Foreign Direct Investment and IT Industry in India

Aung Kyaw Oo 1 and Almas Heshmati 2

1
akoo@snu.ac.kr, 2 heshmati@snu.ac.kr
Techno-Economics and Policy Program
College of Engineering, Seoul National University

Abstract
Foreign Direct Investment (FDI) plays a vital role in the development of not only the
developing country but also to developed and newly industrialized countries (NICs). As every
developing country in the world recognizes the importance of FDI to its economic development,
laws, regulations and rules are being imposed or modified to harvest bilateral benefits from FDI.
In this study, theoretical knowledge and practicalities of FDI in India in comparison with the
other countries are studied. In addition, the contribution of Information Technology (IT) industry
to the Economy of India is investigated. Finally, observation and suggestions are launched based
on the investigation and findings in the study.
Key-words: IT, Development, FDI

I. Introduction

India is a country in the southern part of Asia and shares boundaries with Myanmar and
Bangladesh in the East, Pakistan in the North-west and China and Nepal in the North-east. It has
a population of about 1.103 billion with a density of 348 persons per square kilometer as of 2005.
It is the second populous country all over the world. The country has 17 official languages, 6
major religions, and ethnic diversity as wide as all of Europe. The Indian market is widely diverse.

It is still very hard to do business in India (outside certain leading sectors like IT, and
even in these it is still not easy). Recent edition of the World Bank's widely quoted "Ease of
Doing Business" survey ranks India 116th of 155 countries, two places behind Iraq. A variety of
factors responsible for this result included restrictions and outright bans on foreign investment in
various sectors, time-consuming and complex bureaucracy and restrictive labor laws and a
shortage of two-lane roads and international airports, and a creaking railway network contributed
to it. If these problems are not handled attentively, it will be difficult to imagine India's FDI rising
as rapidly as China's has in the last few years. But, there are no easy solutions to these problems.
India's consolidated fiscal deficit currently stands at around 8% of GDP. According to the
Economist Intelligence Unit's World Investment Service, FDI will continue to grow in India, but
at a modest pace, reaching US$14.3 billion by 2010.

The objectives of the study are shown in section (2). The next section depicts FDI policy
and Practice in India and Contribution of IT industry into India Economy is investigated in
section (4). In section (5), Software sector in IT industry is presented. Comparison of India’s FDI
with some countries is discussed in section (6). Observation and suggestions are launched in
section (7) and the last section sees the conclusion of the study.

II. Motivation for the Study

The current trend in the state-controlled economy and developmental phenomenon of
India, a populous country of southern Asia, stimulates the author to go more deeply into the share
and inflows of FDI into its economy paying focus on the IT industry and hence this study comes
into life. The study seeks the real-world data after following the current theory and practices in
the FDI implementation of India. Then, assessment and appreciation upon the IT industry of the
country with respect to the FDI inflows are carried out as much details as it can go. This study in
addition will pave the way and highlight some paramount facts and figures for putting
investments and doing business in India. The research plan for this study is laid out as follows;

Data Collection

Data Categorization

Investigation

Data Analysis

Suggestions

Figure (1): Study Plan

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 III. FDI Policy and Practice in India
In this section, the author will review some of the pioneer-concepts and originations of
the idea of FDI and how FDI has been perceived and given priority in the India’s Economy
through ages beginning from its independence in the year 1947.
India's post-independence economic policy combined private sector with state planning
and control. Prior to 1991, foreign firms were allowed to enter the Indian market only if they
possessed technology unavailable in India. Almost every aspect of production and marketing
was tightly controlled, and many of the foreign companies that came to India eventually
abandoned their projects. The Industrial Policy announced in July 1991 was vastly simpler,
more liberal and more transparent than its predecessors, and it actively promoted foreign
investment as indispensable to India's international competitiveness. The new policy permits
automatic approval for foreign equity investments of up to 51 percent, so long as these
investments are made in one of 35 "high priority" industries that account for the lion's share of
industrial activity.

