PROJECT REPORT

ON
FDI & ITS IMPACT ON INDIAN ECONOMY
SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS
FOR THE BACHELORS DEGREE IN BUSINESS ADMINISTRATION
OF

H.N.B.G.U, SHRINAGAR

SUBMITTED BY:

BBA Vth SEMESTER

SUBMITTED TO

Faculty, IMS

INSTITUTE OF MANAGEMENT STUDIES-DEHRADUN

BATCH 2009-2012

1
 DECLARATION

I hereby declare that the project entitled "FDI & Its Impact

on Indian Economy" submitted for the award of BBA

Degree is my original work and the project has not

formed the basis for the award of any degree,

asossciateship, fellowship or any other similar titles.

Signature of the Student:

Place:

Date:

2
 CERTIFICATE

This is to certify that the project FDI & Its Impact on

Indian Economy" is the bonafied work carried out by

-------------student of BBA-V Institute of Management Studies,

Dehradun during the year 2012, in partial fulfillment of the

requirements for the award of the Degree of Bachelor of

Business Administration and that the project has not

formed the basis for the award previously of any degree,

diploma, associateship, fellowship or any other similar title.

Signature of the Guide:

Place:

Date:

3
 ACKNOWLEDGEMENT

I would like to express my gratitude and profound thanks to Ms.

_________________, for her supervision and guidance throughout

the summer training project report. I am again grateful to

Computer Lab Staff, who provided the most valuable

suggestions and co-operation at every step in completing this

summer training project report. Without their guidance I would

not have been able to complete my report.

I would also like to give thanks to my respondents for

providing their valuable time in giving important data needed for

this study. Without their support I would not have been able to

complete my report..

_---------------------

BBA V SEM

4
 EXECUTIVE SUMMERY

Summer training is an organized process for increasing skills

of a management student. It is a learning process involving the
acquisition of skills and performance.

It is necessary and useful in the case of all type management

students. It is necessary to increase the confidence of student.

The training helps the management student in converting his

theoretical knowledge in practical knowledge because now he
is doing practical work.

5
Contents

1: Introduction.
Foreign Institutional Investment.
Foreign Direct Investment.
Investment highlights of FIIs.
Role of govt. to attract the FDI.
2: Research methodology
Objectives of the study.
Limitations of the study.

3: Pattern of FDI in INDIA.

Introduction, Determinants & Types of FDI.
Capital Flows & Growth in India.
Recent Trends of Foreign Investment in india.
Investment in indian market.

4: FDI & its impact on indian economy.

Indian Economy.
Selected Economic indicators.
Sectoral overview.
Disinvestment.
Policy initiatives.
Opportunities.
Import & Export trend.

5: FDI Last updates march 2009.

6: Conclusion & suggestion.

7: Bibliography.

8: Annexures.

6
7
 I.

Introduction to Foreign Institutional Investment

Post liberalization period of India has witnessed a rapid expansion and

enrichment of various industrial activities. After the independence India followed a
socialist-inspired approach for most of its independent history, with strict
government control over private sector participation, foreign trade, and foreign
direct investment. However, since the early 1990s, India has gradually opened up
its markets through economic reforms by reducing government controls on foreign
trade and investment. The privatization of publicly owned industries and the
opening up of certain sectors to private and foreign interests has proceeded slowly
amid political debate.

Foreign Investment refers to investments made by residents of a country in

financial assets and production process of another country. After the opening up of the
borders for capital movement these investments have grown in leaps and bounds. But it
had varied effects across the countries. In developing countries there was a great need
of foreign capital, not only to increase their productivity of labor but also helps to build
the foreign exchange reserves to meet the trade deficit. Foreign investment provides a
channel through which these countries can have access to foreign capital. It can come in
two forms: foreign direct investment (FDI) and foreign portfolio investment (FPI).
Foreign direct investment involves in the direct production activity and also of medium
to long-term nature. But the foreign portfolio investment is a short-term investment
mostly in the financial markets and it consists of Foreign Institutional Investment (FII).
The present study examines the determinants of foreign portfolio investment in the
Indian context as the country after experiencing the foreign exchange crisis opened up
the economy for foreign capital. India, being a capital scarce country, has taken lot of
measures to attract foreign investment since the beginning of reforms in 1991. Till the
end of January 2003 it could attract a total foreign investment of around US$ 48
billions out of which US$ 23 billions is in the form of FPI. FII consists of around US$

8
12 billions in the total foreign investments. This shows the importance of FII in the
overall foreign investment programme. As India is in the process of liberalizing the
capital account, it would have significant impact on the foreign investments and
particularly on the FII, as this would affect short-term stability in the financial markets.
Hence, there is a need to determine the push and pull factors behind any change in the
FII, so that we can frame our policies to influence the variables which drive-in foreign
investment. Also FII has been subject of intense discussion, as it is held responsible for
intensifying currency crisis in 1990s elsewhere. The present study would examine the
determinants of FII in Indian context. Here we make an attempt to analyze the effect of
return, risk and inflation, which are treated to be major determinants in the literature,
on FII. The proposed relation (discussed in detail later) is that inflation and risk in
domestic country and return in foreign country would adversely affect the FII flowing
to domestic country, whereas inflation and risk in foreign country and return in
domestic country would have favorable affect on the same. In the next section we
would briefly discuss the existing studies. In section 3, we discuss the theoretical
model.
There was a strong growth in Foreign Direct Investment (FDI) flows with three
quarters of such flows in the form of equity. As per the economic survey, the growth
rate was 27.4 per cent in 2005-06, which was followed by 98.4 per cent in April-
September 2006. At US$ 4.2 billion during the first six months of this fiscal, FDI was
almost twice its level in April-September, 2005. Capital flows into India remained
strong on an overall basis even after gross outflows under FDI with domestic corporate
entities seeking a global presence to harness scale, technology and market access
advantages through acquisitions overseas.

Total FDI inflows for April-December 2006 stood at US$ 9.3 billion, as
compared to US$ 3.5 billion in the corresponding period last fiscal. According to
certain estimates, India is likely to receive US$ 12 billion of FDI during the current
financial year as compared to US$ 5.5 billion in the previous fiscal.

In the past two years, FDI has jumped 100 per cent, from US$ 3.75 billion in
2004-05 to US$ 7.231 billion till November 2006. However, these figures may be an
underestimation, say Finance Ministry officials, since these numbers do not include the

9
amount that is reinvested by foreign companies operating in the country. The figure for
2006-07 is likely to be close to US$ 10 billion if one takes into account profits
reinvested by foreign players in Indian operations.

The number of foreign institutional investors (FIIs) registered with the Securities and
Exchange Board of India (Sebi) has now increased to 1,030. In the beginning of
calendar year 2006, the figure was 813. As many as 217 new FIIs opened their offices
in India during 2006. This is the highest number of registrations by FIIs in a year till
date. The previous highest was 209 in 2005. The net investments made by the
institutions during 2006 was US$ 9,185.90 million against US$ 9,521.80 million in
2005.

Some investment highlights of FII

Billionaire investor George Soros-owned fund Dacecroft and New York-based

investment firm Blue Ridge are picking 21 per cent equity stake in Anil Dhirubhai
Ambani Group's Reliance Asset Reconstruction Company (Reliance ARC).

Role of Government initiatives

The Government is looking at reviewing regulation involving foreign investments into

the country. Aimed at simplifying the investment process, the revised policy will treat
foreign direct investment (FDI) and investment from foreign institutional investors (FII)
in the same light.

At present, investments by GE Capital, for instance, are termed as FII, while funds from
GE are bracketed as FDI. This, despite the fact that GE Capital could be a subsidiary of
GE. And in sectors which have a cap on investments, matters are even more
complicated. In such a situation, treating all foreign investments, irrespective of FDI or
FII, as the same in terms of investment limits and conditions, can be a more workable
solution. Once the changes are in place, the policy will be more in tune with
investments in developed countries where the distinctions between FDI and FII are fast
disappearing.

10
The sectors that will be affected by the revision include asset reconstruction companies,
direct-to-home distribution of broadcast signals and real estate, where separate sub-
ceilings or conditions apply at present for FDI, leaving FII investments outside their
ambit.

In a move to bolster investments in the aviation sector, the Reserve Bank of India has
said that FIIs can pick up stake in domestic airlines beyond the sectoral FDI cap of 49
per cent through secondary market purchases.

Meanwhile, FDI into India is on the verge of surpassing FII for the first time, the Prime
Minister's Economic Advisory Council (EAC) has said. According to the EAC, net FDI
for 2006-07 would be around US$ 9 billion, up from US$ 4.7 billion last year while FII
or portfolio inflows are likely to be US$ 7 billion.

Advantages of FII

The advantages of having FII investments can be broadly classified under the
following categories.
A. Enhanced flows of equity capital
FIIs are well known for a greater appetite for equity than debt in their asset structure.
For example, pension funds in the United Kingdom and United States had 68 per cent
and 64 per cent, respectively, of their portfolios in equity in 1998. Thus, opening up
the economy to FIIs is in line with the accepted preference for non-debt creating
foreign inflows over foreign debt. Furthermore, because of this preference for equities
over bonds, FIIs can help in compressing the yield-differential between equity and
bonds and improve corporate capital structures..
B. Managing uncertainty and controlling risks
Institutional investors promote financial innovation and development of hedging
instruments. Institutions, for example, because of their interest in hedging risks, are
known to have contributed to the development of zero-coupon bonds and index futures.
FIIs, as professional bodies of asset managers and financial analysts, not only enhance
competition in financial markets, but also improve the alignment of asset prices to
fundamentals. 39. Institutions in general and FIIs in particular are known to have good

11
information and low transaction costs. By aligning asset prices closer to fundamentals,
they stabilize markets. Fundamentals are known to be sluggish in their movements.
Thus, if prices are aligned to fundamentals, they should be as stable as the
fundamentals themselves. Furthermore, a variety of FIIs with a variety of risk-return
preferences also help in dampening volatility.
C. Improving capital markets
. FIIs as professional bodies of asset managers and financial analysts enhance
competition and efficiency of financial markets. Equity market development aids
economic development. By increasing the availability of riskier long term capital for
projects, and increasing firms incentives to supply more information about themselves,
the FIIs can help in the process of economic development.

