e@pected positive si&n. T+is could !e attri!uted to t+e fact t+at*R sector is not receivin& enou&+ %I as per its reAuirement. !ut t+issector is &ainin& more attention in recent years.

not+er important factor w+ic+ influenced %I inflows is t+e Trade,P. Its+ows t+e e@pected positive si&n. In ot+er words; t+e elasticity coefficient!etween Trade,P and %I inflows is 11.#' percent w+ic+ s+ows t+at onepercent increase in Trade,P causes 11.#' percent increase in %Iinflows to India.

T+e ne@t important factor w+ic+ s+ows t+e predicted positive si&n is*eserves,P. T+e elasticity coefficient !etween *eserves,P and %I

inflows is 1.44 percent w+ic+ means one percent increase in *eserves,Pcauses an increase of 1.44 percent in t+e level of %I inflows to t+ecountry.

not+er important factor w+ic+ s+ows t+e predicted positive si&n is %I-.Position i.e. financial position. T+e elasticity coefficient !etween financialposition and %I inflows is 15.2 percent i.e. one percent increase infinancial position causes15.2 percent increase in t+e level of %I inflows tot+e country.

In t+e (conomic ,rowt+ 0odel; t+e varia!le ,P, >,ross omesticProduct ,rowt+ i.e. level of economic &rowt+? w+ic+ s+ows t+e mar)et siFe

of t+e +ost economy revealed t+at %I is a vital and si&nificant factor influencin& t+e level of economic &rowt+ in India. In a nuts+ell; despitetrou!les in t+e world economy; India continued to attract su!stantial amountof %I inflows. India due to its fle@i!le investment re&imes and policiesprove to !e t+e +orde for t+e forei&n investors in findin& t+e investmentopportunities in t+e country.



SU''ESTIONS

T+us; it is found t+at %I as a strate&ic component of investment is needed!y India for its sustained economic &rowt+ and development. %I is

necessary for creation of Eo!s; e@pansion of e@istin& manufacturin&industries and development of t+e new one. Indeed; it is also needed in t+e+ealt+care; education; *R; infrastructure; retailin& and in lon& termfinancial proEects. So; t+e study recommends t+e followin& su&&estionsG

T+e study ur&es t+e policy ma)ers to focus more on attractin& diversetypes of %I.

T+e policy ma)ers s+ould desi&n policies w+ere forei&n investment can!e utilised as means of en+ancin& domestic production; savin&s; ande@portsJ as medium of tec+nolo&ical learnin& and tec+nolo&y diffusion andalso in providin& access to t+e e@ternal mar)et.

It is su&&ested t+at t+e &overnment s+ould pus+ for t+e speedyimprovement of infrastructure sector=s reAuirements w+ic+ are important for diversification of !usiness activities.

,overnment s+ould ensure t+e eAuita!le distri!ution of %I inflowsamon& states.T+e central &overnment must &ive more freedom to states;so t+at t+ey can attract %I inflows at t+eir own level. T+e &overnments+ould also provide additional incentives to forei&n investors to invest instates w+ere t+e level of %I inflows is Auite low.

,overnment s+ould open doors to forei&n companies in t+e e@port Loriented services w+ic+ could increase t+e demand of uns)illed wor)ers

and low s)illed services and also increases t+e wa&e level in t+eseservices.,overnment must tar&et at attractin& specific types of %I t+at are a!le

to &enerate spillovers effects in t+e overall economy. T+is could !eac+ieved !y investin& in +uman capital; *R activities; environmentalissues; dynamic products; productive capacity; infrastructure and sectorswit+ +i&+ income elasticity of demand.

T+e &overnment must promote policies w+ic+ allow developmentprocess starts from wit+in >i.e. t+rou&+ productive capacity and !ya!sorptive capacity?.

It is su&&ested t+at t+e &overnment endeavour s+ould !e on t+e typeand volume of %I t+at will si&nificantly !oost domestic competitiveness;en+ance s)ills; tec+nolo&ical learnin& and invaria!ly leadin& to !ot+ socialand economic &ains.



It is also su&&ested t+at t+e &overnment must promote sustaina!ledevelopment t+rou&+ %I !y furt+er stren&t+enin& of education; +ealt+ and*R system;political involvement of people and !y ensurin& personalsecurity of t+e citiFens.

,overnment must pay attention to t+e emer&in& sian continent as t+enew economic power L +ouse of !usiness transaction and try to !oost t+etrade wit+in t+is re&ion t+rou&+ !ilateral; multilateral a&reements and alsoconcludes %Ts wit+ t+e emer&in& economic sian &iants.

%I s+ould !e &uided so as to esta!lis+ deeper lin)a&es wit+ t+eeconomy; w+ic+ would sta!iliFe t+e economy >e.&. improves t+e financialposition; facilitates e@ports; sta!iliFe t+e e@c+an&e rates; supplementdomestic savin&s and forei&n reserves; stimulates *R activities anddecrease interest rates and inflation etc.? and providin& to investors asound and relia!le macroeconomic environment.

s t+e appreciation of Indian rupee in t+e international mar)et isprovidin& &olden opportunity to t+e policy ma)ers to attract more %I in,reenfield proEects as compared to 7rownfield investment. So t+e&overnment must invite ,reenfield investments.

%inally; it is su&&ested t+at t+e policy ma)ers s+ould ensure optimumutiliFation of funds and timely implementation of proEects. It is also o!servedt+at t+e realisation of approved %I into actual dis!ursement is Auite low. Itis also su&&ested t+at t+e &overnment w+ile pursuin& prudent policies mustalso e@ercise strict control over inefficient !ureaucracy; red H tapism; andt+e rampant corruption; so t+at investor=s confidence can !e maintained for

attractin& more %I inflows to India. ast !ut not least; t+e study su&&estst+at t+e &overnment ensures %I Auality rat+er t+an its ma&nitude.Indeed;India needs a !usiness environment w+ic+ is conducive to t+e needs of !usiness. s forei&n investors doesn=t loo) for fiscal concessions or specialincentives !ut t+ey are more of a mind in +avin& access to a consolidateddocument t+at specified official procedures; rules and re&ulations;clearance; and opportunities in India. In fact; t+is can !e ac+ieved only if India implements its second &eneration reforms in totality and in ri&+tdirection. T+en no dou!t t+e t+ird &eneration economic reforms ma)e Indianot only favoura!le %I destination in t+e world !ut also set an e@ample to

t+e rest of t+e world !y ac+ievin& w+at is predicted !y ,oldmanSac+s23;24 >in 2::3; 2::#? t+at from 2::# to 2:2:; India=s ,P per capitain S terms will Auadruple and t+e Indian economy will overta)e %ranceand Italy !y 2:2:; ,ermany; 8 and *ussia !y 2:25;Napan !y 2:35 andS !y 2:43.



C$APTER -

F%I IN IN%IAN RETAIL SECTOR



*etailin& is t+e interface !etween t+e producer and t+e individual consumer !uyin& for personal consumption. T+is e@cludes direct interface !etweent+e manufacturer and institutional !uyers suc+ as t+e &overnment andot+er !ul) customers. retailer is one w+o stoc)s t+e producer=s &oods

and is involved in t+e act of sellin& it to t+e individual consumer; at a mar&inof profit. ssuc+; retailin& is t+e last lin) t+at connects t+e individualconsumer wit+ t+e manufacturin& and distri!ution c+ain.T+e retail industry in India is of late often !ein& +ailed as one of t+e sunrisesectors in t+e economy. T 8earney; t+e wellH)nown internationalmana&ement consultancy; recently identified India as t+e <second mostattractive retail destination= &lo!ally from amon& t+irty emer&ent mar)ets. It+as made India t+e cause of a &ood deal of e@citement and t+e cynosure of many forei&n eyes. Mit+ a contri!ution of 14D to t+e national ,P andemployin& #D of t+e total wor)force >only a&riculture employs more? in t+e

country; t+e retail industry is definitely one of t+e pillars of t+e Indianeconomy.

-01The I47ia4 S5e4ario<

Trade or retailin& is t+e sin&le lar&est component of t+e services sector interms of contri!ution to ,P. Its massive s+are of 14D is dou!le t+e fi&ureof t+e ne@t lar&est !road economic activity in t+e sector.1 Sin&+al; rvind; Indian *etailG T+e road a+ead; *etail !iF; T+e retailindustry is divided into or&anised and unor&anised sectors.Or&anisedretailin& refers to tradin& activities underta)en !y licensed retailers; t+at is;

t+ose w+o are re&istered for sales ta@; income ta@; etc.T+ese include t+ecorporateH!ac)ed +ypermar)ets and retail c+ains; and also t+e privatelyowned lar&e retail !usinesses. nor&anised retailin&; on t+e ot+er +and;refers to t+e traditional formats of lowHcost retailin&; for e@ample; t+e localkirana s+ops; owner manned &eneral stores; paan/beedi s+ops;convenience stores; +and cart and pavement vendors; etc. nor&aniFedretailin& is !y far t+e prevalent form of trade in India Lconstitutin& '$D of total trade; w+ile or&anised trade accounts only for t+e remainin& 2D.(stimates vary widely a!out t+e true siFe of t+e retail !usiness in India. T8earney estimated it to !e *s. 4;::;::: crores and poised to dou!le in

2::5.2 On t+e ot+er +and; if one used t+e ,overnment=s fi&ures t+e retailtrade in 2::2H:3 amounted to *s. 3;$2;::: crores. One t+in& allconsultants are a&reed upon is t+at t+e total siFe of t+e corporate ownedretail !usiness was *s. 15;::: crores in 1''' and poised to &row to*s.35;::: crores !y 2::5 and )eep &rowin& at a rate of 4:D per annum.3In a recent presentation; %II +as estimated t+e total retail !usiness to !e



*s.11;::;::: crores or 44D of ,P4. ccordin& to t+is report dated -ov.2::3;sales now account for 44D of t+e total ,P and food sales accountfor "3Dof t+e total retail sales; increasin& to *s.1:: !illion from Eust *s.3$.1 !illion in 1''". %ood retail trade is a very lar&e se&ment of t+e total

economic activity of our country and due to its vast employment potential; itdeserves very special focused attention. (fficiency en+ancements andincrease in t+e food retail sales activity would +ave a cascadin& effect onemployment and economic activity in t+e rural areas for t+e mar&inaliFedwor)ers. T+us even wit+out %I drivin& it; t+e corporate owned sector ise@pandin& at a furious rate. T+e Auestion t+en t+at arises is t+at since t+ereis o!viously no deart+ of indi&enous capital; w+at is t+e need for %IQ It isnot t+at retailin& in Indiais in t+e need of any tec+nolo&y special to forei&nc+ains.

2 ,an&uly; Sa!y; *etailin& Industry in India; www.indiaonestop.com

3 Sin&+al; rvind; Tec+nopa) ProEections; 1'''; +an&in& *etailandscape; www.)saHtec+nopa).com.

4 +en&appa; P.,; c+ot+; alit+; 0u)+erEee; rpita; *amac+andra *eddy7.0. R *avi; P.; (volution of %ood *etail +ainsG T+e Indian onte@t; 5H"t+ -ov. 2::3; www.ficci.com

E;plo6;e4t i4 Retaili4g<

simple &lance at t+e employment num!ers is enou&+ to paint a &oodpicture of t+e relative siFes of t+ese two forms of trade in India L or&anisedtrade employs rou&+ly 5 la)+ people w+ereas t+e unor&aniFed retail tradeemploys nearly 3.'5 crores5U ccordin& to a ,oI study t+e num!er ofwor)ers in retail trade in 1''$ was almost 1#5 la)+s. ,iven t+e recentnum!ers indicated !y ot+er studies; t+is is only indicative of t+e ma&nitudeof e@pansion t+e retail trade is e@periencin&; !ot+ due to economice@pansion as well as t+e <Eo!less &rowt+= t+at we +ave seen in t+e pastdecade. It must !e noted t+at even wit+in t+e or&anised sector; t+e num!erof individuallyHowned retail outlets far out num!er t+e corporate!ac)edinstitutions. T+ou&+ t+ese num!ers translate to appro@imately $D of t+ewor)force in t+e country >+alf t+e normal s+are in developed countries?t+ere are far more retailers in India t+an ot+er countries in a!solutenum!ers; !ecause of t+e demo&rap+ic profile and t+e preponderance ofyout+; India=s wor)force is proportionately muc+ lar&er. T+at a!out 4D of

http://www.indiaonestop.com/

http://www.ksa-technopak.com/

http://www.indiaonestop.com/




India=s population is in t+e retail trade says a lot a!out +ow vital t+is!usiness is to t+e socioHeconomic eAuili!rium in India. Or&anised retail isstill in t+e sta&es of findin& its feet in India even now. T+ou&+ or&anisedtrade ma)es up over #:H$:D of total trade in developed economies; India=s

fi&ure is low even in comparison wit+ ot+er sian developin& economiesli)e +ina; T+ailand; Sout+ 8orea and P+ilippines; all of w+om +ave fi&ures+overin& around t+e 2:H25D mar). T+ese fi&ures Auite accurately revealt+e relative underdevelopment of t+e retail industry in India. >6eredevelopment is used in t+e narrowest sense of t+e term; implyin& leanemployment and +i&+ automation?

Retail a a For5e7 E;plo6;e4t. Se5tor<

It is important to understand +ow retailin& wor)s in our economy; and w+at

role it plays in t+e lives of its citiFens; from a social as well as an economicperspective. India still predominantly +ouses t+e traditional formats ofretailin&; t+at is; t+e local )irana s+op; paan/beedi s+op; +ardware stores;wee)ly +aats; convenience stores; and !aFaars; w+ic+ to&et+er form t+e!ul). 0ost importantly; Indian retail is +i&+ly fra&mented; wit+ a!out 11million outlets operatin& in t+e country and only 4D of t+em !ein& lar&ert+an 5:: sAuare feet in siFe. ompare t+is wit+ t+e fi&ure of Eust :.' millionin t+e S; yet caterin& to more t+an 13 times of t+e Indian retail mar)etsiFe. %i&ures Auoted from nil Sasi=s article Indian *etail 0ost%ra&mented >u&. 1$; 2::4? T+e 6indu 7usiness ine.T+e Indian retail‖

industry was; and continues to !e; +i&+ly fra&mented. ccordin& to t+e&lo!al consultancy firms -eilsen and 8S Tec+nopa); India +as t+e+i&+est s+op density in t+e world. In 2::1 t+ey estimated t+ere were 11outlets for every 1;::: people.# %urt+er; a report prepared !y 0c8insey Rompany and t+e onfederation of Indian Industry >II? predicted t+at&lo!al retail &iants suc+ as Tesco; 8in&fis+er; arrefour and +old werewaitin& in t+e win&s to enter t+e retail arena. T+is report also states t+at t+eIndian retail mar)et +olds t+e potential of !ecomin& a 3:: !illion per yearmar)et !y 2:1:; provided t+e sector is opened up si&nificantly.$ It does not

tal) a!out creatin& additional Eo!s +owever; w+ic+ s+ould !e t+e primeconcern of t+e policy ma)er. One of t+e principal reasons !e+ind t+ee@plosion of retail and its fra&mented nature in t+e country is t+e fact t+atretailin& is pro!a!ly t+e primary form of dis&uisedunemployment/underemployment in t+e country. ,iven t+e already overHcrowded a&riculture sector; and t+e sta&natin& manufacturin& sector; andt+e +ard nature and relatively low wa&es of Eo!s in !ot+; many million



Indians are virtually forced into t+e services sector. 6ere; &iven t+e lac) of opportunities; it is almost a natural decision for an individual to set up asmall s+op or store; dependin& on +is or +er means and capital. nd t+us;a retailer is !orn; seemin&ly out of circumstance rat+er t+an c+oice. T+is

p+enomenon Auite aptly e@plains t+e millions of )irana s+ops and smallstores. T+e e@plosion of retail outlets in t+e more !usy streets of Indianvilla&es and towns is a visi!le testimony of t+is.

Sin&+al; rvind; Stron& Pillar of Indian (conomy;‖ www.)saH tec+nopa).com

Iyen&ar; Nayant+i +ina; India onfront t+e MalH0arts; Online sia Times;www.atimes.com; Nanuary;31;2::4.

