Title Page for Project Management Group Project

Program & Batch: Term: Course Name: Name of the faculty: Topic/ Title : Original or Revised Write-up: Group Number: Contact No. and email of Group Coordinator: Group Members: Sl. 1 2 3 4 5 6 7 8 PGDM 2012-14 V EPRE Dr. Sujoy Chakraborty FDI and its Impact on India Original 6 Contact no: 7503139677 Email id: aditi2612@gmail.com Roll No. 12DM-012 12DM-083 12DM-171 12FN-074 12FN-066 12HR-008 12HR-022 12HR-031 Name Aditi Gupta Maryne Ann James Vriti Mayank Swarup Kunal Parekh Divya Aggarwal Ramya Krishnan Sweta Rani

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9/10/2013

FDI and its Impact on India

Subject: EPRE Under the guidance of Dr. Sujoy Chakraborty

Group 6, Section E 12DM-012 Aditi Gupta 12DM-083 Maryne Ann James 12DM-171 Vriti 12FN-074 Mayank Swarup 12FN-066 - Kunal Parekh 12HR-008 Divya Aggarwal 12HR-022 Ramya Krishnan 12HR-031 Sweta Rani

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Contents
List of Tables .......................................................................................................................................... 4 List of Figures ......................................................................................................................................... 4 Introduction ............................................................................................................................................. 5 Why FDI ................................................................................................................................................. 5 Trade and Investment ......................................................................................................................... 6 Technology Transfers .......................................................................................................................... 6 Human Capital Enhancement ............................................................................................................. 6 Competition ........................................................................................................................................ 7 Enterprise Development ..................................................................................................................... 8 Types of FDI ........................................................................................................................................... 8 By Direction ........................................................................................................................................ 8 By Target ............................................................................................................................................ 8 By Motive ........................................................................................................................................... 9 Entry Routes for FDI in India ................................................................................................................. 9 Instruments for receiving FDI ............................................................................................................... 10 Mode of Payment .............................................................................................................................. 11 FDI Policy in India................................................................................................................................ 11 FDI Prohibited Sectors in India ........................................................................................................ 12 FDI Permitted Sectors in India.......................................................................................................... 12 The FDI Confidence Index ................................................................................................................... 16 FDI Inflow ............................................................................................................................................ 17 Country-wise FDI inflows in India ................................................................................................... 18 Mauritius: ...................................................................................................................................... 19 Singapore: ..................................................................................................................................... 19 USA: ............................................................................................................................................... 19 European Union: ........................................................................................................................... 19 Japan: ............................................................................................................................................ 20 Sector-wise FDI inflows in India ...................................................................................................... 21 Rupee Decline presages FDI flight ....................................................................................................... 23 Can FDI prove instrumental in cutting Current Account Deficit .......................................................... 26 Bibliography .......................................................................................................................................... 28

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List of Tables
Table 1: Sector-wise FDI caps................................................................................................................ 15 Table 2: FDI Inflows Year Wise in India ................................................................................................. 18 Table 3: Country-wise Inflows Received in India (2013-2014-upto May 2013) .................................... 19 Table 4: Country-wise FDI Inflows (April 2000 to June 2013) ............................................................... 21 Table 5:Sector-wise FDI Inflows (April 2000 to June 2013) .................................................................. 22

List of Figures
Figure 1: FDI Confidence Index 2013 .................................................................................................... 16 Figure 2: Country-wise FDI flow ............................................................................................................ 20 Figure 3: Financial Year-Wise Equity Inflows ........................................................................................ 26

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Introduction
In terms of Economics FDI constitutes Capital Account. Foreign Direct Investment, simply put, is an investment made by an entity or a company in one country into an entity or a company in another country to leverage the host countrys advantage, in the form of cheap resources or to access consumer markets. It is a direct investment into the business either by buying a company or by expanding an existing business in the target country. Both the countries gain from this long term relationship the investor in terms of getting a higher return on his investments and the investee gaining by the way of increased know how, technology transfer and industry improvement. FDI is different from passive investments like portfolio investment i.e. investing in stocks and bonds of another country. The threshold as defined by the OECD is that the investor must own at least 10% of the voting stock or ordinary shares of the company in which investment has been made. The investment can be made through any of the following methods: By establishing a wholly owned subsidiary By acquiring shares in the foreign company Through a merger or an acquisition of an enterprise By participating in a joint venture with a company

Particularly in India FDI was opened post liberalization of economy in 1991. Post 1993, FDI was a significant contributor to positive BOP. Over a span of 10 years post liberalization Current Account was constantly running negative chiefly because of imports surpassing exports. This was the time when Capital Account was consistently positive because of considerable contribution made by FDI. FDI is one of the measures of economic globalisation and a solution to long term stability with minimum exposure to international shocks.

