GLOBAL BUSINESS ENVIRONMENT

DOON BUSINESS SCHOOL

Comparison between FDI flows in INDIA & CHINA

From Walmart and Unilever on the one side and TPG Capital ,a tide of global capital is flooding into India from
strategic investors to financial sponsors and consequently changing the pecking order of mega M&A
sweepstakes in the prized market of Asia.

For the first time in two decades, India has been getting more foreign investment than its neighbour China. In
2018, India saw more than $38 billion of inbound deals compared with China’s $32 billion, buoyed by stable
fundamentals, a bankruptcy code and fresh opportunities in sunrise sectors.

India’s (FDI) was the highest ever with 235 deals amounting to $37.76 billion this calendar year, according to
data from Dealogic, a global M&A and capital markets data provider, beating China, which has historically been
the favourite for emerging market bets.China’s trade standoff with the US is seen as a major reason for the
slowdown.

Trends of FPI & FDI flows

FPI inflows into India
The general trend of foreign inflows into India will continue to be positive after their combined investments into
the country's debt and equity market hit an all-time high in March, Ashmore Group's UK-based head of research
Jan Dehn told ET.

FPI inflows into Indian equity and debt combined are at a record high in March. Why?
Two reasons: EM (emerging markets) is outperforming developed markets and investors are underweight EM.
They are therefore chasing the marketand putting more money to work. Some of this money is going into EM.
Second, Modi’s strong showing in the Uttar Pradesh vote reduces political uncertainty considerably and gives rise
to hopes of further reforms.

Will the foreign inflows into Indian equity and debt sustain going ahead and why?
There will be ups and downs along the way, but the general trend will be positive. The global financial markets
engaged in a giant portfolio shift out of EM and into the QE (quantitative easing)-sponsored markets over the past
five years. Now inflation is rising and QE is being replaced by fiscal stimulus, so developed market bonds look
vulnerable. This is prompting investors to rotate back into EM. This trade has only just begun. There are good
valuation, stronger growth, cheap currencies and benign technicals in EM. Hence, the trade has legs.

What kind of returns do you expect from Indian equities between now and the year end and how will they
fare versus other emerging markets?
India will have 10% returns, which is good, but Indian stocks will underperform other EM markets, because they
start of more expensive than other markets. The key to really pushing Indian stocks higher is the financial sector.
If Modi managers to put the banks on a stronger footing then the credit markets can expand and that would be
extremely bullish for earnings.
FDI inflows into India
India’s equity inflows fell for the first time in six years in the year ended 31 March,
underscoring the economic policy challenges faced by the government when
Narendra Modi starts his second innings as prime minister on Thursday.

Data released by the department for promotion of industry and internal trade on
Tuesday showed FDI equity inflows into India declined 1% to $44.4 billion in the
year to 31 March, signalling a squeeze in long-term foreign investment into the
country.
The decline in FDI inflows comes at a time when domestic indicators already point
towards a slowdown in consumption and investment activity. India’s economy
grew at the slowest pace in five quarters at 6.6% in the three months ended
December, prompting the statistics department to trim its 2018-19 forecast from
the 7.2% previously forecast to 7% in February. The first set of macro data the new
government will have to deal with is the fourth-quarter GDP data (to be announced
on 31 May) that may further decelerate to 6.4%.
The two sectors where FDI inflows dropped the most in 2018-19 are
telecommunications (fell 56% to $2.7 billion) and pharmaceuticals (dropped 74%
to $266 million).
However, FDI in the services sector, including financial, banking, insurance and
outsourcing businesses, rose 37.3% in 2018-19, arresting the extent of the decline
in FDI inflows.
Mauritius remained India’s top source for FDI, its share declined by 2 percentage
points to 32% in 2018-19, while the share of Singapore rose by 2 percentage points
to 20% during the same year.
Capital gains on investments made in India through companies in Mauritius and
Singapore have become fully taxable from 1 April, as concessions cease to exist on
the routes after India signed new double tax avoidance treaties with both countries.
This may further impact FDI inflows into India from these two countries.
Macro indicators such as vehicle sales and air passenger growth also point to a
slowdown in the economy.
Sales of automobiles across segments in India fell 16% in April to touch the lowest
in eight years, while domestic air travel in April contracted 4.5% for the first time
in nearly five years.
Ashima Goyal, member of the prime minister’s Economic Advisory Council, in an
interview with Business Standard said: “Although the government is on a path
towards fiscal consolidation, there is limited space for a fiscal stimulus. The pre-
election slowdown in government spending can be reversed and expenditure
planned for the year frontloaded."
However, chief economic adviser Krishnamurthy Subramanian, in an interview last
week, said the core of consumption in the economy is pretty okay and one should
not oscillate between the extremes.

