WHY INDIA IS LACKING IN ATTRACTING FDI AS

COMPARED TO CHINA, BRAZIL, MEXICO, RUSSIA?

R.V.Seckar, M.Com, F.C.S, I.C.S.A (UK), LLB.

Company Secretary, Chandra Group of Companies

Many may recall the economy of India was in bad shape before 1991 as it had to pledge its
entire gold reserves with World Bank when Mr. Chandra Sekhar was the Prime Minister of
India to avail IMF loan and to poise its balance of trade.
No doubt, the economic liberalization introduced when Mr.ManMohan Singh was the
finance minister in 1991 under then Mr.Narasimha Rao government had contributed
acceleration in economic growth which has created substantial employment and reduced
the poverty levels. India’s economic reform is supported by flow of FDI (Foreign Direct
Investment) both into and outside India. However, India has to introduce further
economic reforms to accomplish the government’s development goals like reducing
inequality and poverty and increasing employment. In this research essay, I wish to
emphasise the need for further reforms to attract more FDI to make India as economic
super power by the turn of 2020.
Since 1991, economic reforms are being introduced in many phases. As a first step to
attract more foreign investment, industrial licensing was abolished for all except 18
industries under the Industries Act of 1951. Further, in 1991, the number of sectors
reserved for the public sector was reduced to eight as government wanted to have control
only in railway, atomic energy, defense and other core sectors. Further, no prior
permission was needed to be obtained for investment in MRTP –designated companies in
India since 1991.
To accelerate industrial growth and economic development, quantitative restrictions on
imports have been virtually abolished and tariffs were reduced. The peak custom’s duty
rate was reduced in FY 1991-92 from 150% to just 35% in 2001 and it was further
reduced to just 10 % in 2007. India achieved current –account convertibility in 1994 by
removing exchange controls on current-account transactions.
Since 1991, both FDI and portfolio investment have been liberalised. Foreign Institutional
Investors (FIIs) have been permitted to invest in shares of listed companies in the Indian
stock market from 1993 onwards.
In 1991, automatic approval for FDI projects with up to 51% of foreign equity in 34
specified sectors was introduced. Now, FDI is being allowed in almost in all sectors except
gambling, lottery, retail trade (except single brand), defense, atomic energy and railways.
Now, many sectors have opened for 100% foreign ownership without Indian government
prior approval. Since 1991, as balance of payments has improved, Indian government has
gradually relaxed its foreign-exchange restrictions on foreign investments.

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In the post reform phase, India recorded an average economic growth rate of 6.5% per
annum which included growth acceleration to 8.9% per annum since FY 2003-04. Further,
poverty rate in India decreased from 26.1% in 1991 to 21.8% in 2007. It is to be noted
that services sector, led by insurance, communication and information technology services
which has outperformed other sectors.
Foreign Direct Investment (FDI)

FDI increased by ten percent in December 2009 to $1.5 billion as compared to $1.36
billion in December 2008. This is the third consecutive month that FDI inflows have
posted a vibrant year-on-year increases. (NASSCOM Mint Report 2010).
BPO Industry performance and FDI in BPO Sector in India.

year Exports Domestic

(USD bn) (INR bn) BPO sector has accounted for over 10 percent of the
FY 08-09 47.1 590 total FDI investment in India in the last decade alone.
FY 09-10 49.7 662
FY 10-11 56-57 761-775
Source:
(outlook)
http://www.nasscom.in/Nasscom/templates/NormalPa
ge.aspx?id=58639

Outflow Foreign Direct Investment (OFDI)

Since 2000, India has been accumulating its OFDI (Outward Foreign Direct Investment)
stocks. As of March 2008, India had invested about USD 49.8 billion in overseas stock
which is a landmark development as considering just USD 3.7 billion in 2000. Though, in
global level, India occupied 36th rank in OFDI in 2008 having 0.3% in 2008, among
developing nations, India has gradually enhanced its dominance thereby becoming 13th
largest nation in terms of OFDI stock in 2007. The lion’s share of India’s OFDI was
parked in the developed countries and in 2006 about 32.3% was invested in stocks of
developed nations. The major OFDI investment in developed nations by India mirrors
trade-backing OFDI projects in these developed nations and acquisition of strategic
assets have become a vital strategy for many Indian companies to enhance their
competitiveness in an ever increasing competing environment.
Bilateral Investment Promotion Agreements (BIPAs)

With the help of BIPAs and double taxation avoidance agreements, government is able to
increase the flow of FDI into India. Foreign investors in India have been offered strong
guarantees in the post –establishment phase on fair and equitable treatment, national
treatment, and non-expropriation without fair compensation, free repatriation of capital
and profits and access to International arbitration. Further, to encourage more flow of