T+e presence of more t+an one retailer for every +undred persons isindicative of t+e lac) of economic opportunities t+at is forcin& people into t+isform of selfHemployment; even t+ou&+ muc+ of it is mar&inal. 7ecause of t+isfra&mentation; t+e Indian retail sector typically suffers from limited access tocapital; la!our and real estate options. T+e typical traditional retailer followst+e lowHcostHandHsiFe format; functionin& at a smallHscale level; rarely eli&i!lefor ta@ and followin& a c+eap model of operations. s on Nanuary 1st of t+isyear; t+ere were 413.$$ la)+s Eo! see)ers re&istered at t+e (mployment(@c+an&e'. T+ey re&ister at t+e e@c+an&e; to enEoy t+e !enefits and securityt+at a Eo! in t+e or&anised sector provides L lifetime employment; pension;and union mem!ers+ip etc. 7ut over t+e period 1''2H '3 to 2::1H:2; only atotal of 3:;::: Eo!s +ave !een added in t+e or&aniFed sector in t+e w+olecountry1: vast maEority is aware of w+at t+ese fi&ures si&nify L t+at t+ey aremost unli)ely to &et suc+ Eo!s. T+erefore; t+ey find Eo!s in t+e informal sector;mostly in retail. *etailin& is !y far t+e easiest !usiness to enter; wit+ lowcapital and infrastructure needs; and as suc+; performs a vital function in t+eeconomy as a social security net for t+e unemployed. India; !ein& a free anddemocratic country; provides its people wit+ t+is cus+ion of !ein& a!le to

ma)e a livin& for oneself t+rou&+ selfHemployment; as opposed to an economyli)e +ina; w+ere employment is re&ulated. 9et; even t+is does not annul t+efact t+at a multitude of t+ese soHcalled <selfHemployed= retailers are simplytryin& to scrape to&et+er a livin&; in t+e face of limited opportunities foremployment. In t+is li&+t; one could !rand t+is sector as one of forced sper fi&ures &iven in www.tn.&ov.in 1: 0ont+ly a!stract of Statistics; olume




http://www.tn.gov.in/




http://www.tn.gov.in/



5#; -o.#; Nuly 2::4; entral Statistical Or&anisation; ,OI employment ;‖w+ere t+e retailer is pus+ed into it; purely !ecause of t+e paucity of opportunities in ot+er sectors.

The *aiti4g Foreig4 #:gger4a:t<

T+e lar&est retailer in t+e world <MalH0art= +as a turnover of 25" !n. andis &rowin& annually at an avera&e of 12H13D. In 2::4 its net profit was ';::: mn. It +ad 4$:" stores employin& 1.4 mn persons. Of t+ese 1355were outside t+e S. T+e avera&e siFe of a MalHmart is $5;::: sA.ft andt+e avera&e turnover of a store was a!out 51 mn. T+e turnover peremployee avera&ed 1#5;:::. In 2::4 MalH0art +ad a 'D return onassets and 21D return on eAuity.7y contrast t+e avera&e Indian retailer +ada turnover of *s. 1$";:#5. Only 4D of t+e 12 million retail outlets were

lar&er t+an 5:: sA.ft in siFe. T+e total turnover of t+e unor&aniFed retailsector was *s. #35;::: crores employin& 3'.5 mn persons. et alone t+eavera&e Indian retailer in t+e unor&aniFed sector; no Indian retailer in t+eor&anised sector will !e a!le to meet t+e onslau&+t from a firm suc+ asMalH0art L w+en it comes. Mit+ its incredi!ly deep poc)ets MalH0art will!e a!le to sustain losses for many years till its immediate competition iswiped out. T+is is a normal predatory strate&y used !y lar&e players todrive out small and dispersed competition. T+is entails Eo! losses !y t+emillions.India +as 35 towns eac+ wit+ a population over 1 million. If MalH0art were to open an avera&e MalH0art store in eac+ of t+ese cities and

t+ey reac+ed t+e avera&e MalH0art performance per store L we are loo)in&at a turnover of over *s. $:;33: mn wit+ only 1:1'5 employees.(@trapolatin& t+is wit+ t+e avera&e trend in India; it would mean displacin&a!out 4;32;::: persons.If lar&e %I driven retailers were to ta)e 2:D of t+eretail trade; as t+e now somew+at +ardHpressed 6industan ever imitedan@iously anticipates; t+is would mean a turnover of *s.$:: !illion ontoday=s !asis. T+is would mean an employment of Eust 43;54: personsdisplacin& nearly ei&+t million persons employed in t+e unor&aniFed retailsector. Mit+ possi!le implications of t+is ma&nitude; a &reat deal ofprudence s+ould &o into policyma)in&. *at+er we seem to movin& towardsa policy steamrolled o!viously !y vested interests actin& in concert wit+ t+eII R%II. Me need to ta)e a deep +ard loo) at %I in t+e retail sector. Int+i conte@t we must !e concerned a!out t+e statement t+e %inance0inister; 0r.P. +idam!aram; made w+ile ma)in& t+e mid year review for2::4H:5. On retail; t+e review notes t+at creatin& an effective supplyc+ain from t+e producer to t+e consumer is critical for development of many



sectors; particularly processed and semiHprocessed a&roHproducts. In t+isconte@t; it says; t+e role t+at could !e played !y or&anised retail c+ains;includin& international ones merits careful attention.‖

The 2:etio4 o3 Foreig4 %ire5t I4=et;e4t F%I? i4 Retail<

,iven t+is !ac)drop; t+e recent clamour a!out openin& up t+e retail sectorto %orei&n irect Investment >%I? !ecomes a very sensitive issue; wit+ar&uments to support !ot+ sides of t+e de!ate. It is widely ac)nowled&ed12 *eview +ints at %I in retail; pp 1H15; Times of India; 14 ec.2::4 t+at%I can +ave some positive results on t+e economy; tri&&erin& a series ofreactions t+at in t+e lon& run can lead to &reater efficiency andimprovement of livin& standards; apart from &reater inte&ration into t+e&lo!al economy. Supporters of %I in retail trade tal) of +ow ultimately t+e

consumer is !enefited !y !ot+ price reductions and improved selection;!rou&+t a!out !y t+e tec+nolo&y and )nowH+ow of forei&n players in t+emar)et. T+is in turn can lead to &reater output and domestic consumption.

7ut t+e most important factor a&ainst %I driven modern retailin& is t+at‖it is la!our displacin& to t+e e@tent t+at it can only e@pand !y destroyin& t+etraditional retail sector. Till suc+ time we are in a position to create Eo!s ona lar&e scale in manufacturin&; it would ma)e eminent sense t+at anypolicy t+at results in t+e elimination of Eo!s in t+e unor&anised retail sectors+ould !e )ept on +old.T+ou&+ most of t+e +i&+ deci!el ar&uments infavour of %I in t+e retail sector are not wit+out some merit; it is not fully

applica!le to t+e retailin& sector in India; or at least; not yet. T+is is!ecause t+e primary tas) of &overnment in India is still to provideliveli+oods and not create so called efficiencies of scale !y creatin&redundancies. s per present re&ulations; no%I is permitted in retail tradein India. llowin& 4'D or 2"D %I >w+ic+ +ave !een t+e proposed fi&urestill date? will +ave immediate and dire conseAuences. (ntry of forei&nplayers now will most definitely disrupt t+e current !alance of t+e economy;will render millions of small retailers Eo!less !y closin& t+e small slit ofopportunity availa!le to t+em. Ima&ine if MalH0art; t+e world=s !i&&est

retailer sets up operations in India at prime locations in t+e 35 lar&e citiesand towns t+at +ouse more t+an 1 million people13. T+e supermar)et willtypically sell everyt+in&; from ve&eta!les to t+e latest electronic &ad&ets; ate@tremely low prices t+at will most li)ely undercut t+ose in near!y localstores sellin& similar &oods. MalH0art would !e more li)ely to source itsraw materials from a!road; and procure &oods li)e ve&eta!les and fruitsdirectly from farmers at preordained Auantities and specifications. T+is



means a forei&n company will !uy !i& from India and a!road and !e a!le tosell low L severely undercuttin& t+e small retailers. Once a monopolysituation is created t+is will t+en turn into !uyin& low and sellin& +i&+. Suc+reHorientation of sourcin& of materials will completely disinte&rate t+e

already esta!lis+ed supply c+ain. In time; t+e nei&+!ourin& traditionaloutlets are also li)ely to fold and peris+; &iven t+e <predatory= pricin& power t+at a forei&n player is a!le to e@ert. s -ic) *o!!ins wrote in t+e conte@tof t+e (ast India ompany; 7y controllin& !ot+ ends of t+e c+ain; t+ecompany could !uy c+eap and sell dear 14. T+e producers and traders at‖t+e lowest level of operations will never find place in t+is sector; w+ic+would now +ave demand mostly only for fluent (n&lis+Hspea)in& +elpers.6avin& !een uprooted from t+eir traditional form of !usiness; t+ese personsare unli)ely to !e suita!le for ot+er areas of wor) eit+er. It is easy tovisualise from t+e discussion a!ove; +ow t+e entry of Eust one !i& retailer is

capa!le of destroyin& a w+ole local economy and send it +urtlin& down aspiral. One must also not for&et +ow countries li)e +ina; 0alaysia andT+ailand; w+o opened t+eir retail sector to %I in t+e recent 13 ensus2::1; *e&istrar of ensus; ,OI 14 *o!!ins; -ic); T+e Morld=s %irst0ultinational. T+e -ew Statesman; >ec. 13; 2::4? past; +ave !een‖forced to enact new laws to c+ec) t+e prolific e@pansion of t+e new forei&nmalls and +ypermar)ets15. ,iven t+eir economies of scale and +u&eresources; a !i& domestic retailer or any new forei&n player will !e a!le toprovide t+eir merc+andise at c+eaper rates t+an a smaller retailer. 7utstoppin& an Indian retailer from &rowin& !i&&er is somet+in& current pu!lic

policy cannot do; w+ereas t+e State does +ave t+e prero&ative in w+et+er forei&n entry in t+e retail sector s+ould !e stalled or not. It is true t+at it is int+e consumer=s !est interest to o!tain +is &oods and services at t+e lowestpossi!le price. 7ut t+is is a privile&e for t+e individual consumer and itcannot; in any circumstance; override t+e responsi!ility of any society toprovide economic security for its population. learly collective wellH!ein&must ta)e precedence over individual !enefits.

%it:ri4g the $or4et. Net<

If you assume 4: mn adults in t+e retail sector; it would translate intoaround 1": million dependents usin& a 1G4 dependency ratio. Openin& t+eretailin& sector to %I means dislocatin& millions from t+eir occupation; andpus+in& a lot of families under t+e poverty line. Plus; one must not for&ett+at t+e western concept of efficiency is ma@imiFin& output w+ile minimiFin&t+e num!er of wor)ers involved L w+ic+ will only increase social tensions ina poor and yet developin& country li)e India; w+ere tens of millions are still



see)in& &ainful employment. iEay; Tarun; e!ateG S+ould %I 7e llowed In *etail 7randin&Q ; T+e %inancial (@press; >ec. "; 2::4? T+is‖dislocated and unemployed +orde +as to !e accommodated somew+ereelse. 7ut if you loo) at t+e &rowt+ rates of la!our in manufacturin& and

industry; you wonder w+ere t+is new accommodation can !e foundQ &riculture already employs nearly ":D of our total wor)force; and is indire need of s+eddin& e@cess !a&&a&e. T+at leaves us wit+ manufacturin&as t+e only ot+er alternative. Mit+ only 1#D of our total wor)force alreadyemployed in industry; w+ic+ contri!utes alto&et+er only 21.#D of our ,P;t+is sector can +ardly a!sor! more wit+out a maEor e@pansion. So far Indian economy +as !een +eavily &eared towards t+e service sector t+atcontri!utes 5"D of our ,P. T+e service sector=s contri!ution to t+eincrease in ,P over t+e last 5 years +as !een "3.'D. 6avin& a +i&+contri!ution from services is an attri!ute t+at is c+aracteristic of developed

economies. M+at is anomalous in t+e Indian case is t+e fact t+at in ot+er fast developin& economies; say +ina; manufacturin& accounts for asi&nificant s+are of ,P; w+ereas in India; manufacturin& contri!utes amere 23.1D of t+e ,P. It is evident t+at t+e manufacturin& sector +as!een t+e en&ine for economic &rowt+ in +ina; w+ic+ +as !een &rowin& at1:.1D since 1''11". In India;t+e credit for its 5.'D &rowt+ over t+ecorrespondin& period &oes mostly to t+e service sector. Ironically it wouldseem t+at t+e Indian economy is &ettin& a postHindustrial profile wit+out+avin& !een industrialisedU *etailin& is not an activity t+at can !oost ,P!y itself. It is only an intermediate valueHaddin& process. If t+ere aren=t any

&oods !ein& manufactured; t+en t+ere will not !e many &oods to !eretailedU T+is underlines t+e importance of manufacturin& in a developin&economy. One could ar&ue t+at t+e alarmin&ly low contri!ution of industryis attri!uta!le to t+e structural adEustments &oin& on t+e sector; &ettin& ridof t+e fla! and &ettin& ready to compete; !ut t+at still cannot undermine t+eseriousness of 1" alculated from Morld evelopment Indicators 2::3.t+eissue at +and; in t+at only ".215 million out of productive co+ort of "::million is employed in or&anised manufacturin&.Only until t+e tardy &rowt+of t+e manufacturin& sector is addressed properly and its productivity c+artstarts to loo) prettier; could one !e&in t+in)in& of dislocatin& some of t+eretailin& wor)force into t+is space. ntil t+at day; distur!in& t+e +ornet=snest would !e one very painful e@perience for t+e economy.



Re5o;;e47atio4<

1. T+e retail sector in India is severely constrained 6 li;ite7 a=ailailit6 o3a4> 3i4a45e. T+e ,overnment and *7I need to evolve suita!le lendin& policies t+at will ena!le retailers in t+e or&anised and unor&anised sectors

to e@pand and improve efficiencies. Policies t+at encoura&e unor&anisedsector retailers to mi&rate to t+e or&anised sector !y investin& in space andeAuipment s+ould !e encoura&ed.

2. Natio4al Co;;iio4 must !e esta!lis+ed to study t+e pro!lems of t+eretail sector and to evolve policies t+at will ena!le it to cope wit+ %I asand w+en it comes.

3. T+e proposed -ational ommission s+ould evolve a clear set of 5o47itio4alitie o4 gia4t 3oreig4 retailer on t+e procurement of farmproduce; domestically manufactured merc+andise and imported &oods.T+ese conditionalities must !e aimed at encoura&in& t+e purc+ase of

&oods in t+e domestic mar)et; state t+e minimum space; siFe and specifydetails li)e; construction and stora&e standards; t+e ratio of floor space topar)in& space etc. ,iant s+oppin& centres must not add to our e@istin&ur!an snarl.

4. (ntry of forei&n players must !e gra7:al a47 8ith o5ial a3eg:ar7 sot+at t+e effects of t+e la!our dislocation can !e analysed R policyfinetuned.Initially allow t+em to set up supermar)ets only in metros. 0a)et+e costs of entry +i&+ and accordin& to specific norms and re&ulations sot+at t+e retailer cannot immediately indul&e in <predatory= pricin&.

5. In order to address t+e dislocation issue; it !ecomes imperative to develop

and i;pro=e the ;a4:3a5t:ri4g e5tor in India. T+ere +as !een asu!stantial fall in employment !y t+e manufacturin& sector; to t+e e@tent of 4.:" la)+s over t+e period 1''$ to 2::1; w+ile its contri!ution to t+e ,P+as &rown at an avera&e rate of only 3.#D1#. If t+is sector is &iven dueattention; and allowed to ta)e win&s; t+en it could !e a source of &reatcompensation to t+e displaced wor)force from t+e retail industry.

". T+e &overnment must actively encoura&e settin& up of 5ooperati=etore to procure and stoc) t+eir consumer &oods and commodities fromsmall producers. T+is will address t+e dual pro!lem of limited promotionand mar)etin& a!ility; as well as mar)et penetration for t+e retailer. T+e

&overnment can also facilitate t+e settin& up of ware+ousin& units and coldc+ains; t+ere!y lowerin& t+e capital costs for t+e small retailers.#. ccordin& to IndiaInfoline.com; agro pro7:5t a47 3oo7 pro5ei4g

e5tor i4 I47ia i repo4ile 3or -90) illio4 o:t o3 the total 1+!illio4 retail e5tor >t+ese are 2::1 fi&ures?. T+is is more t+an Eust asiFea!le portion of t+e pie and w+at ma)es it even more si&nificant is t+e



fact t+at in t+is se&ment; returns are li)ely to !e muc+ +i&+er for anyretailer. Prices for peris+a!le &oods li)e ve&eta!les; fruits; etc. are not fi@ed>as opposed to; say; !randed te@tiles? and t+erefore; t+is is w+ereeconomies of scale are li)ely to )ic) in and !enefit t+e consumer in t+e 1#alculated from 0ont+ly a!stract of Statistics; olume 5#; -o.#; Nuly 2::4;Ce4tral Statiti5al Orga4iatio4; ,OI; ,P fi&ures from I47ia Oer=er Statiti5al $a47oo> >2::4?. form of lower prices. 7ut due attention must!e &iven to t+e producer too.Often t+e producer loses out; for e@ample;w+en t+e &oods are procured at *s.2 and ultimately sold to t+e consumer at a!out *s.15 as in t+e case of tomatoes now. T+e ,overnmentt+emselves can tap into t+e opportunities of t+is se&ment; rat+er t+anlettin& it !e lost to forei&n players. nd !y doin& so; t+ey can more directlyensure t+e welfare of producers and t+e interest of t+e consumers.$. Set up an Agri5:lt:ral Perihale Pro7:5e Co;;iio4 APPC?@ to

ensure t+at procurement prices for peris+a!le commodities are fair tofarmers and t+at t+ey are not distorted wit+ relation to mar)et prices.Re5o;;e47atio4 3or the Foo7 Retail Se5tor< Mit+ 3." million s+opsretailin& food and employin& 4D of total wor)force and contri!utin& 1:.'Dto ,P1$; t+e foodHretailin& se&ment presents a focused opportunity to t+e,overnment to catalyFe &rowt+ R employment.

