Professional Documents
Culture Documents
Kanishka Mehrotra
Fundamentals of
Business
Environment
(FDI AND FII IMPACT ON INDIAN ECONOMY)
SUBMITTED BY : Kanishka
Mehrotra
PRN NUMBER : 14021021049
BATCH : 2014-17 (B)
FDI & FII Impact on Indian Economy
Tyagi
ACKNOWLEDGEMENT
Kanishka Mehrotra
Symbiosis Centre for Management Studies, Noida
EXECUTIVE SUMMARY
Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII)
flows are usually preferred over other forms of external finance because they are nondebt creating, non-volatile and their returns depend on the performance of the projects
financed by the investors. FDI and FII also facilitates international trade and transfer
of knowledge, skills and technology. In a world of increased competition and rapid
technological change, their complimentary and catalytic role can be very valuable.
Over the years, FDI and FII inflow in the country is increasing. However,
India has tremendous potential for absorbing greater flow of FDI and FII in the
coming years. Serious efforts are being made to attract greater inflow of FDI and FII
in the country by taking several actions both on policy and implementation front. An
essential requirement of the foreign investing community in making their investment
decision is availability of timely and reliable information about the policies and
procedures governing FDI and FII in India.
Foreign direct investment (FDI) and FII in India has played an important role
in the development of the Indian economy. FDI and FII in India has - in a lot of ways
- enabled India to achieve a certain degree of financial stability, growth and
development. This money has allowed India to focus on the areas that may have
needed economic Attention, and address the various problems that continue to
challenge the country. India has continually sought to attract FDI from the worlds
major investors. In 1998 and 1999, the Indian national government announced a
number of reforms designed to encourage FDI and present a favorable scenario for
investors. FDI and FII are permitted through financial collaborations, through private
equity or preferential allotments, by way of capital markets through Euro issues, and
in joint ventures.
INTRODUCTION
The Government of India has recognized the key role of the foreign direct investment
(FDI) and foreign institutional investment (FII) in its process of economic development,
not only as an addition to its own domestic capital but also as an important source of
technology and other global trade practices. In order to attract the required amount of FDI
and FII, it has bought about a number of changes in its economic policies and has put in
its practice a liberal and more transparent FDI and FII policy with a view to attract more
foreign direct institutional investment inflows into its economy. These changes have
heralded the liberalization era of the foreign investment policy regime into India and have
brought about a structural breakthrough in the volume of FDI and FII inflows in the
economy.
The influx of FIIs has indeed influenced the secondary market segment of the Indian
stock market. But the supposed linkage effects with the real economy have not worked.
Instead there has been an increased uncertainty and skepticism about the stock market in
this country. On the other hand, the surge in foreign portfolio investment in the Indian
economy has introduced some serious problems of macroeconomic management for the
policymakers like inflation, currency appreciation etc.
On the other hand FDI is what the government really needs to attract in various sectors
like infrastructure, education etc. it is much more stable than the foreign institutional
investment which comes via the stock market route, and has more accountability and
brings fundamental and tangible benefits to the economy.
In this context, this report is going to analyze the trends and patterns of foreign direct
investment (FDI) and foreign institutional investment (FII) flows into India during the
post liberalization period.
entrepreneurship, technological know- how, skills and practices, access to marketsabroad- in their economic development, developing nations accepted FDI as a sole visible
panacea for all their scarcities. Further, the integration of global financial markets paves
ways to this explosive growth of FDI around the globe.
The year 1991 marks a new growth phase of FDI in India with an all time high flow
of FDI. Following the Industrial Policy (1991) , a large number of foreign companies
from different parts of the world rushed into India. In this period, in addition to
thousands of foreign collaborations in India, as many as 145 foreign companies
registered in India within a span of 10 years from 1991-2000. Companies like General
Motors, Ford Motors, and IBM that divested from India in the 1950s and 1970s
reentered India during this period. A large number of Asian companies like Daewoo
Motors, Hyundai Motors and LG Electronics from S. Korea, Matsushita Television
and Honda Motors from Japan invested in India during this period.
With the legislation of the Industrial Licensing Policy, 1991, industrial licensing was
abolished except for 18 industries. FDI up to 51% equity was allowed in 34 formerly high
priority industries and the concept of phased manufacturing requirement on foreign
companies was removed. Further, the tariffs on imports have been steadily reduced in
every budget since 1991.
