FDI in India

A Study Report
3/15/2013

Submitted by:
Submitted to: Prof. S.K. Chaddha

Harvinder Singh Jamaaljyot Singh Jiwanjot Singh MBA 2nd sem Sec B

j INDEX
1. INTRODUCTION AND HISTORY
Key Statistics in Recent Years Important Developments in Recent Years

2. IMPORTANT SECTORS AND FDI Foreign Direct Investment in Retail Foreign Direct investment in Real Estate FDI in Multi Brand Retail Sector India FDI in Power Trading FDI in Broadcasting Sector FDI in DTH, FDI in Cable 3. FDI IN INSURANCE SECTOR IN INDIA

4. POLICY INITIATIVES 5. WHY FDI NOT ALWAYS SOLVE THE PROBLEM 6. ADVANTAGES AND DISADVANTAGES 7. ENTRY ROUTES FOR FDI : 8. RECENT TRENDS OF FDI IN INDIA: 9. EXPERT OPINION :
10.CONCLUSION

FDI IN INDIA
INTRODUCTION AND HISTORY
Indias economic policy reforms have played a critical role in the performance of the Indian economy since 1991. Among other things, the reforms have involved opening the economy, making it more competitive, getting the government out of the huge morass of regulation, empowering the states to take more responsibility for economic management and thereby creating a kind of competition between the states for foreign investors. The GDP growth rate which had collapsed to 0.8% in 1991-92 rebounded to a near normal 5.3% in 1992-93, and then accelerated to 6.2% in 1993-94. Subsequently, the GDP grew at an average rate of 7.5% in the three years 1994-95 to 1996-97, before slowing down to 5.1% in 1997-98. It is important to note that despite the slowdown, the average growth rate in the four years 1994-95 to 1997-98 was 6.9%, significantly higher than the growth rate of 5.6% achieved in the 1980s. In 1998-99, the GDP is estimated to have grown at5.9 percent. The positive trends being seen in most sectors had the capability to more than neutralise the debilitating effects of two general elections in two years, the crisis in East Asia, Kargil operations, the nuclear explosions, and the U.S. sanctions that followed. In the backdrop of the East Asian crisis, growth did slow down a little bit, but India has kept growing and has avoided the worst of the crisis. From the narrow financial point of view two things that India did were quite helpful. One, it did keep some limit on the short-term capital inflows and did not go overboard in borrowing short term from abroad. This helped India to avoid the financial reversals of some of its neighbors. Second, it kept the rupee flexible and the depreciation of the rupee definitely helped keep the Indian economy more competitive and kept economic growth going during this period. In the context of the East Asian crisis, certain kinds of money fled while other kinds did not. The hottest money was short-term loans from international banks. Indeed, the reversal of short-term bank lending constituted a very large proportion of the overall $105 billion reversal in capital flows. The banks put in $56 billion in net lending in 1996, and then withdrew an estimated $21 billion in net loans in 1997, for a swing of $77 billion (or 73 percent of the overall reversal). Portfolio equity investors (e.g. country equity funds) also reversed gear, to the extent of $24 billion. Foreign direct investors, by contrast, were very stable. It is estimated that net foreign direct investment remained roughly unchanged between 1996 and 1997, at around $7 billion in net flows each year. It is significant to point out here that India went through a near disaster in 1991 that was, among others causes, based on short-term borrowing. Of course, at that time it was short-term borrowing from the non-resident Indians, (NRIs) but it was the same kind of phenomenon - lots of short-term capital had come in and lots had moved out and created a severe payments crisis. In terms of foreign

