CHAPTER - 1

INTRODUCTION TO FDI

1.1 OVERVIEW

The last two decade of the 20th century witnessed a dramatic world-wide increase in

foreign direct investment (FDI), accompanied by a marked change in the attitude of most

developing countries towards inward FDI. As against a highly suspicious attitude of these

countries towards inward FDI in the past, most countries now regard FDI as beneficial for

their development efforts and compete with each other to attract it. Such shift in attitude

lies in the changes in political and economic systems that have occurred during the

closing years of the last century.

The wave of liberalisation and globalization sweeping across the world has opened many

national markets for international business. Global private investment, in most part, is

now made by multinational corporations (MNCs). Clearly these corporations play a major

role in world trade and investments because of their demonstrated management skills,

technology, financial resources and related advantages. Recent developments in global

markets are indicative of the rapidly growing international business. The end of the 20 th

century has already marked a tremendous growth in international investments, trade and

financial transactions along with the integration and openness of international markets.

FDI is a subject of topical interest. Countries of the world, particularly developing

economies, are vying with each other to attract foreign capital to boost their domestic

rates of investment and also to acquire new technology and managerial skills. Intense

competition is taking place among the fund-starved less developed countries to lure

foreign investors by offering repatriation facilities, tax concessions and other incentives.

However, FDI is not an unmixed blessing. Governments in developing countries have to

1

be very careful while deciding the magnitude, pattern and conditions of private foreign

investment.

In the 1980s, FDI was concentrated within the Triad (EU, Japan and US). However, in the

1990s, the FDI flows to developed countries declined, while those to developing countries

increased in response to rapid growth and fewer restrictions. Most FDI flows continue

still to be concentrated in 10 to 15 host countries overwhelmingly in Asia and Latin

America. South, East and Southeast Asia has experienced the fastest economic growth in

the world, and emerged as the largest host region. China is now the largest host country in

the developing world.

In India, prior to economic reforms initiated in1991, FDI was discouraged by

Imposing severe limits on equity holdings by foreigners and

Restricting FDI to the production of only a few reserved items.

The Foreign Exchange Regulation Act (FERA), 1973 (now replaced by Foreign

Exchange Management Act [FEMA]), prescribed the detailed rules in this regard and the

firms belonging to this group were known as FERA firms. All foreign investors were

virtually driven out from Indian industries by FERA. Technology transfer was possible

only through the purchase of foreign technology.

Foreign investment policies in the post-reforms period have emphasized greater

encouragement and mobalisation of non-debt creating private inflows for reducing

reliance on debt flows. Progressively liberal policies have led to increasing inflows of

foreign investment in the country.

Though India has one of the most transparent and liberal FDI regimes among the

developing countries with strong macro-economic fundamentals, its share in FDI inflows

is dismally low. The country still suffers from weaknesses and constraints, in terms of

policy and regulatory framework, which restricts the inflow of FDI.

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1.2 WHAT IS FOREIGN DIRECT INVESTMENT?

FDI is the process whereby residents of one country (the home country) acquire

ownership of assets for the purpose of controlling the production, distribution and other

activities of a firm in another country (the host country).

IMF Definition

According to the BPM5, FDI is the category of international investment that reflects the

objective of obtaining a lasting interest by a resident entity in one economy in an

enterprise resident in another economy. The lasting interest implies the existence of a

long-term relationship between the direct investor and the enterprise and a significant

degree of influence by the investor on the management of the enterprise.

UNCTAD Definition

The WIR02 defines FDI as an investment involving a long-term relationship and

reflecting a lasting interest and control by a resident entity in one economy (foreign direct

investor or parent enterprise) in an enterprise resident in an economy other than that of

the FDI enterprise, affiliate enterprise or foreign affiliate. FDI implies that the investor

exerts a significant degree of influence on the management of the enterprise resident in

the other economy. Such investment involves both the initial transaction between the two

entities and all subsequent transaction between them among foreign affiliates, both

incorporated and unincorporated. Individuals as well as business entities may undertake

FDI.

