Amar Garg

FOREIGN DIRECT INVESTMENT IN INDIA AND ITS IMPACT ON BANKING,INSURANCE AND PHARMACEUTICAL SECTOR"
A Dissertation submitted in partial fulfillment of the requirements for the award of M.B.A. Degree of Bangalore University By
AMAR GARG Registration no: 07XQCM6002 2007-09

MBA Fourth Semester M P Birla Institute of Management Bangalore
Under the guidance and supervision of
PRAVEEN BHAGAWAN Faculty M P Birla Institute of Management Bangalore 560001
DECLARATION
I hereby declare that this dissertation entitled a study on FOREIGN DIRECT INVESTMENT IN INDIA AND ITS IMPACT ON BANKING, INSURANCE AND PHARMACEUTICAL SECTOR is the result of my own research work carried out under the guidance and supervision of Prof. Praveen Bhagawan, Faculty, M P Birla Institute of Management, Bangalore
I also declare that this dissertation has not been submitted earlier to any Institute/organization for the award of any degree or diploma.
Place: Bangalore Date: (Amar Garg)
M. P. BIRLA INSTITUTE OF MANAGEMENT
PRINCIPALS CERTIFICATE
This is to certify that this dissertation entitled FOREIGN DIRECT INVESTMENT IN INDIA AND ITS IMPACT ON BANKING, INSURANCE AND
PHARMACEUTICAL SECTOR is the result of research work carried out by Mr. Amar Garg under the guidance and supervision of Prof. Praveen Bhagawan, Faculty, M.P. Birla Institute of Management, Bangalore.
Place: Bangalore Date:
(Dr. Nagesh S Malavalli) Principal
GUIDES CERTIFICATE
I hereby state that this Dissertation entitled FOREIGN DIRECT INVESTMENT IN INDIA AND ITS IMPACT ON BANKING, INSURANCE AND
PHARMACEUTICAL SECTOR is an offshoot of the project work carried out by Mr. Amar Garg under my guidance and supervision
Place: Bangalore Date:
(Prof. Praveen Bhagawan) Faculty
ACKNOWLEDGEMENT
I am happy to express my gratitude to Dr. N. S. Malavalli, (Principal, M. P. Birla Institute of Management) for many valuable ideas imparted to me by him for my project.
I extend my sincere thanks to Prof. Praveen Bhagawan (Faculty), M.P.Birla Institute of Management, Bangalore for guiding me throughout this project work
Place: Bangalore Date: (Amar Garg)
TABLE OF CONTENTS:
Chapter No.
CHAPTERS
Page No.
EXECUTIVE SUMMARY
INTRODUCTION TO FDI Introduction Steps to attract FDI Benefits of FDI Disadvantages of FDI Determinants of FDI FDI quality FDI and economic development FDI and infrastructure development Government policies Evolution of FDI Major FDI investors Trend and patterns of FDI in India Reasons of FDI in India Investment risks in India
2 43
LITERATURE REVIEW
44 - 46
RESEARCH DESIGN
47 51
INDUSTRY PROFILE Banking Insurance Pharmaceutical
52 - 61
DATA ANALYSIS AND INTERPRETATION
62 - 74
FINDINGS. CONCLUSION AND RECOMMENDATIONS
75 - 80
BIBLIOGRAPHY
81 - 82
ANNEXURES
83 - 109
LIST OF GRAPHS AND TABLES:
S.No.
PARTICULARS
PAGE No.
TABLE ON GOVERNMENT POLICY REGARDING FDI
19 - 20
GRAPH ON FDI FROM 2000-2009
64
GRAPH ON FDI IN 2008-2009
65
GRAPH ON COUNTRY WISE FDI INFLOWS
65
GRAPH ON STATE WISE FDI INFLOWS
66
GRAPH ON SECTOR WISE FDI INFLOWS
67
TABLE ON FDI INFLOWS IN BANKING AND INSURANCE SECTORS OVER THE YEARS
67
GRAPH ON FDI INFLOWS IN BANKING AND INSURANCE SECTORS OVER THE YEARS
68
TABLE ON FDI INFLOWS IN PHARMACEUTICAL SECTOR OVER THE YEARS GRAPH ON FDI INFLOWS IN PHARMACEUTICAL SECTOR OVER THE YEARS
68
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69
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TABLE OF LEAST SQUARE METHOD IN BANKING AND INSURANCE SECTOR
70
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GRAPH ON TRENDS OF FDI INFLOWS IN BANKING AND INSURANCE SECTOR FROM THE YEAR 2002-2010
71
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TABLE OF LEAST SQUARE METHOD IN PHARMACEUTICAL SECTOR
73
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GRAPH ON TRENDS OF FDI INFLOWS IN PHARMACEUTICAL SECTOR FROM THE YEAR 20022010
74
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ANNEXURES FDI DATA
84 - 109
EXECUTIVE SUMMARY:
This Dissertation Report is a study on Foreign Direct Investment in India and its Impact on Banking, Insurance and Pharmaceutical Sector of an Indian Economy.
The report describes about the introduction , evolution , and development of Foreign Direct Investment in India. Basically there is an attempt to find out the reasons for the flow of funds to India, more specifically, an attempt to find out the reasons for India being one of the favorites; amongst all Asian countries, for foreign investors. The project explains about the various policies, risks, guidelines, initiatives and plans for attracting Foreign Direct Investment in India.It consists of various FDI data i.e. year wise, sector wise, country wise, state wise and other related data to the project.It also consists of various tables, graphs, charts relating to the project. It is a generalized report on the trends, patterns in the foreign investment flow in India, with an attempt to explain and project the reasons for FDI being attracted to India most. This report has the information and data regarding Banking, Insurance and Pharmaceutical sectors of an Indian economy. This report shows the movement of FDI Inflows in Indian economy and reasons behind that. The key results and findings of the report is that FDI is very necessary for the country and its economys growth and development.It is noticed that to have a continous flow of FDI in the economy, country need to have consistent and stable government, policies, procedures,good tax breaks and additional benefits to foreign investors. By this report we found that FDI and growth of a particular sector in our case it is confined to Banking , Insurance and Pharmaceutical sector of Indian economy are interrelated, hence with FDI inflows in these specified sectors one can see growth and development in that sector.
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CHAPTER 1:
INTRODUCTION TO FOREIGN DIRECT INVESTMENT:
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1.1 INTRODUCTION TO FDI:

Definition of Foreign Direct Investment: Foreign direct investment is that investment, which is made to serve the business interests of the investor in a company, which is in a different nation distinct from the investor's country of origin. Foreign direct investment is investment made by a foreign individual or company in productive capacity of another country. It is the movement of capital across national frontiers in a manner that grants the investor control over the acquired asset. A parent business enterprise and its foreign affiliate are the two sides of the FDI relationship. Together they comprise an MNC. The parent enterprise through its foreign direct investment effort seeks to exercise substantial control over the foreign affiliate company. 'Control' as defined by the UN, is ownership of greater than or equal to 10% of ordinary shares or access to voting rights in an incorporated firm. For an unincorporated firm one needs to consider an equivalent criterion. Ownership share amounting to less than that stated above is termed as portfolio investment and is not categorized as FDI. Foreign direct investments (FDI) are investment of foreign assets into domestic structures, equipments and organization. FDI reflects the objectives of obtaining a lasting interest by a resident entity in one economy (Direct Investor) in entity resident in an economy other than that of the Investor (Direct investments enterprise). The lasting interest implies the existing of a long-term relation between the direct investor and the enterprise and a significant degree influence on the management of the enterprise. Direct investment involves both the initial transaction between the two entities and all the subsequent capital transactions between them and among affiliated enterprises, both incorporated and unincorporated. Most of the developing countries suffer from low level of income and low level of capital formation. However, despite this shortage of capital, these countries have
developed a strong urge for industrializing and economic development. Consequently, they have embarked upon large-scale programmes of industrialization. Since the
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domestic resources to carry out such programmes have been entirely in adequate, these countries have had to depend on foreign capital Foreign capital takes two main forms private foreign investments and foreign aid. Private foreign investment as far as FDI is concerned, the private foreign investor either sets up a branch or a subsidiary in the recipient country. Of particular importance has been the increasing role of the multi-national corporations (MNCs) in the underdeveloped countries. These MNCs have set up a large number of branches and subsidiaries in these countries and have bought with them new technological expertise, machinery and equipment, better management and organization, superior marketing techniques etc. Indirect foreign investment or portfolio investment takes place when the nationals (includes foreign institutional investors) (FIIs) of one-country purchase shares or debentures floated by industries in some other countries (operating in the stock market). Foreign aid can be defined include all official grants and concessional loans, in currency or in kinds, which are broadly aimed at transferring resources from developed to les developed nations on developmental and / or income distributional grounds. FDI has always been as obsessive and overreaching objective among policy makers and political leaders of the developing nations. FDI is the largest source of external finance for many developing countries in their industrial developments. Recognizing the Importance of FDI governments the world over are opening their economies to encourage the flow of trade, technology information, investment and finance for the development of industries. In India the lure of non-debt creating FDI flows has galvanized successive governments since 1990-91. Now the government talks about ensuring $10 billion FDI flows into India as the minimum consideration for achieving the economic growth target of 8% per annum. Because the sustained flow of FDI would give the economy a smooth ride to banish the twin dangerous of endemic poverty and huge un-employment and cope with the vast investment requirements of maintaining the rickety infrastructure and creating more amenities. FDI have been found to be contributing negatively to a countrys national income. Not only they have distorted the economic structure of the country but also have
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interfered into the policy decision of the developing country. There have been instances when they have tried to undermine democracy by shifting the powers to make critical economic decisions from the hands of elected officials in a country to un-elected representing the interest of huge organization that are not accountable to anybody. Entry of FDI also assumes importance. If the FDI entry is through the take over of domestic firms, it does not add up to productive capacity of the country, rather it simply transfers the ownership and control from domestic to foreign hands. This transfer is also accompanied more often by lay offs of employees (their technology transfers, mostly labour replacing is not conducive to the available resource of the given country) or the closing of some productions or functional activities. It has been witnessed that if the acquires are global oligopolies, they may well dominate the local market. Acquisitions of local firm are used deliberately to reduce competition in domestic market and to threaten local entrepreneurship. In India situation is not much different. According to the RBI study on the finances of 334 FDI companies, it has been found out that these companies have turned out to be net negative foreign exchange earners. Their dividend figures are way below the export earnings and the preferred avenue for repatriation of foreign exchange is import. Besides this, most of the raw materials imported by the MNCs are of an intra-firm nature i.e. sourced from parent firm or affiliated in other countries. The study has also revealed decline in export intensity of sales of FDI companies to a low of 9.33% in 1999-2000. Considering that the corresponding ratios of China, Malaysia and Singapore are 35%, 70% and 80% respectively viewing India as an import destination rather than exportmanufacturing hub.
Classification of Foreign Direct Investment: Foreign direct investment may be classified as Inward or Outward.
Foreign direct investment, which is inward, is a typical form of what is termed as 'inward investment'. Here, investment of foreign capital occurs in local resources. The factors propelling the growth of Inward FDI comprises tax breaks, relaxation of existent regulations, loans on low rates of interest and specific grants. The idea behind this is that, the long run gains from such a funding far outweighs the disadvantage of the
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income loss incurred in the short run. Flow of Inward FDI may face restrictions from factors like restraint on ownership and disparity in the performance standard. Foreign direct investment, which is outward, is also referred to as direct investment abroad. In this case it is the local capital, which is being invested in some foreign resource. Outward FDI may also find use in the import and export dealings with a foreign country. Outward FDI flourishes under government backed insurance at risk coverage. Outward FDI faces restrictions under a host of factors as described below: Tax incentives or the lack of it for firms, which invest outside their country of origin or on profits, which are repatriated. Industries related to defense are often set outside the purview of outward FDI to retain government's control over the defense related industrial complex Subsidy scheme targeted at local businesses Lobby groups with vested interests possessing support from either inward FDI sector or state investment funding bodies Government policies, which lend support to the phenomenon of industry nationalization Foreign direct investment may be further classified by their set target. The areas here are Greenfield investment and Acquisitions and Mergers Greenfield investments involve the flow of FDI for either building up of new production capacities in the host nation or for expansion of the existent production facilities of the host country. The plus points of this come in form of increased employment opportunities, relatively high wages, R&D activities and capacity enhancement. The flip side comes in the form of declining market share for the domestic firm and repatriation of profits made to a foreign country, which if retained within the country of origin could have led to considerable capital accumulation for the nation. Multinationals mostly rely on mergers to bring in FDI. Until 1997 mergers and acquisitions accounted for around 90% of FDI flow to the US economy. FDI flow through acquisitions does not render any long run advantage to the economy of the host nation as under Greenfield investments. Some other types of foreign
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direct investment in vogue are termed as Horizontal FDI, Forward Vertical FDI, Vertical FDI and Backward Vertical FDI. Types of FDI: There are two types of FDI: Greenfield investment : It is the direct investment in new facilities or the expansion of existing facilities. It is the principal mode of investing in developing countries. Mergers and Acquisition : It occurs when a transfer of existing assets from local firms takes place.
Types of Foreign Direct Investment: An Overview: FDIs can be broadly classified into two types: outward FDIs and inward FDIs. This classification is based on the types of restrictions imposed, and the various prerequisites required for these investments. An outward-bound FDI is backed by the government against all types of associated risks. This form of FDI is subject to tax incentives as well as disincentives of various forms. Risk coverage provided to the domestic industries and subsidies granted to the local firms stand in the way of outward FDIs, which are also known as direct investments abroad. Different economic factors encourage inward FDIs. These include interest loans, tax breaks, grants, subsidies, and the removal of restrictions and limitations. Factors detrimental to the growth of FDIs include necessities of differential performance and limitations related with ownership patterns. Other categorizations of FDI exist as well. Vertical Foreign Direct Investment takes place when a multinational corporation owns some shares of a foreign enterprise, which supplies input for it or uses the output produced by the MNC.
Horizontal foreign direct investments happen when a multinational company carries out a similar business operation in different nations. Foreign Direct Investment is guided by different motives. FDIs that are undertaken to strengthen the existing market structure or explore the opportunities of new markets can be called market-seeking FDIs. Resource-seeking FDIs are aimed at factors of
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production which have more operational efficiency than those available in the home country of the investor. Some foreign direct investments involve the transfer of strategic assets. FDI activities may also be carried out to ensure optimization of available opportunities and economies of scale. In this case, the foreign direct investment is termed as efficiency-seeking.
Forbidden Territories: FDI is not permitted in the following industrial sectors: Arms and ammunition. Atomic Energy. Railway Transport. Coal and lignite. Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.
Investment in India: Government of India recognizes the key role of Foreign Direct Investment (FDI) in economic development not only as an addition to domestic capital but also as an important source of technology and global best practices. The Government of India has put in place a liberal and transparent FDI policy. FDI up to 100% is allowed under the automatic route in most sectors/activities. FDI policy in India is reckoned to be among the most liberal in emerging economies. FDI Policy permits FDI up to 100 % from foreign/NRI investor without prior approval in most of the sectors including the services sector under automatic route. FDI in sectors/activities under automatic route does not require any prior approval either by the Government or the RBI. Consistent economic growth, de-regulation, liberal investment rulse, and operational flexibility are all the factors that help increase the inflow of Foreign Direct Investment or FDI. FDI or Foreign Direct Investment is any form of investment that earns interest in enterprises which function outside of the domestic territory of the investor.
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FDIs require a business relationship between a parent company and its foreign subsidiary. Foreign direct business relationships give rise to multinational corporations. For an investment to be regarded as an FDI, the parent firm needs to have at least 10% of the ordinary shares of its foreign affiliates. The investing firm may also qualify for an FDI if it owns voting power in a business enterprise operating in a foreign country.
1.2 Steps to attract FDI:

Promotional efforts to attract foreign direct investment (FDI) have become the important point of competition among developed and developing countries. This competition is also maintained when countries are adopting economic integration at another level. While some countries lowering standards to attract FDI in a "race to the bottom," others praise FDI for raising standards and welfare in recipient countries. There are several trends, which are reinforcing traditional impulses for foreign direct investment that is access to natural resources, markets, and low-cost labor. With the rise of globalization technological progress allows for the separation of production into more discrete phases across national barriers. Expansion in Information and communication technologies, Improvement in logistics necessarily allow production to be close to markets while taking advantage of the specific characteristic of individual production locations.Countries have adopted their respective policies for attracting more investment. Some countries rely on targeted financial concessions like tax concessions, cash grants and specific subsidies. Some countries focus on improving the infrastructure and skill parameter and creating a base meet the demands and expectations of foreign investors. Others try to improve the general business climate of a country by changing the administrative barriers and red tapism. Many governments have created state agencies to help investors through this administrative paperwork. Finally most of the countries have entered into international governing arrangements to increase their attractiveness for more investment.
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"Better Investment Climate" Need of the Hour: Sound investment climate is crucial for economic growth. Microeconomic reforms aimed at simplifying business regulations, strengthening property rights, improving labor market flexibility, and increasing firms' access to finance are necessary for raising living standards and reducing poverty in a country. Reform is necessary for creating an investment-oriented climate. Reform management matters as investment climate reforms are done politically. They often favor unorganized over organized groups and the benefits tend to accrue only in the long term, while costs are felt up front. Political decisions play a significant role in this context.Each and every countries over the globe are stepping forward to change the climate for attracting more investment. Opening up of doors by most of the nations have compelled them for adopting reforms.
1.3 Benefits of Foreign Direct Investment:

