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Role of Foreign Direct Investment (FDI) in a growing economy

-:CONTENTS:Sr.No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 SUBJECT Introduction of the Study Need & Purpose For FDI TYPES OF FDI FLOW TO INDIA Objective of the Study Scope of the Project Growth of Foreign direct Investment Sectors Benefited With FDI Regulatory Mechanism for FDI Year wise FDI Inflow Diversified FDI Inflows Governments Participation In FDI LAWS OF FDI Permissible Limits for FDI in different Sectors FDI in Retail Sector RESULTS OF THE STUDY FDI Impact on Domestic Enterprises LIMITATION OF FOREIGN DIRECT INVESTMENT Conclusion PAGE No. 7 9 9 10 10 11 12 16 19 20 21 20 24 47 54 54 56 56

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Bibliography

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Introduction of the Study


Foreign Direct Investment (FDI) is capital provided by a foreign direct investor, either directly or through other related enterprises, where the foreign investor is directly involved in the management of the enterprise. Development of a new business or acquisition of at least 10% interest in a domestic company or a tangible assets, (purchase of bond & stock). Foreign direct investment is the transfer by a multinational firm of capital, managerial, and technical assets from its home country to a host country. FDI has three components: equity capital, reinvested earnings and intra-company loans. FDI flows are recorded on a net basis (capital account credits less debits between direct investors and their foreign affiliates) in a particular year. Outflows of FDI in the reporting economy comprise capital provided (either directly or through other related enterprises) by a company resident in the economy (foreign direct investor) to an enterprise resident in another country (FDI enterprise). Inflows of FDI in the reporting economy comprise capital provided (either directly or through other related enterprises) by a foreign direct investor to an enterprise resident in the economy (called FDI enterprise). Foreign direct investment (FDI) includes significant investments by foreign companies, such as construction of production facilities or ownership stakes taken in U.S. companies. FDI not only creates new jobs, it can also lead to an infusion of innovative technologies, management strategies, and workforce practices. The ultimate flow of foreign involvement is direct ownership of foreign- based assembly or manufacturing facilities. The foreign company can buy part or full interest in a local company or build its own facilities. If the foreign market appears large enough, foreign promotion facilities offer distinct advantages. First, the firm secures cost economies in the form of cheaper labor or raw material, foreign government incentives, and freight savings. Second, the firm strengthens its image in the host country because it creates jobs. Third, the firm develops the recent relationship with the government, customers, local suppliers, and distributors, enabling it to adapt its product better to the local environment. Forth, the firm retains full retain over its investment and therefore can develop manufacturing and marketing policies that serve its long-term international objectives. Fifth, the firm assures itself access to the market in case the host country starts insisting that locally purchased goods have domestic content.

Need & Purpose For FDI :


India need FDI for reasons such as:- SUSTAINING HIGH LEVEL OF INVESTMENT FOR DEVLOPMENT FULFILL THE TECHNOLOGICAL GAP EXPLOITATION OF NATURAL RESOURCES DEVLOPMENT OF ECONOMIC INFRASTRUCTURE. SUSTAINING HIGH LEVEL OF INVESTMENT:-as India is a developing country, it need certain amount of saving to invest for its development. This gap between investment and saving is filled by foreign capital. TECHNOLOGICAL GAP:- India has lower level of technology as compare to developed nations which is very necessary for industrial and other development so it need technology transfer which comes with fdi when it assumes the form of private foreign investment. EXPLOITATION OF NATURAL RESOURCES:- India is full with natural resource but it has no required technical skill and expertise to exploit it so India need foreign capital to undertake the exploitation of its mineral wealth. DEVLOPMENT OF ECONOMIC INFRASTRUCTURE:- Domestic capital of developing countries like India is too low to build up its economic infrastructure so it need some foreign capital to develop its economic infrastructure

TYPES OF FDI FLOW TO INDIA


NRI deposits:- The Forms of Foreign Capital Flowing into India include, NRI deposits, which are made in profitable foreign currency accounts.

Portfolio flow of capital:- portfolio flow of capital that are made by institutional foreign investors that make investments in India's debt and stock markets. Investment made in commercial banks:- The Forms of Foreign Capital Flowing into India also include, investments that are being made by the foreign investors in the commercial banks of India Private foreign investment:- under private foreign investment investors either sets up a branch or a subsdiary in the host country. The major sectors that have been benefited from Foreign Direct Investment are as follows: Financial sector (banking and non-banking). Insurance Telecommunication Hospitality and tourism Pharmaceuticals Software and Information Technology.

Objective of the Study:


To know Which sector is good for investment . To know the reason for investment in India. To know which country s safe to invest . To know how can India Grow by Investment . To Examine the trends and patterns in the FDI across different sectors and from different countries in India To know in which sector we can get more foreign currency in terms of investment in India To know how much to invest in a developed country or in a developing. To know which country in investing in which country Influence of FII on movement of Indian stock exchange

To understand the FII & FDI policy in India.

Scope of the Project : The Scope of the Project is to find out where in India is Foreign Direct Investment is taking place

Growth of Foreign direct Investment

Governments Participation in FDI - INDIAN SCENARIO

In order to attact Foreign direct Investment (FDI) from the worlds major investors and in order to present a favorable scenario for investors the Indian government has announced a number of reforms and has implemented several industrial policies. The foreign direct investment is allowed in India through collaborations that are of financial nature, joint venture collaborations, through preferential allotments, investment through EURO issues.Apart from this it has opened of FDI route by setting up of 100% EOUs /EHTPs/ STPs etc and entering into Foreign technology agreement. As a result of the various policy initiatives taken, India has been rapidly changing from a restrictive regime to a liberal one, and FDI is encouraged in almost all the economic activities under the automatic route, huge amounts of foreign direct investment is coming into India through nonresident Indians, international companies, and various other foreign investors. The growth of FDI in India boosted the economic growth of the country major advantages of FDI in India have been in terms of: Increased capital flow. Improved technology. Management expertise. Access to international markets

