DISSERTATION REPORT ON FOREIGN DIRECT INVESTMENT AND ITS IMPACT ON INDIAN ECONOMY

DISSERTATION REPORT ON “FOREIGN DIRECT INVESTMENT & ITS IMPACT ON INDIAN ECONOMY” SUBMITTED TO UTTRAKHAND TECHNICAL UNIVERSITY IN PARTIAL FULFILMENT OF “MASTER OF BUSINESS ADMINISTRATION” (TWO YEARS FULL TIME DEGREE PROGRAMME)

SUBMITTED TO :

SUBMITTED BY:

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CERTIFICATE

This Is to certify that the project work titled “ FOREIGN DIRECT INVESTMENT & ITS IMPACT ON INDIAN ECONOMY” Is an independent work of “XYZ” student MBA full time 2009-2011. The project has been prepared under my guidance and supervision. This project is in original and not submitted previously.

DATE:-

PLACE

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ACKNOWLEDGEMENT

Consideration, dedication & hard work are essential but not the only factor to achieve the desired goals. Corporation & guidance of the people to make a success must supplement these. It is my pleasure to acknowledge the assistance of a number of people without whose help this project would not have been possible.

First and foremost I would like to express our gratitude to Dr. XYZ my research guide, XYZ for providing invaluable encouragement, guidance, assistance and supervision in completion my dissertation report.

After doing this training I can confidently say that this experience has not only enriched my management knowledge but also has unparsed the maturity of thought and vision, the basic attributes required for being a successful professional.

Date: M.B.A.IV(FINAN CE)

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Contents Chapter 1:

Introduction.  Foreign Institutional Investment.  Foreign Direct Investment.  Investment highlights of FIIs.  Role of govt. to attract the FDI.

Chapter 2:

Research methodology  Objectives of the study.  Limitations of the study.

Chapter 3:

Pattern of FDI in INDIA.  Introduction, Determinants & Types of FDI.  Capital Flows & Growth in India.  Recent Trends of Foreign Investment in india.  Investment in indian market.

Chapter 4:

FDI & its impact on indian economy.  Indian Economy.  Selected Economic indicators.  Sectoral overview.  Disinvestment.  Policy initiatives.  Opportunities.  Import & Export trend.

Chapter 5:

FDI Last updates march 2010.

Chapter 6:

Conclusion & suggestion.

Chapter 7: .

Bibliography.

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CHAPTER –I Introduction to Foreign Institutional Investment

Post liberalization period of India has witnessed a rapid expansion and enrichment of various industrial activities. After the independence India followed a socialist-inspired approach for most of its independent history, with strict government control over private sector participation, foreign trade, and foreign direct investment. However, since the early 1990s, India has gradually opened up its markets through economic reforms by reducing government controls on foreign trade and investment. The privatization of publicly owned industries and the opening up of certain sectors to private and foreign interests has proceeded slowly amid political debate.

Foreign Investment refers to investments made by residents of a country in financial assets and production process of another country. After the opening up of the borders for capital movement these investments have grown in leaps and bounds. But it had varied effects across the countries. In developing countries there was a great need of foreign capital, not only to increase their 7

productivity of labor but also helps to build the foreign exchange reserves to meet the trade deficit. Foreign investment provides a channel through which these countries can have access to foreign capital. It can come in two forms: foreign direct investment (FDI) and foreign portfolio investment (FPI). Foreign direct investment involves in the direct production activity and also of medium to long-term nature. But the foreign portfolio investment is a shortterm investment mostly in the financial markets and it consists of Foreign Institutional Investment (FII). The present study examines the determinants of foreign portfolio investment in the Indian context as the country after experiencing the foreign exchange crisis opened up the economy for foreign capital. India, being a capital scarce country, has taken lot of measures to attract foreign investment since the beginning of reforms in 1991. Till the end of January 2003 it could attract a total foreign investment of around US$ 48 billions out of which US$ 23 billions is in the form of FPI. FII consists of around US$ 12 billions in the total foreign investments.

This shows the importance of FII in the overall

foreign investment programme. As India is in the process of liberalizing the capital account, it would have significant impact on the foreign investments and particularly on the FII, as this would affect short-term stability in the financial markets. Hence, there is a need to determine the push and pull factors behind any change in the FII, so that we can frame our policies to influence the variables which drive-in foreign investment. Also FII has been 8

subject of

intense discussion, as it is held responsible for

intensifying currency crisis in 1990’s elsewhere. The present study would examine the determinants of FII in Indian context.

Here we make an attempt to analyze the effect of return, risk and inflation, which are treated to be

major determinants in the

literature, on FII. The proposed relation (discussed in detail later) is that inflation and risk in domestic country and return in foreign country would adversely affect the FII flowing to domestic country, whereas inflation and risk in foreign country and return in domestic country would have favorable affect on the same. In the next section we would briefly discuss the existing studies. In section 3, we discuss the theoretical model.

There was a strong growth in Foreign Direct Investment (FDI) flows with three quarters of such flows in the form of equity.

As per the economic survey, the growth rate was 27.4 per cent in 2008-09, which was followed by 98.4 per cent in April-September 2006. At US$ 4.2 billion during the first six months of this fiscal, FDI was almost twice its level in April-September, 2005. Capital flows into India remained strong on an overall basis even after gross outflows under FDI with domestic corporate entities seeking a global presence to harness scale, technology and market access advantages through acquisitions overseas.

Total FDI inflows for April-December 2006 stood at US$ 9.3 billion, as compared to US$ 3.5 billion in the corresponding period 9

last fiscal. According to certain estimates, India is likely to receive US$ 12 billion of FDI during the current financial year as compared to US$ 5.5 billion in the previous fiscal.

In the past two years, FDI has jumped 100 per cent, from US$ 3.75 billion in 2004-05 to US$ 7.231 billion till November 2006. However, these figures may be an underestimation, say Finance Ministry officials, since these numbers do not include the amount that is reinvested by foreign companies operating in the country. The figure for 2009-2010 is likely to be close to US$ 10 billion if one takes into account profits reinvested by foreign players in Indian operations.

The number of foreign institutional investors (FIIs) registered with the Securities and Exchange Board of India (Sebi) has now increased to 1,030. In the beginning of calendar year 2006, the figure was 813. As many as 217 new FIIs opened their offices in India during 2006. This is the highest number of registrations by FIIs in a year till date. The previous highest was 209 in 2005. The net investments made by the institutions during 2006 was US$ 9,185.90 million against US$ 9,521.80 million in 2005.

Some investment highlights of FII Billionaire investor George Soros-owned fund Dacecroft and New York-based investment firm Blue Ridge are picking 21 per cent

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equity stake in Anil Dhirubhai Ambani Group's Reliance Asset Reconstruction Company (Reliance ARC).

Role of Government initiatives The Government is looking at reviewing regulation involving foreign investments into the country. Aimed at simplifying the investment process, the revised policy will treat foreign direct investment (FDI) and investment from foreign institutional investors (FII) in the same light.

At present, investments by GE Capital, for instance, are termed as FII, while funds from GE are bracketed as FDI. This, despite the fact that GE Capital could be a subsidiary of GE. And in sectors which have a cap on investments, matters are even more complicated. In such a situation, treating all foreign investments, irrespective of FDI or FII, as the same in terms of investment limits and conditions, can be a more workable solution. Once the changes are in place, the policy will be more in tune with investments in developed countries where the distinctions between FDI and FII are fast disappearing.

The sectors that will be affected by the revision include asset reconstruction companies, direct-to-home distribution of broadcast signals and real estate, where separate sub-ceilings or conditions apply at present for FDI, leaving FII investments outside their ambit.

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In a move to bolster investments in the aviation sector, the Reserve Bank of India has said that FIIs can pick up stake in domestic airlines beyond the sectoral FDI cap of 49 per cent through secondary market purchases.

Meanwhile, FDI into India is on the verge of surpassing FII for the first time, the Prime Minister's Economic Advisory Council (EAC) has said. According to the EAC, net FDI for 2009-2010 would be around US$ 9 billion, up from US$ 4.7 billion last year while FII or portfolio inflows are likely to be US$ 7 billion.

Advantages of FII The advantages of having FII investments can be broadly classified under the following categories.

A. Enhanced flows of equity capital FIIs are well known for a greater appetite for equity than debt in their asset structure. For example, pension funds in the United Kingdom and United States had 68 per cent and 64 per cent, respectively, of their portfolios in equity in 1998. Thus, opening up the economy to FIIs is in line with the accepted preference for 12

non-debt creating foreign inflows over foreign debt. Furthermore, because of this preference for equities over bonds, FIIs can help in compressing the yield-differential between equity and bonds and improve corporate capital structures..

B. Managing uncertainty and controlling risks Institutional investors promote financial innovation and development of hedging instruments. Institutions, for example, because of their interest in hedging risks, are known to have contributed to the development of zero-coupon bonds and index futures.

FIIs, as professional bodies of asset managers and

financial analysts, not only enhance

competition in financial

markets, but also improve the alignment of asset prices to fundamentals. 39. Institutions in general and FIIs in particular are known to have good information and low transaction costs. By aligning asset prices closer to fundamentals, they stabilize markets. Fundamentals are known to be sluggish in their movements. Thus, if prices are

aligned to fundamentals, they

should be as stable as the fundamentals themselves. Furthermore, a variety of FIIs with a variety of risk-return preferences also help in dampening volatility.

C. Improving capital markets .

FIIs as professional bodies of asset managers and financial

analysts enhance competition and efficiency of financial markets.

Equity market development aids

economic development.

By

increasing the availability of riskier long term capital for projects, 13

and increasing firms’ incentives to supply more information about themselves,

the FIIs can help in the process of economic

development.

D. Improved corporate governance Good corporate governance is essential to overcome the principal-agent problem between share-holders and management. Information asymmetries and incomplete contracts between share-holders and management are at the root of the agency costs. Dividend payment, for example, is discretionary. Bad corporate governance makes equity finance a costly option. With boards often captured by managers or passive, ensuring the rights of shareholders is a problem that needs to be addressed efficiently in any economy.

Management Control and Risk of Hot Money Flows The two common apprehensions about FII inflows are the fear of management takeovers and potential capital outflows.

A. Management control FII sactas agents on behalf of their principals – as financial investors maximizing

returns. There are domestic laws that

effectively prohibit institutional investors from

taking

management control. For example, US law prevents mutual funds from owning

more than 5 per cent of a company’s stock.

According to the International Monetary Fund’s Balance of Payments Manual 5,

FDI is that category of international 14

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

in the management of the enterprise. According to EU

law, foreign investment is labeled direct investment when the investor buys more than 10 per cent of the investment target, and portfolio investment when the acquired stake is less than 10 percent. Institutional investors on the other hand are specialized financial intermediaries

managing savings collectively on behalf

of investors, especially small investors, towards

specific

objectives in terms of risk, returns, and maturity of claims. All take-overs are governed by SEBI (Substantial Acquisition of Shares and

Takeovers) Regulations, 1997, and sub-accounts of

FIIs are deemed to be “persons acting

in concert” with other

persons in the same category unless the contrary is established.

B.

Potential capital outflows

FII inflows are popularly

described as “hot money”, because of the herding behaviour and potential for large capital outflows. Herding behaviour, with all the FIIs

trying to either only buy or only sell at the same time,

particularly at times of market

stress, can be rational. With

performance-related fees for fund managers, and

performance

judged on the basis of how other funds are doing, there is great incentive to

suffer the consequences of being wrong when 15

everyone is wrong, rather than taking the

risk of being wrong

when some others are right. The incentive structure highlights the danger of a contrarian bet going wrong and makes it much more severe than performing

badly along with most others in the

market. It not only leads to reliance on the same information as others but also reduces the planning horizon to a relatively short one.

Value at Risk models followed by FIIs may destabilize

markets by leading to See Bikhchandani, S and S. Sharma (2000): “Herd Behaviour in Financial Markets”, Working Paper No. WP/00/48, International Monetary Fund, Washington DC, 2000.

15 simultaneous sale by various FIIs, as observed in Russia and Long Term Capital

Management 1998 (LTCM) crisis.

Extrapolative expectations or trend chasing rather than

focusing

on fundamentals can lead to destabilization. Movements in the weightage

attached to a country by indices such as Morgan

Stanley Country Index (MSCI) or

International Finance

Corporation (W) ( IFC) also leads to en masse shift in FII portfolios. . Another source of concern are hedge funds, who, unlike pension funds, life

insurance companies and mutual funds, engage in

short-term trading, take short positions

and borrow more

aggressively, and numbered about 6,000 with $500 billion of assets under control in 1998.

50.

Some of these issues have been

relevant right from 1992, when FII investments were allowed in.