Why FDI
FDI has countless benefits for both the investor and the beneficiary. One of the major one is that it allows money to move freely to businesses that have the best prospects for growth anywhere in the world. Investors aggressively seek the best return for their money with the least risk.

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Trade and Investment

Inward FDI contributes to integration of developing countries into the global economy by stimulating and enhancing foreign capital flows. Several factors such as expansion and establishment of international networks of enterprises and an increasing importance of foreign subsidiaries in foreign companies strategies for distribution, sales and marketing are at play. A developing countrys ability to attract FDI is influenced by the participant's approach to involve in importing and exporting activities. Would-be host countries of FDI must consider a policy of openness to international trade since it is vital to their development. Host countries can attract FDI by raising the size of the relevant market by pursuing policies of regional trade liberalisation and integration. Inward investment helps host countries that are financially constrained make use of their resource endowment (minerals) or their geographical location. Targeted measures to harness the benefits of FDI such as establishing export-processing zones (EPZs) aid in development. They contribute in raising imports as well as exports of developing countries. FDI leads to an upsurge in imports, which is gradually reduces as local companies acquire the skills to serve as subcontractors to the entrant Foreign companies.

Technology Transfers
Technology transfer and transmission work by four correlated conduits: vertical linkages with suppliers or purchasers in the host countries; horizontal linkages with competing or complementary companies in the same industry; migration of skilled labour; and the internationalisation of R&D. Vertical linkages or backward linkages with local suppliers in developing countries have the most positive effects. Foreign companies provide technical assistance, training and other information to raise the quality of the suppliers products. Foreign companies support local suppliers to purchase raw materials and intermediate goods and in modernizing and upgrading production facilities.

Human Capital Enhancement

The advantageous effects of training provided by FDI complement a generic increase in skill levels. The existence of MNEs provide a useful demonstration effect, as the demand for skilled labour by these enterprises provides host-country authorities with an early indication
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of what skills are in demand. The task for the host country is to meet this demand in a timely manner and provide education and training to the work force. MNEs provide more training and upgrading of human capital than do domestic enterprises. The human capital thus created spills over to the rest of the host economy. Policies to improve labour-market flexibility and encourage entrepreneurship, among other strategies, could help bolster such spillovers. Human capital levels and spillovers are closely interrelated with technology transfers. In particular, technologically advanced sectors and host countries are more likely to see human capital spillovers and, conversely, economies with a high human capital component lend themselves more easily to technology spillovers. The consequence of this is that efforts to reap the benefits of technology and human capital spillovers could gain effectiveness when policies of technological and educational improvement are undertaken conjointly.

Competition
A surge in the number of strategic alliances has changed the way in which formally independent corporate entities interact. Alliances limit direct competition while creating efficiency gains. There has also been a wave of privatizations that attract considerable foreign direct investment (mainly in developing and emerging countries), and this has significant effects on competition. The effect of FDI on host-country concentration is stronger in developing countries than in more mature economies. The magnitude and dispersion of their effects are linked positively to prevailing levels of competition. The direct impact of competition varies by sector and host country. There are very few industries where global concentration has reached levels causing real concern for competition, especially if relevant markets are global in scope. In addition, high levels of concentration in properly defined markets doesnt result in reduced competition if barriers to entry and exit are low or buyers are in good position to protect themselves from higher prices. It is economically appropriate for strong foreign competitors to replace less productive domestic enterprises but stringent policies should be in place to safeguard a healthy degree of competition. The best way to attain this is by expanding the relevant market by increasing the host countrys openness to international trade.
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Enterprise Development
International mergers and acquisitions lead to changes in management and corporate governance. Such firms impose their own company policies, internal reporting systems and principles of information disclosure on acquired firms. Their corporate practices are superior to the ones prevalent in the host economy and this boosts corporate efficiency. The effects of FDI on enterprise restructuring are positive, because investors pick their targets among enterprises with a potential for achieving efficiency gains. Countries aiming to improve the economic efficiency of their domestic business sectors have to encourage FDI as a vehicle for enterprise restructuring.

Types of FDI
By Direction
Horizontal FDI It is an investment in the same industry in the host country as a firm operates in at the home country. Platform FDI It is an investment from a source country to a destination country for the purpose of exporting to a third country. Vertical FDI It takes two forms: o Forward Vertical FDI Where an industry abroad provides inputs for a firms domestic production process o Backward Vertical FDI When an industry abroad sells the output of a firms domestic production.