As is evident from the above definitions, there is a large degree of commonality between

the IMF, UNCTAD definitions of FDI. The IMF definition is followed internationally.

3

1.3 NATURE OF FDI

Almost all modern (FDI) is carried out by corporations rather than individuals. Somewhat

like portfolio investment, the flows of FDI have historically been highly concentrated,

both in terms of geography and by industry and at both the investor and receptor poles.

Geographically, the ownership of global stocks of FDI is highly skewed towards only a

few large, high income countries. Each investing country has, whether by accident or

design , tended to direct the major part of its FDI to only a very few receiving countries;

in fact the pattern of global distribution of FDI have been highly similar to historical

relationships based on colonial ties or other forms of political hegemony.

Viewed industrially, for any given country, FDI generally comes from less than four or

five out of twenty or so major industry groups and inflows into those same industries in

the receptor country.

General attribute of FDI is that it has evoked by type over time. Prior to First World War,

a crude but valid generalization would that a large part of FDI was in service sector of the

host economy (particularly transportation, power, communication and trading) while most

of the rest was of the “backward vertical integration” type. During the inter-war period,

most of the currently largest manufacturing multinational corporations (MNCs) made

their initial foreign investments, but these horizontal or market extension types of

investments have now become major category.

The fourth recognized characteristic of manufacturing FDI is that it originates in

industries that are technologically intensive, “skill oriented” or progressive. In addition,

the FDI prone industries are typically more concentrated, have higher advertising outlays

per unit of sales and exhibit above average export propensities. Industries from which

FDI tends to originate display many characteristics associated with oligopoly.

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1.4 FDI IN DEVELOPING COUNTRIES

FDI is now increasingly recognized as an important contributor to a developing country’s

economic performance and international competitiveness.

After the debt-crisis that hit the developing world in early 1980s, the conventional

wisdom quickly became that it had been unwise for countries to borrow so heavily from

international banks or international bond markets. Rather countries should try to attract

non-debt-creating private inflows (DFI). The financial advantage is that such capital

inflows need not be repaid and that outflow of funds (remittance of profits) would

fluctuate with the cycle of the economy. It has also been widely observed that the

structural adjustment efforts of the 1980s failed to lead to new patterns of sustained

growth in developing countries. In particular, structural adjustment programs failed to

restore private investment to desirable levels. Again it is hoped that FDI could play an

important role; the World Bank observes that FDI can be an important complement to the

adjustment effort, especially in countries having difficulty in increasing domestic savings.

Against this background of balance of payments problems and low level of private

investment, it is probably not surprising that attitudes in developing countries towards

FDI have shifted. In the 1960s and 1970s many countries maintained a rather cautious,

and sometimes an outright negative position with respect to FDI. In the 1980s, however

the attitudes shifted radically towards a more welcoming policy stance. This change was

not so much due to new research finding on the impact of FDI but to the economic

problems facing the developing world. Developing countries are liberalizing their foreign

investment regimes and are seeking FDI not only as a source of capital funds and foreign

exchange but also as a dynamic and efficient vehicle to secure the much needed industrial

technology, managerial expertise and marketing know-how and networks to improve on

growth, employment, productivity and export performance.

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1.5 ADVANTAGES OF FDI

Foreign Direct Investment has the following potential benefits for less developed

countries.

1. Raising the Level of Investment : Foreign investment can fill the gap between

desired investment and locally mobilised savings. Local capital markets are often not

well developed. Thus, they cannot meet the capital requirements for large investment

projects. Besides, access to the hard currency needed to purchase investment goods

not available locally can be difficult. FDI solves both these problems at once as it is a

direct source of external capital. It can fill the gap between desired foreign exchange

requirements and those derived from net export earnings.

2. Upgradation of Technology : Foreign investment brings with it technological

knowledge while transferring machinery and equipment to developing countries.

Production units in developing countries use out-dated equipment and techniques that

can reduce the productivity of workers and lead to the production of goods of a lower

standard.