One of the advantages of foreign direct investment is that it helps in the economic development of the particular country where the investment is being made. This is especially applicable for the economically developing countries. During the decade of the 90s foreign direct investment was one of the major external sources of financing for most of the countries that were growing from an economic perspective. It has also been observed that foreign direct investment has helped several countries when they have faced economic hardships. An example of this could be seen in some countries of the East Asian region. It was observed during the financial problems of 1997-98 that the amount of foreign direct investment made in these countries was pretty steady. The other forms of cash inflows in a country like debt flows and portfolio equity had suffered major setbacks. Similar observations have been made in Latin America in the 1980s and in Mexico in 1994-95. Foreign direct investment also permits the transfer of technologies. This is done basically in the way of provision of capital inputs. The importance of this factor lies in the fact that this transfer of technologies cannot be accomplished by way of trading of goods and
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services as well as investment of financial resources. It also assists in the promotion of the competition within the local input market of a country. The countries that get foreign direct investment from another country can also develop the human capital resources by getting their employees to receive training on the operations of a particular business. The profits that are generated by the foreign direct investments that are made in that country can be used for the purpose of making contributions to the revenues of corporate taxes of the recipient country. Foreign direct investment helps in the creation of new jobs in a particular country. It also helps in increasing the salaries of the workers. This enables them to get access to a better lifestyle and more facilities in life. It has normally been observed that foreign direct investment allows for the development of the manufacturing sector of the recipient country. Foreign direct investment can also bring in advanced technology and skill set in a country. There is also some scope for new research activities being undertaken. Foreign direct investment assists in increasing the income that is generated through revenues realized through taxation. It also plays a crucial role in the context of rise in the productivity of the host countries. In case of countries that make foreign direct investment in other countries this process has positive impact as well. In case of these countries, their companies get an opportunity to explore newer markets and thereby generate more income and profits.It also opens up the export window that allows these countries the opportunity to cash in on their superior technological resources. It has also been observed that as a result of receiving foreign direct investment from other countries, it has been possible for the recipient countries to keep their rates of interest at a lower level.It becomes easier for the business entities to borrow finance at lesser rates of interest. The biggest beneficiaries of these facilities are the small and medium-sized business enterprises.
1.4 Disadvantages of Foreign Direct Investment:

The disadvantages of foreign direct investment occur mostly in case of matters related to operation, distribution of the profits made on the investment and the personnel. One of
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the most indirect disadvantages of foreign direct investment is that the economically backward section of the host country is always inconvenienced when the stream of foreign direct investment is negatively affected. The situations in countries like Ireland, Singapore, Chile and China corroborate such an opinion. It is normally the responsibility of the host country to limit the extent of impact that may be made by the foreign direct investment. They should be making sure that the entities that are making the foreign direct investment in their country adhere to the environmental, governance and social regulations that have been laid down in the country.The various disadvantages of foreign direct investment are understood where the host country has some sort of national secret something that is not meant to be disclosed to the rest of the world. It has been observed that the defense of a country has faced risks as a result of the foreign direct investment in the country. At times it has been observed that certain foreign policies are adopted that are not appreciated by the workers of the recipient country. Foreign direct investment, at times, is also disadvantageous for the ones who are making the investment themselves. Foreign direct investment may entail high travel and communications expenses. The differences of language and culture that exist between the country of the investor and the host country could also pose problems in case of foreign direct investment. Yet another major disadvantage of foreign direct investment is that there is a chance that a company may lose out on its ownership to an overseas company. This has often caused many companies to approach foreign direct investment with a certain amount of caution.At times it has been observed that there is considerable instability in a particular geographical region. This causes a lot of inconvenience to the investor. The size of the market, as well as, the condition of the host country could be important factors in the case of the foreign direct investment. In case the host country is not well connected with their more advanced neighbors, it poses a lot of challenge for the investors.At times it has been observed that the governments of the host country are facing problems with foreign direct investment. It has less control over the functioning of the company that is functioning as the wholly owned subsidiary of an overseas company.This leads to serious issues. The investor does not have to be completely obedient to the economic policies of the country where they have invested the money. At
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times there have been adverse effects of foreign direct investment on the balance of payments of a country. Even in view of the various disadvantages of foreign direct investment it may be said that foreign direct investment has played an important role in shaping the economic fortunes of a number of countries around the world.
1.5 Determinants of Foreign Direct Investment:

One of the most important determinants of foreign direct investment is the size as well as the growth prospects of the economy of the country where the foreign direct investment is being made.It is normally assumed that if the country has a big market, it can grow quickly from an economic point of view and it is concluded that the investors would be able to make the most of their investments in that country. In case of foreign direct investments that are based on export, the dimensions of the host country are important as there are opportunities for bigger economies of scale, as well as spill-over effects.The population of a country plays an important role in attracting foreign direct investors to a country. In such cases the investors are lured by the prospects of a huge customer base. Now if the country has a high per capita income or if the citizens have reasonably good spending capabilities then it would offer the foreign direct investors with the scope of excellent performances. The status of the human resources in a country is also instrumental in attracting direct investment from overseas. There are certain countries like China that have taken an active interest in increasing the quality of their workers. They have made it compulsory for every Chinese citizen to receive at least nine years of education. This has helped in enhancing the standards of the laborers in China. If a particular country has plenty of natural resources it always finds investors willing to put their money in them. A good example would be Saudi Arabia and other oil rich countries that have had overseas companies investing in them in order to tap the unlimited oil resources at their disposal.Inexpensive labor force is also an important determinant of attracting foreign direct investment. The BPO revolution, as well as the boom of the Information Technology companies in countries like India has been a proof
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of the fact that inexpensive labor force has played an important part in attracting overseas direct investment. Infrastructural factors like the status of telecommunications and railways play an important part in having the foreign direct investors come into a particular country. It has been observed that if the infrastructural facilities are properly in place in a country then that country receives a substantial amount of foreign direct investment. If a country has extended its arms to overseas investors and is also able to get access to the international markets then it stands a better chance of getting higher amounts of foreign direct investment.It has been observed in the recent years that a couple of countries have altered their stance vis-a-vis overseas investment. They have reset their economic policies in order to suit the interests of the overseas investors.These companies have increased the transparency of the legal frameworks in place. This has been done so that the overseas companies can understand the implications of their investment in a particular country and take the appropriate decisions.
1.6 Foreign Direct Investment Quality:

The quality of FDI, is not more than quantity, is equally important. In a country such as India with a historically tariffs and large domestic market, FDI might move in merely to produce behind tariff walls for the domestic market. Such FDI becomes virtually indistinguishable from domestic investment and has, in the Indian context, sometimes lobbied for higher protection along with domestic firms. FDI becomes attractive for its own sake when it makes a net contribution to export and/or has spillover effects. Policy should target FDI with potential for such effects, rather any FDI, perse. A powerful tool to achieve this is to make deep cuts in tariff so that opportunities for production behind walls recede. Another pitfall in FDI policy is to let such investment substitute for a genuine domestic privatization programmes. Hence, at the level of policy, a successful FDI policy must be integrated with a policy of trade reforms and genuine privatization.
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1.7 Foreign Direct Investment and Economic Development:

Foreign direct investment has a major role to play in the economic development of the host country. Over the years, foreign direct investment has helped the economies of the host countries to obtain a launching pad from where they can make further improvements. This trend has manifested itself in the last twenty years. Any form of foreign direct investment pumps in a lot of capital knowledge and technological resources into the economy of a country. This helps in taking the particular host economy ahead. The fact that the foreign direct investors have been able to play an important role vis-a-vis the economic development of the recipient countries has been due to the fact that these countries have changed their economic stances and have allowed the foreign direct investors to come in and improve their economies. It has often been observed that the economically developing as well as underdeveloped countries are dependent on the economically developed countries for financial assistance that would help them to achieve some amount of economical stability. The economically developed countries, on their part, can help these countries financially by investing in these countries. This financial assistance can be channelized into various sectors of the economy. The channelization is normally done on the basis of the requirements of particular sectors. It has been observed that the foreign direct investment has been able to improve the infrastructural condition of a country. There is ample scope of technological development of a country as well. The standard of living of the general public of the host country could be improved as a result of the foreign direct investment made in a country. The health sector of many a recipient country has been benefited by the foreign direct investment. Thus it may be said that foreign direct investment plays an important role in the overall economic and social development of a country. It has been observed that the private sector companies are not always interested in undertaking activities that help in improving the infrastructure of the country. This is because the gains form these infrastructural activities are made only in the long term; there are no short term benefits as such. M. P. BIRLA INSTITUTE OF MANAGEMENT 24
This is where the foreign direct investment can come in handy. It can also assist in helping economically underdeveloped countries build their own research and development bases that can contribute to the technological development of the country. This is a very crucial contribution as most of these countries are not able to perform these functions on their own. These assistances come in handy, especially in the context of the manufacturing and services sector of the particular country, that are able to enhance their productivity and ultimately advance from an economic point of view. At times foreign direct investment could be provided in form of technology. Else, the money that comes in a country through the foreign direct investment can be utilized to buy or import technology from other countries. This is an indirect way in which foreign direct investment plays an important part in the context of economic development. Foreign direct investment can also be helpful in assisting the host countries to set up mass educational programs that help them to educate the disadvantaged sections of the society. Such assistance is often provided by the non-governmental organizations in the form of subsidies. The developing countries can also tackle a number of healthcare issues with the help of the foreign direct investment.
1.8 Foreign Direct Investment and Infrastructure Development:

One of the many areas in which foreign direct investment can benefit a country or any entity, for that matter, is that of development of infrastructure. It has been observed over the years, that a lot of countries as well as other recipients of direct investment from overseas entities have used that money in order to develop the infrastructural facilities at their disposal. All the various types of infrastructure that are at the disposal of a country like health or education, for example, may be benefited by foreign direct investment. Technological infrastructure is one of the many areas in which foreign direct investment is meant to benefit a country. With the help of foreign direct investment being made in a country the government can construct, as well as, improve the existing technological tools at their disposal.This in turn also plays a very crucial role in the economic development of a country as this technological advancement assists a country in upgrading its industries and thus helps them to face the challenges of the contemporary
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global economy.Foreign direct investment is also capable of upgrading the health infrastructure of a particular country. This could be done by way of providing high-end equipments or medicines.Such investment is normally made by the world level organizations in countries that are economically backward and have no or little medical infrastructure to speak of. For years, the World Health Organization, as well as the World Bank and the International Monetary Fund have been providing a number of the economically backward countries, all over the world and especially in Africa, with money and medicines in order to eradicate critical diseases or improve the medical infrastructure in place.They have also been sponsoring public health awareness programs that make people aware about critical diseases that need to be eradicated. In India, for example, pulse polio and HIV prevention measures have been at the center of such activities. Communication infrastructure is an important area where the foreign direct investment can come in handy. The money that is invested in a country by overseas entities can be used for the construction of roads, railways and bridge These facilities are used for establishing connections with the remote areas of a country and for transporting important services to these parts like medicines and aids at times of floods or other natural disasters. A lot of construction groups are taking active interest in developing the communicational infrastructure of other countries. Foreign direct investment is also used for the purpose of educating the unskilled labor force that is present in a country. In India during the later stages of 80s and 90s there was a situation whereby there was a huge labor force but it was mostly unskilled and was employed in the unorganized sector. It was possible with the help of the financial assistance from the overseas direct investors to train these people so that they may be capable of being recruited into the industry. Foreign direct investment is also useful for executing mass educational programs that can educate those people who remain out of the bounds of conventional and institutional education as they are not able to afford it or it may not be available in their areas.
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1.9 GOVERNMENT POLICY TOWARDS FOREIGN DIRECT INVESTMENT:

Sectors Attracting Foreign Direct Investment: Though the services sector in India constitutes the largest share in the Gross Domestic Product, still it has failed to some extent in attracting more funds in the forms of investments.
Important sectors of the Indian Economy attracting more investments into the country are as follows: Electrical Equipments (Including Computer Software & Electronic) Telecommunications (radio paging, cellular mobile, basic telephone service) Transportation Industry Services Sector (financial & non-financial) Fuels (Power + Oil Refinery) Chemical (other than fertilizers) Food Processing Industries Drugs & Pharmaceuticals Cement and Gypsum Products Metallurgical Industries
Sectors prohibited for FDI:
i. Retail trading (except Single Brand Product retailing) ii. Atomic energy iii. Lottery business iv. Gambling and Betting v. Agricultural or plantation activities of Agriculture (excluding Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisiculture and Cultivation of
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Vegetables, Mushrooms etc., under controlled conditions and services related to agro and allied sectors) and Plantations (other than Tea Plantations)
Sector-specific policy for FDI : In the following sectors/activities, FDI upto the limit indicated below is allowed subject to other conditions as indicated.
In Sectors/Activities not listed below, FDI is permitted up to 100% on the automatic route subject to sectoral rules / regulations applicable.
INDIA: SECTOR SPECIFIC POLICY FOR FOREIGN DIRECT INVESTMENT

Sector/Activity Airports (a) Greenfield projects 100% Automatic FIPB beyond 74% Subject to sectoral regulations notified by Ministry of Civil Aviation Subject to sectoral regulations notified by Ministry of Civil Avation Subject to conditions notified vide Press Note 2 (2005 Series) including a minimum capitalization of US$ 10 million for wholly owned subsidiaries and US$ 5 millionfor joint venture. The funds would have to be brought within six months of commencement of business of the Company FDI Cap/Equity Entry Route Other Conditions
(b) Existing projects
100%
Construction Development projects including housing, commercial premises, resorts, educational institutions, recreational facilities, city and regional level infrastructure, townships
100%
Automatic
Petroleum & Natural Gas (a) Other than Refining and including market study and formulation; investment/financing; setting up infrastructure for marketing in Petroleum & Natural Gas sector) Subject to sectoral regulations issued by Ministry of Petroleum and Natural Gas; and in the case of actual trading and marketing of petroleum products, divestment of 26% equity in favour of India partner/public within 5 years.
100%
Automatic
26% in case of PSUs (b) Refining 100% in case of Private companies
FIPB Subject to sectoral policy Automatic
Telecommunication
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(a) Basic and cellular; Unified Access Services, National/International Long Distance, V-Sat, Public Mobile Radio Trunked Services (PMRTS), Global Mobile Personal Communications Services (GMPCS) and other value added telecom services
74% (including FDI, FII, NRI, FCCBs, ADRs, GDRs, convertible preference shares, and proportionate foreign equity in Indian promoters/investin g Company
Automatic upto 49% FIPB beyond 49%
Subject to guidelines notified in the PN 5/2005 Series
(b) ISP with gateways, radiopaging, end-to-end bandwidth
Automatic up to 49% 74% FIPB beyond 49%
Subject to licencing and security requirements notified by the Department of Telecommunication
(c) ISP without gateway, infrastructure provider providing dark fibre, electronic mail and voice mail
100%
Automatic up to 49% FIPB beyond 49%
Subject to the condition that such companies shall divest 26% of their equity in favour of Indian public in 5 years, if these companies are listed in other parts of the world. Also subject to licensing and security requirements, where required.
(d) Manufacture of telecom equipment Power including generation ( Except Atomic energy); regulations transmission, distribution and Power Trading Ports Roads & Highways Shipping
100%
Automatic
Subject to sectoral requirements
Subject to provisions of the Electricity Act 2003
100% 100% 100%
Automatic Automatic Automatic
Subject to sectoral regulations Subject to sectoral regulations Subject to sectoral regulations
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1.10 EVOLUTION OF FDI IN INDIA:

INDIA ranks second in the world in terms of financial attractiveness, people and skills availability and business environment. This is revealed in AT Kearney's 2007 Global Services Location Index. Country's financial stability in the current environment of financial turbulence and a possible unwinding of macro imbalances sends clear message to the prospective foreign investors about India's position as an expanding investment destination. "India's external sector has displayed considerable strength and resilience since the reforms in 1991- despite several domestic as well as global political events and supply shocks in food and fuel........we partner with the global economy fully on the trade and current account while there is progressive liberalisation of the capital account, consistent with the progress in reforms in the real, fiscal and financial sectors", observed Dr Y.V.Reddy, Governor of India's central banking authorities, Reserve Bank of India (RBI) at the World Leaders Forum in New York in April this year. "The strong macro economic fundamentals, growing size of the economy and improving investment climate has attracted global corporation to invest in India. A major outcome of the economic reforms process aimed at opening up the economy and embracing globalization has led to to tremendous increase in Foreign Direct Investment inflows into India", says country's powerful industry lobby CII. Post 1948, the industrial policy announced by the government of India focused on the industrial growth and the overall development of the nation. The primary trust was given in the areas of consistent increase in production and a fair and equitable distribution of food grains. The industry policy was later revised after the adoption of the constitution and the revised policy was adopted in the year 1956. Further, in order to meet the continuous challenges facing the economy, the policy was further revised in the years 1973, 1977 and 1980. A comprehensive statement of industrial policy was again issued on July 24, 1991. Thereafter, foreign investment and acquisition of technology necessary for Indias industrial development would be allowed only if it is in the national interest. In other areas, even existing collaborations will not be renewed. In fact, the government offered to issue an illustrative list of industries where no foreign collaboration, financial
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or technical, is considered necessary since indigenous technology has fully developed in this field. Thus the entire emphasis was on preventing foreign investment. The 1991 resolution, issued in the aftermath of the economic reforms initiatives, stated that foreign investment and technology collaboration would be welcomed to obtain higher technology, to increase exports and to expand the production base. It was recognized that foreign investment would bring in attend advantages of technology transfer, marketing expertise, introduction of modern managerial techniques and new possibilities for promotion of exports. The government, therefore, welcomed foreign investment, which was in the interest of the countries industrial development. Since then, FDI has gained prominence across the globe and has been recognized as an instrument that facilitates international economic integration.
1.11 MAJOR FDI INVESTORS IN INDIA:

In FDI equity investments Mauritius tops the list of first ten investing countries followed by US, UK, Singapore, Netherlands, Japan, Germany, France, Cyprus and Switzerland. Between April 2000 and July 2008 FDI inflows from Mauritius stood at $ 30.18 billion followed by $5.80 billion from Singapore; $ 5.47 billion from the US; $ 4.83 billion from the UK; $ 3.12 billion from the Netherlands; $ 2.26 billion from Japan; $1.83 billion from Germany; $ 1.41 billion from Cyprus; and $1.02 billion from France. The average FDI inflows per year during the 9th Plan was $ 3.2 billion and during the 10th Plan it increased manifold to stand at $ 16.33 billion the annual average being $ 6.16 billion. The top five sectors attracting FDI in fiscal 2007-08 included Services sector; Housing and Real Estate; Construction activities; Computer Software & hardware; and Telecommunications. The infrastructure sector that offers massive potential to attract FDI witnessed marked increase in FDI inflows during this five-year period. The extant policy for most of the infrastructure sectors permits FDI up to 100 percent on the automatic route. From $ 1902 million in fiscal 2001-02 the foreign investment in India's infrastructure sector increased to $ 2179 million in 2006-07. But fiscal 2007-08 witnessed significant increase in the FDI inflows in the infrastructure. In first nine
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months till December 2007 of fiscal 2007-08 stood at $ 4095 million. From 2000-01 to December 2007, total FDI in India's infrastructure sector stood at $ 10575 million. Of the total FDI amounting to $ 56450 million in first 11 months of fiscal 2007-08, direct investment stood at $ 25455 million. of this, equity investment accounts for the major share with $ 20636 million. Portfolio investments totaled $ 30995 million. The countrywide figures for 200-01 to January 2009 reveal Mauritius in the leading position accounting for about 43.3 percent of total FDI inflows into India. The US and UK is far behind it with 7.72 percent and 6.41 percent respectively. FDI from Mauritius during this period stood at $ 35180 million. In terms of Rs it stood at Rs 1527677 million. FDI by US and UK during this period stood at $ 6171 million and $ 5153 million. In terms of Indian currency it comes to Rs 271491 million and Rs 225415 million respectively. The sector attracting most to the FDI is service sector from the year 2000 to 2009 having 22% share with cumulative inflows of 78742 US million $. Number of cumulative Foreign Technology Transfer Approvals from the year 20002008 are 8024 and in the year 2008-2009 they are 62.
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TRENDS AND PATTERNS OF FOREIGN DIRECT INVESTMENT IN INDIA:
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1.12 Trends and Patterns of FDI in India:

Foreign capital plays an important role in the process of economic development of a country at the initial stage of development. To what extent it is to be invited depends upon the type of economy. If it is a closed economy welcoming of foreign capitals is limited, if it is an open economy role of foreign is high. Since the under developed countries are having lack of capital, certainly the foreign capital will make a dent in the process of economic development of that country. So far as Indian economy is
concerned the welcoming of the foreign capital is limited. But after liberalization of the economy the in flow of foreign capital into India is very high. The role of foreign capital in the process of economic developments is a debatable issue. Due to the FDI inflow in to the Indian economy, poverty has not been reduced, unemployment has increased, agricultural sector, village, cottage and house hold industries have been disrupted due to liberalized import policy. The Indian floodgates are opened for foreign goods, which are competing with Indian goods. The Indian goods are relatively costlier. The Indian producers are not been able to stand in the competition of the foreign goods in the Indian market, which are cheaper than Indian goods. Indian producers particularly agriculturists, handsomer could not get even the cost of production, which resulted in increased debt burden. Many of them have resorted to suicides due to increased in debt burden as well as pressure for repayment of debt. This is true in almost all states of the country. This is problem is more acute in states like PUNJAB, ANDHRA PRADESH, MAHARASHTRA, KERALA, KARNATAKA AND TAMILNADU. In the context we have to consider the trends and patterns of FDI inflow into India. Foreign direct investment (FDI) in India has played an important role in the development of the Indian economy. FDI in India has in a lot of ways enabled India to achieve a certain degree of financial stability, growth and development. This money has allowed India to focus on the areas that may have needed economic attention, and address the various problems that continue to challenge the country. India has continually sought to attract FDI from the worlds major investors. In 1998 and 1999, the Indian national government announced a number of reforms designed to encourage FDI and present a favorable scenario for investors. M. P. BIRLA INSTITUTE OF MANAGEMENT 34
FDI investments are permitted through financial collaborations, through private equity or preferential allotments, by way of capital markets through Euro issues, and in joint ventures. FDI is not permitted in the arms, nuclear, railway, coal & lignite or mining industries. A number of projects have been announced in areas such as electricity generation, distribution and transmission, as well as the development of roads and highways, with opportunities for foreign investors. The Indian national government also provided permission to FDIs to provide up to 100% of the financing required for the construction of bridges and tunnels, but with a limit on foreign equity of INR 1,500 crores, approximately $352.5m. Currently, FDI is allowed in financial services, including the growing credit card business. These services include the non-banking financial services sector. Foreign investors can buy up to 40% of the equity in private banks, although there is condition that stipulates that these banks must be multilateral financial organizations. Up to 45% of the shares of companies in the global mobile personal communication by satellite services (GMPCSS) sector can also be purchased. Although the Chinese approval process is complex, it includes both national and regional approval in the same process. Federal democracy is perversely an impediment for India. Local authorities are not part of the approvals process and have their own rights, and this often leads to projects getting bogged down in red tape and bureaucracy. India actually receives less than half the FDI that the federal government approves.
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OVERALL TRENDS AND PATTERNS:
Indias share of global FDI flows rose from 1.8 per cent in 1996 to 2.2 per cent in 1997. FDI in India in 1997-98 was lower at U.S.$ 5,025 million compared to U.S.$ 6,008 million in 1996-97 because of a decline in portfolio investment. Although foreign direct investment (FDI) increased by 18.6 per cent from U.S.$ 2,696 million in 1996-97 to U.S.$ 3,197 million in 1997- 98
International developments continue to affect capital flows into India in 1998-99 as well. Mauritius, as in the previous two years, was the dominant source of FDI inflows in 1997- 98. U.S.A. and S. Korea were, respectively, the second and third largest sources of FDI. S. Korea increased its flow of investment in India from a meager U.S.$ 6.3 million in 1996-97 (0.2 per cent of total FDI) to U.S.$ 333.1 million in 1997-98 (10.4 per cent share).
In 1999 the foreign direct investment in India went down to 2.2 billion dollars compared to 2.6 billion dollars in 1998. There has been a sharp rise in the number of FDIs approved in 2004. During the first seven months of 2004, between January and July, Rs 5,220 crore worth of FDI was approved. Almost a third share of the investment in India is by NRI.
According to the latest Reserve Bank of India figures, outflows through various NRI deposits schemes amounted to $903 million since May 2004, as against net inflows of $1.2 billion in the corresponding period last year.
By 2004, India received $5.3 billion in FDI, big growth compared to previous years, but less than 10% of the $60.6 billion that flowed into China. As compared to 2006 India slid one place to the third position in terms of projects, which numbered 676. In terms of jobs created India dropped to the second position in 2007 from being the first in 2006. Jobs created stood at 246,361. In comparison to 2006 it was a 45% decline in job creation for the Indian job market in 2007.
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The country had received $ 15.7 billion FDI in 2006-07 as compared with $ 5.5 billion a year ago. If reinvested earnings and other capital inflows are included, total inflows in 2006-07 add up to $ 19.5 billion compared with $7.7 billion in 2005-06, he said.Mauritius continued to remain as the biggest source of FDI for India, largely because of its tax breaks that helps companies from elsewhere route their funds through the island, followed by Japan, Cyprus, the US and Singapore.Services, telecom, electrical equipment, real estate and transportation were the five major sectors that received a majority of FDI in India this year.
In spite of the global meltdown, in fiscal year 200708, about US$ 32.4 billion as foreign investment had poured into India. The country posted a 45 per cent growth in foreign direct investment (FDI) with US$ 23.3 billion between AprilDecember 2008, over the same period last year. The FDI inflows between AprilNovember 2008 stood at US$ 19.79 billion.
FDI inflows between April-October 2008 were US$ 18.70 billion, as against the US$ 9.27 billion received during same period last year. Inflow of FDI equity for the month of September 2008 alone was US$ 2.56 billion, a growth of 259 per cent over the same month in last year. Further, October 2008 has witnessed FDI inflows of US$ 1.49 billion, thereby increasing the FDI inflows for the period April-October 2008 to US$ 18.7 billion.
According to the Reserve Bank of India's (RBI) monthly bulletin, NRIs have pumped in US$ 513 million (on net basis) in NRI deposits in September 2008, which is the highest since December 2006.
The Foreign Investment Promotion Board (FIPB) has cleared around 30 proposals accounting for more than US$ 1.21 billion in the last few months. The approvals for such proposals went up about 50 per cent in 2008 as against 2007.
The FDI inflows in 2007-08 saw an increase of 56.50 per cent over 15.70 billion dollars in the previous year. India, which saw a GDP growth of 8.7 per cent in 2007-08, aims to more than double its FDI inflows between 2006-07 and end of the current financial year.
Foreign Direct Investment (FDI) inflows into India touched a level of $4.9 billion in the first quarter of the current financial year (2007-08), largely led by British
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telecom major Vodafones $801 million injection into the countrys growing telecoms market. Inflows during April to June in the current year jumped 185 per cent against $ 1.7 billion in the corresponding period of the previous year. During January-June 2007, inflows rose 216 per cent compared to $ 3.6 billion in the corresponding period last year. The Delhi region received the maximum inflows of $1.3 billion, accounting for 36 per cent of the total FDI up to May 2007. If Mumbai, Bangalore and Chennai were added to the list of regions, they accounted for two-thirds of the total inflows into the country.Vodafone topped the list of big-ticket foreign investments in India. Matsushita Electric Works of Japan followed it with $342 million. Foreign Direct Investment (FDI) equity capital inflow during the year 2007-08 till February 2008 has reached a record level of US $ 20.1 billion. This is the highest FDI into equity in the country during any year. The inflow of ECBs and foreign currency convertible bonds slowed considerably in October 2008 - down 60 per cent from Rs283.49 crore in September to Rs112.52 crore. Apart from the decline in ECBs, domestic funds too have become scarce and increasingly dear following a rise in interest rate. The service sector has been the prime mover of India's gross domestic product in recent years and foreign investors so far never had doubts about its potential. The situation has, however, changed drastically in the current year. 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 Rs5,727 crore FDI in the first seven months of 2008 against Rs10,215 crore in 2007. Its share in total FDI inflow has fallen to only 5.8 per cent in 2008. The service sector, however, has continued to enjoy a steady inflow of FDI. Its share in total inflow has increased further 23.2 per cent during January-July 2008. FDI inflows received in the month of February 2008 are an unprecedented US $ 5.671 billion. The inflows in the month of February have surpassed the inflows received in any single year since 1991 barring last year i.e. 2006-07.
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The FDI inflows received in February 2008 is an increase of 712% over that in February 2007. The inflows for April 2006 - February 2007 were US $ 11.88 billion. The inflows for April 2007-February 2008 at US $ 20.137 billion is thus an increase of about 70% over the corresponding period of last financial year.
With the global economy facing the brunt of financial instability in 2008, FDI is projected to become an important instrument for fostering global job creation and investment of capital.
India had received 24.57 billion dollars in Foreign Direct Investment (FDI) during the last fiscal (2008-2009). India is fast catching up with China in the flow of foreign direct investment (FDI) as capital inflows through this route has crossed $10 billion in the first quarter of this fiscal. FDI in the first quarter of the financial year 2009 has far exceeded the total FDI flows received by the domestic economy in 2005-06, Reserve Bank of Indias data said.
The total FDI inflows into the country in the April-June period amounted to $10.073 billion, nearly one billion more than the total FDI inflows--$8.961 billion-- in the 2005-06 period, RBI said in its August report. The FDI flow into India was less than $10 billion annually until 2005-06. It shot up to $22 billion in 2006-07 and $32 billion in 2007-08. China has averaged $ 50 billion annually in the past decade. If the first quarter trend continues, India could cross this fiscal $40 billion mark in FDI annual inflow for the first time. FDI flows, during AprilJune, has doubled when compared to the same quarter of financial year 2008, $5 billion. Of the total FDIs reached here in the April-June period this fiscal, around $2.253 billion was on account of the acquisition of shares of Indian companies by foreign entities.
The government has in February 2009 approved 29 foreign direct investment (FDI) proposals worth US$ 118.95 million including an US$ 70.49 million hotel project of AAPC Singapore Pte Ltd, a hotel management company this month.
While the momentum in the foreign direct investment is expected to continue in the remaining part of financial year 2009 on the back of a strong domestic demand, the pace of the growth may be a little lower compared to the preceding
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months, the RBI said. The country received a record $11.9 billion FDI in the final quarter of last financial year and has continued the momentum despite the choppy market conditions in some of the major economies in the first quarter on the back of a strong domestic demand for various projects. According to the Reserve Banks estimates, total FDI in the first six months of the current calendar year aggregated to $21.948 billion, close to a $22.079 mark routed to the domestic market by foreign direct investors in 2006-07. Meanwhile, FIIs sold a total of $ 5.177 billion in the April-June period, much above as compared to a $4.1 billion in Q4 financial year 2009, the RBI said. Total FII inflows in financial year 2008 stood at $20.328 billion while other investors including offshore funds put in $298 million during the period. However, in the current fiscal, except in January, FIIs sold nearly $15.811 billion. In January, the country received an FII inflow of 6.49 billion. FDI inflows fall 73% in February 2009:Global financial crisis continued to take its toll on foreign direct investment (FDI) to the country as such inflows fell in February 2009, for the fourth time in five months. FDI inflows in February dropped by as much as 73% to $1.49 billion from $ 5.67 billion a year ago. FDI inflows from the beginning till the penultimate month of 2008-09 fiscal has touched only $25.38 billion. This means, the country may miss the $35 billion FDI target for 2008-09 or even the reduced target of $30 billion. But total FDI during April 2008-February 2009 has already crossed $24.57 billion that the country received in the previous fiscal, an official said. In 2006-07, India had received only $15.5 billion worth FDI. Though FDI inflows were robust in the first half of 2008-09, as the global financial crisis started spreading, it slowed down. After maintaining a monthly average of $2.8 billion till September in the 2008-09 financial year, FDI inflows fell by 26% in October to $1.49 billion. After slipping by a similar 26% in November to just $1 billion, FDI inflows once again fell to $1.36 billion in December 2008 from $1.56 billion in December 2007, a year-on-year slump of about 13%.However, it turned upwards in January, rising 55% at $2.74 billion, against $1.77 billion in January 2008.
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While during the April-September 2008, FDI inflows were up 137% from the year-ago period at $17.2 billion, the growth fell to 66% during the April 2008January 2009 period at $23.94 billion.
India has attracted FDI inflows of around $88 billion from April 2000 to February 2009. FDI inflows were robust in the first half of 2008-09, as the global financial crisis started spreading It slowed after maintaining a monthly average of $2.8 billion till September in the 2008-09 FDI inflows fell 26% in October to $1.49 billion After slipping 26% in November to just $1 billion, FDI inflows once again fell to $1.36 billion in December 2008 from $1.56 billion in December 2007 In 2008-09, India received FDI inflows of $24.57 billion. August alone saw FDI inflow of $2.32 billion, a jump of 180% over August 2007. Pointing out that the manufacturing sector received $5 billion worth FDI during the April-August period, an increase of 41% over inflow. The industries in the manufacturing sector that got a sizeable portion of FDI include metallurgical industries ($765 million), cement and gypsum products ($627 million), automobile ($441 million), telecom equipments ($309 million) and chemicals, other than fertilizers ($301 million).
Mauritius continued to be the leading FDI source, comprising 37% of the inflows. Other significant amount of FDI has come from Singapore ($1.45 billion), the US ($943 million) dollar, Cyprus ($433 million).
Leading investments included Royal Bank of Scotland, UK acquiring shares in Reliance Ports and Terminals Ltd in a $382 million dollar transaction and DE Shaw Composite Investment, Mauritius pumping in $384
According to report, India has set a 35-billion dollars FDI target for the current fiscal (2009-2010) Branding India as a "safe and stable" investment destination amid global financial turmoil, country's Commerce and Industry minister Kamal Nath expects despite the global financial meltdown, FDI inflows into India during the current fiscal M. P. BIRLA INSTITUTE OF MANAGEMENT 41
year (2008-09) is estimated to close at $ 35 billion signifying over $ 11 billion invested in the previous financial year (India's fiscal year is April to March). In 2007-08, reinvested earnings of foreign firms in India stood at $ 5.5 billion. Global firms have routed most of the investment through tax havens like Mauritius and Singapore during 2007-08, while Japanese firms have poured more money into India. Lot of investment is expected to flow into petroleum, manufacturing and electronic hardware sectors. Policymakers estimate that to sustain high growth rate India will need massive investment in the five year period to March 2012, including $500 billion in infrastructure, to sustain high growth rates. In January, India raised FDI limits in petroleum refinery, aviation, commodity exchanges, credit information companies and mining of some precious metals to attract more capital and boost growth in those sectors. The Congress(I)-led UPA government wanted to raise FDI limits in insurance to 49 cent. in fact the Cabinet has okayed it, now it will go to Parliament. However, the retail trade is yet to be opened further. The government is in the process of fine tuning FDI rules in order to make India more attractive as FDI destination.
Aggressive Investment Plans: The surging economy has resulted in India emerging as the fastest growing market for many global majors. This has resulted in many companies lining up aggressive investment plans for the Indian market. Footwear retail company, Pavers England Footprint, has plans to invest US$ 10 million for setting up 1,000 stores in India by 2013. Moreover, the company also plans to invest US$ 3 million on an R&D facility in Chennai. General Motors India plans to invest US$ 500 million, in addition to US$ 1 billion it has already committed to invest in India. General Motors will also invest US$ 200 million in its Talegaon plant near Pune for its powertrain project. American Tower Corporation (ATC) plans an investment of about US$ 500 million to buy a stake in an Indian telecom tower company.
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Norway-based Telenor has acquired Unitech Wireless with a US$ 1.23 billion investment for a 60 per cent stake. Leading global multiplex player Cinepolis plans to start its India operations with an investment of US$ 350 million. Finnish engineering and technology group, Metso started the development of its 49-acre multi-functional industrial facility, in Rajasthan, with an investment of around US$ 33.28 million over two years.
Swiss processing and packaging major, Tetra Pak International SA, plans to invest US$ 100.85 million in its second plant in Maharashtra. Japanese telecom major, NTT DoCoMo, will be buying 27.31 per cent equity capital of Tata Teleservices for around US$ 2.48 billion. The Goldman Sachs Group will be making an overall investment of almost US$ 100 million in its wholly owned non-banking financial company, Pratham Investments and Trading Private Ltd.
Ford Indias plans to expand its capacity in India will continue as per schedule. The expansion programme entails doubling its car manufacturing capacity to 200,000 units per year and an engine manufacturing facility with a capacity of producing 250,000 engines annually. The project will be completed by early 2010.
All Green Energy India, a subsidiary of Singapore-based All Green Energy Pvt Ltd, will be investing around US$ 96.30 million for the development of 10 biomass-based renewable energy projects over the next three years.
StarragHeckert, a global company in the field of milling machine centres for the aerospace, transport (automotive), energy and precision machinery markets, is planning to invest US$ 31 million in two phases.
Socomec UPS India, part of Socemec, France, will be investing US$ 5.02 million over the next three years. Targetting a 10 per cent share of the US$ 600 million UPS market in India, Socomec has inked alliances with 24 new business partners.
A joint venture by Punj Llyod and US-based Thorium Power will see an investment of around US$ 1 billion for exploring commercial nuclear power opportunities. M. P. BIRLA INSTITUTE OF MANAGEMENT 43
Singapore-based Universal Success Enterprises Ltd (USEL) has signed three pacts with the Gujarat government for infrastructure projects and will be investing about US$ 17.5 billion for the same.
Government Initiatives: The government has taken significant steps to make foreign direct investment simpler, and render caps on FDI redundant. In a recent move, the government has announced that equity investments coming through companies with Indians having majority ownership and control would be taken as fully domestic equity. With the changes in the FDI policy, sectors like retail, telecom and media amongst others would benefit greatly.The change in FDI norms will bring much respite to retailers who can now raise funds through stake sale in subsidiaries, and also build closer alliances with their foreign partners. Furthermore, with the revised FDI norms, extensive re-organization of company finances across many sectors would be seen and companies would now be subject to further dividend distribution tax of 15 per cent, including surcharges. Additionally, the government has made new amendments to these revised norms. Even indirect foreign investment would not be allowed in sectors where foreign investment is barred, like multi-brand retail, agriculture, lottery and atomic energy. The Department of Industrial Policy and Promotion (DIPP) and the Finance Ministry are planning to remove the cap on FDI in single-brand retail and permit up to 100 per cent foreign investments as against the 51 per cent currently. The government is also considering the removal of the incentive cap in wind energy which is restricted to projects up to 49 MW, presently. The Reserve Bank of India (RBI) will now permit FDI up to 49 per cent in credit information companies with voting rights up to 10 per cent. The government is now planning to permit FDI in investment companies as well. The government has also proposed wide-ranging modifications in the guidelines FDI over various sectors.
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Investment by Indian companies in which foreign firms have beneficial investment will account as direct FDI. Direct investments made by NRIs to account as FDI.
Looking ahead: With the government planning more liberalization measures across a broad range of sectors and continued investor interest, the inflow of FDI into India is likely to further accelerate. The Union Commerce and Industry Minister in India, Mr Kamal Nath, has assured that India will not be greatly affected by the current global meltdown and has expressed confidence about achieving the FDI target set for this year.
1.13 REASONS OF FOREIGN DIRECT INVESTMENT IN INDIA: FDI in India:

India is now the third most favoured destination for Foreign Direct Investment (FDI), behind China and the USA, according to an AT Kearney survey that tracked investor confidence among global executives to determine their order of preferences. India remains attractive investment destination and it will be a good parking lot for money. FDI inflows reflect growing confidence (of global investors) in India.
Investment in Indian market: 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 the market. No company, of any size, aspiring to be a global player can, for long ignore this country which is expected to become one of the top three emerging economies.
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Success in India: Success in India will depend on the correct estimation of the country's potential, 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. For those who take the time and look to India as an opportunity for long-term growth, not short-term profit- the trip will be well worth the effort.
Market potential: 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. 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, despite the practically unlimited possibilities in India for overseas businesses, the world's most populous democracy has, until fairly recently, failed to get the kind of enthusiastic attention generated by other emerging economies such as China.
Lack of enthusiasm among investors: The reason being, after independence from Britain 50 years ago, India developed a highly protected, semi-socialist autarkic economy. Structural and bureaucratic impediments were vigorously fostered, along with a distrust of foreign business. Even as today the climate in India has seen a sea change, smashing barriers and actively seeking foreign investment, many companies still see it as a difficult market. 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. Developing a basic understanding or potential of the Indian market, envisaging and developing a Market Entry Strategy and implementing these strategies when actually entering the market are three basic steps to make a successful entry into India.
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Developing
basic
understanding
or
potential
of
the
Indian
market
The Indian middle class is large and growing; wages are low; many workers are well educated and speak English; investors are optimistic and local stocks are up; despite political turmoil, the country presses on with economic reforms.But there is still cause for worries-
Infrastructural hassles: The rapid economic growth of the last few years has put heavy stress on India's infrastructural facilities. The projections of further expansion in key areas could snap the already strained lines of transportation unless massive programs of expansion and modernization are put in place. Problems include power demand shortfall, port traffic capacity mismatch, poor road conditions (only half of the country's roads are surfaced), low telephone penetration (1.4% of population).
Indian Bureaucracy: Although the Indian government is well aware of the need for reform and is pushing ahead in this area, business still has to deal with an inefficient and sometimes still slowmoving bureaucracy.
Diverse Market: The Indian market is widely diverse. The country has 17 official languages, 6 major religions, and ethnic diversity as wide as all of Europe. Thus, tastes and preferences differ greatly among sections of consumers. Therefore, it is advisable to develop a good understanding of the Indian market and overall economy before taking the plunge. Research firms in India can provide the information to determine how, when and where to enter the market. There are also companies which can guide the foreign firm through the entry process from beginning to end --performing the requisite research, assisting with configuration of the project, helping develop Indian partners and financing, finding the land or ready premises, and pushing through the paperwork required.
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Check on Economic Policies: The general economic direction in India is toward liberalization and globalization. But the process is slow. Before jumping into the market, it is necessary to discover whether government policies exist relating to the particular area of business and if there are political concerns which should be taken into account.
India still major FDI destination: Bureaucracy a hurdle: According to AT Kearney Global Survey, India still remains high on corporate investor radar screen and is widely perceived to offer ample opportunities for investment. However, despite its size and potential, India is yet to convert considerable favourable investor sentiment into substantial new inflows of Foreign Direct Investment (FDI). Bureaucracy and Regulatory Environment in India have been termed as the biggest bottlenecks for foreign direct investment inflows. These observations follow a general decline in FDI inflows into India - which are nearing 1996 levels with $2.63 billion in 2000 (projected) - over the last couple of years even as China and Brazil are increasingly finding favour with foreign investors.
The Indian market size and potential are unparalleled. No other country offers this magnitude of untapped markets. But India must take the environment conducive for attracting investment, Mr. Paul Laudicina, Vice President and Managing Director of the Global Business Policy Council of AT Kearney, said at a seminar on FDI in India organized by the Federation of Indian Chambers of Commerce and Industry (FICCI). Among the other perceived barriers to attracting foreign investment are a slowdown in the economic reforms process, the poor state of Indian infrastructure, cultural barriers, involvement of the government in economy, poverty and the consequential income disparity. Mr. Laudicina said that among the other driving factors were labour skills and wages, besides opportunities in infrastructure development. About 75 per cent of investors interviewed during the survey said that India is replete with investment opportunities... India needs to cash in on this sentiment, he said.
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Comparing India with Brazil and China - two other large markets higher up on the Kearney Investment Index - he said that India had higher long-term attractiveness but it needed to work upon its short-term benefits. The industries/products in India, which are of interest to foreign investors, include financial services, industrial products and telecom and other hi-tech products. Mr. Laudicina also pointed out that China is the biggest adversary to India as far as attracting FDI was concerned. On the FDI confidence index, while China second only to the US and is followed by Brazil, India makes an appearance only at the seventh position.
India: A much favoured destination: India has been rated as the fourth most attractive investment destination in the world, according to a global survey conducted by Ernst and Young in June 2008. India was after China, Central Europe and Western Europe in terms of prospects of alternative business locations. With 30 per cent votes, India emerged ahead of the US and Russia, which received 21 per cent votes each. As per the global survey of corporate investment plans carried out by KPMG International, released in June 2008, (a global network of professional firms providing audit, tax, and advisory services), India will see the largest overall growth in its share of foreign investment, and it is likely to become the world leader for investment in manufacturing. Its share of international corporate investment is likely to increase by 8 per cent to 18 per cent over the next five years, helping it rise to the fourth, from the seventh position, in the investment league table, pushing Germany, France and the UK behind. According to the AT Kearney FDI Confidence Index 2007, India continues to be the second most preferred destination for attracting global FDI inflows, a position it has held since 2005. India topped the AT Kearney's 2007 Global Services Location Index, emerging as the most preferred destination in terms of financial attractiveness, people and skills availability and business environment. India is emerging as the most favoured investment destination for many countries.
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The US Consul General, Aileen Crowe Nandi has said, "India is emerging as the most favoured destination for overseas investment and an important trading partner for the US." A recent survey conducted by the Japan Bank for International Cooperation (JBIC) shows that India has become the most-favoured destination for long-term Japanese investment. In recent times, Japanese corporations have bought varying amounts of equity stakes in Indian firms, particularly, in the automobile sector and also machine tools, electronics and IT. In terms of cumulative FDI inflow, Japan is the fifth largest investor and Japan's FDI in India is estimated to be around US$ 5.5 billion over five years from 2006 to 2010. Further, according to Tourism Minister Anil Sarkar, Australia and many South-Asian countries such as Cambodia, Vietnam and Thailand have plans for investing in the tourism sector in the Indian state of Tripura. In terms of FDI equity inflows during April to October, the largest investments came from Mauritius (US$ 7.69 billion), Singapore (US$ 1.90 billion), U.S.A (US$ 1.25 billion), Cyprus (US$ 827 million), Netherlands (US$ 740 million), U.K ( US$ 701 million), Germany (US$ 538 million), France US$ 295 million), Japan (US$ 223 million), and UAE (US$ 186 million).
Sector-wise FDI: The sectors bagging the maximum amount of FDI equity during April to October, 2008 are the Services Sector (US$ 3.35 billion), Computer Hardware and Software (US$ 1.52 billion), Telecommunications (US$ 1.99 billion), Construction Activities (US$ 1.74 billion), & Housing and Real Estate (US$ 1.82 billion) . Now, global investors are also evincing interest in other sectors like telecommunication, energy, construction, automobiles, electrical equipment apart from others. Investment in the Indian realty market is set to increase to US$ 20 billion by 2010. Many big names in international retail are also entering Indian cities. Global players such as Wal Mart, Marks & Spencers, Rosebys etc., have lined up investments to the tune of US$ 10 billion for the retail industry.
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According to Mines Minister, Mr Sis Ram Ola, "FDI of about US$ 2.5 billion per annum is expected in the mining sector from the fifth year of implementation of the new National Mineral Policy (NMP)." The surge in mobile services market is likely to see cumulative FDI inflows worth about US$ 24 billion into the Indian telecommunications sector by 2010, from US$ 3.84 billion till March 2008.
1.14 Investment Risks in India:

(1). Sovereign Risk: India is a vibrant parliamentary democracy and has been one since its political independence from British rule more than 50 years ago. There is no serious revolutionary movement in India; hence there is no conceivable possibility of the state collapsing. Sovereign Risk in India is therefore zero for both "foreign direct investment" and "foreign portfolio investment." It is however advisable to avoid investing in the extreme north-eastern parts of India because of terrorist threats. Kashmir in the northern tip is also a troubled area, but investment opportunities in Kashmir are anyway restricted by law.
(2). Political Risk: India suffered political instability for a few years due to the failure of any party to win an absolute majority in Parliament. However, political stability has returned since the previous general elections in 1999. However, political instability did not change India's economic course though it delayed certain decisions relating to the economy. The political divide in India is not one of policy, but essentially of personalities. Economic liberalization (which is what foreign investors are interested in) has been accepted as a necessity by all parties including the Communist Party of India (Marxist). Thus, political instability in India, in practical terms, posed no risk to foreign direct investors because no policy framed by a past government has been reversed by any successive government so far. You can find a comparison in Italy which has had some 45 governments in 50 years, yet overall economic policy remains unchanged. Even if
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political instability is to return in the future, chances of a reversal in economic policy are next to nil. As for terrorism, no terrorist outfit is strong enough to disturb the state. Except for Kashmir in the north and parts of the north-east, terrorist activity is either non-existent or too weak to be of any significance. It would take an extreme stretching of the imagination to visualize a Bangladesh-type state-disrupting revolution in India or a Kuwait-type annexation of India by a foreign power.Hence, political risk in India is practically nonexistent.
3). Commercial Risk: Commercial risk exists in business in any country. Not each and every product or service can be readily sold; hence it is necessary to study the demand/supply situation for a particular product or service before making any major investment. There is a large number of market research firms in India (including our own) which will study demand/supply situation for any product/service and advise the potential investor accordingly in exchange of a professional fee. The IndiaOneStop website provides some accurate statistics and insights into the most viable sectors for foreign direct investments.
(4). Risk of Foreign Sanctions: India did not seem to be in the good books of the United States government due to its nuclear weapons and missiles development policy. However, US President Bill Clinton's state visit to India in 2000 was a massive hit which even saw the President dancing with a crowd of colorfully dressed women in the northwestern state of Rajasthan. Subsequent to the visit, visits between the two countries at different levels took place, and the US government has all but come to terms with the reality of a nuclear-armed India.
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LITERATURE SURVEY:
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LITERATURE REVIEW:
According to SUKUMAR MUKHOPAHYAY (OCTOBER 5,2002):One of the most encompassing and growing areas of activity is the service sector today, traditionally we have been thinking only about transport, communication and the tourism service sector, but the present development has crossed these boundaries and gone into new fields like banking, insurance and others. The globalization o services have taken place with the substantial expansion in trade and foreign direct investment in the services. Now the service sector accounts for nearly 40 percent of the world stock FDI and 40 per cent of world FDI flows. one important method for developing the service sector is to allow more FDI into Indian economy. The justification is that the requirement for capital for upgrading, expanding and modernizing most services is so large that we just do not have the resources to invest in them. In some cases foreign investment is required for concomitant, beneficial in the area of infrastructure, another area India should seek benefits is in the export of remote processing services for which India has demonstrated its comparative advantage in recent years. According to Icfai Journal of Insurance Law, Vol. 5, No. 4, pp. 63-74, October 2007 and Planning Commission, Government Of India:In Banking sector49% FDI is allowed from all sources on the automatic route subject to guidelines issued from RBI from time to time. Indian federal government has opened up the banking sector for foreign investors raising the ceiling of foreign direct investment in the Indian private sector banks to 49 percent. However, the ceiling of FDI in the country's public sector banks remains unchanged at 20 percent. Foreign banks having branches in India are also entitled to acquire stakes upto 49% through "automatic routes". It is to be noted that under "automatic route" fresh shares would not be issued to foreign investors who already have financial or technical collaboration in banking or allied sector. They would require FIPB approval. However, some statutory approvals of the Reserve Bank of India (RBI), country's central banking authority, would be required. There are 29 Indian private
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sector banks. RBI has also specified the voting rights of foreign investors. The scope for disinvestment is also there. In Insurance sectorThe debate relating to Foreign Direct Investment (FDI) in the insurance sector is gaining importance. The Law Commission report, on overhauling of insurance law in India, has made some of the suggestions relating to the operational areas of insurance business and suggested the Insurance Regulatory Development Authority (IRDA), to appoint a specialized committee to look into the investment and capital portfolios of the insurance companies. The K P Narasimhan (KPN) committee appointed for such purpose has recommended to increase the share of FDI to 49% in the insurance companies. The proposal is objected and protested by some of the political parties. The Union Budget of 2006-2007 also promised reforms of domestic insurance industry. A debate is on cards to fix a cap on the FDI investment in India after considering the model of South Korea. FDI up to 26% in the Insurance sector is allowed on the automatic route subject to obtaining licence from Insurance Regulatory & Development Authority (IRDA). In Pharmaceutical sectorFDI up to 100% is permitted on the automatic route for manufacture of drugs and pharmaceutical, provided the activity does not attract compulsory licensing or involve use of recombinant DNA technology, and specific cell / tissue targeted formulations. FDI proposals for the manufacture of licensable drugs and pharmaceuticals and bulk drugs produced by recombinant DNA technology, and specific cell / tissue targeted formulations will require prior Government approval. An Ordinance on Patents (Third) Amendment was promulgated by the Government on December 26, 2004 to make the Indian patents law WTO compliant and to fulfill Indias commitment under TRIPS to introduce product patent protection for Drugs, Food and Chemicals with effect from January 1, 2005. All had discussed about the impact of the FDI, there inflows, trends, changes,
developments and patterns are also concerned of the different sectors of the Indian economy.
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CHAPTER 2:
RESEARCH DESIGN:
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2 RESEARCH DESIGN:
2.1 STATEMENT OF PROBLEM:
In todays economy FDI plays an important role in a each sector. so it is important to understand the concept and trends of FDI, therefore in this study an attempt is made to find out the inflows, analysis and interpretation of inflows and the impact of FDI on different sectors, with an objective of having a balanced growth in the economy.
2.2 OBJECTIVES OF THE STUDY:
To find out the trends and patterns of FDI in India. To find out the reasons for the flow of funds to India, more specifically, an attempt to find out the reasons for India being one of the favourites; amongst all Asian countries, for foreign investors.
To find out various investment, policies and guidelines of FDI in India. To do the complete analysis and interpretation of inflows of FDI in three sectors in Indian economy.
2.3 SCOPE OF THE STUDY: The study will be basically focusing on the analysis and interpretation of inflows of FDI sector wise but it will be restricted to three sectors i.e. Banking, Insurance and Pharmaceutical of an Indian economy.
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2.4 SIGNIFICANCE OF THE STUDY:
This will help in knowing expected future inflows, and growth of FDI in India. This will help in knowing future prospects of FDI in India. This will help in making appropriate decision for the investments in particular sector in an Indian economy. This will help in knowing the impact of FDI inflows in particular sector in an Indian economy.
2.5 RESEARCH METHODOLOGY:
The researcher conducted a descriptive research to arrive at the analysis and findings. A descriptive research is the suitable kind of research methodology which has been used for conducting this study because the study involves an in depth knowledge and a lot information about the subject matter.
2.6 SAMPLE:
Sample Unit: FDI Sampling Size: 3 Sectors Sampling Technique: Convenience Sampling Technique The sample shall be the FDI inflows of 3 sectors of an Indian economy over a period of 10 years.
2.7 HYPOTHESIS:
HO: With the inflows of FDI in a particular sector, there is no significant increase in the growth of that particular sector. H1: With the inflows of FDI in a particular sector, there is a significant increase in the growth of that particular sector.
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2.8 DATA COLLECTION: The inflows of FDI shall be collected by looking into various websites such as:www.UNCTAD.org, www.fdi.net, www.dipp.nic.in, www.economywatch.com. and magazines which state the FDI inflow, rates and amount over a period of 10 years.
2.9 LIMITATION OF THE STUDY: The study and the analysis are limited to the information available on the internet, as well as, various survey reports and journals. An in depth coverage of the topic was not possible as it is very vast and requires expert knowledge. This study is just an overview of such sort of investment options and there effect on our country.
2.10 RESEARCH PROCESS:
The study begins with the understanding of the topic under discussion, i.e. Foreign Investment Decision in India. It explains the importance of foreign investment, as well as, its history in India. The researcher has tried to explain the impact and affect of FDI by selecting the Banking, Insurance and Pharmaceutical sector. On the basis of the yearly and sectoral flow of FDI in this sector, the researcher has made an attempt to explain the effect and impact of FDI.Moreover, with the data on yearly flow of FDI in the country, the study aims to explain the reasons for the increase in the flow of FDI in the country.
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2.11 OVERVIEW OF THE CHAPTER:
Executive Summary
Chapter 1 Details of the theoretical background to project study. Evolution Of FDI in India. Major FDI Investors in India. Trends And Patterns of Foreign Direct Investment in India Reasons of Foreign Direct Investment In India. Investment Risks in India
Literature survey
Chapter 2 Design of the study includes statement of problem, objectives, significance and scope of the study along with methodology.
Chapter 3 Industry profile/ respondent profile Banking , Insurance , and Pharmaceuticals.
Chapter 4 Study of problem through data analysis and interpretation along with charts and tables.
Chapter 5 Gives summary of findings , conclusion and recommendations.
Bibliography Annexures M. P. BIRLA INSTITUTE OF MANAGEMENT 60
CHAPTER 3:
INDUSTRY PROFILE:
BANKING INSURANCE PHARMACEUTICALS
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3.1 BANKING SECTOR:

The Banking Industry in the country is the largest financial intermediary. According to the Finance Minister, Chidambaram, the challenges facing the Indian Banking Industry can be classified under 3Cs consolidation, convergence and competition. These 3Cs will be the key drivers for the Banking sector is still far behind the international standards in the areas of capital, technology and systems. For any nation, capital is the major fuel for economic growth. India lacks investment capital in many sectors, banking being one of them. Therefore, it becomes important to woo FDI. Capital flows in to those nations where the investment climate is favorable. Though India has been wooing FDI since the mid-nineties, it is still not in a position to attract the required investment for the growth of the economy. Foreign Investment in the Indian Banking sector is regulated by the governments Foreign Direct Investment (FDI) policy. For any nationalized bank, a ceiling of 20% on all types of foreign investments in the banks paid up capital has been stipulated in terms of the provisions of the Banking Companies Act 1970/80. When it comes to investments by Non Resident Indians (NRIs), it is restricted to 40% of the paid up capital and 20% with respect to FDIs. This is also subjected to the condition that the combination of FDI and NRI investment should be within the prescribed limit of 40% foreign equity in the sector. FIIs were allowed to acquire 24% in addition to the 40% prescribed limit. With liberalization, FDI in the banking sector was brought under the parlance of the automatic route. The central governments announcement on May 21, 2001 allowed a 49% stake of foreign investments in all private sector banks under this automatic route. With a forward looking outlook, the banking sector was further liberalized with a hike in the FDI limit from the existing 49% to 74% under the automatic route, that was inclusive of FDI investments. This came into force on March 5, 2004. This allowed a composite foreign investment stake to the extend of 74% that includes FDI, FII, NRIs, GDRs, ADRs and acquisition of shares from the existing shareholders. Ceiling cannot exceed 49% and at least 26% of the total capital in banks needs to be held by Indian Residents. These developments have opened up avenues for institutional investors.
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The FDI hike is only available to a regulated wholly owned subsidiary of a foreign bank in India. The 74% limit in Indian private banks can be through direct or portfolio route. The 74% foreign holding will include FDI, FII, initial public offer, private placements and ADRs / ADRs. Interested foreign investors should have mandatory credit rating and permission from the RBI. The current FDI norms are not applicable to Public Sector Banks (PSBs) where the foreign investment ceiling is fixed to 20%. The limit of foreign participation through the FDI route was 49% and through FII it was 49% again totaling to 98% foreign participation, which is now decreased to 74%.
FDI in Indian Banks: The government provided details of Foreign Direct Investment in private banks. They are as follows: -
ING Vysya Bank: 43.99% is held by Mauritius Holding and BBL Mauritius Investments (of Bank Brussels Lambert Group).
UTI Bank: 14.70%is held by HSBC Asia Pacific Holdings (UK) Ltd of HSBC Group.
Centurion Bank: 46.53% is held by Bank Muscat, Kephinance Investment Pvt Ltd and sabre capital worldwide.
HDFC Bank: 13.18% is held by JP Morgan Bank (ADS Depository).
ICICI Bank: 20.06% is held by Deutsche Bank Trust Company Americas (ADRs Depository).
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IndusInd Bank: 31.10%is held by IndusInd International Holdings Ltd.
Development Credit Bank: 49% is held by the Aga Khan Fund Ltd for Economic Development.
Yes Bank: 45% is held by the Rabobank International, CVC International, Russell AIF Capital Inc and Chrys Capital LLC-2.
As per RBIs proposal on ownership and governance of private sector banks, No single entity or group of related entities can have shareholdings or control, directly or indirectly, in any bank in excess of 10% of the paid-up capital of the private sector bank. Further, the percentage of FDI by a single entity or group of related entities may not exceed 10%. Although RBI may not materially alter the terms and conditions, it could give sometime to the players to reduce their stakes.
Guidelines to be followed by private banks: The private sector banks are required to maintain a minimum net worth of Rs 300 crore in their balance sheet. The promoters stake is to be capped at 10%. The FII and FDI stake by single or group of related entities to be capped at 10%. The private banks and the foreign banks that are operating in India should not hold more than 5% of the paid-up capital in another bank in India. Large industrial houses are allowed to acquire up to 10% stake in private banks. There is a continued allowance of overall ceiling of 74% foreign holding in private banks. Directors & CEO to satisfy the fit and proper criteria. The board of the bank should not have more than one member of a family or a close relative or associate.
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General Guidelines on Foreign Investment: In India, the FIIs, NRIs and the Persons of Indian Origin (PIOs) are permitted to participate in the primary as well as the Secondary Capital Market through the Portfolio Investment Scheme (PIS). The facilitates FIIs and NRIs to acquire the shares and debentures of Indian Companies via the stock exchanges in the country. The ceiling of such investments is capped at 24% of the paid-up capital for FIIs and 10% for the NRIs and PIOs. As far as the public sector banks are concerned, including the state bank of India, the limit is 20% on the paid-up capital. Here, it is to be noted that the 24% ceiling on FII can be raised only after the approval of the board and the 10% ceiling for NRIs / PIOs can be raised to 24% only after the approval of the general body of the company. The central bank of the country monitors the ceiling on the FII. NRI and PIO investments in India on a regular (daily) basis. For effective supervision, the RBI has fixed cut off points that are 2% points less than the actual ceiling of the foreign investments. Once the total purchase of the equity share of the company by the foreign investors reaches the cut off point that is below 2% of the total limit, the central bank cautions all the concerned bank branches not to purchase any more equity shares without its approval.
The Road Map: Road Map for foreign banks in India, RBI makes it clear that foreign presence must be considered only in two phases. The first phase is to last from 2004 to 2009. In the first phase, the acquisition by foreigners in Indian Private Sector banks can only relate to certain specified banks that are in a bad shape. The guidelines state that, In order to allow Indian Banks sufficient time to prepare themselves for global competition, initially entry of foreign banks will be permitted only in private sector banks that are identified by RBI for restructuring. In such banks, foreign banks would be allowed to acquire a controlling stake in a phased manner. Therefore until 2009, foreign acquisition of Indian Banks is to be limited to those that are about to collapse and have been vetted by the RBI for restructuring. Thereafter, In the second phase, after a review is made with regard to the extent of penetration of foreign investment in Indian banks and functioning of foreign banks, foreign banks may be permitted, subject to regulatory approvals and such conditions as may be prescribed,
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to enter into merger and acquisition transactions with any private sector bank in India provided it falls within the overall investment limit of 74%. These look to be very sensible guidelines, clearly indicating RBIs own assessment of the requirements of the Indian Banking System. The central bank only wants to ensure that undesirable players are kept out of the dynamic financial system. It wants only real capital brought in for the developments of the banking sector instead of unconsciously allowing vested interests to take control of the situation. Given the experience of many other developing countries, RBIs moves are crucial and timely and the road map is to be lauded for its pragmatism.
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3.2 INSURANCE SECTOR:

The union government had opened up the insurance sector for private participation in 1999 allowing them to have foreign equity up to 26%. After liberalization of insurance sector in 1999, no significant change has taken place as for as mobilizing savings by this sector is concerned. The foreign capital that followed in after the opening up of the insurance sector has not been accompanied by any technological innovation in the insurance sector. It is, therefore, suggested to bring down the entry capital norm of Rs 100 crore to Rs 60 crore for life and non-life insurance business and Rs 50 crore for health insurance, which would obviously attract more number of domestic players and wean the sector from depending on foreign equity and players. Twelve private sector companies have entered the life insurance business. Apart from the HDFC, which has a foreign equity of 18.6%, all the other private companies have foreign equity of 26%. In general insurance, 8 private companies have entered, 6 of which have foreign equity of 26%. Among the private players in general insurance, Reliance does not have any foreign equity.
Competition in Insurance Sector: Even after the liberalization of the insurance sector, the public sector insurance companies have continued to dominate the insurance market, enjoying over 76% of the market share. In fact, the LIC, which is the only public sector life insurer enjoys over 73.91% of the market share in Life Insurance. Given the huge market share enjoyed by the public sector companies, the argument, which is often made by advocates of greater liberalization that the entry of private players would bring down the cost of insurance due to the enhanced competition, does not seem to be noticed. The price making capacity of the market leaders in the public sector is likely to remain intact for the time being. The foreign insurance companies do have the reputation of charging less premium compared to the risks involved and promising abnormally high returns in order to grab greater market share. Such competition, however, although capable of reducing the cost of insurance for a while has often led to gigantic frauds and bankruptcies.
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Induction of New Technology: The issue of foreign equity is often linked to the induction of new technology and products. The private insurance companies have nothing to offer in this respect. In the insurance sector, there is no need for technology to be brought in from other countries, leave alone high technology. The mortality rates and other principles of insurance are based on the Indian conditions, because the policyholders are from this country. The products of LIC are being renamed by the private insurance companies and are sold as their own products. Hence, foreign expertise is also not involved in this sector. Therefore there is no justification even on this country. It was also argued that competition would expand market and foreign insurers would bring in better products. The size of the market has remained by and large the same and from this market the private companies are picking up the creamy sections in the metros seriously eroding the ability of public sector to subsidize its products in the rural areas.
Indias domestic savings: Foreign investors are not interested in minority holding at whatever level but in securing controlling interest. Nor they are interested in bringing additional resources for development. They are interested in gaining control over Indias domestic savings. Their overriding reason is profit.
Social Responsibilities: Foreigners have no new products to render. They confine themselves to skimming the cream of the business eschewing all social responsibility. The public sector insurance, on the contrary, is seen expanding insurance cover to hitherto uncovered area and investing heavily in social and economic development.
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3.3 PHARMACEUTICALS SECTOR:

In the current process of globalization, multinational enterprises play a starring role. The share of cross-border capital flows accounted for by the foreign direct investment (FDI) of multinationals has been rising in recent years. In fact, in recent decades cross border flows of FDI have grown at much faster rates than have flows of goods and services or people. As per Balance of Payment Manual, fifth edition FDI refers to an investment made to acquire lasting interest in enterprises operating outside of the economy of the investor. Further, in cases of FDI, the investors purpose is to gain an effective voice in the management of the enterprise. The foreign entity or group of associated entities that makes the investment is termed the direct investor. The unincorporated or incorporated enterprise a branch or subsidiary, respectively, in which direct investment is made is referred to as a direct investment enterprise. Some degree of equity ownership is almost always considered to be associated with an effective voice in the management of an enterprise. In other words, a firm becomes multinational when through FDI it establishes in two or more countries business enterprises in which it exercises some minimum level of ownership control. Foreign Direct Investment is permitted in India through various forms such as through financial collaborations, capital markets and through private placements or preferential allotments. Foreign Direct Investment policy of Government of India as stated at confederation of Indian Industry home page perceived as very simple and investor friendly. India welcomes foreign investment in virtually all the sectors except defense, railways and atomic energy. Specially, no government approval is required for FDI except for the small negative list notified by the government. Foreign Direct Investment policy towards Drugs and pharmaceuticals is that FDI up to 100% is permitted on the automatic route for manufacture of drugs and pharmaceuticals, provided the activity does not attract compulsory licensing or involve use of recombinant DNA technology, and specific cell/tissue targeted formulations. FDI proposals for the manufacture of licensable drugs and pharmaceuticals and bulk drugs
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produced by recombinant DNA technology, and specific cell/tissue targeted formulations will require prior government approval.
Indian Pharma Industry: The Indian pharmaceutical industry has been many ups and downs since the time of its establishment. Today, it is one of the major players in the bulk drugs and generics segments in the world market. Indian pharmaceutical products enjoy both cost and labour advantages. The pharmaceuticals industry in India has during the last 30 years, grown from a low capital-intensive formulations activity to a highly sophisticated and modern industrial segment. The key facts of Indian pharmaceutical industry are that it has an annual turnover of Rs 226 billion with a growth of 5.1% (2003). Indias share of world Pharma market is 1.0% in value and 8% in volume terms. It has globally ranked as 4th in terms of volume and 13th in terms of value. The table-2.4.A indicates ranking of top ten companies based on market capitalization. There is continuous growth in investment in fixed assets of Pharma industry support with an increase in operating cash flows over period of six years.
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CHAPTER 4:
DATA ANALYSIS AND INTERPRETATION:
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4.1 FDI from 2000-2009:
FDI Inflows
25000 20000 15000 10000 5000 0 2000- 2001- 2002- 2003- 2004- 2005- 2006- 2007- 200801 02 03 04 05 06 07 08 09 Years
Interpretaton:
This is the chart showing the trends,patterns and the movement of FDI inflows in Indian economy. After 1999-2000 in the year 2000-2001 there is a sudden decrease in FDI in India due to weaken economy, political instability and all other factors. Then it moves constantly same till the year 2006-2007 when FDI start increasing at a good speed and quantity, its mainly because India starts to be considered as best destination for investment purposes due to huge tax breaks,development,good market,etc.
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4.2 FDI in 2008-2009:

FDI Inflows
4000 3500 3000 2500 2000 1500 1000 500 0 April May June July Aug Sept Oct Nov Dec Jan Months 2008-09
Interpretation:
This graph shows the FDI Inflows in India in the previous year i.e. 2008-2009 monthly.First two months has approximately the same and good amount of FDI Inflows but after May it decrease due to global recession which affect FDI and India indirectly,but many research and analysis shows that India is least affected by this recession as compared to other countries.
4.3 Country Wise FDI Inflows:

FDI Inflows
160000 140000 120000 100000 80000 60000 40000 20000 0 MAURITIUS NETHERLANDS Countries FRANCE
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Interpretation:
This graph shows that Mauritius is in the leading position accounting for about 43.3 percent of total FDI inflows into India, then it is followed by Singapore (9%), U.S.A. (8%),U.K, Netherlands, Japan, Germany and others. It is all because of tax breaks, benefits and advantages they get in India and give birth to FDI.
4.4 State Wise FDI Inflows:

FDI Inflows
30000 25000 20000 15000 10000 5000 0 Munbai Ahmedabad Chennai States Kolkata Chandigarh Series2 Series1
Interpretation:
This table shows the state receiving highest FDI inflows and in this Mumbai is the first one to receive highest FDI inflows with 35%,then New Delhi with 16%, Ahmedabad,Bangalore and then followed by others.
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4.5 Sector wise FDI Inflows:

FDI Inflows
80000 70000 60000 50000 40000 30000 20000 10000 0 Service Real Estate Power Chemicals
Sectors
Interpretation:
This table shows sector wise FDI inflows in which service sector receives the highest FDI inflows with 23%, then it is followed by computer hardware and software, telecommunications, construction and others.
4.6 years:
FDI Inflows in BANKING and INSURANCE Sectors over the
Years
2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
FDI Inflows
1551 1235 2106 2565 21047 26589 23045
Growth(%)
-20.37 70.53 21.79 720.55 26.33 -13.33
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Interpretation:
As we can see in the table there is a downturn in FDI inflows in the year 2003-2004 as compared to the year 2002-2003 i.e of 20.37 %(-ve), this is due political instability and government policies.Then we can see there is gradual increase in the growth of the FDI inflows except in the year 2006-2007 which has abnormal growth as compared to previous years, it is due to lot of FDI and NRI deposits schemes and also the various tax breaks are given to the foreign companies that overall attract FDI.
FDI Inflows
30000 25000 20000 15000 10000 5000 0 20022003 20032004 20042005 20052006 Years 20062007 20072008 20082009
4.7 FDI Inflows in PHARMACEUTICAL Sector over the years: Years

2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
FDI Inflows
192 502 1343 760 970 1140 1438
Growth(%)
161.46 167.53 -43.41 27.63 17.525 26.14
76
Interpretation:
By going through the table we can see there is a good amount of growth in the year 20032004 as compared to the previous year , this can be because there is introduction of new technology, and more foreign firms had invested there by increasing the amount of FDI inflows in that year.Then in the year 2005-2006 there is negative growth as there were economic crisis were going on in that year and this sector was very much affected by that and thats the reason it attracts very less FDI inflows.Then till now there is a continuous and normal growth over the year in this sector.
FDI Inflows 1600 1400 1200 1000 800 600 400 200 0 20022003 20032004 20042005 20052006 Years 20062007 20072008 20082009
4.8 Hypothesis:
The intention of the researcher is to find out the future FDI inflows and future growth attached to it in a particular sector.To accomplish this task first the method of least square is used to find out the future FDI inflows in a particular sector and then with that regression analysis is done to find out the growth in that particular sector.
HO: With the inflows of FDI in a particular sector, there is no significant increase in the growth of that particular sector. H1: With the inflows of FDI in a particular sector, there is a significant increase in the growth of that particular sector. M. P. BIRLA INSTITUTE OF MANAGEMENT 77
4.8.1 For Banking and Insurance sector:

Least Square Method:
Years 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 TOTAL 2009-2010 (predicted)
FDI Inflows(y) 1551 1235 2106 2565 21047 26589 23045 78138
Range(x) -3 -2 -1 0 1 2 3 0
x^2 9 4 1 0 1 4 9 28
Xy -4653 -2470 -2106 0 21047 53178 69135 134131
Formula: Y=a + bx A=sum of y / n A= 78138 / 7 = 11162.57
B= sum of xy / sum of x^2 B= 134131 / 28 = 4790.393
Y= a + bx Y= 11162.57 + (4790.393 * x) For predicting FDI inflows for the year 2009-2010 we would take range(x) value as 4. Y= 11162.57 + (4790.393 * 4) M. P. BIRLA INSTITUTE OF MANAGEMENT 78
=30324.14 So FDI inflows for the year 2009-2010 will be 30324.14 (predicted)
Trends of FDI inflows from the year 2002-2010:
35000 30000 25000 20000 Series1 15000 10000 5000 0 1 2 3 4 5 6 7 8
Now we will apply:
Regression Analysis:
The following regression statistics is found through excel software:
Regression Statistics: Multiple R R Square Adjusted R Square Standard Error Observations = 0.357104 = 0.127523 = -0.04697 = 274.9488 =7
Coefficients:
79
Intercept X Variable 1
= 23.65477 = 0.00819
Y= a + bx Where, a= intercept b= x variable 1 x= predicted value of FDI inflows for the year 2009-2010 i.e. (30324.14)
Y= a + bx =23.65477 + (0.00819 * 30324.14) = 271.9945
So future growth will be 271.9945 %
Interpretation:
First from least square method we came to know future FDI Inflows in the year 20092010 i.e. 30324.14 (predicted value) if the trends and patterns of FDI inflows in Banking and Insurance remains same and constant in the future as it was in the past years.Future FDI Inflows for the year 2009-2010 has been calculated on the basis of historical and secondary data available taking all variables constant and same over the years. The predicted FDI value may change due to various economic factors within the year. Then we had applied Regression analysis to find out the growth in the particular sector i.e. 271.9945% by considering the calculated predicted value of FDI inflows. By this we can conclude that there is a relationship between FDI and the growth of the Banking and Insurance sector and there is a direct impact of FDI on Banking and Insurance sector. So FDI and the growth of Banking and Insurance sector are inter-related and for that reason we have rejected the Null Hypothesis (HO), and accepts the Alternate Hypothesis (H1) i.e. with the increase in FDI in a particular sector, there is a significant increase in the growth of that particular sector.
80
4.8.2 For Pharmaceutical sector:

Years 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 TOTAL 2009-2010 FDI Inflows(y) 192 502 1343 760 970 1140 1438 6345 Range (x) -3 -2 -1 0 1 2 3 0 x^2 9 4 1 0 1 4 9 28 Xy -576 -1004 -1343 0 970 2280 4314 4641
Formula: Y=a + bx A=sum of y / n A= 6345 / 7 = 906.43
B= sum of xy / sum of x^2 B= 4641 / 28 = 165.75
Y= a + bx Y= 906.43 + (165.75 * x) For predicting FDI inflows for the year 2009-2010 we would take range(x) value as 4. Y= 906.43 + (165.75 * 4) = 1569.43
So FDI inflows for the year 2009-2010 will be 1569.43 (predicted) M. P. BIRLA INSTITUTE OF MANAGEMENT 81
Trends of FDI Inflows from the year 2002-2010:
inflows 1800 1600 1400 1200 1000 800 600 400 200 0 1 2 3 4 5 6 7 8 inflows
Now we will apply:
Regression Analysis:
The following regression statistics is found through excel software:
Regression Statistics: Multiple R R Square Adjusted R Square Standard Error Observations = 0.154007 = 0.023718 = -0.17154 = 87.91006 =7
Coefficients: Intercept X Variable 1 = 25.91198 = 0.027658
82
Y= a + bx Where, a= intercept b= x variable 1 x= predicted value of FDI inflows for the year 2009-2010 i.e. (1569.43)
Y= a + bx =25.91198 + (0.027658* 1569.43) = 67.31955
So future growth will be 67.31955 %
Interpretation:
First from least square method we came to know future FDI Inflows in the year 20092010 i.e. 1569.43 (predicted value) if the trends and patterns of FDI inflows in Pharmaceutical sector remains same and constant in the future as it was in the past years. Future FDI Inflows for the year 2009-2010 has been calculated on the basis of historical and secondary data available taking all variables constant and same over the years. The predicted FDI value may change due to various economic factors within the year. Then we had applied Regression analysis to find out the growth in the Pharmaceutical sector i.e. 67.31955% by considering the calculated predicted value of FDI inflows. By this we can conclude that there is a relationship between FDI and the growth of the Banking and Insurance sector and there is a direct impact of FDI on Pharmaceutical sector. So FDI and the growth of Pharmaceutical sector are inter-related and for that reason we have rejected Null Hypothesis (HO), and accept the Alternate Hypothesis (H1) i.e. with the increase in FDI in a particular sector, there is a significant increase in the growth of that particular sector.
83
CHAPTER 5:
FINDINGS, CONCLUSION AND RECOMMENDATIONS:
84
5.1 FINDINGS:
These are some of the Findings from the Report: Inviting more countries for investment to exploit the potential resources. Indian market is suitable for any sectors. Investment is done on the basis of increasing the status of our country. Government approach towards the FDI is favorable to some extend. Increasing the FDI limit in each sector will give the control. FDI policies are very strict which will control the malpractices. Huge competition takes place in the market. In each sector the number of options and selections are increased. Innovations and new techniques come into existence. Changing lifestyle and cultural activities. Maximum utilization of available resources. Providing more employment opportunities. Developing the remote areas. Domestic players are affected to play well in the market. Must focus more on human needs and their development. Certain limits will help the domestic players to enter into market. Inflow of FDI into the country helps to develop and grow the domestic economy. Induction of New Technology came into the country with the inflows of FDI. With the inflows of Foreign Direct Investment into the countrys economy, market situations and conditions goes up. Growth and Development of the sectors of countrys economy are dependent on the inflow of Foreign Direct Investment. It is found that India is the least affected Country in the world by the global recession as it has a stable policies, procedures and many other factors India is been the favorites, amongst all Asian countries for foreign investors as it has developing, attractive and growing economy.
85
5.2 CONCLUSION:
Banking Sector: The RBIs road map for foreign ownership limits the role of FDI in banking until 2009. Foreign banks can grow organically or through acquisitions. There is a limitation on foreign banks growing organically:- India is willing to allow no more than 15 branches to foreign banks every year in the ongoing WTO negotiations on trade in services. As for acquisitions, the RBI road map limits foreign equity to 5% in private banks in general. A higher stake will be permitted only in private banks identified by the RBI as candidates for restructuring. This effectively pre-clued the better-run banks serving as vehicles for an enlarged foreign presence in the Indian market. Only after 2009 will foreign banks be permitted to acquire up to 74% equity in private Indian banks. Even then, public sector banks may not be available to foreign banks, if the present policy stance towards state ownership continues. Insurance Sector: A major role played by the insurance sector is to mobilize national savings and canalizes them into investments in different sectors of the economy. However, no significant change seems to have occurred, as far as mobilizing savings by the insurance sector is concerned, following the liberalization of the insurance sector in 1999. Data from the RBI shows that the trend of the savings in life insurance by the household to GDP ratio, while showing a clear upward trend through the 1990s signifying increasing business for the insurance sector, does not show any structural break. After 1999 it can therefore be inferred that the foreign capital which flowed in after the opening up of the insurance sector to private players has not been accompanied by any technological innovation in the insurance business, which would have created greater dynamism in savings mobilization.The business activities of the private companies are limited in urban areas, where a fairly good market network of the public sector insurance companies already exists. The glaring evidence for this is the composition of agents operating in the insurance sector. On account of their urban-bond operational activity, the private insurance companies can neither increase the insurance base of the economy significantly, nor lead to substantially, nor lead to substantial employment generation.
86
Given this background, further increase in foreign participation is only going to yield on intensified competition for the urban insurance markets, rather than lead to a growth in overall savings. To place the proposal for hike in FDI, the government advanced such arguments that FDI would continue to be encouraged and activity sought, particularly in the areas of infrastructure, high technology and exports. Pharmaceutical Sector: The foreign direct investment has been allowed in various sectors of industries. In general, Government of Indias FDI policy is perceived as more liberal and investor friendly as compared to others. Government has allowed 100% foreign direct investment in drugs and pharmaceuticals with the increased competition in global Pharma markets; pharmaceutical firms face several challenges in their quest to retain their competitiveness. There are various dimensions to address the situation.It brings to an end that both Indian and foreign owned companies are doing well in terms of financial performance and there is a further scope to measure the non-financial performance of both the companies and find the difference.
The Net Benefits of Global Investment As you can see, international investment, like many aspects of globalization, presents opportunities as well as challenges. You may wonder where the balance of costs and benefits lies. The question is particularly acute for developing countries: many of the greatest controversies about financial liberalization covered in this issue brief are raised when investment flows from developed to developing countries. To be sure, many of the problems of developing countries stem from internal deficiencies, ranging from the inadequate supervision of the banking sector to corruption or inadequate labor and environmental standards. On the one hand, very few economists - even among the harshest critics of financial liberalization - dispute that international investment can be a powerful engine for economic growth. A look at development statistics shows that there is a correlation between investment and growth in developing countries. Proponents of liberalization such as David Dollar of the World Bank point out that essentially no developing country
87
has managed to achieve rapid and sustained growth, successfully raising the prosperity levels of their population, without increasing their openness to foreign investment. But critics question the extent to which these success stories can be attributed to foreign investment alone. They tend to argue that what is most important for a developing country is that it supports an environment that is generally supportive of investment. That is, when the climate is favorable for domestic investment, it is likely to be favorable for international investment. Economists from this school of thought - while not denying the importance of international investment - tend to promote policy prescriptions that are more focused on internal concerns. For example, when asking whether a developing country with a limited government budget should spend funds improving infrastructure at an export processing zone to help attract foreign investors, or spend that money on local and national courts, police and prosecutors to improve the management of their justice system, which will eventually help control corruption, they would argue for the latter. Their reading of the data posits that investment tends to follow growth, not lead it. Other economists have suggested that, when disaggregating the data on growth and investment in developing countries, many of the supposed problems associated with foreign investment flows can be attributed to certain kinds of restrictions on investment. According to Theodore Moran: "Foreign direct investment is most likely to be harmful - actually damaging - to the growth and welfare of developing countries and the economies-in-transition when the investor is sheltered from competition in the domestic market and burdened with high domestic content, mandatory joint ventures and technology-sharing requirements." (Moran, 1999) Example of FDI Failure Investment by Enron in the Power Sector.
To conclude Foreign Direct Investment in the country is very much necessary but it should be under proper vigilance and restricted to a certain limit by the means of different policies and procedures.
88
5.3 RECOMMENDATIONS:
These are some of the Recommendations from the report: The majority Directors on the board including Chairman, Managing Directors and CEO should be resident Indian citizens. Resident Indian promoters should hold at least 10 percent equity of the license company. India not as much an export or FDI target as first wherewithal to instill confidence among investors and buyers. India needs to strengthen domestic manufacturing units and niche market Foreign Investment Implementation Authority (FIIA) mechanism has been activated to ensure speedy resolution of investment related problems, which has been widely acknowledged as an effective problem-solving platform. Experience shows that a blind faith in the market, coupled with relaxing FDI limits, will not lead to increased market share or expand the manufacturing base. The key here is not FDI limits but the cost of services and the thrust that the government is willing to put into these sectors. No remote access should be provided to any equipment manufacturer or any other agency outside the country for any maintenance/repairs by licensee. Foreign Direct Investment is very much necessary for the countrys economy and countrys growth and development but it should be under proper vigilance, policies and procedures to safeguard the domestic and overall economy of the country. As report shows that there is a importance and benefits of Foreign Direct Investment in Indias growth and development, so Indian government should take steps like having good and attractive markets, giving tax breaks to foreign investors, having a sound economy, having good policies and procedures, having a stable political structure and as like many others to attract more and more Foreign Direct investment into India.
89
BIBLIOGRAPHY
90
6.1 BIBLIOGRAPHY:
Books references:
Charles W. Hill - International Business - Tata McGraw-Hill - 2007 Eun-Resnick - International Financial Management Tata McGraw-Hill - 2007 Monthly bulletin of RBI. Economic survey report. Articles on FDI from dailies & magazines. Annual reports of FDI companies.
Websites:
http://www.globalpolicy.org http://www.valuenotes.com http://outlookmoney.com http://www.atkearney.com http://www.indiaonestop.com http://rru.worldbank.org http:// www.going-global.com http://www. finance.indiamart.com http:// www.ipanet.net
91
ANNEXURES:
92
7.1 FDI DATA:
7.1.1 FDI EQUITY INFLOWS:
A. CUMULATIVE FDI EQUITY INFLOWS (equity capital components only):
1 Cumulative amount of FDI inflows . (from August 1991 to January 2009)
Rs. 4,36,400 crore
US$ 103,100 million
B. FDI EQUITY INFLOWS :
1.
Cumulative amount of FDI inflows (from April 2000 to March 2008)
Rs. 2,70,100 crore
US$ 62,509 million
2.
Amount of FDI inflows during 2008-09 (from April 2008 to January 2009)
Rs.105,673 crore
US$ 23,885 million
3.
Cumulative amount of FDI inflows (updated up to January 2009)
Rs. 3,75,772 crore
US$ 86,394 million
93
C. FDI EQUITY INFLOWS DURING FINANCIAL YEAR 2008-09:
Financial Year 2008-09 (April-March)
Amount of FDI inflows
(In Rs. crore) (In US$ mn) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. April 2008 May 2008 June 2008 July 2008 August 2008 September 2008 October 2008 November 2008 December 2008 January 2009 15,005 16,563 10,244 9,627 9,995 11,676 7,284 5,305 6,626 13,347 105,673 58,203 (+) 81 % 3,749 3,932 2,392 2,247 2,328 2,562 1,497 1,083 1,362 2,733 23,885 14,466 (+) 65 %
2008-09 (up to January 2009) 2007-08 (up to January 2008) %age growth over last year
94
D. FDI EQUITY INFLOWS DURING CALENDAR YEAR 2008:
Calendar Year 2008 (Jan.-Dec.)
Amount of FDI inflows
(In Rs. crore) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11 12. January 2008 February 2008 March 2008 April 2008 May 2008 June 2008 July 2008 August 2008 September 2008 October 2008 November 2008 December 2008 6,960 22,529 17,932 15,005 16,563 10,244 9,627 9,995 11,676 7,284 5,305 6,626 135,167 79,736 (+) 70 %
(In US$ mn) 1,767 5,670 4,443 3,749 3,932 2,392 2,247 2,328 2,562 1,497 1,083 1,362 33,033 19,156 (+) 72 %
Year 2008( up to December 2008) Year 2007 (up to December 2007) %age growth over last year
95
E. SHARE OF TOP INVESTING COUNTRIES FDI EQUITY INFLOWS (Financial year-wise):