investment, it is the direct investment that should be actively sought for and doors should be thrown wide open to foreign direct investment. FDI brings huge advantages (new capital, technology, managerial expertise, and access to foreign markets) with little or no downside. There are lots of international investors who would flock to India right now, especially now that they see that India has a lot of safety for them in comparison with China, for example. But, they are put off by the fact that they cannot get reliable power or that the road system is so dreadful that even if they are producing effectively, they will not be able to get the goods to the market or back to the port for exports. Continuing fiscal difficulties that are often linked to the chronic infrastructure difficulties remain a major challenge for India. The government has set for itself an ambitious target of achieving $10 billion in actual FDI inflows per year. In order for this target to be met, it is essential to undertake some hard reform steps. We will discuss these in section VI. Should the Government decide to implement some of the most critical reform actions necessary for making India an attractive investment destination, then it is very likely that India will not only be able to meet the target, but in fact do much better than that. Of course, additionally, availability of infrastructure services, such as uninterrupted power, good roads, and adequate port, and telecomm facilities are very essential. In order to achieve the governments goal, it is crucial to raise the FDI approvals to actual ratio. On a cumulative basis, FDI approvals between April 1991and September 1998 were of the order of $54,268 million, whereas, actual FDI during the same period was a mere $11,806 million. Therefore, actual FDI as a proportion of FDI approved was only 21.7 percent The same ratio is much higher in China, Indonesia, Korea, Malaysia, Philippines, and Thailand. A few of the Indian States have been more reform-oriented, such as Andhra Pradesh, Gujarat, Karnataka, Maharashtra, and Tamil Nadu, but states, such as Haryana, Kerala, Orissa, Madhya Pradesh, Punjab, Rajasthan and West Bengal have a lot to catch-up with. Of course, Bihar and Uttar Pradesh are even further behind. States that are ahead in the reform efforts right now are going to find that if they move against the populist policies and set up regular markets for services, such as power and water then they are going to be ahead of the rest in the game. There are rather significant differences in reform interest and economic performance between a large part of northern India and southern India where Karnataka, Tamil Nadu and Andhra Pradesh are quite dynamic now in trying to get the infrastructure, and the policy regime right to attract large-scale foreign investment. In the north, in Bihar, Uttar Pradesh one does not see the same kind of reform dynamism and the results are therefore poor in terms of economic growth. These differences will be noticed politically sooner rather than later, (as inequalities will become glaring) and the states that are ahead will be rewarded with better performance and the states that are behind will find that there is the demand to catch up with the states that are growing Bajpai and Sachs (1999). That will spur a kind of competition among the Indian states and make the reform process go much faster. State-wise approvals of FDI in India suggest differing performances among Indian states. States are now in

competition with one another to attract private investment, both domestic and foreign. State-level data on FDI approvals (aggregate FDI approvals between 1991-97) suggest that the relatively fast moving reformers have tended to attract higher investments, both from foreign and domestic investors. From the long-term development point of view, we are of the view that India has tremendous growth prospects through export-led growth and that export-led growth involves a broad range of sectors, both traditional and new Bajpai and Sachs (1998). The most interesting by far of the new sectors is software and information technology. India is becoming one of the most important players of the world in this sector and it is the fastest growing foreign exchange earner for India. Export-led growth in services is one of the most interesting developments, and export-led growth in manufactures, the more traditional textiles and apparel, in electronics and other labor-intensive operations remains an area where India could do a lot more than in the past. China has achieved a lot more in manufactured export production than India and for no particular reason. India has the resource base, it has the entrepreneurship, has the access to the sea coast, a vast labor force, it has everything that coastal China has had except the interest of government which neglected this for a long time and which even today underemphasises the role of industrial facilities, underemphasises the role of infrastructure, of land area, of effective port facilities that one needs to be able to compete with China in this area Bajpai, Jian and Sachs (1997). But it is, we believe, a place where one could find tens of millions of jobs over the next few years in real, significant foreign exchange earning private sector activity. This would require a change of attitude, a real promotion of these sectors both at the state and central government levels. Indias neighbors that are relying heavily on FDI, such as China, Indonesia, Malaysia, and Thailand, have been pulling far ahead of India in economic growth, income levels, and productivity, while also increasing their security and geopolitical influence in the world community. Indias continuing ambivalence to FDI, as a result, exacts a heavy toll on the Indian economy. Undoubtedly, India is ceding billions of dollars of FDI to its neighbors each year, flows that otherwise would have come to India. While China achieved actual FDI inflows of around $45.3 billion in 1997, India settled for a mere $3.2 billion! (Table 2). Why is it that India, which provides the largest market after China in the developing world is unable to attract substantial volume of FDI? Further, when it comes to comparing China and India, why can India not match or even outpace China in attracting FDI given Indias superior conditions regarding the rule of law, democracy, and the widely spoken English language? As against the pre-1991 policy of considering all foreign investment on a case by case basis and that too within a normal ceiling of 40% of total equity investment, the new policy provides for automatic approval of FDI up to 51% of equity in a specified list of 34 specified high-priority, capital intensive, hi-technology industries, provided the foreign equity covers the foreign exchange involved in importing capital goods and outflows on account of dividend payments are balanced by export earnings over a period of 7 years from the commencement of production. Investment above 51% equity is permitted on the basis of case by case approvals given by a specifically constituted Foreign Investment Promotion Board (FIPB). Foreign technology agreements were also liberalized for 34 industries with firms left