Sectors Benefited With FDI

Sector-wise FDI Inflows ( From April 2000 to January 2010) SECTOR AMOUNT OF FDI INFLOWS In Rs Million Services Sector 787420.81 In US$ Million 18118.40 8876.43 6215.55 5029.01 3310.23 5118.85 3129.66 1964.06 1551.88 2612.85 1324.92 1621.03 2244.17 1480.94 1112.92 1217.50 760.32 748.57 648.86 1194.20 522.86 PERCENT OF TOTAL FDI INFLOWS (In terms of Rs) 22.39 11.12 7.83 6.07 4.17 6.20 3.90 2.47 1.80 3.11 1.63 2.01 2.68 1.77 1.38 1.49 0.98 0.96 0.80 1.48 0.60

Computer Software & 391109.74 hardware Telecommunications 275441.38

Construction Activities 213595.12 Automobile 146799.41

Housing & Real estate 217936.02 Power 137089.37

Chemicals (Other than 87008.07 Fertilizers) Ports Metallurgical industries 63290.50 109563.20

Electrical Equipments 57379.63 Cement & Gypsum Products Petroleum & Natural Gas Trading Consultancy Services Hotel and Tourism Food Processing Industries Electronics 70781.19 94417.17 62416.85 48647.43 52500.05 34362.49 33914.75

Misc. Mechanical & 28310.13 Engineering industries Information & Broadcasting (Incl. Print media) Mining 52115.90 21204.94

Regulatory Mechanism for FDI

Measuring FDI restrictiveness The FDI Index gauges the restrictiveness of a countrys FDI rules by looking at the four main types of restrictions on FDI: Foreign equity limitations Screening or approval mechanisms Restrictions on the employment of foreigners as key personnel Operational restrictions, e.g. restrictions on branching and on capital repatriation or on land ownership The FDI Index is not a full measure of a countrys investment climate. A range of other factors come into play, including how FDI rules are implemented. Entry barriers can also arise for other reasons, including state ownership in key sectors. A countrys ability to attract FDI will be affected by factors such as the size of its market, the extent of its integration with neighbours and even geography. Nonetheless, FDI rules are a critical determinant of a countrys attractiveness to foreign investors. Furthermore, unlike geography, FDI rules are something over which governments have control. FDI restrictions tend to arise mostly in primary sectors such as mining, fishing and agriculture, but also in media and transport.

Year wise FDI Inflow

Diversified FDI Inflows

Governments Participation In FDI

On February 11, 2010, the Government of India approved new rules on foreign direct investment. They were issued on March 26 by the Department of Industrial Policy and Promotion (DIPP) and entered into force on April 1. Under the liberalized measures, the Finance Minister can endorse proposals involving foreign equity of up to INR1200 crore [1 crore equals 10,000,000 Indian rupees (INR)] (about US$268 million as of April 5, 2010) without seeking approval from the Cabinet Committee on Economic Affairs (CCEA), creating an automatic consideration procedure. Previously, FDI proposals for amounts above INR600 crore were referred to the CCEA. Because the CCEA is comprised of several ministers in charge of various portfolios, it could be a time-consuming procedure. The new FDI rules stipulate that proposals for FDI of up to RS1,200 crore will be handled by the FIPB, which is under the Finance Ministry. This administrative change is expected to streamline the process. (Singh, supra.) Now, foreign investors who have already obtained the requisite approval are not required to obtain new approvals in order to make additional investments in the same entity if: 1) The investment activities or sectors have been transferred to the automatic procedure; 2) Previous sectoral caps on foreign FDI activities have been removed or the permitted FDI amount increased and the activities have been placed under the automatic route; or 3) The approval was obtained to meet previous requirements set forth in Press Note 18/1998 or Press Note 1/2005. These Notes address foreign investment/ technical collaboration proposals "where the foreign investor has or had any previous joint venture or technology transfer/trademark agreement in the same or allied field in India. Moreover, foreign investors will no longer need to obtain no-objection certificates (NOC) from domestic company jointventure partners in order to invest on their own in the same sectors.

LAWS OF FDI

GOVERNING LAWS

Both domestic (of the investing and recipient economies) and international laws govern FDI. Domestic investment codes typically include provisions to attract FDI and safeguard direct investors, such as promises of national treatment, most-favored-nation treatment, tax incentives, security measures, and/or dispute resolution .In the event of an investor-State dispute, investors generally must exhaust local remedies before turning to other nations or international dispute resolution, such as the International Centre for Settlement of Investment Disputes, an international arbitration institution. International law also governs FDI. Sources of international law include, inter alia, multilateral treaties, bilateral investment treaties (BITs), customary international law, and judicial decisions. Multilateral treaties, such as the Agreement on Trade-Related Investment Measures (regarding trade in goods) and the Agreement on Trade-Related Aspects of Intellectual Property (regarding intellectual property) harmonize disparate domestic laws. Attempts, however, to negotiate a comprehensive, multilateral investment treaty have failed. As such, the U.S. views BITs as particularly important and has negotiated40 that are currently in force.

Foreign Direct Investment (FDI) Permissable Limits in Different Sectors as on December 2012
Sl. No. Sector FDI Permissible Limit

Hotel & Tourism

100%

Power

100%

Drugs & Pharmaceuticals

100%

Roads, Highways, Ports and Harbours

100%

Pollution Control and Management

100%

Call Centers in India

100%

Telecom Sector

74%

Insurance

26%

Defense

26%

What are the Permissible different Sectors :


(A) 26% FDI is permitted in Defence Newspaper and media ** Petroleum refining

Limits

for

FDI

in

Pension sector (allowed in October 2012 as per cabinet decision)

(B)

49% FDI is permitted in :

Banking Cable network** DTH ** Infrastructure investment Telecom Insurance (Enhanced from 26% to 49% in October, 2012)
49% (FDI & FII) in power exchanges registered under the Central Electricity Regulatory Commission (Power Market) Regulations 2010 subject to an FDI limit of 26 per cent and an FII limit of 23 per cent of the paid-up capital is now permissible. [Permitted in September 2012]

(C ) 51% is Permitted in Multi-Brand Retail (Since September 2012) Petro-pipelines

(D) 74% FDI is permitted in Atomic minerals Science Magazines /Journals Petro marketing Coal and Lignite mines Telecom (E)100% FDI is permitted in Single Brand Retail (Increased to 100% from 51% in December 2011). Advertizement Airports Cold-storage BPO/Call centres E-commerce Energy (except atomic) export trading house Films Hotel, tourism Metro train Mines (gold, silver) Petroleum exploration Pharmaceuticals Pollution control Postal service Roads, highways, ports.