The issues, which continue to be relevant even today, are: (i) 16

benchmarking with the best practices in other developing countries that compete with

India for similar investments; (ii) if

management control is what is to be protected, is there a reason to put a restriction on the maximum amount of shares that can be held by a foreign investor rather than the maximum that can be held by all foreigners put together;

and (iii) whether the limit of 24 per

cent on FII investment will be over and above the 51

per cent

limit on FDI. There are some other issues such as whether the existing ceiling on the ratio between equities and debentures in an FII portfolio of 70:30 should continue

or not, but this is beyond

the terms of reference of the Committee To conclude Foreign Institutional Investment refers to investments made by residents of a country in financial assets and production process of another country. After the opening up of the borders for capital movement these investments have grown in leaps and bounds. But it had varied effects across the countries. It can affect the factor productivity of the recipient country and can also affect the balance of payments. In developing countries there is a great need of foreign capital, not only to increase their productivity of labor but also helps to build the foreign exchange reserves to meet the trade deficit. Foreign investment provides a channel through which these countries can have access to foreign capital. It can come in two forms: foreign direct investment (FDI) and

foreign

portfolio

investment

(FPI).

Foreign

direct

investment involves in the direct production activity and also of 17

medium to long-term nature. But the foreign portfolio investment is a short-term investment mostly in the financial markets and it consists of Foreign Institutional Investment (FII). The FII, given its short-term nature, might have bi-directional causation with the returns of other domestic financial markets like money market, stock market, foreign exchange market, etc. Hence, understanding the determinants of FII is very important for any emerging economy as it would have larger impact on the domestic financial markets in the short run and real impact in the long run.

The some basic objective of the research and methodology used to achieve the project work is presented in the preceding chapter no II.

Overseas FDI by Indian Corporations Increasing Competitiveness of Indian industry due to globalization of Indian Economy has led to emergence and growth of Indian multinationals. This is evident from the FDI overseas from India, which increased by 13.5 times during the last 7 years. The year 2009-2010 witnessed large overseas acquisition deals by Indian corporate to gain market shares and reap economies of scale, supported by progressive liberalization of the external payments regime. Overseas investment that started off initially with the acquisition of foreign companies in the IT and related services

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sector has now spread to other areas such as manufacturing including auto components and drugs and pharmaceuticals.

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CHAPTER-II

Research methodology and data source

Introduction to research:Research refers to a search for knowledge. Research is scientific investigation.

ACCORDING TO REDMAN AND MORY: A market research can’t draw decision, but it helps in the task of decision making. “Research is a systematic effort to gain new knowledge.” ACCORDING TO LERNER’S DICTIONARY OF CURRENT ENGLISH, Research is careful investigation or inquiry especially through search for new facts in any branch of knowledge.

OBJECTIVE OF RESEARCH: 20

a. To study the present status of FDI in India. b. To assess the sector wise FDI in pre &post reform period. c. OPTo study the role of government in boosting FDI in the country d. To study the impact of FDI on Balance of Payment.

Research design: Descriptive research will be used as it is a study of project to describe the present status of fdi in india and the role of government to boosting the fdi in india.

Sample size: Last six years fdi census report is used.

Sample area: Data is collected from the census report of fdi India.

Collection of data: Collection of data is one of the important aspects of research methodology. This consists of gathering the data from various sources.

Types of data:

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Data is important to collect the necessary information. Data may be of two types: primary and secondary data.

Secondary data is one of the parts of research methodology through which information about the project can be collected. For this research data is collected through Websites of RBI, ministery of commerce and various books.

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The study will be based on the secondary data.

2

Review of literature, books and other papers relevant to the topic for obtaining secondary data and for preparing theoretical parts.

3

The collected data will be systematically arranged , tabulated and appropriate analysis will be drawn.

Limitations of the study: 1. The data is collected on secondary basis.

2. The time was short to cover the whole information.

3. Fdi is not only source that impact on Indian economy.

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CHAPTER-III PATTERN OF FDI IN INDIA INTRODUCTION: India's post-independence economic policy combined a vigorous private sector with state planning and control, treating foreign investment as a necessary evil. Prior to 1991, foreign firms were allowed to enter the Indian market only if they possessed technology unavailable in India. Almost every aspect of production and marketing was tightly controlled, and many of the foreign companies that came to India eventually abandoned their projects.

The industrial policy announced in July 1991 was vastly simpler, more liberal and more transparent than its predecessors, and it actively promoted foreign investment as indispensable to India's international competitiveness. The new policy permits automatic 23

approval for foreign equity investments of up to 51 percent, so long as these investments are made in any of

"high priority"

industries that account for the lion's share of industrial activity.

Identifying the growth-augmenting role of foreign capital flows has assumed critical importance in India in recent years. The overall shift in the policy stance in India from export pessimism and foreign exchange conservation to one that assigns an important role to export of goods and services in the growth process has primarily been guided by the perception that an open trade regime could offer a dynamic vehicle for attaining higher economic growth. The absence of any strong and unanimous empirical evidence justifying the universal relevance of an export led growth strategy as also the continued reliance and targets for sustainable current accounts has motivated grater focus on the growth augmenting capacity of foreign capital in the 1990s.

Structural reforms and external financial liberalization measures introduced in the 1990s in India brought in their wake surges un capital flows as well as episodes of volatility associated with the capital account dictating the balance of payment outcome.

Large capital inflows enables an easing of resource constraints and an acceleration of growth in the mid-1990s. in the second half, the foreign exchange market development as well as the rapid transmission of international sell offs facilitated by cross border integration of equity markets via capital flows have as a level 24

provoked a reassessment of the benefits and costs of employing capital flows as a level of growth. Throughout the 1990s, the role assigned to foreign capital in India has been guided by the consistent with the absorptive capacity of the economy. In the aftermath of South-East-Asia crisis, however, the need for further strengthening the capacity to withstand vulnerabilities has necessitated a shift in policy that assigns greater weight age to stability in view of the growing importance of capital flows in relation to trade flows in influencing the course of the exchange rate

and the potentially large volatility and self fulfilling

expectations that often characterize capital flows, reserve adequacy has also emerged as an additional requirement for ensuring stable growth in the context of capital flows. Given the trade off between growth and instability associated with capital flows, the emphasis of the debate relating to capital flows in India has centered around sustainability a country specific approach to liberalization of the capital account a desirable composition and maturity profit of capital flows, and appropriate reserve management and exchange rate policies in the context of capital flows, with only occasional reference to the growth enhancing role of foreign capital in India.

Determinants of FDI: Is India capable of attracting much larger volumes of FDI than she does at present? Should India throw all doors wide open to FDI as advocated by the Harvard economists? Is China's 25

experience a role model for India? The literature on FDI sheds some light on these issues.

Why do firms go abroad? Why do they choose to invest in specific locations? The origins of the theoretical literature on determinants of FDI are to be found in Stephen Hymer’s doctoral dissertation (1978). His thesis briefly put is that firms go abroad to exploit the rents inherent in the monopoly over advantages they possess and FDI is their preferred mode of operations. The advantages firms possess include patented technology, team specific managerial skills, marketing skills and brand names. All other methods of exploiting these advantages in external markets such as licensing agreements and exports are inferior to FDI because the market for knowledge or advantages possessed by firms tends to be imperfect. In other words, they do not permit firms to exercise control over operations essential for retaining and fully exploiting the advantages they own. Hymer's insights form the basis for other explanations such as the transactions costs and internalisation theories ( Buckley and Casson, 1991), most of which in essence argue that firms internalise operations, forge backward and forward linkages in order to by-pass the market with all its imperfections. Dunning (1973) neatly synthesises these and other explanations in the well-known eclectic paradigm or the OLI explanation of FDI. For a firm to successfully invest abroad it must possess advantages which no other firm possess (O), the country it 26

wishes to invest in should offer location advantages (L), and it must be capable of internalising operations (I). Internalisation is synonymous with the ability of firms to exercise control over operations . And such control is essential for the exploitation of the advantages which firms possess and the location advantages which host countries offer.

It is the location advantages emphasised by Dunning, which forms the core of much of the discussion on the determinants of FDI in developing countries. The two other attributes necessary for FDI are taken as given from the perspective of developing countries. Dunning (1973) set the ball rolling on econometric studies with a statistical analysis of survey evidence on the determinants of FDI. His study identified three main determinants of FDI in a particular location; market forces (including market size and growth, as determined by the national income of the recipient country), cost factors (such as labour cost and availability and the domestic inflation situation) and the investment climate (as determined by such considerations as the extent of foreign indebtedness and the state of the balance of payments).

During (1973, 1981) analysis proved influential and were pursued further by others (Agarwal 1980, Root and Ahmed (1979), Levis, 1979, Balasubramanyam and Salisu, 1991) Although the empirical literature continues to grow unabated both in size and

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econometric sophistication, its overall message can be briefly summarised in the form of the following propositions.

1. Host countries with sizeable domestic markets, measured by GDP per capita and sustained growth of these markets, measured by growth rates of GDP, attract relatively large volumes of FDI 2. Resource endowments of host countries including natural resources and human resources are a factor of importance in the investment decision process of foreign firms.

3. Infrastructure

facilities

including

transportation

and

communication net works are an important determinant of FDI. 4. Macro economic stability, signified by stable exchange rates and low rates of inflation is a significant factor in attracting foreign investors.

5. Political stability in the host countries is an important factor in the investment decision process of foreign firms.

6. A stable and transparent policy framework towards FDI is attractive to potential investors.

7. Foreign firms place a premium on a distortion free economic and business environment. An allied proposition here is that a distortion free foreign trade regime, which is neutral in terms of the incentives it provides for import substituting (IS) and

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export industries (EP), attracts relatively large volumes of FDI than either an IS or an EP regime.

8. Fiscal and monetary incentives in the form of tax concessions do play a role in attracting FDI, but these are of little significance

in

the

absence

of

a

stable

economic

environment.

How does India fare on these attributes? She does possess a large domestic market, she has achieved growth rates of around 8.5 to 9 percent per annum in recent years, her overall record on macroeconomic stability, save for the crisis years of the late eighties, is superior to that of most other developing countries. And judged by he criterion of the stability of policies she has displayed a relatively high degree of political stability. It is, however, India’s trade and FDI regimes which are seen as major impediments to increased inflows of FDI. The product and factor market distortions generated by the inward looking import substitution industrial policies India pursued until recently have been widely discussed. So too her complex and cumbersome FDI regime in place until the nineties.

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Types of FDI: •

Greenfield Investment: Direct investment in new facilities or the expansion of existing facilities. Greenfield investments are the primary target of a host nation’s promotional efforts because they create new production capacity and jobs, transfer technology and know-how, and can lead to linkages to the global marketplace. However, it often does this by crowding out local industry; multinationals are able to produce goods more cheaply (because of advanced technology and efficient processes) and uses up resources (labor, intermediate goods, etc). Another downside of greenfield investment is that profits from production do not feed back into the local economy, but instead to the multinational's home economy. This is in contrast to local industries whose profits flow back into the domestic economy to promote growth.

•

Mergers and Acquisitions: Mergers and acquisitions occur when a transfer of existing assets from local firms to foreign firms takes place, this is the primary type of FDI. Cross-border mergers occur when the assets and operation of firms from 30

different countries are combined to establish a new legal entity.

Cross-border acquisitions occur when the control of assets and operations is transferred from a local to a foreign company, with the local company becoming an affiliate of the foreign company. Unlike greenfield investment, acquisitions provide no long term benefits to the local economy-- even in most deals the owners of the local firm are paid in stock from the acquiring firm, meaning that the money from the sale could never reach the local economy. Nevertheless, mergers and acquisitions are a significant form of FDI and until around 1997, accounted for nearly 90% of the FDI flow into the United States.

•

Horizontal Foreign Direct Investment: Horizontal foreign direct investment is investment in the same industry abroad as a firm operates in at home. Horizontal FDI help to

create

economies of scale because the size of the firm become large to reap the advantage and gains.

•

Vertical Foreign Direct Investment: the vertical integration occurs among the firm involved in different stage of the production of a single final product. for example if oil exploration firm and refinery firm merges together. It will be called vertical direct investment. Vertical investment reduces transportation cost, and of communication and coordinating production. Vertical direct investment takes in two forms:

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1) Backward vertical FDI: where an industry abroad provides inputs for a firm's domestic production process 2) Forward vertical FDI: in which an industry abroad sells the outputs of a firm's domestic production processes.

Capital flows and growth in India: Capital flows into India have been predominantly influenced by the policy environment, recognizing the availability constraint and reflecting the emphasis of self reliance, planned levels of dependence on foreign capital in successive Plans were achieved through import substitution industrialization in the initial years of planned development. The possibility of export replacing foreign capital was generally not explored until the 1980s. it is only in the 1990s that elements of an export led growth strategy became clearly evident alongside compositional shifts in the capital flows in favour of commercial debt capital in the 1980s and in favour of non debt flows in the 1990s. The approach to liberalization of restriction on specific capital account transaction however, has all along been against any big-bang.