free to negotiate the terms of technology transfer based on their own commercial judgement and without the need for government approval for hiring of foreign technicians and foreign testing of indigenously developed technologies. This is subject to a registration procedure with the Reserve Bank of India (RBI).

In December 1996, the government allowed automatic approval of FDI up to 74 percent by the RBI in nine categories of industries1. Subsequently, in January 1997, the government announced the first ever guidelines for expeditious approval of FDI in areas not covered under automatic approval. Priority areas for FDI proposals, as mentioned in the guidelines include infrastructure, export potential, large scale employment potential particularly for the rural areas, items with linkages with the farm sector, social sector projects like hospitals, health care and medicines, and proposals that lead to induction of technology and infusion of capital. Refer to Appendix I for a chronological listing of policy reform in the FDI regime and related areas.

All over the world, FDI is seen as an important source of non-debt inflows, and is increasingly being sought as a vehicle for technology flows, and as a means of building inter-firm linkages in a world in which multinational corporations (MNCs) are primarily operating on the basis of a network of global interconnections. In the current global scenario, it is possible for India to achieve very dynamic growth based upon laborintensive manufacturing, that combines the vast supply of Indian labor, including skilled managerial and engineering labor, with foreign capital, technology, and markets Bajpai and Sachs (1997). On this basis, the East Asian economies have achieved growth rates consistently above 6 percent per year, and China has managed growth in excess of 10 percent per year in the 1990s. Malaysia, to cite another example, has shifted from being a raw-material exporter in the 1970s (with commodities accounting for 80 percent of exports) to a manufacturing exporter (with manufactures, mainly electronics, accounting for 70 percent of exports), and with GDP growth of 8 percent per year. MNCs offer the capital, international market access, and technology that India lacks, and are therefore vital to remolding India as a strong and rapidly growing economy.

Usually, there are a number of firm-specific and country-specific factors that affect location decisions of individual FDI projects. Be that as it may, the WEFs 1997 global executive survey identified six important factors that determine FDI location. Of course, there are a complex set of considerations, including tax rates, exit barriers, wages, project approval procedures, and decentralized decision-making and so on that matter. According to the results of the survey, market size is supposed to be the most important factor that a firm has in mind while making a decision on investment location. In addition, the expected growth in market size is another significant factor. Empirical analysis confirms the significance attached by the investors on both the current market size and the expected growth in market size. There is strong positive correlation between FDI inflows and the market growth index. Another factor in the determination of FDI flows is competitiveness.

Key Statistics in Recent Years:

India received FDI worth US$ 1.94 billion in October 2012 while cumulative inflows for AprilOctober 2012-13 stood at US$ 14.78 billion, according to latest data released by the Department of Industrial Policy and Promotion (DIPP).

The sectors which have received high level of FDI during the first seven months of 2012-13 include services (US$ 3.6 billion), hotel and tourism (US$ 3.11 billion), metallurgy (US$ 1.21 billion), construction (US$ 691 million) and automobile (US$ 743 million).

Country wise, high levels of FDI came during the period from Mauritius (US$ 6.75 billion), Japan (US$ 1.52 billion), Singapore (US$ 1.24 billion), the Netherlands (US$ 1.05 billion) and the UK (US$ 611 million), showed the DIPP data.

Another statement issued by the Reserve Bank of India (RBI) revealed that foreign exchange reserves stood at US$ 294.99 billion for the week ended January 4, 2013 wherein the value of gold reserves was recorded at US$ 27.21 billion and that of foreign currency assets (FCAs) was at US$ 261.06 billion. The value of special drawing rights (SDRs) was US$ 4.40 billion and the countrys reserve position with the IMF was at US$ 2.30 billion.