Township Wholesale trading

Insurance Sector: FDI in Insurance sector in India


FDI up to 26% in the Insurance sector is allowed on the automatic route subject to obtaining license from Insurance Regulatory & Development Authority (IRDA)

Telecommunication: FDI in Telecommunication sector


i. In basic, cellular, value added services and global mobile personal communications by satellite, FDI is limited to 49% subject to licensing and security requirements and adherence by the companies (who are investing and the companies in which investment is being made) to the license conditions for foreign equity cap and lock- in period for transfer and addition of equity and other license provisions. ii. ISPs with gateways, radio-paging and end-to-end bandwidth, FDI is permitted up to 74% with FDI, beyond 49% requiring Government approval. These services would be subject to licensing and security requirements. iii. iv. No equity cap is applicable to manufacturing activities. FDI up to 100% is allowed for the following activities in the telecom sector : a. b. c. d. ISPs not providing gateways (both for satellite and submarine cables); Infrastructure Providers providing dark fiber (IP Category 1); Electronic Mail; and Voice Mail

The above would be subject to the following conditions: e. FDI up to 100% is allowed subject to the condition that such companies would divest 26% of their equity in favor of Indian public in 5 years, if these companies are listed in other parts of the world. f. The above services would be subject to licensing and security requirements, wherever required.Proposals for FDI beyond 49% shall be considered by FIPB on case to case basis.

Trading: FDI in Trading Companies in India


Trading is permitted under automatic route with FDI up to 51% provided it is primarily export activities, and the undertaking is an export house/trading house/super trading house/star trading house. However, under the FIPB route:i. 100% FDI is permitted in case of trading companies for the following activities:

exports; bulk imports with ex-port/ex-bonded warehouse sales; cash and carry wholesale trading; other import of goods or services provided at least 75% is for procurement and sale of goods and services among the companies of the same group and not for third party use or onward transfer/distribution/sales.

ii. The following kinds of trading are also permitted, subject to provisions of EXIM Policy: a. Companies for providing after sales services (that is not trading per se) b. Domestic trading of products of JVs is permitted at the wholesale level for such trading companies who wish to market manufactured products on behalf of their joint ventures in which they have equity participation in India.

c. Trading of hi-tech items/items requiring specialized after sales service d. Trading of items for social sector e. Trading of hi-tech, medical and diagnostic items. f. Trading of items sourced from the small scale sector under which, based on technology provided and laid down quality specifications, a company can market that item under its brand name. g. Domestic sourcing of products for exports. h. Test marketing of such items for which a company has approval for manufacture provided such test marketing facility will be for a period of two years, and investment in setting up manufacturing facilities commences simultaneously with test marketing

FDI up to 100% permitted for e-commerce activities subject to the condition that such companies would divest 26% of their equity in favor of the Indian public in five years, if these companies are listed in other parts of the world. Such companies would engage only in business to business (B2B) e-commerce and not in retail trading.

Power: FDI In Power Sector in India


Up to 100% FDI allowed in respect of projects relating to electricity generation, transmission and distribution, other than atomic reactor power plants. There is no limit on the project cost and quantum of foreign direct investment.

Drugs & Pharmaceuticals


FDI up to 100% is permitted on the automatic route for manufacture of drugs and pharmaceutical, provided the activity does not attract compulsory licensing or involve use of recombinant DNA technology, and specific cell / tissue targeted formulations.

FDI proposals for the manufacture of licensable drugs and pharmaceuticals and bulk drugs produced by recombinant DNA technology, and specific cell / tissue targeted formulations will require prior Government approval.

Roads, Highways, Ports and Harbors


FDI up to 100% under automatic route is permitted in projects for construction and maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels, ports and harbors.

Pollution Control and Management


FDI up to 100% in both manufacture of pollution control equipment and consultancy for integration of pollution control systems is permitted on the automatic route.

Call Centers in India / Call Centres in India


FDI up to 100% is allowed subject to certain conditions.

Business Process Outsourcing BPO in India


FDI up to 100% is allowed subject to certain conditions.

Special Facilities and Rules for NRI's and OCB's


NRI's and OCB's are allowed the following special facilities: 1. Direct investment in industry, trade, infrastructure etc. 2. Up to 100% equity with full repatriation facility for capital and dividends in the following sectors i. ii. 34 High Priority Industry Groups Export Trading Companies

iii. iv. v. vi. vii. viii. ix. x. xi. xii.

Hotels and Tourism-related Projects Hospitals, Diagnostic Centers Shipping Deep Sea Fishing Oil Exploration Power Housing and Real Estate Development Highways, Bridges and Ports Sick Industrial Units Industries Requiring Compulsory Licensing

3. Up to 40% Equity with full repatriation: New Issues of Existing Companies raising Capital through Public Issue up to 40% of the new Capital Issue. 4. On non-repatriation basis: Up to 100% Equity in any Proprietary or Partnership engaged in Industrial, Commercial or Trading Activity. 5. Portfolio Investment on repatriation basis: Up to 1% of the Paid up Value of the equity Capital or Convertible Debentures of the Company by each NRI. Investment in Government Securities, Units of UTI, National Plan/Saving Certificates. 6. On Non-Repatriation Basis: Acquisition of shares of an Indian Company, through a General Body Resolution, up to 24% of the Paid Up Value of the Company. 7. Other Facilities: Income Tax is at a Flat Rate of 20% on Income arising from Shares or Debentures of an Indian

India Further Opens Up Key Sectors for Foreign Investment


India has liberalized foreign investment regulations in key sectors, opening up commodity exchanges, credit information services and aircraft maintenance operations. The foreign investment limit in Public Sector Units (PSU) refineries has been raised from 26% to 49%. An additional sweetener is that the mandatory disinvestment clause within five years has been done away with. FDI in Civil aviation up to 74% will now be allowed through the automatic route for non-scheduled and cargo airlines, as also for ground handling activities. 100% FDI in aircraft maintenance and repair operations has also been allowed. But the big one, allowing foreign airlines to pick up a stake in domestic carriers has been given a miss again. India has decided to allow 26% FDI and 23% FII investments in commodity exchanges, subject to the proviso that no single entity will hold more than 5% of the stake.