By Target
Greenfield Investment It is an investment in setting up new facilities or further expansion of existing facilities. Greenfield investments are of great importance to the host country as they create new production capacity, generate employment often at higher wages than the domestic firms, lead to increase in technological know-how and knowledge transfer, increase in R&D investment and an increase in worldwide linkages. However, the downside is that it sometimes also leads to crowding out of domestic industries. Also, the profits obtained do not feed the host nation but flow back to the multinationals economy while the profits from the local industries flow back entirely into the domestic economy.
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Mergers & Acquisitions - It is a primary type of FDI which entails the transfer of existing assets and operations from a local firm to a foreign firm. o Cross border merger - the assets of both the countries are combined to form a new legal entity. o Cross border acquisition - the control of assets is transferred from a local to a foreign company, wherein the local company becomes an affiliate of the foreign company.

By Motive
Market Seeking These investments aim mainly at penetrating newer markets or employed as a defensive strategy to maintain existing markets out of fear of losing it rather than discovering a new one. Resource Seeking These are investments with a motive to harness the factors of production of the destination country which are either not available or prove to be more efficient and profitable than those obtainable at the home country. Examples can be the cheap labour in Southeast Asia and natural resources in Africa Efficiency Seeking This type of FDI usually comes after the benefits from market seeking and resource seeking investments have been realised. To further increase the profitability, these are investments with which firms hope to increase their efficiency by exploiting the benefits of scope and scale.

Entry Routes for FDI in India

In accordance with the Foreign Direct Investment Scheme, non-residents can make investments in mandatorily fully convertible debentures and fully convertible preference shares of an Indian company through two routes: Automatic Route o 100% FDI is allowed in all sectors except where the provisions of the consolidated FDI policy on Entry routes for Investment are attracted o FDI allowed under this route does not require any prior approval of the Indian Govt or RBI

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Government Route o FDI in sectors and activities not covered in Automatic route requires prior approval of the Govt which are considered by the Foreign Investment Promotion Board, Ministry of Finance, Deptt. of economic affairs. o Indian companies that have FDI approval through FIPB do not require any subsequent clearance from the RBI for receiving inward remittance and for issue of shares to NRI

Eligibility for Investment in India

Person resident or Entity incorporated outside India o Anybody but a citizen or entity incorporated in Pakistan o Person or entity based in Bangladesh cannot enter via automatic route o It mandatorily requires FIPB permit NRIs in or Citizen of Nepal and Bhutan o Can invest on repatriation basis only o Amount of consideration to be paid only by way of inward remittance in free foreign exchange Overseas Corporate Bodies (OCBs) de-recognized wef Sep 16,2013

Instruments for receiving FDI

Foreign investment is considered as FDI only if the investment is made in equity shares, fully and mandatorily convertible debentures and preference shares with the pricing decided upfront as a figure or based on the formula that is decided upfront. The price at the time of conversion should not be less than the fair value worked out. Any foreign investment made in any instrument issued by an Indian company will be considered as ECB and will be treated as per the ECB guidelines if: a) Give an option to the investor to convert or not to convert it into equity b) Does not involve upfront pricing of the instrument

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Mode of Payment
Now that we have discussed the possible instruments via which foreign investments can enter into FDI in India we will discuss the mode of payment under the same. The Indian company can receive the amount of consideration for shares /debentures /preference shares via any of the following modes: a) Inward remittance b) Debit to NRE/FCNR account of a person concerned maintained with an AD category I bank c) Conversion of royalty/lump sum/ technical knowhow fee due for payment or conversion of ECB d) Conversion of import payables / pre incorporation expenses / share swap e) Debit to non-interest bearing Escrow account in Indian Rupees in India which is opened with the approval from AD Category I bank and is maintained with the AD Category I bank on behalf of residents and non-residents The shares/debentures are required to be issued within 180 days of the payment made via any of the above modes or else the amount would be refunded. However in certain cases, on submission of an application to RBI, Indian companies can get to issue shares/debentures for the consideration received even post 180 days from the date of receipt.

FDI Policy in India

The FDI policy is very liberal and is being further revised and liberalized. This is to attract fresh investments and boost the economy. The Department of Industrial Policy and Promotion is compiling a document that contains all the various regulations. This document will form a reflection of the regulatory framework. The department organizes events like Destination India and Invest India to promote investment. Efforts are been made to improve the business environment in India too. This includes computerization of information, single window system, reduction of documents, online registrations etc. The department also interacts with investors in international meets. The department has a chat forum in their website for information.