1. Provision of trai4i4g in +andlin&; storin&; transportin&; &radin&; sortin&;maintainin& +y&iene standards; up)eep of refri&eration eAuipment; pac)in&;etc. is an area w+ere ITI=s and SISI=s can play a proactive role.

2. reation of i43ratr:5t:re for retailin& at mandis; community welfare

centers; &overnment and private colonies wit+ a t+rust on easier lo&isticsand +y&iene will ena!le &reater employment and +i&+er +y&ieneconsciousness; and faster turnaround of transport and +i&+er rollover of produce.1$ +en&appa; P.,.; c+ot+; alit+; 0u)+erEee; rpita; *eddy;7.0. *amac+andra; *avi; P.. L (volution of %ood *etail +ainsG T+eIndian onte@t >-ov. 2::3?‖

3. 2:alit6 reg:latio4; certification R price administration !odies can !ecreated at district and lower levels for up&radin& t+e tec+nical and +umaninterface in t+e rural to ur!an supply c+ain.

4. Cre7it a=ailailit6 for retail traders must !e encoura&ed wit+ a view to

en+ancin& employment and +i&+er utiliFation of fi@ed assets. T+is wouldlead to less wasta&e >India +as currently t+e +i&+est wasta&e in t+e world?of peris+a!les; en+ance nutritional status of producers and increase caloricavaila!ility.

5. Several successful models o3 i4tegrati4g =er6 lo4g 3oo7 :ppl6 5hai4in dairy; ve&eta!le; fis+ and fruit +ave !een evolved in India. T+ese



one off interventions can !e replicated in all states; se&ments and areas.Cross integrations of t+ese uniAue food supply c+ains will provide newproducts in new mar)ets increasin& consumer c+oice; economic activityand employment.". ,overnment intervention in food retail se&ment is necessitated !yGa? T+e lac) of any ot+er !ody at remote/&rassroots level.

!? -eed to provide mar)et for casual and distant selfHemployed &rowers and &at+erers.

c? 0aintain re&ulatory standards in +y&iene.d? See) mar)ets in India and a!road >provide c+arter aircrafts; freeFe fryin&;

vacuumin&; de+ydratin&; pac)in& facilities for small producers at nodalpoints?.e? Provide scope and opportunity for productive selfHemployment >since,ovt. can=t provide employment?. t a su!seAuent sta&e; t+ese

interventions can !e inte&rated into t+e supply c+ains of t+e forei&nretailers in India and a!road; creatin& "! syner&y !etween nationalpriorities; mar)et realities; &lo!aliFation; and privateHpu!lic cooperation. Int+is fas+ion; t+e ,overnment can try to ensure t+at t+e domestic andforei&n players are appro@imately on an eAual footin& and t+at t+e domestictraders are not at an especial disadvanta&e. T+e small retailers must !e&iven ample opportunity to !e a!le to provide more personaliFed service;so t+at t+eir +i&+er costs are not duly nullified !y t+e presence of !i&supermar)ets and +ypermar)ets.



C$APTER (

IN%IAS POLICY ON F%I



India=s conscious s+ift in t+e early 1'':s from an inwardHloo)in&development strate&y to a &lo!aliFed mar)etH!ased approac+ resulted insi&nificant c+an&es in its forei&n investment policy. Till t+e 1'':s; t+e policy

was +eavily restrictive wit+ maEority forei&n eAuity permitted only in a+andful e@portHoriented; +i&+ tec+nolo&y industries. OutwardHorientedreforms radically c+an&ed suc+ perceptions wit+ forei&n investment policy!ecomin& pro&ressively li!eral followin& steady wit+drawal of e@ternalcapital controls and simplification of procedures. (na!lin& policies +averesulted in a&&re&ate forei&n investment into India increasin& from S1:3million in 1'':H'1 to S"1.$ !illion in 2::#H2::$.1 India is variouslyidentified as one of t+e most attractive lon&Hterm investment locations.2 Itcan attract muc+ lar&er forei&n investments &iven its distinct virtues of lar&edomestic mar)et; risin& disposa!le incomes; developed financial

arc+itecture and s)illed +uman resources. 7ut transformin& t+e potential toactual will depend si&nificantly upon furt+er li!eraliFation of its forei&ninvestment policy. T+is paper outlines salient aspects of India=s forei&ninvestment policy and traces t+e evolution of t+e same. It follows up wit+ acritical evaluation of t+e policy from a political economy perspective.Structurally t+e paper is divided into t+ree sections wit+ t+e first and seconddealin& wit+ features of t+e investment policy and its evolution and t+e t+irdattemptin& to outline t+e unfinis+ed policy a&enda and t+e constraints onfurt+er li!eraliFation from a political economy perspective. mitendu Palit isa visitin& researc+ fellow at t+e Institute of Sout+ sian Studies >ISS? at

t+e -ational niversity of Sin&apore >-S?. omments and feed!ac) ont+e paper may )indly !e sent to isasapVnus.edu.s& oramitenduV&mail.com. T+e views e@pressed in t+e paper are entirely personal to t+e aut+or. sual disclaimers apply.

1 Total of forei&n direct investment and forei&n portfolio investment.(stimates o!tained from t+e Handbook of Statistics on Indian Economy ;*eserve 7an) of India >*7I?; Ta!le 15'; p. 2"4. vaila!le atG+ttpG//r!idocs.r!i.or&.in/rdocs/Pu!lications/P%s/$#541.pdf Bccessed onNune 5; 2::'C.

2 O!servations from -T=s World Investment Report >2::#? and <%orei&n irect Investment onfidence Inde@= of .T. 8earney. See Foreignirect Investment inIndia: !olicies and !rocedures; ,overnment of India; p. "J availa!le atG

"#!alit/India$s Foreign Investment !olicy Operatio4al Feat:re



%orei&n investment comprises forei&n direct investment >%I? and forei&nportfolio investment >%PI?. T+e two cate&ories are conceptually distinct inseveral respects. %I represents a lon&Hterm vision and strate&iccommitment of t+e investors to t+e recipient economy. In contrast; %PI is

intrinsically s+ortHterm aimin& to ma@imiFe ris)Hreturn payoffs from capitalmar)ets. M+ile !ot+ %I and %PI are reflected in capital structures ofresident enterprises as eAuity +eld !y nonHresident entities; %I isdistin&uis+ed !y t+e investor=s desire to +old a controllin& sta)e in t+eenterprise.3 In t+is respect; forei&n investment policies of +ost economiesusually refer to %I policies wit+ operational procedures for portfolioinvestment !ein& functionally inclusive aspects of suc+ policies. India=spresent policy framewor) for inward %I was introduced !y t+e IndustrialPolicy Statement of Nuly 24; 1''1. T+e framewor) +as su!seAuentlyevolved and enlar&ed in line wit+ reforms and structural developments in

t+e economy. T+e present policy allows forei&n investors to invest inresident entities t+rou&+ eit+er t+e automatic route or t+e government%administered route. 0ost sectors and activities Aualify for t+e automatic route. T+is route allows investors to !rin& in funds wit+out o!tainin& priorpermission from t+e ,overnment; *7I; or any ot+er re&ulatory a&ency.6owever; invested enterprises are reAuired to inform *7I wit+in 3: days ofreceipt of funds and also comply wit+ documentation reAuirements wit+in3: days of issue of s+ares to forei&n investors.4 ertain investmentintentions do not Aualify under automatic route and reAuire prior permissionfrom t+e &overnment. T+ere are also sectors/activities w+ere despite !ein&

eli&i!le for automatic route; forei&n investment is su!Eect to ot+er caveats. detailed +ttpG//www.dipp.nic.in/manual/%IW0anualWatset.pdf Bccessedon Nune 2; 2::'C. 3 7ot+ I0% and O( define %I as investment for

<o!tainin& a lastin& interest !y resident entity of one economy in anenterprise t+at is resident in anot+er economy.=T+e <lastin& interest=sym!oliFes a desire to e@ert si&nificant influence in mana&erial control oft+e invested enterprise. T+e I0%=s 7alance of Payment 0anual >1''3; 5t+edition? defines a <direct investor as one ownin& 1:D or more of anenterprise=s capital.K See uce; 0. and (spana; 7. >2::3?; <efinitions of%orei&n irect InvestmentG 0et+odolo&ical -ote;= Nuly 31J See also+ttpG//www.!is.or&/ pu!l/c&fs22!de3.pdf Bccessed on Nune 1'; 2::'C 4 T+ese apply to nonHresident Indians >-*Is?; Persons of Indian Ori&in>PIOs? and Overseas orporate 7odies >O7s? as well.

"#!alit/India$s Foreign Investment !olicy

illustration of t+ese sectors and associated conditions is at ppendi@ 1. ppendi@ 1 also indicates e@tant restrictions on de&ree of forei&n

http://www.bis.org/

http://www.bis.org/

http://www.bis.org/



investment permitted in various sectors. T+ou&+ almost all ofmanufacturin& is fully open to forei&n investment; limitations on e@tent offorei&n owners+ip >measured !y proportion of eAuity capital !elon&in& tononHresident entities? prevail in several services. 0ost of India=s a&riculture

is closed to forei&n investment; w+ile it is pro+i!ited in atomic ener&y;lottery !usiness; &am!lin& R !ettin& and retail tradin& >e@cept sin&leH!randretailin&?. T+e present policy permits forei&n investors to colla!orate wit+local partners as well as esta!lis+ w+olly owned su!sidiaries >MOSs?. 7ot+

Eoint ventures and MOSs can !e incorporated as resident enterprises under t+e Indian ompanies ct >1'5"?. %orei&nHowned enterprises can also !eunincorporated entities suc+ as liaison/proEect/!ranc+ offices. ommercialscopes of unincorporated entities; +owever; are narrower compared to t+eir incorporated counterparts.5 India does not restrict repatriation ofinvestments; dividends and profits. -onHresident investors can dispose

eAuity s+ares wit+out prior &overnment permission. T+ey are also allowedto purc+ase immova!le property in India after acAuirin& permission fordoin& !usiness as incorporated/unincorporated entities." Suc+ acAuisition;+owever; needs to !e !rou&+t to t+e notice of t+e *7I wit+in ': days.%urt+ermore; accordin& to t+e %orei&n (@c+an&e 0ana&ement ct >%(0?of 2:::; acAuired property cannot !e transferred wit+out permission of*7I.# Ot+er t+an fundin& new ventures; forei&n investors can acAuiresta)es in e@istin& resident companies. (Auity transfer from residents tononHresidents in suc+ instances of mer&ers and acAuisitions >0R? isusually permitted under t+e automatic route. 6owever; if t+e 0Rs are in

sectors and activities reAuirin& prior &overnment permission >ppendi@ 1?t+en transfer can proceed only after suc+ permission. T+e forei&ninvestment policy offers some additional !enefits to e@patriate Indianinvestors >-*Is; PIOs and O7s?$ includin& permission to invest moret+an t+e prescri!ed forei&n eAuity ceilin&s in specific sectors suc+ asdomestic sc+eduled passen&er airlines; &round +andlin& and car&oservices w+ere e@patriates can invest up to 1:: percent under t+eautomatic route as opposed to nonH5 iaison and proEect offices cannotcarry out e@clusive commercial activities e@cept for facilitatin& e@portHimport!usiness; tec+nical/financial colla!orations and activities incidental toproEects. 7ranc+ offices; !esides actin& as !uyin&/sellin& a&ents of parentcompanies; can render consultancy services and researc+ wor). Source isas cited in 3 a!ove; p. 24H25. " iaison offices cannot acAuire immova!leproperty. # *efer -otification -o. %(0 21/2:::H*7 dated 0ay 3; 2:::. $ompanies or ot+er entities owned directly or indirectly to t+e e@tent of atleast ": percent !y -*Is. e@patriate investment ceilin& of 4' percent.'



(@patriate investors also enEoy more li!eral facilities wit+ respect to transfer of immova!le property acAuired in India.S+ortHterm portfolio investors;primarily forei&n institutional investors >%IIs?1:; can invest in eAuity s+aresand converti!le de!entures of resident enterprises. T+ey; +owever; need to

re&ister wit+ t+e Securities and (@c+an&e 7oard of India >S(7I? H India=scapital mar)et re&ulator. %IIs can split capital portfolios in #:G3: ratios!etween eAuity and de!t. T+ou&+ t+ey can transact on notified stoc)e@c+an&es wit+out prior permission of *7I; individually; t+ey cannot ownmore t+an 1: percent eAuity in paidHup capitals of Indian enterprises; w+ilea&&re&ate %II +oldin& is capped at 24 percent. In t+is respect; t+e forei&ninvestment policy s+ows a clear preference for lon&erHterm %I; w+ic+ isallowed up to 1:: percent in most areas; rat+er t+an s+ortHterm portfolioflows. Small scale enterprises11 can attract %I up to 24 percent of t+eir total capital. 6i&+er levels of forei&n eAuity reAuire t+e enterprises to

surrender t+eir <small= status. Small enterprises cannot remain <small=even if <nonHsmall= domestic investors pic) up more t+an 24 percent of t+eir capitals. %orei&n investors see)in& more t+an 24 percent eAuity+oldin& in enterprises manufacturin& items reserved for small industriesreAuire prior &overnment approval. Infusion of suc+ eAuity also reAuires t+esmall enterprise to o!tain an industrial license for continuin& to produceitems reserved for small industries. Investin& in Special (conomic ones>S(s? attracts a slew of incentives for forei&n investors wit+ suc+investments e@empt from practically all ta@es; includin& t+ose on e@portprofit; capital &ains; dividend distri!ution as well as customs duties on

imported &oods and local e@cise. In addition; investments in specificse&ments of infrastructure suc+ as roads; airports; seaports; inlandwaterways;sanitation and sewa&e systems; solid waste mana&ement;electricity &eneration; transmission R distri!ution and +ousin& and +ospitaldevelopment are eli&i!le for full incomeHta@ e@emptions. India +as dou!leta@ avoidance a&reement >T? wit+ "' countries ena!lin& forei&ninvestors to c+oose t+eir preferred ta@ation turfs.

' Press -ote # >2::$?; epartment of Industrial Promotion and Policy>IPP?;,overnment of India. vaila!le atG +ttpG//siadipp.nic.in/policy/

c+an&es.+tm Bccessed on Nune 3; 2::'C.1: %IIs include asset mana&ement companies >0s?; pension and mutual funds;investmenttrusts; endowment foundations; university funds; c+arita!le trusts andsocieties. %urt+er details on portfolio investment sc+eme are availa!le atsource cited in 3 a!ove; p. 32H33.11 n enterprise w+ose investment inplant and mac+inery does not e@ceed *s 1: million.