Sectors like credit information companies, industrial parks and construction and development projects have also been opened up to more foreign investment. Also keeping India's civilian nuclear ambitions in mind, India has also allowed 100% FDI in mining of titanium, a mineral which is abundant in India. Sources say the government wants to send out a signal that it is not done with reforms yet. At the same time, critics say contentious issues like FDI and multi-brand retail are out of the policy radar because of political compulsions.

Forbidden Territories:

Arms and ammunition Atomic Energy Coal and lignite

Rail Transport Mining of metals like iron, manganese, chrome, gypsum, sulfur, gold, diamonds, copper, zinc.

Foreign Investment through GDRs (Euro Issues)


Indian companies are allowed to raise equity capital in the international market through the issue of Global Depository Receipt (GDRs). GDR investments are treated as FDI and are designated in dollars and are not subject to any ceilings on investment. An applicant company seeking Government's approval in this regard should have consistent track record for good performance (financial or otherwise) for a minimum period of 3 years. This condition would be relaxed for infrastructure projects such as power generation, telecommunication, petroleum exploration and refining, ports, airports and roads.

1. Clearance from FIPB


There is no restriction on the number of Euro-issue to be floated by a company or a group of companies in the financial year. A company engaged in the manufacture of items covered under Annex-III of the New Industrial Policy whose direct foreign investment after a proposed Euro issue is likely to exceed 51% or which is implementing a project not contained in Annex-III, would need to obtain prior FIPB clearance before seeking final approval from Ministry of Finance.

2. Use of GDRs
The proceeds of the GDRs can be used for financing capital goods imports, capital expenditure including domestic purchase/installation of plant, equipment and building and investment in software development, prepayment or scheduled repayment of earlier external borrowings, and equity investment in JV/WOSs in India.

Foreign direct investments in India are approved through two routes

1. Automatic approval by RBI


The Reserve Bank of India accords automatic approval within a period of two weeks (subject to compliance of norms) to all proposals and permits foreign equity up to 24%; 50%; 51%; 74% and 100% is allowed depending on the category of industries and the sectoral caps applicable. The lists are comprehensive and cover most industries of interest to foreign companies. Investments in high priority industries or for trading companies primarily engaged in exporting are given almost automatic approval by the RBI.

2. The FIPB Route Processing of non-automatic approval cases


FIPB stands for Foreign Investment Promotion Board which approves all other cases where the parameters of automatic approval are not met. Normal processing time is 4 to 6 weeks. Its approach is liberal for all sectors and all types of proposals, and rejections are few. It is not necessary for foreign investors to have a local partner, even when the foreign investor wishes to hold less than the entire equity of the company. The portion of the equity not proposed to be held by the foreign investor can be offered to the public.

iii.
Sr. No. 1. 2. 3. 4.

Analysis of sector specific policy for FDI


Sector/Activity Hotel & Tourism NBFC Insurance Telecommunication: cellular, value added services ISPs paging with gateways, radio74% 100% 51% Automatic FDI cap/Equity 100% 49% 26% 49% Above 49% need Govt. licence Entry/Route Automatic Automatic Automatic Automatic

5.

Electronic Mail & Voice Mail Trading companies: primarily export activities

bulk imports, cash and carry 6. 7. 8. 9. 10 11. 12. wholesale trading 100% Power(other than atomic reactor power plants) 100% Drugs & Pharmaceuticals 100% Roads, Highways, Ports and 100% Harbors Pollution Management Call Centers BPO For NRI's and OCB's: i. ii. 34 High Priority Industry Groups Export Companies iii. Hotels and Trading 100% Automatic Control and 100% 100% 100% Automatic Automatic Automatic Automatic Automatic Automatic Automatic

Tourism-related Projects iv. Hospitals, Diagnostic Centers v. vi. vii. viii. ix. Shipping Deep Sea Fishing Oil Exploration Power Housing and Real Estate Development x. Highways, Bridges and Ports

xi. Units xii.

Sick

Industrial

Industries Requiring Licensing Compulsory

xiii. Sector Airports:

Industries Reserved for Small Scale

13.

Greenfield projects 14 15. 16. 17. Existing projects Assets reconstruction company Cigars and cigarettes Courier services Investing companies in infrastructure telecom sector) (other than

100% 100% 49% 100% 100% 49%

Automatic Beyond 74% FIPB FIPB FIPB FIPB FIPB

iv.

Analysis of FDI inflow in India


From April 2000 to August 2011-12 (Amount US$ in Millions)

S.No 1. 2. 3. 4. 5.

Financial Year 2000-01 2001-02 2002-03 2003-04 2004-05

Total FDI Inflows 4,029 6,130 5,035 4,322 6,051

% Growth Over Previous Year ---(+) 52 (-) 18 (-) 14 (+) 40

6. 7. 8. 9. 10. 11. 12.

2005-06 2006-07 2007-08 2008-09 2009-10 2010-2011 2011-2012

8,961 22,826 34,362 35,168 16,232 19427 28403

(+) 48 (+) 146 (+) 51 (+) 02 (-) 0.1 (+) 15 (+) 31

v.

Analysis of share of top ten investing countries FDI equity in flows


From April 2000 to January 2012 (Amount in Millions)

Sr. No

Country

Amount of FDI Inflows

As

To FDI

Total 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Mauritius Singapore U.S.A. U.K. Netherlands Japan Cyprus Germany France U.A.E. 19,18,633.61 3,80,142.56 3,32,935.60 2,40,974.98 1,78,047.76 1,50,129.05 1,32,448.04 1,12,242.06 61,686.39 50,915.59 Inflow 44.01 8.72 7.64 5.53 4.08 3.44 3.04 2.57 1.42 1.17

Mauritius
Mauritius invested Rs.19,18,633 million in India Up to the January 2010, equal to 44.01 percent of total FDI inflows. Many companies based outside of India utilize Mauritian holding companies to take advantage of the India- Mauritius Double Taxation Avoidance Agreement (DTAA). The DTAA allows foreign firms to bypass Indian capital gains taxes, and may allow some India-based firms to avoid paying certain taxes through a process known as round tripping. The extent of round tripping by Indian companies through Mauritius is unknown. However, the Indian government is concerned enough about this problem to have asked the government of Mauritius to set up a joint monitoring mechanism to study these investment flows. The potential loss of tax revenue is of particular concern to the Indian government. These are the sectors which attracting more FDI from Mauritius Electrical equipment Gypsum and cement products Telecommunications Services sector that includes both non- financial and financial Fuels.

