fdi in inida
TRANSCRIPT
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FOREIGN DIRECT INVESTMENT (FDI) IN INDIA 2014
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Introduction
The Foreign Direct Investment means cross border investment made by a resident in one
economy in an enterprise in another economy, with the objective of establishing a lasting
interest in the investee economy.FDI is also described as investment into the business ofa country by a company in another
country. Mostly the investment is into production by either buying a company in the target
country or by expanding operations of an existing business in that country. Such investments
can take place for many reasons, including to take advantage of cheaper wages, special
investment privileges (e.g. tax exemptions) offered by the country. Foreign direct investment
(FDI) in its classic form is defined as a company from one country making a physical investment
into building a factory in another country.Though India stands today as the largest
democracy, its administrative as well as
the political set up have many flaws and
shortcomings. The Indian system of
administration and governance is
impregnated with flaws like shortages of
power, bureaucratic hassles, political
uncertainty, and infrastructural
deficiencies .In spite of all these political
shortcomings, India is perceived to be one
of the most lucrative grounds for investing, in the eyes of the wealthy European as well as
American investors. This is the true reason why the researches made into the sector establishes
more and more foreign investors coming to India and investing liberally into the various sectors
of the Indian economy.
Various Indian market sectors have experienced a recent progress and boom, owing to the
investment made in them as well as due to the relaxation of rules and regulations that had been
levied on the foreign direct investment in India, by the Indian government. One of such sectors
of the Indian economy that has seen a sudden booming phase of prosperity and sustained growth,
owing to these factors is the real estate as well as the construction business in India. It was the
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year of 2005, when the Indian Central government finally realized the economic prosperity that
foreign direct investment in India would bring about. Thus, in an effort to encourage this, the
government made a crucial amendment to some of the governing laws on the subject, in order to
allow one hundred per cent foreign direct investment in India, in the real estate and constructionsector.Untill this point of time, the Indian law permitted only the non resident Indians (NRIs) or
persons of Indian origin (PIOs) to make foreign direct investment in India. Even these people
had been levied with many restrictions. With the upliftment of these restrictions, a host of
foreign investors and companies stormed India with their products, services and business ideas
along with their money. This money in turn helped the Indian economy to grow in volume as
well as statures.
India has been ranked at the second place in global foreign direct investments in 2010 and will
continue to remain among the top five attractive destinations for international investors during
2010-12 period, according to United Nations Conference on Trade and Development
(UNCTAD) in a report on world investment prospects titled, 'World Investment Prospects
Survey 2009-2012'. The 2010 survey of the Japan Bank for International Cooperation released in
December 2010, conducted among Japanese investors, continues to rank India as the second
most promising country for overseas business operations. A report released in February 2010 by
Leeds University Business School,
commissioned by UK Trade & Investment
(UKTI), ranks India among the top three
countries where British companies can do
better business during 2012-14. According
to Ernst and Young's 2010 European
Attractiveness Survey, India is ranked as
the 4th most attractive foreign direct
investment (FDI) destination in 2010.
However, it is ranked the 2nd most
attractive destination following China in
the next three years. Moreover, according
to the Asian Investment Intentions survey released by the Asia Pacific Foundation in Canada,
Foreign direct investment in e-commerce will boost infrastructure
development and spur manufacturing facility among other
advantages, says a discussion paper by DIPP.
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more and more Canadian firms are now focusing on India as an investment destination. From 8
per cent in 2005, the percentage of Canadian companies showing interest in India has gone up to
13.4 per cent in 2010.
India attracted FDI equity inflows of US$ 2,014 million in December 2010. The cumulative
amount of FDI equity inflows from April 2000 to December 2010 stood at US$ 186.79 billion,
according to the data released by the Department of Industrial Policy and Promotion (DIPP). The
services sector comprising financial and non-financial services attracted 21 per cent of the total
FDI equity inflow into India, with FDI worth US$ 2,853 million during April-December 2010,
while telecommunications including radio paging, cellular mobile and basic telephone services
attracted second largest amount of FDI worth US$ 1,327 million during the same period.
Automobile industry was the third highest sector attracting FDI worth US$ 1,066 million
followed by power sector which garnered US$ 1,028 million during the financial year April-
December 2010. The Housing and Real Estate sector received FDI worth US$ 1,024 million.
During April-December 2010, Mauritius has led investors into India with US$ 5,746 million
worth of FDI comprising 42 per cent of the total FDI equity inflows into the country. The FDI
equity inflows in Mauritius is followed by Singapore at US$ 1,449 million and the US with US$
1,055 million, according to data released by DIPP.