(01'ra7:al E=ol:tio4

India=s approac+ to forei&n investment durin& t+e 1'5:s and 1'":s was

cautiously pra&matic. It was ensured t+at owners+ip and enterprise controlremained primarily wit+ resident investors. Mit+in suc+ limitations; forei&ninvestment was sou&+t to !e utiliFed in a manner !eneficial for t+eeconomy. T+e official position on forei&n investment was articulated in astatement12 made to t+e onstituent ssem!ly on pril "; 1'4'; !yNawa+arlal -e+ru. %orei&n capital was reco&niFed as an importantsupplement to domestic savin&s for facilitatin& national economic andtec+nolo&ical pro&ress. %orei&n investors were allowed full freedom of repatriation wit+ t+e assurance of compensation in t+e unforeseen event of nationaliFation. %orei&n investment proposals; +owever; were sanctioned

only after careful scrutiny necessitated !y India=s fra&ile !alance of payments >7OP? and scarce forei&n e@c+an&e reserves. ut+orities did notwis+ to a&&ravate 7OP difficulties &iven t+e unconditional assurance of repatriation and forei&n investment t+erefore was c+anneliFed mostly into

<essential= industries. T+e ti&+t monitorin& ensured t+at t+ere was +ardlymuc+ %I in t+e economy >e@cept in t+e oil sector? till t+e middle of t+e1'5:s. T+e situation c+an&ed from India=s 2nd %iveH9ear Plan >1'5"H 1'"1?t+at awarded +i&+ priority to rapid industrialiFation. T+e Industrial Policy*esolution >IP*? of 1'5" emp+asiFed on increasin& tec+nolo&icalcapa!ilities of indi&enous industry for producin& +i&+Auality capital;

intermediate and consumer &oods. T+e t+rust on tec+nolo&ical selfHrelianceincreased t+e importance of %I wit+ t+e latter e@pected to !e a )eyconduit for transfer of advanced tec+nolo&y. t t+e same time; w+ile forei&ne@c+an&e difficulties +ad earlier forced rationin& of %I; a&&ravation of t+esame difficulties increased its acceptance13; as it was realiFed t+at forei&ne@c+an&e resources were inadeAuate for importin& lar&eHscale mac+ineryand eAuipment for domestic industry. %orei&n investment !e&an to !e12See II >1'"5?; India Welcomes Foreign Investment !y India Investmententre 13 8idron; 0. >1'"5?; Foreign Investments in India; O@fordniversity Press >OP?;ondon.encoura&ed wit+ fiscal incentives14 durin&t+e late 1'5:s and 1'":s wit+ forei&n capital also allowed in industriesreserved e@clusively for t+e pu!lic sector.15 T+e 1'#:s )ic)ed off aninwardHloo)in& p+ase t+at led to forei&n investment &ettin& +eavilyre&ulated. T+e scope of forei&n investment was not only confined toindustries reAuirin& sop+isticated tec+nolo&y; !ut was accompanied !y adeli!erate attempt to divert %I from consumer &oods to capital and



intermediate &oods.1" *estrictin& %I was a part of efforts aimin& toe@tend state control in various sectors of t+e economy and was consistentwit+ promul&ation of restrictive le&islations suc+ as 0onopolies and*estrictive Trade Practices >0*TP? ct >1'"'?; t+e Patent ct >1'#:? and

allied measures suc+ as nationaliFation of !an)s; insurance companies andcoal mines.T+e Industrial Policy *esolution >IP*? of 1'#3 limited forei&nparticipation to e@portHoriented industries t+at were strate&ically importantfor lon& term &rowt+ prospects of t+e country. T+e most restrictive controlswere enforced t+rou&+ t+e %orei&n (@c+an&e *e&ulation ct >%(*? of 1'#3. %(* consciously discriminated !etween domestic and forei&ninvestors ma)in& it mandatory for !ranc+es and su!sidiaries of forei&nfirms to convert forei&n eAuities to minority +oldin&s.1# T+ere were;+owever; some e@ceptions suc+ as predominantly e@portHoriented firms; or t+ose producin& items reAuirin& sop+isticated tec+nolo&y. 7ut even t+ese

firms +ad to fulfill e@port o!li&ations !y e@portin& certain minimum parts of t+eir annual turnovers. T+e Industrial Policy *esolution >IP*? of 1'##furt+er indicated industries w+ere no forei&n colla!oration >financial or tec+nical? was considered necessary. %orei&n companies; w+ic+ +adalready diluted forei&n owners+ip to 4: percent or less in line wit+ t+e%(*; were assured treatment on par wit+ t+eir Indian counterparts.6owever; despite imposition of suc+ sweepin& controls; it is notewort+y t+atno restrictions were imposed on remittance of profits; royalties; dividendsand repatriation of capital. T+e year 1''1 mar)ed a )ey transition in India=sforei&n investment policy. T+e transformation was induced !y t+e

&overnment=s decision to encoura&e sta!le nonHde!t creatin& lon&H 14T+ese included concessional rates of dividend ta@ for forei&n investors andlowerin& of ta@es on tec+nical service fees and income from royalties. 15P+illips Petroleum of S +ad a minority sta)e in oc+in *efinery td. L apu!lic sector underta)in&. T+e International Telep+one and Tele&rap+sorporation of t+e S also colla!orated wit+ t+e ,overnment in a similar manner for manufacturin& telep+one eAuipment. See II >1'"5?; p. '. 1"0artinussen; N. >1''$?; &ransnational Corporations in a eveloping Country: &'e Indian E(perience; -ew el+i; Sa&e. 1# Section 2' of %(*dealt wit+ !ranc+es of forei&n companies in India and Indian Eoint stoc)companies +avin& forei&n participation. T+e %(* stipulatedG 1. 7ranc+esof forei&n companies were to convert to Indian companies wit+ minimum":D eAuity participation. 2. Su!sidiaries of forei&n companies were toreduce forei&n eAuity to 4:D or less. term capital flows as a maEor sourceof funds for supplementin& domestic savin&s. T+is was a si&nificantdeparture from t+e overt reliance on de!tHcreatin& flows durin& t+e 1'#:s



and 1'$:s. Suc+ reliance was instrumental in creatin& structuralim!alances in t+e economy t+at manifested in a serious !alance of payments crisis in 1''1. T+e crisis precipitated a paradi&matic s+ift in t+epolicy perspective on future development of t+e country resultin& in reforms

aimin& to move away from a ri&idly controlled; inwardHloo)in&;statedominated economic framewor) to a decontrolled; outwardHorientedand mar)etHfriendly system. T+e positive outloo) towards %I was a )eypart of t+is s+ift. T+e forei&n investment policy for a reformin& Indianeconomy was articulated in t+e new industrial policy announced on Nuly 24;1''1. T+e latter differed si&nificantly different from its predecessors in itsemp+asis on private entrepreneurs+ip. (ntry !arriers to private participationin different industries were sou&+t to !e removed !y reducin& t+e scope of industrial licensin&; restrictin& t+e pu!lic sector to areas of vital nationalimportance; and wit+drawin& several pro+i!itions under t+e 0*TP ct of

1'"'; w+ic+ constrained e@pansion of industrial investment. T+e industrialpolicy allowed forei&n investment in t+irty five +i&+Hpriority industries w+ileremovin& several procedural controls on inflow of %I.1$ T+e policyintroduced t+e <automatic= route for %I. Sectors opened to %I includedalmost t+e entire &amut of mac+ineries >e.&. ru!!er; printin&; electrical;industrial and a&ricultural?; processed food; oil e@traction; cement;metallur&ical industries; c+emical; ceramics; paper; fi!res; p+armaceuticals;fertiliFers; automo!iles R auto components; electrical eAuipment;+otels Rtourism and software.1' T+e t+rust was clearly on attractin& forei&n capitaland tec+nolo&y in lar&e se&ments of manufacturin& wit+ %I in services

remainin& restricted to tourism and software.(asy entry of forei&n capital innotified industries was accompanied !y some limitin& restrictions. %orei&nowners+ip was capped at a ma@imum of 51 percent of enterprise capital.

utomatic approval was contin&ent upon t+e proposed forei&n eAuitycoverin& t+e forei&n e@c+an&e reAuirement for imported capital &oods. 1$

<Statement on Industrial PolicyK; Nuly 24; 1''1; para&rap+ 1.25 asreproduced in Handbook of Industrial !olicy and Statistics >2::"H2::#?;Office of (conomic dviser; 0inistry of ommerce and Industry;,overnment of IndiaJ p. "J availa!le atG+ttpG//eaindustry.nic.in/2::$W+andout.+tm Bccessed on Nune 2; 2::'C.

1' Press -ote -o. 1: >1''2 series?; IPP; ,overnment of IndiaJ pp. ":H$1J vaila!le atG +ttpG//siadipp.nic.in/policy/c+an&es.+tm Bccessed on Nune 2;2::'C. "#!alit/India$s Foreign Investment !olicy

%urt+ermore; companies receivin& automatic approval for %I up to 51percent were reAuired to <!alance= t+eir dividend payments !y e@portearnin&s over a period of seven years.2: (ntry of forei&n investment was



streamlined in two distinct c+annels. part from t+e automatic route; anempowered 7oard was set up for ne&otiatin& wit+ investors and approvin&investments in select areas. T+is !oard Lt+e %orei&n Investment Promotion7oard >%IP7? L administers t+e &overnment c+annel of forei&n

investments.21 Su!seAuent developments in %I policy +ave focused onalterin& t+e scale and scope of forei&n investment !etween t+ese tworoutes. Since 1''1; %I policies and procedures +ave !een pro&ressivelyrela@ed at different points in time. maEor policy revamp occurred in%e!ruary 2:::. T+e automatic route was si&nificantly e@panded to ma)e%I in all items/activities eli&i!le for t+e route e@cept a wellHdefined

<ne&ative list=. T+e latter included industries reAuirin& licenses under t+eIndustries >evelopment and *e&ulation? ct of 1'51 and in terms of locational policy reAuirements of t+e Industrial Policy of 1''1; proposalsinvolvin& %I +i&+er t+an 24 percent of eAuity in smallHscale enterprises;

instances w+ere forei&n colla!orator +ad previous venture/tieHup in India;cases relatin& to acAuisition of s+ares in resident Indian companies in favor of forei&n/-*I/O7 investors and all proposals fallin& outside notifiedsectoral policy/caps relatin& to t+e automatic route; or in sectors w+ere %Iwas not permitted. T+e <ne&ative list= proposals were to !e e@amined !y%IP7. i!eraliFation of %I policies +as !een a part of reforms aimin& toremove controls on industrial output. )ey reform in t+is re&ard +as !eenreduction of t'e scope of t'e public sector . India=s industrialiFation durin&t+e first four decades of its planned development was led !y t+e pu!licsector. Pu!lic enterprises dominated t+e !asic and +eavy se&ments of

manufacturin& >e.&. steel; cement and coal?. M+ile consumer &oods andintermediates +ad siFea!le presence of small and medium privateenterprises; )ey services >e.&. electricity; telecommunication; roadtransport; aviation;s+ippin&; !an)in&; insurance? were monopoliFed !y statea&encies. (ffective entry of forei&n investors in t+e Indian economy wasinconceiva!le till t+e scope of t+e pu!lic sector was reduced and privateenterprise allowed to fill up t+e vacuum. T+e Industrial Policy of 1''1limited pu!lic sector monopoly to only ei&+t activities w+ile 2: Source is ascited in 1$ a!oveJ pp. 15H1". 21 T+e %IP7 is located in t+e epartment of (conomic ffairs; 0inistry of %inance.T+e 7oard includes Secretaries of t+eepartment of (conomic ffairs; epartment of Industrial Policy RPromotion; epartment of ommerce; epartment of (conomic *elations;0inistry of (@ternal ffairs and 0inistry of Overseas ffairs. T+e 7oard isc+aired !y t+e Secretary; epartment of (conomic ffairs. Source is as in 3a!oveJ freein& up t+e rest. 22 Su!seAuently state monopoly +as!eencramped to only sectors of strate&ic importance suc+ as atomic



ener&y. Private initiative and forei&n investment +as !een allowed in mostof t+e erstw+ile domain of t+e pu!lic sector includin& <sensitive= se&mentssuc+ as defense; insurance; petroleum R natural &as.Industrial licenseswere widely perceived as critical entry !arriers for private enterprise. It was

evident t+at mere openin& up of t+e economy to forei&n investment wasunli)ely to see suc+ investment materialiFin& unless entry !arriers wereremoved. T+us w+ile limitin& t+e pu!lic sector increased potential forcompetition; )it'dra)al of licenses facilitated competition. T+e IndustrialPolicy of 1''1 confined mandatory licensin& to 1$ manufacturin&industries. T+ese included minerals and natural resourceH!asedproducts;c+emicals; alco+olic !evera&es; to!acco and consumer dura!les.23icensin& continued even in some +i&+Hpriority industries made eli&i!lefor %I up to 51 percent t+rou&+ automatic route >e.&.p+armaceuticals andautomo!iles?. T+ese were; +owever; freed soon after. M+ile automo!iles

were deHlicensed in pril 1''3; most !ul) dru&s and formulations werefreed from licensin& in 1''4.24 T+e measures +ave yielded dividends wit+leadin& &lo!al automo!ile assem!lers >e.&. 7enF; 6onda; 6yundai; Toyota?settin& up production facilities in India and t+e p+armaceutical R!iotec+nolo&y industries witnessin& entry of maEor &lo!al players suc+ as,la@oSmit+8line; (li ily; 0onsanto and Moc)+ardt. Pro&ressive deHlicensin& +as resulted in licensin& now !ein& confined to five activitiesGalco+olic !evera&es; electronic aerospace and defense eAuipment;ci&arettes R to!acco; industrial e@plosives and +aFardous c+emicals.25%I is permitted in t+ese industries; t+ou&+ proposals for manufacture of

ci&arettes and defense eAuipment reAuire clearance from t+e %IP7; w+ilet+e remainin& is eli&i!le for t+e automatic route. T+e industrial policy of1''1 Eustified entry of forei&n investment !y citin& t+e intrinsic virtues of%I suc+ as advanced tec+nolo&y; proven mana&erial e@pertise andmodern mar)etin& 22 T+ese areas were arms R ammunition; atomicener&y; coal and li&nite; mineral oils; minin& of iron and man&anese; minin&of copper; lead; Finc and tin; minerals specified in t+e Sc+edule to tomic(ner&y and railway transport.23 oal R li&nite; petroleum; alco+olic drin)s;animal fats R oils; su&ar; ci&arettes R to!acco; as!estos; plywood andot+er woodH!ased products; raw +ides R s)ins R leat+er; tanned anddressed fur s)ins; motor cars; paper and newsprint; electronic aerospaceand defense eAuipment; industrial e@plosives; +aFardous c+emicals; dru&sR p+armaceuticals; (ntertainment electronics >e.&. television; taperecorders?; w+ite &oods >refri&erators; was+in& mac+ines; microwaveovens; air conditioners etc?. See nne@ II; Press -ote -o. ' >1''1 series?;



IPP; ,overnment of India; availa!le atG+ttpG//siadipp.nic.in/policy/c+an&es.+tm Bccessed on Nune 3; 2::'C.24 Press -ote -o. 5 >1''"? series; IPP; ,overnment of IndiaJ Source asin 23 a!ove. 25 Source is as cited in 3 a!ove; p. 14. tec+niAues.2" -ew

e@port possi!ilities were also underlined as one of t+e li)ely spinHoffs fromsuc+ investment. It was t+erefore natural t+at %I !e initially allowed only insectors w+ere advanced tec+nolo&y and ot+er attri!utes could ma)e asi&nificant difference to industrial capacities and competitiveness; !ot+ indomestic and overseas mar)ets. 0ore industries +ave !een su!seAuentlyopened to %I. lmost t+e entire sweep of manufacturin& ran&in& from!asic and capital &oods to intermediates and consumer dura!les are nowopen to forei&n investment. 7ut t+e acrossHt+eH!oard openin& up inmanufacturin& +as not !een accompanied !y similar moves in services anda&riculture. Over time India=s forei&n investment policy +as steadily

enlar&ed t+e scope of forei&n owners+ip in resident enterprises. T+e 1''1policy made a rat+er cautious !e&innin& in t+is respect; w+ic+ was fully insync wit+ t+e cali!rated approac+ c+aracteriFin& India=s economic reforms.Mit+ %I ceilin& froFen at 51 percent; forei&n investors; w+ile aspirin& to!ecome maEority sta)e+olders; +ad to still +ave local partners and could notesta!lis+ MOSs. %orei&n eAuity remained capped at 51 percent for Auite afew years and it was only in Nanuary 1''# t+at nine industries were allowedto increase %I to #4 percent2# under t+e automatic route. T+e !ul) of t+ee@panded list comprised services includin& minin&; electricity &enerationand transmission; nonHconventional ener&y &eneration and distri!ution;

construction; land transport; water transport; stora&e and ware+ousin&.Only two industries L !asic metals R alloys and ot+er manufacturin&industries L were manufacturin&. In a si&nificant move; 1:: percent forei&nowners+ip under automatic route was allowed in electricity &eneration;transmission; and distri!ution in Nune 1''$. 6owever; t+e proEects werecapped at a ma@imum of *s 15 !illion >appro@imately S3:: millionV1S*s 5:?. Mit+in less t+an a year in Nanuary 1'''; proEects for construction and maintenance of roads; +i&+ways; ve+icular !rid&es; tollroads; ve+icular tunnels; ports and +ar!ours were permitted 1:: percent%I under automatic route su!Eect to same limitations on siFe.2$Permission of full forei&n owners+ip underlined t+e ur&ency of invitin&funds in India=s infrastructure. Since t+en; almost all manufacturin&activities and several services +ave !een allowed to access 1:: percent%I under automatic route. T+e &radual ease of entry ena!led to forei&ninvestors t+rou&+ t+e automatic route mar)s anot+er )ey reform in India=sforei&n investment policy. T+e automatic route is a simpler route t+an t+e



&overnmentHadministered >%IP7? process 2" Source is as cited in 1$a!ove; p. 11. 2# Press -ote -o. 2 >1''# series?; IPP; ,overnment of IndiaJ Source is as cited in 23 a!ove. 2$ Press -ote -o. 1 >1''' series?;IPP; ,overnment of India. Source is as cited in 23 a!ove. acAuirin& prior

permission !efore t+e investor can !rin& in funds; t+ere are moreprocedures involved entailin& &reater transaction costs. %or almost adecade; +owever; t+e scope of t+e automatic route remained relativelyrestricted. It is interestin& to note t+at t+ou&+ !ul) dru&s fi&ured in

nne@ure III of t+e industrial policy of 1''1; w+ic+ specified industrieseli&i!le for %I under automatic route; investment proposals in dru&scontinued to !e &uided !y restrictive provisions of t+e ru& Policy of 1'$".It was only in Octo!er 1''4 t+at %I in !ul) dru&s; intermediates andformulations were &ranted automatic approval.2' T+e covera&e of t+eautomatic route remained restricted till Nanuary 1''#; w+en t+irteen new

industries were permitted %I up to 51 percent under automatic route.3:(ase of entry for forei&n investors were &reatly e@panded in %e!ruary2:::31 wit+ %I in all industries c+anneliFed to t+e automatic route !arrin&activities attractin& provisions of t+e <-e&ative ist= mentioned earlier. T+escopes of t+e -e&ative ist and intervention !y %IP7 +ave narrowed over time. 0uc+ of t+e contraction +as come from increases in %I limits for automatic route as well as wider structural facilitations. )ey step in t+isrespect +as !een simplification of rules relatin& to forei&n investment ininstances w+ere t+e investor +ad a previous tieHup wit+ a local partner.%orei&n investors wit+ previous tieHups were reAuired to Eustify w+y t+e new

venture will not !e inEurious to t+e e@istin& colla!oration.32 T+e currentrules specify t+e onus of Eustification on !ot+ t+e forei&n investor as well ast+e local partner. ll proposals of t+is nature now Aualify under t+eautomatic route unless t+e proposed venture is e@actly in t+e <same= field.