Singapore
Singapore continues to be the single largest investor in India amongst the Singapore with FDI inflows into Rs. 3,80,142 crores up to January 2010 Sector-wise distribution of FDI inflows received from Singapore the highest inflows have been in the services sector (financial and non financial), which accounts for about 30% of FDI inflows from Singapore. Petroleum and natural gas occupies the second place followed by computer software and hardware, mining and construction.

U.S.A.
The United States is the third largest source of FDI in India (7.64 % of the total), valued at 732335 crore in cumulative inflows up to January 2010. According to the Indian government, the top sectors attracting FDI from the United States to India are fuel, telecommunications, electrical equipment, food processing, and services. According to the available M&A data, the two top sectors attracting FDI inflows from the United States are computer systems design and programming and manufacturing

U.K.
The United Kingdom is the fourth largest source of FDI in India (5.53 % of the total), valued at 2,40,974 crores in cumulative inflows up to January 2010 Over 17 UK companies under the aegis of the Nuclear Industry Association of UK have tied up with Ficci to identify joint venture and FDI possibilities in the civil nuclear energy sector. UK companies and policy makers the focus sectors for joint ventures, partnerships, and trade are non-conventional energy, IT, precision engineering, medical equipment, infrastructure equipment, and creative industries.

Netherlands
FDI from Netherlands to India has increased at a very fast pace over the last few years. Netherlands ranks fifth among all the countries that make investments in India. The total flow of FDI from Netherlands to India came to Rs. 1, 78,047 crores between 1991 and 2002. The total percentage of FDI from Netherlands to India stood at 4.08% out of the total foreign direct investment in the country up to August 2009.

Following Various industries attracting FDI from Netherlands to India are:


Food processing industries Telecommunications that includes services of cellular mobile, basic telephone, and radio paging

Horticulture Electrical equipment that includes computer software and electronics Service sector that includes non- financial and financial services

vi.

Analysis of sectors attracting highest FDI equity inflows


From April 2000 to March 2010 (Amount in Millions)

Sr. No

Country

Amount Inflows

of

FDI %

As

To FDI

Total Inflow 22.14 9.48 8.46 7.46 6.09 4.36 4.13 2.89 2.57 2.33

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Service Sector (Financial & Non Financial) Computer Software & Hardware Telecommunication Housing & Real Estate Construction Activities Automobile Industry Power Metallurgical Industries Petroleum & Natural Gas Chemical

9,65,210.77 4,13,419.03 3,68,899.62 3,25,021.36 2,65,492.96 1,90,172.22 1,79,849.92 1,25,785.57 1,11,957.00 1,01,680.18

The sectors receiving the largest shares of total FDI inflows up to arch 2010 were the service sector and computer software and hardware sector, each accounting for 22.14 and 9.48 percent respectively. These were followed by the telecommunications, real estate, construction and automobile sectors. The top sectors attracting FDI into India via M&A activity were manufacturing; information; and professional, scientific, and technical services. These sectors correspond closely with the sectors identified by the Indian government as attracting the largest shares of FDI inflows overall. The ASSOCHAM has revealed that FDI in Chemicals sector (other than fertilizers) registered maximum growth of 227 per cent during April 2008 March 2009 as compared to 11.71 per

cent during the last fiscal. The sector attracted USD 749 million FDI in FY 09 as compared to USD 229 million in FY 08. During the year 2009 government had raised the FDI limit in telecom sector from 49 per cent to 74 per, which has contributed to the robust growth of FDI. The telecom sector registered a growth of 103 per cent during fiscal 2008-09 as compared to previous fiscal. The sector attracted USD 2558 million FDI in FY 09 as compared to the USD 1261 million in FY 08, acquired 9.37 per cent share in total FDI inflow. India automobile sector has been able to record 70 per cent growth in foreign investment. The FDI inflow in automobile sector has increased from USD 675 million to 1,152 million in FY 09 over FY 08. The other sectors which registered growth in highest FDI inflow during April March 2009 were housing & real estate (28.55 per cent), computer software & hardware (18.94 per cent), construction activities including road & highways (16.35 per cent) and power (1.86 per cent).

Foreign Investment Promotion Board


The FIPB (Foreign Investment Promotion Board) is a government body that offers a single window clearance for proposals on foreign direct investment in the country that are not allowed access through the automatic route. Consisting of Senior Secretaries drawn from different ministries with Secretary ,Economic Affairs in the chair, this high powered body discusses and examines proposals for foreign investment in the country for restricted sectors ( as laid out in the Press notes and extant foreign investment policy) on a regular basis. Currently proposals for investment beyond 600 crores require the concurrence of the CCEA (Cabinet Committee on Economic Affairs). The threshold limit is likely to be raised to 1200 crore soon.The Board thus plays an important role in the administration and implementation of the Governments FDI policy. In circumstances where there is ambiguity or a conflict of interpretation, the FIPB has stepped in to provide solutions. Through its fast track working it has established its reputation as a body that does not unreasonably delay and is objective in its decision making. It therefore has a strong record of actively encouraging the flow of FDI into the country. The FIPB is assisted in this task by a FIPB Secretariat. The launch of e- filing facility is an important initiative of the Secretariat to further the cause of enhanced accessibility and transparency .