Amount Rupees in crores (US$ in million)
Ran ks
Country
2005-06 (AprilMarch)
2008-09 Cumulati %age to total (April ve Jan.09 ) Inflows Inflows (April 00 (in terms to of Jan. 09) rupees) 42,394 (9,545) 14,636 (3,237) 7,192 (1,639) 3,478 (791) 3,636 (826) 1,171 (264) 2,623 (604) 4,738 (1,040) 1,885 (425) 947 (220) 105,673 (23,885) 152,768 (35,180) 32,761 (7,594) 27,149 (6,172) 22,542 (5,154) 15,557 (3,531) 10,507 (2,390) 9,361 (2,148) 8,805 (2,025) 5,269 (1,186) 3,820 (883) 375,773 (86,396) 43 %
1.
MAURITIUS
11,441 (2,570) 1,218 (275) 2,210 (502) 1,164 (266) 340 (76) 925 (208) 1,345 (303) 310 (70) 82 (18) 219 (49) 24,613 (5,546)
28,759 (6,363) 2,662 (578) 3,861 (856) 8,389 (1,878) 2,905 (644)
44,483 (11,096) 12,319 (3,073) 4,377 (1,089) 4,690 (1,176) 2,780 (695)
2.
SINGAPORE
9%
3.
U.S.A.
8%
4.
U.K.
6%
5.
NETHERLANDS
4%
6.
JAPAN
382 3,336 (85) (815) 540 (120) 266 (58) 528 (117) 1,174 (260) 70,630 (15,726) 2,075 (514) 3,385 (834) 583 (145) 1,039 (258) 98,664 (24,579)
3%
7.
GERMANY
3%
8.
CYPRUS
3%
9.
FRANCE
2%
10.
U.A.E.
1%
TOTAL FDI INFLOWS *
96
F. SECTORS ATTRACTING HIGHEST FDI EQUITY INFLOWS:

Amount Rupees in crores (US$ in million)
Ran ks
Sector
200506 (AprilMarch )
2008-09 (April Jan. 09)
1.
2.
3.
4. 5.
SERVICES SECTOR (financial & nonfinancial) COMPUTER SOFTWARE & HARDWARE TELECOMMUNICATI ONS (radio,paging, cellular mobile,basic telephone services) HOUSING & REAL ESTATE CONSTRUCTION ACTIVITIES (including roads & highways) AUTOMOBILE INDUSTRY POWER METALLURGICAL INDUSTRIES PETROLEUM & NATURAL GAS CEHMICALS (other than fertilizers)
2,399 (543) 6,172 (1,375) 2,776 (624)
21,047 (4,664) 11,786 (2,614) 2,155 (478)
26,589 (6,615) 5,623 (1,410) 5,103 (1,261)
Cumulati % age ve to Inflows total (April 00 Inflow to s Jan. 09) (In terms of rupee s) 23,045 78,742 22 % (5,061) (18,118) 6,944 (1,599) 10,797 (2,374) 39,111 (8,876) 27,544 (6,216) 11 %
8%
171 (38) 667 (151)
2,121 (467) 4,424 (985)
8,749 (2,179) 6,989 (1,743)
10,632 (2,408) 7,974 (1,866)
21,794 (5,119) 21,360 (5,029)
6% 6%
6.
630 (143) 386 (87) 6,540 (147) 64 (14) 1,731 (390)
1,254 (276) 713 (157) 7,866 (173) 401 (89) 930 (205)
2,697 (675) 3,875 (967) 4,686 (1,177) 5,729 (1,427) 920 (229)
4,824 (1,074) 4,079 (924) 3,608 (850) 1,196 (263)
14,680 (3,310) 13,709 (3,130) 10,956 (2,613) 9,442 (2,244)
4%
7. 8. 9.
4% 3% 3%
10.
2,561 8,701 (579) (1,964)
2%
97
G. STATEMENT ON RBIS REGIONAL OFFICE-WISE (WITH STATE COVERED) FDI EQUITY INFLOWS (from April 2000 to January 2009):
Ran ks RBIs - Regional Office State covered Amount of FDI Inflows %age with FDI inflows (in rupee terms) US$ in million 35.19
Rupees in crores
1.
MUMBAI
MAHARASHTRA, DADRA & NAGAR HAVELI, DAMAN & DIU DELHI, PART OF UP AND HARYANA
123,773.94
28,619.3
2.
NEW DELHI
55,308.98
12,716.9
15.72
3. 4. 5.
AHMEDABAD BANGALORE CHENNAI
GUJARAT KARNATAKA TAMIL NADU, PONDICHERRY ANDHRA PRADESH WEST BENGAL, SIKKIM, ANDAMAN & NICOBAR ISLANDS RAJASTHAN CHANDIGARH, PUNJAB, HARYANA, HIMACHAL PRADESH GOA
23,877.01 23,830.83 19,902.78
5,496.2 5,499.6 4,491.9
6.79 6.78 5.66
6. 7.
HYDERABAD KOLKATA
14,657.51 5,379.93
3,408.7 1,271.6
4.17 1.53
8. 9.
JAIPUR CHANDIGARH`
2,007.20 1,754.72
425.7 384.2
0.57 0.50
10.
PANAJI
1,128.69
250.8
0.32
98
11.
KOCHI
KERALA, LAKSHADWEEP
837.73
194.0
0.24
12.
BHOPAL
MADHYA PRADESH, CHATTISGARH ORISSA
565.47
129.1
0.16
13.
BHUBANESHWA R GUWAHATI
437.92
97.4
0.12
14.
ASSAM, ARUNACHAL PRADESH, MANIPUR, MEGHALAYA, MIZORAM, NAGALAND, TRIPURA UTTAR PRADESH, UTTRANCHAL BIHAR, JHARKHAND
228.85
53.2
0.07
15.
KANPUR
71.66
16.4
0.02
16. 17.
PATNA
1.78 77,966.01 351,731.09
0.4 17,955.4 81,010.6 3,301.1
0.00 22.16 100.00 -
RBIS REGIONS NOT INDICATED
Sub. Total 18. Stock Swapped (from 2002 to 2009) Advance of Inflows (from 2000 to 2004) RBIs-NRI Schemes (from 2000 to 2002)
14,546.64
19.
8,962.22 1,962.8 533.06 121.3 -
20.
GRAND TOTAL (from April 2000 to January 2009)
375,773.01
86,395.8
99
India: Foreign Investment Inflows (Fiscal 2007-08) (In US$ Million)

SEGME NT 19 9596 A. Direct Invest ment (I+II+I II) 1. Equity (a+b+c+ d+e) a. Govt. (SIA/FIP B) b. RBI c. NRI d. Acquisiti on of shares. e. Equity capital of unincorp orated bodies# Reinvest ed earnings + Other capital ++ B. Portfoli o Invest ment (a+b+c ) a. GDRs/A DRs## b. FIIs** c. Offshore funds & others Total (A+B) 19 9697 19 9798 19 9899 YEAR 19 9920 00
20 0001
20 0102
20 0203
20 0304
20 0405
20 0506
20 0607
214 4
282 1
355 7
246 2
215 5
402 9
613 0
503 5
432 2
605 1
896 1
220 79
214 4 124 9 169 715
282 1 192 2 135 639
355 7 275 4 202 241
246 2 182 1 179 62
215 5 141 0 171 84
240 0 145 6 454 67
409 5 222 1 767 35
276 4
222 9
377 8 106 2 125 8 -
597 5 112 6 223 3 218 1
164 82 215 6 715 1 627 8
919 739 -
928 534 -
11
125
360
400
490
362
881
916
735
930
61
191
190
32
528
435
897
135 0
164 5
183 3
146 0
190 4
276 0
509 1
279
390
438
633
369
226
506
274 8
331 2
182 8
-61
302 6
276 0
202 1
979
113 77
931 5
124 92
700 3
683 200 9
136 6 192 6
645
270 390
768 213 5
831 184 7
477 150 5
600
459 109 18
613 868 6
255 2 992 6
377 6 322 5
979
377
56
20
204
59
123
82
39
16
14
489 2
613 3
538 5
240 1
518 1
678 9
815 1
601 4
156 99
153 66
214 53
290 82
100
India: Foreign Investment Inflows (Fiscal 2007-08)

(In US$ Million)
MONTH SEGMEN T Ap r. Ma y Ju ne Jul y Au g. Se pt. Oct. No v. De c. Ja n. Fe b.
Apr . to Feb
A. Direct Investm ent (I+II+I II)
16 43
21 20
12 38
70 5
83 1
71 3
202 7
18 64
15 58
17 67
56 70
254 55
1. Equity (a+b+c+ d+e)
16 43
21 20
12 38
70 5
83 1
71 3
202 7
18 64
15 58
17 67
56 70
206 36
a. Govt. (SIA/FIP B)
76
84 7
17 7
17 7
76
11 7
95
82
12 7
22 1
25 9
225 4
b. RBI
69 9 -
10 50 -
91 2 -
51 5 -
51 2 -
20 1 -
171 0 -
96 5 -
13 85 -
88 4 -
47 04 -
135 37 -
c. NRI
d. Acquisiti on of shares.
86 8
22 3
14 9
13
24 3
39 5
222
81 7
46
66 2
70 7
434 5
101
e. Equity capital of unincorp orated bodies#
500
Reinvest ed earnings +
447 6
Other capital ++
343
B. Portfoli o Investm ent (a+b+c)
19 74
18 52
36 64
67 13
28 75
70 81
956 4
10 7
52 94
67 39
89 04
309 95
a. GDRs/AD Rs##
11
30 0
20 28
44 8
273 1
15 8
27 08
24 9
87
872 6
b. FIIs**
19 63
18 47
32 79
46 85
33 23
70 57
683 3
26 5
23 96
64 90
89 91
219 71
c. Offshore funds & others
85
23
19 0
298
Total (A+B)
36 17
39 72
49 02
74 18
20 44
77 94
115 91
17 57
68 52
85 06
32 34
564 50
102
7.1.2 Sector-wise FDI Inflows:
Sector-wise FDI Inflows ( From April 2000 to January 2009)

AMOUNT OF FDI INFLOWS SECTOR In Rs Million In US$ Million PERCENT OF TOTAL FDI INFLOWS (In terms of Rs)
Services Sector Computer Software & hardware Telecommunications Construction Activities Automobile Housing & Real estate Power Chemicals (Other than Fertilizers) Ports Metallurgical industries Electrical Equipments Cement & Gypsum Products Petroleum & Natural Gas Trading Consultancy Services Hotel and Tourism Food Processing Industries Electronics Misc. Mechanical & Engineering industries
787420.81 391109.74 275441.38 213595.12 146799.41 217936.02 137089.37 87008.07 63290.50 109563.20 57379.63 70781.19 94417.17 62416.85 48647.43 52500.05 34362.49 33914.75 28310.13
18118.40 8876.43 6215.55 5029.01 3310.23 5118.85 3129.66 1964.06 1551.88 2612.85 1324.92 1621.03 2244.17 1480.94 1112.92 1217.50 760.32 748.57 648.86
22.39 11.12 7.83 6.07 4.17 6.20 3.90 2.47 1.80 3.11 1.63 2.01 2.68 1.77 1.38 1.49 0.98 0.96 0.80
103
Information & Broadcasting (Incl. Print media) Mining Textiles (Incl. Dyed, Printed) Sea Transport Hospital & Diagnostic Centres Fermentation Industries Machine Tools Air Transport ( Incl. air freight) Ceramics Rubber Goods Agriculture Services Industrial Machinery Paper & Pulp Diamond & Gold Ornaments Agricultural Machinery Earth Moving Machinery Commercial, Office & Household Equipments Glass Printing of Books (Incl. Litho printing industry) Soaps, Cosmetics and Toilet Preparations Medical & Surgical Appliances Education Fertilizers Photographic raw Film & Paper Railway related components
52115.90 21204.94 26736.94 17653.81 27241.42 27743.46 10955.32 10552.19 17462.43 11392.76 7937.13 13748.27 18612.76 11014.62 6649.12 5749.34 5798.71 5683.60 6066.23 4984.88 8087.87 14374.11 4282.17 2580.20 3281.85
1194.20 522.86 611.03 402.59 644.73 658.04 247.88 240.71 409.92 247.60 188.39 316.97 429.06 248.15 148.37 134.22 132.74 126.51 135.80 114.54 177.42 309.09 96.59 63.90 75.11
1.48 0.60 0.76 0.50 0.77 0.79 0.31 0.30 0.50 0.32 0.23 0.39 0.53 0.31 0.19 0.16 0.16 0.16 0.17 0.14 0.23 0.41 0.12 0.07 0.09
104
Vegetable oils and Vanaspati Sugar Tea & Coffee (Processing & warehousing coffee & rubber) Leather, Leathergoods & Piackers Non-conventional energy Industrial instruments Scientific instruments Glue and Gelatine Boilers & steam generating plants Dye-Stuffs Retail Trading (Single brand) Coal Production Coir Timber products Prime Mover (Other than electrical generators Defence Industries Mathematical, Surveying & drawing instruments Misc. industries Sub Total Stock Swapped (from 2002 to 2008) Advance of Inflows (from 2000 to 2004) RBI's NRI Schemes Grand Total
3769.18 1836.64 3774.81 1621.56 3640.58 1368.36 511.44 385.80 238.67 406.48 1074.67 614.10 50.17 139.59 178.30 6.87 50.35 180561.54 3517310.79 145466.35 89622.22 5330.60 3757729.96
83.69 41.58 84.28 36.74 86.84 29.47 11.64 8.44 5.40 9.52 25.18 15.42 1.12 3.10 3.72 0.15 1.27 4162.55 81010.63 3391.07 1962.82 121.33 86395.85
0.11 0.05 0.11 0.05 0.10 0.04 0.01 0.01 0.01 0.01 0.03 0.02 0.00 0.00 0.01 0.00 0.00 5.19 100.00 -
105
7.1.3 Country wise FDI inflows:
Country wise FDI inflows (April 2000 to January 2009)