33 T+e %IP7 is also no lon&er reAuired to decide on proposals pertainin& totransfer and acAuisition of resident s+ares !y nonresidents wit+ t+e processnow !ein& dele&ated to t+e automatic route. 34 Indeed; e@cept for se&ments w+ere %I +as eAuity caps >ppendi@ 1? and t+e narrowlydefined premise of new ventures in 2' Press -ote -o. 4 >1''4 series?;

IPP; ,overnment of India. Source is as cited in 23 a!ove. 3: Same as in2# a!ove. 31 Press -ote -o. 2 >2::: series?; IPP; ,overnment of India.Source is as cited in 23 a!ove. 32 Press -ote no. 1$ >1''$ series?J IPP;,overnment of India. Source is as cited in 23 a!ove. 33 Press note no. 1>2::5 series?J IPP; ,overnment of India. Source is as mentioned in 1'a!ove.34 Press note -o. 4 >2::" series?J IPP; ,overnment of India.Source is as mentioned in 23 a!ove. 6owever; %IP7=s approval is reAuired



for transfer of s+ares in sectors w+ere %I is not permitted up to 1::Dunder automatic route >ppendi@ 1?. %or all t+ese industries; %IP7 approvalis reAuired in instances w+ere an Indian company is !ein& incorporatedwit+ forei&n funds and suc+ a company is eit+er owned/controlled !y nonH

resident entities; or w+ere owners+ip/control of Indian companies restin&wit+ resident Indian entities is !ein& transferred to nonHresident entities onaccount of mer&er; amal&amation or acAuisition. Press -ote -o. 3 >2::'series?; IPP; ,overnment of India. Source a&ain is as in 23 a!ove. fieldsw+ere investors +ave e@istin& colla!orations; t+e %IP7=s role is confined tocases w+ere investment proposals involve more t+an 24 percent eAuity insmall enterprises.

The U43i4ihe7 Age47a

India=s present forei&n investment policy facilitates easy entry of forei&n

capital in most areas su!Eect to specific limits on e@tent of forei&nowners+ip. (ntry options +ave not only !ecome procedurally simpler; !utprospects for +i&+er yields from investment +ave also !ecome !ri&+ter wit+wit+drawal of restrictive provisions suc+ as !alancin& dividend payouts !ye@ports. In +indsi&+t; t+e !alance of payments crisis in 1''1 left little optionfor India ot+er t+an adoptin& an accommodatin& policy towards forei&ninvestment. T+e crisis was lar&ely a result of t+e economy=s +eavy relianceon +i&+Hcost e@ternal de!t for financin& !alance of payments deficits. M+ile+efty inflows of concessional assistance covered t+ese deficits durin& t+e1'5:s; 1'":s; and 1'#:s; non concessional loans on mar)et terms were

t+e main sources of finance durin& t+e 1'$:s leadin& to s+arp increase inde!tHservice o!li&ations.35 T+e imperative for t+e economy was to ur&entlyreduce reliance on de!t flows in favour of sta!le; nonHde!t capital li)e %I.T+e importance of forei&n investment in revitaliFin& t+e economy also fittedwell wit+ t+e spirit of mar)etHoriented economic restructurin& initiated fromearly 1'':s. li!eral forei&n investment policy was consistent wit+simultaneous measures aimin& for &reater inte&ration wit+ t+e worldeconomyG removal of import restrictions; introduction of a mar)etH!asede@c+an&e rate mana&ement system; converti!ility of t+e Indian *upee in

t+e current account of t+e !alance of payments; p+ased wit+drawal of restrictions on capital account transactions and replacement of %(*>1'#3? !y t+e %orei&n (@c+an&e 0ana&ement ct >%(0? of 2:::.3"T+ou&+ %I inflows +ave responded positively to policy c+an&es !yincreasin& from S '# million in 1'':H1''1 to S 32.4 !illion in 2::#H2::$; t+ey mi&+t +ave !een muc+ more +ad forei&n investment not !een



re&ulated in some )ey areas. ctivities promisin& +i&+ returns oninvestment yet !ein& of a strate&ic nature35 Nalan; 7. >1''2?; Introduction ; in Nalan; 7. >ed.?;‖ &'e Indian Economy:!roblems and !rospects; -ew el+i; i)in&. 3" %(0 >2:::? +as replaced

%(* >1'#3? from Nune 1; 2:::. nder %(0 >2:::?; t+ere are no restrictionson current account transactions involvin& forei&n e@c+an&e. apital accounttransactions >e.&. investment !y nonHresident entities in India and investment!y Indian entities a!road? continue to !e re&ulated !y t+e *7I. %(0indicates a move away from a re&ulatory arran&ement in t+e Indian forei&ne@c+an&e mar)et to a mana&ement mec+anism.

"#!alit/India$s Foreign Investment !olicy

>e.&. telecommunications; defense production; !roadcastin&; print mediaand satellite operations? +ave limitations on forei&n owners+ip and reAuire&overnment sanctions. Suc+ concerns; +owever; s+ould not apply to

a&riculture. -onet+eless forei&n investment can only !e in a few valueHadditive a&ricultural activities li)e aAuaculture; floriculture; pisciculture;+orticulture; development of seeds; animal +us!andry and cultivation of ve&eta!les and mus+rooms. M+ile t+ese are eli&i!le for 1:: percent %Iunder automatic route; investment in tea plantations is re&ulated !y t+e%IP7 and is su!Eect to t+e restrictive condition of divestment of eAuity infavour of local partners >ppendi@ 1?. losed policies for %I in a&riculturecan partly !e e@plained on account of t+e latter fi&urin& primarily inadministrative domains of states. rticle 24" in t+e Sevent+ Sc+edule of t+eIndian onstitution divides responsi!ilities !etween t+e central &overnment>nion ist?; state &overnments >State ist? and Eointly !etween centre andstates >oncurrent ist?. T+is vests a&riculture; water; and land wit+states3# ena!lin& state &overnments to frame t+eir own policies in t+esesu!Eects. On t+e ot+er +and; e@ternal trade R commerce and industries restwit+ t+e central &overnment. T+e onstitutional separation of responsi!ilities implies t+at framin& an overarc+in& forei&n investmentpolicy in a&riculture reAuires close coordination !etween individual states;as well as !etween t+e centre and states.Suc+ coordination is difficult toac+ieve in a lar&e and comple@ federal administrative setHup li)e India=s. In

addition; forei&n investment in )ey a&ricultural activities suc+ asprocurement is not possi!le unless individual states reform t+eir mar)etin&and procurement policies.T+e fate of forei&n investment in India=sa&riculture will depend upon political mana&ement of domestic sensitivities.Several se&ments of India=s a&riculture remain protected from imports. T+isinwardHloo)in& attitude seems to +ave influenced t+e outloo) towardsforei&n investment as well. Potential welfare &ains >or losses? associated



wit+ &reater mar)et access to imports in a sector providin& liveli+ood toaround twoHt+ird of t+e country=s population >despite contri!utin& only 1#percent of national output? is de!ata!le. -onet+eless; resistance to mar)etaccess and antipat+y to forei&n investment +as overloo)ed t+e positive

difference w+ic+ suc+ investment can ma)e to a&ricultural productivity andinfrastructure. 7ut &iven t+e political sensitivity associated wit+ impacts of economic policies on farmin& liveli+oods; a circumspect approac+ toforei&n &oods and capital loo)s set to prevail in t+e foreseea!le future.Service reforms +ave pro&ressed far slowly t+an t+ose in manufacturin&.Pu!lic services in India were state monopolies for decades. (ven now; railtransport; electricity &eneration; airports . 3# Sevent+ Sc+edule >rticle24"? of t+e onstitution of India; availa!le atG+ttpG//indiacode.nic.in/coiwe!/fullact1.aspQtfnm::D2:51 seaports;!an)in& and insurance +ave overarc+in& state presence. Openin& up most

services to forei&n investment +ad to !e preceded !y domestic reformsena!lin& private entry and competition. Suc+ reforms too) considera!letime in sectors li)e electricity and telecommunication due to effortsreAuirin& esta!lis+ment of independent re&ulators for creatin& appropriateincentive structures for private investment. Mit+ t+e e@ception of telecommunications; re&ulatory framewor)s for most pu!lic services arestill tryin& to come to terms wit+ t+e comple@ c+allen&es arisin& fromnascent &rowt+ of competition in +istorically controlled territories. ecisionsrelatin& to removal of industrial licenses and entry of forei&n investment inmanufacturin& could !e ta)en relatively easily since !ot+ fi&ured under t+e

operational purview of t+e IPP in t+e 0inistry of Industry. 6owever; forei&ninvestment decisions in services entailed e@tensive consultations !etweenIPP and individual ministries in c+ar&e of specific services addin& todelays in arrivin& at decisions. T+ou&+ t+e IPP notifies policies on forei&ninvestment in services; investment &uidelines are usually accompanied !yspecifications issued !y nodal ministries. %I in power and airports; for e@ample; despite !ein& allowed up to 1:: percent under automatic route issu!Eect to provisions of t+e (lectricity ct of 2::3 and departmentalre&ulations of t+e 0inistry of ivil viation respectively.Slow pro&ress indomestic reforms in competition and re&ulation +as resulted in %Iremainin& restrictive in several services. T+ese include domesticpassen&er airlines; %0 radio and ca!le networ) services; pu!lis+in& of newspapers and retail tradin& >e@cept sin&le !rand?3$. 6owever; inservices suc+ as telecommunication and t+e internet; minin&; roadtransport; electricity and nonHpassen&er aviation services; %I policies aremore li!eral >ppendi@ 1?. (ner&y; road transport and minin& were amon&

http://indiacode.nic.in/coiweb/fullact1.asp?tfnm=00%2051





t+e earliest to !e opened up to forei&n investment on account of pressin&investment needs for au&mentin& capacities. Mit+in financial services; li!eralpolicies for nonH!an)in& services are accompanied !y relatively restrictivere&ulations in insurance and !an)in&. India=s forei&n investment re&ime +as

e@perienced a &radual pace of li!eraliFation in line wit+ t+e caution andcali!ration c+aracteriFin& India=s economic reforms. T+e latter +ave never !een overly a&&ressive. 0easures to decontrol and introduce competition+ave usually !een accompanied !y conditions aimin& to temper t+e initialintensity of suc+ competition. T+e earliest efforts to invite forei&n capital inNuly 1''1 were accompanied !y t+e dividend !alancin& condition. T+econdition of forei&n eAuity coverin& forei&n e@c+an&e reAuirements for importof capital &oods L applica!le to automatic approvals for 51 percent %I in+i&+Hpriority industries L was wit+drawn muc+ later. Similar moves in t+e later years pertain to 3$ -*Is can invest up to 1:: percent in sc+eduled domestic

passen&er airlines. limitation on proEect siFes in electricity and road transportdespite allowin& 1:: percent %I and minimum capitaliFation norms for non!an)in& financial companies >-7%s?. T+e caveats reflect caution arisin&from concerns over maintainin& sta!le levels of forei&n e@c+an&e reserves aswell as avoidin& mar&inaliFation of domestic producers in different se&ments.ali!rated policy moves +ave !een aimed at assua&in& political opposition aswell. Introduction of economic reforms &enerated intense de!ates in aneconomy accustomed to decades of controls and planned development.ontrols +ad produced pressure lo!!ies enEoyin& political patrona&e and

influence. Opposition to reforms were spear+eaded !y t+ese se&ments; w+ic+included domestic producers !enefittin& from +i&+ import tariffs and entry!arriers li)e industrial licensin&. Indeed; early moves to open upmanufacturin& to %I evo)ed a c+orus of protests from many of India=sleadin& industrialists L popularly c+ristened t+e <7om!ay lu!= L demandin&a <level playin& field= !etween domestic and forei&n investors.3' In t+e yearst+at followed; t+ere were attempts to e@ploit t+e emotive

<imperial= aspect of forei&n investment !y +i&+li&+tin& its alle&edly adverseeffects on indi&enous producers and industries. &itations a&ainst forei&ninvestment wit+ pronounced nationalistic +ues and ar&uin& for discrimination !etween domestic and forei&n investors were led !yor&anisations li)e t+e Swades+i Na&aran 0anc+ >SN0?. T+e SN0 was !ornin t+e early 1'':s in response to India=s efforts to &lo!aliFe and isdedicated to fi&+tin& economic <imperialism= for protectin& indi&enousindustries. On t+e ot+er +and; t+e eft parties >e.&. ommunist Party of India >PI? and t+e ommunist Party of India >0ar@ist? >PIH0? +ave !een



eAually +ostile to forei&n investment. T+eir opposition stems from antipat+yto private investment per se and is an e@tension of t+e <infant industry=ar&ument defendin& importHsu!stitution and protectionist policies. Politicalopposition to %I +as +ad a sym!iotic association wit+ interest &roups wit+

eac+ tryin& to support t+e ot+er on common &rounds. In telecom andfinance; sta)e+olders earnin& rents from monopolistic <virtues= could +ardly!e e@pected to support competition; private entry and forei&n investment.T+ese specifically include employee federations affiliated to mainstreampolitical parties and representin& interests of India=s overHprotectedor&aniFed sector wor)ers.4: Suc+ &roups are still active and resistante@plainin& w+y 3' See a? 7oAuerat; ,. >2::3?; <Swades+i in t+e T+roes of i!eraliFation;= in andy; %.and +aud+uri; 7.>eds.?; E(amining t'e Spatial imension: *lobali+ation and ,ocal evelopment in India; -ew el+i;0ano+ar Pu!lications and !? T+a)ore; >1''$?; <on&ress 0ore i)ely to

Sustain i!eraliFation=; -usiness Commentary ; %e!ruary 2"; availa!le atG+ttpG//www.rediff.com/money/1''$/fe!/ 2"dilip.+tm Bccessed on Nune 1#;2::'C.4: India=s la!or mar)et is c+aracteriFed !y dualism w+ere strin&entla!our laws on <e@it= in t+e formal or&aniFed sector coHe@ist wit+ minimumre&ulations protectin& India=s insurance sector w+ic+ allowed ma@imumforei&n owners+ip of 2" percent way !ac) in Octo!er 2::: +as note@perienced any furt+er increase in scope of suc+ owners+ip after almostnine years and two different &overnments. T+e role of politically motivatedpressure lo!!ies in restrictin& %I is !est understood from t+e virulentopposition to forei&n entry in retail trade. modern; efficient and

tec+nolo&ically advanced or&aniFed retail industry +as never !eenwelcomed !y India=s +u&e unor&aniFed retail trade. Suc+ opposition +asenEoyed covert political support &iven t+e si&nificance of t+e 13 millionstron& small unor&aniFed retailers as a political constituency. In t+is respectt+e runHup to t+e latest Parliamentary elections +eld durin& prilH 0ay 2::'witnessed an interestin& political consensus. espite !ein& at oppositee@tremes of t+e ideolo&ical spectrum; election manifestos of t+e ri&+tHwin&7+aratiya Nanata Party >7NP? and t+e eft parties were common in resistin&forei&n entry in retail.41 T+e rat+er parado@ical similarity in a&endas wasclearly on account of !ot+ viewin& unor&aniFed retail as a <core=constituency and advocatin& protectionist policies for safe&uardin&economic interests of small retailers.T+e success of t+e on&ressHledcoalition at t+e elections is unli)ely to c+an&e t+e prospects of forei&ncapital in retail since political opposition continues to remain si&nificantwit+in t+e le&islature. Parliament ommittee +as recently opined t+atforei&n retail firms are li)ely to inflict si&nificant welfare losses !y creatin&

http://www.rediff.com/money/1998/feb/





lar&eHscale unemployment t+rou&+ predatory pricin& policies.42 T+ou&+t+is +as not stopped MalH0art from commencin& India operations;43 anyprecipitate move to encoura&e furt+er forei&n entry in retail appears remoteat t+is Euncture. T+is is in spite of t+e latest employee interests in t+e

unor&aniFed sector. See 8umar; Palit and Sin&+ >2::#?; <Sustaina!ility of (conomic ,rowt+ in India=; Mor)in& Paper -o. 25; entre for International,overnance Innovation >I,I?; 0ay; availa!leatG+ttpG//www.ci&ionline.or&/sites/default/files/PaperD2:25

WIndia.pdf Bccessed on Nune 21; 2::'C. 41 <Party manifestos see) to a@e %I in retail=; -usiness ,ine; pril 21; 2::'; availa!le atG+ttpG//www.t+e+indu!usinessline.com/2::'/:4/21/stories /2::':421513$15::.+tm Bccessed on Nune 1"; 2::'C. 42 <6ouse Panel

pplies 7ra)es on %I in retail=; &'e &imes of India; Nune '; 2::'; availa!leatG +ttpG//timesofindia.indiatimes.com/articles+ow/ msidH4"32#51;prtpa&eH

1.cms Bccessed on Nune 1"; 2::'C. 43 MalH0art and 7+arti ,roup openedt+eir first cas+ and carry store in t+e city of mritsar in PunEa! on 0ay 3:;2::'. Story availa!le atG +ttpG//www.!loom!er&.com/apps/newsQpid2:":12:5Rsida5I N n((O(STo Bccessed on Nune 21; 2::'C. preH!ud&et (conomic Survey of t+e 0inistry of %inance ma)in& a stron& pitc+for %I in multiHformat retail; particularly in distri!ution of food items.44Influential &roups also continue to !loc) entry of forei&n capital in!roadcastin&; print media and aviation. In t+ese areas; as well as ineducation; le&al and accountancy services; w+ic+ till now +ave almostentirely inwardHloo)in& forei&n investment policies; comple@ities involved in

multilateral trade ne&otiations +ave also; influenced investment policies.*estrictions on forei&n entry in t+ese sectors +ave !een partly due toIndia=s unwillin&ness to offer deeper commitments in services ne&otiationson account of lu)ewarm responses to its own demands for en+ancedmar)et access elsew+ere. *eluctance to offer deeper mar)et accesscommitments; +owever; +as often !een influenced !y domesticprotectionist pressures. %ortunately; India=s forei&n investment policy +aspro&ressed in spite of political opposition and lo!!yist pressures. T+is isprimarily due to favora!le dispositions of )ey decisionHma)ers towardsforei&n investment. In more recent times; +owever; political resistance isturnin& out to !e more successful in !loc)in& reforms t+an in t+e past. T+iscould !e due to t+e comple@ nature of t+e turfs w+ere forei&n capital still+as limited access. &riculture; education; retail; media etc are sectorsw+ere policy consensus !etween centres and states L a difficult mission toaccomplis+ in t+e first place L needs to !e followed !y effectivecoordination !etween central and state

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a&encies. *eforms in many of t+ese se&ments entail involvement of statele&islatures as well. 0atters are not +elped !y mana&ement compulsions of coalition politics; w+ere minority partners +old considera!le sway and canstall decisions on reforms and forei&n investment. 44 Economic Survey

2::$H2::'J 7o@ 2."J p. 32; availa!le atG+ttpG//www.india!ud&et.nic.in/es2::$H:'/c+apt2::'/ c+ap24.pdf Bccessedon Nuly 2; 2::'C.