Government steps taken, time to time, to affect FDI/FPI flows:-

The Union Minster of Finance and Corporate Affairs, Nirmala Sitharaman said that FDI
inflows into India have remained robust despite global headwinds. Presenting the Union
Budget 2019-20 in Parliament today, she said that India’s FDI inflows in 2018-19 remained
strong at USD 64.375 billion marking a 6% growth over the previous year. The Finance
Minister proposed the following steps to further consolidate the gains in order to make India
a more attractive FDI destination,

 The Government will examine suggestions of further opening up of FDI in aviation,

media (animation, AVGC) and insurance sectors in consultation with all stakeholders.
 100% Foreign Direct Investment (FDI) will be permitted for insurance intermediaries.
 Local sourcing norms will be eased for FDI in Single Brand Retail sector.

Global Foreign Direct Investment (FDI) flows slid by 13% in 2018, to USD 1.3 trillion from
USD 1.5 trillion the previous year – the third consecutive annual decline, according to
UNCTAD’s World Investment Report 2019.

The Finance Minister further stated that it is high time India not only gets integrated into
global value chain of production of goods and services, but also become part of the global
financial system to mobilise global savings, mostly institutionalized in pension, insurance and
sovereign wealth funds. Nirmala Sitharaman informed that the Government is contemplating
organizing an annual Global Investors Meet in India, using National Infrastructure
Investment Fund (NIIF) as the anchor, to get all three sets of global players-top
industrialists/corporate honchos, top pension/insurance/sovereign wealth funds and top digital
technology/venture funds.

An important determinant of attracting cross-border investments is availability of investible

stock to the Foreign Portfolio Investors (FPIs). This issue assumes greater significance in
view of the gradual shift, from stock targeted investments, towards passive investment
whereby funds track global indices composition of which depends upon available floating
stock.

The Finance Minister in her Budget speech underlined that as Foreign Portfolio Investors are
a key source of capital to the Indian economy, it is important to ensure a harmonized and
hassle free investment experience for them. She proposed to rationalize and streamline the
existing Know Your Customer (KYC) norms for FPIs to make it more investor friendly
without compromising the integrity of cross-border capital flows.

Restrictions of FDI Limits in various sectors:-

Defence
India has relaxed foreign direct investment norms in defence sector, doing away with the clause that allowed only
“state of the art” technology to be considered for stakes of more than 49% and thereby giving the government
more power to decide on investment proposals by foreign entities. Although the government kept the FDI limit
unchanged – at 49% under the automatic route and 100% under approval route – it ushered in a major boost to
the small arms manufacturing sector.

This has given the government more authority to decide on foreign investments, leaving overseas entities unclear
about which of their proposals will be allowed. “The ambiguity on what is modern technology remains and there is
no clarity on what are the norms to be followed for investing over 49%. This has led to even more confusion,”
said an executive at a foreign firm, requesting anonymity.

Retail sector
The Government of India has revised its existing policy of imposing restrictions on
foreign investment in the railways by liberalising the FDI limit to 100% on ‘Automatic’
route in the rail infrastructure sector1. Accordingly, it has been decided to permit FDI in
certain construction, operation and maintenance activities of the railways transportation
sector. To date the Government had reserved railway industry for public sector2.
Key changes

1. FDI in rail infrastructure up to 100% will be cleared through automatic route,

which means no approval from the Foreign Investment Promotion Board would
be required. However, proposals involving FDI beyond 49% in sensitive areas
from a security point of view would have to be brought by the Ministry of Railways
before the Cabinet Committee on Security for consideration on a case to case
basis.
 2. The railway infrastructure where FDI is now permitted will include construction,
operations and maintenance activities in the following:
o Suburban corridor projects through PPP
o High speed projects
o Dedicated freight lines
o Rolling stock including train sets, and locomotives/coaches manufacturing
and maintenance facilities
o Railways electrification
o Signalling systems
o Freight terminals
o Passenger terminals
o Infrastructure in industrial parks pertaining to railways line/sidings
including electrified railway lines and connectivity to main railway line
o Mass Rapid Transportation Systems
The FDI in the abovementioned activities is open to private sector participation subject to
sectorial guidelines of the Ministry of Railways.
4. The FDI continues to remain prohibited in Railway Operations.
5. The definition of ”Infrastructure”3 has now been modified to include ‘railways
line/sidings including electrified railway lines and connectivity to the main railway
line’, in addition to the existing activities that were already covered in the
definition of infrastructure such as “facilities required for functioning of units
located in the Industrial Park includes roads (including approach roads), water
supply and sewerage, common effluent treatment facility, telecom network,
generation and distribution of power, air conditioning”.

