1

INDIAN ECONOMIC ENVIRONMENT

LATEST TRENDS OF FDI IN INFRASTRUCTURE: HAVE WE ACHIEVED REMARKABLY?

Prepared by: GROUP NO: 20 DIV: II, T.Y BBA Darshan kataria (65) Shweta lalwani (72) Riti nagarsheth (86) Rima Prajapati (120)

ACKNOWLEDGEMENT

Any accomplishment requires efforts of many people. I would like to thank all the persons who helped me in my preparation and made this project possible. We would like to express our gratitude to all our teaching faculty of INDIAN ECONOMIC ENVIRONMENT, who helped us by giving proper guidelines regarding the project. We would also like to thank MSU BBA for providing us this opportunity.

INDEX
TOPIC Foreign direct investment Types of FDI and FDI in India Benefits of FDI Infrastructure sector in India Power sector FDI inflows in power sector Analysis of power sector Telecommunication sector Role in Indias development FDI policy in telecommunication Inflow of FDI in telecommunication sector Civil aviation sector Civil aviation at a glance FDI in civil aviation India investment overview Bibliography PAGE NO. 4 5 6 9 10 11 13 15 16 21 24 29 30 31 33 36

FOREIGN DIRECT INVESTMENT

Foreign direct investment (FDI) or foreign investment refers to the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments. Usually involves participation in management, joint-venture, transfer of technology and expertise. There are two types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in a net FDI inflow (positive or negative) and "stock of foreign direct investment", which is the cumulative number for a given period. Direct investment excludes investment through purchase of shares. FDI is one example of international factor movements.

FDI is a measure of foreign ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization. The figure below shows net inflows of foreign direct investment in the United States. The largest flows of foreign investment occur between the industrialized countries (North America, Western Europe and Japan). But flows to non-industrialized countries are increasing sharply

Types of Foreign Direct Investment

an individual; a group of related individuals; an incorporated or unincorporated entity; a public company or private company; a group of related enterprises; a government body; an estate (law), trust or other social institution; or any combination of the above.

Foreign Direct investment in INDIA

Starting from a baseline of less than USD 1 billion in 1990, a recent UNCTAD survey projected India as the second most important FDI destination (after China) for transnational corporations during 2010-2012. As per the data, the sectors which attracted higher inflows were services, telecommunication, construction activities and computer software and hardware. Mauritius, Singapore, the US and the UK were among the leading sources of FDI. FDI for 2009-10 at USD 25.88 billion was lower by five per cent from USD 27.33 billion in the previous fiscal. Foreign direct investment in August dipped by about 60 per cent to aprox. USD 34 billion, the lowest in 2010 fiscal, industry department data released showed. In the first two months of 2010-11 fiscal, FDI inflow into India was at an all-time high of $ 7.78 billions up 77% from $ 4.4 billions during the corresponding period in the previous year.

Benefits of Foreign Direct Investment

One of the advantages of foreign direct investment is that it helps in the economic development of the particular country where the investment is being made. This is especially applicable for developing economies. During the 1990s, foreign direct investment was one of the major external sources of financing for most countries that were growing economically. It has also been noted that foreign direct investment has helped several countries when they faced economic hardship. An example of this can be seen in some countries in the East Asian region. It was observed during the 1997 Asian financial crisis that the amount of foreign direct investment made in these countries was held steady while other forms of

cash inflows suffered major setbacks. Similar observations have also been made in Latin America in the 1980s and in Mexico in 1994-95. For host countries, inward FDI has the potential for job creation and employment, which is often followed by higher wages. Resource transfer, in terms of capital and technical knowledge, is also a key motivator that encourages inward FDI. In recent years, FDI has been used more as a marketentry strategy for investors, rather than an investment strategy. Despite the decline in trade barriers, FDI growth has increased at a higher rate than the level of world trade as businesses attempt to circumvent protectionist measures through direct investments. With globalization, the horizons and limits have been extended and companies now see theworld economy as their market. Additionally for investors, FDI provides the benefits of reduced cost through the realization of scale economies, and coordination advantages, especially for integrated supply chains. The preference for a direct investment approach rather than licensing and franchising can also been viewed in terms of strategic control, where management rights allows for technological know-how and intellectual property to be kept in-house.

In the global economy today, we see many developing countries competing for foreign direct investment. FDI is said to be an important factor for spurring the development of a nation. Lets take a look at some advantages of foreign direct investment to a host country:

Integration into global economy A developing country, which invites FDI, can gain a greater foothold in the world economy by getting access to a wider global market. Technology advancement FDI can introduce world-level technology and technical know-how and processes to developing countries. Foreign expertise can be an important factor in upgrading the existing technical processes in a host country. For example, the civilian nuclear deal between India and the United States would lead to transfer of nuclear energy know-

how between the two countries and allow India to upgrade its civilian nuclear facilities.

