Role Of FDI In Industrial Growth Finance Essay

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In today's fast-globalising world,foreign investment is crucial to a country's economy
growth. Here is increasing competition among nations to attract foreign investment
to spur economic growth.Foreign investment comes from two ways: foreign direct
investment (FDI) and foreign institutional investment (FII).

Foreign direct investment (FDI)

FDI is defined as an investment made to acquire lasting (business) interest in
enterprices operatimg outside of the investor's economy.
For instance, if a company registered in USA buys a stake in an Indian
Company,such an investment is termed FDI.
The FDI relationship consists of a parent enterprise and a foreign affiliate, which
together form an multinational corporation. FDI, is permitted through financial
collaborations, capital markets,joint ventures & technical collaborations.
The best example of FDI is Maruti Suzuki. India's experience in the automobile
sector with Suzuki ushering in the modern car on Indian roads - that has been a force
multiplier for the whole automobile sectors - can be seen as a typical example of the
collateral benefit of FDI.

Foreign institutional investment (FII) (How FDI

is different from FII)
Foreign institutional investor is an institute (or an investor) that is registered in a
country outside of the one in which it is currently investing. Such investors include
insurance/reinsurance companies,pensionfunds,mutualfunds,hedgefunds,banks
charitable trusts,foundations, and endowments.

Where can an FII invest?

All FIIs are required to obtain an initial registration with Securities &Exchange
Board of India (SEBI).For granting registration SEBI takes into account track record
of FII.
All registered FIIs can invest in equity market in shares ,debentures, mutual funds.
One major market regulations pertaining FIIs is ONE FII cannot hold more than 10
% of total issued capital.SEBI also regulates that one company should not contribute
more than 30 % share the portfolio of FII.
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How much FII inflow does India attract?

As per data released by SEBI, FIIs invested U.S $ 6.6 billion in equities in Jan-Apr
2010,& U.S $ 5.94 billion in debt in Jan -Apr 2010.s
Number of registered FIIs under SEBI 1711 and registered sub-accounts* rose to
5,382 as of April 30,2010.
*Sub-account- Foreign corporates or affiliates estd. outside India on whose behalf
investments are proposed to be made in India.

FDI in the Pre and Post-reform era of Indian

Economy
Foreign Investment Policy
Pre-1991 era related to import substitution and imputed a highly confined role to FDI
in the economy. As a result, foreign equity participation was limited to 40% and FDI
was largely restricted to priority industries requiring sophisticated technology.
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Policy changes with regard to FDI were brought about consequent to the issuance of
Industrial Policy Statements 1980 and 1982. For instance, 100 per cent exportoriented foreign firms were exempted from 40 per cent equity restrictions.
Simplification of licensing procedures for MRTP companies; allowing non-resident
Indians (NRIs) to invest in Indian companies through equity participation.

However in July 1991 there were fundamental changes in policy. The important
reforms were:permitting large firms including foreign firms' substantial expansion and
diversification;
allowing foreign firms upto a maximum of 51 per cent in high priority industries;
Foreign investments allowed in 22 consumer goods industries subject to the
conditions of dividend being ploughed back;
de-reserving ready-made garments manufacturing and
opening the industry to large-scale undertakings including foreign companies,
subject to the export obligation of 50% and investment limit of Rs. 30 million were
other significant policy changes relating to FDI flow.
Realizing the importance of large investments special incentives have been offered
for attracting FDI in these sectors in infrastructure industries like, power generation,
telecommunications, petroleum exploration, petroleum refining, transportation
(roads, railways, ports, shipping and air services),.

Magnitude of FDI Inflows

India was one of the lowest recipients of FDI among developing countries until
1970sIt was only in the 1990s and in the post-2000, India experienced significant
inflows of foreign capital in the form of FDI and portfolio capital.
India is far behind China in attracting FDI, but it has done remarkably well in recent
years as compared to its performance in the past. For instance, FDI flows reached US
$4675 million in 2003-04 from a small aggregate FDI inflow of US $ 1130 million for
the period 1981-90. India is among the top four Asian destinations for foreign direct
investments. The inflow of US $ 4.3 billion during 2003 was 26.47 per cent higher
over the previous year's inflow of US $3.4 billion. The share of FDI in both total
foreign capital (TFC) and gross domestic product (GDP) reached over 2.3 per cent by
2002, from 0.025 per cent during the 1980s.
The sudden jump in FDI inflows may be attributed to the policy of liberalisation
since 1991.
Trends in Sectorwise Share of FDI, 1921 - 2000

Adnatages of FDI
FDI is usually preferred over other forms of external finance because it is non-debt creating;
non-volatile,and
its returns depend on the performance of the projects financed by the
investors.C:\Users\J S Cheema\Pictures\FDI-logo21-300x300.png
FDI facilitatesinternational trade by promoting transfer of knowledge,
skills,
technology.
In a world of cut throat competition and rapid technological change,FDI's catalytic &
complimentary role can be very valuable.