A large part of the net capital flows to India in the capital account is being offset by the debit servicing burden. As a consequence,

net

resource

transfer

have

fluctuated

quite

significantly in the 1990s turning negative in 1995-96. Till the early 1980s, the capital account of the balance of payment had 32

essentially a financing function. Nearly 80 percent of the financing requirement was met through external assistance. Aid financed import were both largely.

Ineffectual in increasing the rate of growth and were responsible for bloating the inefficient public sector. Due to the tied nature of bilateral aid, India has to pay 20 to 30 percent higher prices in selection to what it could have got through international.

The real resource transfer associated with aid to India, therefore, was mush lower. There were occasions “when India accepted bilateral aid almost reluctantly and without enthusiasm because of the combination of low priority of the project and the inflated process of goofs” The environment for enhancing aid effectiveness has been highlighted as one of the key factor in the assessments of aid by donors, i.e. :open trade secured private property rights, the absence of corruption, respect for the rile of law social safety nets, aid sound macroeconomic and financial policy” the report pf the High Level committee on Balance of Payments 1993 identified a number of factors constraining effective aid utilization on India and underscored the need to initial urgent action on both redacting the overhang of unutilized aid and according priority to externally sided projects in terms pf plan allocations and budgetary previsions. Net resource transfer under aid to India, however turned negative in the second half of the 1990s.

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In the 1980s, India increased its reliance on commercial loans as external assistance increasingly fell short of the growing financing needs. The significant pressures on the balance of payments as the international oil prices more than doubled in 197980 and the world trade volume growth decelerated sharply during 19980-82, triggered an expansion in India’s portfolio of capital inflows to include IMF facilities, grater reliance on the two deposit schemes for non resident Indian the Non- Resident External Rupee Accounts (NRERA) (that started in 1970) and foreign currency Non Resident Account (FCNR) (that started in 1975) and commercial borrowings on a modest scale. A few select banks all Indian financial institutions leading public sector undertakings and certain private corporate were allowed to raise commercial capital from, the international market in the form of loan, bonds and euro notes. Indian borrowed received final terms in the 1980s Spreads over LIBOR for loan to India improved gradually from about 100 basis points in the early 1980s to about 25 basis points for PSUs (50 basis points for private entitles) towards end of 1980s.

Maturities were elongated from seven year to ten year during this period. Debt sustainability indicators, particularly debt/GDP ration and debt service ratio, however, deteriorated significantly during this period.

The policy approach to ECB has undergone fundamental shift sine then with the institution of reformer and external sector 34

consolidation in the 1990s. Ceilings are operated on commitment of ECB with sub ceilings for short term debt. The ceiling on annual approvals has been raised gradually. The force of ECB policy continuous to place emphases on low borrowing cost (by specifying the spread on LIBOR or US TB rates), lengthened maturity profited (liberal norms for above 8 years of maturity) and end use restrictions.

Given the projected need for financing infrastructure project, 15 percent of the total infrastructure financing may have to come from foreign sources. Since the ratio of infrastructure investment to GDP is projected to increase from 5.5 percent in 1995-96 to about 8 percent by 2006, with a foreign financing of about 15 percent foreign capital of about 1.2 percent of GDP has to be earmarked only for he infrastructure sector to achieve a GDP growth rate of bout 8 percent.

NRI deposits represent an importance avenue to access foreign capital. The policy framework for NRI deposit during 1990s has offered increased options to the NRIs through different deposit schemes and by modulation rate of return maturities and the application of cash reserve ratio (CRR) in the 190s FCNR (B) deposit rates have been linked to LIBOR and short term deposits are discouraged. For NRERA, the interest rate are determined by banks themselves. The non resident Rupee deposit (NR (NR) RD) 35

introduced in June 1992 is non reparable although interest earned is fully reparable under the obligation of current account convertibility subscribed to in 1994. in the 1990s NRI deposit remained an important sources of foreign capital with outstanding balances under various schemes taken together rising from about US $10 billion at the close of 1980s to US $ 23 billion at the close of 2001. capital flows from NRIs have occasionally taken the form of large investment in specific bonds, i.e. the Indian Development Bond (IDB) in 1991, the Resurgent Indian Bond RIB) in 1998 and Indian Millennium Deposit (IMD) in 2000.

The need for supplementing data capital with non debt capital with a clear prioritization in favor of the latter has characters the government policy framework from capital flows in the 1990s. the high level committee on balance of payments recommended the need for achievement this composition shift. A major shift in the policy stance occurred in 1991-92 with the liberalization of norms for foreign direct a portfolio investment in India.

The liberalization process started with automatic approval up to 51 percent for investment in select areas. Subsequently the areas covered under the automatic route and the limits of investment were raised gradually culminating in permission for 100 percent participation

in

certain

areas

(particularly

oil

refining

telecommunications, and manufacturing activities in special 36

economic zone). The requirement of balancing the dividend payments with export earnings which was earlier limited to a short list of 22 consumer goods items was completely withdrawn. Limit for FDI in projects relating to electricity generation, transmission and distribution has been removed. FDI in non bank financial activities and insurance is also permitted. Restriction on portfolio investment through purchased of both traded primary and secondary market Indian securities are also liberalized. As opposed to the earlier restriction permitting non- resident Indian (MRIs) overseas corporate bodies (OCBs) to acquire up to 1 percent for foreign institutional investor (FIIs)/NRIs/OCBs while allowing investment by FIIs in September 1992. Subsequently the aggregate limit was raised gradually and presently for FDI investment in different sector provided the general body of the respective firms takes a decision to that effect. Portfolio investment in Global Depository Receipts (GDRs) /American Depository Reseats (ADRs) /Foreign currency convertible bonds (FCCBs) floated by Indian companies in international markets is also permitted.

It is difficult to asses the direct contribution of these flows particularly FDI to the growth process. Anecdotal evidence suggests that foreign controlled firms often use third party export to meet their export obligations. Another factor that contributes to widening the technology gap in FDI in India is the inappropriate intellectual property (IP) regime of India. Survey results for 100US 37

multinationals indicate that about 44 percent of the firms highlighted the weak IP protection in India as a constraining factor for transfer of new technology to Indian subsidiaries. For investment in sector like chemicals and pharmaceuticals almost 80 percent of the firms review Indian IP regime as the key constraining factor for technology transfer. Information collected from annual surveys of select foreign controlled rupee companies (FCRCs)/FDI companies on the export intensity of FCRC/FDI firms during the 1980 and 1990 shows that these firms export only about 10 percent of their domestic sales and the export intensity has increased only modestly in the 1990. it appears that the lure of the large size of the domestic market continues to be on of the primary factor causing FDI flows into India.

Spillover of positive externalities associate with FDI in the form of transfer of technology is also highlighted as another factor that could contribute to growth. The relationship between technology imports comprising impost of capital goods and payment for royalty and technical know how fees) and domestic technology efforts in terms of R & D expenditure does not exhibit any complementarily foreign exchange spent on technology import as percentage of domestic expenses on R & D rather increased significantly in the 1990 in relation to 1980 suggesting the use of transfer patterns of resource transfer. The share of imported raw materials in total raw materials used by FDI firms however, 38

outperformed the overall growth in industrial production in the 1990.

Foreign direct investment Foreign direct investment (FDI) is defined as a long term investment by a foreign direct investor in an enterprise resident in an economy other than that in which the foreign direct investor is based. The FDI relationship, consists of a parent enterprise and a foreign affiliate which together form a transnational corporation (TNC). In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate. The UN defines control in this case as owning 10% or more of the ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm.

In the years after the Second World War global FDI was dominated by the United States, as much of the world recovered from the destruction wrought by the conflict. The U.S. accounted for around three-quarters of new FDI (including reinvested profits) between 1945 and 1960. Since that time FDI has spread to become a truly global phenomenon, no longer the exclusive preserve of OECD countries. FDI has grown in importance in the global economy with FDI stocks now constituting over 20% of global GDP. In the last few years, the emerging market countries such as China and India have become the most favoured destinations for FDI and investor confidence in these countries has soared. As per 39

the FDI Confidence Index compiled by A.T. Kearney for 2005, China and India hold the first and second position respectively, whereas United States has slipped to the third position.

Foreign Investment in India recent tends: After a sharp set back in 1998-99 foreign investment inflows made a smart recovery in 2004-05 and the position was broadly maintained in 2004-05. total foreign investment comprising direct and portfolio which average about US$. 39 billion during the four year ended 1997-98 fell sharply to US $ 2.40 billion in 1998-99 as a fall out of the Asian Crisis in 2004-05, with the total inflow of US$ .10 billion. During the first eight months of 2004-05 total foreign investment inflows have risen by about 47 percent of US $ 3.68 billion form US $ 2.51 billion in the corresponding period in 2004-05 due mainly to about 61 percent increase in foreign direct investment (FDI). The trends in foreign investment flows in 200405 and 2004-05 augur well when seen against the background of private capital flows (net) to emerging market economics being only marginal in 2000 and negative in2001.

(i) Foreign Direct Investment :

40

Foreign direct investment (FDI) flows after reaching a peek of US $ 3.56 billion in 1997-98 receded gradually to US 2.16 billon in 2004-05. FDI inflows rose only marginally to US $ 2.34 billion in 2004-05. FDI inflows during the current financial year (2004-05) o far have been encouraging. During April-November 2001 they show an increase of 61 percent to US $ 2.37 billion for US $ 1.47 billion during April-November 2000,. The source and direction of FDI remained by and large unchanged during the 1990s. companies registered in Mauritius and the US were the principal source of FDI was channeled into computer hardware and software, engineering industries, service, electronic and electrical equipment chemical and allied products and food and dairy products.

FDI is seen as means to supplement domestic investment for achieving a higher level of economic growth and development.

FDI benefits domestic industry as well as the Indian consumer by providing opportunities for technological up-gradation access to global managerial skills and practice optimal utilization of human and nature resources making Indian industry internationally competitive opening up export markets providing backward and forward linkages and access to international quality goods and services. Towards this end, the FDI policy has been constantly received and necessary steps have been taken to make Indian a most favorable destination for FDI. 41

ii) Portfolio Investment: Fresh inflows for portfolio investment by foreign institution investors (FIIs) during 2004-05 were US$ 1.85 billion slightly lower than the inflows of US $ 2.14 billion in the previous year.

During the first eight months of 2004-05 such inflows amounted to US $ 799 million and increase of US $532

million over the

inflows amounted to US $ 799 million and increase of US $ 532 million over the inflows during the corresponding period in 200405. the policy in regard to portfolio investment by FIIs in reviewed constantly and major initiative are taken when necessary. In the Budge for 2004-05 it was proposed to rises the limit for portfolio investment by FIIs from the normal level of 24 percent of the paid up capital of the Company have been permitted to raise the aggregate ceiling for portfolio investment by FIIs through secondary market form the normal level of 24 percent up to the applicable sector cap level of the issued and paid up capital of the company subject to compliance company to the enhances limit beyond 24 percent and (b) a special resolution passé by the general body of the company approving the enhanced limit beyond 24 percent.

Funds raised through issue of ADRs/GDRs amounted in US $831 million in 2004-05 compared with US $ 768 million in 200001. During the current financial year up to November 2001 US $ 477 million has been raised through this route. The government 42

has been liberalizing the guidelines for issue of GDRs/ADRs in a phased manner. The initiative taken in 2004-05 include (a)

As a follows up of the announcement in the budget for 2004-05 Indian companies have been permitted to list in foreign stock exchange by sponsoring ADR/GDR issues with overseas depositor against share held by its shareholders subject to prescribed conditions

(b)

All companies that have made an ADR/GDR issue earlier and list abroad have been permitted the facility of overseas business acquisition through ADR/GDR stock swap under the automatic route subject to conditions that include adherence to FDI policy and the value limit for the transaction not toe exceed US $100 million of 10 times the export earning during the processing

financial

year

Indian

ADRs/GDRs

announced by the Financial Minister in the Union Budge 2004-05 are under finalization in consultation with they RBI and the SEBI.