Private Equity (PE) companies invested around US$ 8.85 billion in 2012, according to consultancy firm PwC. Information technology (IT) and healthcare seemed to have witness the highest number of deals on the PE canvas wherein there were 162 deals worth US$ 3.25 billion in IT and healthcare witnessed 48 deals worth US$ 1.23 billion.

Similarly, the pace intensified on the merger and acquisition (M&A) front. There were as many as 268 deals (involving Indian entities) that amounted to about US$ 36.3 billion in 2012; up 22.6 per cent over the 2011 tally, reported the global deal tracking firm Mergermarket.

Important Developments in Recent Years:

The Government has recently cleared four FDI proposals worth Rs 1, 287 crore (US$ 239.33 million) based on the recommendations of Foreign Investment Promotion Board (FIPB) - the apex body for clearing foreign investment proposals. The proposals include Hospira Healthcare's plan to infuse Rs 1, 194.75 crore (US$ 222.17 million) of foreign equity to acquire manufacturing facilities in pharmaceuticals sector; Mumbai-based Perrigo API's proposal to induct foreign equity worth Rs 55 crore (US$ 10.23 million) to manufacture pharma inputs; Kolkata-based Pran Beverages proposal to increase foreign equity to the tune of Rs 30.25 crore (US$ 5.62 million) for manufacturing beverages and telecommunications firm InterCall Asia Pacific Holdings' proposal worth Rs 6.75 crore (US$ 1.25 million) to set up a wholly-owned subsidiary.

The Government has also given its nod to British footwear retailer Pavers England, US-based clothing company Brooks Brothers and Italian jeweller brand Damiani to set up stores in India under the single brand retail policy. Meanwhile, FIPB has allowed construction and engineering firm Larsen & Toubro (L&T) to induct foreign investment in its defence production venture.

FIPB has also cleared the way for Swedish furniture maker IKEA by allowing its entry into Indias single-brand retail space. IKEA intends to bring in Rs 10,500 crore (US$ 1.95 billion) of FDI, the largest in the category so far and set-up 25 single-brand retail stores in the country through its 100 per cent subsidiary. The proposal will now head to the Cabinet Committee on Economic Affairs (CCEA) for its consideration.

The US-based packaging major MeadWestvaco Corporation plans to invest US$ 184 million to strengthen its presence in industrial packaging and triple its sales in India. The company has signed a memorandum of understanding (MoU) with Gujarat Government regarding the same. The outlay, to be spread over the next three to five years in the packaging and paperboard industry in India, aims to create 800 jobs in the industry.

The US-based seed fund 500 Startups, which started investing in India just over a year ago, has clicked its tenth deal in the country, endorsing technology start-up ZipDial. The investment was higher than US$ 250, 000. Bangalore-based ZipDial was founded in 2010.

IMPORTANT SECTORS AND FDI:

Foreign Direct Investment in Retail

The Retail Industry is the sector of economy which is consisted of individuals, stores, commercial complexes, agencies, companies, and organizations, etc., involved in the business of selling or merchandizing diverse finished products or goods to the end-user consumers directly and indirectly. Goods and products of the retail industry or sector, are the finished final objects/products of all sectors of commerce and economy of a country. The Retail sector of India is vast, and has huge potential for growth and development, as the majority of its constituents are un-organized. The retail sector of India handles about $250 billion every year, and is expected by veteran economists to reach to $660 billion by the year 2015. The business in the organized retail sector of India, is to grow most and faster at the rate of 15-20% every year, and can reach the level of $100 billion by the year 2015. Here, it is noteworthy that the retail sector of India contributes about 15% to the national GDP, and employs a massive workforce of it, after the agriculture sector. India's growing economy with a rate of approximately 8% per year, makes its retail sector highly fertile and profitable to the foreign investors of all sectors of commerce and economy, of all over the world.