Increased competition - As FDI brings in advances in technology and processes, it increases the competition in the domestic economy of the developing country, which has attracted the FDI. Other companies will also have to improve their processes and products in order to stay competitive in the market. Overall, FDI improves the quality of a products and processes in a particular sector. Improved human resources Employees of a host country in which there is an FDI get exposure to globally valued skills. The training and skills upgradation can enhance the value of the human resources of the host country.

The advantages of foreign direct investment to the investor includes access to a larger market in the host country, ability to tap the potential of a cheap and skilled labour, making use of resources in the host country and pursuing growth goals by diversification and optimising costs.

How important is FDI for developing countries?

During the past 15 years, the importance of FDI in the world economy has increased rapidly. The total stock of FDI increased from 8% of world GDP in 1990 to 26% in 2006. Although the bulk of FDI continues to take place between OECD countries, the increase in FDI has been particularly pronounced in developing countries, largely reflecting the integration of large emerging economies, the socalled BRICs (Brazil, Russia, India and China), into the world economy.

The increase of FDI into developing countries has been spectacular. The share of non-OECD countries in the global stock of inward FDI has risen from 22% in 1990 to 32% in 2005 (see Figure 1). China is by far the most important nonOECD country as a recipient of FDI, accounting for about one third of FDI in non-OECD countries in 2005.

However, FDI inflows also tend to be sizable in many other emerging countries. Indeed, since the mid-1990s, inward FDI has become the main source of external finance for developing countries and is more than twice as large as official development aid. Developing countries have also become increasingly active as foreign direct investors themselves.

The share of non-OECD countries in the global stock of outward FDI has risen from 10% in 1990 to 17% in 2005. The rise in outward FDI in emerging economies reflects predominantly the increase in FDI between non-OECD countries (South-South FDI). Outward FDI by emerging economies into the OECD remains relatively small, despite recurrent claims in the popular media that developing countries are acquiring strategic assets in OECD countries.

THE INFRASTRUCTURE SECTOR IN INDIA

Over the past four years, the Indian Economy consistently recorded growth rates in excess of 8.5% per annum resulting in rapidly increasing infrastructure spending.

Total infrastructure spending is expected to increase from

10

US$ 24 billion in 2005 to US$ 47 billion in 2009. (FICCI) Total investment requirement in the infrastructure sector over the next five years is US$ 445 billion

It is estimated that the Infrastructure Sector needs to grow at a CAGR of 15% over the next five years to support the growing requirements of virtually every other sector of the Indian Economy.

With the objective of stimulating and mobilizing increased private sector Investments, either from domestic sources or foreign avenues, the government has offered various incentives

POWER SECTOR
The huge size of the market in the power sector in India and high returns on investment are important factors in boosting FDI inflows to power. 100% FDI is permitted to this sector under automatic route in almost all the power sectors in India except the Atomic energy. There are huge opportunities of FDI in power sector in India. The power sector in India has grown significantly and is an important part of infrastructure. Investment potential in the power sector of India is huge due to the market size and returns on investment capital. Past few years have witnessed an outstanding growth in the power sector especially the sectors based on renewable sources of energy. The total installed capacity of the electric power generation

11

stations in India according to estimates of January 2007 is 128182.47 MW which comprise of the following:

THERMAL = 84149.84 MW HYDRO = 33941.77 MW NUCLEAR = 3900 MW RENEWABLE ENERGY SOURCES (RES) = 6190.86 MW

The government of India aims at reaching 2, 00,000 MW by the year 2012. The regional transmission network along with inter-regional capacity to transmit power will be expanded to ensure this growth. The total power generation in India has increased from 264.3 Billion Units (BUs) during 1990-91 to 551.7 Billion Units during 2006-07(up to Jan.'07). The investments required in the execution of this task will be generated from public-private partnerships in the sector.

Opportunities of Foreign Direct Investment (FDI) in the Power Sector in India exist in Hydro Projects Captive Power Ultra Mega Power Projects Nuclear Power National Grid Program Rural Electrification Trading Renewables

12

FDI INFLOWS TO POWER: 100% FDI is allowed in the power sector under the automatic route in India with the exception of Atomic Energy. Important aspects of FDI in the power sector of India are 100 percent Foreign Direct Investment is allowed under automatic route in almost all the power sectors in India except the Atomic Energy Power projects involving generation and distribution tasks are allowed in all types and sizes As per the Electricity Act 2003, trading in power is activated A duration of 30 years will given as a renewable license period Thermal power plants will get a return of 16 percent on equity and will get 68.5 percent PLF The import of equipments will be entitled to 20 percent of import duty Power generating projects will have a five year tax holiday with five more years which will have a deduction of 30 percent taxable profits.