D. Improved corporate governance Good corporate governance is essential to

overcome the principal-agent problembetween share-holders and management.
Information asymmetries and incomplete contracts between share-holders and
management are at the root of the agency costs. Dividend payment, for example, is
discretionary. Bad corporate governance makes equity finance a costly option. With
boards often captured by managers or passive, ensuring the rights of shareholders is a
problem that needs to be addressed efficiently in any economy.

Management Control and Risk of Hot Money Flows

The two common apprehensions about FII inflows are the fear of management
takeovers and potential capital outflows.
A. Managementcontrol
FIIsactas agents on behalf of their principals as financial investors maximizing
returns. There are domestic laws that effectively prohibit institutional investors from
taking management control. For example, US law prevents mutual funds from owning
more than 5 per cent of a companys stock. According to the International Monetary
Funds Balance of Payments Manual 5, FDI is that category of international
investment that reflects the objective of obtaining a lasting interest by a resident
entity in one economy in an enterprise resident in another economy. The lasting interest
implies the existence of a long-term relationship between the direct investor and the

12
enterprise and a significant degree of influence by the investor in the management of
the enterprise. According to EU law, foreign investment is labeled direct investment
when the investor buys more than 10 per cent of the investment target, and portfolio
investment when the acquired stake is less than 10 percent. Institutional investors on
the other hand are specialized financial intermediaries managing savings collectively
on behalf of investors, especially small investors, towards specific objectives in terms
of risk, returns, and maturity of claims. All take-overs are governed by SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations, 1997, and sub-
accounts of FIIs are deemed to be persons acting in concert with other persons in the
same category unless the contrary is established.
B. Potential capital outflows FII inflows are popularly described as hot money,
because of the herding behaviour and potential for large capital outflows. Herding
behaviour, with all the FIIs trying to either only buy or only sell at the same time,
particularly at times of market stress, can be rational. With performance-related fees
for fund managers, and performance judged on the basis of how other funds are doing,
there is great incentive to suffer the consequences of being wrong when everyone is
wrong, rather than taking the risk of being wrong when some others are right. The
incentive structure highlights the danger of a contrarian bet going wrong and makes it
much more severe than performing badly along with most others in the market. It not
only leads to reliance on the same information as others but also reduces the planning
horizon to a relatively short one. Value at Risk models followed by FIIs may
destabilize markets by leading to See Bikhchandani, S and S. Sharma (2000): Herd
Behaviour in Financial Markets, Working Paper No. WP/00/48, International
Monetary Fund, Washington DC, 2000. 15 simultaneous sale by various FIIs, as
observed in Russia and Long Term Capital Management 1998 (LTCM) crisis.
Extrapolative expectations or trend chasing rather than focusing on fundamentals can
lead to destabilization. Movements in the weightage attached to a country by indices
such as Morgan Stanley Country Index (MSCI) or International Finance Corporation
(W) ( IFC) also leads to en masse shift in FII portfolios.
. Another source of concern are hedge funds, who, unlike pension funds, life
insurance companies and mutual funds, engage in short-term trading, take short
positions and borrow more aggressively, and numbered about 6,000 with $500 billion

13
of assets under control in 1998. 50. Some of these issues have been relevant right
from 1992, when FII investments were allowed in. The issues, which continue to be
relevant even today, are: (i) benchmarking with the best practices in other developing
countries that compete with India for similar investments; (ii) if management control
is what is to be protected, is there a reason to put a restriction on the maximum amount
of shares that can be held by a foreign investor rather than the maximum that can be
held by all foreigners put together; and (iii) whether the limit of 24 per cent on FII
investment will be over and above the 51 per cent limit on FDI. There are some other
issues such as whether the existing ceiling on the ratio between equities and debentures
in an FII portfolio of 70:30 should continue or not, but this is beyond the terms of
reference of the Committee
To conclude Foreign Institutional Investment refers to investments made by
residents of a country in financial assets and production process of another country.
After the opening up of the borders for capital movement these investments have
grown in leaps and bounds. But it had varied effects across the countries. It can affect
the factor productivity of the recipient country and can also affect the balance of
payments. In developing countries there is a great need of foreign capital, not only to
increase their productivity of labor but also helps to build the foreign exchange
reserves to meet the trade deficit. Foreign investment provides a channel through
which these countries can have access to foreign capital. It can come in two forms:
foreign direct investment (FDI) and foreign portfolio investment (FPI). Foreign
direct investment involves in the direct production activity and also of medium to
long-term nature. But the foreign portfolio investment is a short-term investment
mostly in the financial markets and it consists of Foreign Institutional Investment
(FII). The FII, given its short-term nature, might have bi-directional causation with the
returns of other domestic financial markets like money market, stock market, foreign
exchange market, etc. Hence, understanding the determinants of FII is very important
for any emerging economy as it would have larger impact on the domestic financial
markets in the short run and real impact in the long run. The some basic objective of
the research and methodology used to achieve the project work is presented in the
preceding chapter no II.

14
Overseas FDI by Indian Corporations

Increasing Competitiveness of Indian industry due to globalization of Indian Economy

has led to emergence and growth of Indian multinationals. This is evident from the FDI
overseas from India, which increased by 13.5 times during the last 7 years. The year
2006-07 witnessed large overseas acquisition deals by Indian corporate to gain market
shares and reap economies of scale, supported by progressive liberalization of the
external payments regime. Overseas investment that started off initially with the
acquisition of foreign companies in the IT and related services sector has now spread to
other areas such as manufacturing including auto components and drugs and
pharmaceuticals.

15
II.

OBJECTIVE OF STUDY AND RESEARCH METHODOLOGY

For a long time, the theory of international trade and the theory of foreign direct
investment have been relatively disjoint. But, empirical studies have commonly found
foreign direct investment (FDI) and trade to be inter-linked. FDI has been found to
either substitute trade (in the case of tariff-hopping investment) or complement trade
(in the case of intra-firm trade). However, the relationship between FDI and trade has
become far more complex in the current WTO regime wherein several developing
countries have initiated import liberalisation and entered into trading arrangements that
have drastically reduced trading costs and encouraged trade. With the growing volumes
of trade, the focus of policy makers in the developing countries has now shifted from
whether FDI causes trade to whether trade can boost FDI inflows and in particular,
what kinds of trade can boost FDI inflows? The answers to these questions have
gained importance with the bilateral and plurilateral trading options becoming
available to the developing countries. In spite of the significance of the issue,
particularly to the developing countries like India, there is hardly any literature on the
impact of trade on FDI flows. Some studies indicate that FDI is used to preserve
markets that were previously established by exports (Grosse and Trevino, 1996) while
others have suggested that FDI and, in particular, U.S. FDI, follows exports (Eaton
and Tamura, 1994). Though a large number of studies have been undertaken on the
impact of FDI on trade, the impact of trade on FDI inflows yet remains to be
estimated empirically. There are reasons to expect that different kinds of trade would
influence FDI flows differently. Thus, one would expect differential impact of trade
associated with cross-border or international vertical integration, and vertical and
horizontal intra- industry trade 1 on inward FDI flows in developing countries. While
trade associated with cross-border vertical integration may boost FDI by providing
incentives of cost reduction, intra-industry trade may discourage the FDI that seeks
economies of scale. It is evident from the above that the impact of different kinds of
trade on FDI flows in developing countries is not only an important and useful area for

16
research but also holds great significance for the policy makers. However, this paper,
which makes an attempt to address these issues in the context of Indian industries, has
a limited aim. An analysis of the impact of Indias trade liberalisation of the 1990s on
FDI in Indian industries is presented in the paper using industry-level and firm-level
data. The relationship between trade and FDI is studies also in a regional context with
the help of state level data on trade and FDI. Further, the paper examines the
differential impact of trade associated with cross-border vertical integration and intra-
industry trade on FDI inflows. The rest of the paper is organized as follows. The next
section presents a quick review of the relevant literature. Section 3 describes the trends
in trade and FDI in Indian manufacturing in the pre and post-reform period, as a
background to the empirical analysis presented in the paper. Section 4 sets out some
hypotheses regarding the effect that economic reforms, particularly trade liberalisation,
may have had on FDI inflows and how the effects of intra-industry trade and inter-
industry trade 1 Horizontal intra-industry trade is trade in final products which are
differentiated by attributes, while vertical intra-industry trade is trade in final products
which are differentiated by quality. on FDI inflows differ. There exists an extensive
literature on the impact of FDI on trade. Following Mundell (1957), it was long
thought that FDI substitutes trade. The proposition was challenged by Agmon (1979),
and subsequently a number of studies emphasised potential complementarities between
FDI and trade. This literature has been reviewed by Ethier (1994, 1996) and Markusen
(1995, 1998). However, recently, there have been some studies that have explored
further the relationship between FDI and trade by taking a unified approach, which
postulates simultaneous determination of the two flows in developed countries
(Markusen and Maskus, 2001). These studies on trade and FDI mentioned above can
be divided into three categories: First, those that argue that the determinants of FDI
and trade are similar and therefore what determines trade also determines FDI flows
(Ekholm, 2002). Second, those that estimate econometric models in which FDI,
exports and imports are determined simultaneously and argue that all three are
endogenous variables and therefore their interactions should be taken into account
(Hejazi and Safarian, 2003). Lastly, those that look at the impact of regional trade
agreements on FDI flows (Binh and Haughton, 2002; Worth, 2002). Banga (2004)
shows that regional trading agreements like ASEAN and APEC can influence FDI

