Impact of International Capital Flows on India's Economic Growth
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Transcript of Impact of International Capital Flows on India's Economic Growth
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Impact of International Capital Fon India's Economic Growth
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BACKGROUND: INDIA TRANSFORMED
TodayStrong macro economic fu
Encouraging foreign invest
Outsourcing destination
Growing consumerism
Impetus on infrastructure d
Yesterday Slow rate of growth
Bureaucratic
Protected and slow
Small consumer markets
Weak infrastructure
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INTRODUCTION
International capital flows have significant potential benefits foreconomies around the world.
Capital flows are most helpful when the magnitude of those flows and stable.
The international capital flow such as direct and portfolio flows hascontribution to influence the economic behavior of the countries pand negatively.
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FACTORS AFFECTING FOREIGN INVEST
Rate of interest
Speculation
Profitability
Costs of production
Economic condition
Government policies
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SIGNIFICANCES OF FOREIGN INVESTM
Expansion in employment
Consumer benefit
Technological improvement
Import export
Growth in economy
Government benefits
Competition
Global relationship
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LIMITATIONS OF FOREIGN INVESTMEN
Work on the high profit areas rather than priority sector
Technological advancement
Unfavourable effect towards balance of payment
Interferes in the national politics
Unfair & unethical trade practices
Unfavourable for countries economy
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EXPORT AND IMPORT
85,206105152
128888
166162189001
117118908
157056190670
257629
307651
2004-05 2005-06 2006-07 2007-08 2008-09 2
Exports (US$ Mn.) Imports (US$ Mn.)
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FOREIGN INVESTMENTS
Foreign Investment
Direct Investment(FDI)
Wholly OwnedSubsidiary
Joint Venture
Acquisition
InstitutionalInvestment (FII)
Portfolio Investment(FPI)
Investment In
GDRs, ADRs
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FOREIGN DIRECT INVESTMENT (
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MEANING OF FDI
Foreign direct investment is investment of foreign assets into domstructures, equipment, and organizations.
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TYPES OF FDI
1. Wholly owned subsidiary
2. Joint venture
3. Acquisition
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WHY FDI IN INDIA ?
Liberal, Largest Democracy, Political Stability
Second Largest emerging market (US$2.4 trillion)
Skilled & Competitive labors force
Highest rates of return on investment
Growth over the past few years averaging 8% Destination for BPO, KPO, etc.
Second largest English speaking, scientific, technical &executivemanpower
Low costs & Tax exemptions in SEZ
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FACTORS ATTRACT FDI
Qualified, educated/skilled labor pool
Long term market potential
Access to natural resources
Large size of the economy,particularly the large and growingmiddle class
Political & environment stability
Open door policy towards FDI
Large and growing market
Gradual reduction in barriers to trade
Large English speaking popu
Well-established legal systemindependent judiciary
Financial incentives (funds frgovt.)
Fiscal incentives (exemption
import duties) Indirect incentives (provides
other resources)
Availability of natural resour
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SIGNIFICANCE OF FDI
Financial transfer in foreignexchange
Physical resources like machinerytools equipment etc.
Information & database
Worldwide contacts
Research & development
Trade channels
Economic growth
Management expertise
Financial resources for exp
Employment generation
Contribution to exports gr
Access to international ma
Good relation between twcountries
Government earns in the flicenses fees, registration taxes which is spend for puexpenditure
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FOREIGN INSTITUTIONAL INVESTMEN
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FOREIGN INSTITUTIONAL INVESTMENT (F
FIIs are defined under SEBI Regulations as
an institution that is a legal entity established or incorporated outsproposing to make investments in India only in securities.
It includes foreign pension funds, mutual funds,charitable/endowment/university funds etc. as well as asset managecompanies and other money managers operating on their behalf.
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TYPES OF FIIS
1. Portfolio Investment
2. Investment In GDRs, ADRs
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WHY INDIA NEED FII ?
Large unused natural resource
To share technical know-how
To bring in new technology in country
To make good foreign relation
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FII: HOW TO IMPACT INDIAN ECONOM
FII leads to appreciation of the currency
Problems of Inflation
Cant be used for long term
Problems for small investors
Adverse impact on exports: if our Indian currency appreciates just because of FI
inflow in India) there is adverse effect on our export. Our export industry will beuncompetitive due to appreciation of rupees.