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FDI Prohibited Sectors in India

FDI is prohibited in: (a) Lottery Business (b) Gambling and Betting (c) Chit funds (d) Nidhi company (e) Trading in Transferable Development Rights (TDRs) (f) Real Estate Business or Construction of Farm Houses (g) Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes (h) Activities / sectors not open to private sector investment

FDI Permitted Sectors in India

FDI is permitted in the below mentioned sectors subject to laws, rules and regulations. Sector Name & Description Investment Cap Entry Route

Agriculture & Animal Husbandry Floriculture, Horticulture, Development of Seeds, 100% Animal Husbandry, Pisciculture, Aquaculture, Cultivation of vegetables & mushrooms and services related to agro and allied sectors Plantation Tea Plantation Mining a) Metals and Non Metal Ores Explorations of Diamonds and precious stones

Automatic

100%

FIPB

74%

Automatic Automatic

Gold, Silver excluding titanium bearing minerals and 100% its ores b) Coal and Lignite Coal and Lignite mining for power projects and iron 100% and steel cement units

Automatic

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To set up coal processing plants c)Titanium bearing minerals and its ores Petroleum and Natural Gas

100% 100%

Automatic FIPB

Exploration activities of petroleum and natural gas, 100% infrastructure related to the marketing of petroleum products and natural gas Petroleum refining by PSU Defence Defence industry subject to Industrial License Drugs and Pharmaceuticals 49%

Automatic

FIPB

26% 100%

FIPB Automatic

Power Power generation, transmission, distribution and 100% trading Insurance Telecommunications 26% 49% 100%

Automatic

Automatic Automatic FIPB

Housing and Real Estate Infrastructure of residential and commercial 100% premises including business centre and office, townships, roads and bridges Broadcasting FM Radio Cable Network Headend-in-the-sky(HITS) 49% 49% 49% 74%

Automatic

FIPB FIPB Automatic FIBP

Hardware Facilities
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a)Setting up of up-linking hubs and teleports b)Up-linking a non news channel c)Up-linking a news channel Print Media a)Newspaper and Periodicals

49% 100% 26%

FIPB FIPB FIBP

26%

FIBP FIBP

b)Indian Editions of foreign magazines dealing with 26% news c)Scientific and technical magazines Civil Aviations a)Airports Greenfield Projects Existing Projects 100%

FIPB

100% 74% 100%

Automatic Automatic FIPB

b)Air Transport Service Scheduled Air Transport Service Non Scheduled Air Transport Service Helicopter Services c)Ground Handling Services

49% 49% 74% 100% 49% 74% 100% 100%

Automatic Automatic FIPB Automatic Automatic FIPB Automatic FIPB

d)Maintenance and repair organizations Courier Services Retail Single Brand Multi Brand Banking

49% 100% 51%

Automatic FIPB FIPB

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Private Sector Public Sector

74% 20%

Automatic FIPB

NBFCs Underwriting, portfolio management services, 100% investment advisory services, financial consultancy, stock broking, asset management, venture capital, custodian, factoring, leasing and finance, housing finance, forex broking, etc. Asset Reconstruction Satellites Establishment and Operations Private security agencies Trading E-commerce activities Hotel and Tourism Advertising Films Mass rapid transport systems Pollution control and management Special Economic Zones Credit Information companies Commodity Exchange Infra companies in Securities market 100%

Automatic

FIPB

74% 49% 100% 100% 100% 100% 100% 100% 100% 100% 74% 49% 49%

FIPB FIPB Automatic Automatic Automatic Automatic Automatic Automatic Automatic Automatic FIPB FIPB FIPB

Table 1: Sector-wise FDI caps (FDI_Circular_01_2013 n.d.)

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The FDI Confidence Index

The FDI Confidence Index ranks nations on how political, economic and regulatory changes will affect FDI in these nations. It provides a sense of investor attitudes about the future. It is constructed from a survey of more than 300 executives from 28 countries to examine where the global investment dollars are likely to be headed. It has been observed that on an average, the top five nations account for almost 35% of the total FDI inflows.

Figure 1: FDI Confidence Index 2013

United States leads for the first time since 2001 as it makes progress towards sustainable growth even in the face of policy uncertainties of debt issues and fiscal challenges. Emerging markets continue to charge ahead with China, Brazil and India in the top five again. Other developed nation in the top ten are Canada and Australia for their minerals and fossil fuels and UK and Germany for the investment opportunities they provide.

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India, in the last decade, has seen rapid economic growth and has a young and fast growing population. The country saw FDI inflow of $25.5 billion in 2012 with investors still exuding confidence in Indias potential. Citing some examples, British beverage company Diageo bought a stake for $2 billion in United Spirits, the Indian liquor company in November 2012. In the same year, Starbucks opened its first store in India and currently has more than 20 stores in India. However, Indias slide from the second position to the fifth reflects a cooling off in the investor sentiments. Increasing inflation and deficits and a decrease in growth indicate a tough path ahead. To get back their confidence, the reform agenda includes opening investment in pension firms, reducing red tape and bureaucracy and simplifying approval of infrastructure projects. But investors are not assured of the promised changes via economic reforms seeing the string of scandals including telecom licenses, coalfield block allocations and CWG scam.