Foreign Investment in India Schematic Representation
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Advantages
Increase economic growth by dealing with different international products 1 million (1 Crore) employment will create in three yearsUPA Government Billion dollars will be invested in Indian market Spread import and export business in different countries Agriculture related people will get good price of their goods
Disadvantages
Will affect 50 million merchants in India Profit distribution, investment ratios are not fixed An economically backward class person suffers from price raise Retailer faces loss in business Market places are situated too far which increases traveling expenses Workers safety and policies are not mentioned clearly Inflation may be increased Again India become slaves because of FDI in retail sector
A foreign company planning to set up business operations in India may:
Incorporate a company under the Companies Act, 1956, as a Joint Venture or a WhollyOwned Subsidiary.
Set up a Liaison Office / Representative Office or a Project Office or a Branch Office ofthe foreign company which can undertake activities permitted under the Foreign
Exchange Management (Establishment in India of Branch Office or Other Place of
Business) Regulations, 2000.
Types of FDI
Horizontal FDI arises when a firm duplicates its home country-based activities at thesame value chain stage in a host country through FDI.
Platform FDI Foreign direct investment from a source country into a destination countryfor the purpose of exporting to a third country.
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Vertical FDI takes place when a firm through FDI moves upstream or downstream indifferent value chains i.e., when firms perform value-adding activities stage by stage in a
vertical fashion in a host country.
Different Types of FDI
Procedure for receiving Foreign Direct Investment in an Indian company
A foreign company planning to set up business operations in India may:
Incorporate a company under the Companies Act, 1956, as a Joint Venture or a Wholly Owned
Subsidiary. Set up a Liaison Office / Representative Office or a Project Office or a Branch Office
of the foreign company which can undertake activities permitted under the Foreign Exchange
Management (Establishment in India of Branch Office or Other Place of Business) Regulations,
2000.
An Indian company may receive Foreign Direct Investment under the two routes as given under:
1. Automatic RouteFDI up to 100 per cent is allowed under the automatic route in all activities/sectors except where
the provisions of the consolidated FDI Policy, paragraph on 'Entry Routes for Investment' issued
by the Government of India from time to time, are attracted.
HorizontalFDI
Platform FDI
VerticalFDI
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FDI in sectors /activities to the extent permitted under the automatic route does not require any
prior approval either of the Government or the Reserve Bank of India.
2. Government RouteFDI in activities not covered under the automatic route requires prior approval of the
Government which are considered by the Foreign Investment Promotion Board (FIPB),
Department of Economic Affairs, Ministry of Finance.
Indian companies having foreign investment approval through FIPB route do not require any
further clearance from the Reserve Bank of India for receiving inward remittance and for the
issue of shares to the non-resident investors. The Indian company having received FDI either
under the Automatic route or the Government route is required to report in the AdvanceReporting Form, the details of the receipt of the amount of consideration for issue of equity
instrument viz. shares / fully and mandatorily convertible debentures / fully and mandatorily
convertible preference shares through an AD Category I Bank, together with copy/ ies of the
FIRC evidencing the receipt of inward remittances along with the Know Your Customer (KYC)
report on the non-resident investors from the overseas bank remitting the amount, to the
Regional Office concerned of the Reserve Bank of India within 30 days from the date of receipt
of inward remittances. Further, the Indian company is required to issue the equity instrument
within 180 days, from the date of receipt of inward remittance or debit to NRE/FCNR (B)
account in case of NRI/ PIO.
Foreign investment is reckoned as FDI only if the investment is made in equity shares , fully and
mandatorily convertible preference shares and fully and mandatorily convertible debentures with
the pricing being decided upfront as a figure or based on the formula that is decided upfront. Any
foreign investment into an instrument issued by an Indian company which:
gives an option to the investor to convert or not to convert it into equity or
does not involve upfront pricing of the instrumentas a date would be reckoned as ECB and would have to comply with the ECB guidelines.
The FDI policy provides that the price/ conversion formula of convertible capital instruments
should be determined upfront at the time of issue of the instruments. The price at the time of
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TRENDS IN FDI FLOWS TO INDIA
With the tripling of the FDI flows to EMEs during the pre-crisis period of the 2000s, India also
received large FDI inflows in line with its robust domestic economic performance. The
attractiveness of India as a preferred investment destination could be ascertained from the large
increase in FDI inflows to India, which rose from around US$ 6 billion in 2001-02 to almost
US$ 38 billion in 2008-09. The significant increase in FDI inflows to India reflected the impact
of liberalisation of the economy since the early 1990s as well as gradual opening up of the
capital account. As part of the capital account liberalisation, FDI was gradually allowed in
almost all sectors, except a few on grounds of strategic importance, subject to compliance of
sector specific rules and regulations. The large and stable FDI flows also increasingly financed
the current account deficit over the period. During the recent global crisis, when there was a
significant deceleration in global FDI flows during 2009-10, the decline in FDI flows to India
was relatively moderate reflecting robust equity flows on the back of strong rebound in domestic
growth ahead of global recovery and steady reinvested earnings (with a share of almost 25 per
cent) reflecting better profitability of foreign companies in India. However, when there had been
some recovery in global FDI flows, especially driven by flows to Asian EMEs, during 2010-11,
gross FDI equity inflows to India witnessed significant moderation. Gross equity FDI flows to
India moderated to US$ 20.3 billion during 2010-11 from US$ 27.1 billion in the preceding year.
