Index / Miscellaneous / Foreign Direct Investment In India

Foreign Direct Investment In India

This free essay Foreign Direct Investment In India. If you do not find your term paper, you can search our essay database for other topics on the search page essays.

Autor:  konarohit  11 February 2011
Tags:  FDI,  India
Words: 5720   |   Pages: 23
Views: 2359

      

Foreign Direct Investment and It's Impact On Indian Economy

CONTENT:
1) Abstract
2) Introduction
3) How FDI has come to India
4) Foreign Direct Investment and Economic Growth
5) Current Trend in FDI
6) FDI Inflow
7) Financial Year Wise FDI Equity Inflow
8) Sector wise analysis of FDI inflow
9) FDI and Trade
10) FDI policy and framework
11) Comparison of FDI between India and China
12) Conclusion

Abstract:
Foreign direct investment (FDI) has boomed in post-reform India.
Moreover, the composition and type of FDI has changed considerably since
India has opened up to world markets. This has fuelled high expectations that
FDI may serve as a catalyst to higher economic growth. We assess the growth
implications of FDI in India by subjecting industry-specific FDI and output data
to Granger causality tests within a panel co integration framework. It turns out
that the growth effects of FDI vary widely across sectors. FDI stocks and output
are mutually reinforcing in the manufacturing sector. In sharp contrast, any
causal relationship is absent in the primary sector. Most strikingly, we find only
transitory effects of FDI on output in the services sector, which attracted the
bulk of FDI in the post-reform era. These differences in the FDI-growth
relationship suggest that FDI is unlikely to work wonders in India if only
remaining regulations were relaxed and still more industries opened up to FDI.


INTRODUCTION:
Foreign direct investment (FDI) in its classic form is defined as a company from one country making a physical investment into building a factory in another country. It is the establishment of an enterprise by a foreigner. Its definition can be extended to include investments made to acquire lasting interest in enterprises operating outside of the economy of the investor. The FDI relationship consists of a parent enterprise and a foreign affiliate which together form an international business or a multinational corporation (MNC). In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate. The IMF defines control in this case as owning 10% or more of the ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm; lower ownership shares are known as portfolio investment. Foreign direct investment (FDI) is a measure of foreign ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization. The largest flows of foreign investment occur between the industrialized countries (North America, North West Europe and Japan). But flows to non-industrialized countries are increasing.
Type of Foreign Direct Investors
A foreign direct investor may be classified in any sector of the economy and could be any one of the following:
• an individual;
• a group of related individuals;
• an incorporated or unincorporated entity;
• a public company or private company;
• a group of related enterprises;
• a government body;
• an estate (law), trust or other societal organization; or
• any combination of the above.

HOW FDI HAS COME TO INDIA:
Compared to most industrializing economies, India followed a fairly restrictive foreign private investment policy until 1991 – relying more on bilateral and multilateral loans with long maturities. Inward foreign direct investment (FDI, or foreign investment, or foreign capital hereafter) was perceived essentially as a means of acquiring industrial technology that was unavailable through licensing agreements and capital goods import. Even for technology licensing agreements, there were restrictions on the rates of royalty payment and technical
fees. Development banks largely met the external financial needs for importing capital equipment. However, foreign investment was permitted in designated industries, subject to varying conditions on setting up joint ventures with domestic partners, local content clauses, export obligations, promotion of local R and D and so on – broadly similar to those followed in many rapidly.

All this changed since 1991. Foreign investment is now seen as a source of scarce capital, technology and managerial skills that were considered necessary in an open, competitive, world
economy. India sought to consciously 'benchmark' its policies against those of the rapidly growing south-east Asian economies to attract a greater share of the world FDI inflows. Over the decade, India not only permitted foreign investment in almost all sectors of the economy (barring agriculture, and, until recently, real estate), but also allowed foreign portfolio investment – thus
practically divorcing foreign investment from the erstwhile technology acquisition effort. Further, laws were changed to provide foreign firms the same standing as the domestic ones.

1. Foreign Direct Investment and Economic Growth:
All the countries in the world , be they the Less Developed Countries (LDCs) in Africa or Asia, the Newly Industrializing Countries (NICs) in East Asia or Latin America, or the Developed Countries (DCs) in the West, have one thing in common; they all continue to strive for growth – rapid economic growth. There are several factors that help or hinder the economic growth of a country, and the factors, that are often identified as stimulants for a country's growth are:
(1) Large amounts of investment capital,
(2) Advanced Technologies,
(3) Highly skilled labor,
(4) Well-developed transportation and communication infrastructure,
(5) Stable and supportive political and social institutions,
(6) Low tax rates, and
(7) Favorable regulatory environment.