Foreign Direct investment in Real Estate

Fast and steadily growing economy of India, has a huge real estate industry amounting to about US$ 12 billion. Meticulous studies reveal that this real estate industry of India has been constantly growing at a high rate of 30% for last several years. After the Agriculture sector, the Real Estate sector of India, is the second biggest employer in the country, and possesses immense potential for foreign direct investment for diverse purposes, especially after the liberalization of FDI norms recently by the Government of India in 2005. So far, it is found that majority of the real estate developments have been made in the fields of residential housing facilities, and the remaining in the IT/ITES offices, business enterprises, hotels, hospitals, shopping malls, and industrial establishments. Today, abundant opportunities are available for foreign direct investment in real estate business of India, in these and other fields. Today, along with NRIs and PIOs, foreigners are also facilitated to invest in the real estate sector of India in residential housing and townships, commercial premises, infrastructural facilities (at regional and local levels), technological parks, hotels & resorts, hospitals, educational institutions, industries, special economic zones (SEZs), retail, leisure and recreational amenities, etc, under the confinement of certain conditions. For wholly-owned subsidiaries a minimum capitalization of $10 million is made compulsory, and for joint ventures, it is $5 million. Again, a minimum of 25 acres of land coverage is desirable for FDI projects in real estate. Global Jurix, one of the reputed legal organizations of the world, helps comprehensively and expertly regarding these all types of fdi in indian real estate.

FDI in Multi Brand Retail Sector India

The recently declared policy of the Government of India regarding foreign direct investment in the Multi- brand Retail sector of India, is like a welcome and great boon to all foreign retailers and investors. The Government of India has now finally decided to allow FDI up to 51% in the Multi-brand Retail sector of India. For a long time, the vast $450 billion retail market of India has been striking and alluring to foreign investors and retailers of the world over, for making highly profitable and secure foreign direct investment. Now, they are fully enabled and well-facilitated to perform such lucrative investments in huge and constantly growing retail sector of India. Some of the most outstanding features of the retail sector of India are described below, as service to all foreign retailers, companies, and investors of diverse sectors of commerce and industry. Ours prestigious and globally reputed legal organization is well-equipped to provide prompt and impeccable services for most secure and productive foreign direct investment in Indian retail sector. Ours well-experience law firm has been offering refined and swift legal services to people and entities in almost all economic sectors in India and countries worldwide. Today, the retail industry of India is estimated to be worth US $ 450 billion, and by dint of this economic value, it is regarded as one of the top five largest retail markets in the whole world. The constantly growing economy of India with an average rate of 8% and India's 1.2 billion people, together make the retail

industry of India highly growth-oriented and immensely profitable in present and future times. As per an estimate by mellow and expert economists, the retail market of India can reach the level of around $ 650 billion by the year 2015. The latest decision of Indian Government is to boost the growth in retail, further more.

FDI in Power Trading

One of the significant and visionary decisions taken recently by the Indian Cabinet Committee on Economic Affairs (CCEA) regarding foreign direct investment, is to permit FDI up to 49% in the power exchanges or power trading in India. This decision of CCEA has been highly appreciated by the power exchanges of India, foreign investors of the world over, and the whole power sector of the country. Here, it may be mentioned that, FDI in the power sector of India has been permitted up to 100% (except the Atomic energy), but, there was no concrete and clear provision for FDI in the power trading in India. It is hoped that this decision of the Government of India will boost perfect and easy power exchanges, augment the availability of power, improve energy distribution, and introduce most efficient and best practices in power trading. In this article, we are providing necessary information about FDI in power trading in India, in the light of the latest governmental decision (September 2012), in the following paragraphs. Perfect and swift legal services for foreign direct investment in India in any desired sector, have been our specialty for a long time; now, we will also include to these services, the legal services for fdi in the power trading, in order to serve investors of the worldover.

Power Trading involves purchasing and selling of electricity, with the help and guidance of the Power Exchanges. The power exchanges serve as a well-organized, unbiased, and open platform to the generators, suppliers, traders, shareholders, and consumers in the power sector of a country. At present, there are two main power exchanges functioning full-fledged in India, the Indian Energy Exchange (IEX) and the Power Exchange India (PXI). Collectively, these two major power exchanges handle just 2% of the total 800 billion units of power generated in the whole country. Hence, there was desperate need for fdi in the power trading in India, to make this power sector of the country better and most efficient.