Co45l:io4

M+ile India +as an overall mar)etHfriendly and li!eral policy towards forei&ninvestment; forei&n capital still does not enEoy eAually porous access in allparts of t+e economy. %airly un+indered access to manufacturin& isaccompanied !y conspicuous lac) of access in certain services and

a&riculture. India=s future forei&n investment policy faces t+e criticalc+allen&e of increasin& access of forei&n capital to t+ese se&ments for en+ancin& inward %I. T+e e@istin& pattern of inward %I into India doespoint to t+e possi!ility of su!stantive increase in investment followin&furt+er li!eraliFation. %I inflows in India +ave !een concentratin& mostly inservices. %inancial and nonHfinancial services; computer software;telecommunications; +ousin& and construction +ave !een t+e top drawersof %I durin& pril 2::: L 0arc+ 2::'.45 T+e servicesorientation of inward%I vindicates ar&uments for &reater li!eraliFation of forei&n investmentpolicies in services. espite !ein& relatively more restricted t+an

manufacturin&; India=s services are drawin& si&nificant %I due toundisputed virtues of lar&e domestic mar)et and s)illed +uman resources.0anufacturin& is una!le to do so in spite of more li!eral entry rulesprimarily on account of persistence of +i&+ transaction costs arisin& frompoor infrastructure; infle@i!le la!or policies in t+e formal sector and opaAueland mar)ets. Structural c+an&es wit+in t+e economy also point to a lar&er role of forei&n investment in some sectors. Insurance is a )ey area in t+isrespect. *isin& life e@pectancy and &reater +ealt+care costs +aveincreased demand for a variety of life and nonHlife; eAuity mar)etlin)ed

insurance products. ,lo!al insurance maEors wit+ a diverse productportfolio can ma)e a maEor difference in t+is re&ard.4" India=s aviationindustry; particularly t+e lowHcost se&ment; can !enefit from forei&n fundsand mana&erial e@pertise at a time w+en it is stru&&lin& to recover fromfinancial difficulties. India=s a&riculture; on t+e ot+er +and; is in dire need of investments for en+ancin& productivity and 45 Fact S'eet on ForeignInvestment J 0ay 2$; 2::'J IPP; ,overnment of IndiaJ p. 2; availa!le atG

http://www.indiabudget.nic.in/es2008-09/chapt2009/





+ttpG//www.dipp.nic.in/fdiWstatistics/indiaW%IW 0arc+2::'.pdf Bccessedon Nune 5; 2::'C. 4" T+e Economic Survey 2::$H2::' ar&ues for 1::percent forei&n eAuity in special insurance companies providin& allinsurance products to rural residents and in a&ricultureHrelated activities.

Ot+erwise; it favors increasin& %I cap to 4' percent in insurance. Sourceis as in 45 earlier. improvin& infrastructure; particularly in stora&e;conservation and transmission of farm produce. %orei&n investment a&aincan play a critically important role in au&mentin& capacities. India +as !eena!le to provide an ena!lin& environment to forei&n investors in severalrespects. eep reforms in capital mar)ets aided !y an efficient re&ulatoryarc+itecture +ave facilitated portfolio investments. Transfer and acAuisitionof s+ares are ta)in& place accordin& to investorHfriendly &uidelines. %orei&ne@c+an&e re&ulations +ave !een ali&ned to &lo!al standards courtesy%(0. 7ut t+ese facilitations need to !e matc+ed !y a more open forei&n

investment policy for increasin& %I inflows to a level +i&+er t+an t+eir current s+are of only 3 percent of India=s ,P. more open policy calls for committed political consensus on forei&n investment. Suc+ an accord +asproved elusive so far. 6owever; &iven t+at India=s reforms +ave !eenirreversi!le notwit+standin& political discord; +opes of furt+er reforms inforei&n investment are not entirely farfetc+ed

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C$APTER +

CASES ON F%I IN IN%IAN

RETAIL SECTOR



+01Foreig4 Retailer Regro:p i4 I47ia

T6( M ST*((T NO*-

T+e potential of t+e !oomin& Indian mar)et is captivatin& to t+e world=s!i&&est store c+ains; w+ic+ lon& to ma)e it a linc+pin of t+eir &rowt+strate&ies. -ow; wit+ t+e Indian &overnment !ac)trac)in& from retailli!eraliFation; retailers li)e MalH0art Stores Inc. and Tesco P areretoolin& t+eir plans.T+e political !ac)las+ a&ainst forei&n retailers was amaEor set!ac) for MalH0art; w+ic+ for years lo!!ied Indian officials toc+an&e t+e rules; ar&uin& t+at allowin& international retailers to run t+eir own stores in t+e country would not only improve s+oppin& options for t+e

pu!lic; !ut moderniFe t+e entire economy.T+e world=s lar&est retailer also+as !een vocal a!out India=s potential impact on its !ottom line.(@ecutives of .S.H!ased MalH0art said durin& a 0arc+ investors=conference on its international !usiness t+at t+e company e@pected toturn a profit more Auic)ly in India t+an in +ina; w+ere t+e process too) adoFen years.T+e enormity of t+e Indian retail mar)et +as daFFled maEor corporationsG onsultin& firm .T. 8earney; w+ic+ +as !een pollin&companies a!out &lo!alHe@pansion aspirations for more t+an a doFenyears; said India now ran)s only !elow +ina on t+eir priority lists; a+eadof mar)ets li)e 7raFil and t+e .S.7ut pu!lic opposition to t+e move inIndia remains rife. *ad+a 8ris+na Store in 7en&ali 0ar)et in central el+iis typical of t+e momHandHpop stores t+e Indian &overnment wants toprotect from !i&H!o@ retailers li)e MalH0art. T+e small store=s s+elves arestac)ed wit+ items as diverse as s+ampoos; coo)in& oils; diapers andmil). 8amles+ ,upta and +er +us!and +ave !een operatin& t+e store for 25 years.If c+ains li)e MalH0art and Tesco are permitted to operate inIndia; everyt+in& will !e over; 0rs. ,upta said. If t+ey sell &oods‖

c+eaper t+an us; w+o will come +ereQ lready; we +ave lost 2:D of our !usiness since 7i& 7aFaar and *eliance started operatin& in t+e last twoyears; s+e said; referrin& to two Indian retailers.To protect stores li)e‖

t+ese; ma 7+arti; a leader of t+e main opposition party; t+e ri&+tHofHcenter 7+aratiya Nanata Party; +ad t+reatened t+at s+e would personallyset fire to any MalH0art stores if t+ey were allowed to enter India. S+e



said s+e was prepared to &o to prison for it. T+is party=s votin&constituency includes small retailers.T+e political opposition to loosenin&t+e forei&nHinvestment rules ensures t+at; for now; MalH0art=s only way to&ra! a piece of t+e lucrative mar)et is t+rou&+ a partners+ip wit+ 7+arti

(nterprises td. to operate w+olesaleHstyle cas+ and carry s+ops‖sellin& !ul) items to smallH!usiness owners. T+e Eoint venture only +adnine stores as of t+e end of Octo!er; a minuscule presence for a retail&iant wit+ more t+an ';::: s+ops in 2$ countries.arrefour S; t+eworld=s secondHlar&est retailer !e+ind MalH0art; +as lon& pe&&ed Indiaas a strate&ic mar)et. %or years; t+e %renc+ company +as !een see)in&a local partner wit+ w+om to launc+ a c+ain of supercenters. personclose to arrefour said t+e company is unswayed in its Auest; re&ardless

of w+et+er t+e retail law &oes into effect or not; t+ou&+ t+is person addedt+at +avin& a maEority sta)e would !e important sym!olically. Impatient‖

to &et its !usiness started in India; arrefour +as opened two w+olesalecas+HandHcarry stores in t+e meantime. T+e first opened in el+i a year a&o; and t+e second opened in Naipur in -ovem!er. T+e openin& of t+esecond store coincided wit+ t+e passin& of t+e retail law; and protestersdemonstrated outside t+e store a&ainst t+e new law. arrefour intends toopen more w+olesale stores ne@t year !ut +asn=t detailed its plans.T+eIndian &overnment=s decision to put t+e proposal for multi!rand retailers

on ice came also as a !low to Tesco; w+ic+ alon& wit+ ot+er 7ritis+!usinesses +as advocated c+an&in& t+e re&ulations. Tesco +as !eenuna!le to open standHalone retail stores in India and instead operatest+rou&+ a franc+ise deal wit+ Tata ,roup unit Trent. T+e decision todefer Bforei&n direct investmentC is a missed opportunity for Indianproducers; farmers and consumers; Tesco said.Saloni -an&ia; senior ‖

vice president and +ead of retail and consumer &oods at Tec+nopa); aconsultin& firm !ased in -ew el+i; is +opeful t+at t+e decision to allow

forei&n retailers to open supermar)ets in India mi&+t still +appen.num!er of !rands were already in t+e country and will continue to !elieveand !e a part of t+e India opportunity; 0s. -an&ia said. M+ile t+e‖

discussion +as !een put on +old; it will come !ac) in due course of timeand t+e &overnment will come up wit+ a plan.‖



T+e door remains open to sin&le !rand retailers in India; li)e I)ea‖

,roup of Sweden; -i)e Inc. of t+e .S. and 0ar)s and Spencer ,roupP of t+e .8. ntil now; sin&leH!rand forei&n retailers li)e -i)e couldonly +old 51D of an Indian Eoint venture. -ow; t+e &overnment is allowin&

1::D forei&n investment in sin&leH!rand retail; w+ic+ is attractive tocompanies li)e I)ea t+at +ave pu!licly said t+at t+ey weren=t interested inpartners+ips.7rands li)e evi Strauss R o.; -i)e and *ee!o)International td. +ave !een in India for several years. T+eir products+ave !een popular amon& a !randHconscious &eneration and were !ein&sold in India initially t+rou&+ department stores and more recently t+rou&+t+eir standHalone stores operated via Eoint ventures or franc+isees. 0ar)sR Spencer entered t+e mar)et in 2::1; initially as a franc+ise !usiness. In

2::$; t+e company; w+ic+ +as 23 stores in India; si&ned a EointHventurea&reement wit+ t+e Indian company *eliance *etail td.; a unit of *eliance Industries td.; w+ic+ +as allowed 0ar)s R Spencer to openlar&er stores and tap into local sourcin&.0ore recently; !rands li)eTommy 6ilfi&er; ara; 0an&o and %renc+ onnection +ave set up storesin t+e !i&&er cities; offerin& more c+oice and providin& more competitionto increasin&ly discernin& consumers.T+ese !rands; under t+e newpolicy; will now +ave t+e opportunity to !uy out t+eir partners or franc+isees wit+ t+e condition t+at t+ey source at least 3:D of t+eir future

products from Indian small and midsiFe enterprises.7ut t+is reAuirementposes a pro!lem for companies in t+e lu@uryH&oods sector; many of w+ic+ma)e t+eir products in (urope and e@port t+em to mar)ets li)e India.ne@ample is 7ur!erry ,roup P; t+e 7ritis+ trenc+Hcoat ma)er. T+ecompany +as seven stores in India; all of w+ic+ are operated as a Eointventure wit+ t+e Indian company ,enesis olors Pvt. td. 7ur!erry;w+ic+ opened its first store in India in 2::$; owns 51D of t+eventure.7ur!erry faces +i&+ import duties in India !ecause many of its

products fall under a soHcalled lu@uryta@ on +i&+Hend &oods. T+ecompany would face difficulty satisfyin& t+e sourcin& reAuirements if itdecided to ta)e full owners+ip of its Indian operation. 7ur!erry=straditional raincoats are made in (n&land; and most of its leat+er products come from Italy.



$.2? T6( -(M 9O*8 TI0(S

I47ia to Eae Retail R:le 3or Foreig4 Co;pa4ie

By VIKAS BAJAJ Published: November 24, 2011

007I X T+e Indian &overnment decided on T+ursday to allow forei&nretailers li)e MalH0art and Tesco to open stores in t+e country; t+e firsttime t+at policy ma)ers +ave moved to open India=s vast and fastH&rowin& retail mar)et to outsiders.

NIE I45 *alMart Store I45

T+e lon&Hawaited decision !y t+e ca!inet of Prime 0inister 0anmo+an Sin&+will allow retailers w+o sell multiple !rands of products to own 51 percent of t+eir Indian operations; wit+ t+e rest +eld !y an Indian partner. Previously;suc+ retailers were not allowed to conduct retail !usiness in t+ecountry.ompanies li)e pple and -i)e t+at sell only one !rand of product int+eir retail operations will now !e allowed to own 1:: percent of t+eir stores;

up from 51 percent. spo)esman for t+e &overnin& on&ress Party confirmedt+e move on Indian television !ut provided no details a!out t+e decision;w+ic+ is opposed !y smallHstore owners and many political parties; includin&one t+at supports 0r. Sin&+=s &overnment. senior minister was e@pected toma)e a statement a!out t+e decision in Parliament on %riday.MalH0art; Tesco;arrefour and I)ea are amon& t+e multinational retailers t+at +ad e@pressedinterest in investin& in India if t+e rules were c+an&ed.On T+ursday; MalH0artwelcomed t+e move as a first; important step; addin& t+at t+e company‖

would study t+e conditions and t+e finer details of t+e new policy and t+eimpact t+at it will +ave on our a!ility to do !usiness in India. nalysts said t+e‖

fact t+at policy ma)ers opened t+e retail mar)et despite of opposition fromot+er parties su&&ested t+ey mi&+t !e more willin& to open up t+e !roader economy furt+er.In t+e last seven years; t+e coalition &overnment led !y t+eon&ress Party +as delayed many proposals to open domestic industries li)einsurance and

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aviation to &reater forei&n investment and competition.One +ad almost&iven up +ope t+at t+e &overnment would ma)e a !i& move; said rvind‖

Sin&+al; c+airman of Tec+nopa) dvisors; a consultin& firm t+at specialiFesin t+e retailin& industry. T+ere is a !i& sense of relief. 0r. Sin&+al and‖

ot+er analysts say India needs si&nificant forei&n investment to +elpesta!lis+ a modern retail industry and a more efficient supply system.