Foreign equity participation was limited to 40 percent before the year 1991, and
foreign investors were saddled by numerous operating constraints. Foreign equity investments in
excess of 51 percent, or those which fall outside the specified "high priority" areas, must be
approved by the Foreign Investment Promotion Board (FIPB) and approved by a Cabinet
Committee. The government on some occasions has denied requests for a foreign equity stake
exceeding 51 percent. Non-resident Indians (NRI's) and Overseas Corporate Bodies-OCBs (firms
with NRI majority ownership) may hold 100 percent ownership in all industries except those
reserved for the public sector. The Ministry of Industry has expanded the list of industries eligible
for automatic approval of foreign investments and, in certain cases, raised the upper level of
foreign ownership from 51 percent to 74 percent and further in certain cases to 100 percent. In
January 1998, the simplified procedures for automatic FDI approvals were announced.

India is the fifth largest economy in the world (ranking above France, Italy, the United
Kingdom, and Russia) and has the third largest GDP in the entire continent of Asia. The under-
mentioned chart will show the vision of India to double its GDP per capita up to US $5,000 from
$ 2,500 between 2002 and 2020 [16]. It is also the second largest among emerging nations (These
indicators are based on purchasing power parity). India is also one of the few markets in the
world which offers high prospects for growth and earning potential in practically all areas of
business. Yet, in spite of the unlimited possibilities in India for overseas businesses, it has, until

3
recently, failed to get the kind of enthusiastic attention generated by other emerging economies
like China.

India, among the European investors, is believed to be a good investment despite

political uncertainty, bureaucratic hassles, shortages of power and infrastructural
deficiencies. India presents a vast potential for overseas investment and is actively encouraging
the entrance of foreign players into its market. No company, of any size, aspiring to be a global
player can, for a long time, ignore this country which is expected to become one of the top three
emerging economies. Success in India will depend on the correct estimation of the country's
potential, however, underestimation of its complexity or overestimation of its possibilities can
lead to failure. While calculating, due consideration should be given to the factor of the inherent
difficulties and uncertainties of functioning in the Indian system.
Entering India's marketplace requires a well-designed plan backed by serious thought and
careful research. After regaining independence from Britain nearly 60 years ago, India developed
into a highly protected, semi-socialist autarkic economy. Structural and bureaucratic impediments
were vigorously fostered. India is rightfully quoted to be an incomparable country and is both
frustrating and challenging at the same time. Foreign investors should be prepared to take India as
it is with all of its difficulties, contradictions and challenges. Three basic steps to make a
successful entry into Indian Market are:-
(a) Developing a basic understanding or potential of the Indian market,
(b) Envisaging and developing a Market Entry Strategy, and
(c) Implementing these strategies when actually entering the market.
The stock of foreign direct investment (FDI) in India soared from less than US$ 2 billion
in 1991, when the country undertook major reforms to open up the economy to world markets, to
almost US$ 39 billion in 2004 ( Source: UNCTAD online database). Currently, it is being

4
discussed to deregulate FDI restrictions further, e.g., by allowing FDI in retail trade.
Policymakers in India as well as external observers attach high expectations to FDI. According to
the Minister of Finance, P. Chidambaram, “FDI worked wonders in China and can do so in India”
(Indian Express, November 11, 2005). The implicit assumption seems to be that higher FDI has
caused higher growth.
Bajpai and Sachs (2000) advice policymakers in India to throw wide open the doors to
FDI which is supposed to bring “huge advantages with little or no downside.” Moreover, some
observers doubt that economic reforms went far enough to change the character of FDI in India
and, thus, result in types of FDI that may have more favorable growth effects. For example,
Balasubramanyam and Mahambare (2003) as well as Fischer (2002) argue that the reforms
implemented so far have not eliminated the distinct anti-export bias of India's trade policy. This
may explain why, according to Arabi (2005) and Agarwal (2001), FDI in India has remained
domestic market seeking. Agrawal and Shahani (2005) reckon that it is the quality of FDI that
matters for a country like India rather than its quantity. FDI is often supposed to be of higher
quality if it is export oriented, transfers foreign technologies to the host country, and
induces economic spillovers benefiting local enterprises and workers (Enderwick, 2005) [p-
2,1].
In India, Foreign Direct Investment (FDI) is permitted [9] under the following forms of
investments:-

1. Through financial collaborations.

2. Through joint ventures and technical collaborations.
3. Through capital markets via Euro issues.
4. Through private placements or preferential allotments.