17
inflows into the region as the risks associated with investments decline with greater
regional integration. Though the above studies have to some extent noted the effects of
trade on FDI inflows, they have not exclusively captured these effects by empirically
determining the effects of different kinds of trade on FDI inflows. This paper adds to
the existing literature by investigating the impact of trade associated with cross-border
vertical integration and intra-industry trade on FDI flows for the Indian industry in the
post reforms period. FDI is a mean for the transfer of technology and know-how to
developing countries. Economic policy maker of the country until the decade of the
nineties attempted to regulate and control its spheres of activity and the contractual
forms of foreign enterprise participation in the economy. The framework of policies
they put in place was guided by the desire to limit foreign control of economic activity
but at the same time take advantage of the technology and know how provided by
foreign capital. This attempt at riding two horses in tandem, a complex feat, inevitably
resulted in a complex and cumbersome bureaucratically guided FDI regime and earned
India the reputation for hostility towards FDI. Nonetheless, the volume of FDI in
segments of the manufacturing sector was significant if not substantial. The 1991
economic reforms, a watershed in India's economic development strategy, signalled a
major departure in the FDI policy framework and removed many of the restraints on
ownership and composition of FDI. It is a fact that the 1991 reforms were a response to
the grave economic crisis which the country was faced with in 1991, most liberalisation
attempts in recent history have been driven by crises of one sort or the other. And far
from representing a genuine change in heart towards foreign enterprise participation,
India may have been compelled to adopt a liberal FDI regime. Nevertheless inflows of
FDI increased appreciably during the recent year and FDI appears to have had an
impact on growth, exports and productive efficiency of Indian industry.
The Expert Meeting on "Capacity Building in the Area of FDI: Data
Compilation and Policy Formulation in Developing Countries", convened in
accordance with the decision taken by the Commission on Investment, Technology and
Related Financial Issues at its ninth session was held from 12 to 14 December 2005
and provided a forum for discussing key issues on FDI data compilation, analysis, and
policy formulation in developing countriesThe meeting was attended by a large number
of government officials and national experts from some 50 countries, as well as

18
representatives of other international (e.g. IMF, OECD, Eurostat, UNIDO) and regional
(e.g. Caricom, Pacific Islands Forum) organizations, and some non-governmental
organizations, with proven expertise on balance of payments and TNC statistics. Most
of these representatives including those from developing countries came from
capitals in their respective countries. Based on the note prepared by the UNCTAD
Secretariat (TD/B/COM.2/EM.18/2) as well as 49 papers and presentation materials
submitted by experts, discussion took place on the following agenda items:
Quality of FDI data: how good are they?;
New developments in FDI statistics;
FDI data issues and problems;
Improving the measurement of FDI and TNC activities; and
Policy implications: what can be done?
Main messages of the Expert Meeting Based on the experiences of the experts and
the information they shared about methodologies and challenges in compiling FDI
statistics, five criteria were identified to assess the quality of FDI data reliability,
comparability, usefulness, comprehensiveness and timeliness. The Experts also
emphasized the importance of FDI data for analyzing a country's participation in the
world economy and as a basis for formulating appropriate policies. The need to collect
reliable, accurate, timely and comparable statistical information on FDI (on a balance
of payments basis) and on the overall activities of TNCs (complementary to FDI data)
was stressed by many experts. Such information is necessary for policy makers to
formulate policies that will help their country achieve their development objectives.
Requests were made to international organizations to play a more active role in that
area. Specifically, UNCTAD should increase its technical assistance, for example, by
providing guidance on methods for data collection on TNCs operations data.Keeping
these factors in to consideration.

19
The present study is taken up with the following objectives:

a. To study the present status of FDI in India.

b. To assess the sector wise FDI in pre &post reform

period.

c. To study the role of government in boosting FDI in

the country

d. To study the impact of FDI on Balance of

Payment.

20
 Research methodology and data source

Introduction to research:-

Research refers to a search for knowledge. Research is scientific

investigation.

ACCORDING TO REDMAN AND MORY:

A market research cant draw decision, but it helps in the task of decision
making. Research is a systematic effort to gain new knowledge.
ACCORDING TO LERNERS DICTIONARY OF CURRENT ENGLISH,
Research is careful investigation or inquiry especially through search for
new facts in any branch of knowledge.

OBJECTIVE OF RESEARCH:

The main idea behind the research is to study the objectives of the research design and
to ensure that data collected is relevant to the objectives. The main aim thus to research
is to find out the truth, which is hidden, and which has not been discovered.

21
 RESEARCH PROCESS-

Identify the problem

\

Set the objectives

Develop the Research Plan

Data collection

Analysis of Data

Finding (results)

All these steps are done systematically as one by one to find out the results. The first
step in the research process is to identify the problem and set objective carefully and
agree on the research objective.

The second step to research process is to develop the most efficient research plan for
gathering the needed information. Designing the research plan call for gathering the
primary data, secondary data, or both, research instruments, sampling plan & contacts
methods

The next step in the research process is data collection. It is most expensive and most
prone to error. Data collection methods are rapidly improving, thanks to modern
computer and tele communication.

The forth step in research process is to analyze the collected data. In this step
researcher tabulate the data and develop the frequency distribution.

The last step in the research process is that the researchers present their findings to the
relevant parties. The researcher should present the major findings that are pertinent to
major marketing decision facing management.

22
Collection of data:
Collection of data is one of the important aspects of research methodology. This
consists of gathering the data from various sources.

Types of data:
Data is important to collect the necessary information. Data may be of two types:
primary and secondary data.
Secondary data is one of the parts of research methodology through which information
about the project can be collected. For this research data is collected through Websites
of Rbi,ministery of commerce and various books.

1 The study will be based on the secondary data.

2 Review of literature, books and other papers relevant to the topic for obtaining
secondary data and for preparing theoretical parts.

3 The collected data will be systematically arranged , tabulated and appropriate

analysis will be drawn.

Limitations of the study:

1. The data is collected on secondary basis.

2. The time was short to cover the whole information.
3. Fdi is not the only source that impact on indian economy.

23
III.
PATTERN OF FDI IN INDIA

INTRODUCTION:
India's post-independence economic policy combined a vigorous private sector
with state planning and control, treating foreign investment as a necessary evil. Prior to
1991, foreign firms were allowed to enter the Indian market only if they possessed
technology unavailable in India. Almost every aspect of production and marketing was
tightly controlled, and many of the foreign companies that came to India eventually
abandoned their projects. The industrial policy announced in July 1991 was vastly
simpler, more liberal and more transparent than its predecessors, and it actively
promoted foreign investment as indispensable to India's international competitiveness.
The new policy permits automatic approval for foreign equity investments of up to 51
percent, so long as these investments are made in any of "high priority" industries that
account for the lion's share of industrial activity.
Identifying the growth-augmenting role of foreign capital flows has assumed
critical importance in India in recent years. The overall shift in the policy stance in
India from export pessimism and foreign exchange conservation to one that assigns an
important role to export of goods and services in the growth process has primarily been
guided by the perception that an open trade regime could offer a dynamic vehicle for
attaining higher economic growth. The absence of any strong and unanimous empirical
evidence justifying the universal relevance of an export led growth strategy as also the
continued reliance and targets for sustainable current accounts has motivated grater
focus on the growth augmenting capacity of foreign capital in the 1990s.

Structural reforms and external financial liberalization measures introduced in

the 1990s in India brought in their wake surges un capital flows as well as episodes of
volatility associated with the capital account dictating the balance of payment outcome.
Large capital inflows enables an easing of resource constraints and an acceleration of
growth in the mid-1990s. in the second half, the foreign exchange market development
as well as the rapid transmission of international sell offs facilitated by cross border
integration of equity markets via capital flows have as a level provoked a reassessment
of the benefits and costs of employing capital flows as a level of growth. Throughout
24
the 1990s, the role assigned to foreign capital in India has been guided by the consistent
with the absorptive capacity of the economy. In the aftermath of South-East-Asia crisis,
however, the need for further strengthening the capacity to withstand vulnerabilities has
necessitated a shift in policy that assigns greater weight age to stability in view of the
growing importance of capital flows in relation to trade flows in influencing the course
of the exchange rate and the potentially large volatility and self fulfilling expectations
that often characterize capital flows, reserve adequacy has also emerged as an
additional requirement for ensuring stable growth in the context of capital flows. Given
the trade off between growth and instability associated with capital flows, the emphasis
of the debate relating to capital flows in India has centered around sustainability a
country specific approach to liberalization of the capital account a desirable
composition and maturity profit of capital flows, and appropriate reserve management
and exchange rate policies in the context of capital flows, with only occasional
reference to the growth enhancing role of foreign capital in India.

Determinants of FDI:

Is India capable of attracting much larger volumes of FDI than she does at present?
Should India throw all doors wide open to FDI as advocated by the Harvard
economists? Is China's experience a role model for India? The literature on FDI sheds
some light on these issues.