FDI IN POWER SECTOR:

Cumulative FDI inflows during January 2000-2009 (up to December 2009) are Rs. 472,231.23 crores (US$ 105.99 billion). Out of this, the amount of FDI inflows in the Power Sector during January 2000 to December 2009 is Rs. 20,283.86 crores (US$ 4.50 billion) which is 4.24% of the total FDI inflows. During the period from January 2000 to December 2009, cumulative FDI inflows received from FIPB/SIA, acquisition of existing shares & RBIs automatic routes

13

only. However, this amount does not include FDI inflows received through acquisition route prior to January 2000.

Further, the FDI inflows data on Country specific in respect of Power Sector is available only for the period January 2000 to December 2009. The amount of FDI inflows project specific in respect of all Countries & Sector are not centrally maintained prior to January 2000.

SHARE OF TOP FIVE COUNTRY ATTRACTING FDI INFLOWS FOR POWER SECTOR
(from January 2000 to December 2009):

Ranks

Country

Amount of FDI inflows

%age with total FDI inflows in Power Sector

Rupees in crore

US $ in million

1.

Mauritius

11,472.15

2,465.28

54.89

14
2. 3. 4. 5. Total of above Singapore U.A.E. U.S.A. U.K. 1,525.95 1,283.99 860.60 512.51 15,655.20 362.04 265.42 184.18 106.11 3,383.03 8.06 5.91 4.10 2.36 75.32

SHARE OF TOP FIVE RBIS REGION-WISE (WITH STATE COVERED) IN FDI INFLOWS FOR POWER SECTOR (from January 2000 to December 2009):
Ranks RBIs Regional Office States Covered Amount of FDI inflows %age inflows Sector with FDI for Power

Rupees in crore

US $ in million

1.

Mumbai

2. 3. 4. 5. Total Of Above

New Delhi Ahmedabad Hyderabad Chennai

Maharashtra, Dadra & Nagar Haveli, Daman & Diu Delhi, Part Of UP and Haryana Gujarat Andhra Pradesh Tamil Nadu, Pondicherry

5,058.61

1,097.81

24.44

3,638.53 3,098.46 2,084.04 1,215.74 15,095.38

770.74 681.61 457.78 256.30 3,264.24

17.16 15.18 10.19 5.71 72.68

DETAILS OF TOP 10 FDI INFLOWS RECEIVED IN POWER SECTOR

(Through Indian companies, from January 2000 to December 2009):

S. No

Name Of Company

Indian

Country

Name Of Foreign Collaborat or

Rbi Regional Office

Item Of Manufactur e

Amount Of FDI Inflows

(In Crore) Mumbai 2,160.35 Generation And Supply Of Power

Rs

(In US$ Million) 450.07

1 2

Dabhol Company Ltd

Power

Mauritius Country Details Awaited Royal Bank Of Scotland Plc

Reliance Utilities Ltd

Region Not Indicated

1,320.00

327.09

15
3 Essar Wind Power P. Ltd Mauritius Essar Power Holdings Ltd. Various Nirs Fim Ltd. Mumbai Electricity Generation, Transmission & Distribution Generation & Transmission Of Electric Energy Generation & Transmission Of Electric Energy Produced In Gas Based Thermal Power Plants Generation And Transmission Of Electric Energy Produced In Hydro-Electric Power Plants. Generation And Transmission Of Electricity Generation And Supply Of Power. Generation & Transmission Of Electric Energy Produced In Gas Based Thermal Power Plants Electricity Generation, Transmission & Distribution 1,299.03 266.01

Adani Power Ltd.

U.A.E.

Ahmedabad

1,181.80

243.98

Sophia Company Ltd.

Power

Mauritius

New Delhi

987.55

203.71

Adani Power Ltd

Mauritius

31 Power Investment s A1 Ltd

Ahmedabad

750.00

188.76

Reliance Utilities Ltd.

Singapore

Bio Metrix Marketing P. Ltd. Royal Bank Of Scotland Lnm India Internet Ventures

Mumbai

700.00

177.49

Reliance Utlities Ltd

Country Details Awaited Mauritius

Region Not Indicated New Delhi

600.00

149.92

Sophia Company Ltd.

Power

592.53

122.23

10

Ptc India Ltd.

U.S.A.

As Per Annexure

New Delhi

499.99

103.22

TELECOMMUNICATION SECTOR

INTRODUCTION
The telecom services have been recognized the world-over as an important tool for socio-economic development for a nation. It is one of the prime support services needed for rapid growth and modernization of various sectors of the economy. Indian telecommunication sector has undergone a major process of transformation through significant policy reforms, particularly beginning with the announcement of NTP 1994 and was subsequently re-emphasized and carried forward under NTP 1999. Driven by various policy initiatives, the Indian telecom sector witnessed a

16

complete transformation in the last decade. It has achieved a phenomenal growth during the last few years and is poised to take a big leap in the future also.

STATUS OF TELECOM SECTOR

The Indian Telecommunications network with 621 million connections (as on March 2010) is the third largest in the world. The sector is growing at a speed of 45% during the recent years. This rapid growth is possible due to various proactive and positive decisions of the Government and contribution of both by the public and the private sectors. The rapid strides in the telecom sector have been facilitated by liberal policies of the Government that provides easy market access for telecom equipment and a fair regulatory framework for offering telecom services to the Indian consumers at affordable prices. Presently, all the telecom services have been opened for private participation.