FDI is not permitted [9] in the following industrial sectors:-

1. Arms and ammunition.

2. Atomic Energy.
3. Railway Transport.
4. Coal and lignite.
5. Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper,
zinc.

Government at all levels is reluctant to abdicate control over key sectors of the economy
by privatizing parts of their infrastructure. This is even more of a concern where foreign

5
ownership is involved. Utilities controlled and run by foreigners are highly visible targets for
political discontent. Most governments in India do not have a strong record of regulating
private industries, because the public sector has been so dominant. Thus, there is insufficient
awareness that regulation can be as effective as direct ownership for control purposes while also
producing gains in efficiency. This government concern manifests itself in several ways, such as
rules prohibiting private entry into certain sectors, limiting it to minority stakes, or imposing
restrictions on foreign ownership.
Government often prefers to involve domestic investors in developing the private sector.
Because most infrastructure sectors have been dominated by state−owned enterprises, however,
private entrepreneurs have been prevented from developing technical and managerial skills. Thus,
qualified domestic investors are rare. At the same time, whatever the situation may be, local
capital is the cheapest form of equity capital (as it eliminates the foreign exchange risk), and the
development of domestic capital markets can greatly facilitate the successful implementation of
infrastructure projects.
Many government officials view potential private infrastructure investors simply as
an extra source of funding. Although private sector involvement does offer extra financing and
the willingness to manage some risks (e.g., those associated with construction and operation),
private companies are generally not willing to bear risks that they cannot control (e.g., political or
regulatory risk). Thus, additional financing will emerge only if the investors retain control over
the asset. Limitations on this ability to control will most likely result in investors' being unwilling
to make serious financial commitments.
In most developing countries, investors quickly come to the realization that a general
invitation by senior government officials to participate in infrastructure projects does not at all
reflect the opinion of many parts of government. In fact, governments tend to be a blend of
numerous interest groups with different motivations and ambitions. Their views about private
participation in infrastructure are shaped less by the overall political objectives for the country as
a whole than by the narrower objectives of their particular responsibilities. Ministries of Finance
or Economy tend to be positively inclined toward private sector investment in infrastructure
based on their concerns about the country's macroeconomic and financial performance. They tend
to view private involvement as a potentially valuable tool in boosting foreign exchange reserves,
limiting budgetary pressures through large−scale public investments, and enhancing the overall
competitiveness of the economy through the injection of new capital and managerial skills.
Furthermore, in many cases the state−owned enterprises responsible for service provision have