Why do firms go abroad? Why do they choose to invest in specific locations? The
origins of the theoretical literature on determinants of FDI are to be found in Stephen
Hymers doctoral dissertation (1978). His thesis briefly put is that firms go abroad to
exploit the rents inherent in the monopoly over advantages they possess and FDI is their
preferred mode of operations. The advantages firms possess include patented
technology, team specific managerial skills, marketing skills and brand names. All other
methods of exploiting these advantages in external markets such as licensing
agreements and exports are inferior to FDI because the market for knowledge or
advantages possessed by firms tends to be imperfect. In other words, they do not permit
firms to exercise control over operations essential for retaining and fully exploiting the
advantages they own. Hymer's insights form the basis for other explanations such as the

25
transactions costs and internalisation theories ( Buckley and Casson, 1991), most of
which in essence argue that firms internalise operations, forge backward and forward
linkages in order to by-pass the market with all its imperfections. Dunning (1973)
neatly synthesises these and other explanations in the well-known eclectic paradigm or
the OLI explanation of FDI. For a firm to successfully invest abroad it must possess
advantages which no other firm possess (O), the country it wishes to invest in should
offer location advantages (L), and it must be capable of internalising operations (I).
Internalisation is synonymous with the ability of firms to exercise control over
operations . And such control is essential for the exploitation of the advantages which
firms possess and the location advantages which host countries offer.

It is the location advantages emphasised by Dunning, which forms the core of much
of the discussion on the determinants of FDI in developing countries. The two other
attributes necessary for FDI are taken as given from the perspective of developing
countries. Dunning (1973) set the ball rolling on econometric studies with a statistical
analysis of survey evidence on the determinants of FDI. His study identified three main
determinants of FDI in a particular location; market forces (including market size and
growth, as determined by the national income of the recipient country), cost factors
(such as labour cost and availability and the domestic inflation situation) and the
investment climate (as determined by such considerations as the extent of foreign
indebtedness and the state of the balance of payments).

Dunnings (1973, 1981) analysis proved influential and were pursued further by
others (Agarwal 1980, Root and Ahmed (1979), Levis, 1979, Balasubramanyam and
Salisu, 1991) Although the empirical literature continues to grow unabated both in size
and econometric sophistication, its overall message can be briefly summarised in the
form of the following propositions.

1. Host countries with sizeable domestic markets, measured by GDP per capita and
sustained growth of these markets, measured by growth rates of GDP, attract
relatively large volumes of FDI

26
 2. Resource endowments of host countries including natural resources and human
resources are a factor of importance in the investment decision process of
foreign firms.
3. Infrastructure facilities including transportation and communication net works
are an important determinant of FDI.
4. Macro economic stability, signified by stable exchange rates and low rates of
inflation is a significant factor in attracting foreign investors.
5. Political stability in the host countries is an important factor in the investment
decision process of foreign firms.
6. A stable and transparent policy framework towards FDI is attractive to potential
investors.
7. Foreign firms place a premium on a distortion free economic and business
environment. An allied proposition here is that a distortion free foreign trade
regime, which is neutral in terms of the incentives it provides for import
substituting (IS) and export industries (EP), attracts relatively large volumes of
FDI than either an IS or an EP regime.
8. Fiscal and monetary incentives in the form of tax concessions do play a role in
attracting FDI, but these are of little significance in the absence of a stable
economic environment.

How does India fare on these attributes? She does possess a large domestic market, she
has achieved growth rates of around 8.5 to 9 percent per annum in recent years, her
overall record on macroeconomic stability, save for the crisis years of the late eighties,
is superior to that of most other developing countries. And judged by he criterion of the
stability of policies she has displayed a relatively high degree of political stability. It is,
however, Indias trade and FDI regimes which are seen as major impediments to
increased inflows of FDI. The product and factor market distortions generated by the
inward looking import substitution industrial policies India pursued until recently have
been widely discussed. So too her complex and cumbersome FDI regime in place until
the nineties.

27
 Types of FDI:

Greenfield Investment: Direct investment in new facilities or the expansion of

existing facilities. Greenfield investments are the primary target of a host nations
promotional efforts because they create new production capacity and jobs, transfer
technology and know-how, and can lead to linkages to the global marketplace.
However, it often does this by crowding out local industry; multinationals are able
to produce goods more cheaply (because of advanced technology and efficient
processes) and uses up resources (labor, intermediate goods, etc). Another downside
of greenfield investment is that profits from production do not feed back into the
local economy, but instead to the multinational's home economy. This is in contrast
to local industries whose profits flow back into the domestic economy to promote
growth.

Mergers and Acquisitions: Mergers and acquisitions occur when a transfer of

existing assets from local firms to foreign firms takes place, this is the primary type
of FDI. Cross-border mergers occur when the assets and operation of firms from
different countries are combined to establish a new legal entity. Cross-border
acquisitions occur when the control of assets and operations is transferred from a
local to a foreign company, with the local company becoming an affiliate of the
foreign company. Unlike greenfield investment, acquisitions provide no long term
benefits to the local economy-- even in most deals the owners of the local firm are
paid in stock from the acquiring firm, meaning that the money from the sale could
never reach the local economy. Nevertheless, mergers and acquisitions are a
significant form of FDI and until around 1997, accounted for nearly 90% of the FDI
flow into the United States.

Horizontal Foreign Direct Investment: Horizontal foreign direct investment is

investment in the same industry abroad as a firm operates in at home. Horizontal
FDI help to create economies of scale because the size of the firm become large to
reap the advantage and gains.

28
 Vertical Foreign Direct Investment: the vertical integration occurs among the
firm involved in different stage of the production of a single final product . for
example if oil exploration firm and refinery firm merges together. It will be called
vertical direct investment. Vertical investment reduces transportation cost, and of
communication and coordinating production. Vertical direct investment takes in two
forms:

1) backward vertical FDI: where an industry abroad provides inputs for a firm's
domestic production process
2) forward vertical FDI: in which an industry abroad sells the outputs of a firm's
domestic production processes.

Capital flows and growth in India:

Capital flows into India have been predominantly influenced by the policy
environment, recognizing the availability constraint and reflecting the emphasis of self
reliance, planned levels of dependence on foreign capital in successive Plans were
achieved through import substitution industrialization in the initial years of planned
development. The possibility of export replacing foreign capital was generally not
explored until the 1980s. it is only in the 1990s that elements of an export led growth
strategy became clearly evident alongside compositional shifts in the capital flows in
favour of commercial debt capital in the 1980s and in favour of non debt flows in the
1990s. The approach to liberalization of restriction on specific capital account
transaction however, has all along been against any big-bang.

A large part of the net capital flows to India in the capital account is being offset
by the debit servicing burden. As a consequence, net resource transfer have fluctuated
quite significantly in the 1990s turning negative in 1995-96. Till the early 1980s, the
capital account of the balance of payment had essentially a financing function. Nearly
80 percent of the financing requirement was met through external assistance. Aid
financed import were both largely.
Ineffectual in increasing the rate of growth and were responsible for bloating the
inefficient public sector. Due to the tied nature of bilateral aid, India has to pay 20 to 30

29
percent higher prices in selection to what it could have got through international. The
real resource transfer associated with aid to India, therefore, was mush lower. There
were occasions when India accepted bilateral aid almost reluctantly and without
enthusiasm because of the combination of low priority of the project and the inflated
process of goofs The environment for enhancing aid effectiveness has been
highlighted as one of the key factor in the assessments of aid by donors, i.e. :open trade
secured private property rights, the absence of corruption, respect for the rile of law
social safety nets, aid sound macroeconomic and financial policy the report pf the
High Level committee on Balance of Payments 1993 identified a number of factors
constraining effective aid utilization on India and underscored the need to initial urgent
action on both redacting the overhang of unutilized aid and according priority to
externally sided projects in terms pf plan allocations and budgetary previsions. Net
resource transfer under aid to India, however turned negative in the second half of the
1990s.

In the 1980s, India increased its reliance on commercial loans as external

assistance increasingly fell short of the growing financing needs. The significant
pressures on the balance of payments as the international oil prices more than doubled
in 1979-80 and the world trade volume growth decelerated sharply during 19980-82,
triggered an expansion in Indias portfolio of capital inflows to include IMF facilities,
grater reliance on the two deposit schemes for non resident Indian the Non- Resident
External Rupee Accounts (NRERA) (that started in 1970) and foreign currency Non
Resident Account (FCNR) (that started in 1975) and commercial borrowings on a
modest scale. A few select banks all Indian financial institutions leading public sector
undertakings and certain private corporate were allowed to raise commercial capital
from, the international market in the form of loan, bonds and euro notes. Indian
borrowed received final terms in the 1980s Spreads over LIBOR for loan to India
improved gradually from about 100 basis points in the early 1980s to about 25 basis
points for PSUs (50 basis points for private entitles) towards end of 1980s. Maturities
were elongated from seven year to ten year during this period. Debt sustainability
indicators, particularly debt/GDP ration and debt service ratio, however, deteriorated
significantly during this period.

30
 The policy approach to ECB has undergone fundamental shift sine then with the
institution of reformer and external sector consolidation in the 1990s. Ceilings are
operated on commitment of ECB with sub ceilings for short term debt. The ceiling on
annual approvals has been raised gradually. The force of ECB policy continuous to
place emphases on low borrowing cost (by specifying the spread on LIBOR or US TB
rates), lengthened maturity profited (liberal norms for above 8 years of maturity) and
end use restrictions.