Table 1: Equity FDI Inflows to India(Percent)
Sectors 2006-07
2007-
082008-
092009-
102010-
11
Sectoral shares (Percent)
Manufactures 17.6 19.2 21.0 22.9 32.1
Services 56.9 41.2 45.1 32.8 30.1
Construction, Real estate and mining 15.5 22.4 18.6 26.6 17.6
Others 9.9 17.2 15.2 17.7 20.1
Total 100.0 100.0 100.0 100.0 100.0
Equity Inflows (US$ billion)
Manufactures 1.6 3.7 4.8 5.1 4.8
Services 5.3 8.0 10.2 7.4 4.5
Construction, Real estate and mining 1.4 4.3 4.2 6.0 2.6
Others 0.9 3.3 3.4 4.0 3.0
Total Equity FDI 9.3 19.4 22.7 22.5 14.9
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From a sectoral perspective, FDI in India mainly flowed into services sector (with an average
share of 41 per cent in the past five years) followed by manufacturing (around 23 per cent) and
mainly routed through Mauritius (with an average share of 43 per cent in the past five years)
followed by Singapore (around 11 per cent). However, the share of services declined over theyears from almost 57 per cent in 2006-07 to about 30 per cent in 2010-11, while the shares of
manufacturing, and others largely comprising electricity and other power generation
increased over the same period (Table 1). Sectoral information on the recent trends in FDI flows
to India show that the moderation in gross equity FDI flows during 2010-11 has been mainly
driven by sectors such as construction, real estate and mining and services such as business
and financial services. Manufacturing, which has been the largest recipient of FDI in India, has
also witnessed some moderation (Table 1).
I. CUMULATIVEFDIFLOWSINTOINDIA(2000-2013):
A. TOTALFDIINFLOWS(fromApril, 2000toMarch, 2013):
1. CUMULATIVEAMOUNTOF FDIINFLOWS(Equityinflows+Re-investedearnings+Othercapital)* -
US$290,078 millio
2. CUMULATIVEAMOUNTOFFDI EQUITY INFLOWS(excluding,amountremittedthroughRBIs-NRI Schemes)
Rs. 896,38 crore US$193,282 millio
B. FDIINFLOWSDURINGFINANCIALYEAR 2012-13(fromApril, 2012to March,2013):
1. TOTAL FDI INFLOWSINTOINDIA(Equityinflows+Re-investedearnings+Othercapital)(asper RBIsMonthly bulletindated: 13.05.2013).
- US$36,860 million
2. FDI EQUITY INFLOWS Rs. 121,907 crore US$22,423 million
C. FDIEQUITYINFLOWS(MONTH-WISE) DURINGTHE FINANCIALYEAR2012-13:
Financial Year2012-13
(April-March)
AmountofFDIEquityinflows
(InRs.Crore) (InUS$mn)
1. April,2012 9,620 1,857
2. May, 2012 7,229 1,327
3. June, 2012 6,971 1,244
4. July,2012 8,182 1,475
5. August,2012 12,578 2,264
6. September,2012 25,552 4,679
7. October,2012 10,295 1,942
http://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=2513#T2http://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=2513#T2http://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=2513#T2http://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=2513#T2 -
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8. November, 2012 5,798 1,058
9. December, 2012 6,012 1,100
10
January,2013 11,719 2,157
11
February,2013 9,654 1,795
12
March, 2013 8,297 1,525
2012-13(uptoMarch, 2013) # 121,907 22,4232011-12(up to March, 2012)# 165,146 35,121
%age growthover lastyear (-)28% (-)38%
D. FDIEQUITYINFLOWS(MONTH-WISE) DURINGTHE CALENDAR YEAR 2013:
Calendar Year 2013
(Jan.-Dec.)
Amount of FDI Equity inflows
(In Rs. Crore) (In US$ mn)
1. January, 2013 11,719 2,157
2. February, 2013 9,654 1,795
3. March, 2013 8,297 1,525
Year 2013 (up to March, 2013) # 29,670 5,477
Year 2012 (up to March, 2012) # 29,354 5,844%age growth over last year ( + ) 01 % ( - ) 06 %
Note: Country &Sectorspecificanalysisisavailablefromtheyear2000onwards, asCompany-wisedetailsareprovidedbyRBI fromApril,2000onwards only.