6
obtained a higher degree of autonomy in the recent past in order to improve their commercial
viability [p-29, 3].
(a) Capital Flows and Technology Policy
The enlargement of the international capital market will open up increasing opportunities
for India to attract foreign direct and institutional investment. Foreign direct investment (FDI)
expanded globally from $159 billion in 1991 to $1,270 billion in 2000, but with an increasing
proportion of these flows moving between developed nations. During this period, FDI flows to
India increased six-fold to $2.3 billion, which represents less than 0.2 per cent of global FDI. The
amount of capital globally available will continue to grow, but improvements in infrastructure
and elimination of bureaucratic barriers will be major determinants of India’s success in attracting
a greater share of FDI flows. The size and prosperity of China’s non-resident population has been
a vital link for the channeling of technology, investment and business back to the mainland. A
similar mobilisation of India’s expatriate population could have momentous impact on the inflow
of FDI in 2020 [5].
India’s technology policy needs to be reformulated in the light of the emerging
international economic environment, to capitalise on the accelerated global development and
diffusion of technologies, and keep pace with more demanding international standards for cost,
quality and productivity. India will need to be far more aggressive in acquiring and applying
advanced technologies in a wide range of fields, including agriculture, information technology,
energy, health 85 and education. At the same time, India can also aspire to become an important
contributor to the expansion of global frontiers of technology by building upon and leveraging its
already significant achievements in fields such as pharmaceuticals, biotechnology, software,
space and energy. It can also revive, simultaneously, its traditional knowledge and technologies
through formal R&D efforts [5].
(c) Law, Approval and Obstacles in FDI
According to [6], inflexible labor law in India claims to be one of the barriers for the
potentials of FDI inflows. A World Bank study entitled ‘Doing Business,' released earlier in 2005,
rated India as among countries with the most rigid labor laws with a score of 48, while China had
only 30 and Singapore zero[7]. Any FDI in India is approved through one of the following two
routes:-

• The automatic RBI route; the Reserve Bank of India (RBI) is empowered to
automatically approve, within a period of two weeks, a number of FDI proposals as
listed by the Government of India in a comprehensive list. This list covers most industries

7
 which are of interest to foreign companies. RBI usually gives automatic approval to
investment in high-priority industries or for trading companies engaged in exporting.

• The FIPB route; this is for processing of non-automatic cases. Foreign Investment
Promotion Board (FIPB) approves all the cases not meeting the parameters of automatic
approval. This usually takes four to six weeks. FIPB usually adopts a very liberal
attitude for all sectors and for all proposals, hence rejections are few. Another
convenience for foreign investors is that they don't need a local partner, even if they are
not going to hold the entire equity of the company. Foreign investors can offer the portion
of equity, not held by them, to the public [p-10, 2].

There are some major roadblocks to larger FDI inflows in India. These are enumerated
below:-

• India also scores poorly in terms of skills and productivity of labor. It is no state secret
that quality and cost of labor plays a major role in determining how much FDI a country
gets. India's labor may be cheap, but is it really skilled and highly productive?

• If approved FDI is to be translated into actual investment quickly, it will require more
transparent sector-wise policies.

• India's tariff rates are still among the highest in the world. This makes India much
less attractive a destination for exports-oriented manufacturing. The following chart,
comparing with other eight countries in Asia, describes the burdensome tax rates upon
the investors in India [16].

8
 • India's export processing zones have so far not done well in attracting FDI. These zones
lack dynamism because of several reasons, limited scale being one of them.

• Reforms in India have so far concentrated on removing entry barriers, but what about
exit barriers? There is hardly any liberalization of exit barriers till date. Firms still find it
very difficult to exit the market freely, even if they find entering it relatively easy. This
will prevent large volumes of FDI to flow to India.

• India's labor laws are of ancient origin! Thus, companies find it almost impossible to
retrench or lay-off any worker. In India, even private sector workers enjoy as much job
security as public sector workers. This makes them lazy and unproductive. Until and
unless India overhauls its labor laws, large inflows of FDI will continue to elude it.

• It's beyond the comprehension of ordinary mortals that if corporate tax rates in East
Asia are in the range of 15 to 30 percent, why India continues with a higher tax rates?
And still it hopes to be world's preferred FDI destination!

Thus it was found out that foreign direct investment has certainly increased in India in the
last one and a half decade, but it is still nowhere near its true potential. Poor infrastructure,
obsolete labor laws and large number of exit barriers continue to make foreign investors
hesitant to invest substantially in India [15].