ROLE IN INDIAS DEVELOPMENT

Contribution to GDP

17

According to the UNCTAD, there is a direct correlation between the growth in mobile teledensity and the growth in GDP per capita in developing countries, which tend to have a high percentage of rural population. The share of the telecom services industry in the total GDP has been rising over the past few years (the telecom sector contribution in GDP went up from 2.52% in FY05 to 2.83% in FY07).

LIBERALIZATION
The process of liberalization in the country began in the right earnest with the announcement of the New Economic Policy in July 1991. Telecom equipment

18

manufacturing was de-licensed in 1991 and value added services were declared open to the private sector in 1992, following which radio paging, cellular mobile and other value added services were opened gradually to the private sector. This has resulted in large number of manufacturing units been set up in the country. As a result most of the equipment used in telecom area is being manufactured within the country. A major breakthrough was the clear enunciation of the government s intention of liberalizing the telecom sector in the National Telecom Policy resolution of 13th May 1994.

NATIONAL TELECOM POLICY 1994

In 1994, the Government announced the National Telecom Policy which defined certain important objectives, including availability of telephone on demand, provision of world class services at reasonable prices, improving Indias competitiveness in global market and promoting exports, attractive FDI and stimulating domestic investment, ensuring Indias emergence as major manufacturing / export base of telecom equipment and universal availability of basic telecom services to all villages. It also announced a series of specific targets to be achieved by 1997.

TELECOM REGULATORY AUTHORITY OF INDIA (TRAI)

The entry of private service providers brought with it the inevitable need for independent regulation. The Telecom Regulatory Authority of India (TRAI) was, thus, established with effect from 20th February 1997 by an Act of Parliament, called the Telecom Regulatory Authority of India Act, 1997, to regulate telecom services, including fixation/revision of tariffs for telecom services which were earlier vested in the Central Government. TRAIs mission is to create and nurture conditions for growth of telecommunications in the country in manner and at a pace, which will enable India to play a leading role in emerging global information society. One of the

19

main objectives of TRAI is to provide a fair and transparent policy environment, which promotes a level playing field and facilitates fair competition. In pursuance of above objective TRAI has issued from time to time a large number of regulations, orders and directives to deal with issues coming before it and provided the required direction to the evolution of Indian telecom market from a Government owned monopoly to a multi operator multi service open competitive market. The directions, orders and regulations issued cover a wide range of subjects including tariff, interconnection and quality of service as well as governance of the Authority. The TRAI Act was amended by an ordinance, effective from 24 January 2000, establishing a Telecommunications Dispute Settlement and Appellate Tribunal (TDSAT) to take over the adjudicatory and disputes functions from TRAI. TDSAT was set up to adjudicate any dispute between a licensor and a licensee, between two or more service providers, between a service provider and a group of consumers, and to hear and dispose of appeals against any direction, decision or order of TRAI.

NEW TELECOM POLICY 1999

The most important milestone and instrument of telecom reforms in India is the New Telecom Policy 1999 (NTP 99). The New Telecom Policy, 1999 (NTP-99) was approved on 26th March 1999, to become effective from 1st April 1999. NTP99 laid down a clear roadmap for future reforms, contemplating the opening up of all the segments of the telecom sector for private sector participation. It clearly recognized the need for strengthening the regulatory regime as well as restructuring the departmental telecom services to that of a public sector corporation so as to separate the licensing and policy functions of the Government from that of being an operator. It also recognized the need for resolving the prevailing problems faced by the operators so as to restore their confidence and improve the investment climate. Key features of the NTP 99 include: Strengthening of Regulator. National long distance services opened to private operators. International Long Distance Services opened to private sectors. Private telecom operators licensed on a revenue sharing basis, plus a onetime entry fee. Resolution of problems of existing operators envisaged.

20

Direct interconnectivity and sharing of network with other telecom operators within the service area was permitted. Department of Telecommunication Services (DTS) corporatized in 2000. Spectrum Management made transparent and more efficient. All the commitments made under NTP 99 have been fulfilled; each one of them, in letter and spirit, some even ahead of schedule, and the reform process is now complete with all the sectors in telecommunications opened for private competition.