FDI Inflow
Foreign direct investment (FDI) has increased by 24.2 % year-on-year in India to US$ 3.95 billion in April-May 2013 with US$ 2.32 billion of FDI in April 2013. The sectors which had attracted highest levels of FDI include hotels and tourism sector followed by pharmaceuticals, chemicals and construction sector. Singapore alone attracted FDI flows worth US$ 1.29 billion in April 2013, which was followed by Mauritius, the Netherlands and the US with FDI inflows worth US$ 355 million, US$ 173 million and US$ 149 million respectively. FDI inflows aggregated at Rs.1217926.4 in 2012. Cumulative inflow of FDI during the first decade after liberalization was US$ 14, 485 million but the overall growth of FDI over the previous years during the next decade was good except the years 2002-2003 and 2003-2004. The FDI inflow has started showing the downward growth after the global crisis of 2008 and the trend is still continuing. According to experts, the global financial problems which was a worldwide downfall, particularly in the European markets, had earlier made the investors cautious of taking

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overseas investments and the thus the decline in FDI. Also, the macroeconomic factors such as a high current account deficit and inflation, as well as the policy paralysis leading to delays in the approval of large FDI projects has affected the inflow of FDI in India. Currently, the decline in the value of rupee is resulting in the flight of FDI from India. Financial Year (AprilMarch) August 1991- March 2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 Total Amount (US million) 14,485 2,463.00 4,065.00 2,705.00 2,188.00 3,219.00 5,540.00 12,492.00 24,575.00 27,330.00 25,834.00 19,427.00 146319 % change over previous year

65% -50% -19% 47% 72% 125% 97% 11% -5% -25%

Table 2: FDI Inflows Year Wise in India (Government Of India n.d.)

Country-wise FDI inflows in India

83% of cumulative FDI in India is contributed by ten countries while the remaining 17% by the rest of the world. If the earlier history of the country is analyzed, then it indicates that during 2007-2010, the total amount of Rs 526537 of FDI was received from 113 countries including NRI investments. Over the years Indias perception abroad has been changing but the recent macroeconomic factors in the Indian economy has hampered the growth of FDI inflows in India, especially the degrading Indian economy and the policy paralysis in the Indian economy. Country-wise FDI Inflows Received in India (2013-2014-upto May 2013) Countries Amount of FDI Inflows %age to Total FDI Inflows (In In Rs. In US$ (millions) (millions) terms of US$) Singapore Mauritius Germany Netherlands 79553.3 44296.42 26047.77 12259.17 1461.07 809.33 473.8 224.84 36.96 20.48 11.99 5.69

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U.S.A Hong Kong South Africa Japan Spain Cyprus France United Kingdom Others Total

11985.94 6098.67 5500.09 5272.08 5127.34 3142.57 2725.34 2245.14 11709.98 215963.81

219.6 110.97 101.15 96.31 93.33 57.41 50.02 40.92 213.86 3952.61

5.56 2.81 2.56 2.44 2.36 1.45 1.27 1.04 5.39 100

Table 3: Country-wise Inflows Received in India (2013-2014-upto May 2013) (India Stat n.d.)

Mauritius: Since 2011, Mauritius has always topped the position for FDI inflows in India with a share of 37.63% of total FDI inflows. The tremendously high investment from Mauritius is because of routing of international funds through the country given the tax advantages because of the Double Taxation Avoidance Agreement which was signed in 1982 between the two countries. A large number of FIIs trading on the Indian stock markets operate from Mauritius. All the major US corporations use the Mauritius offshore financial sector to channel their investments in India. Singapore: Singapore has become a fast growing source of investments funds to India in the recent years. It has become the highest source of FDI in 2013. It has overtaken even large developed economies like US, UK and Japan which are the most important destinations for funds. USA: The USA is the fifth largest source of FDI in India (5.76% of the total) valued at US$ 11436.27 in cumulative inflows between Jan. 2000 to May 2013. According to M&A data, the two sectors which are attracting the top most FDI inflows are computer systems design and manufacturing. European Union: Within European Union, UK and Netherlands are the largest FDI contributors, followed by countries like France, Germany, Spain, etc. FDI from EU to India is primarily from centers like power/energy, telecommunications, and transportation sectors, manufacturing, information services; and professional, scientific and technical service.