% to total FDI Inflows ( In terms of Rs)
COUNTRY
Amount of FDI Inflows
(In Rs. million) Mauritius USA UK Singapore Netherlands Japan Germany Cyprus France Switzerland UAE Cayman Island Bermuda Sweden Korea (South) British Virginia Italy Hong Kong Spain Malaysia Canada Denmark Belgium Australia Austria South Africa 1527677.20 271491.44 225415.64 327613.84 155573.88 105068.17 93614.01 88051.59 52689.43 34234.63 38197.22 26936.84 21888.37 22614.91 20009.67 16816.04 25016.34 15675.71 18906.28 9359.88 10369.53 5454.95 12561.91 11105.07 2233.62 3464.20
(In US$ million) 35180.30 6171.93 5153.81 7594.32 3530.94 2390.29 2147.51 2024.72 1185.82 779.25 882.86 654.27 488.77 513.53 457.02 391.90 593.13 363.78 441.46 206.09 238.99 122.92 279.38 249.09 51.29 76.44 43.43 7.72 6.41 9.31 4.42 2.99 2.66 2.50 1.50 0.97 1.09 0.77 0.62 0.64 0.57 0.48 0.71 0.45 0.54 0.27 0.29 0.16 0.36 0.32 0.06 0.10
106
Luxembourg Russia Ireland Oman Finland Thailand West Indies Indonesia Norway Bahrain Nevis Ice Land Gibraltar Moracco Panama Saudi Arabia Taiwan Liberia Bahamas Kenya Slovenia Sri Lanka Myanmar Israel Kuwait Portugal Malta Kazakhstan British Isles Channel Island New Zealand Isle of Man Tunisia Liechtenstein Slovakia Belorussia
4814.43 17555.24 3183.30 2575.13 2603.48 1891.88 2228.72 1566.97 1325.32 1087.21 1337.44 811.13 815.06 699.77 756.43 690.71 824.35 578.42 632.55 536.33 390.74 496.15 357.49 955.57 318.87 344.02 289.19 281.05 306.42 398.38 556.08 228.08 198.40 193.42 189.83 474.07
109.90 365.38 75.59 60.44 59.34 44.10 51.75 34.03 30.82 24.94 30.64 18.61 19.06 15.21 17.42 15.97 19.58 13.09 14.27 11.64 8.24 11.50 8.96 22.92 6.93 8.46 6.55 7.07 7.05 9.06 13.56 5.25 4.31 4.23 4.40 11.66
0.14 0.50 0.09 0.07 0.07 0.05 0.06 0.04 0.04 0.03 0.04 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.01 0.01 0.01 0.03 0.01 0.01 0.01 0.01 0.01 0.01 0.02 0.01 0.01 0.01 0.01 0.02
107
China Korea (North) Nigeria Fiji Islands Maldives Uruguay Ghana Chile Scotland Poland Virgin Islands St. Vincent Yemen Seychelles Cuba Brazil Columbia Uganda Ukraine Philippines Czech Republic Aruba Croatia Greece Yugoslavia Lebanon Jamaica Estonia Hungary Vanuatu Bulgaria Tanzania Vietnam Qatar Zambia Turkey
505.58 174.03 202.13 222.78 136.97 158.13 135.61 205.87 119.05 86.14 145.71 348.64 70.13 88.28 47.32 68.79 41.24 36.87 31.07 30.12 720.38 19.65 18.44 15.31 11.31 11.11 10.00 10.66 6.75 40.75 6.43 22.517 5.08 4.80 6.64 35.25
10.85 3.85 4.38 5.06 3.08 3.58 3.08 4.70 2.69 1.89 3.12 8.05 1.73 2.10 1.04 1.68 0.94 0.84 0.69 0.68 16.78 0.43 0.42 0.36 0.24 0.24 0.22 0.25 0.15 0.87 0.14 0.55 0.12 0.11 0.14 0.82
0.01 0.00 0.01 0.01 0.00 0.00 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.02 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
108
Nepal Jordon Egypt Libya Latvia Mexico Peru Iran West Africa Georgia Coast Rica Afghanistan East Africa Romania Djibouti Venezuela NRI
8.39 48.14 3.01 2.56 2.50 2.55 2.01 1.68 4.56 0.10 0.10 0.09 0.06 0.05 0.01 0.00 157382.20
0.20 0.99 0.07 0.06 0.06 0.06
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 4.47
0.04
0.04 0.11 0.00 0.00 0.00 0.00 0.00 0.00 0.00 3717.47
Unindicated country
161510.48
3863.43
4.62
FIIs
2.46
0.06
0.00
Sub. Total Stock Swapped (From 2002-2008) Advance of Inflows (From 20002004) RBI's NRI Schemes
3517309.64
81010.57
100.00
145466.35
3301.07
89622.22
1962.82
5330.60
121.33
GRAND TOTAL
3757728.81
86395.79
109
7.1.4 FDI INFLOWS FINANCIAL YEAR-WISE DATA:

(Amount US$ million)
S Financial Year . (April-March) N o .
Equity FIPB Route/R BIs Automati c Route/Ac quisition Route 15483 Equity Capital of unincorpo rated bodies
Reinvested Earnings +
Other Capital +
Total FDI Inflows
% age growth over previous year
(A) 1991-2000 (From August 1991 to March 2000) 1 2000-2001 . 2 2001-2002 . 3 2002-2003 . 4 2003-2004 . 5 2004-2005 . 6 2005-2006 . 7 2006-2007 . 8 2007-2008 (P) + . 9 2008-2009 (April. Dec) (P) + (B) Sub Total (1 to 9 above) (From April 2000 to January 2009) CUMULATIVE TOTAL (A) + (B) (From August 1991 to January 2009)
15483
2339 3904 2574 2197 3250 5540 15585 24575 23885 83849
61 191 190 32 528 435 896 2294 334 4959
1350 1645 1833 1460 1904 2760 5828 7168 3004 26952
279 390 438 633 369 226 517 327 203 3382
4029 6130 5035 4322 6051 8961 22826 34362 27426 119142
(+) 52 % (-) 18 % (-) 14 % (+) 40 % (+) 48 % (+) 146 % (+) 51 % -
99332
4959
26952
3382
134625
110
7.1.5 FINANCIAL YEAR WISE FDI EQUITY INFLOWS:

S.No Financial Year (April - March) Amount of FDI Inflows (Including Advance) In rupees crores In US $ million Amount of FDI Inflows (Excluding Advance) In rupees crores In US $ million %growth over previous year
(A) 1991-2000 (August 1991 March 2000) 1. 2. 3. 4. 5. 6. 7. 8. 9. 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 (April - January)
60604 12646 19361 14932 12117 17138 24613 70630 98664 105673 375774
16698 2908 4222 3134 2634 3759 5546 15726 24579 23885 86393
59698 10733 18654 12955 10237 14653 24613 70630 98664 105673 366812
16484 2463 4065 2722 2225 3219 5546 15726 24579 23885 84430
(+) 65 % (-) 33 % (-) 18 % (+) 45 % (+) 72 % (+) 184 % (+) 56 % -
(B) Sub Total (1 to 9 above) (from April 2000 January 2009) CUMULATIVE TOTAL (A) + (B) (from August 1991 January 2009)
436428
103091
426510
100914
111
7.1.6 FOREIGN TECHNOLOGY TRANSFER (FTC):

(from August 1991 to November 2008)
NUMBER OF CUMULATIVE FTC APPROVALS:
Number Of Cumulative FTC Approvals: (from August 1991 to November 2008)
8024
No. of FTC Approvals during 2007 - 2008: (from April 2007 March 2008)
95
No. of FTC Approvals during 2008 2009: (from April 2008 November 2008)
62
FOREIGN TECHNOLOGY TRANSFER:
COUNTRY WISE FOREIGN TECHNOLOGY TRANSFER APPROVALS (August 1991-February 2008)

% with total technical approvals 22.31 13.93 10.93 10.83 6.09 35.91 100.00
COUNTRY
No. of FTA
USA Germany Japan UK Italy Other countries All Countries
1772 1106 868 860 484 2851 7941
112
SECTOR WISE TECHNOLOGY TRANSFER APPROVALS (August 1991February 2008)
SECTOR
No. Technical Collaborations approved
% of total Technical Collaborations approved
Electrical Equipments (Incl. computer software & electronics)
1255
15.80
Chemicals (other than fertilizers)
886
11.16
Industrial Machinery
869
10.94
Transportation Industry
742
9.34
Misc. Mach. Engineering Industry
442
5.57
Other sectors
3747
47.19
Total all sectors
7941
100.00
113
India's Outward Foreign Direct Investment:
OUTWARD FOREIGN DIRECT INVESTMENT: WORLD & DEVELOPING COUNTRIES (In US$ Billion*)
Yr. 2004 A. World outward FDI flows Outward FDI flows from developing economies. 877 Yr. 2005 837 Yr. 2006 1216
117
116
174
Of which South Africa Brazil China Korea India Singapore Russian Federation B. World outward FDI stock C. Income on outward direct investment D. Cross border M&As E. Total asset of foreign affiliates F. Exports of foreign affiliates G. Employment of foreign affiliates ('000) 1.4 9.8 5.5 4.7 2.2 8.1 13.8 10325 607 381 42807 3733 59458 0.9 2.5 12.3 4.3 2.5 5.0 12.8 10579 845 716 42637 4197 63770 6.7 28.2 16.1 7.1 9.7 8.6 18.0 12474 972 880 51187 4707 72627
As an outcome of liberalization policies, India's outward foreign direct investment witnessed an unprecedented rise in recent period. India's overseas investments that began with Information Technology and related services sectors has over the years spread to wider areas like manufacturing and financial and non-financial areas. According to a
114
Reserve Bank of India report, number of proposals approved for outward FDI from India in joint ventures and Woss increased from 1214 in 2003-04 to 1817 in 2006-07. The amount of approved proposals increased from $ 1466 million in 2003-04 to $ 15060 million in 2006-07.
APPROVED PROPOSALS (In US$ Million)
No. of proposals Year
Amount of approved proposals
Equity
Loan
Guarantee
Total
2003-04
1214
822.40
229.90
413.83
1466.13
2004-05
1281
2010.03
384.39
409.91
2804.33
2005-06
1395
1887.78
629.74
337.32
2854.84
2006-07
1817
11244.96
1475.28
2339.76
15060.00
Apr.-Dec. 2007
1595
11324.99
1331.77
5780.50
18437.26
Apr.-Dec. 2006
1268
4594.09
1270.70
2079.75
7944.54
The amount of outward FDI from India on account of JVs/WOSs, according to the RBI report, increased from $ 1495 million in 2003-04 to $ 12880 million in 2006-07. Equity accounted for 90 percent of the total investments and the remaining 10 percent by way of
115
loans in 2006-07. Inflows from India's outward FDI are in the form of dividend, royalty, license fee, brand fee, technical know how fee, repayment of loans etc. During 2006-07 total inflows from outward FDI amounted to $ 295 million.
ACTUAL OUTFLOWS (In US$ Million)
Year
Equity*
Loan
Guarantee Invoked
Total
2003-04
1234.25
260.93
1495.18
2004-05
1365.59
402.79
1768.38
2005-06
3858.46
1008.10
3.00
4869.56
2006-07
11599.01
1281.07
12880.08
2007-08 (AprilDecember)
9096.50
1017.72
10114.22
2006-07 (AprilDecember)
8097.27
876.07
8973.34
116
INFLOWS FROM INDIA'S OUTWARD FDI (In US$ Million)
Year
Dividend
Others@
Total
2006-07
21.96
272.75
294.71
2007-08 (April-December)
29.41
307.68
337.09
2006-07 (April-December)
20.15
274.33
294.48
The sectoral pattern of outward FDI is led by manufacturing during first nine months of fiscal 2007-08 with $ 7634 million followed by non-financial services' $ 1677.71 million and $ 620.48 million. Of the total investments 96 percent were of large investments (4 5 million and above). Sector wise 43 percent were bin manufacturing followed by nonfinance financial services ( 10 percent) and trading ( 4 percent).
117
SECTORAL PATTERN OF OUTWARD FDI DURING APRIL-DECEMBER 2007

(In US$ Million)
Month Sector
Total Approva ls
April
May
June
July
Aug.
Sept.
Oct.
Nov.
Dec
Trading
54.22
28.25
46.74
40.57
24.17
114.98
311.55
620.48
Manufacturing
149.10
549.00
4122.00
495.40
219.52
1339.11
256.93
345.09
157.78
7634.00
Non Financial Services
66.79
234.20
61.20
23.63
364.91
420.61
139.50
248.07
118.78
1677.71
Others
52.47
396.90
883.30
172.60
67.20
77.67
4554.26
596.99
879.84
7681.09
Financial
7.00
25.46
32.46
Total
322.60
1208.00
5113.00
732.20
651.63
1861.56
5072.67
1527.16
1156.40
17645.74
118

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FOREIGN DIRECT INVESTMENT IN INDIA AND ITS IMPACT ON BANKING,INSURANCE AND PHARMACEUTICAL SECTOR"

AMAR GARG Registration no: 07XQCM6002 2007-09

Under the guidance and supervision of

PRAVEEN BHAGAWAN Faculty M P Birla Institute of Management Bangalore 560001

Place: Bangalore Date: (Amar Garg)

M. P. BIRLA INSTITUTE OF MANAGEMENT

Place: Bangalore Date:

(Dr. Nagesh S Malavalli) Principal

M. P. BIRLA INSTITUTE OF MANAGEMENT

Place: Bangalore Date:

(Prof. Praveen Bhagawan) Faculty

M. P. BIRLA INSTITUTE OF MANAGEMENT

Place: Bangalore Date: (Amar Garg)

M. P. BIRLA INSTITUTE OF MANAGEMENT

INDUSTRY PROFILE Banking Insurance Pharmaceutical

M. P. BIRLA INSTITUTE OF MANAGEMENT

DATA ANALYSIS AND INTERPRETATION

FINDINGS. CONCLUSION AND RECOMMENDATIONS

M. P. BIRLA INSTITUTE OF MANAGEMENT

LIST OF GRAPHS AND TABLES:

TABLE ON GOVERNMENT POLICY REGARDING FDI

GRAPH ON FDI FROM 2000-2009

GRAPH ON FDI IN 2008-2009

GRAPH ON COUNTRY WISE FDI INFLOWS

GRAPH ON STATE WISE FDI INFLOWS

GRAPH ON SECTOR WISE FDI INFLOWS

M. P. BIRLA INSTITUTE OF MANAGEMENT

TABLE OF LEAST SQUARE METHOD IN BANKING AND INSURANCE SECTOR

TABLE OF LEAST SQUARE METHOD IN PHARMACEUTICAL SECTOR

ANNEXURES FDI DATA

M. P. BIRLA INSTITUTE OF MANAGEMENT

M. P. BIRLA INSTITUTE OF MANAGEMENT

INTRODUCTION TO FOREIGN DIRECT INVESTMENT:

M. P. BIRLA INSTITUTE OF MANAGEMENT

1.1 INTRODUCTION TO FDI:

M. P. BIRLA INSTITUTE OF MANAGEMENT

M. P. BIRLA INSTITUTE OF MANAGEMENT

M. P. BIRLA INSTITUTE OF MANAGEMENT

M. P. BIRLA INSTITUTE OF MANAGEMENT

M. P. BIRLA INSTITUTE OF MANAGEMENT

M. P. BIRLA INSTITUTE OF MANAGEMENT

1.2 Steps to attract FDI:

M. P. BIRLA INSTITUTE OF MANAGEMENT

1.3 Benefits of Foreign Direct Investment:

M. P. BIRLA INSTITUTE OF MANAGEMENT

1.4 Disadvantages of Foreign Direct Investment:

M. P. BIRLA INSTITUTE OF MANAGEMENT

M. P. BIRLA INSTITUTE OF MANAGEMENT

1.5 Determinants of Foreign Direct Investment:

M. P. BIRLA INSTITUTE OF MANAGEMENT

1.6 Foreign Direct Investment Quality:

M. P. BIRLA INSTITUTE OF MANAGEMENT

1.7 Foreign Direct Investment and Economic Development:

1.8 Foreign Direct Investment and Infrastructure Development:

M. P. BIRLA INSTITUTE OF MANAGEMENT

M. P. BIRLA INSTITUTE OF MANAGEMENT

1.9 GOVERNMENT POLICY TOWARDS FOREIGN DIRECT INVESTMENT:

Sectors prohibited for FDI:

M. P. BIRLA INSTITUTE OF MANAGEMENT

INDIA: SECTOR SPECIFIC POLICY FOR FOREIGN DIRECT INVESTMENT

(b) Existing projects

26% in case of PSUs (b) Refining 100% in case of Private companies