Differences in the growth rates of the countries are explained by the differences in the endowments or levels of these factors. Less Developed Countries often lack one or more of these resources or factors, and therefore, their growth rates lag behind those of the Developed Countries.

In recent years, several of the LDCs have recognized the importance of these factors, and have initiated steps to create a favorable environment for growth. Perhaps, the most important hurdle faced by the LDCs in their quest for rapid economic growth is the lack of capital, especially capital in the form of foreign exchange reserves that can pay for advanced technologies, and infrastructure. Some of the sources of foreign exchange for an LDC are:

(a) Remittances by expatriates,
(b) Development assistance and loans from other countries or the U.N. affiliated organizations,
(c) Exports,
(d) Foreign portfolio investment,
(e) Foreign Direct investment (FDI) by multinational corporations (MNCs).

The factors that motivate the MNCs to invest in the LDCs have been studied by many scholars, most notably by Dunning (1988).Some of the factors that have a significant impact on the FDI decisions of MNCs are: (a) Transportation costs, (b) Restrictions or high tariffs on exports by the home country or imports by the host country (c) Impediments to the licensing of the production technologies, (d) Protection of patent rights, proprietary technologies and know-how, (e) Control of downstream raw materials, (f) Specialized knowledge of marketing and distribution channels, (7) Import substitution in the host country, and (8) Favorable tax and regulatory policies in the host country, etc. Of course, the ultimate motive behind the foreign direct investments undertaken by the MNCs is to realize an increased return on their capital.

From a theoretical point of view, foreign direct investment is expected to accelerate or contribute to the economic growth of all countries, especially the less developed ones. As discussed in Ram and Zhang
(2002), some of the arguments in favor of this hypothesis are:
(1) FDI provides the financial resources needed by the host country.
(2) FDI acts as a vehicle for the transfer of advanced manufacturing technologies from the DCs to the LDCs.
(3) FDI increases competition in the host country's markets,
(4) FDI helps the host countries improve their foreign exchange reserves (or balance-of-payments position)
by increasing exports.
(5) FDI brings along with it the management know-how needed to run the facilities,
(6) FDI enhances the training and employment opportunities for the people of the host country,
(7) FDI reduces the burden of imports on the host countries through import substitution.
(8) FDI acts as catalyst for increasing domestic savings and investment.

In general, FDI provides ready access to the world markets and acts as a conduit for the host country to participate in the globalization process. Some specific
drawbacks the LDCs may suffer as a result of the entry by MNCs are:
(1) MNCs may repatriate more funds than they bring in, to their home countries.
(2) MNCs may transfer inferior technologies to the host countries.
(3) MNCs may monopolize some markets in the host countries by destroying domestic
competition through price cutting.
(4) MNCs may focus only on the domestic markets of the host
country and may not contribute to the exports from the host country.
(5) MNCs may exert undue influence on the political and regulatory systems of the host countries so as to benefit the foreign investors.
(6) MNCs may have a negative impact on the cultural and social norms of the host countries through the imposition of their standards.

CURRENT TREND IN FDI:
1.With the integration of international capital markets, global FDI flows grew strongly in the 1990s at rates well above those of world economic growth and trade. Recorded global inflows grew by an average of 13 percent a year during 1990–97.1
Driven by large cross-border mergers and acquisitions (M&A), these inflows increased by an average of nearly 50 percent a year during 1998–2000, reaching
a record $1.5 trillion in 2000 . Inflows declined to $729 billion in 2001, mostly as a result of the sharp drop in cross-border M&A among the industrial countries, coinciding with the correction in world equity markets.2 Worldwide, the value of cross-border M&A declined from the record $1.1 trillion in 2000 to about $600 billion in 2001.Now India has bagged FDI to the extent of
$37.5 billon during the year 2008 and it is expected that FDI would reach to the extent of $50 billion during this fiscal year.