FDI in Broadcasting Sector

In order to liberalize the Broadcasting sector of India to foreign direct investment, the Indian Cabinet Committee on Economic Affairs (CCEA) raised the FDI cap from 49% to 74% in many fields of the Broadcasting sector in September 2012. However, CCEA opted to retain the existing cap of 26% in the fields of TV News Channels and the FM Radio. The recent governmental decision will be applied to the following BCSP In all cases, up to 49% of FDI will be made under the Automatic Route, and after this limit further investment up to 74% will be performed under the Governmental Route (FIPB Approval). More information regarding foreign direct investment in these fields of the broadcasting sector, and ideas about

ours swift and impeccable services for the same, are given in the lower section of this article separately.

FDI in DTH, FDI in Cable

Till now, foreign direct investment in the DTH and Cable TV was limited to 49% in India. And, in the field of Head-end in the Sky (HITS) it was up to 74%. Now on, after the recent decision of the Government of India, the maximum permission limit of FDI in these all fields of the broadcasting sector has been set to 74%. The Head-end in the Sky (HITS) is nothing but a satellite multiplex service which offers TV Channels for cable operations. In India at present, about 26 million households use DTH, and over 80 million houses are connected through the cable network. Thus, foreign companies and investors are given welcome and great opportunities for making direct investment in the ever-expanding and highly profitable broadcasting sector of India. But, in the fields of TV News Channels, Current Affairs, and the FM Radio, the upper limit of FDI is kept at the existing level of 26%, which is to be made strictly under the proper FIPB approval (approval of the Foreign Investment Promotion Board).

FDI in Insurance Sector in India

After increasing the FDI cap in the Multi-brand Retail sector, Aviation sector, Power Trading, and Broadcasting sector, the Indian Cabinet Committee on Economic Affairs (CCEA) is strongly expected to raise the FDI ceiling in the Insurance and Pension sectors and the Pharmaceutical sector of India. A robust proposal for raising FDI threshold to 49% in the Insurance sector from the existing limit of 26%, has been submitted to the cabinet for proper approval in the quickest possible period. Such an increment in the FDI ceiling in the insurance sector of India, will certainly be highly and greatly appreciated by domestic and foreign insurance companies, for the purpose of expanding and enriching their insurance and re-insurance businesses under diverse insurance categories. More information regarding the insurance sector of India, is separately offered in the following section in details. Here, it may be noted that, the existing limit of foreign direct investment in the insurance sector of India, which is just 26%, is permitted to be made through the Automatic Route with proper license from the Insurance Regulatory and Development Authority (IRDA) of India. It means that a foreign investor cannot acquire more that 26% stake in the private insurance companies anywhere in India. As in all other economic sectors of India, ours prestigious and globally reputed law firm well-based in India, has been providing perfect and swift legal services for secure and profitable foreign direct investment in the insurance sector of India or abroad, for a long successful period.

Policy Initiatives
The Government has been really proactive to promote foreign investments in the country and hence keeps introducing related reforms and policies to sustain the growth. Recently, the Government of India (GoI) has enhanced the ceiling for FDI in asset reconstruction companies (ARCs) to 74 per cent from 49 per cent. However, foreign investments in ARCs would be required to comply with the stipulated FDI norms in terms of the entry routes and sectoral caps. The 74 per cent FDI limit in ARCs will be the combined limit of FDI and foreign institutional investors (FIIs). Meanwhile, Mr Jyotiraditya Scindia, the Minister of State (Independent Charge) for Power, has informed that FDI up to 100 per cent is allowed, under the automatic route, for:

Generation and transmission of electric energy produced in hydro electric, coal/lignite based thermal, oil based thermal and gas based thermal power plants;

Non-Conventional Energy Generation and Distribution; Distribution of elective energy to households, industrial, commercial and other users; and Power Trading

The extant policy permits any foreign power company to invest in the power sector through FDI route. Further, several global power plant equipment manufacturing companies from Japan, Europe and the USA have formed joint ventures (JVs) with Indian companies for making India their manufacturing hub for supercritical boilers/turbine generators and technology transfer. Also, in order to give a boost to micro and small enterprises (MSEs), capital investment limit by foreign multinational companies has been raised to 100 per cent from 24 per cent. The Government aims to create an environment of healthy competition among MSMEs through this enhanced capital investment by foreign multinational companies. Future Outlook India has become one of the most preferred investment destinations across the globe, owing to its lower costs and higher quality output. Recent reform initiatives undertaken by the Government, lack of investment options in other countries and overall a positive investor sentiment are certain factors that have made India attract the highest amount of foreign inflows as against its Asian peers in 2012. Believing that the trend would persist, HSBC has stated in its research report that there might be a shift in FDI flows from China to India in coming years.