Given the projected need for financing infrastructure project, 15 percent of the
total infrastructure financing may have to come from foreign sources. Since the ratio of
infrastructure investment to GDP is projected to increase from 5.5 percent in 1995-96 to
about 8 percent by 2006, with a foreign financing of about 15 percent foreign capital of
about 1.2 percent of GDP has to be earmarked only for he infrastructure sector to
achieve a GDP growth rate of bout 8 percent.

NRI deposits represent an importance avenue to access foreign capital. The

policy framework for NRI deposit during 1990s has offered increased options to the
NRIs through different deposit schemes and by modulation rate of return maturities and
the application of cash reserve ratio (CRR) in the 190s FCNR (B) deposit rates have
been linked to LIBOR and short term deposits are discouraged. For NRERA, the
interest rate are determined by banks themselves. The non resident Rupee deposit (NR
(NR) RD) introduced in June 1992 is non reparable although interest earned is fully
reparable under the obligation of current account convertibility subscribed to in 1994.
in the 1990s NRI deposit remained an important sources of foreign capital with
outstanding balances under various schemes taken together rising from about US $10
billion at the close of 1980s to US $ 23 billion at the close of 2001. capital flows from
NRIs have occasionally taken the form of large investment in specific bonds, i.e. the
Indian Development Bond (IDB) in 1991, the Resurgent Indian Bond RIB) in 1998 and
Indian Millennium Deposit (IMD) in 2000.

31
 The need for supplementing data capital with non debt capital with a clear
prioritization in favor of the latter has characters the government policy framework
from capital flows in the 1990s. the high level committee on balance of payments
recommended the need for achievement this composition shift. A major shift in the
policy stance occurred in 1991-92 with the liberalization of norms for foreign direct a
portfolio investment in India.

The liberalization process started with automatic approval up to 51 percent for

investment in select areas. Subsequently the areas covered under the automatic route
and the limits of investment were raised gradually culminating in permission for 100
percent participation in certain areas (particularly oil refining telecommunications, and
manufacturing activities in special economic zone). The requirement of balancing the
dividend payments with export earnings which was earlier limited to a short list of 22
consumer goods items was completely withdrawn. Limit for FDI in projects relating to
electricity generation, transmission and distribution has been removed. FDI in non bank
financial activities and insurance is also permitted. Restriction on portfolio investment
through purchased of both traded primary and secondary market Indian securities are
also liberalized. As opposed to the earlier restriction permitting non- resident Indian
(MRIs) overseas corporate bodies (OCBs) to acquire up to 1 percent for foreign
institutional investor (FIIs)/NRIs/OCBs while allowing investment by FIIs in
September 1992. Subsequently the aggregate limit was raised gradually and presently
for FDI investment in different sector provided the general body of the respective firms
takes a decision to that effect. Portfolio investment in Global Depository Receipts
(GDRs) /American Depository Reseats (ADRs) /Foreign currency convertible bonds
(FCCBs) floated by Indian companies in international markets is also permitted.

It is difficult to asses the direct contribution of these flows particularly FDI to

the growth process. Anecdotal evidence suggests that foreign controlled firms often use
third party export to meet their export obligations. Another factor that contributes to
widening the technology gap in FDI in India is the inappropriate intellectual property
(IP) regime of India. Survey results for 100US multinationals indicate that about 44
percent of the firms highlighted the weak IP protection in India as a constraining factor

32
for transfer of new technology to Indian subsidiaries. For investment in sector like
chemicals and pharmaceuticals almost 80 percent of the firms review Indian IP regime
as the key constraining factor for technology transfer. Information collected from
annual surveys of select foreign controlled rupee companies (FCRCs)/FDI companies
on the export intensity of FCRC/FDI firms during the 1980 and 1990 shows that these
firms export only about 10 percent of their domestic sales and the export intensity has
increased only modestly in the 1990. it appears that the lure of the large size of the
domestic market continues to be on of the primary factor causing FDI flows into India.

Spillover of positive externalities associate with FDI in the form of transfer of

technology is also highlighted as another factor that could contribute to growth. The
relationship between technology imports comprising impost of capital goods and
payment for royalty and technical know how fees) and domestic technology efforts in
terms of R & D expenditure does not exhibit any complementarily foreign exchange
spent on technology import as percentage of domestic expenses on R & D rather
increased significantly in the 1990 in relation to 1980 suggesting the use of transfer
patterns of resource transfer. The share of imported raw materials in total raw materials
used by FDI firms however, outperformed the overall growth in industrial production in
the 1990.
Foreign direct investment

Foreign direct investment (FDI) is defined as a long term investment by a

foreign direct investor in an enterprise resident in an economy other than that in which
the foreign direct investor is based. The FDI relationship, consists of a parent enterprise
and a foreign affiliate which together form a transnational corporation (TNC). In order
to qualify as FDI the investment must afford the parent enterprise control over its
foreign affiliate. The UN defines control in this case as owning 10% or more of the
ordinary shares or voting power of an incorporated firm or its equivalent for an
unincorporated firm.

In the years after the Second World War global FDI was dominated by the
United States, as much of the world recovered from the destruction wrought by the
conflict. The U.S. accounted for around three-quarters of new FDI (including reinvested

33
profits) between 1945 and 1960. Since that time FDI has spread to become a truly
global phenomenon, no longer the exclusive preserve of OECD countries. FDI has
grown in importance in the global economy with FDI stocks now constituting over 20%
of global GDP. In the last few years, the emerging market countries such as China and
India have become the most favoured destinations for FDI and investor confidence in
these countries has soared. As per the FDI Confidence Index compiled by A.T. Kearney
for 2005, China and India hold the first and second position respectively, whereas
United States has slipped to the third position.

Foreign Investment in India recent tends:

After a sharp set back in 1998-99 foreign investment inflows made a smart recovery in
1999-2000 and the position was broadly maintained in 2000-01. total foreign
investment comprising direct and portfolio which average about US$. 39 billion during
the four year ended 1997-98 fell sharply to US $ 2.40 billion in 1998-99 as a fall out of
the Asian Crisis in 2000-01, with the total inflow of US$ .10 billion. During the first
eight months of 2001-02 total foreign investment inflows have risen by about 47
percent of US $ 3.68 billion form US $ 2.51 billion in the corresponding period in
2000-01 due mainly to about 61 percent increase in foreign direct investment (FDI).
The trends in foreign investment flows in 2000-01 and 2001-02 augur well when seen
against the background of private capital flows (net) to emerging market economics
being only marginal in 2000 and negative in2001.

(i) Foreign Direct Investment :

Foreign direct investment (FDI) flows after reaching a peek of US $ 3.56 billion
in 1997-98 receded gradually to US 2.16 billon in 1999-2000. FDI inflows rose only
marginally to US $ 2.34 billion in 2000-01. FDI inflows during the current financial
year (2001-02) o far have been encouraging. During April-November 2001 they show
an increase of 61 percent to US $ 2.37 billion for US $ 1.47 billion during April-

34
November 2000,. The source and direction of FDI remained by and large unchanged
during the 1990s. companies registered in Mauritius and the US were the principal
source of FDI was channeled into computer hardware and software, engineering
industries, service, electronic and electrical equipment chemical and allied products and
food and dairy products.

FDI is seen as means to supplement domestic investment for achieving a higher

level of economic growth and development. FDI benefits domestic industry as well as
the Indian consumer by providing opportunities for technological up-gradation access
to global managerial skills and practice optimal utilization of human and nature
resources making Indian industry internationally competitive opening up export
markets providing backward and forward linkages and access to international quality
goods and services. Towards this end, the FDI policy has been constantly received and
necessary steps have been taken to make Indian a most favorable destination for FDI.

ii) Portfolio Investment:

Fresh inflows for portfolio investment by foreign institution investors (FIIs)
during 2000-01 were US$ 1.85 billion slightly lower than the inflows of US $ 2.14
billion in the previous year. During the first eight months of 2001-02 such inflows
amounted to US $ 799 million and increase of US $532 million over the inflows
amounted to US $ 799 million and increase of US $ 532 million over the inflows during
the corresponding period in 2000-01. the policy in regard to portfolio investment by
FIIs in reviewed constantly and major initiative are taken when necessary. In the Budge
for 2001-02 it was proposed to rises the limit for portfolio investment by FIIs from the
normal level of 24 percent of the paid up capital of the Company have been permitted
to raise the aggregate ceiling for portfolio investment by FIIs through secondary market
form the normal level of 24 percent up to the applicable sector cap level of the issued
and paid up capital of the company subject to compliance company to the enhances
limit beyond 24 percent and (b) a special resolution pass by the general body of the
company approving the enhanced limit beyond 24 percent.

35
 Funds raised through issue of ADRs/GDRs amounted in US $831 million in
2000-01 compared with US $ 768 million in 1999-2000. During the current financial
year up to November 2001 US $ 477 million has been raised through this route. The
government has been liberalizing the guidelines for issue of GDRs/ADRs in a phased
manner. The initiative taken in 2001-02 include
(a) As a follows up of the announcement in the budget for 2001-02 Indian
companies have been permitted to list in foreign stock exchange by
sponsoring ADR/GDR issues with overseas depositor against share held
by its shareholders subject to prescribed conditions
(b) All companies that have made an ADR/GDR issue earlier and list abroad
have been permitted the facility of overseas business acquisition through
ADR/GDR stock swap under the automatic route subject to conditions
that include adherence to FDI policy and the value limit for the
transaction not toe exceed US $100 million of 10 times the export
earning during the processing financial year Indian ADRs/GDRs
announced by the Financial Minister in the Union Budge 2001-02 are
under finalization in consultation with they RBI and the SEBI.