FII and stock market: when cap on FII is high then they can bring in lot of funds istock market.
FII and inflation: the huge amount of FII fund flow creates the huge demand for rupees. In that situation RBI print more money in the market. This situation couexcess liquidity thereby leading to inflation.
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ADVANTAGES OF FII
Increase forex reserve
Large availability of capital
Increases domestic saving and investments
FIIS can individually purchase up to 10% and collectively up to 24%paid-up share capital of an Indian company
This limit of 24% can be increased to sectorial cap/ statutory limitapplicable to the Indian company by passing A boardresolution/shareholder resolution
Proprietary funds, foreign individuals and foreign corporates can reas A sub- account and invest through the FII. Separate limits of 10%
available for the sub-accounts
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FDI is prohibited in
Chit funds
Real Estate Business
Arms & Atomic Energy
Railway Transport
Agriculture & Plantation
Gambling and Betting including casinos etc.
Lottery Business including Government/private lottery, online lotteries, etc.
Manufacturing of Cigars, cheroots andcigarettes, of tobacco or of tobaccosubstitutes
FII is prohibited in
Business of chit fund
Agricultural or plantation activi
Trading in Transferable Develop(TDRs)
Real estate business or construhouses (real estate business do
development of townships, conresidential/commercial premisebridges
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REGULATION FOR FDI FORMATION
Automatic Approval By RBI
The RBI allows automatic approval within a period of two weeks (s
to compliance of norms) to all proposals and permits foreign equit24%; 50%; 51%; 74% and 100% is allowed depending on the categoindustries and the sectorial caps applicable.
Investments in high priority industries or for trading companies priengaged in exporting are given almost automatic approval by the
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REGULATION FOR FDI FORMATION
The Foreign Investment Promotion Board (FIPB) Route
FIPB Approves all other cases where the parameters of automatic
are not met. Normal processing time is 4 to 6 weeks.
Its approach is liberal for all sectors and all types of proposals, andrejections are few.
It is not necessary for foreign investors to have a local partner, eventhe foreign investor wishes to hold less than the entire equity of thcompany.
The portion of the equity not proposed to be held by the foreign incan be offered to the public.
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WHAT FIIS CAN DO?
A Foreign Institutional Investor may invest only in the following:-1. Securities in the Primary & Secondary markets including shares,
debentures
2. Commercial paper
3. Security receipts
4. Indian Depository receipts
5. Units of schemes floated by domestic mutual funds including Unof India, whether listed on a recognized stock exchange or not
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DIFFERENTIATION BETWEEN FDI & FII
FDI
It is long-term investment
Investment in physical assets
Aim is to increase enterprise capacity orproductivity or change management control
Leads to technology transfer, access to marketsand management inputs
FDI flows into the primary market
Entry and exit is relatively difficult
FDI is eligible for profits of the company
Direct impact on employment of labour and
wages
FII
It is generally short-term investme
Investment in financial assets
Aim is to increase capital availabili
FII results in only capital inflows
FII flows into the secondary marke
Entry and exist is relatively easy
FII is eligible for capital gain
No direct impact on employment oand wages
Financial Year Wise FDI In Flow From
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GROWTH OF FDI IN INDIA
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-
FDI In Flow 4029 6130 5035 4322 6051 8961 22826 34835 41874 3774
% INCREASE 0 52% -18% -14% 40% 48% 146% 53% 20% -8%
4029
6130 50354322
60518961
22826
34835
41874
3774
0
52%
-18% -14%
40%48%
146%
53%
20%
-
-10000
0
10000
20000
30000
40000
50000
a c a ea se o o2000-2012
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EXPERTS VIEWS ON FDI IN INDIA
Chief Economic Adviser
Raghu ram Rajan
"The safest form of financing is through
FDI, without any doubt because its long
term... If you can make more financingthrough FDI, you are safer and so to the
extent we can open up more to FDI...
There will be efficiency, because there will
be more competition in local economy,"
"We Have To
That We Are NDependent O
Investors That
Environment
External Inves
Fickle
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