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 IV. Contribution of IT Industry into India Economy
(a) IT Market
Indian software development and IT-enabled service (ITES) market continues booming.
The sector, which had managed to sustain growth during the challenging 2000-02, reverting
gradually to its performance levels prior to the global economic recession. Apart from the IT
services segment grew in excess of 40 percent during 2003- 04.
India continues to expand its presence in two of the 10 major IT services lines. Custom
application development and maintenance and applications outsourcing accounted for nearly 88
percent of total software exports in 2003-04. More recently, Indian companies have begun
moving up the value chain and are offering services in IT consulting, systems integration,
network consulting and integration processing services and IS outsourcing. The Indian software
and services export sector has a pyramid structure, with a handful of companies logging in
revenues in excess of Rs. 10 billion (US$ 210 million). The number of companies with revenues
above Rs. 1 billion (US$ 21 million) has grown from 52 in 2001-02 to 70 in 2002-03. Tier 1
companies within the industry (top five firms) account for about 32 percent of total software
exports.
(b) IT growth
The Indian IT industry is a US$20 billion industry in the year 2003-04, representing a 26
percent increase over the 2003 revenues of US$15.8 billion. The IT industry’s contribution to the
Indian GDP has increased from approximately 1.4 percent in 1998-99 to more than 3 percent in
2003-04. The Indian IT industry includes hardware, peripherals, networking, training,
domestic and export market for software and services and Business Process Outsourcing
(BPO).
Year 2003-04 2004-05 2005-06*
IT software and service exports 9.2 12.0 15.2
ITE-BPO exports 3.6 5.2 7.3
Domestic market 3.9 4.8 6.0
Total 16.7 22.0 28.5
*Estimated (Units in US $ Billion)
Table (1): Progress of IT Industry in India [16].

The following table (2) shows the employment force of India only in the industry of
Information Technology.

10
 Table (2): Human resource capital in IT industry of India
(c) IT Companies in India
The Indian IT services industry comprises a diverse group of companies-large, near-
billion dollar global companies and small start-ups, Indian companies and multinationals. Growth
rates across companies are quite varied. Tier 1 companies (i.e. the top 5 firms) account for about
32 percent of total software exports; and have benefited from customers’ recent scaling of
operations. Tier 2 companies (with revenues of between Rs. 1 billion and Rs. 10 billion) account
for about 24 percent of the industry, and face the challenge of differentiation from tier 1 players.
The revenues of these companies are under pressure because of fierce bidding by those in Tier 1
[10]. MNC back-ends account for about 26 percent of the industry. Focused companies (about 3-4
percent of the industry) include those with a focus on a particular domain/service line/products,
who are facing the challenge of cutbacks in key markets such as telecom, and managing to
diversify their offerings. Small companies, with revenues of less than Rs. 1 billion, account for
12-14 percent of the market, and many have witnessed a slow growth due to excessive
dependence on staff augmentation.
(d) Exports by Verticals
• The financial services sector (IT spending by banks, insurance companies, and
securities firms) accounted for the largest share of Indian software and services exports
at around 40 per cent followed by manufacturing with around 12 percent
• Emerging verticals: Healthcare, Telecom Service providers, Retail and Government
Exports by Service Lines
Custom application development and maintenance, and application