36
 Foreign investment in billions

iii) Non Resident Indian Deposit:

Fresh accrual to non resident deposit including accrued interest rose by over 50 percent
to US $2.30 billion in 2000-01, on top of an increase of over 60 percent in 1999-2000.
during the first eight months of the current financial year 2001-02, accrual to NRI
deposit were about US $1.98 billion higher than the US $1.52 billion in the same period
last year. The outstanding balances under non resident deposit schemes continued their
increasing trend, reflecting the overall confidence of non-resident Indian in the strength
of the economy. Outstanding balance under all the non-0resident deposit schemes
amounted to US$ 24.64 billion at the end of November 2001, up from US $ 23.07
billion at the end March 2001 and Dus$.68 billion at end March 2000 raised through
IMD amounted to US $3.81 billion in 2000-01, compared with the gross disbursement
of US $ 3.19 billion in 1999-2000. The increase in disbursements in 2000-01 was
mainly on account of the refinancing of prepayment of more expensive loans with
relatively softer terms. The prepayment of loans was also reflects in significant increase
in amortization payments form US $ 1.50 billion in 1999-2000 to US $5.31 billion in
2000-01. as a result disbursements, net of amortization payments in 2000-01 turned
negative at US$ 1.50 billion compared with the net inflow of US $0.31 billion in the

37
previous year. The negative flows in 2000-01 were more made up by the funds raised
through Indian Millennium Deposits of US $5.51 billion resulting in net overall inflows
of US $4.01 billion under external commercial borrowing.

The external commercial borrowing policy continues to provide flexibility in

borrowing by Indian corporate and public sector undertaking (PSUs) while at the same
time maintaining safe limits for total external borrowings consistent with prudent debt
management. The guiding principles for ECB policy are to keep maturities long, costs
low, and encourage infrastructure and export sector financing which are crucial for
overall growth of the economy. The status of approvals given to the corporate under
normal windows during the last three financial years.
The idea of India is changing. This is best proved by the increasing number of
countries showing interest to invest in India. Another encouraging factor is that India is
considered a stable country for investing in by corporate overseas. This is evident from
the fact that not a single corporate has approached the World Bank Group's Multilateral
Investment Guarantee Agency (Mega) for non-commercial risk cover for making
investments into the country.

India has displaced US as the second-most favored destination for foreign direct
investment (FDI) in the world after China according to an AT Kearney's FDI
Confidence Index that tracked investor confidence among global executives to
determine their order of preferences. The United Nations Conference on Trade and
Development (Unclad) has said that India is among the "dominant host countries" for
FDI in Asia and the Pacific (APAC). It is evident. The investment scenario in India has
changed. And the figures say that it is for the better.

India attracted more than three times foreign investment at US$ 7.96 billion
during the first half of 2005-06 fiscal, as against US$ 2.38 billion during the
corresponding period of 2004-05. For the first six months of this fiscal, the country
drew US$ 2.86 billion of FDI and US$ 5.10 billion of portfolio investment through
GDRs, ADRs, FIIs, offshore funds and others. In a bid to stimulate the sector further,
the government is working on a series of ambitious economic reforms.

38
 The Centre has divested some of its own powers of approving foreign
investments that it exercised through the Foreign Investment Promotion Board (FIPB)
and has handed them over to the general permission route under the RBI.

The FDI cap for aviation has been hiked from 40 to 49 per cent through the
automatic route. It has set up an Investment Commission that will garner investments in
the infrastructure sector among others, and plans to increase the limit for investment in
the infrastructure sector. The Government approved sweeping reforms in FDI with a
first step towards partially opening retail markets to foreign investors. It will now allow
51 per cent FDI in single brand products in the retail sector. Besides retail, other sector
are being opened:

100 per cent allowed in new sectors such as power trading, processing and
warehousing of coffee and rubber.
FDI limit raised to 100 percent under automatic route in mining of diamonds and
precious stones, development of new airports, cash and carry wholesale trading
and export trading, laying of natural gas pipelines, petroleum infrastructure,
captive mining of coal and lignite.
Subject to other regulations, 100 percent FDI is allowed in distillation and
brewing of potable alcohol, industrial explosives and hazardous chemicals.
Indian investor allowed to transfer shares in an existing company to foreign
investors.
Limit for telecoms services firms raised to 74 per cent from 49 per cent.

Investment in Indian market:

India, among the European investors, is believed to be a good investment despite
political uncertainty, bureaucratic hassles, shortages of power and infrastructural
deficiencies. India presents a vast potential for overseas investment and is actively
encouraging the entrance of foreign players into the market. No company, of any size,
aspiring to be a global player can, for long ignore this country which is expected to
become one of the top three emerging economies.

Market potential:

39
India is the fifth largest economy in the world (ranking above France, Italy, the United
Kingdom, and Russia) and has the third largest GDP in the entire continent of Asia. It is
also the second largest among emerging nations. (These indicators are based on
purchasing power parity.) India is also one of the few markets in the world which offers
high prospects for growth and earning potential in practically all areas of business.Yet,
despite the practically unlimited possibilities in India for overseas businesses, the
world's most populous democracy has, until fairly recently, failed to get the kind of
enthusiastic attention generated by other emerging economies such as China.

Capital Flows:

Capital flows to India remained strong during 2005-06, led by foreign investment
flows. Foreign direct investment (FDI) inflows into India at US $ 5.8 billion during
2005-06 (April-January) were 31 per cent higher than in the corresponding period of
the previous year, on the back of sustained growth in activity and positive investment
climate. FDI was channeled mainly into manufacturing, business and computer
services. Mauritius, the US and the UK continued to remain the dominant sources of
FDI to India. Foreign institutional investors (FIIs) after remaining subdued during
April-May 2005 made large purchases in the Indian stock markets in the subsequent
months. Cumulative FII inflows during April-February 2005-06 amounted to US $ 8.2
billion, 19 per cent higher than a year ago. The number of FIIs registered with the SEBI
increased from 685 at end-March 2005 to 882 by end-March 2006. Capital inflows
through the issuances of American depository receipts (ADRs)/global depository
receipts (GDRs) were also substantially higher as booming stock markets offered
corporate

40
 (US $ million)

Table 3.1 capital flows

Item Period 2004-05 2005-06

1 2 3 4

Foreign Direct Investment into India April-January 4,478 5,843

FIIs (net) April-February 6,858 8,176
ADRs/GDRs April-January 442 2,141
External Assistance (net) April- 673 914
December
External Commercial Borrowings (Medium April- 2,857 -1,555
and long-term) (net) December
(3,945*)
Short-term Trade Credits (net) April- 2,963 1,697
December
NRI Deposits (net) April-January -771 1,666

* : Excluding the IMD redemption.

the opportunity to issue equities abroad. Reflecting the increased domestic investment
activity, demand for external commercial borrowings (ECBs), including foreign
currency convertible bonds (FCCBs), remained high. Non-Resident Indian deposit
accounts recorded inflows during April-January 2005-06 in contrast to net outflows in
the previous year (Table 53).

Lack of enthusiasm among investors:

The reason being, after independence from Britain 50 years ago, India developed
a highly protected, semi-socialist autarkic economy. Structural and bureaucratic
impediments were vigorously fostered, along with a distrust of foreign business. Even
as today the climate in India has seen a sea change, smashing barriers and actively
seeking foreign investment, many companies still see it as a difficult market. India is
rightfully quoted to be an incomparable country and is both frustrating and challenging
at the same time. Foreign investors should be prepared to take India as it is with all of
its difficulties, contradictions and challenges.

41
 Developing a basic understanding or potential of the Indian market
The Indian middle class is large and growing; wages are low; many workers are well
educated and speak English; investors are optimistic and local stocks are up; despite
political turmoil, the country presses on with economic reforms. But there is still cause
for worries-

Infrastructural hassles:

The rapid economic growth of the last few years has put heavy stress on India's
infrastructural facilities. The projections of further expansion in key areas could snap
the already strained lines of transportation unless massive programs of expansion and
modernization are put in place. Problems include power demand shortfall, port traffic
capacity mismatch, poor road conditions (only half of the country's roads are surfaced),
low telephone penetration (1.4% of population).

Indian Bureaucracy:

Although the Indian government is well aware of the need for reform and is
pushing ahead in this area, business still has to deal with an inefficient and sometimes
still slow-moving bureaucracy.

Diverse Market:

The Indian market is widely diverse. The country has 17 official languages, 6
major religions, and ethnic diversity as wide as all of Europe. Thus, tastes and
preferences differ greatly among sections of consumers.

Therefore, it is advisable to develop a good understanding of the Indian market

and overall economy before taking the plunge. Research firms in India can provide the
information to determine how, when and where to enter the market. There are also
companies which can guide the foreign firm through the entry process from beginning
to end --performing the requisite research, assisting with configuration of the project,
helping develop Indian partners and financing, finding the land or ready premises, and
pushing through the paperwork required.

42
Developing up-front takes:

Market Study-

Is there a need for the products/services/technology? What is the probable

market for the product/service? Where is the market located? Which mix of products
and services will find the most acceptability and be the most likely to generate sales?
What distribution and sales channels are available? What costs will be involved? Who
is the competitor.

Check on Economic Policies:

The general economic direction in India is toward liberalization and globalization. But
the process is slow. Before jumping into the market, it is necessary to discover whether
government policies exist relating to the particular area of business and if there are
political concerns which should be taken into account.

Foreign Direct Investment (FDI) is permitted as under the following forms of

investments.

Through financial collaborations.