INDIAN TELECOMMUNICATIONS AT A GLANCE

(As on 31st March 2010)

Rank in world in network size Tele-density (per hundred populations) Telephone connection (In millions) Fixed Mobile Total Village Public Telephones inhabited (Out of 5,93,601 uncovered villages) Foreign Direct Investment (in millions) (from April 2000 till March 2010) Licenses issued Basic CMTS UAS

3rd 52.74 36.95 548.32 621.28 5,69,385 4070 2 38 241

21

Infrastructure Provider I ISP (Internet) National Long distance International Long Distance

219 371 29 24

FDI POLICY
1. In Basic, Cellular Mobile, Paging and Value Added Service, and Global Mobile Personal Communications by Satellite, Composite FDI permitted is 74% (49% under automatic route) subject to grant of license from Department of Telecommunications subject to security and license conditions. 2. FDI up to 74% (49% under automatic route) is also permitted for the following: Radio Paging Service Internet Service Providers (ISPs) 3. FDI up to 100% permitted in respect of the following telecom services: Infrastructure Providers providing dark fibre (IP Category I);

22

Electronic Mail; and Voice Mail Subject to the conditions that such companies would divest 26% of their equity in favour of Indian public in 5 years, if these companies were listed in other parts of the world. 4. In telecom manufacturing sector 100% FDI is permitted under automatic route. 5. The Government has modified method of calculation of Direct and Indirect Foreign Investment in sector with caps and have also issued guidelines on downstream investment by Indian Companies. 6. Guidelines for transfer of ownership or control of Indian companies in sectors with caps from resident Indian citizens to non-resident entities have been issued Foreign Direct Investment limit in telecom services is 74 percent subject to the following conditions: (i) This is applicable in case of Basic, Cellular, Unified Access Services, National/ International Long Distance, V-Sat, Public Mobile Radio Trunked Services (PMRTS), Global Mobile Personal Communications Services (GMPCS) and other value added Services. Both direct and indirect foreign investment in the licensee company shall be counted for the purpose of FDI ceiling. Foreign Investment shall include investment by Foreign Institutional Investors (FIIs), Non-resident Indians (NRIs), Foreign Currency Convertible Bonds (FCCBs), American Depository Receipts (ADRs), Global Depository Receipts (GDRs) and convertible preference shares held by foreign entity. In any case, the `Indian shareholding will not be less than 26 percent. FDI up to 49 percent is on the automatic route and beyond that on the Government route. FDI in the licensee company/Indian promoters/investment companies including their holding companies shall require approval of the Foreign Investment Promotion Board (FIPB) if it has a bearing on the overall ceiling of 74 percent. While approving the investment proposals, FIPB shall take note that investment is not coming from countries of concern and/or unfriendly entities.

(ii)

(iii)

23

(iv) (v)

The investment approval by FIPB shall envisage the conditionality that Company would adhere to licence Agreement. FDI shall be subject to laws of India and not the laws of the foreign country/countries.

Tabular form of FDI policy for the Telecom Sector is as under: Sr. Sector/Activity FDI Cap/Equity Entry route No. 1. Basic and cellular, Unified74% (includingAutomatic Access Services,FDI, FII, NRI,upto 49%. National/International FCCBs, ADRs, Long Distance, V-Sat,GDRs, Public Mobile Radioconvertible FIPB Trunked Servicespreference (PMRTS) Global Mobileshares, andbeyond Personal Communicationsproportionate 49%. Services (GMPCS) andforeign equity in other value added telecomIndian services promoters /Investing Company) 2. ISP with gateways, radio-74% Automatic paging, end-to-end upto 49% bandwidth. FIPB beyond 49% * 3. a) ISP without gateway, 100% Automatic up to 49% b) Infrastructure provider providing dark fibre, right of way, duct space, tower (Category I);

FIPB beyond 49%

c) Electronic mail and voice mail

24

4.

Manufacture of telecom100% equipments Guidelines for calculationof total foreign investment i.e. direct and indirect foreign investment in Indian companies Guidelines for transfer ofownership or control of Indian companies in sectors with caps from resident Indian citizens to non-resident entities.

Automatic

STATEMENT ON FINANCIAL YEAR WISE FOR FOREIGN DIRECT INVESTMENT (FDI) INFLOWS OF TELECOMMUNICATIONS SECTOR FROM APRIL 2000 TO AUGUST 2010 Sr. Year (Apr-Mar) No. 1 2000-01 2 2001-02 3 2002-03 4 2003-04 5 2004-05 6 2005-06 7 2006-07 8 2007-08 9 2008-09 10 2009-10 11 2010-11 (Apr-Aug) Grand Total in Rs. crore 784.16 3,938.46 907.73 408.78 569.54 2,774.18 2,155.08 5,102.61 11,726.87 12,338.32 4,789.22 45,494.95 in US$ million 177.69 873.23 191.60 88.87 124.53 623.16 477.74 1,261.46 2,558.39 2,553.95 1,054.39 9,985.00

25

COUNTRY WISE FDI INFLOW FROM APRIL 2000 TO AUGUST 2010 Sr. No. 1 2 3 4 5 6 7 8 9 10 Name of Country the Amount of Foreign Direct Investment Inflows (In Rs. (In US$ million) crore) Mauritius 29,883.09 6,617.66 Singapore 6,642.95 1,430.13 Russia 1,902.39 394.48 Japan 1,533.44 313.92 U.S.A. 1,059.76 234.71 Country Details 801.56 181.55 Awaited Cyprus 764.79 162.06 U.K. 433.44 94.13 NRI(As 333.01 77.02 Individual Investor) Netherlands 269.56 61.20 %age with Inflows 66.28 14.32 3.95 3.14 2.35 1.82 1.62 0.94 0.77 0.61