3. Improvement in Export Competitiveness : FDI can help the host country improve

its export performance. By raising the level of efficiency and the standards of product

quality, FDI makes a positive impact on the host country’s export competitiveness.

Further, because of the international linkages of MNCs, FDI provides to the host

country better access to foreign markets. Enhanced export possibility contributes to

the growth of the host economies by relaxing demand side constraints on growth. This

is important for those countries which have a small domestic market and must

increase exports vigorously to maintain their tempo of economic growth.

4. Employment Generation : Foreign investment can create employment in the modern

sectors of developing countries. Recipients of FDI gain training of employees in the

6

course of operating new enterprises, which contributes to human capital formation in

the host country.

5. Benefits to Consumers : Consumers in developing countries stand to gain from FDI

through new products, and improved quality of goods at competitive prices.

6. Resilience Factor: FDI has proved to be resilient during financial crisis. For instance,

in East Asian countries such investment was remarkably stable during the global

financial crisis of 1997-98. In sharp contrast, other forms of private capital flows like

portfolio equity and debt flows were subject to large reversals during the same crisis.

Similar observations have been made in Latin America in the 1980s and in Mexico in

1994-95. FDI is considered less prone to crises because direct investors typically have

a longer-term perspective when engaging in a host country.

7. Revenue to Government : Profits generated by FDI contribute to corporate tax

revenues in the host country.

1.6 DISADVANTAGES OF FDI

FDI is not an unmixed blessing. Governments in developing countries have to be very

careful while deciding the magnitude, pattern and conditions of private foreign

investment. Possible adverse implications of foreign investment are the following:

1. When foreign investment is competitive with home investment, profits in domestic

industries fall, leading to fall in domestic savings.

2. Contribution of foreign firms to public revenue through corporate taxes is

comparatively less because of liberal tax concessions, investment allowances,

disguised public subsidies and tariff protection provided by the host government.

3. Foreign firms reinforce dualistic socio-economic structure and increase income

inequalities. They create a small number of highly paid modern sector executives.

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They divert resources away from priority sectors to the manufacture of sophisticated

products for the consumption of the local elite. As they are located in urban areas,

they create imbalances between rural and urban opportunities, accelerating flow of

rural population to urban areas.

4. Foreign firms stimulate inappropriate consumption patterns through excessive

advertising and monopolistic market power. The products made by multinationals for

the domestic market are not necessarily low in price and high in quality. Their

technology is generally capital-intensive which does not suit the needs of a labour-

surplus economy.

5. Foreign firms able to extract sizeable economic and political concessions from

competing governments of developing countries. Consequently, private profits of

these companies may exceed social benefits.

6. Continual outflow of profits is too large in many cases, putting pressure on foreign

exchange reserves. Foreign investors are very particular about profit repatriation

facilities.

7. Foreign firms may influence political decisions in developing countries. In view of

their large size and power, national sovereignty and control over economic policies

may be jeopardized. In extreme cases, foreign firms may bribe public officials at the

highest levels to secure undue favours. Similarly, they may contribute to friendly

political parties and subvert the political process of the host country.

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CHAPTER - 2

FOREIGN DIRECT INVESTMENT IN INDIA

Since independence till 1990, the performance of Indian economy has been dominated by

a regime of multiple controls, restrictive regulations and wide ranging state intervention.

Industrial economy of the country was protected by the state and insulated from external

competition. As a result of which, India was thrown a long way behind the world of rapid

expanding technology. The cumulative effect of these policies started becoming more and

more pronounced. By the year 1989-90, the situation on the balance of payment and

foreign exchange reserves became precarious and the country was driven to the brink of

default. The credibility reached the sinking level that no country was willing to advance

or lend to India at any cost. In such circumstances, the government quickly followed a

liberalized economic policy in July 1991.