Education

The Government of India ("GOI") has allowed for 100% Foreign Direct Investment ("FDI") in
the education sector under the automatic route. Recently, GOI also allowed for 100% FDI in
the Construction Development projects which would also include educational institutions.
These investments are also carried through the automatic route.

However, despite allowing 100% FDI in the education sector, there has hardly been any
investment in this sector and the response from foreign investors has been very lukewarm,
to say the least.

The primary issue behind the lack of investment is the fact that the investment has to be
done through a not-for-profit entity. The not-for- profit character would inevitably require the
Indian entity to be either registered as a Society or a Trust (in case of schools, colleges and
private/deemed universities) or a Section 8 Company (mostly in case of schools) under the
Companies Act, 2013. This not-for-profit requirement has become a major bottleneck for
attracting investments.
Further, a Trust or a Society is also not eligible to receive foreign investments under the
automatic route. Even if investments are to be permitted, the entities being of a non-profit
nature would not be able to distribute any returns on the investment.

A Section 8 Company is of a charitable nature and hence would require applying its profits or
other income towards the promotion of its objects.

In addition, the procedures and conditions are still very much unclear with regards to how
the foreign investment regulations for education sector would be enforced. This will lead to
various issues with regard to the overlapping regulations of Centre and States.

Multiple regulators along with the requirement of numerous approvals and regulatory
compliances have hampered investor confidence in investing in this sector.

Hence, the solution to this problem could be to drop the mandatory requirement for a not-for-
profit character. This would increase foreign investors confidence since they would be
assured of returns on their investment.

Further the regulatory mechanism can be eased to ensure that there is clarity with regards to
all the approvals and clearances required for such investments.

Finally, detailed guidelines should be laid down regarding routing of such foreign investment
to ensure that there are no confusions with regards to the foreign investments in the
education sector.

Agriculture
Agriculture is the main resource of livelihood/occupation for over 75 per cent of the rural population in
India. Although, it employs about 52 per cent of the labour force, it contributes to only 14.4 per cent of
GDP and 10.23 per cent of all exports. Any effort of poverty reduction and economic development must
address the problems being faced by the agricultural sector and turn the challenges into economic
opportunities for the poor population in rural India. India being a participant to World Trade
Organization’s General Agreement on Trade in Services, which include wholesale and retailing services,
had to open up the retail trade sector to foreign investment . India is one of the fastest growing retail
markets in the world. The retail sector in India is a key contributor to the country’s economy and was
responsible for contributing 22 per cent to gross domestic product (GDP) in 2011. In 2012, the
Government of India framed some major liberalization policies to support and encourage this sector.
India is now the last major boundary for globalized retail agriculture market. In the twenty years since the
economic liberalization of 1991, India’s middle class has greatly expanded, and so has its purchasing
power. 100 per cent foreign direct investment (FDI) allowed through the automatic route covering
Horticulture, Floriculture, development of seeds, Animal Husbandry est. and Services related to Agro
Buisson and Agriculture allied sectors. In India Agricultural retail market is highly patchy and unorganized.
Given the various changes like effective subside of rural credit in organized sector, especially for small
and marginal farmers, continuous increase of input cost and stagnant crop price, profit potential of
agricultural sector has declined substantially. Farmers are still kept on tenterhook, not knowing how to
manage their economy, except to play it by years (Gupta D., 2005). If production is good then there is
surplus and prices decrease. When there is crop failure farmers hardly get any return in terms of higher
price. West Bengal an eastern province of India is the most densely populated among the provinces and
paddy is the principal crop here involving millions of rural people for their livelihood. Profitability in
paddy cultivation gradually came down to only 13 per cent in 2007 and has further come down to 10 per
cent in 2011as per the report of the commission for Agricultural Costs and Prices (CACP).

SUBMITTED BY
SUBHAM CHAKRABORTY

PGDM SAP

0191PGM002