43

Foreign investment in billions

iii) Non Resident Indian Deposit: Fresh accrual to non resident deposit including accrued interest rose by over 50 percent to US $2.30 billion in 2004-05, on top of an increase of over 60 percent in 2004-05. during the first eight months of the current financial year 2004-05, accrual to NRI deposit were about US $1.98 billion higher than the US $1.52 billion in the same period last year. The outstanding balances under non resident deposit schemes continued their increasing trend, reflecting the overall confidence of non-resident Indian in the strength of the economy. Outstanding balance under all the non0resident deposit schemes amounted to US$ 24.64 billion at the end of November 2001, up from US $ 23.07 billion at the end March 2001 and Dus$.68 billion at end March 2000 raised through 44

IMD amounted to US $3.81 billion in 2004-05, compared with the gross disbursement of US $ 3.19 billion in 2004-05. The increase in disbursements in 2004-05 was mainly on account of the refinancing of prepayment of more expensive loans with relatively softer terms. The prepayment of loans was also reflects in significant increase in amortization payments form US $ 1.50 billion in 2004-05 to US $5.31 billion in 2004-05. as a result disbursements, net of amortization payments in 2004-05 turned negative at US$ 1.50 billion compared with the net inflow of US $0.31 billion in the previous year. The negative flows in 2004-05 were more made up by the funds raised through Indian Millennium Deposits of US $5.51 billion resulting in net overall inflows of US $4.01 billion under external commercial borrowing.

The external commercial borrowing policy continues to provide flexibility in borrowing by Indian corporate and public sector undertaking (PSUs) while at the same time maintaining safe limits for total external borrowings consistent with prudent debt management. The guiding principles for ECB policy are to keep maturities long, costs low, and encourage infrastructure and export sector financing which are crucial for overall growth of the economy. The status of approvals given to the corporate under normal windows during the last three financial years.

The idea of India is changing. This is best proved by the increasing number of countries showing interest to invest in India.

45

Another encouraging factor is that India is considered a stable country for investing in by corporate overseas. This is evident from the fact that not a single corporate has approached the World Bank Group's Multilateral Investment Guarantee Agency (Mega) for non-commercial risk cover for making investments into the country.

India has displaced US as the second-most favored destination for foreign direct investment (FDI) in the world after China according to an AT Kearney's FDI Confidence Index that tracked investor confidence among global executives to determine their order of preferences. The United Nations Conference on Trade and Development (Unclad) has said that India is among the "dominant host countries" for FDI in Asia and the Pacific (APAC).

It is evident. The investment scenario in India has changed. And the figures say that it is for the better.

India attracted more than three times foreign investment at US$ 7.96 billion during the first half of 2008-09 fiscal, as against US$ 2.38 billion during the corresponding period of 2004-05. For the first six months of this fiscal, the country drew US$ 2.86 billion of FDI and US$ 5.10 billion of portfolio investment through GDRs, ADRs, FIIs, offshore funds and others. In a bid to stimulate the sector further, the government is working on a series of ambitious economic reforms.

46

The Centre has divested some of its own powers of approving foreign investments that it exercised through the Foreign Investment Promotion Board (FIPB) and has handed them over to the general permission route under the RBI. The FDI cap for aviation has been hiked from 40 to 49 per cent through the automatic route. It has set up an Investment Commission that will garner investments in the infrastructure sector among others, and plans to increase the limit for investment in the infrastructure sector. The Government approved sweeping reforms in FDI with a first step towards partially opening retail markets to foreign investors. It will now allow 51 per cent FDI in single brand products in the retail sector. Besides retail, other sector are being opened: •

100 per cent allowed in new sectors such as power trading, processing and warehousing of coffee and rubber.

•

FDI limit raised to 100 percent under automatic route in mining of diamonds and precious stones, development of new airports, cash and carry wholesale trading and export trading,

laying

of

natural

gas

pipelines,

petroleum

infrastructure, captive mining of coal and lignite.

•

Subject to other regulations, 100 percent FDI is allowed in distillation and brewing of potable alcohol, industrial explosives and hazardous chemicals.

47

•

Indian investor allowed to transfer shares in an existing company to foreign investors.

•

Limit for telecoms services firms raised to 74 per cent from 49 per cent.

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.

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,

48

failed to get the kind of enthusiastic attention generated by other emerging economies such as China.

Capital Flows: Capital flows to India remained strong during , led by foreign investment flows. Foreign direct investment (FDI) inflows into India at US $ 5.8 billion during 2008-09 (April-January) were 31 per cent higher than in the corresponding period of the previous year, on the back of sustained growth in activity and positive investment climate. FDI was channeled mainly into manufacturing, business and computer services. Mauritius, the US and the UK continued to remain the dominant sources of FDI to India. Foreign institutional investors (FIIs) after remaining subdued during AprilMay 2005 made large purchases in the Indian stock markets in the subsequent months. Cumulative FII inflows during April-February 2008-09 amounted to US $ 8.2 billion, 19 per cent higher than a year ago. The number of FIIs registered with the SEBI increased from 685 at end-March 2005 to 882 by end-March 2006. Capital inflows through the issuances of American depository receipts (ADRs)/global depository receipts (GDRs) were also substantially higher as booming stock markets offered corporate

49

(US $ million)

Table 3.1 capital flows Item

Period

2007-08 2008-09

1

2

3

4

Foreign Direct Investment into India FIIs (net)

AprilJanuary AprilFebruary AprilJanuary AprilDecember AprilDecember

4,478

5,843

6,858

8,176

442

2,141

673

914

2,857

-1,555

ADRs/GDRs External Assistance (net) External Commercial Borrowings (Medium and long-term) (net) Short-term Trade Credits (net)

April2,963 December April-771 January

NRI Deposits (net)

(3,945* ) 1,697 1,666

* : Excluding the IMD redemption. the opportunity to issue equities abroad. Reflecting the increased domestic investment activity, demand for external commercial borrowings (ECBs), including foreign currency convertible bonds (FCCBs), remained high. Non-Resident Indian deposit accounts

50

recorded inflows during April-January 2008-09 in contrast to net outflows in the previous year (Table 53).

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 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 worriesInfrastructural 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 51

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 slow-moving 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.

52

Developing up-front takes: Market StudyIs there a need for the products/services/technology? What is the probable market for the product/service? Where is the market located? Which mix of products and services will find the most acceptability and be the most likely to generate sales? What distribution and sales channels are available? What costs will be involved? Who is the competitor.

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.

Foreign Direct Investment (FDI) is permitted as under the following forms of investments.

•

Through financial collaborations.

•

Through joint ventures and technical collaborations.

•

Through capital markets via Euro issues.

•

Through private placements or preferential allotments.

Forbidden Territories: 53

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.

Foreign

Investment

through

GDRs

(Euro

Issues)

Foreign Investment through GDRs is treated as Foreign Direct Investment :

Indian companies are allowed to raise equity capital in the international market through the issue of Global Depository Receipt (GDRs). GDRs are designated in dollars and are not subject to any ceilings on investment. An applicant company seeking Government's approval in this regard should have consistent track record for good performance (financial or otherwise) for a minimum period of 3 years. This condition would be relaxed for infrastructure projects such as power generation, telecommunication, petroleum exploration and refining, ports, airports and roads.

54

Clearance from FIPB: There is no restriction on the number of Euro-issue to be floated by a company or a group of companies in the financial year . A company engaged in the manufacture of items covered under Annex-III of the New Industrial Policy whose direct foreign investment after a proposed Euro issue is likely to exceed 51% or which is implementing a project not contained in Annex-III, would need to obtain prior FIPB clearance before seeking final approval from Ministry of Finance.

Use of GDRs: The proceeds of the GDRs can be used for financing capital goods imports,

capital

expenditure

including

domestic

purchase/installation of plant, equipment and building and investment in software development, prepayment or scheduled repayment of earlier external borrowings, and equity investment in JV/WOSs in India.

Restrictions: However, investment in stock markets and real estate will not be permitted. Companies may retain the proceeds abroad or may remit funds into India in anticipation of the use of funds for approved end uses. Any investment from a foreign firm into India requires the prior approval of the Government of India.

55

Investment in India - Foreign Direct Investment - Approval Foreign direct investments in India are approved through two routes: Automatic approval by RBI: The Reserve Bank of India accords automatic approval within a period of two weeks (provided certain parameters are met) to all proposals involving: •

foreign equity up to 50% in 3 categories relating to mining activities (List 2).

•

Foreign equity up to 51% in 48 specified industries (List 3).

•

Foreign equity up to 74% in 9 categories (List 4).

•

Where List 4 includes items also listed in List 3, 74% participation shall apply.

The lists are comprehensive and cover most industries of interest to foreign companies. Investments in high-priority industries or for trading companies primarily engaged in exporting are given almost automatic approval by the RBI. Opening an office in India: Opening an office in India for the aforesaid incorporates assessing the commercial opportunity for self, planning business, obtaining legal, financial, official, environmental, and tax advice as needed, choosing legal and capital structure, selecting a location, obtaining personnel, developing a product marketing strategy and more.

56

The FIPB Route: FIPB stands for Foreign Investment Promotion Board which approves all other cases where the parameters of automatic approval are not met. Normal processing time is 4 to 6 weeks. Its approach is liberal for all sectors and all types of proposals, and rejections are few. It is not necessary for foreign investors to have a local partner, even when the foreign investor wishes to hold less than the entire equity of the company. The portion of the equity not proposed to be held by the foreign investor can be offered to the public.

Foreign Direct Investment Recent Trend: India. India replaces the United States as the 2nd most attractive FDI location, up from 3rd place in 2004 and reaching its highest ranking ever. While India's IT and software industry has made it the darling in the global business community over the past few years, global investor interest in other areas is just now catching up.

Indian government has been trying to attract foreign direct investment (FDI) and it seems be paying off. India is still way behind in terms of attracting FDI but India is improving. Forbes reported: “The economy drew in a record 2.9 bin used in foreign direct investment (FDI) in the first four months of the fiscal year ending next March, nearly double last year's amount, the Press Trust of India news agency reported.

'FDI inflows in April-July 2009-2010 increased by 92 pct to 2.9 bin used from 1.5 bin used in the same period of the last fiscal

57

year,' the news agency quoted Commerce Minister Kamal Nath as telling reporters.

The Indian government is reforming the Foreign Investment Promotion Board, and has established the Indian Investment Commission to act as a one-stop shop between the investor and the bureaucracy. Also, India has raised FDI caps in the telecom, aviation, banking, petroleum and media sectors. 'India is set to receive 12 bln usd this year as against 8.3 bln USD in 2008-09,' Nath was quoted as saying.” $12 billion is an impressive figure.

There is no doubt that India is attracting more FDI and India will perhaps continue to do for the foreseeable future. However, the bad part is that the growth in Indian economy and FDI are not creating enough jobs in India. This is what India needs at this moment. So, I hope that Indian government will try to focus on this area more.

Indian government is trying very aggressively to attract foreign direct investment (FDI) and FDI is coming into India these days in a satisfactory way. The interesting thing is that Indian companies have become matured and strong enough to expand their business outside of India. In other words, Indian companies have started to invest in foreign countries in large scale. "No wonder, foreign direct investment (FDI) outflows from India now exceed inflows. June alone saw the closure of 10 cross-border big time deals with a combined transaction value of $1.5 billion.

Around 76 deals worth $5.2 billion were cut in six months between January and June this year. In comparison, the whole of 2005 saw 58

136 deals at a value of $4.7 billion. This could well be the beginning of a global presence for Indian companies. In Unctad’s outward FDI performance index rankings covering 132 economies, India improved its rank from 80 in 1990 to 54 in 2004."Indian companies may have started to go abroad on a large scale but the reality is that they have still some catching up to do compared to companies of China, Korea, Japan and even Malaysia. So, the next challenge is to catch up the big companies of Asia in terms of global presence India requires $150 billion worth of investments to upgrade the country's weak infrastructure over the next 10 years. The government is considering sweeping liberalization to expedite the FDI project review process and eliminate FDI restrictions across a broad range of sectors, including airports, oil, gas and natural resources.

Although more investors view India as an attractive destination, bureaucracy, perceived corruption and a poor infrastructure may cloud efforts to attract FDI. Among the most recent troubles: Telecom Malaysia and Singapore Technologies' bid to buy Idea Cellular was abandoned when it ran into regulatory problems.

Singapore's Changi airport withdrew its bid for the Delhi and Mumbai airports because of constraints on foreign investors.

59

Financial services investors upgrade India from 4th to 2nd most attractive FDI location. The emergence of local players, ICICI Bank and HDFC Bank, along with foreign investors, has helped restructure India's underdeveloped financial sector and spur competition. Deutsche Bank (Germany) is launching a range of savings, investment and loan products as well as investment and financial planning services in seven major Indian cities.

Telecom and utilities investors rank India their 3rd most attractive destination. One reason for the interest is the relaxation of ownership restrictions. In October 2005, the Indian government raised foreign ownership levels to 74 percent (from 49 percent), a move that will add fuel to India's booming IT and software industry. According to NASSCOM, the Indian IT software and services exports have grown from $5.3 billion in 2000 to $16.5 billion in 2005.

Also, estimates suggest that India has the world's fastest-growing mobile phone market, growing at 35 percent per year until 2006.

Immediately following the relaxation of restrictions, Vodafone Group (U.K.) acquired a 10 percent stake in Bharti Tele-Ventures, India's largest mobile phone operator.