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FDI, double taxation agreement has removed tax disadvantages for MNCs functioning in
India.
India is the largest recipient among developing economies in 2007
India has recorded a 3.6 times higher FDI in FY 2006-07 alone as compared to in the year
2003-04. An inflow of USD 34.4 billion in FY 2007 -08 which was in excess of government
targeted figure of USD25 billion. It is to be noted that the aggregate of FDI inflows both
to the whole world and to the developing world almost tripled from 2003 to 2007, in India,
FDI inflows have rose more than five times during the analogues period. India was ranked
in the 8th place in the size of FDI flows among developing nations with four percent of
total FDI flows to developing economies.
Statistics of FDI inflows in India

CUMULATIVE FDI FLOWS INTO INDIA (1991 -2010).

1 Cumulative Amount of FDI Flows into India In INR In USD

[from April 2000 to March 2010]
(Equity inflows + including data on “Re- USD 1,61,546 million
invested earnings ‘& Other Capital “which
is available from April 2000 onwards. These
are the estimates on an average basis, based
upon data for the previous two years,
published by RBI in their Monthly Bulletin.
2 Cumulative Amount of FDI Equity Inflows Rs 5,77,108 USD 1,32,428 million
( from August 1991 to March 2010) Crores
Note: FDI inflows include amount received on account of advance pending for issuing of shares
for the year 1999 to 2004.

Source: DIPP, March, 2010

Year –wise FDI Equity Inflows in to India – A comparison

In Rupees in Crores In USD million

2009-10 ( Up to March 2010 ) 123,377 25,888
2008-09 ( Up to March 2009) 123,025 27,331
% of growth over last year (+ ) 03% (-) 05 %
Source: DIPP, March, 2010
Current Position of country wise FDI flow into India

Ranks Country Cumulative Inflows Cumulative % to total inflows

( April 2000 to Inflows ( in terms of US
March 2010 ) ( April 2000 to $)
Rupees in crores March 2010 )
USD in millions
1 Mauritius 210,906 47,240 43%

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 2 Singapore 45,147 10,190 9%

3 U.S.A 37,190 8,278) 8%

4 U.K 25,998 5,884 5%

5 Netherlands 20,126 4487 4%

6 Cyprus 17,777 3899 4%

7 Japan 16,895 3714 3%

8 Germany 12,468 2799 3%

9 U.A.E 7,023 1,549 1%

10 France 6,919 1,530 1%

Total FDI Inflows into India 516,503 115,728

Source: DIPP, March, 2010

Note: (i) Indicates inflows under NRI Scheme of RBI, stock swapped and advances pending for issue of shares.
(ii) Cumulative Country –wise FDI equity inflows (from April 2000 to March 2010) – Annex A
( iii) % worked out in US$ terms and FDI inflows received through FIPB / SIA + RBI’s Automatic Route +
acquisition of existing shares only.

Sector wise FDI Investment in India

Ranks Sector Cumulative Cumulative % to total

Inflows Inflows inflows ( in
( April 2000 to ( April 2000 terms of US $)

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 March 2010 ) to March
Rupees in crores 2010 )
USD in
millions
1 Service Sector 105,411 23,640 21%
( financial & non-
financial)

2 Computer Software and 43,846

Hardware
9872 9%
3 Telecommunications 40,706 8931 8%
( radio, paging ,cellular
mobile , basic telephone
services)
4 Housing & Real 37,369 8357 8%
Estate
5 Construction Activities 35,721 8059 7%
(including roads &
Highways)
6 Power 20,919 4,627 4%
7 Automobile 20,677 4,565 4%
Industry
8 Metallurgical 13,440 3,130 3%
Industries
9 Petroleum & 11,504 2,666 2%
Natural Gas
10 Chemicals ( other 11,274 2,496 2%
than fertilizers)

Source: DIPP, March, 2010

However, FDI inflows in India do not play a pivotal role in capital formation. FDI in India
constituted about 4.7% of gross fixed capital formation over 2004-06 which is much lower
than the 10.6 percent found in developing Asia , 12.4% in developing nations and 10.4% in
the globe as whole. However, India stood at 35th and 13th largest destination for FDI stock
which reached USD 118.3 billion in March 2008. India’s FDI stock accounted for 0.5% of
aggregate of stocks in the world and 1.5% of FDI stocks in the developing nation.
India’s FDIs stock increased to 10.4% in FY 2007-08 as a ratio to GDP but this number is
much lesser than the average ratio of 27.8% in the world as a whole and 29.2% in the
developing world in 2007.
Bottlenecks in attracting FDI into India

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 Statistics about FDI flows to developing nations in 2007

China 14%
Hong Kong ( China) 10%
Russia 9%
Brazil 6%
Mexico 4.2%
Saudi Arabia 4.2%
Singapore 4.1%
India 4%

Why India is in 10th place in attracting FDI into India? Why it has been relegated to the
10th place in attracting FDI. Definitely it is due to rigorous administrative procedures
that a recipient company has to follow in case of receipt of foreign investment in India.