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Japan: Japan is the fourth largest of cumulative FDI inflows in India between January 2000 and June 2013, i.e. the cumulative flow is US$ 14749.51million and its share is 7.42% of the total inflow. India is one of the largest recipients of Japanese Official Development Assistance (ODA), through which it assisted in building infrastructure, including electricity generation, water supply and transportation. Automobile is the largest recipient of FDI from Japan.
1% 1% 1% 2% 2% 3% 3% 6% 6% 37% 5% Singapore Mauritius Germany Netherlands U.S.A Hong Kong South Africa Japan 12% 21% Spain Cyprus

FDI Inflow

Figure 2: Country-wise FDI flow

Following is the table enumerating the country-wise FDI inflows in India for the term April 2000 to June 2013. It can be deduced that the inflow from Mauritius, United Kingdom and Singapore have drastically decreased over the years. Country-wise FDI Inflows in India (April 2000 to June 2013) Country Amount of FDI Inflows in Rs. (Jan to Dec) 2012 2013$ (mn) (mn) 491418.84 154970.49 152421.76 115826.88 43718.77 27129.97 103644.23 38253.71 33832.89 20065.09 89526.74 40270.15 Cumulative Total (from April 2000 to May, 2013) (In Rs.) (In US$) (mn) (mn) 347247.15 74765.29 100418.45 21311.99 80740.85 17599.35 71222.63 14749.51 52679.33 11436.27 44672.02 9372.76 %age with Total FDI Inflows (+) 37.63 10.73 8.86 7.42 5.76 4.72

Mauritius Singapore United Kingdom Japan U.S.A Netherlands

2011 (mn) 437791.67 195969.66 454283.15 143486.13 47127.75 58889.06

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Cyprus Germany France UAE Switzerland Spain Others Total

61530.75 50102.32 8008.69 67162.83 38830.57 45451.01 22555.13 36176.92 12183.03 10418.11 14310.93 4906.3 9681.7 14570 5789.27 10027.41 22989.85 7908.05 80425.86 124370.58 31898.09 1601360.21 1217926.4 512660.73

32911 6992.74 28326.44 5989.97 17425.15 3672.32 11584.65 2471.81 11268.65 2403.4 7580.15 1574.8 120865.21 26459.74 926941.68 198799.95

3.52 3.01 1.85 1.24 1.21 0.79 13.26 100

Table 4: Country-wise FDI Inflows (April 2000 to June 2013) (India Stat n.d.)

Sector-wise FDI inflows in India

Sector wise analysis of FDI in India shows that Services Sector including the telecommunication, information technology, travel and many others, is the largest recipient of FDI with 19.22% of total FDI inflow. The service sector is followed by the computer hardware and software in terms of FDI. High volumes of FDI takes place in telecommunication, automobile, real estate, construction, power, etc. Sector-wise Foreign Direct Investment (FDI) Inflows in India (April 2000 to June 2013) Sectors Amount of FDI Inflows In Crore In US$ Services Sector* 177594.62 38179.78 Construction Development: Townships, Housing, 101994.86 22247.5 Built-Up Infrastructure and Construction-Development Projects Telecommunications 58785.79 12865.83 Computer Software & Hardware 53757.6 11862.37 Drugs & Pharmaceuticals 54321.68 11318.32 Chemicals (Other Than Fertilizers) 41118.29 8993.12 Automobile Industry 42015.28 8810.07 Power 36805.41 7953.93 Metallurgical Industries 35448.07 7620.73 Hotel & Tourism 33819.35 6731.89 Petroleum & Natural Gas 24950.25 5406.7 Trading 19243.58 4063.79 Information & Broadcasting (Including Print Media) 16163.91 3406.19 Electrical Equipments 14826.59 3211.43 Non-Conventional Energy 13425.78 2683.72 Cement and Gypsum Products 11941.58 2656.29

%age with Total FDI Inflows (+) 19.22 11.2

6.48 5.97 5.7 4.53 4.43 4 3.84 3.39 2.72 2.05 1.71 1.62 1.35 1.34
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Miscellaneous Mechanical & Engineering Industries Industrial Machinery Construction (Infrastructure) Activities Consultancy Services Others Total

11432.46 11504.84 10332.94 9928.46 147530.34 926941.68

2477.18 2388.12 2198.77 2136.36 31587.84 198799.93

1.25 1.2 1.11 1.08 15.81 100

Table 5:Sector-wise FDI Inflows (April 2000 to June 2013) (India Stat n.d.)