FDI INFLOW IN INDIA:

FINANCIAL YEAR WISE FDI EQUITY INFLOW:
( Equity capital components wise)

Financial Year
(April – March Amount of
FDI inflow
(including
Advances)
In rupees crores Amount of
FDI inflow
(excluding
Advances)
In rupees crores
%age change
Over the previous year
2000-01 12,640
10,733 -------------
2001-02 19,361
18,654 + 65%
2002-03 14,932
12,958 -33%
2003-04 12,117
10,237 -18%
2004-05 17,138
14,653 +45%
2005-06 24,613
24,613 +72%
2006-07 70,630
70,630 +184%
2007-08 98,664
98,664 +56%
2008-09 122,99
122,99 +11%
2009-10( upto
Sept09) 74,378 74,378 ----------------

14,932
12,117
17,138
24,613
70,630
98,664

FDI inflow and robust growth in india:
Amount Rupees in crores (US$ in million) Ranks Country 2006-07
(April-
March) 2007-08
(April-
March) 2008-09
(April-
March) 2009-10
(April-
Sept. '09) Cumulative
Inflows
(April '00 to
Sept. '09) %age to total
Inflows
(in terms of rupees)
1. MAURITIUS 28,759
(6,363) 44,483
(11,096) 50,794
(11,208) 31,761
(6,520) 193,034
(43,385) 44 %
2. SINGAPORE 2,662
(578) 12,319
(3,073) 15,727
(3,454) 5,763
(1,187) 39,615
(8,998) 9 %
3. U.S.A. 3,861
(856) 4,377
(1,089) 8,002
(1,802) 5,991
(1,244) 33,951 (7,579) 8 %
4. U.K. 8,389
(1,878) 4,690
(1,176) 3,840
(864) 1,364
(282) 24,268 (5,508) 5 %
5. NETHERLANDS 2,905
(644) 2,780
(695) 3,922
(883) 2,761
(571) 18,614
(4,161) 4 %
6. JAPAN 382
(85) 3,336
(815) 1,889
(405) 3,857
(793) 15,082
(3,324) 3 %
7. CYPRUS 266
(58) 3,385
(834) 5,983
(1,287) 3,871
(794) 13,920
(3,067) 3 %
8. GERMANY 540
(120) 2,075
(514) 2,750
(629) 1,815
(375) 11,304
(2,548) 3 %
9. FRANCE 528
(117) 583
(145) 2,098
(467) 891
(185) 6,373
(1,412) 1 %
10. U.A.E. 1,174
(260) 1,039
(258) 1,133
(257) 2,344
(484) 6,350
(1,404) 1 %
TOTAL FDI INFLOWS * 70,630
(15,726) 98,664
(24,579) 122,919
(27,329) 74,378
(15,312) 467,504 (105,153) -
SHARE OF TOP INVESTING COUNTRIES FDI EQUITY INFLOWS (Financial year-wise):

SECTOR WISE ANALYSIS OF FDI INFLOW:

FDI INFLOWS IN REAL ESTATE :

Indian Real estate is on the high growth path:
In 2003-04, India received total FDI inflow of US$ 2.70 billion, of which only 4.5% was committed to real estate sector. In 2004-05 this increased to US$ 3.75 billion of which, the real estate shares was 10.6%.

However, in 2005-06, while total FDIs in India were estimated at US$ 5.46 billion, the real estate share in them was around 16%. The Study, nevertheless projects that in 2006-07, total FDIs will touch about US$ 8 billion in which the real estate share is estimated to be about 26.5%.

Source: ASSOCHAM report

The Government of India has set up certain guidelines for investors willing to apply in FDI in real estate, which have conditions like area, investment options and target for completion of a project.
1) Minimum area
• In case of development of serviced housing plots, 10 hectares (25 acres)
• In case of construction-development projects, built-up area of 50,000 sq m.
• In case of a combination project, any of the above two conditions
2) Investment
• Minimum capitalization
• for wholly owned subsidiaries - US$ 10 million
• for JV with Indian partners - US$ 5 million–, to be brought in within 6 months of commencement of business
• Original investment cannot be repatriated before a period of three years from completion of capitalization.
• The investor may exit earlier with prior approval from Foreign Investment Promotion Board (FIPB).
3) Time frame & rules
• At least 50 per cent of the project to be developed within five years from the date of obtaining all statutory clearances.
• Investor cannot sell undeveloped plots - where roads, water supply, street lighting, drainage, sewerage and other conveniences are not available

FDI INFLOW IN SERVICE SECTOR:
Despite the global financial crisis, inflow of foreign capital to the country has increased sharply in 2008.