0odern stores ma)e up a!out 5 percent of India=s 5:: !illion retailindustry; wit+ t+e rest made up of corner stores and ot+er smallenterprises.nalysts +ave estimated t+at up to 35 percent of Indian fruitsand ve&eta!les spoil !efore t+ey &et to mar)et; lar&ely as a result of anantiAuated supply system t+at includes many w+olesale mar)ets andmiddlemen.Partly as a result; Indian food prices often rise Auic)ly w+ent+ere are minor disruptions in t+e supply or +arvest of staple crops li)eonions and potatoes. %ood inflation in recent mont+s +as !een +overin&near 1: percent.M+ile some companies +ave !e&un !uildin& supplynetwor)s in parts of India; 0r. Sin&+al said it would ta)e t+ree to five yearsof investment to esta!lis+ a more efficient supply c+ain. ompanies willneed to wor) from t+e &round up; settin& up ware+ouses; !uyin& truc)s andesta!lis+in& relations+ips wit+ farmers and ot+er suppliers.I don=t seeany immediate impact in t+e ne@t si@ mont+s; 0r. Sin&+al said. Supply‖

c+ain development ta)es its own time. It moves from one state to

anot+er. %or t+e last two years; MalH0art; t+e &iant merican retailer; +as‖

!een operatin& w+olesale stores in India t+at sell only to ot+er !usinessesJit now +as nine suc+ outlets. It +as also esta!lis+ed relations+ips wit+farmers in some states li)e PunEa! to supply ve&eta!les and ot+er produceto t+e retail supermar)ets of its Indian partner 7+arti *etail. 0etro; a,erman retail c+ain; +as also opened w+olesale stores in India.T+e movewill also +elp Indian companies li)e t+e %uture ,roup; t+e country=s lar&estretailer; and %lip8art.com; a fastH&rowin& online store; t+at would li)e toraise money from forei&n investors to e@pand t+eir operations.In many

cases; Indian retailers; especially t+ose t+at operate online stores; +ave!een settin& up separate retail and w+olesale companies to &et around t+erestrictions on forei&n investment. T+eir merican venture capital partnersinvest in t+e w+olesale operations; w+ic+ sell &oods and services to t+eretail firms.T+e decision will face stiff opposition from political parties;includin& partners of t+e on&ress Party li)e t+e Trinamool on&ress; an

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important party in t+e eastern part of t+e country.T+e lead opposition partyin Parliament; t+e 7+aratiya Nanata Party; said !efore t+e decision wasannounced t+at forei&n retailers would merely displace domesticstores.%orei&n direct investment wit+ deep poc)ets enterin& t+is se&ment

will +ave an adverse impact on our domestic retail sector; w+ic+ is&rowin&; t+e party said.‖

$.3?T6( -(M 9O*8 TI0(S

I47ia S:pe47 Pla4 to Let i4 Foreig4 Retail

8uni Ta)a+as+i for T+e -ew 9or) Times

C:to;er hop at Bet Pri5e@ a tore Goi4tl6 o84e7 6 *alMart a47Bharti E4terprie@ i4 I47ia0

B6 #IM YAR%LE Y P:lihe7<%e5e;er (@ "!11

NE* %EL$I H Fa5i4g a harh politi5al rea5tio4 that ha paral6e7 theI47ia4 Parlia;e4t@ the go=er4i4g Co4gre Part6 a44o:45e7 o4*e74e7a6 that it 8o:l7 :pe47 pla4 to allo8 3oreig4 ;:ltira47retailer li>e *alMart to ope4 tore i4 I47ia0Relate7

*alMart %eate Rage i4 I47ia%e5e;er -@ "!11?

MalH0art Stores Inc

T+e decision; announced in Parliament; was a set!ac) for Prime 0inister 0anmo+an Sin&+ and seemed certain to deepen criticism t+at +isadministration +ad !ecome increasin&ly adrift and ineffective. %orei&ncorporations ea&er to enter t+e Indian retail mar)et must now also putaside any e@pansion plans.,overnment will ta)e a decision after a

consensus is developed; Prana! 0u)+erEee; t+e Indian finance minister;‖said in announcin& t+e suspension.T+e Auestion is w+et+er t+e&overnmentwill try to resurrect t+e plan in t+e wee)s or mont+s a+ead. T+e Indianeconomy +as !een slowin& in recent mont+s; partly !ecause of t+e &lo!aleconomic downturn !ut also; many analysts say; !ecause of t+e ina!ility of t+e &overnment to pass crucial reforms; includin& on forei&n retail

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investment.%or mont+s; 0r. Sin&+ +as ta)en a political !atterin&. 6isadministration +as !een !eset !y scandals; and opposition leaders +avesucceeded in stallin& t+e on&ress Party=s a&enda in Parliament. M+en 0r.Sin&+=s ca!inet approved t+e forei&n retail measure on -ov. 24; !usiness

&roups and many economists +ailed t+e decision as a !old reform t+at would!enefit consumers and farmers w+ile providin& a muc+Hneeded Eolt to t+eIndian economy.-o parliamentary vote was reAuired for t+e e@ecutive decisionto ta)e effect; !ut loud resistance Auic)ly arose from !ot+ political allies andopponents of t+e on&ress Party. 0amata 7anerEee; a powerful ally;t+reatened to wit+draw +er Trinamool on&ress Party from t+e coalitionnational &overnment.Opposition parties !loc)ed all de!ate in Parliament for days and condemned t+e proposal as a direct t+reat to millions of small!usinesses across India. Political resistance from Indian traders and s+opowners +as !loc)ed previous efforts to pus+ t+rou&+ similar measures.7yMednesday; wit+ ot+er important pieces of le&islation stalled; 0r. 0u)+erEeeannounced t+e &overnment=s retreat on forei&n retail as part of a deal wit+opposition leaders to restart Parliament.nalysts and newspaper editorials+ave e@coriated on&ress Party leaders; sayin& t+ey mis+andled t+e issue !yfailin& to consult in advance wit+ allies li)e 0s. 7anerEee and for ma)in& t+eannouncement w+ile Parliament was in session X even t+ou&+ parliamentaryapproval was not reAuired.T+e political +andlin& is e@traordinarily inept;‖

said Pratap7+anu 0e+ta; a political analyst in -ew el+i.0r. 0e+ta said t+e decision!y on&ress Party leaders to pus+ aside t+e forei&n retail measure +admost li)ely !een lin)ed to an important election early ne@t year in t+e stateof ttar Prades+. *a+ul ,and+i; re&arded as t+e party=s prime minister inwaitin&; +as sta)ed +is reputation on ma)in& siFa!le &ains in t+at state;

India=s most populous.T+e political maneuverin&s of t+e on&ress Partywere secondary on Mednesday for many !usiness leaders w+o re&ardedt+e retreat on forei&n retail investment as a maEor !low. eeply

disappointin&; said *aEiv 8umar; secretary &eneral of t+e %ederation of ‖Indian +am!ers of ommerce and Industry; a leadin& !usiness &roup.T+eretail measure; w+ic+ would +ave allowed multiH!rand stores li)e MalH0artto open stores wit+ a minority Indian partner; was indefinitely ta!led.+owever; t+e measure also opened t+e door for sin&leH!rand retailers li)eI)ea and ,ap to enter t+e Indian mar)et. On T+ursday mornin&; Indian

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media Auoted unnamed &overnment sources sayin& t+at type of forei&nretail investment mi&+t still !e allowed to move forward.0r. 8umar notedt+at on&ress Party leaders +ad not rescinded t+e e@ecutive order onforei&n retail !ut +ad merely suspended t+e plan and t+us left open t+e

possi!ility t+at it could !e resuscitated. Still; 0r. 8umar was s)eptical t+atany action would !e ta)en !efore t+e ttar Prades+ elections and possi!lyeven after t+at.It=s &oin& to ta)e a lon& time to come !ac); +e said.‖

T+is waitin& for a <consensus= X I can=t see it +appenin& now.‖

$.4?T6( (O-O0I TI0(S

I47ia ope4 retail e5tor to 3oreig4 ra47 li>e A7i7a@ I>ea a47 other

-(M (6IG ,overnment +as allowed forei&n !rands suc+ as didas or +ome furnis+in&s &iant I)ea to open 1::Hpercent owned s+ops; !ut willcontinue to !loc) t+e entry of supermar)ets. T+e retail reform allowin&w+olly forei&nHowned sin&le !rand stores into t+e country was announcedlate Tuesday !y t+e leftHleanin& &overnment; w+ic+ +ad initially announcedsweepin& plans to t+row open t+e sector. In ecem!er; it said it planned toallow in forei&n supermar)et c+ains suc+ as MalH0art; !ut it !ac)trac)edtwo wee)s later amid parliamentary opposition and protests from smalls+op)eepers. 0aEor Mestern !rands suc+ as didas already own s+ops in

t+e !oomin& retail centres and s+oppin& malls of maEor cities; !ut t+ey arecurrently o!li&ed to operate wit+ a local partner. %orei&n direct investment>%I? up to 1:: per cent; under t+e &overnment approval route; would !epermitted in sin&le !rand product retail tradin&; t+e epartment of Industrial Policy and Promotion > IP P? said late Tuesday. T+e condition ist+at t+e forei&n companies ownin& more t+an 51 percent of t+eir s+ops inIndia source a minimum of 3: percent of t+eir products from smallHscalelocal cotta&e industry suppliers. T+e move will not only mean more %I!ut lead to employment and also lead to more c+oices for consumers; t+esecretary &eneral of !usiness lo!!y &roup %I I; *aEiv 8umar; said in astatement. T+e sourcin& clause will lead to a direct !enefit for t+e S0(>small and mediumHsiFed enterprises? sector; +e added. 7ut rvindSin&+al; c+airman of ,ur&aonH!ased retail consultancy Tec+nopar); told

%P +e was sceptical t+at forei&n companies would !e rus+in& to open1::Hpercent owned stories !ecause of t+e local supplier condition.

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T+is is an unfeasi!le demand. If a forei&n !rand li)e I)ea comes to Indiat+ey want t+eir own suppliers; w+o are very efficient; +e said. T+einsistence t+at t+e suppliers !e small in scale also limits t+e options of lar&e companies suc+ as I)ea. If t+ey come +ere and do find &ood local

suppliers; w+at +appens w+en t+ose suppliers soon !ecome too !i& to !eincludedQ T+is means t+at t+e reform will not mean very muc+; +e said.T+e c+an&e to t+e forei&n direct investment rule does not reAuireparliamentary approval. T+e &overnment Hturn on allowin& insupermar)ets was forced after an ally in t+e rulin& coalition t+reatened toAuit over t+e move. I wonder a!out t+e &overnmentKs real intention toreform t+e retail sector; Sin&+al said. On t+is t+in)in&; multiH!randsupermar)ets will never !e allowed +ere. Ot+er analysts said !rands li)e

didas; ouis uitton or ,ucci; w+ic+ are already in India; mi&+t loo) toe@pand t+eir presence; w+ile ot+ers would !e unli)ely to Eump in wit+ a1::Hpercent owned store. ction may not come from new players. Onlyt+ose w+o understand t+e Indian mar)ets and its c+allen&es and policieswill !e interested; nil TalreEa; a partner wit+ consultancy eloitte India;said.

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C$APTER 9

F%I IN%IAN RETAIL BI%S FOR A BRI'$TERFUTURE



In a landmar) decision for t+e Indian retail industry; t+e ca!inet finally &aveits nod to allow %orei&n irect Investment >%I? in multi!rand retailse&ment and even raised t+e !ar for %I in sin&le !rand retail. lt+ou&+;%I in multi!rand retail is still under consideration !y t+e ,overnment;

1::D %I in sin&le !rand retail +as !ecome a reality allowin& forei&n!rands to finally +ave t+e owners+ip on t+eir Indian !usiness. T+is comesas a stron& indication of a futuristic approac+ from t+e Indian ,overnment.T+e policy; most certainly; will +ave a lon& term impact on retail and retailreal estate developments in t+e country.T+e policy is e@pected to ena!let+e &rowt+ of or&aniFed retail as it will open up t+e door for a num!er of prominent &lo!al retail !rands. 6ence; t+e retail sector is poised to seesome si&nificant c+an&es in its current dynamics. In t+is paper; us+man RMa)efield *esearc+ presents a snaps+ot of t+e impact of t+e new policy onIndian retail real estate sector.

IN%IA A%VANTA'E

1? India +as a relatively youn&er population in t+e a&e !rac)et of 15H"4 wit+a median a&e of 2".2 years; lowest amon& t+e 7*I countries.0oreover; 2'.#D of t+e population is in !etween t+e a&e &roup of :H14w+ic+ is t+e +i&+est amon& t+e 7*I.

2? India is t+e nint+ lar&est in t+e world !y nominal ,P and t+e fourt+lar&est !y Purc+asin& Power Parity >PPP?. >SourceG International0onetary %und? IndiaKs per capita income +as tripled from S 423 in

2::2H:3 to S 1;21' in 2:1:H11; avera&in& 14.4D &rowt+ over t+eseei&+t years. >SourceG Morld 7an)? Service industry accounts for 54.# Dof t+e ,P; alt+ou&+ a&riculture is t+e predominant occupation in India.ependency on a&riculture +as reduced and s+are of services andindustry sector +as increased.

901?EVOLUTION OF IN%IAN RETAIL

T+e story of Indian retail +as !een an intri&uin& one wit+ diverseopportunities and c+allen&es. Till t+e 1'':Ks Indian retail mar)et wasprimarily dominated !y traditional nei&+!or+ood retailers or K)iranaK >0om RPop? stores. 6owever wit+ t+e economic pro&ression; India +as acceptedt+e e@posure of or&aniFed retail in t+e last decade. T+e transition was&radual; wit+ 1::D %I in cas+ and carry / w+olesale format allowed in1''# and 51D %I in sin&le !rand retail permitted in 2::". s a result;cumulative %I in retail tradin& >sin&le !rand? till pril 2:11 is estimated at



appro@imately S "1 million w+ic+ represents :.:5D of t+e total %Iinflow. T+e &rowt+ of or&aniFed retail was furt+er propelled on account of t+e demand &enerated !y t+e rise of Indian middle class; a fast c+an&in&consumer mindset and increasin& disposa!le incomes. *idin& on t+e

favora!le demo&rap+ics and a steady economic &rowt+; Indian retail sector soon emer&ed as one of t+e fastest &rowin& sectors in t+e domesticeconomy. Mit+ 1::D %I in as+ R arry format; India witnessed t+e entryof retail &iants li)e 0etro , and Malmart. T+e &rowt+ was also fuelled !yretail real estate and infrastructure developments in t+e country. wideran&e of retail cate&ories and innovative formats li)e supermar)et;+ypermar)et; and as+ R arry cate&ories evolved across india

90"?F%I POLICY FRAME*OR

lt+ou&+ Indian economy demonstrated resilience in recessionaryconditions primarily due to its in+erent stren&t+; it must also !e noted t+att+e sustenance of its economic &rowt+ calls for t+e ne@t round of reforms Lof w+ic+ *etail %I; and cAuisition *e+a!ilitation R *esettlement 7ill;Pu!lic Private Partners+ip 7ill are t+e )ey milestones. espite t+e fact t+att+ere are diverse opinions on almost all of t+ese in t+e society; t+e onlyapparent way for t+e economic &rowt+ down t+e road is t+rou&+ t+esereforms. M+ile analysts continue to o!serve t+is vast maFe of socioHeconomic landscape in India wit+ deep interest; t+ere is no denyin& t+at t+ecountry needs to implement second &eneration reforms for inclusive and

sustaina!le &rowt+.

Source: &ec'nopak "dvisors !vt ,td

0anufacturers openin& t+eir own outlets Pure play *etailers; realiFin& t+epotential start to test waters; stall most of t+em in apparel se&ment ar&eInvestment ommitments !y lar&e Indian corporate (ntry in food and&eneral merc+andise cate&ory Investments in t+e 7ac) (nd Pan India(@pansion !ut still limited to top 1:: cities *epositionin& (@istin& Players

(ntry of lar&e &lo!al retailers ompetition !e&innin& to increase %rin&ePlayers &ettin& 0ar&inalised Specialty formats !ased on finer se&mentationof t+e mar)et Private !rands &ettin& esta!lis+ed 0ore a&&ression fromInternational Players 0ore t+an 5H" players wit+ *evenues in e@cess of S #::mm 0ovement to smaller cities and rular areas ar&e scaleconsolidation Stiff competition Pre 1''5=s 1''5 to 2::5 2::5 to 2:1: 2:1:Onwards SiFe of Industry



1?T+e a!inet +as approved 1::D %I in sin&le !rand retail and 51D %Iin multiH!rand retail.

2?,overnment stipulates t+at t+e minimum capital for investment reAuireds+all !e S 1:: million and 5:D of t+e investment s+ould !e in t+e!ac)end infrastructure.

3?Investments s+ould !e restricted to cities wit+ population over 1 million

4?In Nanuary 2:12; t+e &overnment notified its earlier decision of permittin&1::D %I in sin&leH!rand product retail tradin&. %or investin& in sin&leH!rand retail; t+e &overnment +as made it mandatory for t+e retailer tosource atleast 3:D of t+e products sold from small industries/villa&e and

cotta&e industries; artisans and craftsman.

T+e a!inet approval for %I in multiH!rand retail and raisin& t+e cap insin&le !rand retail came as t+e ne@t !i& move for Indian retail. 6owever;w+ile t+e proposed %I in multi!rand retail +as !een temporarilysuspended due to disa&reement !etween political parties; t+e on&ress led,overnment +as !een a!le to pave t+e way for 1::D %I in sin&le !randretail se&ment. T+e decision is e@pected to create a +ealt+y &rowt+situation for retailers across cate&ories.fter muc+ deli!eration epartmentof Industrial Policy and Promotion +as permitted %I upto 1::D under t+e

,overnment approved route. T+ere are certain conditions t+at are+i&+li&+ted in t+e notification w+ic+ +ave to !e complied for forei&ninvestments in sin&le !rand. Of t+em; it is mandatory to source of atleast3:D of t+e value of products sold from domestic small and cotta&eindustries w+ic+ +ave a ma@imum investment of I-* 5 crores in plant andmac+inery. T+is is e@pected to provide stimulus for t+e manufacturin&sector t+at will &et e@posed to &lo!al tec+nolo&ies; desi&n and !usinesspractices.