*Dataon Re-investedearnings&Othercapital, are theestimateson anaveragebasis,
basedupondata for the previoustwoyears, published by RBI in monthlybulletindated:10.12.2012.#Figuresareprovisional, subject toreconciliationwith RBI,Mumbai.^Inflows forthemonthofMarch,2012areasreportedbyRBI, consequent to the adjustmentmadein
thefiguresofMarch, 11,August,11andOctober,11.
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small producers and farmers will gain. As things stand, even if modern retail were to take off on
all cylinders, these arguments would still not hold water for the next 10 years.
For one, there is the fact that aside from very old markets like America and Europe, in most
newly developed markets, modern trade accounts for only 20-25 percent of all retail. India isalready at 8 percentwhich is significantbut the impact hasnt been as dramatic as one would
have assumed.
Then there is the fact
that the economics of
the Indian market is
such that it makes
little sense for global
retailers to focus on
all consumers. Were
convinced they will
focus their energies
on the top 33 percent
of urban Indian
households (a mere
10 percent of all Indian households); investing in the others isnt quite what they know how to do
profitably yet. As for small manufacturers, we dont see that huge numbers of them will benefit.
Retailers across the world like to work with a small group of select vendors because it makes for
better profitability. So yes, a small number will benefit significantly. And yes, employment will
be generated. But it wont be anywhere close to the numbers now being touted. Then there is the
argument that encouraging modern retail to invest will provide the much-needed booster shot for
the countrys dismal supply chain infrastructure. Here again, lets face it. Retailers arent in the
business of building national infrastructure. About the only infrastructure theyd be interested in
is their last mile.
The only argument that holds true is that kiranas or the small, traditional shopkeepers who are
now an Indian staple, will not die. But that is a tribute to the small shopkeeper rather than
prescience on the part of the government. A more honest case for FDI in modern retail would be
that it will lay the foundations for a new industry, guaranteed to grow for at least the next five
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decades. Do we need it? The question is rhetorical. Did we need cheaper air travel, more
television entertainment, cellphones, and air-conditioned cars? Now that weve stated our
assessment upfront, wed like to explain how and why we came to these conclusions.
Without doubt, it will immediately save the indigenous modern retail industry that has been built
until now. What has been built until now? Between all the modern retailers in India, they now
manage to generate Rs 2 lakh crore in revenuesa very impressive number by any reckoning
and growing at a compounded rate of 25 percent each year, according to India Retail Report
2012 from Images. But the problem is, most players in the Indian retail business just arent
making any money yet, and are carrying large amounts of debt, not having had enough equity to
fund business losses that are par for the course in the build-up phase of retailing
businesses. Retail businesses guzzle a lot of cash for a long time and then return it handsomely.
If not carefully funded with patient capital, of the equity kind, the investment phase can be life
threatening. Kishore Biyani, the largest, most ambitious modern Indian retailer, is a victim of
precisely this phenomenon. His business managed to generate Rs 14,000 crore in sales, but in the
process incurred expensive and debilitating debt of almost Rs 9,000 crore. Just paying off the
accumulated interest was wiping out all the profits the business was generating.
Unable to sustain the business, he was forced to sell a part of it to the competing Aditya Birla
Nuvo group, and reduce debt to a manageable amount. However, his business still needs a lot of
money to grow to get to serious profitability. Biyani is not alone. Foodworld, the first Indian
supermarket chain, and one that consumers loved languished at a boutique scale by modern retail
standards, with 60 stores mostly in South India, and lost all early-mover advantages and is now a
minor player. Shoppers Stop has just 52 stores in 21 years of operations. In contrast, Tesco, for
example, has 3,054 stores in just the UK, with revenues of 42 billion in 2011. In India, a
country that is so much bigger, all modern supermarket and hypermarket stores put together
would not add up to this number.
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FDI in Aviation, Multi-brand retail
The retail FDI policy stipulated that
at least half the investments be made
in back-end infrastructure, such ascold-chain and warehousing and
stores could be set up only in cities
with a population of at least one
million.
In states that do not have cities with
population of more than 1 million
according to the 2011 census, retail
outlets may be set up in the cities of
their choice, preferably the largest
city.
The government also eased the FDI norms for single-brand retail, including the condition that
global firms will have to source 30% of their merchandise from local small firms and artisans.Globally, single-brand retail follow a business model of 100% ownership and retail giants, such
as Swedish furniture major IKEA, had cited the 30% mandatory sourcing clause from Indian
small firms as restrictive condition.
Conclusion
India needs to take a lesson from China where organized and unorganized retail seem to co-exist
and grow together. Further, India's local enterprises will potentially receive an up gradation with
the import of advanced technological and logistics management expertise from the foreign
entities.
In our view, the government has an opportunity to utilize the liberalization for achieving certain
of its own targets:
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