Investors in the heavy and light manufacturing sectors are optimistic about India. The country's largest FDI commitment was won when Pohang Iron & Steel (South Korea) confirmed a $12 60

billion deal to build a steel plant and develop iron ore in Orissa.

The success of this deal will be a test case for future large-scale, long-term foreign investment in India. The government has established special economic zones to encourage a competitive, export-oriented manufacturing sector. In 2004, India had the fastest growing large-passenger-car market in the world, which will likely continue to expand given the country's low loan rates, rising incomes and flourishing middle class.

MNCs are happy operating in India, India received record foreign direct investment (FDI) in 2006, with equity inflows expected to top 11 billion dollars, more than double the 5.5 billion dollars of inflows

last

year.

"…A survey on FDI conducted by FICCI shows that the performance of 385 foreign investors operating in India was satisfactory, with 69 per cent reporting profits or break-even. And around 83% of the respondents have expansion plans on the cards.

Despite the overall conditions of slowdown, over 71 per cent respondents reported a capacity utilization of 50-75 per cent. As many as 74 per cent of the respondents find the handling of approvals and applications at the Centre to be good to average.

Around 62 percent find the overall policy framework to be good to average. "The apparent increase in the FDI inflow shows that the improved policy environment is having a positive impact," says a 61

senior official at FICCI. FDI this year(2006) has reached to US$ 20243 Mn as compared to US$ 133 Mn corresponding period 1991-1992.Largest investors in India as per the data provided by Business Today Dec 2009. is as follow:

Table no 3.2 Largest investors in India Country

2008-09 Apr

March Mauritius 11,411 USA 2,210 Japan 925 Netherlands 340 UK 1164 Germany 1345 Singapore 1218 France 82 South 269

2009-2010

Total

% of Total

– Apr- July

Aug91-

Inflow

6,789 1187 133 349 358 126 1946 164 89

Jul206 57,192 21862 9063 8845 8629 6647 6334 3440 3001

38.49 14.71 6.1 5.95 5.81 4.47 4.26 2.31 2.02

62

Korea Switzerland 426 Total FDI 24613

86 13055

2780 174466

1.82

Inflow

All figures are in crore

Source: Business Today December

31,2009 Above table indicates that Mauritius was the largest investor in India contributing 38.49% of total FDI inflow. This was followed

by USA with 14.71 and Japan by 6.1% of total FDI. Other countries like Netherland and UK contributed 5.95% and 5.81% respectively. Germany and Singapore account for 4.47and 4.26% only . France South Korea and Switzerland contribution of FDI accounts for 2.31% 2.02% ad 1.82% respectively.

Table no 3.3 Statement of country wise FDI inflow 63

Sl No 1 2 3 4 5 6 7 8 9 10 11 12

Country

Amount of FDI %

Netherlands Germany France Italy Belgium Finland Luxembourg Austria Spain Ireland Greece Portugal

Inflow 84851.88 64780.32 32567.79 20408.55 5851.64 1726.78 1720.31 1592.66 1422.03 804.91 98.06 51.32

age

with

FDI inflow 6.51 4.97 2.50 1.57 0.45 0.13 0.13 0.12 0.11 0.06 0.01 0.00

The data presented in the above table indicates that Netherland was the largest investor in India contributing 6.51% of total FDI inflow.

64

This was followed by Germany with 4.97% France by 2.50 and Italy by 1.57% of total FDI in India. Other countries likeBelgium Finland Luxemberg Austria Spain and Ireland Netherland account for 0.45 0.13%, 0.12% , 0.11% 0.06% and 0.01% respectively Foreign investment is encouraged with performance requirements, employment generation, transfer of technology, export performance requirements, manufacturing requirements, training and R&D. The role of FDI is as a means to support domestic investment for achieving a higher level of economic development,

providing

opportunities

for

technological

upgradation, access to global managerial skills and practices, optimal utilisation of human and natural resources, making Indian industry internationally competitive, opening up export markets, providing backward and forward linkages and access to international quality goods and services.

FDI basically complements and supplement domestic investment and to some extent fills up savings – investment gap.

India has always emphasised that developing countries need to retain the ability to screen and channel foreign investment in accordance with their domestic interest and priorities the year wise FDI in the country from the financial year 1991-1992 to 2009-2010 is presented in the table below.

65

Table no 3.4 Yearwise FDI Inflows Sl.NO

Year(Apr-

Amount of FDI Inflow

March) In

Rupees In US$ Million

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

1991-1992 1992-1993 1993-1994 1994-1995 1995-1996 1996-1997 1997-1998 1998-1999 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006

Crore 409 1094 2018 4312 6916 9654 13548 12343 10311 12645 19361 14932 12117 17138 24613

16

2006-2007

13055

2896

17

2007-2008

14536

3645

18

2008-2009

13452

3241

19

2009-2010

13764

3524

TOTAL

216218

52208

66

167 393 654 1374 2141 2770 3682 3083 2439 2908 4222 3134 2634 3755 4343

2009-10 2007-08 2005-06 2003-04 2001-02

Series1

1999-00 1997-98 1995-96 1993-94 1991-92 0%

5%

10%

15%

20%

d To achieve the objectives of the economic reforms, one of our significant policy responses has been to focus on enhancing competitiveness of industry by providing the most conducive investment climate. FDI benefits domestic industry as well as the Indian consumer by providing opportunities for technological upgradation, access to global managerial skills and practices, optimal utilisation of human and natural resources, making Indian industry internationally competitive. Today every sector of Indian economy is trying its best to attract more amount of FDI in order to meet their future needs and make the sector competitive. The different sector attracting highest FDI since last four year is presented in the table below:

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Table no 3.5 Sector Attracting Highest FDI Inflows Amount rupees in crores Sector Rank

1

2 3 4

Electrical Equipments (Including Computer software & electronics) Transportations Industry Service Sector (financial &non – financial) Telecommunications (radio paging, cellular mobile, basic telephone services)

200405 (AprilMarch)

200506 (AprilMarch)

% age with FDI inflows

3893

Cumulative Inflows (from August 1991 to jan 2006) 21,103

2,075

2,449

3,821

2,173

1,417

815

948

13,280

10.19

1,551

1,235

2,106

2,169

12,408

9.52

1,058

532

588

905

12,218

9.38

68

2006200707 08 (April- (AprilMarch) Jan)

16.20

5 6 7 8 9 10

Fuels ( Power + Oil refinery) Chemicals (other than fertilizers) Food Processing Industries Drugs & Pharmaceuticals Cement and Gypsum Products Metallurgical Industries Data indicates that

551

521

759

923

11,484

8.81

611

94

909

1,941

8,542

6.56

177

511

174

175

4,694

3.60

192

502

1,343

67

4,221

3.24

101

44

1

1,970

3,231

2.48

222

146

881

621

2,757

2.12

electrical equipment sector attracted highest

amount of FDI since last four year. It was flowed by transportation industry services sector industry and telecommunication other sector of the economy like Fuels attracted 8.81% of total FDI in last four year.

To conclude, it can be said that FDI is the most import tool to attract investment and boost the industrial development. Indian government has been trying to attract foreign direct investment (FDI) and it seems be paying off. India is still way behind in terms of attracting FDI but India is improving. “The economy drew in a record 2.9 bln usd in foreign direct investment (FDI) in the first four months of the fiscal year ending March., nearly double last year's amount, the Press Trust of India news agency reported.

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Shares of major sectors in FDI inflows (Aug 1991 to may 2009)

Foreign Direct Investment: With continued liberalisation of the foreign direct investment (FDI) policy, procedural relaxations, the sustained growth in the economy, and a favourable investment regime, a horde of global corporations are keen on investing in India. India continues to be regarded as one of the fastest expanding economies and the growth outlook for 2008–09 has been projected at a high sub-eight per cent by different rating agencies.

Further, according to a report by the Centre for Monitoring Indian Economy (CMIE), "Our close monitoring of projects through the CMIE CapEx service shows acceleration in the announcement of fresh investment." The CaPex service, with new projects worth US$ 44.89 billion in July, said that on an average, the monthly 70

capturing of fresh investments was US$ 15.32 billion in 2005–06, which increased to US$ 25.18 billion in 2006–07, and to US$ 32.97 billion in 2007–08. In the first quarter of 2008–09, CMIE CapEx service received projects worth US$ 117.70 billion, averaging at US$ 39.14 billion, the report informed.

In spite of the global meltdown, in fiscal year 2007–08, 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 April-December 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 Commerce Minister, Mr Kamal Nath.

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 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.

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.

India: A much favoured destination : 71

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.

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 mostfavoured destination for long-term Japanese investment.

In recent times, Japanese corporations have bought varying amounts of equity stakes in Indian firms, particularly, in the 72

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.

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)."

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•

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.

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.

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.

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•

•

•

•

•

•

•

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 India’s 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.

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.

75

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 reorganisation 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.

76

The government has also proposed wide-ranging modifications in the guidelines FDI over various sectors.

• •

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 liberalisation 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.

CHAPTER-IV FDI AND ITS IMPACT ON INDIAN ECONOMY

India is emerging as fast growing nation, contributing in world trade by bringing reforms in its trade practices. The world's largest democracy, India, has emerged as a new player on the international arena. From 3.5% growth at the time independence 77

till average growth of 9% in 2008, long closed to foreign competition, India has now opened up its market to foreign companies. The major changes brought in by the Indian government in International trade sweep away many archaic and burdensome

regulations

and

create

a

business-friendly

environment for domestic and international business.

The Indian economy India: The promise of growth: India is today one of the six fastest growing economies of the world. The country ranked fourth in terms of Purchasing Power Parity (PPP) in 2001. The business and regulatory environment is evolving and moving towards constant improvement. A highly talented, skilled and English-speaking human resource base forms its backbone.

The Indian economy has transformed into a vibrant, rapidly growing consumer market, comprising over 300 million strong middle class with increasing purchasing power. India provides a large market for consumer goods on the one hand and imports capital goods and technology to modernize its manufacturing base on the other.

An abundant and diversified natural resource base, sound economic, industrial and market fundamentals and highly skilled and talented human resources, make India a destination for business and investment opportunities with an assured potential for attractive returns.

Far-reaching measures introduced by the government over the past few years to liberalise the Indian market and integrate it with the global economy are widely acknowledged.

78

The tenth five year plan document targets a healthy growth rate of 8% for the Indian economy during the plan period 2002 – 07.

Selected Economic Indicators : India remained relatively unscathed from the 1997-98 Asian financial sector crisis and has maintained a healthy growth rate of over 5 per cent despite recession in major world economies over the past two years. This demonstrates the size, strength and resilience of the Indian economy.

India’s GDP for the year 2004-05 was US$ 422 billion. The real GDP growth varied between 6 to 8 per cent per annum (average 6.5 per cent per annum), during the 1990s.

Were it not for the resilience of China and India, the world economy would have been in deep recession in 2002.

Source: Morgan Stanley Dean Witter report.

The sectoral composition of GDP reflects a transition. While the agricultural and industrial sectors have continued to grow, the services sector has grown at a significantly higher pace - it currently contributes nearly half of India’s GDP. On the external front, cumulative foreign investment inflows have been US$ 50 billion since 1991. This includes over US$ 28 billion of Foreign Direct Investment (FDI) and about US$ 22.6 billion in portfolio investment.

Licensing has been removed from all but six sectors. The Indian government is determined to remove any remaining road blocks, real or perceived. India has one of the most transparent and liberal FDI regimes among the emerging developing economies. The Union government has been continuously opening up new sectors to foreign investment, while enhancing FDI limits in others. The year 2002 saw the opening up of the defence, print media, housing 79

and real estate and urban mass transportation sectors. Some of the key aspects of FDI in the country include: • 100 per cent FDI is allowed in most sectors except telecommunications (49 per cent), insurance (26 per cent), banking (49 per cent), aviation (40 per cent) and small scale industries (24 per cent). FDI in excess of 24% is permitted in SSI sector on 50% export obligation.

• FDI inflows grew by 65 per cent over the previous year to reach US$ 3.91 billion during 2004-05. The growth of 65 per cent is encouraging at a time when global FDI inflows have declined by 40 per cent.

• The upward trend in FDI inflows has been sustained with FDI inflows during April-June 2002 being double that of the corresponding period in 2001.

• An Economist Intelligence Unit (EIU) report on ‘World investment prospects 2002’ projects an annual average FDI inflow of US$ 5.3 billion into India during 2002-2006.

80

External sector : India’s external sector posted significant gains during 2004-05, despite the deepening of the global slowdown and uncertainties owing to September 11, 2001 terrorist attacks. The current account registered a surplus after a period of more than two decades. The buoyancy in capital flows bolstered the foreign exchange.