90&?IMPACT ON RETAIL SE'MENT

1? 1::D %I in sin&le !rand retail would allow many forei&n !rands to ta)efull owners+ip of t+eir Indian !usiness. T+is would increase forei&ninvestment alon& wit+ providin& t+e domestic industries an e@posure tosuperior tec+nolo&y; researc+; desi&n and !usiness practices.



2? In t+e case of Indian corporate retail c+ains; t+e policy will +opefully;ma)e t+em more efficient due to t+e increased competition from forei&n!rands and companies.

3? T+e penetration of or&aniFed retail will improve and t+e development of modern retail will !e spread out !eyond t+e traditional cities. s per t+eensus 2:11; India +as 33 cities w+ic+ +ave a population of 1 million or more t+at are e@pected to witness increased penetration of or&aniFedretail.

4? Mit+ &lo!al retail players and practices comin& into t+e mar)et; t+e retailindustry is e@pected to witness many innovations in formats andstrate&ies c+an&in& t+e dynamics of t+e retail sector.

5? Mit+ t+e advent of international !rands in various formats andcate&ories; t+e mar)et will e@perience international retail practices. s aresult Indian retail will &et e@posure to t+e worldKs !est retail servicesand practices from across t+e &lo!e.

"? %ood and ,rocery se&ment w+ic+ +olds a si&nificant s+are in t+eavera&e consumerKs total +ouse+old spendin&; will witness si&nificantimpact. ,overnmentKs recommendation to invest 5:D of t+e totalinvestment into t+e !ac) end infrastructure will improve t+e supply c+ainefficiency. T+us wit+ !etter supply c+ain mec+anism and !i&&er scale of operations; retailers in t+is cate&ory will see profita!ility.

#? 7etter !ac)Hend infrastructure and supply c+ain efficiency will result inreducin& t+e involvement of intermediaries w+ic+ will ultimately !enefitt+e farmer as well as t+e end consumers. M+ile t+e increased profita!lywill !e passed on to end consumer; t+e farmer will &ain !y &ettin&

Eustified pricin& for t+eir product and a direct access to t+e mar)et. T+e,overnment also e@pects almost 1: million Eo!s to !e created t+rou&+t+e retail se&ment.6ence; in all pro!a!ility; it would !e incorrect todeduce t+at %I in retail will sound a deat+)nell for t+e traditional K)iranaKoperation in Indian cities and towns.

Chart )?%ood and ,rocery *etail 1?7usiness 0onitor International >70I? forecast

t+at sales t+rou&+ 0ass

,rocery *etail outlets to reac+ toS 2#."# !illion !y 2:15



2?ccordin& to industry estimateslac) of supply c+ain infrastructureresults in 4:D loss of farm produceJinvestment in !ac)Hend

infrastructure s+ould +elp reducin&t+is3?Sourcin& of processed food fromS0(s could result in +i&+er mar&ins4?Political support for %I in foodand &rocery may face c+allen&esandmany state may not allow %I orelse allow wit+ more restriction5?6ypermar)ets and supermar)ets

are t+e !est suited retail structure fort+e se&ment

pparel *etail 1?*eadymade and western outfitsare &rowin& at 4:H45D annually2?Openin& of multiH!rand apparelretail for %I is not e@pected to facemaEor political deli!erations3?%or apparel retail; investment in!ac)Hend infrastructure lies in

creation ofware+ouses4?0anufacturin& facilities >for privatela!el !rand? and lo&istics is mostli)ely to !e outsourced5?International retailer could +aveprivate la!el !rand sourced fromS0( se&ment"?epartmental store is t+e !estsuited retail structure for t+is

se&ment%IG Indian *etail 7ids for a 7ri&+ter %uture

%urniture and %urnis+in&s 1? %or furniture retail; options foinvestment in !ac)Hendinfrastructure lies in creation o

manufacturin& facilities



ware+ouses2?Some of t+e furniture productscould !e sourced from t+e S0(se&ment3?%I in furniture retail is note@pected to face maEor politicaldeli!erations4?Specialty retail outlet is !estsuited

structure for t+isse&ment7eauty and Mellness 1?Penetration level of modern retail

is Eust 4D and t+ere is a+u&euntapped potential in t+is se&ment2?Private la!el !rands in some oft+eproduct cate&ories can !e sourcedfrom t+e S0( se&ment3?%I in multiH!rand !eauty andwellness stores is not e@pected toface maEor political deli!erations4?Specialty retail outlet is t+e !estsuited structure for t+is se&ment

,ems and Newelry 1?7randed Eewelry +as rapidlyacAuired a nic+e over t+e past fewyears.Increasin& purc+asin& power

and disposa!le income of IndiaKsmiddle class +as resulted in &rowt+of t+is industry2?Openin& of multiH!rand &emsand

Eewelry stores is not e@pected toface maEor political deli!erations3?Special desi&n products could !esourced from t+e S0( se&ment



4?Tar&et se&ment for retailersarelar&ely in t+e metros and tierH1cities

onsumer ura!les 1?Traditionally mar)et is lar&elydominated !y !randed store;penetration of modern retail is 12Din consumer electronics se&ment2?.onsumer s are !rand consciousfor consumer dura!les +encesourcin&



of products from S0( t+e se&mentis not favora!le3?Tar&et se&ment for retailers wouldnot Eust !e restricted in t+e metrosand tierH1 cities; it would also includetierH2 cities4?%I in consumer dura!les sector too is not e@pected to face any maEor

political deli!eration

90)?T$E ROA% A$EA%

T+e a!inet approval for %I in multi!rand and t+e &overnment notificationfor sin&le !rand retail appears to !e a natural step in t+e forward directionfor t+e Indian economy. It +olds si&nificant scope and opportunities for t+eIndian retail revolution w+ic+ started more t+an a decade a&o. In t+e lastfive years; India +as witnessed retail sector !ein& redefined and now t+eimprovised %I policy definitely +as t+e a!ility to pus+ IndiaKs &rowt+ storyto new +ei&+ts. T+e policy +as !een +ailed !y India Inc. and w+en rolled

out; t+e retail +istory of India will +ave a new c+apter to it.

130



C$APTER 1!

ANALYSIS OF PRIMARY %ATA



a? ARE YOU A*ARE OF RECENT F%I INFLO* IN IN%IAJ

Sales

YES

NO

YES -"K

NO &+K

I4 the ao=e :etio4 @-"K o3 the repo47e4t 8ere a8are o3 the 37ii43lo8 to i47ia0

? %O YOU REALLY T$IN IN%IA NEE% F%I

Sales

YES

NO



9(S "2D

-O 3$D

In t+e a!ove Auestion "2D of t+e respondents felt t+at india seriously needfdi w+ereas 3$D felt t+e our country doesnot reAuire fdi

5? *$AT IS YOUR OPINION ON RECENT F%I

0ost of t+e respondents said t+ey are not satisfied wit+ t+e way t+e fdi inindia is +andled . our country s+ould +andle fdi in a more appropriate andtransparent manner.

7? %ON.T YOU T$IN F%I $AS %ONE MORE $ARM T$AN 'OO% @COMMENT

0ost of t+e respondents felt t+at fdi +ave done more +arm t+an &ood.fdi+as resulted in a stiff competition for local retailers and local retailers arefindin& it difficult to compete wit+ +u&e &iants.+ence .fdi are a +arm for localretailers.

e? ARE YOU A*ARE OF RETAIL SECTOR IN IN%IAJ



Sales

YES

NO

YES 99K

NO 1K

T+is Auestion was added to )now t+e retail )nowled&e of t+e respondents.''D of t+e respondents were well aware of t+e retail sector.

3? %OES RETAIL SECTOR REALLY NEE% F%IJ

Sales

YES

NO

YES )-K

NO ,)K



In t+is Auestion 4"D of t+e respondents felt t+at retail sector needed fdiw+ere as 54D of t+e respondents felt t+at indian retail sector doesnot needfdi.

g? AS A CITIEN ARE YOU CONTENT *IT$ T$E *AY F%I ARE MANA'E%

Sales

YES

NO

YES &+K

NO -"K

In t+is Aestion "2D of t+e respondents felt t+at t+ey are not +appy wit+ t+eway fdi are +andled !y t+e &overnment and it can !e +andled in a far !etter way w+ere as 3$D felt t+at t+ey are satisfied wit+ t+e way fdi are mana&ed.

h? ANY SU''ESTIONS ON F%

N:;er o3 7ail6 repo4e



C$APTER 11

CONCLUSION



%inally; it may !e concluded t+at developin& countries +as ma)e t+eirpresence felt in t+e economics of developed nations !y receivin& a descentamount of %I in t+e last t+ree decades. lt+ou&+ India is not t+e mostpreferred destination of &lo!al %I; !ut t+ere +as !een a &enerous flow of

%I in India since 1''1. It +as !ecome t+e 2nd fastest &rowin& economy oft+e world. India +as su!stantially increased its list of source countries in t+epost L li!eralisation era. India +as si&ned a num!er of !ilateral andmultilateral trade a&reements wit+ developed and developin& nations. Indiaas t+e foundin& mem!er of ,TT; MTO; a si&natory mem!er of S%T anda mem!er of 0I, is ma)in& its presence felt in t+e economic landscape of &lo!alised economies. T+e economic reform process started in 1''1 +elpsin creatin& a conducive and +ealt+y atmosp+ere for forei&n investors andt+us; resultin& in su!stantial amount of %I inflows in t+e country. -o dou!t;%I plays a crucial role in en+ancin& t+e economic &rowt+ and

development of t+e country. 0oreover; %I as a strate&ic component ofinvestment is needed !y India for ac+ievin& t+e o!Eectives of its second&eneration of economic reforms and maintainin& t+is pace of &rowt+ anddevelopment of t+e economy. T+is c+apter +i&+li&+ts t+e main findin&s oft+e study and sou&+t valua!le su&&estions



C$APTER 1"

SU''ESTIONS



T+us; it is found t+at %I as a strate&ic component of investment is needed!y India for its sustained economic &rowt+ and development. %I isnecessary for creation of Eo!s; e@pansion of e@istin& manufacturin&industries and development of t+e new one. Indeed; it is also needed in t+e+ealt+care; education; *R; infrastructure; retailin& and in lon&termfinancial proEects. So; t+e study recommends t+e followin& su&&estionsG

T+e study ur&es t+e policy ma)ers to focus more on attractin& diversetypes of%I.

T+e policy ma)ers s+ould desi&n policies w+ere forei&n investment can!e utilised as means of en+ancin& domestic production; savin&s; ande@portsJ as medium of tec+nolo&ical learnin& and tec+nolo&y diffusion andalso in providin& access to t+e e@ternal mar)et.

It is su&&ested t+at t+e &overnment s+ould pus+ for t+e speedyimprovement of infrastructure sector=s reAuirements w+ic+ are important for diversification of !usiness activities.

,overnment s+ould ensure t+e eAuita!le distri!ution of %I inflowsamon& states. T+e central &overnment must &ive more freedom to states;so t+at t+ey can attract %I inflows at t+eir own level. T+e &overnments+ould also provide additional incentives to forei&n investors to invest instates w+ere t+e level of %I inflows is Auite low.

,overnment s+ould open doors to forei&n companies in t+e e@port Loriented services w+ic+ could increase t+e demand of uns)illed wor)ersand low s)illed services and also increases t+e wa&e level in t+eseservices.

,overnment must tar&et at attractin& specific types of %I t+at are a!leto &enerate spillovers effects in t+e overall economy. T+is could !eac+ieved !y investin& in +uman capital; *R activities; environmentalissues; dynamic products; productive capacity; infrastructure and sectorswit+ +i&+ income elasticity of demand.

T+e &overnment must promote policies w+ic+ allow developmentprocess starts from wit+in >i.e. t+rou&+ productive capacity and !ya!sorptive capacity?.

It is su&&ested t+at t+e &overnment endeavour s+ould !e on t+e typeand volume of %I t+at will si&nificantly !oost domestic competitiveness;

en+ance s)ills; tec+nolo&ical learnin& and invaria!ly leadin& to !ot+ socialand economic &ains.It is also su&&ested t+at t+e &overnment must promote sustaina!le

development t+rou&+ %I !y furt+er stren&t+enin& of education; +ealt+ and



*R system; political involvement of people and !y ensurin& personalsecurity of t+e citiFens.

,overnment must pay attention to t+e emer&in& sian continent as t+enew economic power L +ouse of !usiness transaction and try to !oost t+etrade wit+in t+is re&ion t+rou&+ !ilateral; multilateral a&reements and alsoconcludes %Ts wit+ t+e emer&in& economic sian &iants.

%I s+ould !e &uided so as to esta!lis+ deeper lin)a&es wit+ t+eeconomy; w+ic+ would sta!iliFe t+e economy >e.&. improves t+e financialposition; facilitates e@ports; sta!iliFe t+e e@c+an&e rates; supplementdomestic savin&s and forei&n reserves; stimulates *R activities anddecrease interest rates and inflation etc.? and providin& to investors asound and relia!le macroeconomic environment.

s t+e appreciation of Indian rupee in t+e international mar)et isprovidin& &olden

opportunity to t+e policy ma)ers to attract more %I in ,reenfield proEectsas compared to 7rownfield investment. So t+e &overnment must invite,reenfield investments.

%inally; it is su&&ested t+at t+e policy ma)ers s+ould ensure optimumutilisation of funds and timely implementation of proEects. It is also o!servedt+at t+e realisation of approved %I into actual dis!ursement is Auite low. Itis also su&&ested t+at t+e &overnment w+ile pursuin& prudent policies mustalso e@ercise strict control over inefficient !ureaucracy; red H tapism; andt+e rampant corruption; so t+at investor=s confidence can !e maintained for attractin& more %I inflows to India. ast !ut not least; t+e study su&&ests

t+at t+e &overnment ensures %I Auality rat+er t+an its ma&nitude.Indeed;India needs a !usiness environment w+ic+ is conducive to t+e needs of !usiness. s forei&n investors doesn=t loo) for fiscal concessions or specialincentives !ut t+ey are more of a mind in +avin& access to a consolidateddocument t+at specified official procedures; rules and re&ulations;clearance; and opportunities in India. In fact; t+is can !e ac+ieved only if India implements its second &eneration reforms in totality and in ri&+tdirection. T+en no dou!t t+e t+ird &eneration economic reforms ma)e Indianot only favoura!le %I destination in t+e world !ut also set an e@ample tot+e rest of t+e world !y ac+ievin& w+at is predicted !y ,oldman

Sac+s23;24 >in 2::3; 2::#? t+at from 2::# to 2:2:; India=s ,P per capitain S terms willAuadruple and t+e Indian economy will overta)e %ranceand Italy !y 2:2:; ,ermany; 8 and *ussia !y 2:25;Napan !y 2:35 andS !y 2:43.



C$APTER 1&

BIBLIO'RAP$Y



1. .T. 8earney=s >2::#?G ,lo!al Services ocations Inde@ ;‖www.at)earney.com

2. l+iEaFi; 9a+ya . >1'''?G evelopin& ountries and %orei&nirect Investment ;‖di&itool.li!rary.mc&ill.ca.$$$1/dtlWpu!lis+/#/21"#:.+tm.

3. ndersen P.S and 6ainaut P. >2::4?G %orei&n irect Investmentand (mployment in t+e Industrial ountries ;‖+ttpGYYwww.!isYpu!Ywor)"1.pdf.

4. 7alasu!ramanyam .-; Sapsford avid >2::#?G oes India need a lotmore %I ; (conomic and Political Mee)ly; pp.154'H1555.‖

5. 7asu P.; -aya) -.; rc+ana >2::#?G %orei&n irect Investment inIndiaG(mer&in& 6oriFon ; Indian (conomic *eview; ol. II. -o.2; pp.‖255H2"".

". 7elem Iliana asAueF ,alan >2::"?G T+e effect of Trade i!eraliFationand %orei&n irect Investment in 0e@ico ;‖et+eses.!+am.ac.u)/$'/1/vasAueF&alan:"p+d.pdf.

#. 7+a&wati N.-. >1'#$?; natomy and onseAuences of (@c+an&e ontrol*e&ime ; ol 1; Studies in International economies *elations‖-o.1:; -ew 9or); ideasHrepec.or&/!/n!r/n!er!)/!+a&#$H1.+tml.

Ne8paper1. T+e economic times

2. 7usiness standard3. 7usiness lines

Sear5h e4gi4e

1? www.&oo&le.com

2? www.wi)ipedia.com

http://www.google.com/


http://www.wikipedia.com/


http://www.wikipedia.com/



C$APTER 1)

ANNEXURE



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Foreign Direct Investment in India in retail sector

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