Aggregate inflow of foreign direct investment (FDI) has more than doubled in 2008 over 2007. The stake was enormous. For, Corporate India's dependence on foreign funds has increased steadily in recent years as the easing of norms for FDI, especially, external commercial borrowings (ECB), over the years had led to a dramatic rise in the inflow of foreign capital in India. RBI's recent release shows that the inflow of ECB and foreign currency convertible bonds (FCCBs) has slowed down considerably in 2009 — down 73% from $1,702 million in November 2008 to $453 million in February 2009.

The decline in ECB is feared to affect the investment plans of companies. After all, a large number of companies use these funds to import capital goods . In fact, of the 32 companies which raised funds through ECB and FCCBs last February through the automated route, as many as 15 did so for import of capital goods for expansion of capacity or for modernization of plants

That India's investment activities in recent years have largely been financed by foreign sources may be seen in the sharp rise in FDI inflows. Aggregate inflow of FDI has increased more than nine times during the past five years, from Rs 14,781 crore in 2004 to Rs 1,39,725 crore in 2008.
The service sector has been the prime mover of India's gross domestic product in recent years and foreign investors never had doubts about its potential. However, policy restrictions in the past did not allow them to invest in this industry as much as they willed. Now that restrictions have been eased, FDI has flowed in to this industry as never before.

It accounted for a huge 24.3% of the total FDI inflow in 2008. In actual terms, the FDI inflow to this sector has grown 32 times in the past five years from a mere Rs 1,074 crore in 2004 to Rs 33,947 crore in 2008. The second most important destination of FDI in 2008 was telecommunication. It accounted for about 8.3% of the total FDI flowing into the country in 2007.

But while the service sector and the telecommunication industry have increased their share in total FDI inflows in the country in 2008, the software industry has gone down the ladder further. The poor performance of the software companies dampened the mood of the foreign investors and FDI inflow to software sector has fallen sharply.

The sector received only Rs 7,810 crore FDI in 2008 against Rs 10,214 crore in 2007. Its share in total FDI inflow has fallen to only 5.6% in 2008 against 16% in 2007. But as the financial crisis continues, the big question is: Will FDI inflow to India grow at the same rate in the coming months?

After all, the service sector, which has been the main contributor to GDP growth, was the biggest gainer of the rise in FDI inflow in recent years. Now if the FDI inflow slows down, it will affect the growth of the service sector and in turn, the GDP growth.

FDI INFLOW IN TELECOMMUNICATION INDUSTRY :

The government of India has taken measures to ensure pro-active and positive policies to boost the Foreign Direct Investment (FDI) to telecommunications sector in India. Tremendous growth has taken place in this sector in recent years.

A number of telecom service providers are working in both the private and public sector. The two most crucial causes behind the huge success of the telecom sector are the growing demand for mobile phone services and private sector participation in the telecommunication industry. The private sector participation in the telecommunication sector in India is increasing at a rapid pace.

FDI Inflows to Telecommunications-
The limit to FDI in telecommunications was increased from 49% to 74% in 2009 by the Department of Industrial Policy and Promotion that functions under the Ministry of Commerce and Industry, Government of India. Important aspects of FDI in telecommunications are -
• Telecom sectors which will be entrusted with the FDI ceiling include National/ International Long Distance, Basic, Cellular, V-Sat, Unified Access Services, Public Mobile Radio Trunked Services (PMRTS), Global Mobile Personal Communications Services (GMPCS) and other value added Services
• The major sources of foreign investment in Indian market include Foreign Institutional Investors (FIIs), Non-resident Indians (NRIs), Foreign Currency Convertible Bonds (FCCBs), American Depository Receipts (ADRs), Global Depository Receipts (GDRs) and convertible preference shares held by foreign entity
• The license companies which will be regulated by the public sector banks in India and the public sector financial institutions in India will be recognized as 'Indian holding' and Indian shareholding cannot be less than 26 percent by any means
• FDI up to 49 percent will be allotted to certain telecom sectors in India under automatic route
• In case of the license companies, FDI will require the FIPB approval provided it has a total ceiling of 74 percent
• The investments that would require FIPB approval will clearly depict the evidence that the company would abide by license Agreement
• FDI investments will be entitled to the laws of the Government of India and not the overseas countries
SECTOR-WISE FDI INFLOWS
From APRIL 2000 to JUNE 2009
Telecommunications Sector (including Telecommunications, Radio Paging, Cellular Mobile/Basic Telephone Service & Others (Telecommunications)