Indicators of liquidity and sustainability of external debt improved further. The exchange rate of the rupee remained broadly stable during the year.

FDI flows to India will go up: UNCTAD ‘’Worldwide FDI flows will decline this year - 25 per cent in developing and 31 per cent in developed countries - but India is one of the few countries where it will go up,’’ Karl Sauvant, Director, UNCTAD told UNI. Source: News reports, 25 November 2002.

According to a recent report on global foreign direct investment inflows, India has been rated the seventh most attractive destination in the world for FDI for 2001.

Weak external demand adversely affected India’s export performance during 2004-05. This was counterbalanced by the listless domestic demand for imports and the softness in international oil prices for a greater part of the year. As a result, the trade deficit, on balance of payments basis, declined from US$ 14.4 billion during 2004-05 to US$ 12.7 billion during 2004-05.

The invisible account continued to provide support to the balance of payments with the surplus increasing from US$ 11.8 billion during 2004-05 to US$ 14.1 billion during 2004-05. The current account recorded a surplus of US$ 1.4 billion. Net capital flows were higher at US$ 9.5 billion during 2004-05.

MNCs happy operating in India, 61% in black : 81

"…A survey on FDI conducted by FICCI shows that the performance of 385 foreign investors operating in India was satisfactory, with 61 per cent reporting profits or break-even. And around 51 percent of the respondents have expansion plans on the cards. Despite the overall conditions of slowdown, over 71 per cent respondents reported a capacity utilization of 50-75 per cent.

As many as 93 per cent of the respondents find the handling of approvals and applications at the Centre to be good to average. The simplification of the approval procedure at the Centre can be gauged by the fact that the number of applications going through the automatic route has risen from 16 per cent in 2000 to 29 per cent in 2001. Also the ratio of FDI inflows to approvals had gone up to 52.8 per cent in 2000 compared to 29 per cent in 1996.

Around 63 percent find the overall policy framework to be good to average. "The apparent increase in the FDI inflow shows that the improved policy environment is having a positive impact," says a senior official at FICCI. FDI this year has risen by 61 per cent to US$ 2.37 billion in April- November 2001 compared to US$ 1.47 billion in the corresponding period last year. Besides 70 per cent feel that bringing funds into the country is relatively easy and 69 per cent say that funds repatriation can be carried out fairly easily…"

Source: India Business World, April 2002.

India’s foreign exchange reserves have risen significantly to over US$ 68 billion by the end of December 2002. This has provided the much needed stability to the exchange rate and strengthening of the rupee.

The external debt to GDP ratio of the country has improved significantly from 38.7 per cent in 1992 to around 22.3 percent in 2001. Among developing countries, India has one of the lowest external debt to GDP ratios.

The value of foreign trade has increased substantially. Both exports from and imports into India are increasing. The total volume of 82

foreign trade in 2004-05 was over US$ 95 billion. In order to boost exports and attract foreign investments, the government had announced in April 2000 the establishment of Special Economic Zones (SEZs) policy. The SEZs would offer world class infrastructure, attractive financial and tax incentives and procedural ease of a duty-free trading area. For all practical purposes, units located in the SEZs are given deemed foreign territory treatment.

A unique feature of the transition of the Indian economy has been an element of high growth with stability. Both at the central and state levels and across political affiliations of the Indian federal and state polity, there is consensus on further economic liberalisation. The reforms programme and the market oriented policies of the government are irreversible.

Sectoral overview Agriculture : Two thirds of India’s population lives in rural areas. Agriculture and related activities are the main source of livelihood for them.

The performance of the agricultural sector has continuously been improving (over many decades), helping the country achieve a surplus in food grains production. This has been facilitated through new agricultural techniques and tools acquired by Indian farmers, mechanisation, use of high yielding varieties of seeds, increasing use of fertilizers and irrigation facilities, on-going operational research in the country’s numerous agricultural universities and colleges, etc. With liberalisation of trade in agricultural commodities, India enjoys a competitive advantage in a number of agricultural and processed food products exports.

While the share of agriculture in GDP (26.6 per cent in 2004-05) is declining because of faster growth of the services sector, production in absolute terms has been steadily rising. Agriculture accounts for 62 per cent of total employment. Some other key highlights include: 83

• India had a buffer stock of foodgrains (wheat and rice) of nearly 50 million tonnes (Dec. 02) as against the target of 20 million tonnes at any given point in time. This has helped India enter the foodgrains export market in a significant way.

• India is the largest producer and consumer of tea in the world and accounts for 28 per cent of world production and 15 per cent of world trade.

• Agri-exports account for 13-18 per cent of total annual exports of the country. Agri-exports amounted to over US$ 6 billion in 2004-05.

• The value of agricultural imports of inputs like fertilizers, etc. are approximately one-fourth the value of exports.

Manufacturing : India has moved from an agrarian to a manufacturing and services led economy. The manufacturing sector contributes around onefourth of the total GDP. The country has built a diversified industrial base comprising traditional handicrafts, small, medium and large manufacturing companies and high technology-oriented products. The industrial output has grown to approx US$ 65 billion.

The country has emerged as an important global manufacturing hub - many multinational corporations (MNCs) like Pepsi, General Electric (GE), General Motors (GM), Ford, Suzuki, Hyundai, Gillette, LG, etc. have followed India’s economic liberalisation process from close quarters and set up successful operations in the country in recent years. They have been able to leverage cost advantages while adhering to global manufacturing facilities.

Companies in the manufacturing sector have consolidated around their area of core competence by tying up with foreign companies to acquire new technologies, management expertise and access to foreign markets. The cost benefits associated with manufacturing 84

in India, have positioned India as a preferred destination for manufacturing and sourcing for global markets.

Services : The services sector currently accounts for almost half of the country’s GDP. Expanding at a rate of 8-10 per cent per annum, services is the fastest growing sector in the Indian economy. In fact, the growth in India’s GDP, despite the global slowdown, is attributed largely to its strong performance.

Availability of highly skilled workers has encouraged many international companies to carry out their research and development activities in India. IT, biotech, tourism, health, financial services and education hold the promise of sustainable high growth. To give a perspective: • The Indian IT industry has grown from US$ 0.8 billion in 1994-95 to US$ 10.1 billion in 2004-05. Domestic software has grown at 46 per cent while software exports have grown at 62 per cent over the last 5 years.

• The last decade has seen the Indian entertainment industry grow exponentially. The key drivers for this have been technology and the government’s recognition of the importance of the sector. The industry is expected to grow at a compound annual growth rate (CAGR) of 27 per cent.

Revenues are projected to increase from US$ 3 billion in 2002 to US$ 10 billion in 2005.

• Information Technology enabled Services (ITeS) with elements like call centres, back office processing, content development and medical transcription are key to rapid growth. The sector has an employment potential of 1.1 million by 2008.

Infrastructure :

85

The infrastructure sector in India, traditionally reserved for the government, is progressively being opened up for private sector participation.

Ports : The country has a 7500 km long coastline dotted with numerous major and minor ports. The areas that have been identified for participation and investment by the private sector include leasing out existing assets of the ports, construction of additional assets such as container terminals, cargo berths, handling equipment, repair facility, captive power plants and captive facilities for port based industries. Foreign investment up to 100 per cent equity participation is permitted in ports through the automatic route for construction and maintenance of ports and harbours.

A number of private companies have already set up port facilities in the country. Two greenfield ports i.e. Pipavav and Mundra in Gujarat have been set up through private participation and these have been able to compete with existing major ports. Many multinational and domestic players have taken over existing port facilities and are operating them. Recently the container terminal at Chennai port has been taken over by an Australian port major.

Roads : India has the second largest road network in the world, spanning 3.3 million kilometres. Most of the private investment in this sector has traditionally been through the build-operate-transfer schemes.

However, now many new projects are being bid out on toll collection mechanism.

Currently, the National Highways Authority of India (NHAI) is implementing the National Highways Development Project (NHDP). NHDP is the largest ever highway development project to be undertaken in the country. The project involves widening of over 13,000 km of highways in the country. The investment for this project is estimated at US$ 13.2 billion at 1999 prices. The project has been broken up into a large number of smaller 86

segments, many of which have been commissioned. Currently work has been completed on 1976 kilometers and another 5222 kilometers of length is under construction.

Airports : India has 122 airports, controlled by the Airports Authority of India (AAI). The total passenger traffic handled by these airports in 2004-05 was over 40 million, while the cargo traffic handled was around 854,000 tonnes. The government is in the process of leasing out the four major international airports at Delhi, Mumbai, Chennai and Kolkata to private operators.

Power : Power Sector, hitherto, had been funded mainly through budgetary support and external borrowings. But given the budgetary support limitation due to growing demands from other sectors, particularly social sector and the severe borrowing constraints, a new financing strategy was enunciated in 1991 allowing private enterprise a larger role in the power sector.

The all India installed capacity of electric power generating stations under utilities was 104917 MW as on March 2002 consisting of 26261 MW hydro, 74428 MW thermal, 2720 MW nuclear and 1507 MW wind. A capacity addition target of 4764 MW consisting of 1536 MW of Hydro and 3228 MW of thermal was envisaged for the year 2004-05 of which 3115 MW consisting of 1106 MW of hydro and 2009 MW of thermal was achieved.

Presently, restructuring and regulatory reforms include bringing about reforms in the State Electricity Boards (SEBs) through establishment of the State Electricity Regulatory Commissions.

Reforms are progressing steadily in the sector and privatisation of SEBs have already begun. The government is also planning a massive restructuring of the finances of SEBs and is looking at a one-time settlement of dues of SEBs. In effect, a large amount of liquidity will be injected in the sector.

87

The Ministry of Power has also formulated a Blue Print to provide reliable, affordable and quality power to all users in the country i.e. power on demand by 2012. This requires huge increase in generation capacity, upgradation of existing generation facilities and also the transmission and distribution network.

Telecommunications : India’s telecommunications network ranks among the top ten countries in the world. One of the world’s largest and fastest growing telecom markets, the country has an investment potential estimated at US$ 39 billion by 2005 and US$ 69 billion by 2010.

Despite a strong base of a billion people, the country has a low telephone density of approximately 5 per cent, estimated to grow to 7 per cent by 2005 and 15 per cent by 2010. The government had allowed private participation in cellular services in 1992. The sector witnessed partial de-regulation between 1994 and 1999. The government announced the New Telecom Policy (NTP) in 1999 to further de-regulate the sector with respect to services like basic, international long distance (ILD), national long distance (NLD) and Wireless in Local Loop (WLL) among others.

Financial sector : The Indian financial sector reforms aim at improving the productivity and efficiency of the economy. It remained stable, even when other markets in the Asian region were facing a crisis.

The opening of the Indian financial market to foreign and private Indian players, has resulted in increased competition and better product offerings to consumers.

The financial sector has kept pace with the growing needs of corporates and other borrowers. Banks, capital market participants and insurers have developed a wide range of products and services to suit varied customer requirements. A trend towards mergers and acquisitions is expected in the near future due to the compulsions of size and limitations of growth of business on its own vis-à-vis growth through acquisitions. The recent favourable government 88

policies for enhancing limits of foreign investments in the banking sector have generated interest from global banking majors.

The Reserve Bank of India (RBI) has ushered in a regime where interest rates are more in line with market forces. This has increased the credit disbursements in the economy which, in turn, will boost industry. Banks and trade financiers have also played an important role in promoting foreign trade of the country.

The potential of the sector is evident from existing and projected estimates: • Presently the total asset size of the Indian banking sector is US$ 270 billion while the total deposits amount to US$ 220 billion in a banking network of over 66,000 branches across the country.

• The size of the insurance market with only 20 per cent of the insurable population currently insured, presents an immense opportunity to new players. Foreign insurance majors have entered the country in a big way and started joint ventures in both life and non-life areas.

Disinvestment : The government over the past decade has been increasingly redefining its role from being a provider of goods and services to that of a policy maker and facilitator. Towards this objective, the government has been consistently divesting its stake in various public sector undertakings (PSUs).

• Between 1991 and 2002, the government divestment process had yielded US$ 6.3 billion to the national exchequer.

Policy Initiatives : • There has been a paradigm shift in the government’s approach to selling its stake since 31 March, 2000. From 89

selling minority stakes, the government has started divesting majority holdings and transferring management control to strategic investors in profitable undertakings.

• The government had set up a separate ministry in late 1999 to facilitate the divestment process. It has also set up a cabinet committee and an inter-ministerial group to consider and facilitate specific divestment proposals.

• Some of the key highlights of the disinvestment policy are: • The 1991-92 budget considered divestment of 20 per cent government equity in select PSUs in favour of public sector institutional investors, mutual funds and workers.

• The Disinvestment Commission (1997-99) made specific recommendations on 58 specific PSUs with respect to disinvestment feasibility and the methodology to be adopted.