outsourcing, accounting for 88 percent of total software exports

Emerging service lines: IT consulting, System Integration, Network

Consulting and Integration, Hardware Support and Installation, Processing

Services and IS outsourcing

11
 (e) Domestic IT market
Indian IT vendors are increasingly turning attention to domestic market. The Indian
users’ industries are outsourcing parts or entire IT infrastructure to specialized vendors. Growth
in the domestic software and services segment is at US$ 3.4 billion during 2003-04, up from the
US$2.8 billion in 2002-03.
(f) The key drivers of growth in the domestic IT market include:
• Opportunities in verticals such as Energy, BFSI, Manufacturing, Education, Telecom
and Government
• Increased penetration of computers in the household
• Increased investments in IT by the central and state governments in e-governance
initiatives
• Rapid adoption of broadband
• Increased usage of non-PC devices especially cell-phones
• Increased focus of Small and Medium sized software companies on domestic market.
India has become one of the most favored destinations for sourcing software primarily
driven by the high level of government support, quality of the labor pool, English
language skills, cost advantages, project management skills and over-all quality control.
Additionally, a favorable time zone difference with North America and Europe helps
organizations achieve 24x7 internal operations and customer service.
(g) India’s strengths in IT include:
• Highly skilled, abundant labor pool and market-driven education system
• Labor cost advantages
• Process and quality focus - large number of companies have received SEI-CMM
Level 5 certifications.
• Project management and complex project execution skills and experience
• Indian companies are following well defined security policies as well as adherence to
international security standards. The IT Act 2000 and the Copyright Act provide the
enabling framework for security and IP protection.
• Entrepreneurial culture
• Indian diasporas and strong customer relationships
• Friendly government policies for IT exports
India’s key advantage in the global IT industry is the availability of an abundant, high
quality and cost-effective pool of skilled knowledge workers. The number of knowledge
professionals employed in India is 813,000 in 2003-04.

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 V. Software sector in IT Industry
India's software exports growth in current dollars averaged around 30 percent a year in
1986-93 and near 50 percent a year in the past two years taking export revenue to around US$750
million. A shortage of software engineers in many industrial economies coupled with a trend
towards outsourcing non-core operations have been the driving forces behind the growth of the
software industry in developing countries, including India. India's software exports were
primarily concentrated (80-90 percent) on contractual programming at the clients' premises - low
value added functions with low entry barriers in terms of capital, marketing skills and costs.
These types of exports bring a degree of technology and skills transfer and build up credibility
with potential clients. However, profitability is relatively low and - more damaging - it leads to
the loss of personnel who choose to stay abroad, an important factor contributing to the slow rate
of assimilation and diffusion of information technology throughout India. The share of custom-
made software for off-shore clients has grown to around 35 percent of total software exports.
The increased confidence in outsourcing IT work to Indian software firms, has been substantially
helped by the installation of dedicated satellite links which make it possible to overcome India's
vast communication bottlenecks .As of March 1995, there were 124 high-speed leased data lines
providing 64 kbps links with foreign companies. Value addition and profitability are higher in
this sector as are the benefits from skills transfer, particularly with respect to large project
management. It has also led to a new surge of foreign investment and joint ventures into India by
multinational IT groups such as IBM, Oracle, Novell and Motorola.
The export of application software packages is by far the most difficult segment of the
international software market to penetrate, but it is the main driving force and accounts for the
largest proportion of traded software. India's package exports probably account for about 10
percent of its total software exports. The capital, managerial and marketing skills required are
higher than in other segments of the market, but correspondingly the level of profitability and
skills transfer are greater as well. Additionally, the export of products may be less vulnerable to
recession and easier to sell than services, but competition is intense and advantages based on low
labor costs lose their relative importance. It is expected that the industry will generate a total
employment of around four millions peoples, which accounts for 7 per cent of India's total GDP
as in the year 2008. The year 1995-96 was a boom for the industry. The performance of the
software industry in IT over the last years is as follows [15]:

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 (Units in US $ millions)
1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01*
Domestic software Market 490 670 920 1250 1700 2450
Software Exports 734 1085 1750 2650 4000 6300
Indian Software Industry 1224 1755 2670 3900 5700 8750
*: Estimated (* Source: NASSCOM)
Actually, in 1983, when India's total software exports were only $12 million, who could
imagine that they would multiply 500 times in 17 years and the country would be recognized
around the world as a major IT power [5]? India produces a large number of IT graduates each
year which in theory means that the supply of skilled professionals should not be a constraint to
continued rapid export growth. There is to some extent, however, a mismatch between the skills
taught in India and the skills needed in international markets. Moreover, the quality of training in
some institutes has been poor in the past. In response to these needs a number of training centers
have been set up under franchise from Microsoft, Novell, Apple, IBM and Silicon Graphics,
which should go some way towards addressing these deficiencies.

(a) Where India IT Industry to go?