Low Income Countries in Global FDI Race


The situation of foreign direct investment has been relatively good in the recent times with an increase of 38%. Normally, the foreign direct investment is made mostly into the extractive industries. However, now the foreign direct investors are also looking to pump money into the manufacturing industry that has garnered 47% of the total foreign direct investment made in 1992. However, the situation has not been the same in the countries with a middle income range. The middle income countries have not received a steady inflow of foreign direct income coming their way. The situation is comparatively better in the low income countries. They have had an uninterrupted and continually increasing flow of foreign direct investment. It has been observed that the various debt crises, as well as, other forms of economic crises have had less effect on these countries. These countries had lesser amounts of commercial bank obligations, which again had been caused by the absence of proper financial markets, as well as the fact that their economies were not open to foreign direct investment. During the later phases of the decade of 70s the Asian countries started encouraging foreign direct investments in their economies. China has received the most of the foreign direct investment that was pumped into the countries with low income. It accounted for as much as 86% of the total foreign direct investment made in the lower income countries in with low income. It accounted for as much as 86% of the total foreign direct investment made in the lower income countries in 1995. The economic liberalization in China started in 1979. This led to an increase in the foreign direct investment in China. In the years between 1982 and 1991 the average foreign direct investment in China was US$ 2.5 billion. This average increased by seven times to become US$ 37.5 billion during 1995. A significant amount of the foreign direct investment in China was provided in the industrial sector.

It was as much as 68%. Around 20% of the foreign direct investment of China was made in the real estate sector. During the same period Nigeria had been the second best in terms of receiving foreign direct investment. In the recent times India has risen to be the third major foreign direct investment destination in the recent years. Foreign direct investment started in India in 1991 with the initiation of the economic liberation. There were more initiatives that enabled India to garner foreign direct investments worth US$ 2.9 billion from 1991 to 1995. This was a significant increase from the previous twenty years when the total foreign direct investment in India was US$1 billion. Most of the foreign direct investment made in India has been in the infrastructural areas like telecommunications and power. In the manufacturing industry the emphasis has been on petroleum refining, vehicles and petrochemicals Vietnam is a low income country, which is supposed to have the same potential as China to generate foreign direct investment. The foreign direct investment laws were introduced in Vietnam in 1987-88. This led to an increase in the foreign direct investment made in the country. The amount stood at US$ 25 million in 1993 compared to US$ 8 million in 1993. This amount increased by 3 times after the USA removed its economic sanctions in 1994. The gas and petroleum industries were the biggest beneficiaries of the foreign direct investment. Bangladesh started receiving increasing foreign direct investment after 1991, when the economic reforms took place in the country. After 1991 it was possible for foreign companies to set up companies in Bangladesh without taking permission beforehand. The foreign direct investment rose from US$ 11 million in 1994 to US$ 125 million in 1995. As per the available statistics the manufacturing industry, comprising of clothing and textiles took up 20% of the total approved foreign direct investment. Food processing, chemicals and electric machinery were also important in this regard. The increase in the foreign direct investment in Ghana was remarkable as well. The figures increased from US$11.7 million, on an average, from 1986 to 1992 to US$ 201 million, on an average, from 1993 to 1995. This improvement was brought about by the privatization of the Ashanti Goldfields.

FDI in Retail Sector


More than two decades after the first wave of reforms were introduced in the year1991; the countrys socio-economic health has by no means become better. In the midst of these galloping problems, the announcement by the UPA government about FDI in multi brand retail comes not as a relief but as a matter to be given a serious thought. The debate so far is threefold: (a) one section which is drooling over the reforms and projecting huge surge of investment in infrastructure and thereby increment in the employment levels. (b) The second group is the one which is sceptical about the opening of markets for foreign retail giants like Walmart, Carrefour, Kmart etc. not because they fear that it would affect the overall development of the economy. Rather, this group fears competition from the big foreign companies which have deep pockets to procure products from the world market. Thus, it would affect their profits by a huge margin. (c) The third group comprises of the unorganized retail sector which fears its elimination from the market in the long run. Various claims made by UPA seem to fall flat on any reason if we take into consideration the outcomes of previous reforms. Employment in formal sector has not increased by any count since 1991, informalization of labour in the formal sector is a clear indication of this fact. Productivity in agriculture, where almost 54 per cent of the population is dependent has declined. It is no longer a profitable venture as the input costs have gone up in the post green revolution phase. Rise in the phenomena of rural to urban migration, rural non-farm employment, farmer suicides, show what precarious condition agriculture has landed into. Gradual shift of the economy from agriculture to industry, as expected in the prospects of reforms, has proven to be a fallacy. Instead, the existing industries have become more capital intensive leading to the displacement of labour on a mass scale. Trade liberalisation has given the global players a free hand to rein the economy. As a consequence rate of inflation is rising unchecked as the price of crude oil is fluctuating globally. These examples showcase that reforms and liberal policies have not led to the overall development of the economy. In the light of the above observations, announcement of FDI in multi brand retail does not give much hope. The Indian retail sector is not only very vast but also varied in its composition. The huge population of the country, the rise of the middle class and its purchasing power and a huge market for foreign investment in India are factors that have invoked the interest of the foreign investors. But, it becomes imperative to see what this FDI would entail for the retail sector when it is analyzed by keeping the informal economy at the centre of the debate. When only 4 percent of the retail trade in India comes under the organized retail it becomes essential to evaluate or assess the viability of FDI taking into consideration not this 4 percent but the 96 percent which belongs to the unorganized retail sector. The unorganized retail sector is not a homogeneous category, it comprises of peddlers, street vendors, kiosks, push-cart vendors, weekly traders. It is not unknown that the majority of those engaged in retailing at the lower end of the economy depend on the small and medium enterprises for their supplies. It has been reiterated time and again, by many economists, how and under what conditions the unorganized sector has risen to such heights in India and other developing countries via the route of the neo-liberal regime. Indian retail market is quite diverse in terms of scale, culture and structure. Some reasons for this diversity can be attributed to the divide that exists between rural and urban India. Traditional forms of marketing (neighbourhood markets, mandis, and periodic/weekly markets) coexist with modern day markets (supermarkets, hypermarkets, Single brand outlets etc.). Decline of the rural economy coupled with lack of employment in the manufacturing sector (organized sector) created a vast pool