ADVANTAGES OF FDI
1. Raising the Level of Investment: Foreign investment can fill the gap between
desired investment and locally mobilized savings. Local capital markets are often
not well developed. Thus, they cannot meet the capital requirements for large
investment projects. Besides, access to the hard currency needed to purchase
investment goods not available locally can be difficult. FDI solves both these
problems at once as it is a direct source of external capital. It can fill the gap
between desired foreign exchange requirements and those derived from net export
earnings.
have a small domestic market and must increase exports vigorously to maintain
their tempo of economic growth.
4. Employment
Generation/Development:
Foreign
investment
can
create
DISADVANTAGES OF FDI
FDI is not an unmixed blessing. Governments in developing countries have to be very
careful while deciding the magnitude, pattern and conditions of private foreign
investment. Possible adverse implications of foreign investment are the following:
1. When foreign investment is competitive with home investment, profits in
domestic industries fall, leading to fall in domestic savings.
DETERMINANTS OF FDI
To understand the scale and direction of FDI flows, it is necessary to identify their
major determinants. The relative importance of FDI determinants varies not only
between countries but also between different types of FDI. Traditionally, the
determinants of FDI include the following.
1. Size of the Market: Large developing countries provide substantial markets
where the consumers demand for certain goods far exceed the available supplies.
This demand potential is a big draw for many foreign-owned enterprises. In many
cases, the establishment of a low cost marketing operation represents the first step
by a multinational into the market of the country. This establishes a presence in
the market and provides important insights into the ways of doing business and
possible opportunities in the country.
2. Political stability: In many countries, the institutions of government are still
evolving and there are unsettled political questions. Companies are unwilling to
contribute large amounts of capital into an environment where some of the basics
political questions have not yet been resolved.
3. Macro-economic Environment: Instability in the level of prices and exchange
rate enhance the level of uncertainty, making business planning difficult. This
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PROHIBITED SECTORS.
1. Retail Trading (except single brand product retailing)
2. Lottery Business including Government /private lottery, online lotteries, etc.
3. Gambling and Betting including casinos etc.
4. Chit funds
5. Nidhi company
6. Trading in Transferable Development Rights (TDRs)
7. Real Estate Business or Construction of Farm Houses
8. Manufacturing of Cigars, cheroots, cigarillos and cigarettes substitutes
9. Activities / sectors not open to private sector investment e.g. Atomic Energy
10. Railway Transport (other than Mass Rapid Transport System
PERMITTED SECTORS
Sr.
Sector/Activity
FDI cap/Equity
Entry/Route
1.
100%
Automatic
2.
NBFC
49%
Automatic
3.
Insurance
26%
Automatic
4.
Telecommunication:
No.
Automatic
49%
Above
74%
49%
Govt. licence
100%
5.
Trading companies:
primarily export activities
bulk
imports,
cash
and
Power(other
than
atomic
power plants)
Automatic
100%
Automatic
100%
Automatic
carry
wholesale trading
6.
51%
reactor
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need
7.
100%
Automatic
100%
Automatic
100%
Automatic
Call Centers
100%
Automatic
11.
BPO
100%
Automatic
13.
Airports:
Greenfield projects
100%
Automatic
Existing projects
100%
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49%
FIPB
15.
100%
FIPB
16.
Courier services
100%
FIPB
17.
FIPB
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Note: Cumulative Sector- wise FDI equity inflows (from April 2000 to January 2012)
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It can be seen that the flow of FDI has consistent and gradually increasing over the
years. There has been an increase of 129% i.e. Rs. 13851 Crores from the year 200001 to 2005-06 while the increase from 2005-06 to 2011-12 has been a phenomenal
607% i.e. from Rs. 24584 Cr to Rs. 173947 Cr which can be attributed to relaxation of
foreign investment rules. Despite the global financial credit squeeze brought by the
recession India continues to be an attractive destination for investment as there is
tremendous potential for growth in the vast and diverse markets of our country.
The bars from 2000-01 to 2004-05 have been almost hovering the same levels but
importantly havent gone down which is because the foreign investors saw immense
potential but were not getting enough incentives to enter with huge business
propositions. The breakout came from the year 2005-06 when the investment nearly
doubled as compared to 2000-01, after which there was no looking back as consistent
economic growth, de-regulation, liberal investment rules, and operational flexibility
helped increase the inflow of Foreign Direct Investment or FDI. So much so that even
during the year 2008-09 when the recession had taken its toll on the western countries
there was no indication of falling investment via the FDI route as can be seen from the
chart. In fact during 2008-09 the chart shows that FDI breached the Rs. 1 lakh crore
marks. In percentage terms FDI inflow increased by 28% from 2007-08 to 2008-09.