India Information Technology companies may be missing a significant opportunity by
concentrating their efforts on India's much-hyped export market and failing to capitalize on the
country's burgeoning domestic market, Gartner warned. Speaking at the Gartner Summit India
2005 in Mumbai, analysts said that India continued to have the fastest growing IT market in
the world, and predicted a combined annual growth rate (CAGR) of 19 percent from 2004
through 2008. Though starting from a much smaller base, this is significantly faster growth
than the second fastest growing IT market in the world - China. Gartner estimates that IT
spending in India will surpass US$54.8 billion by 2008, a rise from US$29.5 billion in 2004.
Domestic vendors currently account for only 42 percent of total IT spend in India. Some
said, "The dominance of foreign providers in India is driven by a combination of a lack of
credible domestic IT infrastructure providers - other than in the Telecom space - and the benign
neglect of the emerging and growing domestic services business by the major Indian service
providers. Unless action is taken now, domestic providers could see their share of the Indian
market slip further."
It was further counseled that India's much prized export-focused industry, currently
estimated to be worth around $16.5 billion, could ultimately be under threat if local providers fail
to gain ground in the domestic market. According to Gartner, Indian businesses are increasingly

14
turning to multinational brands in the outsourcing of high-profile contracts. Gartner believes that
if Indian technology providers have no standing in the local market and are thus unable to
compete for these higher-end (transformation oriented) deals, it will hamper their future prospects
in pursuing similar deals in international markets [8].
Gartner has defined three potential scenarios for India's ICT industry in 2010. Each
scenario highlights six parameters: Domestic ICT Industry, ICT Export Industry, Social Impact,
Political Impact, Overall Economy and ICT Standards. Gartner's first scenario, 'Global ICT
Superstar' is characterised by balanced development of both the domestic ICT industry and export
strength. It assumes a high level of government support with the India ICT industry driving policy
as well as defining new global standards. It would lead to a strong economy and a large majority
of the population would stand to benefit. In the second scenario, the domestic ICT industry would
continue to be dominated by foreign multinationals and the export market would struggle for
survival. According to Gartner, in this scenario, dwindling government interest in the ICT
industry would lead to a re-focus on other industries and the country's digital divide would be
pronounced [8].
The World Bank estimates that India will possess the fourth largest economy in the world
by 2020. India’s recent boom in outsourcing of IT services, which is further facilitated by
declining costs of international communication and transportation, only points to the wide range
of economic opportunities existing in the manufacturing and service businesses. At the same time,
the pressure for export of highly educated and highly skilled individuals will also increase, so that
a significant migration of scientific, engineering and medical talent is likely to continue. Steps
however need to be taken to ensure that such migration is not detrimental to the country’s
development [5].
Export of services is a field in which India can excel. Computerization, coupled with low-
cost global telecommunications, is generating rapid growth of trade in service businesses, such as
84 software- and IT- enabled services. This trend will further accelerate, opening up vast
opportunities for countries with the capacity to deliver low-cost, high-quality services. India
already commands an impressive 18.5 per cent share in the global market for customized
software and the Indian software industry is the fastest growing in the world. A NASSCOM-
McKinsey report estimated that by 2008, the global market for IT enabled services alone will
exceed $1,000 billion, and that India’s export of IT services will exceed $50 billion, which is
double the country’s total export of goods and services in 2000[5].

15
 VI. Comparison of India’s FDI Inflows with some countries
In this section, FDI inflows to India will be shown with the help of facts and figures
obtained from many other reliable sources.The following chart compares the inflows of FDI in
US $ billion to each country in the year 2003 and 2004 [p-52, 4].

The following chart will depict the leading foreign investors in India from the mid of
1991 to the mid of 2005 [16]. According to [16], the main investment destinations are
Maharashtra, Delhi and Karnataka and other investment locations include Andhra Pradesh, Tamil
Nadu and West Bengal.