SECTOR-WISE FDI INFLOWS FROM APRIL 2000 TO AUGUST 2010 (Amount in millions)

26

Sector

Amount Inflows (In Rs. crore) TELECOMMUNICATIONS 1. Telecommunications 15,354.29 2. Radio paging 26.25 3. Cellular mobile/basic 28,097.08 telephone services 4. Other (telecom) 2,017.32 Sector Total 45,494.95

of

FDI %age Total (In US$ Inflows million) 3,437.68 2.88 5.70 0.00 6,113.45 5.13 428.17 0.36 9,985.00 8.38

of

Foreign direct investment has been one of the major contributors in the growth of the Indian economy. With a growth rate of 45%, Indian telecom industry has the highest growth rate in the world. Hence the need for higher FDI is felt across sectors in the Indian economy. The telecom sector has played a crucial role in attracting FDI in India. The share of telecom sector in the total FDI inflows in India has gone up to 10% in FY09 as compared with just 3% in FY05. The telecom sector requires huge investments for its expansion as it is capitalintensive and FDI plays a vital role in meeting the fund requirements for expansion of the telecom sector. Telecom accounts for almost 10% of the total FDI inflows in the country and has been the third-largest sector to attract FDI in India in the post-liberalisation era.

27

The Indian telecom industry has been an attractive avenue for foreign investors over the years. As per DIPP figures, the cumulative FDI inflow during August 1991 to June 2009 period, in the telecommunication sector amounted to US$ 113 billion. FDI calculation takes into account radio paging, cellular mobile and basic telephone services in the telecommunication sector. The relaxation in FDI norms has attracted many foreign telecom majors to the sector. The presence of foreign players has not only encouraged faster infrastructure development and up gradation but also has opened up the domestic industry to foreign competition. Since 2004, there has been a large inflow of FDI in the sector. During 2004-05 and 2005-06, a period during which the FDI norms were relaxed, the FDI inflow grew by an astounding 300% to US$ 624 million in 2005-06 from merely US$ 125 million in 2004-05. The inflow of FDI has provided tremendous impetus to the sector in the past few years and the attractiveness of the sector has kept the FDI inflows growing steadily. During FY09 the FDI in the telecom sector at US$ 2,558 million was 103% higher than that seen in FY08 at US$ 1,261 million. Further, the FDI in the sector has already reached US$ 2010 million for a six month period of FY10 (Apr-Sep 09) and is expected to surpass the total FDI for FY09.

28

The governments liberalised FDI policies have resulted in several foreign companies entering into the Indian markets. The influx of foreign players in the Indian telecom industry has led to capacity creation, and better infrastructure, which in turn has bettered the network quality. The rise in FDI has also enabled technology transfer, market access and has improved organisational skills; going forward, FDI could be used for providing telecom services to rural areas, where teledensity is still very low. The change in FDI policy that has raised the FDI limit from 49% to 74% for the sector has made it more attractive for foreign players. In the long run the growth prospects of telecom players that have foreign partners will improve and other players will get new avenues to raise capital. There are multi-faceted advantages of encouraging foreign direct investment in telecom sector. Apart from ensuring telecom services at subsidized prices, it can satisfy the dire need of infrastructural reforms in rural areas. The inflows will allow multiple benefits such as technology transfer, market access, improvement in voice and data quality and organizational skills. It increases the flow of foreign currency and helps in maintaining harmonious relationship with the country from which the investment is made. Moreover, India offers an unprecedented opportunity for telecom service operators, infrastructure vendors, manufacturers and associated services companies. FDI in services responds well to openness especially when it comes to the telecommunications sector. This is quite evident looking at the recent boom in the Indian Telecommunication sector. Further liberalization of services involves potential advantages for Indian economy. Benefits can arise from increased competition, lower prices, and better quality of services. FDI in services like Telecommunications provide key inputs to other productive activities that lead to further investment and competitiveness of an economy. Efforts should be made towards attracting efficiency seeking FDI through a right policy that expands operation, improve local skills, establish linkages and upgrade technology. The telecom industry in India has experienced exponential growth over the past few years and has been an important contributor to economic growth; however, the cut-throat competition and intense tariff wars have had a negative impact on the revenue of players. Despite the challenges, the Indian telecom industry will thrive because of the immense potential in terms of new users. India is one of the most-attractive telecom markets because it is still one of the lowest penetrated markets. The government is keen on developing rural telecom infrastructure and is

29

also set to roll out next generation or 3G services in the country. Operators are on an expansion mode and are investing heavily on telecom infrastructure. Foreign telecom companies are acquiring considerable stakes in Indian companies. Burgeoning middle class and increasing spending power, the governments thrust on increasing rural telecom coverage, favourable investment climate and positive reforms will ensure that Indias high potential is indeed realised.