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investment avenues. Indian Markets have been the clear outperformers vis-a-vis the
global markets in the past years.
As Sub-accounts: The Sub account is generally the underlying fund on whose behalf
the FII invests. The following entities are eligible to be registered as sub-accounts,
viz. partnership firms, private company, public company, pension fund, investment
trust, and individuals. A domestic portfolio manager or a domestic asset management
company shall also be eligible to be registered as FII to manage the funds of subaccounts.
The Government guidelines for FII of 1992 allowed, inter-alia, entities such as asset
management companies, nominee companies and incorporated/institutional portfolio
managers or their power of attorney holders (providing discretionary and nondiscretionary portfolio management services) to be registered as FIIs. While the
guidelines did not have a specific provision regarding clients, in the application form
the details of clients on whose behalf investments were being made were sought.
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FIIs are eligible to purchase shares and convertible debentures issued by Indian
companies under the Portfolio Investment Scheme.
Prohibitions on Investments
Foreign Institutional Investors are not permitted to invest in equity issued by an Asset
Reconstruction Company. They are also not allowed to invest in any company which
is engaged or proposes to engage in the following activities:
Real estate business or construction of farm houses (real estate business does
not include development of townships, construction of residential/commercial
premises, roads or bridges)
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Highly developed stock market and high degree of vigilance over it.
Tax Incentives.
F and O Segment
Role of FIIs
The Indian stock market has come of age and has substantially aligned itself
with the international order.
It is influence of the FIIs which changed the face of the Indian stock markets.
Screen based trading and depository are realities today largely because of FIIs.
FII which based the pressure on the rupee from the balance of payments
position and lowered the cost of capital to Indian business.
FIIs are the trendsetters in any market. They were the first ones to identify the
potential of Indian technology stocks. When the rest of the investors invested
in these scrips, they exited the scrips and booked profits.
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The increase in the volume of activity on stock exchanges with the advent of
on screen trading coupled with operational inefficiencies of the former
settlement and clearing system led to the emergence of a new system called
the depository System.
Flow of money into Indian economy via FIIs has been increasing at a rapid
rate. This has forced economist and policy makers to consider impacts of this
inflow on the macro economic factors as well. This has resulted in deeper
analysis of factors like Interest Rate, Inflation Rate, GDP and Exchange Rate
etc. both in short term as well as long term.
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Year
Number of FIIs
2001-02
490
2002-03
502
2003-04
540
2004-05
685
2005-06
882
2006-07
996
2007-08
1219
2008-09
1334
2009-10
1729
2010-11
2011-12
1767
1758
Source: www.sebi.gov.in
The names of some prominent FIIs registered are: United Nations for and on behalf of
the United Nations Joint Staff Pension Fund, Public School Retirement System of
Missouri, Treasurer of the State North Carolina Equity Investment Fund Pooled Trust,
the Growth Fund of America, AIM Funds Management Inc, etc.
NET FII INVESTMENTS OVER THE YEARS
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terms the purchasing power of my dollar might decrease as my import cost would
increase, and cost of living back home may increase, but when I do consider practical
examples there is always a gain for FII whenever the currency of the country invested
in appreciates w.r.t the home currency)
NET FII
INVESTMENTS
47181.9
36540.2
71486.3
-52987.4
83424.2
133266.8
2714.2
42263.3
BSE SENSEX
CLOSING
9397.93
13786.91
20286.99
9647.31
17464.81
20509.1
15454.9
16950
From the above charts it is clear that net FII investments at BSE show a similar
pattern to the Yearly average closings. The net FII started declining from 2007-08 till
the middle of 2008-09 which caused a sharp fall in Sensex also which went below the
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10000 level in 2007-08 falling by almost 52% as compared to the previous year. But
the FIIs started pouring in again from the end of 2009 after the governments abroad
started providing bail-out packages, sops and various other incentives to the ailing
companies. The Sensex also rises sharply from 2008-09 after the FIIs turned into net
buyers and hence a similar pattern can be found between these two.
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BIBLIOGRAPHY
www.dipp.nic.in
www.sebi.gov.in
www.bseindia.com
www.rbi.org.in
www.unctad.org
www.indiainfoline.com
www.thehindu.com
THANK YOU
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