(Amount in million)
S.No
Sector
Amount of FDI Inflows %age of Total Inflows

(In Rs) (In US$)
1 TELECOMMUNICATIONS
TELECOMMUNICATIONS 133,064.91 3,000.35 41.95
RADIO PAGING 113.92 2.53 0.04
CELLULAR MOBILE/BASIC TELEPHONE SERVICES 175,590.11 3,873.12 55.36
OTHER (TELECOM) 8,430.03 174.87 2.66
Sector Total 317,198.97 7,050.88 100.00

FDI INFLOW IN POWER:
The Power Sector in India-
The power sector in India has grown significantly and is an important part of infrastructure. Investment potential in the power sector of India is huge due to the market size and returns on investment capital. Past few years have witnessed an outstanding growth in the power sector especially the sectors based on renewable sources of energy. The total installed capacity of the electric power generation stations in India according to estimates of January 2007 is 128182.47 MW which comprise of the following:

• Thermal - 84149.84 MW
• Hydro - 33941.77 MW
• Nuclear - 3900 MW
• Renewable Energy Sources (RES) - 6190.86 MW
The government of India aims at reaching 2, 00,000 MW by the year 2012. The regional transmission network along with inter-regional capacity to transmit power will be expanded to ensure this growth. The total power generation in India has increased from 264.3 Billion Units (BUs) during 1990-91 to 551.7 Billion Units during 2007-08(up to Jan.'08). The investments required in the execution of this task will be generated from public-private partnerships in the sector.

FDI Inflows to Power
100% FDI is allowed in the power sector under the automatic route in India with the exception of Atomic Energy. Important aspects of FDI in the power sector of India are -
• 100 percent Foreign Direct Investment is allowed under automatic route in almost all the power sectors in India except the Atomic Energy
• Power projects involving generation and distribution tasks are allowed in all types and sizes
• As per the Electricity Act 2003, trading in power is activated
• A duration of 30 years will given as a renewable license period
• Thermal power plants will get a return of 16 percent on equity and will get 68.5 percent PLF
• The import of equipments will be entitled to 20 percent of import duty
• Power generating projects will have a five year tax holiday with five more years which will have a deduction of 30 percent taxable profits.

FDI INFLOW IN CHEMICAL INDUSTRY:Despite the global recession and liquidity crunch, Indian economy registered 11% rise in FDI in 2008-09 with sectors like Chemicals have recorded the robust growth of 227% and , according to a report released by The Associated Chamber of Commerce and Industry of India (ASSOCHAM)

The ASSOCHAM latest 'Annual FDI Report' has further 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,


Amount Rupees in crores (US$ in million) Ranks Sector 2006-07
(April-March) 2007-08
(April-
March) 2008-09
(April-March) 2009-10
(April- Aug. '09) Cumulative
Inflows
(April '00 to
Aug. '09) % age to total Inflows
(In terms of rupees)
1. SERVICES SECTOR
(financial & non-financial) 21,047
(4,664) 26,589 (6,615) 28,411
(6,116) 12,068
(2,480) 96,521
(21,728) 22 %
2. COMPUTER SOFTWARE & HARDWARE 11,786
(2,614) 5,623
(1,410) 7,329
(1,677) 1,846
(380) 41,342
(9,334) 9 %
3. TELECOMMUNICATIONS
(radio paging, cellular mobile, basic telephone services) 2,155
(478) 5,103
(1,261) 11,727
(2,558) 8,523
(1,743) 36,890
(8,120) 8 %
4. HOUSING & REAL ESTATE 2,121
(467) 8,749
(2,179) 12,621
(2,801) 8,719
(1,797) 32,502
(7,309) 7 %
5. CONSTRUCTION ACTIVITIES
(including roads & highways) 4,424
(985) 6,989
(1,743) 8,792
(2,028) 4,372
(899) 26,549
(6,090) 6 %
6. AUTOMOBILE INDUSTRY 1,254
(276) 2,697
(675) 5,212
(1,152) 3,950
(817) 19,017
(4,205) 4 %
7. POWER 713
(157) 3,875
(967) 4,382
(985) 3,974
(819) 17,985
(4,009) 4 %
8. METALLURGICAL INDUSTRIES 7,866
(173) 4,686
(1,177) 4,157
(961) 1,073
(222) 12,579
(2,945) 3 %
9. PETROLEUM & NATURAL GAS 401
(89) 5,729
(1,427) 1,931
(412) 1,019
(205) 11,196
(2,598) 3 %
10. CEHMICALS
(other than fertilizers) 930
(205) 920
(229) 3,427
(749) 601
(124) 10,168
(2,258) 2 %
G. SECTORS ATTRACTING HIGHEST FDI EQUITY INFLOWS: amount rupees in crore( US $ in millon