Reasons that make India an attractive

investment destination
India is the world's largest democracy with a stable political environment.
India has an abundant English speaking, educated, skilled human resource base
which offers its services at far cheaper rates than that may be found in any other
developing or developed country.
India is world's leader in global outsourcing with more than 80% of the market.
India has at this time a young population with roughly 80% of its population below
45 years of age.
The India market is made more attractive by the fast growing consumer-class that is
markedly western in its orientation .
With favourable foreign investment policies, tax incentives and strong economic
fundamentals, India offers attractive returns to prospective investors

India is also being seen as the global destination for R&D, engineering design and
prototype development and a manufacturing hub for high technology products.
Adequate natural resources and raw materials- Iron ore, Coal, bauxite, Fruits and
Vegetables.
A middle class of 250 million persons growing by 20 million annually - major
consumer of consumption goods, white goods and other durables.
Judicial System- Established rule of law and a vibrant three tiered democracy

The Entry ProcessInvesting in India

Automatic Route-General rule
Inform RBI within 30 days of inflow/issue of shares
Location is in conformity with the prescribed parameters
Units undertake to achieve exports and value addition norms as prescribed in the
Export and Import Policy in force;
Prior Permission-By exception
Approval of Foreign Investment Promotion Board needed.Decision generally within
4-6 weeks.
Proposals attracting compulsory licensing
Items of manufacture reserved for the small scale sector
Extension of foreign technology collaboration agreements

Foreign Technology TransferForeign technology is encouraged by the Government both through FDI and through
foreign technology collaboration agreements.
Approvals are not required in respect to all those foreign technology agreements
which involve:

a lump sum payment of up to USD 2 million

royalty payable up to 5% on net domestic sales and 8% on exports, subject to a total
payment of 8% on sales, without any restriction on the duration of royalty payments.
Note - It is permissible for an Indian Company to issue equity shares against
lumpsum fee and royalty in convertible foreign currency.

Is FDI allowed in all sectors?

MAIN SECTORS WITH LIMIT
FDI equity limit-Automatic route
FDI requiring prior approval
Insurance - 26%
Domestic airlines - 49%
Telecom services- Foreign equity 74%
Private sector banks- 74%
Mining of diamonds and precious stones- 74%
Exploration and mining of coal and lignite for captive consumption- 74%
Defence production - 26%
FM Broadcasting - foreign equity 20%
Broadcasting- cable, DTH, up-linking - foreign equity 49%
Trading- wholesale cash and carry, export trading, etc., 100%
Tea plantation - 100%
Development of airports- 100%

Sectors in which FDI is allowed 100%

SECTORS UNDER AUTOMATIC ROUTE UPTO 100% FDI

INFRASTRUCTURE SECTORS UNDER AUTOMATIC ROUTE UPTO 100% FDI
Most manufacturing activities
Non-banking financial services
Drugs and pharmaceuticals that do not attract compulsory licensing or involve use of
recombinant DNA technology
Food processing
Electronic hardware
Software development
Film industry
Advertising
Hospitals
Private oil refineries
Pollution control and management
Exploration and mining of minerals other than diamonds and precious stones
Management consultancy
Venture capital funds/companies
Setting up/development of industrial park/model town/SEZ
Petroleum Products Pipeline
Wholesale Trading
Electricity Generation (except Atomic energy)
Electricity Transmission

Electricity Distribution
Mass Rapid Transport System
Roads & Highways
Toll Roads
Vehicular Bridges
Ports & Harbours
Hotel & Tourism
Townships, Housing, Built-up Infrastructure and Construction Development Project
Greenfield Airports

How much FDI does India attract?