The main objectives of the liberalized economic policy are twofold. At the country level

the reform aims at freeing domestic investors from all the licensing requirements, virtual

abolition of MRTP restriction on the investment by large houses, and a competitive

industrial structure for Indian companies to achieve a global presence by becoming as

competitive as their counterparts worldwide. Secondly, the focus on structural reforms

intended to tap foreign investment for economic growth and development.

Gradually & systematically the government has taken a series of measures like

devaluation of rupee, lowering of import duties and allowing foreign investment upto

51% of the equity in a large number of industries and investment of large foreign equity

(even up to 100%) in selected areas especially for export oriented products.

In India, since the 1960’s foreign investment and/or foreign collaborations by the

multinationals have been principally viewed as an instrument to facilitate the much

9

needed ‘transfer of technology’. In technological as well as financial collaborations with

foreign firms, the approval and extent of ownership participation had been predominantly

determined by the technology component of the respective products. ‘Import of

technology’ as against the direct foreign investment was the main focus of the policies till

mid-eighties.

The New Industrial Policy (NIP) of July 1991 and subsequent policy amendments have

significantly liberalized the industrial policy regime in the country especially as it applies

to FDI. The industrial approval system in all industries has been abolished except for

some strategic or environmentally sensitive industries. In 35 high priority industries, FDI

up to 51% is approved automatically if certain norms are satisfied. FDI proposals do not

necessarily have to be accompanied by technology transfer agreements. Trading

companies engaged primarily in export activities are also allowed up to 51% foreign

entity. A Foreign Investment Promotion Board (FIPB) has been set up to invite and

facilitate investment in India by international companies. The use of foreign brand names

for goods manufactured by domestic industry which had earlier been restricted was also

liberalized. New sectors have been opened to private and foreign investment. The

international trade policy regime has been considerably liberalized too. The rupee was

made convertible first on trade and finally on the current account. Capital market has

been strengthened. In spite of all these liberalization measures taken by the Indian

government- foreign investments have not been up to expectations. Actual inflow of FDI

has been less than the approval FDI.

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CHAPTER - 3

POLICIES AND PROCEDURES OF FDI

The initial policy stimulus to foreign direct investment in India came in July 1991 when

the new industrial policy provided, inter alia, automatic route approval for projects with

foreign equity participation up to 51 percent in high priority areas. In recent years, the

government has initiated the second generation reforms under which measures have been

taken to further facilitate and broaden the base of FDI in India. The policy of FDI allows

freedom of location, choice of technology repatriation of capital and dividends. The rate

at which FDI inflow has grown during the post-liberalisation period is a clear indication

that India is a fast emerging as an attractive destination for overseas investors. As part of

the economic reforms programme, policy and procedures governing foreign investment

and technology transfer have been significantly simplified and streamlined. Today FDI is

allowed in all sectors including the service sector except in cases where there are sectoral

ceilings.

FDI Policy Regime

Most of the problem for investors arises because of domestic policy, rules and procedures

and not the FDI policy per se or its rules and procedure. India has one of the most

transparent and liberal FDI regimes among the emerging and developing economies. By

FDI regime it means those restrictions that apply to foreign nationals and entities but not

to Indian nationals and Indian owned entities. The differential treatment is limited to a

few entry rules, spelling out proportion of equity that the foreign entrant can hold in an

Indian company or business. There are a few banned sectors and some sectors with limits

on foreign equity proportion. The entry rules are clear and well defined and equity limits

11

for FDI in selected sectors such as telecom quite explicit and well-known.Subject to these

foreign equity conditions a foreign company can set up a registered company in India and

operate under the same laws, rules and regulations as any Indian owned company would.

There is absolutely no discrimination against foreign invested companies registered in

India or in favour of domestic owned ones. There is however a minor restriction on those

foreign entities who entered a particular sub-sector through a joint venture with an Indian

partner. If they want to set up another company in the same sector it must get a no-

objection certificate from the joint venture partner. This condition is explicit and

transparent unlike many hidden conditions imposed by some other recipients of FDI.

Routes for Inward Flows of FDI

FDI can be approved either through the automatic route or by the Government.