Why FDI Not Always Solve The Problem

The annual Economic Freedom of the World (EFW) has just been published and it is for 2012. This is the one brought out by Fraser Institute. There is a parallel Index of Economic Freedom (IEF) produced by Heritage Foundation and the Wall Street Journal. This too has published its 2012 version. Let's take EFW first. Out of 144 countries ranked, India has a rank of 111th, behind both Bangladesh and Nepal, and just ahead of Iran. Ranks are somewhat misleading, because they depend on number of countries being ranked. Far better is to look at scores. For EFW, the higher the score, the better it is and the scores go up to 10. In 1990, just before the reforms started, India had an overall score of 5.05. As reforms proceeded, it went up to 6.89 in 2005. That score has dropped to 6.42 in 2010. I have said 2010, because though the study has been published in 2012, data are for 2010, with a time-lag. In other words, since UPA-I came to power, India's economic freedom scores have deteriorated. One can criticize all such rankings as emanating from rightwing market fundamentalists and authors of such studies would take this criticism as acompliment.

Economic freedom ratings are based on the premise that it is best to provide choice to citizens, because choice drives efficiency and efficiency drives growth. There is thus correlation between economic freedom ratings and indicators of development, including human development. That was also the premise behind 1991 reforms, which the government is trying to resurrect now. Stated thus, it isn't very surprising that growth rates should have declined in India. What I have reported is India's aggregate score. That again is divided into five sub-heads of size of government, legal system and property rights, sound money, freedom to trade internationally and regulation. Without getting into nitty-gritty (you can download and read the report), the worsening since 2005 has been sharpest for legal system and property rights and sound money. There are greater concerns about judicial independence, impartial courts and protection of property rights and also about inflation. In IEF, India doesn't do that badly, at least over time. In ranks, India is 123rd out of 179 countries. In scores, India dropped sharply in 2010, followed by some recovery since then. Essentially, business freedom, freedom from corruption, government spending and monetary freedom pull India down. If India doesn't do as badly in IEF as in EFW, that's because improvements in labour freedom have neutralized effects of some of the other movements.

While you can download and read this report too, I can't resist a quote. Despite India's high economic growth, the foundations for long-term economic development remain fragile in the absence of an efficiently functioning legal framework. Corruption, endemic throughout the economy, is becoming even more serious. The state maintains an extensive presence in many sectors through state-owned enterprises, and the legacy of decades of failed socialist policies includes a substantial tolerance for government meddling in economic

activity. What bothers me is reportage about recent flurry of reforms. We have a long-pending reform agenda. There are no quarrels about that. What triggered that high growth phase between 2003 and 2007? Those reforms were pending even then. It isn't quite the case that we had a benign external environment and growth took off. The external environment was certainly more benign then, but it had a small role to play in growth touching 9%. Growth touched 9% because of high savings and investment rates. Other than problems with procedures (decision-making, land, forest, environment, coal), that was because there was fiscal consolidation and not just household and private corporate, but public savings and investments also increased. Stated differently, what reduced growth was high unproductive public expenditure, dating from 2008 and before the global recession hit us. It wasn't quite the case that this public expenditure was a counter-cyclical policy instrument used to counteract effects of the global slowdown.