According to Ernst and Young's 2010 European Attractiveness Survey, India is
ranked 4th most attractive FDI destination in 2010.
India attracted FDI equity inflows of U.S $1.2 billion during March 2010. The
cumulative figure from August 1991 to March 2010 stood at U.S $ 132.4
billion,according to report released by Department of Industrial Policy and
Promotion (DIPP).
FDI equity inflows during financial year 2009-10 were U.S $ 26 billion.

ROLE OF FDI IN INDIA'S MANUFACTURING

EXPORTS
India is a union of states with a strong centre. Economic Reform decisionin 1995
allowed state governments to retain foreign exchange income which was was a
landmark decision. State governments were free to identify the industries in which
they wanted investment.
In terms of foreign investment 1st tier western & southern states have been the most
successful- Tamil Nadu, Maharashtra and Karnataka in particular, have attracted
US$ 6-10billion each (approvals) over the 1991-98 period. The 2nd tier comprises

Gujarat, Andhra Pradesh, West Bengal and Uttar Pradesh (between $3.6 and $4.6
billion each). Madhya Pradesh and Kerala come next, with $2.4billion and $1.4
billion respectively. Investment in Punjab, Haryana, Himachal Pradesh and Bihar
was tiny, while eleven states received no foreign investment at all.
Disadvantage of FDIPromotion remains controversial and depends on the motive for investment.
If the motive is to capture domestic market (tariff-jumping type of investment) it
may not contribute to export growth.
It puts an impact on local entrepreneur growth.

Growth Sectors of economy for foreign

investmentITIndia is world's leader in global outsourcing with more than 80% of the market
share.
100% FDI permitted without any prior approvals.
400 of Global Fortune 500 companies are clients of Indian firms
R&D base of over 100 FORTUNE 500 companies
Joint Software development in a variety of applications
Hardware manufacturing

TelecommunicationsContinuous increase in no. of phone & internet subscribers

Investment Opportunities
Setting up manufacturing facilities;
Supply of hand sets and equipments

Telecom & Value added service.

Special Economic Zones (SEZ's)An SEZ is an export oriented duty free enclave, which is deemed to be outside the
customs territory of India.
Twenty two operational SEZ's in India and over 200 SEZ's are in various stages of
approval and development.
Tax deduction of 100% for 10 years for SEZ developer.
Exemption from dividend distribution tax for SEZ developer.
Exemption of Sales Tax on purchases from Domestic Tariff Area for both developer
and a SEZ unit.
Exemption from Service Tax for both developer and a SEZ unit.
15 year corporate tax exemption on export profits to a SEZ unit.
No minimum export obligation.
A 100% permitted under the automatic route for SEZ development.
Branches of foreign companies in SEZ's are eligible to undertake manufacturing
activities.
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Biotechnology and Bioinformatics100% FDI permitted without prior approval.

100% pass through Tax incentive to VCFs (venture capitalists) and FVCIs
One main reason for growth - implementation of product patent regime in India in
accordance TRIPS.

Nanotechnology
100% FDI permitted without prior approval.

100% pass through tax incentive to VCFs and FVCIs

Manufacturing
India is seen as the global destination for R&D, engineering design and prototype
development and a manufacturing hub for high technology products.
expansion in core sectors in India such as Steel
Chemicals and petrochemicals
Consumer durables
IT hardware and telecom
Transportation

AutomobileOpportunities to leverage on low cost, high-skilled manpower to reduce cost of

production
Auto Production 2005-06: > 9 million
Passenger Cars: > 1 million
Two wheelers: > 7.6 million

Retail TradingMulti brands are expected to get permission soon.

50% FDI allowed in retail trading (Single Brand)
Fashion lines worldwide looking to enter India market
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Tourism-

India has fast emerged as one of the most enticing destinations for the global leisure
traveler.
100% FDI is also allowed in hotels, which includes restraints, beach resorts and other
tourist complexes providing accommodation and/or catering and food facilities to
tourists.
The tourism sector in India is expected to grow at 8% per annum, between 2007 and
2016.
As travelers surge into India, the demand for rooms, across segments, has
skyrocketed.

Government's major policy initiatives for

tourism include:
Liberalization in aviation sector
Rationalization in tax rates in the hospitality sector
Tourist friendly visa regime
Allowing setting up of Guest Houses
Immigration services
Making available land for construction of hotels
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Other growing sectorsEnergy

Infrastructure
Non- Banking Financial Services
Banking
Real Estate

Media/Broadcasting
Food Proces
Sources & ReferenceDepartment of Industrial Policy and Promotion (Government of India)
www.google.com