1. Automatic Route: Companies proposing FDI under automatic route do not require any

government approval provided the proposed foreign equity is within the specified ceiling

and the requisite documents are filed with Reserve Bank of India (RBI) within 30 days of

receipt of funds. The automatic route encompasses all proposals where the proposed

items of manufacture/activity does not require an industrial license and is not reserved for

small-scale sector. The automatic route of the RBI was introduced to facilitate FDI

inflows. However, during the post-policy period, the actual investment flows through the

automatic route of the RBI against total FDI flows remained rather insignificant. This was

partly due to the fact that crucial areas like electronics, services and minerals were left out

of the automatic route. Another limitation was the ceiling of 51 percent on foreign equity

holding. Increasing number proposals were cleared through the FIPB route while the

automatic route was relatively unimportant. However, since 2000 automatic route has

become significant and accounts for a large part of FDI flows.

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2. Government Approval: For the following categories, government approval for FDI

through the Foreign Investment Promotion Board (FIPB) is necessary:

Proposals attracting compulsory licensing

Items of manufacture reserved for small scale sector.

Acquisition of existing shares.

FIPB ensures a single window approval for the investment and acts as a screening

agency. FIPB approvals are normally received in 30 days. Some foreign investors use the

FIPB application route where there may be absence of stated policy or lack of policy

clarity.

3. Industrial Licensing in FDI Policy : Industrial Licensing is regulated by Industries

(Development and Regulation) Act 1951. Following are the sectors which require

Industrial Licensing:

Industries which abide by compulsory licensing

Manufacturing of items by the larger industrial units for small sector industries

Locational restrictions on the proposed sites

4. Restricted List of sectors: FDI is not permissible in the following cases:

Gambling and Betting, or

Lottery Business, or

Business of chit fund

Housing and Real Estate business (to a certain extent has been opened.)

Trading in Transferable Development Rights (TDRs)

Retail Trading

Railways,

13

Atomic Energy , atomic minerals,

Agricultural or plantation activities or Agriculture (excluding Floriculture,

Horticulture, Development of Seeds, Animal Husbandry, Pisiculture and

Cultivation of Vegetables, Mushrooms etc. under controlled conditions and

services related to agro and allied sectors) and Plantations(other than Tea

plantations)

Post-approval Procedures

1. Project Clearance: After the approval has been obtained, the applicant may get his

unit/company registered with the Registrar of Company. Subsequently, the company

needs to obtain various clearances such as land clearance, building design clearance, pre-

construction clearance, labour clearance, etc. from different authorities before beginning

its operations. These clearances differ from sector to sector and may also differ from state

to state.

2. Registration and Inspection: Each industrial unit is supposed to maintain records in

regard to production, sale and export, use of specified raw materials including public

utilities like water and electricity, labour related details financial details and details in

regard to industrial safety and environment.

The unit is also subject to periodic inspection by the factories inspector, labour inspector,

food inspector, fire inspector, central excise inspector, air and water inspector, mines

inspector, city inspector and the like, the list of which may go up to thirty or more.

3. Foreign Exchange Management Act (FEMA), 2000: The additional provisions

which apply only to entry of FDI emanate from the provisions of FEMA. According to

FEMA, no person resident outside India shall without the approval/knowledge of the RBI

may establish in India a branch or a liaison office or a project office or any other place of

14

business.

FDI in a particular industry may, however, be made through the automatic route under

powers delegated to the RBI or with the approval accorded by the FIPB. The automatic

route means that foreign investors only need to inform the RBI within 30 days of bringing

in their investment. Companies getting foreign investment approval through FIPB route

do not require any further clearance from RBI for the purpose of receiving inward

remittance and issue of shares to foreign investors. RBI has granted general permission

under FEMA in respect to proposals approved by FIPB. Such companies are, however,

required to notify the concerned regional office of the RBI of receipt of inward

remittances within 30 days of such receipts and again within 30 days of issue of shares to

the foreign investors.