Through joint ventures and technical collaborations.

Through capital markets via Euro issues.

Through private placements or preferential allotments.

Forbidden Territories:

FDI is not permitted in the following industrial sectors:

Arms and ammunition.

Atomic Energy.

Railway Transport.

Coal and lignite.

Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper,

zinc.

Foreign Investment through GDRs (Euro Issues)

Foreign Investment through GDRs is treated as Foreign Direct Investment :

43
Indian companies are allowed to raise equity capital in the international market through
the issue of Global Depository Receipt (GDRs). GDRs are designated in dollars and are
not subject to any ceilings on investment. An applicant company seeking Government's
approval in this regard should have consistent track record for good performance
(financial or otherwise) for a minimum period of 3 years. This condition would be
relaxed for infrastructure projects such as power generation, telecommunication,
petroleum exploration and refining, ports, airports and roads.

Clearance from FIPB:

There is no restriction on the number of Euro-issue to be floated by a company or a

group of companies in the financial year . A company engaged in the manufacture of
items covered under Annex-III of the New Industrial Policy whose direct foreign
investment after a proposed Euro issue is likely to exceed 51% or which is
implementing a project not contained in Annex-III, would need to obtain prior FIPB
clearance before seeking final approval from Ministry of Finance.

Use of GDRs:

The proceeds of the GDRs can be used for financing capital goods imports, capital
expenditure including domestic purchase/installation of plant, equipment and building
and investment in software development, prepayment or scheduled repayment of earlier
external borrowings, and equity investment in JV/WOSs in India.

Restrictions:
However, investment in stock markets and real estate will not be permitted. Companies
may retain the proceeds abroad or may remit funds into India in anticipation of the use
of funds for approved end uses. Any investment from a foreign firm into India requires
the prior approval of the Government of India.

Investment in India - Foreign Direct Investment - Approval

Foreign direct investments in India are approved through two routes:

Automatic approval by RBI:

The Reserve Bank of India accords automatic approval within a period of two weeks
(provided certain parameters are met) to all proposals involving:

44
 foreign equity up to 50% in 3 categories relating to mining activities (List 2).

Foreign equity up to 51% in 48 specified industries (List 3).

Foreign equity up to 74% in 9 categories (List 4).

Where List 4 includes items also listed in List 3, 74% participation shall apply.

The lists are comprehensive and cover most industries of interest to foreign companies.
Investments in high-priority industries or for trading companies primarily engaged in
exporting are given almost automatic approval by the RBI.

Opening an office in India:

Opening an office in India for the aforesaid incorporates assessing the commercial
opportunity for self, planning business, obtaining legal, financial, official,
environmental, and tax advice as needed, choosing legal and capital structure, selecting
a location, obtaining personnel, developing a product marketing strategy and more.

The FIPB Route:

FIPB stands for Foreign Investment Promotion Board which approves all other cases
where the parameters of automatic approval are not met. Normal processing time is 4 to
6 weeks. Its approach is liberal for all sectors and all types of proposals, and rejections
are few. It is not necessary for foreign investors to have a local partner, even when the
foreign investor wishes to hold less than the entire equity of the company. The portion
of the equity not proposed to be held by the foreign investor can be offered to the
public.

Foreign Direct Investment Recent Trend:

India. India replaces the United States as the 2nd most attractive FDI location, up from
3rd place in 2004 and reaching its highest ranking ever. While India's IT and software
industry has made it the darling in the global business community over the past few
years, global investor interest in other areas is just now catching up.

Indian government has been trying to attract foreign direct investment (FDI) and it
seems be paying off. India is still way behind in terms of attracting FDI but India is
improving. Forbes reported:

45
The economy drew in a record 2.9 bin used in foreign direct investment (FDI) in the
first four months of the fiscal year ending next March, nearly double last year's amount,
the Press Trust of India news agency reported.
'FDI inflows in April-July 2006-07 increased by 92 pct to 2.9 bin used from 1.5 bin
used in the same period of the last fiscal year,' the news agency quoted Commerce
Minister Kamal Nath as telling reporters.
The Indian government is reforming the Foreign Investment Promotion Board,
and has established the Indian Investment Commission to act as a one-stop shop
between the investor and the bureaucracy. Also, India has raised FDI caps in the
telecom, aviation, banking, petroleum and media sectors. 'India is set to receive 12 bln
usd this year as against 8.3 bln USD in 2005-06,' Nath was quoted as saying. $12
billion is an impressive figure. There is no doubt that India is attracting more FDI and
India will perhaps continue to do for the foreseeable future. However, the bad part is
that the growth in Indian economy and FDI are not creating enough jobs in India. This
is what India needs at this moment. So, I hope that Indian government will try to focus
on this area more.
Indian government is trying very aggressively to attract foreign direct investment
(FDI) and FDI is coming into India these days in a satisfactory way. The interesting
thing is that Indian companies have become matured and strong enough to expand their
business outside of India. In other words, Indian companies have started to invest in
foreign countries in large scale. "No wonder, foreign direct investment (FDI) outflows
from India now exceed inflows. June alone saw the closure of 10 cross-border big time
deals with a combined transaction value of $1.5 billion. Around 76 deals worth $5.2
billion were cut in six months between January and June this year. In comparison, the
whole of 2005 saw 136 deals at a value of $4.7 billion. This could well be the
beginning of a global presence for Indian companies. In Unctads outward FDI
performance index rankings covering 132 economies, India improved its rank from 80
in 1990 to 54 in 2004."Indian companies may have started to go abroad on a large scale
but the reality is that they have still some catching up to do compared to companies of
China, Korea, Japan and even Malaysia. So, the next challenge is to catch up the big
companies of Asia in terms of global presence

46
India requires $150 billion worth of investments to upgrade the country's weak
infrastructure over the next 10 years. The government is considering sweeping
liberalization to expedite the FDI project review process and eliminate FDI restrictions
across a broad range of sectors, including airports, oil, gas and natural resources.

Although more investors view India as an attractive destination, bureaucracy, perceived

corruption and a poor infrastructure may cloud efforts to attract FDI. Among the most
recent troubles: Telecom Malaysia and Singapore Technologies' bid to buy Idea Cellular
was abandoned when it ran into regulatory problems. Singapore's Changi airport
withdrew its bid for the Delhi and Mumbai airports because of constraints on foreign
investors.

Financial services investors upgrade India from 4th to 2nd most attractive FDI location.
The emergence of local players, ICICI Bank and HDFC Bank, along with foreign
investors, has helped restructure India's underdeveloped financial sector and spur
competition. Deutsche Bank (Germany) is launching a range of savings, investment and
loan products as well as investment and financial planning services in seven major
Indian cities.

Telecom and utilities investors rank India their 3rd most attractive destination. One
reason for the interest is the relaxation of ownership restrictions. In October 2005, the
Indian government raised foreign ownership levels to 74 percent (from 49 percent), a
move that will add fuel to India's booming IT and software industry. According to
NASSCOM, the Indian IT software and services exports have grown from $5.3 billion
in 2000 to $16.5 billion in 2005.

Also, estimates suggest that India has the world's fastest-growing mobile phone market,
growing at 35 percent per year until 2006. Immediately following the relaxation of
restrictions, Vodafone Group (U.K.) acquired a 10 percent stake in Bharti Tele-
Ventures, India's largest mobile phone operator.

Investors in the heavy and light manufacturing sectors are optimistic about India. The
country's largest FDI commitment was won when Pohang Iron & Steel (South Korea)
confirmed a $12 billion deal to build a steel plant and develop iron ore in Orissa. The

47
success of this deal will be a test case for future large-scale, long-term foreign
investment in India. The government has established special economic zones to
encourage a competitive, export-oriented manufacturing sector. In 2004, India had the
fastest growing large-passenger-car market in the world, which will likely continue to
expand given the country's low loan rates, rising incomes and flourishing middle class.

MNCs are happy operating in India, India received record foreign direct investment
(FDI) in 2006, with equity inflows expected to top 11 billion dollars, more than double
the 5.5 billion dollars of inflows last year.

"A survey on FDI conducted by FICCI shows that the performance of 385 foreign
investors operating in India was satisfactory, with 69 per cent reporting profits or break-
even. And around 83% of the respondents have expansion plans on the cards. Despite
the overall conditions of slowdown, over 71 per cent respondents reported a capacity
utilization of 50-75 per cent. As many as 74 per cent of the respondents find the
handling of approvals and applications at the Centre to be good to average.