16
The following table [17] shows the approvals and inflows of FDI in India from the
fiscal 1991-92 to 2004-2005.

The following table [p-160,18] will depict the FDI inflows in some selected Asian
developing countries from 2001 to 2003.What it found out here is that India is three-
fold or more behind the FDI inflows of Singapore and Hong Kong although they have
nearly as little as (6) million in population of their own. In comparing the active and
qualified working force with other countries in the shown table, India has more human
resources than others except China. But, why do the others have more FDI inflows than
India? Why do the investors go there instead of coming to India?

17
 VII. Observation and Suggestions
Growth in the size of the international capital market will open up increasing
opportunities for India to attract foreign direct and institutional investment, but a substantial
improvement in infrastructure and elimination of most of the bureaucratic barriers will help India
in attracting a greater share of FDI flows. Mobilization of India’s expatriate population could
have momentous impact on the inflow of FDI in 2020 [5].
Throughout the study, India Economy is projected by paying attention to the FDI inflows
and Information Technology Industry. The credit goes to technical young peoples and English-
speaking scientific professionals for the success in India's software-led IT industry. For further
strengthening the industry, the Government has stepped forward with more qualitative institutes
[15]. Actually, India is producing around (2) million well-qualified engineers annually in
various science and technology disciplines. With this Human intellectual (or) knowledge capital
in hand, it will be, no doubt, the biggest destination for the follow-source suppliers of MNCs or
TNCs around the world. The two main target countries are US and UK even though leading
OECD countries are in the priority list. Low-wage labor in India is the most outstanding strength
compared to those of the other countries not only in the region but in the whole world. What it
needed in the country is to lessen the rigid regulatory measures applied to the investors. India
is now fully digitized. However, the most fundamental infrastructure of Electricity is not fully
yet to come. The government of India is seeking every possible way to fulfill and upgrade the
electricity consumption in the whole country and shouldn’t it?

VIII. Conclusion
In the aftermath of formulating “Vision 2020”, India, currently, is leading in fields like
software technology, pharmaceuticals, space, biotechnology, energy and participating actively in
other science and engineering atmospheres. As mentioned in the report [5], India has great
potentials in attracting millions of employment opportunities for its nationals from all developed
nations especially from OECD countries in IT and IT-enabled services. Not so far away from now,
MNCs and TNCs will certainly come and invest their IT-related businesses and industries in India
more than ever before.

References:

(1) Chakraborty .C; Nunnenkamp .P: Economic Reforms, Foreign Direct Investment
and Its Economic Effects in India , Kiel Working Paper No. 1272 , March 2006.
(2) Government of India: Manual on FDI in India, May 2003.

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(3) Sader. F: Attracting Foreign Direct Investment into Infrastructure, FIAS occasional
Paper 12, World Bank, 2000.
(4) World Investment Report, 2005. IMF.
(5) Gupta, Dr.S.P: Report of the Committee on “India Visions 2020”; Planning
Commission, Government of India, New Delhi, December 2002.
(6) A. Panagariya: “Rigid Labor Laws; a Minor Barrier to Growth”; Economic Times,
India, September 26, 2001.
(7) R. Devraj: ” INDIA: Japanese Investors Learn Indian Labor Laws the Hard Way”:
Inter Press Service, India, August 3rd, 2005.
(8) http://www.gartner.com/press_releases/asset_134972_11.html
(9) http://finance.indiamart.com/investment_in_india/fdi_approval.html
(10) http://www.nasscom.in/Default.aspx?
(11) www.nasscom.org
(12) www.intermesh.net
(13) http://www.corpwatch.org/article.php?id=12531
(14) http://www.yourdictionary.com/business_profile/debt/investment/foreign-
direct-investment-in-india.html
(15) http://economywatch.com/business-and-economy/software-industry.html
(16) http://www.dbresearch.com/PROD/DBR_INTERNET_EN-
PROD/PROD0000000000191797.pdf
(17) http://indiabudget.nic.in/ : Chapter (7), Economic Survey 2004-2005.

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