ADVANTAGES AND DISADVANTAGES:

Advantages It causes a flow of money into the economy which stimulates economic activity employment will increase The long run aggregate supply will shift outwards The aggregate demand will also shift outwards as investment is a component of aggregate demand It may give domestic producers an incentive to become more efficient The government of the country experiencing increasing levels of FDI will have a greater voice at International summits as their country will have more stakeholders in it Increase economic growth by dealing with different international products 1 million employment will be created in three years UPA Government Billion dollars will be invested in Indian market Spread import and export business in different countries Agriculture related people will get good price of their goods

Disadvantages Inflation may increase slightly Domestic firms may suffer if they are relatively uncompetitive If there is a lot of FDI into one industry e.g. the automotive industry then a country can become too Dependent on it and it may turn into a risk that is why countries like the Czech Republic are "seeking to Attract high value-added services such as research and development (e.g.) biotechnology)"Will affect 50 million merchants in India Profit distribution, investment ratios are not fixed An economically backward class person suffers from price raise Market places are situated too far which increases traveling expenses

Workers safety and policies are not mentioned clearly Inflation may be increased Again India become slaves because of FDI in retail sector

Entry routes for FDI :

1 Investments can be made by non-residents in the equity shares/fully, compulsorily and Mandatorily convertible debentures/ fully, compulsorily and mandatorily convertible preference shares of an Indian company, through two routes; 1. The Automatic Route: under the Automatic Route, the non-resident investor or the Indian company does not require any approval from the RBI or Government of India for the investment. 2. The Government Route: under the Government Route, prior approval of the Government of India through Foreign Investment Promotion Board (FIPB) is required. Proposals for foreign investment under Government route as laid down in the FDI policy from time to time, are considered by the Foreign Investment Promotion Board (FIPB) in Department of Economic Affairs (DEA), Ministry of Finance.

Recent Trends of FDI in India:

Indian has been attracting foreign direct investment for a long period. The sectors like telecommunication, construction activities and computer software and hardware have been the major sectors for FDI inflows in India. According to AT Kearney report India sits in 3rd place on the FDI Confidence Index globally. European and North American investors place it 3rd, while Asia-Pacific investors rank it 4th. India is the top location for nonfinancial services investment, and also scores highly in heavy industries, light industries and financial services. Even during economic crisis looming largely on other economies, FDI inflows to India soared from US$25.1billion in 2007 to US$41.6billion in 2008. Multinationals are managing to counter FDI restrictions and supply chain challenges at the most possible way showing path to others who are hesitant to enter into Indian market. For instance, Wal-Mart has taken steps to develop supply chains, procure 30-35 per cent local produce, making changes to its stock policy by reducing inventories etc. Similarly, Auto majors are pumping money in the sector. Ford planned to invest US $500mn in its Chennai plant, Nissan-Renault planning to manufacture ultra-low-cost car with its local partner Bajaj Auto, French tyre maker Michelins to invest US$874mn in its first Indian manufacturing facility. All these developments are helping in getting FDI inflows into the country. The measures introduced by the government to liberalize provisions relating to FDI in 1991 lure investors from every corner of the world. As a result FDI inflows during 1991-92 to March 2010 in India increased manifold as compared to during mid-1948 to March 1990. As per the fact sheet on FDI, there was Rs 6,303.36 billion FDI equity inflows between the period of August 1991 to January 2011.

FDI flow in India (in crores)

EXPERT OPINION :
KISHORE BIYANI, CHAIRMAN, FUTURE GROUP, MUMBAI "We are hoping this time the government will stick to its decision (allowing FDI in multi-brand retail) because that is absolutely essential. "The decision to let individual states decide on whether they want it is a good decision. This should satisfy people who are opposing it. The industry is convinced once a few states implement it the others will see the benefits and definitely consider it as well." Conclusion : At last we can say that this is not a coincidence but looks like a gameplan to meet some possibly internally set deadline as the government might want to go back to the rating agencies and try to convince them with these measures. The reason for the timing also could be because of the political cycle. The positive impact could be on stocks which should have a positive kickback impact on disinvestment and, therefore, fiscal consolidation. In a situation like this, improved sentiment will have a broad impact. The market will behave very negatively even if there is a marginal roll back because market will focus on the positive actions. So the FDI comes with its pros and cons, the Govt. has to ensure that the positive impacts of FDI overweigh the negative impacts of FDI. For example its has to give protection to domestic players in case a giant player like Walmart comes and starts dictating its terms and eventually forces its competition to leave the country like it did in U.S.A. and other European countries, where the domestic players were forced to shift headaquarters because of the cost cutting pressures from the biggest customer The Walmart.