GDP growth in India due to FDI:
After adopting trade liberalization policy India's GDP growth rate has increased. Here I have taken data from 1975 to 2004.From
1 975 to 1991 India has experienced a very low growth rate due to restrictive trade policy but in the year 1991India suffered foreign exchange crisis resulting very low growth rate. So India immediately adopted trade liberalization policy and invited various foreign investors by providing them various type of incentives like low corporate and income tax , tax holidays, preferential tariff , special economic zone etc . so from the graph below we can see that after 1993 India's GDP rate has shown a sharp growth.

FDI and Trade:
Many developing countries pursue FDI as a tool for export promotion, rather than production for the domestic economy. Typically, foreign investors build plants in nations where they can produce goods for export at lower costs. Another way FDI helps boost exports is through preferential access to markets in the parent enterprise's home country.

Foreign Direct Investment and Trade in India is an important addition to the growing literature on the role and importance of FDI since initiation of economic reforms in India in 1991 with a specific focus on trade of food items which constitutes an important area in the context of the level of living and food security of developing economies in general and India in particular

Export of important commodities from INDIA:

FDI policy frame work:

India has among the most liberal and transparent policies on FDI among the emerging economies. FDI up to 100% is allowed under the automatic route in all activities/sectors except the following, which require prior approval of the Government:-

1. Sectors prohibited for FDI
2. Activities/items that require an industrial license
3. Proposals in which the foreign collaborator has an existing financial/technical collaboration in India in the same field
4. Proposals for acquisitions of shares in an existing Indian company in financial service sector and where Securities and Exchange Board of India (substantial acquisition of shares and takeovers) regulations, 1997 is attracted
5. All proposals falling outside notified sectoral policy/CAPS under sectors in which FDI is not permitted.

INVESTING IN INDIA- ENTRY ROUTE:

Automatic route:

Most of the sectors fall under the automatic route for FDI. In these sectors, investment could be made without approval of the central government. The sectors that are not in the automatic route, investment requires prior approval of the Central Government. The approval in granted by Foreign Investment Promotion Board (FIPB). In few sectors, FDI is not allowed.

After the grant of approval for FDI by FIPB or for the sectors falling under automatic route, FDI could take place after taking necessary regulatory approvals form the state governments and local authorities for construction of building, water, environmental clearance, etc.
Procedure under automatic route:

FDI in sectors/activities to the extent permitted under automatic route does not require any prior approval either by the Government or RBI. The investors are only required to notify the Regional Office concerned of RBI within 30 days of receipt of inward remittances and file the required documents with that office within 30 days of issue of shares of foreign investors.

Procedure under Government Approval:

FDI in activities not covered under the automatic route require prior government approval. Approvals of all such proposals including composite proposals involving foreign investment/foreign technical collaboration is granted on the recommendations of Foreign Investment Promotion Board (FIPB).

Application for all FDI cases, except Non-Resident Indian (NRI) investments and 100% Export Oriented Units (EOUs), should be submitted to the FIPB Unit, Department of Economic Affairs (DEA), Ministry of Finance.

Application for NRI and 100% EOU cases should be presented to SIA in Department of Industrial Policy and Promotion.

Application can be made in Form FC-IL. Plain paper applications carrying all relevant details are also accepted. No fee is payable. The guidelines for consideration of FDI proposals by the FIPB are at Annexure-III of the Manual for FDI

1. INDUSTRIAL POLICY

The Government's liberalization and economic reforms program aims at rapid and substantial economic growth, and integration with the global economy in a harmonized manner. The industrial policy reforms have reduced the industrial licensing requirements, removed restrictions on investment and expansion, and facilitated easy access to foreign technology and foreign direct investment.