of surplus labour in the country in the post reform period. This multitude of labour started migrating to urban centres in search of employment and many of them landed up with self employment in the service sector of which retailing forms a huge part. Annihilation of small scale and self employed lower middle class will lead to large scale poverty and destitution because the unorganised sector is absorbing the shocks of migration and rural distress. It manages by catering to middle classes in the metropolis. If this market is gone, they will all be unemployed. On the one hand the government is trying to convince that FDI would not harm the local trading practices and on the other hand various traders associations, vendors are fearing its exit from the retail market in the long run when various multi brand retail giants with their deep pockets and marketing skills would create direct contacts with farmers and producers of essential commodities. Whether its a small vendor selling fruits on his bicycle or a trader who has a kiosk in a neighbourhood where he sells grocery or a weekly market trader who sells garments, all three of them depend on a vegetable mandi, grain mandi and wholesale market for garments respectively. With the entry of the multi-brand retail giants in the market two possibilities emerge ( a) these retail giants are expected to procure 30 percent of goods from medium scale enterprises (but it is not necessary that these enterprises should be from the host country) thus, in case it decides to capture the domestic market it would create direct contact with small and medium enterprises and get commodities at the lowest possible cost and take benefit of the economies of scale. In case this happens, then the retail giants would slowly gain hands and monopolize the market and dictate the prices of essential commodities in the domestic market. This would slowly displace small vendors who dont have enough working capital to compete with retail giants. These vendors who till now were able to purchase goods from the wholesale market by proving their credit worthiness would no longer be able to give cash and carry goods to the retail market. (b) Since multi brand retail stores have the liberty to buy products from anywhere in the world and they have enough resources to conduct market research, it would explore the world market and invest wherever they would be able to maximize their profits through final sale. In this scenario, small vendors and traders would continue to have access to the products which are produced by the small scale industries but at the same time these enterprises would face severe competition from cheap commodities imported from elsewhere. In the long run it is speculated that the prices of their commodities would fall in the markets and sooner or later these domestic small enterprises would be forced to quit. For example, T. Vellayan, president of the Tamil Nadu Federation of Traders Associations gives the example of how the import of palm oil and soyabean oil for edible purposes proved ineffectual to the oil manufacturing units. Vellore, Tiruvannamalai, Cuddalore and Villupuram districts had several stone oil presses. But these traditional oil mills closed down. In Pudukottai district, oil mill premises have been converted into marriage halls ( Frontline, Dec.2011). Another justification given by the government for allowing FDI is that it would stabilize the inflationary trends that the Indian economy is witnessing for the past two years. This logic seems to be a wishful thinking because rising inflation cannot be controlled by the multi brand retail giants instead the prices of food grains, fruits and vegetables and essential commodities would only increase once these retail outfits will make a market for their products in India. Price of diesel and petrol has been exponentially hiked up; this is going to affect the cost of production both in agriculture and manufacturing. Farmers are not going to benefit in any way as they would continue to be exploited by the multi brand retail giants in the long run. If in this context we see the large

unorganized retail sector, we can observe how small vendors of fruits and vegetables are able contain the inflationary pressure by offering lower prices. One round of a weekly market in the neighbourhood of Delhi or elsewhere would show that the margins between the prices at which weekly traders sell their products and the price at which any supermarket sells the same thing varies by more than 20 to 30 percent. Multi brand retail giants would not only affect the price of food grains at the national level but it might also result in the disappearance of Agricultural Produce Marketing Committees which keep a certain minimum check on the price of the foodgrains coming to the grain markets. Thus, corporate capital would get a free reign in the indigenous markets of India and the process of primitive accumulation would set in as predicted by C.P. Chandrashekhar, Prabhat Patnaik et. al. This would have direct impact on that section of the unorganized retail sector which is employed in the lowest level of the market hierarchy who do not have ready cash to invest and whose livelihood is dependent on the recycling of debt for a day, a week, a month or a year because the prices are going to rise in the long run and so will the interests on the borrowed sum. The adverse impact of the FDI would befall the unorganized retail sector with great intensity if the State makes more stringent rules of zoning and regulation. I have been researching the local weekly markets of Delhi for the past three years. These markets are very prominent feature in all parts of Delhi and NCR. There are around twelve hundred weekly markets of which only one fourth are recognized by the Municipal Corporation of Delhi (consequence of zoning). Approximately 2.5 million people are employed through these markets. This figure would just double if we take in to account additional employment that is created around these markets. Various own account and household enterprises are producing commodities on a daily basis for such low end markets. Local weekly markets provide a very easy channel of distribution of commodities produced not only in local small scale industries but also in the neighbouring States. For instance, rubber chappals and shoes made in Agra, sarees made in Surat, hosiery made in Coimbatore, woollens made in Ludhiana are all sold at affordable prices here in these very markets. FDI in multi brand retail would either displace various wholesale markets or the size of such markets would shrink. Today the local markets run on capital which has a fluid or floating nature. But with the coming of multi brand retail stores this floating capital would freeze and small retailers and vendors will be evicted from the market. It is argued by the government that FDI in retail would create employment opportunities. But employment for whom is the crucial question? It would create employment for those who are educated and have professional experience. Taking cue from my observation in the weekly markets of Delhi I would argue that majority of those now employed in these markets have minimal education and have no professional degrees apart from their marketing knowledge. Now if FDI in multi brand retail comes, it is not in any way going to benefit these traders if they lose their sole means of survival.

I have observed in the course of my research that through weekly markets of Delhi hundreds of people have employed themselves who were displaced for one reason or the other. At the same time it has created a distinct market for lower middle class who would not go to a super market or a mall for shopping. Where will this section of population shop for daily needs with the entry of multi brand retail outlets in case it leads to the displacement of weekly markets? Instead of providing infrastructural facilities the State already keeps street vending, peddling and weekly markets at the helm by keeping them in that buffer zone where it is difficult to recognize their real viabilility for the economy at large. Often these are characterized as unlawful, black, or hidden activity. It is my contention that in order to make way for the private capital the State might evict street vendors, cancel their licenses, or remove tehbazaari rights for weekly markets in the times to come. Just as in Delhi, Mumbai, Bangalore and other metropolitan cities, the State, has from time to time uprooted slums and relocated them to the periphery of the city, to make way for the investment by private corporate builders in order to make the city slum free. Similar decisions if taken for the unorganized retail sector would gravely increase inequality and poverty.