The fast development of the telecommunication sector was because of the entry of the international players and the transfer of advanced technologies. With a growth rate of 45% Indian telecom industry is the fastest growing industry in the world and with the move to allow 100% FDI in this sector more FDI inflows are expected. FDI inflows in the real estate sector have helped in the growth, development and expansion of the sector. FDI inflows to Construction Activities have led to a phenomenal economic growth in the country. India has become one of the most important destinations when it comes to the choice for FDI in construction activities as well as real estate sector. The Automobile Industry has alos experienced a phenomenal growth in FDI inflows in the recent years, especially due to the establishment of operations of many Japanese automobile firms. The basic advantages provided by India in the automobile industry include advanced technology, cost effectiveness and efficient workforce. Besides, India has a well-developed and competent Auto Ancillary Industry along with automobile Testing and R&D centers. The Automobile sector ranks second in the manufacturing of three wheelers and third in manufacturing of two wheelers. Opportunities in the Automobile sector exist in establishment of Engineering centers, Two Wheeler Segments, Export, Establishment of R&D centers, Heavy Truck segment, and Passenger Car segment. The increase in inflows to the Metallurgical Industry has helped to bring latest technologies to the industries in the country and thus furthering the growth, development and expansion of the industries. All this has helped in improving the quality of the products of the

metallurgical industries in India. Based upon the data given above and Department of Industrial Policy and Promotion, in India there are 62 sectors in which FDI inflows are found but it is found that top ten sectors almost attract 70% of the FDI inflows. The cumulative FDI inflows from the data given above reveals that services sector in India attracts the maximum FDI inflows worth US$ 38179.78

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million with a 19.2% of the total inflows, followed by the Construction Development amounting to US$ 22247.5 million with 11.2% of the total inflows. The two sectors combined together capture more than 30% of the total inflows. The Construction Industry and the housing and real estate sector are among the new sectors attracting huge FDI inflows that come under the top ten sectors attracting maximum FDI inflows. Thus the sector wise inflows of FDI in India show a varying trend and the share of the all the sectors keep on changing year on year basis except for the services sector which have always maintained a dominant position. But the FDI inflows act as catalyst for growth, quality maintenance, and the development of Industries in India to a greater and larger extend which is not possible in isolation from the world. The technology transfer apart from managerial efficiency, operational efficiency, employment opportunities and infrastructure development, is also seen as a part of major change as a result of FDI inflow.

Rupee Decline presages FDI flight

In the present scenario it seems that India is losing all the investor confidence, at a time when it needs it the most. With a downward spiralling of the rupee value, capital flight is occurring and the outflows of FDI have increased as the FDI leaves the country. The efforts put in by the central bank, RBI; to control the depreciating currency values since July have included measures like restricting currency derivatives, tightening the money supply, and discouraging gold imports. Gold has always been seen as the safest investment in India and with safest investment and thus there is a sharp rise in the demand of gold with the declining value of the rupee. The decline of the Rupee is resulting in a flight of Foreign Direct Investment (FDI). The efforts put in by the Reserve Bank of India (RBI) were not so effective and efficient, so the focus of RBI has shifted to stop the Indian investments as well as the FDIs from going out of the country, which will have a further damping effect on the demand for dollars. The entire phenomenon is like a vicious circle, where one event leads to the other and the other one furthers the first one. With a decline in the value of rupee the investor confidence is shaken and thus it leads to an FDI exodus in the country which puts a downward pressure on the currency of the country. The rupee has fallen by more than 25 percent in a period of just last two years.
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Some industry experts are calling for capital controls in the light of the recent move that has already been made; however, at this point of time in the economy the outside India investments are restricted only to Indian investors rather than foreign investors which is just half the measure. The decline in the value of the currency is seen as a result of the recent development of local industries and export of many of its operations. The strategy followed by many big companies in India to invest outside and tap the untapped markets in the early phases: and thus investing in terms of setting up of operations and tapping market growth and expansion has led to flow of currency outside the country (FDI outflow) and a consequent decline in the currency. The rupee has already lost its value in significant percentage terms as compared to the past, with hitting all time low on August 28, 2013 a value of low near 69 to the dollar. The plunge started with the withdrawal of investments by many investors in May from equity and bond markets. Controlling the drop as a result has become the top main concern for the RBI in with the motive to get back the investors confidence and recent the policy changes that have taken place in terms of change in FDI limits in many sectors are also signalling the fact that grave thought is being to control the drop. The problem being faced in controlling the drop is balancing the forces of free market and capital controls; if capital control is being imposed then the forces of free market are constrained which further hampers investors confidence deterring foreign investors from investing again. The predicament faced by India in such a situation is the classic economic theory; which states that no country can balance free capital movement, with independent economic policy and stable currency simultaneously. A country has to choose between two and let go of the third one. The interest rates have been increased twice in the recent past in an attempt to increase the capital flow into the country, which should have resulted in higher demand of the rupee. Additionally, to curb the rising demand for gold duties were imposed on the import of gold and gold storage in government owned warehouses was mandated to limit the trading into the gold market. Gold is closely connected to the dollar, a rise in the demand of the gold leads to a higher supply of the rupee which leads to depreciation in the value of the rupee. Most of the experts
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believe that these are all short term measures taken by the government and ultimate solution for stopping this downward spiral is to make India an attractive destination for foreign investment. In order to bring back the rupee at its previous value foreign investments need to be brought back, especially capital investments. The current catastrophe is similar to the rising current account deficit and budget deficit of 1990s where there was a fall of more than 30% in rupees value between 1991 and 1992. An emergency loan of US$ 2.2 billion was needed to be taken from the IMF to purchase gold as collateral for the reserves. The loan came with many conditions, which also included a condition to open up the Indian economy to foreign investment; as a result of which the country made significant progress especially in terms of GDP growth after the initial decline in first two years. It is expected that Indias economic will slow down in the coming years and the rising interest rates in recent time will actually weigh profoundly on local industries, further diminishing the growth potential over the next few years. With the increasing current account deficit in the country, it can be expected that things can worsen before they get any better and the country might need to sell its gold reserves again to protract the economy. In order to sustain the economy and have a longer term development and stability in the economy long term growth of foreign investment should be the focus. To encourage more investment in the country serious measures are required and the recent changes in the FDI approval system and the limitation fixed for various sectors earlier is just the beginning. Also the limitation on investments that India does have needs to be abolished to attract more investments.