Entry Options for Foreign Investors

A foreign company planning to set up business operations in India has the following

options:

By incorporating a company under the Companies Act, 1956 through

Joint Ventures; or

Wholly Owned Subsidiaries

Foreign equity in such Indian companies can be up to 100% depending on the

requirements of the investor, subject to equity caps in respect of the area of activities

under the Foreign Direct Investment (FDI) policy.

Enter as a foreign Company through

Liaison Office/Representative Office

Project Office

Branch Office

15

Such offices can undertake activities permitted under the Foreign Exchange Management

Regulations, 2000.

1. Incorporation of Company : For registration and incorporation, an application has to

be filed with Registrar of Companies (ROC). Once a company has been duly

registered and incorporated as an Indian company, it is subject to Indian laws and

regulations as applicable to other domestic Indian companies.

2. Liaison Office/Representative Office : The role of the liaison office is limited to

collecting information about possible market opportunities and providing information

about the company and its products to prospective Indian customers. It can promote

export/import from/to India and also facilitate technical/financial collaboration

between parent company and companies in India. Liaison office can not undertake

any commercial activity directly or indirectly and can not, therefore, earn any income

in India. Approval for establishing a liaison office in India is granted by Reserve Bank

of India (RBI).

3. Project Office : Foreign Companies planning to execute specific projects in India can

set up temporary project/site offices in India. RBI has now granted general permission

to foreign entities to establish Project Offices subject to specified conditions. Such

offices can not undertake or carry on any activity other than the activity relating and

incidental to execution of the project. Project Offices may remit outside India the

surplus of the project on its completion, general permission for which has been

granted by the RBI.

4. Branch Office : Foreign companies engaged in manufacturing and trading activities

abroad are allowed to set up Branch Offices in India for the following purposes:

Export/Import of goods

Rendering professional or consultancy services

16

Carrying out research work, in which the parent company is engaged.

Promoting technical or financial collaborations between Indian companies and

parent or overseas group company.

Representing the parent company in India and acting as buying/selling agents in

India.

Rendering services in Information Technology and development of software in

India.

Rendering technical support to the products supplied by the parent/ group

companies.

Foreign airline/shipping Company.

A branch office is not allowed to carry out manufacturing activities on its own but is

permitted to subcontract these to an Indian manufacturer. Branch Offices established with

the approval of RBI may remit outside India profit of the branch, net of applicable Indian

taxes and subject to RBI guidelines Permission for setting up branch offices is granted by

the Reserve Bank of India (RBI).

CHAPTER - 4

SECTOR SPECIFIC GUIDELINES FOR FDI IN INDIA

17

Hotel & Tourism Sector

100% FDI is permissible in the sector on the automatic route.

The term hotels include restaurants, beach resorts, and other tourist complexes providing

accommodation and/or catering and food facilities to tourists. Tourism related industry

include travel agencies, tour operating agencies and tourist transport operating agencies,

units providing facilities for cultural, adventure and wild life experience to tourists,

surface, air and water transport facilities to tourists, leisure, entertainment, amusement,

sports, and health units for tourists and Convention/Seminar units and organizations.

Private Sector Banking:

49% FDI is allowed from all sources on the automatic route subject to guidelines issued

from RBI from time to time.

Insurance Sector

FDI up to 26% in the Insurance sector is allowed on the automatic route subject to

obtaining licence from Insurance Regulatory & Development Authority (IRDA)

Telecommunication sector

In basic, cellular, value added services and global mobile personal communications by

satellite, FDI is limited to 49% subject to  licensing and security requirements and

adherence by the companies  (who are investing and the companies in which investment

is being made) to the license conditions for foreign equity cap and lock- in period for

transfer and addition of equity and other license provisions.

Trading Companies

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Trading is permitted under automatic route with FDI up to 51% provided it is primarily

export activities, and the undertaking is an export house/trading house/super trading

house/star trading house. However, under the FIPB route:-

Power Sector

Up to 100% FDI allowed in respect of projects relating to electricity generation,

transmission and distribution, other than atomic reactor power plants. There is no limit on

the project cost and quantum of foreign direct investment.