Challenges
Automatic approval is not allowed for foreign investment in retail. Regulations restricting real estate purchases, and cumbersome local laws. Taxation, which favours small retail businesses. Absence of developed supply chain and integrated IT management. Lack of trained work force. Low skill level for retailing management. Lack of Retailing Courses and study options Intrinsic complexity of retailing rapid price changes, constant threat of product obsolescence and low margins

Sector Specific Foreign Direct Investment in India

Hotel & Tourism: FDI in Hotel & Tourism sector in India


100% FDI is permissible in the sector on the automatic route, The term hotels include restaurants, beach resorts, and other tourist complexes providing accommodation and/or catering and food facilities to tourists. Tourism related industry include travel agencies, tour operating agencies and tourist transport operating agencies, units providing facilities for cultural, adventure and wild life experience to tourists, surface, air and water transport facilities to tourists, leisure, entertainment, amusement, sports, and health units for tourists and Convention/Seminar units and organizations.

For foreign technology agreements, automatic approval is granted if i. ii. up to 3% of the capital cost of the project is proposed to be paid for technical and consultancy services including fees for architects, design, supervision, etc. up to 3% of net turnover is payable for franchising and marketing/publicity support fee, and up to 10% of gross operating profit is payable for management fee, including incentive fee.

Private Sector Banking: Non-Banking Financial Companies (NBFC)


49% FDI is allowed from all sources on the automatic route subject to guidelines issued from RBI from time to time. i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. Merchant banking Underwriting Portfolio Management Services Investment Advisory Services Financial Consultancy Stock Broking Asset Management Venture Capital Custodial Services Factoring Credit Reference Agencies

xii. xiii. xiv. xv. xvi. xvii. xviii. xix.

Credit rating Agencies Leasing & Finance Housing Finance Foreign Exchange Brokering Credit card business Money changing Business Micro Credit Rural Credit

b. Minimum Capitalization Norms for fund based NBFCs: i) For FDI up to 51% - US$ 0.5 million to be brought upfront ii) For FDI above 51% and up to 75% - US $ 5 million to be brought upfront iii) For FDI above 75% and up to 100% - US $ 50 million out of which US $ 7.5 million to be brought up front and the balance in 24 months c. Minimum capitalization norms for non-fund based activities: Minimum capitalization norm of US $ 0.5 million is applicable in respect of all permitted nonfund based NBFCs with foreign investment. d. Foreign investors can set up 100% operating subsidiaries without the condition to

disinvest a minimum of 25% of its equity to Indian entities, subject to bringing in US$ 50 million as at b) (iii) above (without any restriction on number of operating subsidiaries without bringing in additional capital)

e. Joint Venture operating NBFC's that have 75% or less than 75% foreign investment will also be allowed to set up subsidiaries for undertaking other NBFC activities, subject to the subsidiaries also complying with the applicable minimum capital inflow i.e. (b)(i) and (b)(ii) above. f. FDI in the NBFC sector is put on automatic route subject to compliance with guidelines of the Reserve Bank of India. RBI would issue appropriate guidelines in this regard.

Methods of Foreign Direct Investments


The foreign direct investor may acquire 10% or more of the voting power of an enterprise in an economy through any of the following methods:

by incorporating a wholly owned subsidiary or company by acquiring shares in an associated enterprise through a merger or an acquisition of an unrelated enterprise participating in an equity joint venture with another investor or enterprise

Foreign direct investment incentives may take the following forms: low corporate tax and income tax rates

Tax holidays Special economic zones Investment financial subsidies Soft loan or loan guarantees Free land or land subsidies Job training & employment subsidies

Infrastructure subsidies

RESULTS OF THE STUDY: My project report will help to find out how FDI contributed Growth in following Employment Firms attempt to capitalize on abundant and inexpensive labor. Host countries seek to have firms develop labor skills and sophistication. Host countries often feel like least desirable jobs are transplanted from home countries. Home countries often face the loss of employment as jobs move.

FDI Impact on Domestic Enterprises


Foreign invested companies are likely more productive than local competitors.

The result is uneven competition in the short run, and competency building efforts in the longer term.

It is likely that FDI developed enterprises will gradually develop local supporting industries, supplier relationships in the host country.

WORK DONE:The following can be mentioned under work done. This section is to specify the work done till date. My Project will be completed tentatively within 2 months. The break up time is as follows 1. Reading / note taking / planning / writing introduction 1 Week 2. Writing review of literature 1 Weeks 3. Writing of research methodology 1 Weeks 4. Carrying out work / recording findings 2 Weeks 5. Data analysis 1 Week 6. Preparing conclusions / Bibliography 1 Week 7. Typing / proof reading / corrections / binding 1 Weeks 8. Total Time Taken: 8 Weeks (2 Months)

LIMITATION OF FOREIGN DIRECT INVESTMENT. Foreign direct investment is not free from limitations. Developing countries like India has very little choice when it comes to opening the different sectors of the economy to foreign investment. A case in point is the opening up of the consumer non-durable industry to foreign investment. Eg :- The advent of Pepsi and Coke saw the exit of domestic soft drink manufactures and the emergence of a duopoly. Similarly, the experience with regard to FDI in the power sector has been far from desirable. The governments of developing countries must be able to channelize FDI in the most desirable areas of investment and the government policy towards FDI should be stable over the long run. Conclusion India, the 4th largest economy in the world is undoubtedly one of the most preferred destinations for foreign direct investments (FDI) as India has proven its caliber in the field of information technology and a host of other significant arenas. The latent strength of India has made it one of the most exciting emerging markets in the world. The strength of India is its skilled managerial and technical manpower that matches the best available in the world. The size of middle class population, a vital part of India, exceeds the population of the USA or the European Union so it provides India

with a distinct cutting edge in global competition. Apart from that Indias time tested institutions offer foreign investors a transparent environment that guarantees the security of their long term investments in this promising land. Indias liberalized economy was a big boon for investors as the updated FDI policy allows a 100% FDI stake in a venture in few sectors. The industrial sector was among the first sectors to be liberalized in India in a series of measures. The industrial policy reforms have substantially reduced the industrial licensing requirements, removed restrictions on expansion and facilitated easy access to foreign technology and foreign direct investment FDI. These factors make India one of the hottest destinations for FDI investment across the globe.

Bibliography

www.rbi.org www.fin.in.nic www.sebi.org www.economywatch.com wikipedia.org www.investopedia.com www.fdiworldental.org www.fdimarkets.com

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