• The second phase of disinvestment started in 1998-99.

Each year since 1999, the government is pushing ahead with reforms and disinvestments. The government has now declared its willingness to reduce its stake below 26 per cent in non-strategic PSUs. Opportunities : The successfully privatised projects during 2002-03 include the long-distance international telecom carrier – Videsh Sanchar Nigam Limited (VSNL); petroleum marketing company – IBP; petrochemical company – Indian Petrochemicals Limited (IPCL); metal manufacturing companies – Hindustan Zinc Limited and Bharat Aluminium Company; hotels belonging to India Tourism Development Corporation (ITDC) and the country’s largest small and medium car manufacturing company – Maruti.

90

The government is now considering disinvestments of the Shipping Corporation of India and two state trading corporations (STC and MMTC) among others. One of the biggest privatisation projects that the government has initiated is the leasing of international airports at the four metropolitan cities of Delhi, Mumbai, Chennai and Kolkata. The privatisation mandates will provide a good opportunity to both domestic and foreign investors to pick up stakes in well-performing assets. http://www.divest.nic.in

Actual Disinvestment from April 1991 onwards and : Methodologies Adopted Year No. of cos. In Actual Methodology which equity sold receipts (INR bn) 2002-03 6 47.48 # Strategic sale of JESSOP-72%, HZL – 26%, MFIL-26%, IPCL – 26% and other modes : HCI, ITDC and Maruti 2004-05 10 56.32 # Strategic sale of CMC – 51%, HTL –74%, VSNL – 25%, IBP – 33.58%, PPL— 74%, and other modes: ITDC, HCI, STC, MMTC 2004-05 4 18.70 Strategic sale of BALCO, LJMC; KRL (CRL), CPCL (MRL) 1999-00 2 18.29 GDR—GAIL VSNL-domestic issue, BALCO restructuring, MFIL’s strategic sale and others 1998-99 5 53.71 GDR (VSNL) / Domestic offerings with the participation of FIIs (CONCOR, GAIL). Cross purchase by 3 Oil sector companies i.e.

91

GAIL, ONGC & Indian Oil Corporation 1997-98 1 9.02 GDR (MTNL) in international market.

1996-97 1 3.80 GDR (VSNL) in international market.

Year No. of cos. In Actual Methodology which equity sold receipts (INR bn) 1995-96 5 3.62 Equities of 4 companies auctioned and Government followed the IDBI fixed price offering for the fifth company.

1994-95 13 48.43 Sale through auction method, in which NRIs and other persons legally permitted to buy, hold or sell equity, allowed to participate.

1993-94 Nil Equity of 7 companies sold by open auction but proceeds received in 94-95.

1992-93 35 (in 3 19.13 Bundling of shares abandoned. tranches) Shares sold separately for each company by auction method.

1991-92 47 (31 in one 30.38 Minority shares sold by auction tranche and method in bundles of "very good", 16 in other) "good", and "average" companies.

Note: - * and # indicate estimated and expected figures Source: Ministry of Disinvestment 1 US$ = INR 49 approx.

Trade Balance

:

92

The trade deficit for April- February, 2007 was estimated at US $ 55858.54 million which was higher than the deficit of US $ 37575.61(P)million during April- February, 2006.

Table n o4.6 Import and Export Trend

DEPARTMENT OF COMMERCEECONOMIC DIVISION IMPORTS

&

EXPORTS: (US $ Million)

(PROVISIONAL) February

April – February

Provisional Provisionally Provisional Provisionally Revised**

Revised**

EXPORTS (incl.re-exports) 2007-2008*

7834.49

8993.67

88760.40

91499.99

2008-2009

9701.71

%Growth

23.83

7.87

22.95

2007-2008*

11040.09

11480.03

126336.01 129118.77

2008-2009

14362.69

%Growth

30.10

109126.78 19.26

20082009/20072008 IMPORTS 164985.32 25.11

2008-2009/ 2007-2008 93

30.59

27.78

TRADE BALANCE 2007-2008*

-3205.60

2008-2009

-4660.98

-2486.35

-37575.61

-37618.78

-55858.54

Table no 4.7 India's Exports of Principal Commodities

India's Exports of Principal Commodities (US $ million) Commodity Group

April-October

Percentage Variation

2007-08 2008-09 1 I.

2

3

20092010 P 4

(3)/(2) (4)/(3) 5

Primary Products 6,200.9 8,355.5 9,717.1 34.7 (14.6)

(14.7)

6 16.3

(13.7)

A. Agricultural & 4,202.9 5,247.7 6,355.5 24.9

21.1

Allied Products of which :

(9.9)

(9.3)

(9.0)

1. Tea

237.1

233.6

269.1

94

–1.5

15.2

2. Coffee

125.6

203.8

260.7

62.3

27.9

3. Rice

595.5

799.7

828.6

34.3

3.6

4. Wheat

244.7

120.2

6.8

–50.9 –94.3

151.4

366.6

214.3 142.1

150.7

171.7

196.6

14.0

14.5

7. Cashew incl. 284.9

358.7

319.6

25.9

–10.9

5. Cotton Raw 48.2 incl. Waste 6. Tobacco CNSL 8. Spices

238.9

272.5

356.2

14.0

30.7

9. Oil Meal

328.6

361.4

441.1

10.0

22.0

Marine 680.1

882.1

937.7

29.7

6.3

19.2

525.0

11.0

2637.0

10.

Products 11.

Sugar

& 17.3

Mollases B. Ores

& 1,998.0 3,107.8 3,361.6 55.5

8.2

Minerals of which :

(4.7)

1. Iron Ore

1,190.5 1,928.7 1,776.5 62.0

2.

(5.5)

Processed 414.1

591.3

(4.7) 762.2

–7.9

42.8

28.9

31,341.3 40,692.6 46,336.1 29.8

13.9

Minerals II. Manufactured Goods of which : A. Leather

(74.0)

(71.8)

(65.3)

& 1,320.3 1,559.5 1,625.0 18.1

Manufactures

95

4.2

B. Chemicals

& 6,128.2 7,926.3 9,088.1 29.3

14.7

Basic 3,521.2 4,780.8 5,583.2 35.8

16.8

Related Products 1.

Chemicals, Pharmaceuticals & Cosmetics 2.

Plastic

& 1,481.9 1,620.1 1,766.6 9.3

9.0

Linoleum 3.

Rubber, 874.1

1,149.1 1,310.0 31.5

14.0

376.3

49.9

13.8

8,560.8 11,761.5 16,045.0 37.4

36.4

1. Manufactures 1,740.7 2,320.1 2,783.3 33.3

20.0

Glass, Paints & Enamels etc., 4.

Residual 251.0

Chemicals

428.4

&

Allied Products C. Engineering Goods of which : of metals 2. Machinery & 1,782.7 2,739.2 3,640.0 53.7

32.9

Instruments 3.

Transport 1,524.8 2,407.2 2,722.7 57.9

13.1

equipments 4. Iron & steel

1,789.4 1,981.8 2,934.8 10.8 96

48.1

5.

Electronic 985.9

1,153.6 1,537.9 17.0

33.3

goods D. Textiles

and 7,304.5 9,037.6 9,533.8 23.7

5.5

1. Cotton Yarn, 1,885.0 2,197.9 2,366.6 16.6

7.7

Textile Products Fabrics,

Made-

ups, etc., 2. Natural Silk 224.2 Yarn,

257.4

239.7

14.8

–6.9

Fabrics,

Madeups

etc.

(incl.silk waste) 3.

Manmade 1,124.1 1,101.2 1,205.6 –2.0

Yarn,

9.5

Fabrics,

Made-ups, etc., 4.

Manmade 26.8

43.5

93.8

62.3

115.9

50.8

49.4

32.6

–2.8

Staple Fibre 5. Woolen Yarn, 38.3 Fabrics, Madeups etc.

6.

Readymade 3,478.0 4,667.5 4,820.2 34.2

3.3

Garments 7. Jute & Jute 147.9

173.7

169.2

17.4

–2.6

78.6

80.9

40.7

2.9

Manufactures 8. Coir & Coir 55.9 97

Manufactures 9. Carpets (a)

324.4

467.0

508.4

44.0

8.9

Carpet 315.5

456.0

500.3

44.5

9.7

0.0

0.0

11.1

8.1

24.6

–26.9

Handmade (b)

Carpet 0.0

Millmade (c)

Silk 8.9

Carpets E. Gems

& 7,366.0 9,547.8 9,132.3 29.6

–4.4

Jewellery F. Handicrafts III. Petroleum

226.9

288.9

190.7

27.3

3,664.5 6,119.0 11,308.5 67.0

–34.0 84.8

Products (8.7) IV. Others

(10.8)

(15.9)

1,127.6 1,502.1 3,633.1 33.2 (2.7)

Total Exports

(2.7)

141.9

(5.1)

42,334.3 56,669.2 70,994.8 33.9

25.3

Provisional.

Note : Figures in brackets relate to percentage to total exports for the

period.

Source : DGCI&S. Table no 4.8 Direction of India's Foreign Trade – Exports

98

Direction of India's Foreign Trade - Exports (US $ million) Group/Country

April-October

Percentage Variation

2007-08 2008-09 2009-

(3)/(2) (4)/(3)

2010 P 1 I.

2 O

E

C

3

4

5

6

D 19,178.5 25,330.5 29,380.1 32.1

16.0

U 8,836.2 12,183.5 14,301.3 37.9

17.4

1. Belgium 1,329.0 1,610.3 1,886.3 21.2

17.1

2. France

2.5

Countries A. E of which:

857.7

1,170.5 1,199.7 36.5

3. Germany 1,450.5 1,914.3 2,235.6 32.0

16.8

4. Italy

1,090.3 1,324.1 1,961.7 21.4

48.2

5.

764.4

5.3

1,314.5 1,383.7 72.0

Netherland 6. U K

1,863.6 2,816.8 3,167.9 51.1

12.5

B. North

8,137.5 10,329.6 11,642.3 26.9

12.7

1. Canada

458.0

24.7

15.1

2. U S A

7,679.6 9,758.6 10,985.2 27.1

12.6

and 1,448.6 1,928.8 2,479.1 33.1

28.5

America

C. Asia

571.0

657.1

Oceania of which:

1. Australia 385.3 99

488.0

523.1

26.7

7.2

2. Japan

1,012.3 1,343.4 1,507.1 32.7

D. Other O E 756.2 C

12.2

888.6

957.4

17.5

7.7

275.9

239.0

–13.4 –13.4

D

Countries of which:

1.

318.6

Switzerland II.

O P E C

6,496.6 8,024.7 12,025.5 23.5

49.9

of which:

1. Indonesia 638.4

733.8

1,013.5 15.0

2. Iran

682.9

580.7

977.5

–15.0 68.3

3. Iraq

70.2

53.0

111.5

–24.6 110.5

4. Kuwait

225.1

294.0

351.5

30.6

19.5

1,025.1 1,391.4 32.5

35.7

3,562.5 4,513.0 7,141.9 26.7

58.2

942.8

1,109.0 1,344.5 17.6

21.2

1. Romania 41.6

46.6

70.5

11.9

51.4

2. Russia

417.1

488.5

27.5

17.1

15,425.2 22,051.9 28,094.6 43.0

27.4

12,037.9 17,221.2 20,742.8 43.1

20.4

a) SAARC 2,337.4 3,062.9 3,562.0 31.0

16.3

1.

–0.6

5.

Saudi 773.9

38.1

Arabia 6. U A E III.

Eastern Europe of which:

IV.

Developing

327.2

Countries of which:

A. Asia

803.8 100

901.5

895.9

12.2

Bangladesh 2. Bhutan

51.7

58.7

27.7

—

–52.7

3. Maldives 25.6

41.8

39.4

63.1

–5.6

4. Nepal

445.1

482.7

546.7

8.4

13.3

5. Pakistan

271.3

327.0

789.1

20.6

141.3

6. Sri Lanka 739.9 b)

1,251.3 1,263.1 69.1

Other 9,700.5 14,158.2 17,180.7 46.0

0.9 21.3

Asian Developing Countries of which: 1. People’s 2,012.1 3,382.3 4,015.4 68.1 Rep

18.7

of

China 2.

Hong 1,957.6 2,722.6 2,633.4 39.1

–3.3

South 526.6

899.8

1,265.4 70.9

40.6

4. Malaysia 614.9

606.7

686.9

–1.3

13.2

5. Singapore 1,895.0 3,284.2 3,872.7 73.3

17.9

6. Thailand 442.8

32.0

36.0

2,231.8 3,048.2 4,973.7 36.6

63.2

Kong 3.