Drugs & Pharmaceuticals  

FDI 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.

Infrastructure Sector

FDI up to 100% under automatic route is permitted in projects for construction and

maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels, ports and

harbors.

Pollution Control and Management

FDI up to 100% in both manufacture of pollution control equipment and consultancy for

integration of pollution control systems is permitted on the automatic route.  

Call Centers in India / Call Centres in India

FDI up to 100% is allowed subject to certain conditions. 

CHAPTER - 5

19

FACTORS AFFECTING FDI

The factors that can narrow the gap between FDI approvals and actual foreign direct

investment inflows and indeed make India a preferred destination for global capital are,

1. Availability of infrastructure in all areas i.e. transports hospitality, telecom, power,

etc.

2. Transparency of processes, policies and decision making and reduction of government

decision making lead time.

3. Stability of policies i.e. entry, exit, labour laws, etc. over a definite time horizon so

that definite plans can be made.

4. Acceptance of International Standards including accounting standards.

5. Capital account convertibility so that all capital and payments can flow easily in and

out of the economy.

6. Simplification of the regulatory framework in general and tax laws.

7. Improvement in bandwidth for internet and data communication.

8. Improvement in the enforcement of intellectual property rights.

9. Implementation of the WTO agreement full.

All investments foreign and domestic are made under the expectation of future profits.

The economy benefits if economy policy fosters competition, creates a well functioning

modern regulatory system and discourages artificial monopolies created by the

government through entry barriers. A recognition and understanding of these facts can

result in a more positive attitude towards FDI. The future policies should be designed in

the light of the above observations.

The most important initiatives that need attention are:

20

1. Empowering the State Governments with regard to FDI.

2. Developing fast track clearance system for legal disputes.

3. Changing the mind set of bureaucracy through HR practices.

4. Developing basic infrastructure.

5. Improving India’s image as an investment destination.

While the magnitudes of inflows have recorded impressive growth, they are still at a

small level compared to India’s potential. The policy reforms undertaken have

undoubtedly enabled the country to widen the sectoral and source composition of FDI

inflows. Within a generation, the countries of East Asian transformed themselves. China,

Indonesia, Korea, Thailand and Malaysia today have living standards much above ours.

When competing for FDI, policy makers have to be aware that various measures intended

to induce FDI are necessary. These include liberalisation of FDI regulations and various

business facilitation measures. Other reforms, such as privatization, tend to be more

effective in stimulating FDI inflows, but need to be complemented by reform in other

areas, in order to ensure that FDI inflows are beneficial. Other determinants of FDI,

which were sufficient in the past, may prove to be less relevant in the future

CHAPTER - 6

21

FDI TRENDS IN INDIA

India is the second most populous country and the largest democracy in the world. The far

reaching and sweeping economic reform undertaken since 1991 have unleashed the

enormous growth potential of the economy. There has been a rapid, yet calibrated, move

towards deregulation and liberalisation, which has resulted in India becoming a favourite

destination for investment. Undoubtedly, India has emerged as one of the most vibrant

and dynamic of the developing economies.

India as an Investment Destination

FDI is seen as a means to supplement domestic investment for achieving a higher level of

economic growth and development. FDI benefits domestic industry as well as the Indian

consumers by providing opportunities for technological upgradation, access to global

managerial skills and practices, optimal utilization of human and natural resources,

making Indian industry internationally competitive, opening up export markets, providing

backward forward linkages and access to international quality goods and services. FDI

policy has been constantly reviewed and necessary steps have been taken to make India a

most favourable destination for FDI. There are several good reasons for investing in

India.

1. Third largest reservoir of skilled manpower in the world.

2. Large and diversified infrastructure spread across the country.

3. Abundance of natural resources and self-efficiency in agriculture.

4. Package of fiscal incentives for foreign investors.

5. Large and rapidly growing consumer market.

6. Democratic government with independent judiciary.

22

7. English as the preferred business language.

8. Developed commercial banking network of over 63000 branches supported by a

number of National and State level financial institutions.