30

CIVIL AVIATION SECTOR

India is one of the few civil aviation markets in the world that witnessed near double-digit growth continuously for the past two decades and this growth story continues. While the aviation industry in many parts of the world faces a recessionary trend, Indian market has maintained its growth momentum both in terms of passenger and cargo traffic. The domestic air passenger traffic in India has witnessed a growth of over 19% between January and August 2010, compared to the same period last year. Passengers carried by domestic airlines during JanuaryAugust were nearly 34 million compared to 28.4 million in the corresponding period in 2009. India's domestic passenger traffic is expected to grow at a rate of 9-10 per cent to reach a level of 150-180 million by the year 2020. It makes India amongst the fastest growing aviation markets in the world with private airlines accounting for major share. With the rapid growth achieved in the recent years, India has become the ninth largest civil aviation market and is expected to be fifth largest civil aviation market in the world in the next few years. It is projected that the centre of gravity in the aviation industry will be shifting to the Asia-Pacific region in the coming years. Considering the strategic position of India, hub-to-hub traffic out of Delhi and Mumbai will be a key part of the future growth. Further, India has an enormous potential for becoming a hub for 'air cargo logistics' and 'Maintenance, Repair & Overhaul' (MRO) work triggered primarily by massive development across the country, fast-growing passenger traffic, aircraft demand, availability of talented engineering workforce, manpower cost competitiveness, fast developing engineering services/R&D expertise and strategic position in the South East Asia.

31

Indian Civil Aviation at a Glance:

Indian has become the ninth largest aviation market in the world From two scheduled airlines operating in 1990 this figure now has gone up to 14 inclusive of cargo airlines From only 100 scheduled Indian aircraft deployed by Indian carriers, the figure has now gone up 4 times to 478. The number is expected to reach thousand in 2020 There are currently 325 non-scheduled aircraft and 793 in the miscellaneous category The total number of aircraft holding current certificate of airworthiness is 1034 With over a 300 million strong middle class, the demand is expected to increase by 8% per annum till 2015 A total number of 557 charter flights were operated bringing 1,18,064 tourists in 2009 Scheduled air services available to/from 82 airports as against only 50 in early 2000 In 2004 - 05, 59 foreign airlines were flying into India. Now, 72 foreign airlines from 49 countries are flying into India International flights deployed by foreign carriers were 711 services / week in winter 2004-05, which increased to 1315 services/week in summer 2009. This is an increase of 85% International flights deployed by Indian carriers increased from 495 services / week to 882 services / week during the same period. This is an increase of 78% Correspondingly, the number of passengers has risen from around 14 million to 27 million to / from India, showing an increase of around 90% With 82 airports already functional, the Government has already identified around 18 new Greenfield airports to be developed

32

It is estimated that the airport system may be handling over 300 million passengers per annum by 2020. For the purpose, a total of USD 30 billion investment is required including the USD 9 billion already identified.

FDI IN Civil Aviation Sector

The present policy of FDI in the Civil Aviation sector covers Airports and Air Transport Services. The Civil Aviation sector, however, includes Airports, Scheduled and Non-Scheduled domestic passenger airlines, Helicopter services/ Seaplane services, Ground Handling Services, Maintenance and Repair organizations; Flying training institutes; and Technical training institutions. It has now been decided to amplify and lay down the policy for Foreign Direct Investment (FDI) for the Civil Aviation sector. For the purposes of the Civil Aviation sector: (i) Airport means a landing and taking off area for aircrafts, usually with runways and aircraft maintenance and passenger facilities and includes aerodrome as defined in clause (2) of section 2 of the Aircraft Act, 1934; (ii) "Aerodrome" means any definite or limited ground or water area intended to be used, either wholly or in part, for the landing or departure of aircraft, and includes all buildings, sheds, vessels, piers and other structures thereon or pertaining thereto; (iii)"Air transport service" means a service for the transport by air of persons, mails or any other thing, animate or inanimate, for any kind of remuneration whatsoever, whether such service consists of a single flight or series of flights; (iv) "Air Transport Undertaking" means an undertaking whose business includes the carriage by air of passengers or cargo for hire or reward; (v) "Aircraft component" means any part, the soundness and correct functioning of which, when fitted to an aircraft, is essential to the continued airworthiness or

33

safety

of

the

aircraft

and

includes

any

item

of

equipment;

(vi) "Helicopter" means a heavier-than -air aircraft supported in flight by the reactions of the air on one or more power driven rotors on substantially vertical axis; (vii) "Scheduled air transport service", means an air transport service undertaken between the same two or more places and operated according to a published time table or with flights so regular or frequent that they constitute a recognizably systematic series, each flight being open to use by members of the public; (viii) Non-Scheduled Air Transport service means any service which is not a scheduled air transport service and will include Cargo airlines; (ix) Cargo airlines would mean such airlines which meet the conditions as given in the Civil Aviation Requirements issued by the Ministry of Civil Aviation; (x) "Seaplane" means an aeroplane capable normally of taking off from and alighting solely on water; (xi) Ground Handling means (i) ramp handling , (ii) traffic handling both of which shall include the activities as specified by the Ministry of Civil Aviation through the Aeronautical Information Circulars from time to time, and (iii) any other activity specified by the Central Government to be a part of either ramp handling or traffic handling.