Korea

B. Africa

584.5

795.1

of which:

1. Benin 2.

24.4

Egypt 217.3

Arab 101

56.3

82.7

131.0 46.9

341.3

379.5

57.1

11.2

Republic 3. Kenya

237.8

269.9

876.9

South 575.4

872.2

1,366.0 51.6

56.6

177.4

234.8

33.9

32.4

6. Tanzania 92.4

138.0

169.3

49.4

22.7

7. Zambia

38.5

68.0

71.9

76.7

1,155.6 1,782.6 2,378.1 54.3

33.4

6.2

4.

13.5

224.9

Africa 5. Sudan

C. Latin

132.5 22.4

American Countries V.

Others

36.8

57.4

61.0

55.9

VI.

Unspecified

254.3

95.6

89.1

–62.4 –6.7

Total Exports

42,334.3 56,669.2 70,994.8 33.9

25.3

Source : DGCI&S.

Table no 4.9 India's Imports of Principal Commodities

India's Imports of Principal Commodities (US $ million) Commodity Group

April-October

Percentage Variation

102

2007-08 2008-09 1 I.

2 Bulk Imports

3

20092010 P 4

(3)/(2) (4)/(3) 5

23,856.1 34,700.6 49,389.4 45.5 (42.1)

6 42.3

(47.4)

(41.8)

A. Petroleum, Products

Petroleum 17,249.3 24,392.2 35,120.8 41.4 &

Related

(33.7)

(30.2)

Material B. Bulk

(29.6)

44.0

Consumption 1,789.7 1,881.5 1,964.7

5.1

4.4

Goods 1. Wheat 2.

Cereals

0.0 &

Cereal 14.3

0.0

189.3

—

—

16.3

21.2

13.8

29.9

Preparations 3. Edible Oil

1,463.2 1,374.5 1,359.4

-6.1

-1.1

4. Pulses

228.1

344.1

394.1

50.8

14.5

5. Sugar

84.0

146.6

0.7

—

—

C. Other Bulk Items 1. Fertilisers a) Crude b) Sulphur &

4,817.1 8,426.9 12,304.0 74.9

46.0

671.5

1,214.5 1,896.9

80.9

56.2

155.1

191.7

212.8

23.6

11.0

70.3

85.7

61.3

21.9

-28.5

446.0

937.1

1,622.8

110.1 73.2

Unroasted Iron Pyrites c)

103

Manufactured 2. Non-Ferrous Metals

687.1

3. Paper, Paperboard & 393.4

1,024.7 1,473.4

49.1

43.8

555.3

750.9

41.2

35.2

265.7

337.8

18.5

27.1

345.9

362.4

26.7

4.8

75.3

85.5

Mgfd. incl. Newsprint 4. Crude Rubber, incl. 224.2 Synthetic & Reclaimed 5. Pulp & Waste Paper

273.0

6. Metalliferrous Ores & 1,245.0 2,183.0 4,049.2 Metal Scrap 7. Iron & Steel II.

1,323.0 2,837.9 3,433.4

Non-Bulk Imports

33,204.0 47,670.5 54,730.7 43.6 (58.2)

A. Capital Goods 1.

114.5 21.0

(57.9)

(52.6)

11,395.3 16,928.1 23,162.8 48.6

Manufactures

14.8 36.8

of 474.9

691.6

840.8

45.7

21.6

280.5

569.6

800.8

103.1 40.6

Metals 2. Machine Tools 3.

Machinery

except 3,204.4 5,380.5 7,466.8

67.9

38.8

1,115.2

26.8

37.5

5. Electronic Goods incl. 5,659.7 7,536.2 9,735.6

33.2

29.2

Electrical & Electronics 4. Electrical Machinery 639.9

811.1

except Electronics Computer Software 6. Transport Equipments 896.7

1,479.0 2,204.7

64.9

49.1

7. Project Goods

460.1

92.3

117.1

B. Mainly Export Related 8,440.7 11,857.5 10,390.8 40.5

-12.4

239.3

104

998.8

Items 1. Pearls, Precious & 4,530.4 6,197.0 4,254.5

36.8

-31.3

43.5

10.3

1,227.1 1,308.6

54.5

6.6

313.5

27.8

-9.8

13,368.0 18,885.0 21,177.2 41.3

12.1

5,159.4 7,396.2 8,936.2

43.4

20.8

1,374.9 1,522.5

79.2

10.7

1,114.0 1,320.5

43.7

18.5

& 1,608.6 2,101.0 2,543.4

30.6

21.1

Semi-Precious Stones 2. Chemicals, Organic & 2,870.6 4,120.0 4,544.7 Inorganic 3. Textile Yarn, Fabric, 794.3 etc.

4. Cashew Nuts, raw

245.4

C. Others

282.9

of which :

1. Gold & Silver

2. Artificial Resins & 767.3 Plastic Materials 3.

Professional 775.0

Instruments etc. except electrical 4.

Coal,

Coke

Briquittes etc.

5.

381.1

564.0

662.3

48.0

17.4

6. Chemical Materials & 463.3

635.4

798.9

37.1

25.7

359.9

444.4

46.6

23.5

57,060.1 82,371.2 104,120.2 44.4

26.4

Medicinal

&

Pharmaceutical

Products

Products 7. Non-Metallic Mineral Manufactures 245.5 Total Imports Memo items

105

Non-Oil Imports

39,810.8 57,979.0 68,999.4 45.6

19.0

Non-Oil Imports excl. Gold & Silver

34,651.4 50,582.8 60,063.2 46.0

18.7

Mainly Industrial Inputs*

31,640.8 46,650.2 55,155.3 47.4

18.2

* Non oil imports net of gold and silver,bulk consumption goods, manufactured

fertilizers

and

professional

instruments.

Note : Figures in brackets relate to percentage to total imports for the

period.

Source : DGCI & S. Table no 4.10 Direction of India's Foreign Trade – Imports

Direction of India's Foreign Trade – Imports (US $ million) Group/Country

April-October 2007-08

2008-09 2009-2010 P

1 I

2

3

4

O E C D Countries

19,245.3 27,569.6 33,616.6

A. E

9,125.9 12,912.3 14,561.2

U

Of which:

1. Belgium

2,386.2 2,976.5 2,285.8

2. France

651.4 106

886.1

1,198.8

3. Germany

1,993.9 3,286.3 4,151.2

4. Italy

681.1

1,020.7 1,460.8

5. Netherland

380.8

620.9

6. U K

1,705.9 2,387.6 2,292.9

B. North America

624.5

3,658.5 5,118.8 6,667.0

1. Canada

314.8

2. U S A

3,343.7 4,559.6 5,935.2

C. Asia and Oceania

559.2

731.9

3,511.3 5,007.4 6,792.3

Of which:

1. Australia

1,840.8 2,891.9 4,099.7

2. Japan

1,602.8 2,016.8 2,534.7

D. Other

O

E

C

D 2,949.6 4,531.1 5,596.0

Countries Of which:

1. Switzerland II.

O

P

E

2,816.8 4,309.5 5,274.2 C

4,733.1 6,669.3 33,602.9

Of which:

III.

1. Indonesia

1,419.3 1,733.1 2,092.5

2. Iran

187.8

430.9

4,491.6

3. Iraq

0.5

1.2

3,517.8

4. Kuwait

121.9

231.2

3,472.0

5. Saudi Arabia

656.9

870.8

8,491.6

6. U A E

1,960.1 2,864.7 4,991.6

Eastern

Europe

1,326.2 2,341.3 2,406.1

Of which:

1. Romania

99.2

192.6

2. Russia

704.9

1,260.1 1,059.9

107

121.3

IV.

Developing

Countries

14,414.4 21,225.6 34,189.2

Of which:

A. Asia

11,429.6 16,963.9 27,143.7

a) S A A R C

447.9

748.9

856.8

1. Bangladesh

23.9

59.3

139.5

2. Bhutan

35.8

39.2

67.7

3. Maldives

0.3

1.0

1.9

4. Nepal

177.4

221.5

162.1

5. Pakistan

53.8

100.6

187.9

6. Sri Lanka

156.7

327.3

297.7

b) Other

Asian 10,981.7 16,215.0 26,286.9

Developing Countries Of which:

1.

People’s

Rep

of 3,550.2 5,990.3 9,471.6

China 2. Hong Kong

869.1

3. South Korea

1,707.0 2,483.2 2,816.9

4. Malaysia

1,231.7 1,388.8 3,185.4

5. Singapore

1,353.4 1,789.8 3,206.2

6. Thailand

431.5

B. Africa

1,296.2 1,425.9

711.3

953.6

1,948.7 2,806.1 4,281.3

Of which:

1. Benin

56.8

65.9

64.5

2. Egypt Arab Republic 92.7

163.2

1,106.9

3. Kenya

25.4

29.0

33.3

4. South Africa

985.2

1,501.5 1,639.8

5. Sudan

15.3

19.3

108

48.9

6. Tanzania

41.2

32.4

24.6

7. Zambia

15.9

21.7

71.4

C. Latin

American 1,036.1 1,455.6 2,764.3

Countries V.

Others

7.1

VI.

Unspecified

17,334.0 24,547.4 270.1

Total Imports

17.8

35.3

57,060.1 82,371.2 104,120.2

Note : The figures for 2009-2010, which include country-wise distribution of petroleum imports, are not strictly comparable with the

data

for

previous

years.

Source : DGCI&S.

\

CHAPTER-V CONCLUSIONS AND SUGGESIONS

109

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.

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.

India has emerged as one of the potential Market and is ranked as 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, 110

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. The some of the important reasons of lack of the higher FDI can be highlighted as: 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 seachange, 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.

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 worriesInfrastructural hassles:

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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 slow-moving 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 112

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.

Developing up-front takes Market Study: Is there a need for the products/services/technology? What is the probable market for the product/service? Where is the market located? Which mix of products and services will find the most acceptability and be the most likely to generate sales? What distribution and sales channels are available? What costs will be involved? Who is the competi 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.

In sum, Indian government is trying very aggressively to attract foreign direct investment (FDI) and FDI is coming into India these days in a satisfactory way the argument that India should attract large volumes of FDI if only because other countries 113

has done so may be misconceived. The structure, stage of development, sources of FDI and historical factors set India apart from other countries. The optimum level of FDI a country should harbour is a function of the structure, stage of development, sources of FDI it has access to and the volume of co-operant factors it possess. And so too would be the contractual forms of foreign enterprise participation the country should opt for. None of these factors underlie the recent exhortations such as "in terms of foreign investment, it is the direct investment that should be actively sought for and doors should be thrown wide open for foreign direct investment. FDI brings huge advantages (new capital, technology, managerial expertise, and access to foreign markets) with little or no downside “. The open door policies advocated include relaxation of limits on foreign equity participation, reduction of corporate tax rates, relaxation of labour laws which at present do not allow retrenchment of workers or closure of loss making enterprises, and promotion of export processing zones (EPZs).

The empirical research and finding on the basis of various studies indicates that there are many economic and non economic factors directing the amount of FDI , Export and Import situation and inturn Balance of Payment of the country. However FDI and Balance of payment trend of last 15 year shows a healthy sign and

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need to be strengthen further to improve the balance of payment situation of the country.

BIBLIOGRAPHY:

• •

Agarwal, J. (1980) ‘Determinants of Foreign Direct Investment: A Survey’, Weltwirtschaftliches Archiv 116, 739-773.

Athreye S and Kapur S. (2001) Private Foreign Investment In India: pain or Panacea, World Economy, 24, 399-424.

•

Bajpai. N. and Sachs.J.D. (2000) Foreign Direct Investment in India: Issues and Problems, Development Discussion Paper No 759, Harvard Institute For International Development.

•

, 12, 343-369.

•

Kidron, M. (1965) Foreign Investments In India, London, Oxford University Press

•

Kokko, A. (1994), Technology, Market Characteristics, and Spillovers, Journal of Development Economics, 43, 279-293

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•

Kumar, N. (1990) Multinational Enterprises in India (Routledge: London)

•

Kumar, N. (1994) Multinational Enterprises and Industrial Organization: The Case of India, New Delhi: Sage

•

Kumar, N. (1995) Industrialization, Liberalization and Two Way Flows of Foreign Direct Investments: The Case of India, INTECH discussion Paper Series 9504

•

Lall, S. (1980) Vertical Inter-firm Linkages In LDCs: An Empirical Study, Oxford Bulletin of Economics and Statistics, 42, 203-226

•

Lall, S. and Kumar, R (1981) Firm- Level Export Performance in an Inward Looking Economy: The Indian Engineering Industry, World Development, 9, 453-463.

•

Lall, S. (1983) Technological Change, Employment Generation and Multinationals: A Case Study of a Foreign Firm and a Local Multinational In India (International Labour Office, Geneva)

Websites: 1. http://commerce.nic.in/pr_archive.htm 2. https://www.imf.org/external/pubs/ft/bop/2006/0609.pdf.

3. www.ficci.com 4. www.rbi.com

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