9. Vibrant capital market consisting of 22 stock exchanges with over 9400 listed

companies.

10. Congenial foreign investment environment that provides freedom of entry,

investment, location, choice of technology, import and export, and

11. Easy access to markets of Bangladesh, Bhutan, Maldives, Nepal, Pakistan and Sri

Lanka.

India’s Performance in the Global Context

According to UNCTAD World Investment Report, 2007, FDI inflows to South Asia

surged by 126% amounting to $22 billion in 2006, mainly due to investment in India. The

country received more FDI than ever before equivalent to the total inflows during 2003-

2005. Inward FDI inflows to China declined for the first time in 7years. The modest

decline by 4% or $69 billion was mainly due to reduced inflows of financial services.

UNCTAD’s World Investment Report publishes a set of benchmarks for inward FDI

performance that ranks countries by how they do in attracting inward direct investment.

In contrast, despite enjoying a healthy rate of economic growth India ranked 120 th on

UNCTAD’s inward FDI performance index 1999-2001, far below China which ranked

59th and lower than both Pakistan (116th) and Srilanka (111th). As far as inward FDI

potential index is concerned, India ranks 84th as against China’s 40th rank. The World

Investment Report, 2005 noted, “While India has been catching up in inward FDI, it still

ranks near the bottom”.

CONCLUSION

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Economic reforms in India have deregulated the economy and stimulated domestic and

foreign investment, taking India firmly into the forefront of investment destinations. The

Government, keen to promote FDI in the country, has radically simplified and

rationalized policies, procedures and regulatory aspects. Foreign direct investment is

welcome in almost all sectors; expect those strategic concerns (defence and atomic

energy).

Since the initiation of the economic liberalisation process in 1991, sectors such as

automobiles, chemicals, food processing, oil and natural gas, petro-chemicals, power,

services, and telecommunications have attracted considerable investments. Today, in the

changed investment climate, India offers exciting business opportunities in virtually every

sector of the economy. Telecom, electrical equipment (including computer software),

energy and transportation sector have attracted the highest FDI.

Despite its market size and potential, India has yet to convert considerable favourable

investor sentiment into substantial net flows of FDI. Overall, India remains high on

corporate investor radar screens, and is widely perceived to offer ample opportunities for

investment. The market size and potential give India a definite advantage over most other

comparable investment destinations.

India’s investment profile, however, is also conditioned by factors that affect the flow of

FDI, which are bureaucratic delays, wide spread corruption, poor infrastructure facilities

pro-labour laws, political risk and weak intellectual property regime.

In short, this means accelerating India’s integration with the global economy.

BIBLIOGRAPHY

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BOOKS:

Alhijazi, Yahya Z.D (1999): “Developing Countries and Foreign Direct

Investment”, digitool.library.mcgill.ca.8881/dtl_publish/7/21670.htm.

Basu P., Nayak N.C, Archana (2007): “Foreign Direct Investment in India:

Emerging Horizon”, Indian Economic Review, Vol. XXXXII. No.2, pp. 255-266.

Dexin Yang (2003): “Foreign Direct Investment from Developing Countries: A

case study of China’s Outward Investment”, wallaby.vu.edu.au/adtvvut/public/adt.

Johnson Andreas (2004):“ The Effects of FDI Inflows on Host Country Economic

Growth”, http://www.infra.kth.se\cesis\research\publications\working

Yew Siew Youg (2007): “Economic Integration, Foreign Direct Investment and

Growth in ASEAN five members”, psarir.upm.edu.my/5038.

Foreign Investment in India: 1947-48 to 2007-08, Dr. Kamlesh Gakhar

Foreign Direct Investment in India: 1947 to 2007, Dr. Nitin Bhasin

INTERNET :

www.eximbank.com

www.imf.org

www.rbi.org

www.worldbank.org

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