Industrial Licensing

All industrial undertakings are exempt from obtaining an industrial license to manufacture, except for
(i) industries reserved for the Public Sector
(ii) industries retained under compulsory licensing
(iii) items of manufacture reserved for the small scale sector and
(iv) if the proposal attracts locational restriction

FDI policy for Industry sector:
Manufacturing
• 100% FDI permitted in all activities under automatic route except:
– Cigar and cigarettes of tobacco - FIPB
– Products reserved for Small Scale Sector
• FDI less than 26% under automatic route
• FDI beyond 26% - FIPB subject to export obligation
– Defence products
• FDI upto 26% - FIPB subject to licensing of Arms and Ammunitions

Mining
• Coal – FDI upto 100% as per Coal Mines (Nationalization) Act 1977
• Diamond, Gold, Silver , Minerals – upto 100% under automatic route as MMRD Act
• Atomic minerals – upto 74% in JV with PSUs – FIPB
Electricity
• FDI upto 100% under automatic route in Generation, Transmission, Distribution and Power Trading as per Electricity Act 2003.

FDI policy for service sector:

• Roads & Highways- 100% FDI permitted under automatic route
• Airports
– Greenfield Projects- 100% FDI permitted under automatic route
– Existing Airports- 100% FDI, beyond 74% requires FIPB approval
– Air Transport- up to 49% FDI under automatic route,100 % NRI
Telecom
– Basic and cellular, Unified Access Services, National/International Long Distance etc.- 74% (Including FDI, FII, NRI, beyond 49% under FIPB route
– ISP without gateway, Infrastructure provider providing dark fibre, right of way, duct space, tower (Category-I), Electronic mail and voice mail- 100%, beyond 49% requires FIPB approval

• Shipping and Ports -100% FDI under automatic route
• Railways- Rolling stocks open for FDI, Railway transport reserved for Public sector.
• Industrial Parks- 100% FDI under automatic route
• Hospitals- 100% FDI under automatic route
• Hotels & Tourism (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)- 100% FDI under automatic route

A Comparison of FDI in India and China:
India and China, two of the largest countries in the world, have experienced rapid economic growth in recent years. The growth, in part, is attributed to the adoption of liberal trade policies by each country, and the consequent surge in the flows of foreign capital to both these countries. ranking of countries in terms of foreign investment (relative to the size of the economy) for the period 1998-2000 is 119 for India, and 47 for China. The ranking a decade ago was 121 and 61 respectively. It shows that even at the start of the reforms, China's ranking was way ahead of India's; China moved up in the ranking much faster than India did in the 1990s.
These statistics are widely seen as an evidence of the failure of India's reforms, since greater inflow of foreign capital in China is believed to be largely responsible for its exceptional growth and export performance. Now China's GDP per capita is now 2.2 times higher than India's (in USD PPP terms). Until the early 1990s, GDP per capita in China and India was at comparable levels ,but China adopted wide-ranging economic reform one decade earlier than India.
According to IFC (2002), India does not follow the standard IMF definition as it excludes (i) external commercial borrowings, that is ADRs/GDRs, (ii) reinvested profits and (iii) subordinated .debt.

CONCLUSION:
It is generally said that future is always uncertain. This saying is correct to some extent. But at the same time it is also said that exceptions are always there. This exception is about India's certain higher rate of growth in the coming future. The future of Indian economy is brighter because of its huge human resources, rapidly upcoming service sector, availability of large number of competent professionals, vast market for every product, increasing impact of consumerism, absence of controls and licenses, interest of foreign entrepreneurs in India and existence of four hundred million middle class people. Even today, India is producing largest number of billionaires in a year, take over by Indian multinationals is amazing, the craze of Indians to go abroad is rapidly diminishing, the Rupee is becoming stronger and stronger in relation to Dollar. India's say in the international diplomacy and political affairs has now become meaningful, thousands of foreigners are working as executives in India, packages are becoming lucrative and competitive and annual rate of growth is highest after China. This present picture gives some reflections of the future. But this is all in the absolute sense and not in the relative terms. A country can only grow if the Govt. policies allow more participation and is able to attract more and more foreign direct investment in India. Today, India provides highest returns on FDI than any other country in the world. India is poised for further growth in manufacturing, infrastructure, automobiles, auto components, food processing sectors, real estate development etc. In this context it is also worth mentioning that savings rate has also increased from 23% to 31% over the last year to this year. India's continuing ambivalence on FDI, as a result, exacts a heavy toll on the economy. Undoubtedly, India is ceding billions of dollars of FDI to its neighbors each year. While China achieved actual FDI inflows of around $45.3 billion in 1997, India settled for a mere $3.2 billion. India therefore stands to win in the next few years.

Google+

Add Project New Miscellaneous essays

 

Popular Miscellaneous papers