Policy for Foreign Direct Investment (FDI) in Civil Aviation sector

The policy for FDI in the Civil Aviation Sector would be subject to the Aircraft Rules, 1934 as amended from time to time, Civil Aviation Requirements, and Aeronautical Information Circulars as notified by the Ministry of Civil Aviation Sector/Activity % of FDI Entry Route Cap/Equity Greenfield projects 100% Automatic Automatic up to 74% Government route beyond 74%

Existing projects 100%

34

Air Transport Services (a) Air Transport Services would include Domestic Scheduled Passenger Airlines; NonScheduled Airlines; Chartered Airlines; Cargo Airlines; helicopter and seaplane services. (b) No foreign airlines would be allowed to participate directly or indirectly in the equity of an Air Transport Undertaking engaged in operating Scheduled, Non-Scheduled, and Chartered airlines. (c) Foreign airlines are allowed to participate in the equity of companies operating Cargo airlines, helicopter and seaplane services.

Sector/Activity

% of Cap/Equity

FDI Entry Route Automatic

1. Scheduled Air Transport Service/ 49% FDI Domestic Scheduled Passenger Airline (100% for NRIs) 2. Non-Scheduled Air Transport Service/ 74% FDI Non-Scheduled airlines, Chartered airlines, and Cargo airlines (100% for NRIs)

Automatic 49%

up

to

Government route beyond 49% and up to 74% Automatic

3. Helicopter services/seaplane requiring DGCA approval

services 100%

Other services under Civil Aviation sector 1. Ground Handling Services subject to 74% FDI sectoral regulations and security clearance (100% for NRIs) Automatic 49% up to

Government route beyond 49% and up to 74% Automatic

2. Maintenance and Repair organizations; 100% flying training institutes; and technical training institutions

35

INDIA INVESTMENT OVERVIEW (Figures in dollars billion)

SECTOR
TOTAL INVESTMENTS INVESTMENT ANNOUNCED/ IN UNDERWAY13 COMPLETED PROJECTS IN PAST 5 YRS12 POLICY/ OTHER DETERRENTS TO INVESTMENT INVESTMENT (LOW/ MEDIUM/ HIGH)

TOTAL INVESTMENT GOAL OVER 5 YEARS

Civil Aviation & 0.13 Airport

2.9

High (C)

15-17

Investment Goal - $ 1517 billion by 2010 Rapid growth in passenger and cargo traffic can be sustained only if there is significant improvement in aviation infrastructure. Delays in execution of green-field airports and leasing of existing airports are unaffordable. Apart from green-field airports at Hyderabad, Bangalore, Navi Mumbai, Ludhiana, Pune and Goa, the sector also requires investments in upgradation and modernization of about 30 major air-ports which account for over 95% of the countrys aviation traffic. The visibility of investments currently is only about 20% of the total requirement of about $ 15 billion over the next 5 years. Impediments Lack of transparency and consistency in tender conditions and project execution Inordinate delay between decision to set up a green-field airport and its financial closure Recommendations

36

Permit 100% FDI in green-field airports Invite bids for green-field airports in select cities based on demand forecasts E.g. Navi Mumbai, NOIDA, Nagpur, Goa, Ludhiana Implement privatization of Chennai and Kolkata expeditiously Incorporate learnings from Delhi/ Mumbai tenders Form SPVs for the next 10 large airports40 (mix of city and resort destinations), and privatize - provide viability gap funding where required Ensure developers have adequate experience and develop world-class facilities for all airports (green-field as well as up-gradation and modernization of existing) Modernize Air Traffic Control (ATC) systems and enhance capabilities of personnel Ensure airport facilities and ATC are comparable to best in class airports like Singapore, Dubai, Hong Kong etc. Remove restrictions on foreign ownership in domestic airlines Complete open skies at the earliest (as done with the US) with all other key markets e.g. UK, Singapore no seasonal window, no restrictions Reduce cost of ATF to international levels Passenger traffic is projected to grow at a CAGR of over 15% in the next 5 years Passenger traffic is projected to grow at a CAGR of over 15% in the next 5 years To cross 100 million passengers p.a. by 2010 Cargo traffic to grow at over 20% p.a. over the next five years.

37

BIBILOGRAPHY
www.dot.gov.in

www.dipp.com
business.mapsofindia.com Fdi-india Sectors www.dpncindia.com/.../..