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Figure 3: Financial Year-Wise Equity Inflows (Government Of India n.d.)

Can FDI prove instrumental in cutting Current Account Deficit

The Law of Balance of Payments suggests that the payments always get balanced. Total money spent or invested must be equal to total money earned which in terms of BoP is that Current account deficit/surplus must be equalled by Capital account surplus/deficit. In India, FDI constitutes an integral component of Capital account. FDI has an impact on both domestic investment climates as well as on foreign trade. Current account deficit can primarily be for two reason; less exports or heavy imports. In todays scenario India is badly stricken by heavy import of Gold and fuel. CAD at 4.9% of GDP Q1, 2013 was the third highest in the world in absolute terms as per Morgan Stanley report. India stands at the top among the emerging economies. Standing at such a dismal low we could possibly let the Indian Rupee depreciate even further in order to encourage exports but this too is hampered due to limited manufacturing base owing to red tapism. To cut down the adverse effects of CAD it has been a strategic move on the part of Indian government to liberalize FDI in 12 sectors namely Telecom, Defence, Single Brand Retail, etc. FDI comes with a long term stability feature which scores over the contrasting nature of FII which hold the potential of subjecting the host countrys vulnerability to external shocks.

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As per the calculations done by Kotak securities, In order to sustain CAD/GDP CAD/GDP of around 3.5 percent (with a neutral BOP), India, on average, would need capital flows of USD95-100 bn each year. Of this, India needs to aim to attract USD 25-30 bn of FDI flows each year. Currently India has allowed 26% FDI in defence, however if it goes beyond 26%, it would be instrumental in reducing Indias dependence on future defence imports in critical technology areas. Similarly for telecom where our imports have been high, an increase from 74% to 100% FDI in July,2013 is a smart move though it should have been done long ago. Also Greenfield FDI is preferred over Mergers and acquisitions in India because of lack of infrastructure. In order to maximize the benefits of FDI, Indian govt must act proactive in implementing FDI policies in different sectors so as to cater to the needs of US, UK which seek investment options in India.

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Bibliography
A.T. Kearney. " Foreign Direct Investment Confidence Index ." 2013. Chouraria, Binit, and Gautam Raj & Nikhil Ranjan. FDI Inflows and its Impact in India. Bangalore: M.S.Ramaiah Institute of Management, 2012. "FDI_Circular_01_2013." DIPP. n.d. http://dipp.nic.in/English/Policies/FDI_Circular_01_2013.pdf. Government Of India. Department Of Industrial Policy & Promotion. n.d. http://dipp.nic.in/English/Publications/FDI_Statistics/FDI_Statistics.aspx (accessed September 7, 2013). India Brand Equity Foundation. Foreign Direct Indvestment (FDI) in India. July 16, 2013. http://www.ibef.org/india-at-a-glance/foreign-direct-investment.aspx (accessed September 7, 2013). India Stat. n.d. http://www.indiastat.com. Naeem, Zain. Decline of the Rupee presages Indian FDI flight. August 15, 2013. http://arabiangazette.com/decline-of-the-rupee-presages-indian-fdi-flight-20130815/ (accessed September 8, 2013). RBI. RBI. n.d. http://www.rbi.org.in/scripts/FAQView.aspx?Id=26. Rerserve Bank of India. August 22, 2013. http://www.rbi.org.in/scripts/AnnualReportPublications.aspx?Id=1110 (accessed September 7, 2013).

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