Foreign investors wanted to know whether their investments would be safe in India and
whether they could rely on the local legal system for redress of grievances. Unlike China,
India is a democracy and there is the rule of the law in India. However, there is lack of an
effective and expeditious alternative dispute resolution mechanism which India should
strengthen in this gamut of law.
Further, in India, administrative procedure is more cumbersome and stringent. On receipt
of FDI, investee has to report to RBI through his banker within 30 days and allotment has
to be made within six months of receipt of funds. Non-observance of this procedure lands
a recipient company in a serious trouble. As RBI officials are toothed with extraordinary
authority to levy penalty for simple, non-intentional failure to report to RBI, fine to the
tune of three or four times of FDI received are levied by RBI officials arbitrarily.
According to Chartered Accountant’s Association, Mumbai, in one case, an OCB invested in
India rupees 8.5 crores (approximately) with the prior approval of FIPB. The OCB wanted
to set up a power plant in Chhattisgarh. There was a condition of local participation up to
40per cent. For four years they ran from pillar to post for several Government
permissions.
Neither they got Government permission nor could they find a local investor. Ultimately,
they were frustrated and gave up the project. Hence they transferred the funds to a
sister company where the OCB already had some investments. The Company delayed in
filing intimation. The Company could not allot shares to OCB as it could not locate a local
investor which was a pre-condition of FIPB approval. In the meanwhile, RBI issued Circular
No. 20 dated 14.12.2007 prohibiting allotment of shares beyond 180 days of receipt of
funds.
For these offenses, RBI imposed a Compounding sum of more than Rs. 3 crores! Company

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admits the violations of non-intimation, non-filing of forms; and step down investment.
Still, such a stiff penalty for all procedural violations where there is no foreign exchange
loss and nothing illegal or immoral!!!
Policy Changes to attract more FDI into India

To be at par with China in attracting FDI, Indian government should introduce the
following policy changes in FDI policy;
• Indian government should come forward to relax the FDI sector gaps in the sectors
like retail trade ,insurance and banking and should review regularly the remaining
FDI limitations to evaluate whether their cost do not overshadow their anticipated
advantages.
• As a basis for cross-state monitoring of FDI performance, India should develop a
system of comparable FDI statistics for union territories and states.
• Indian government should carry out a detailed study into the design of mechanisms
that can be used by it to stimulate states to strengthen the investment approval
procedures.
• By employing OECD’s Checklists for FDI incentive policies as a reference, Indian
government should convene a study and or establishing an inter-state forum to
evaluate the benefits and costs of investment incentive, their openness and their
effect on other states.
• Fortifying implementation of measures to enhance the corporate responsibility and
transparency to fine tune India more closely with internationally –acknowledged
practices and standards.
Conclusion

RBI has issued a new circular for compounding under FEMA - RBI/2009-10/ 56 A.P. (DIR
Series) Circular No. 56 dated June 28, 2010. With this the directions contained in the
compounding of contravention/s issued vide A.P. (DIR Series) Circular No.31 dated
February 1, 2005 are superseded by this circular. However, Government should come
forward to liberalise further by taking bold steps for compounding of non-intentional, non-
pecuniary reporting offenses by investee companies under FEMA.
If India really wants to have maximum economic development and to attain the status of
economic super power by the year 2020, it should ease the FDI norms and should further
liberalise its FDI reporting procedures. An investee company should be allowed to report
to RBI within 6 months of receipt of FDI and allotment has to be made within one year
from receipt of funds. Further, a separate ombudsman like appellate authority should be
created for the redressal of grievances in case of lapse or failure to report the receipt of
FDI .In case of non-intentional, non-mens rea lapses, mere warning should be given to the
erring investee companies rather than levying hefty fines which is unwarranted.
Government should send a study team to China, Hongkong, Brazil, Mexico etc to have a
glimpse over their procedures for FDI in these nations and on basis of recommendation of
such committee, India should liberalise further its procedures for attracting more FDI in

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par with the China so that it could be turn itself as economic superpower by the turn of
2020.

List of References

OECD (2010). OECD Investment Policy Reviews: India 2009. New York: OECD

Publications.

Nasscom. (4 February 2010) Mint Report from Nasscom. Available from

http://www.nasscom.in/Nasscom/templates/NormalPage.aspx?id=58649

Nasscom. (4 February 2010). Indian IT-BPO Industry Exports Touches USD 50 Billion.

Available from

http://www.nasscom.in/Nasscom/templates/NormalPage.aspx?id=58639