Around 62 percent find the overall policy framework to be good to average. "The
apparent increase in the FDI inflow shows that the improved policy environment is
having a positive impact," says a senior official at FICCI. FDI this year(2006) has
reached to US$ 20243 Mn as compared to US$ 133 Mn corresponding period 1991-
1992.Largest investors in India as per the data provided by Business Today Dec 2006.
is as follow:

48
Table no 3.2
Largest investors in India
Country 2005-06 2006-2007 Total % of Total
Apr March Apr- July Aug91-Jul206 Inflow
Mauritius 11,411 6,789 57,192 38.49
USA 2,210 1187 21862 14.71
Japan 925 133 9063 6.1
Netherlands 340 349 8845 5.95
UK 1164 358 8629 5.81
Germany 1345 126 6647 4.47
Singapore 1218 1946 6334 4.26
France 82 164 3440 2.31
South Korea 269 89 3001 2.02
Switzerland 426 86 2780 1.82
Total FDI 24613 13055 174466
Inflow

All figures are in crore Source: Business Today December 31,2006

Above table indicates that Mauritius was the largest investor in India contributing
38.49% of total FDI inflow. This was followed by USA with 14.71 and Japan by 6.1%
of total FDI. Other countries like Netherland and UK contributed 5.95% and 5.81%
respectively. Germany and Singapore account for 4.47and 4.26% only . France South

49
Korea and Switzerland contribution of FDI accounts for 2.31% 2.02% ad 1.82%
respectively.
Table no 3.3
Statement of country wise FDI inflow

Sl No Country Amount of FDI % age with FDI

Inflow inflow
1 Netherlands 84851.88 6.51
2 Germany 64780.32 4.97
3 France 32567.79 2.50
4 Italy 20408.55 1.57
5 Belgium 5851.64 0.45
6 Finland 1726.78 0.13
7 Luxembourg 1720.31 0.13
8 Austria 1592.66 0.12
9 Spain 1422.03 0.11
10 Ireland 804.91 0.06
11 Greece 98.06 0.01
12 Portugal 51.32 0.00

The data presented in the above table indicates that Netherland was the largest investor
in India contributing 6.51% of total FDI inflow. This was followed by Germany with

50
4.97% France by 2.50 and Italy by 1.57% of total FDI in India. Other countries
likeBelgium Finland Luxemberg Austria Spain and Ireland Netherland account for 0.45
0.13%, 0.12% , 0.11% 0.06% and 0.01% respectively
Foreign investment is encouraged with performance requirements,
employment generation, transfer of technology, export performance requirements,
manufacturing requirements, training and R&D. The role of FDI is as a means to
support domestic investment for achieving a higher level of economic development,
providing opportunities for technological upgradation, access to global managerial
skills and practices, optimal utilisation of human and natural resources, making Indian
industry internationally competitive, opening up export markets, providing backward
and forward linkages and access to international quality goods and services.
FDI basically complements and supplement domestic investment and to some
extent fills up savings investment gap. India has always emphasised that developing
countries need to retain the ability to screen and channel foreign investment in
accordance with their domestic interest and priorities the year wise FDI in the country
from the financial year 1991-1992 to 2006-2007 is presented in the table below.

Table no 3.4
Yearwise FDI Inflows
Sl.NO Year(Apr-March) Amount of FDI Inflow
In Rupees Crore In US$ Million
1 1991-1992 409 167
2 1992-1993 1094 393
3 1993-1994 2018 654
4 1994-1995 4312 1374
5 1995-1996 6916 2141
6 1996-1997 9654 2770
7 1997-1998 13548 3682
8 1998-1999 12343 3083
9 1999-2000 10311 2439
10 2000-2001 12645 2908
11 2001-2002 19361 4222
12 2002-2003 14932 3134
13 2003-2004 12117 2634
14 2004-2005 17138 3755
15 2005-2006 24613 4343
16 2006-2007 13055 2896

51
 upto July2006
Total 174466 41798

To achieve the objectives of the economic reforms, one of our significant policy
responses has been to focus on enhancing competitiveness of industry by providing the
most conducive investment climate. FDI benefits domestic industry as well as the
Indian consumer by providing opportunities for technological upgradation, access to
global managerial skills and practices, optimal utilisation of human and natural
resources, making Indian industry internationally competitive. Today every sector of
Indian economy is trying its best to attract more amount of FDI in order to meet their
future needs and make the sector competitive. The different sector attracting highest
FDI since last four year is presented in the table below:

52
 \

Table no 3.5
Sector Attracting Highest FDI Inflows
Amount rupees in crores
Sector 2002- 2003- 2004- 2005- Cumulative % age
03 04 05 06 Inflows with
Rank (April- (April- (April- (April- (from FDI
March) March) March) Jan) August inflows
1991 to jan
2006)
1 Electrical Equipments 2,075 2,449 3,821 3893 21,103 16.20
(Including Computer
software &
electronics)
2 Transportations 2,173 1,417 815 948 13,280 10.19
Industry
3 Service Sector 1,551 1,235 2,106 2,169 12,408 9.52
(financial &non
financial)
4 Telecommunications 1,058 532 588 905 12,218 9.38
(radio paging, cellular
mobile, basic
telephone services)
5 Fuels ( Power + Oil 551 521 759 923 11,484 8.81
refinery)
6 Chemicals (other than 611 94 909 1,941 8,542 6.56
fertilizers)
7 Food Processing 177 511 174 175 4,694 3.60
Industries
8 Drugs & 192 502 1,343 67 4,221 3.24
Pharmaceuticals
9 Cement and Gypsum 101 44 1 1,970 3,231 2.48
Products
10 Metallurgical 222 146 881 621 2,757 2.12
Industries
Data indicates that electrical equipment sector attracted highest amount of FDI since
last four year. It was flowed by transportation industry services sector industry and
telecommunication other sector of the economy like Fuels attracted 8.81% of total FDI
in last four year.

53
 To conclude, it can be said that FDI is the most import tool to attract investment
and boost the industrial development. Indian government has been trying to attract
foreign direct investment (FDI) and it seems be paying off. India is still way behind in
terms of attracting FDI but India is improving. The economy drew in a record 2.9 bln
usd in foreign direct investment (FDI) in the first four months of the fiscal year ending
March., nearly double last year's amount, the Press Trust of India news agency reported.

Shares of major sectors in FDI inflows

(Aug 1991 to may 2007)

Foreign Direct Investment:

With continued liberalisation of the foreign direct investment (FDI) policy, procedural
relaxations, the sustained growth in the economy, and a favourable investment regime,
a horde of global corporations are keen on investing in India. India continues to be
regarded as one of the fastest expanding economies and the growth outlook for 2008
09 has been projected at a high sub-eight per cent by different rating agencies.

Further, according to a report by the Centre for Monitoring Indian Economy (CMIE),
"Our close monitoring of projects through the CMIE CapEx service shows acceleration
in the announcement of fresh investment." The CaPex service, with new projects worth
US$ 44.89 billion in July, said that on an average, the monthly capturing of fresh
54
investments was US$ 15.32 billion in 200506, which increased to US$ 25.18 billion in
200607, and to US$ 32.97 billion in 200708. In the first quarter of 200809, CMIE
CapEx service received projects worth US$ 117.70 billion, averaging at US$ 39.14
billion, the report informed.

In spite of the global meltdown, in fiscal year 200708, about US$ 32.4 billion as
foreign investment had poured into India. The country posted a 45 per cent growth in
foreign direct investment (FDI) with US$ 23.3 billion between April-December 2008,
over the same period last year. The FDI inflows between April-November 2008 stood at
US$ 19.79 billion.

FDI inflows between April-October 2008 were US$ 18.70 billion, as against the US$
9.27 billion received during same period last year. Inflow of FDI equity for the month
of September 2008 alone was US$ 2.56 billion, a growth of 259 per cent over the same
month in last year. Further, October 2008 has witnessed FDI inflows of US$ 1.49
billion, thereby increasing the FDI inflows for the period April-October 2008 to US$
18.7 billion, according to Commerce Minister, Mr Kamal Nath.

According to the Reserve Bank of India's (RBI) monthly bulletin, NRIs have pumped in
US$ 513 million (on net basis) in NRI deposits in September 2008, which is the highest
since December 2006.

The government has in February 2009 approved 29 foreign direct investment (FDI)
proposals worth US$ 118.95 million including an US$ 70.49 million hotel project of
AAPC Singapore Pte Ltd, a hotel management company this month.

The Foreign Investment Promotion Board (FIPB) has cleared around 30 proposals
accounting for more than US$ 1.21 billion in the last few months. The approvals for
such proposals went up about 50 per cent in 2008 as against 2007.

India: A much favoured destination :

India has been rated as the fourth most attractive investment destination in the world,
according to a global survey conducted by Ernst and Young in June 2008. India was
after China, Central Europe and Western Europe in terms of prospects of alternative
business locations. With 30 per cent votes, India emerged ahead of the US and Russia,
which received 21 per cent votes each.

As per the global survey of corporate investment plans carried out by KPMG
International, released in June 2008, (a global network of professional firms providing
audit, tax, and advisory services), India will see the largest overall growth in its share of
foreign investment, and it is likely to become the world leader for investment in
manufacturing. Its share of international corporate investment is likely to increase by 8
per cent to 18 per cent over the next five years, helping it rise to the fourth, from the
seventh position, in the investment league table, pushing Germany, France and the UK
behind.

55
According to the AT Kearney FDI Confidence Index 2007, India continues to be the
second most preferred destination for attracting global FDI inflows, a position it has
held since 2005. India topped the AT Kearney's 2007 Global Services Location Index,
emerging as the most preferred destination in terms of financial attractiveness, people
and skills availability and business environment.

India is emerging as the most favoured investment destination for many countries.

The US Consul General, Aileen Crowe Nandi has said, "India is emerging as the most
favoured destination for overseas investment and an important trading partner for the
US."

A recent survey conducted by the Japan Bank for International Cooperation (JBIC)
shows that India has become the most-favoured destination for long-term Japanese
investment.

In recent times, Japanese corporations have bought varying amounts of equity stakes in
Indian firms, particularly, in the automobile sector and also machine tools, electronics
and IT. In terms of cumulative FDI inflow, Japan is the fifth largest investor and Japan's
FDI in India is estimated to be around US$ 5.5 billion over five years from 2006 to
2010.

Further, according to Tourism Minister Anil Sarkar, Australia and many South-Asian
countries such as Cambodia, Vietnam and Thailand have plans for investing in the
tourism sector in the Indian state of Tripura.

In terms of FDI equity inflows during April to October, the largest investments came
from Mauritius (US$ 7.69 billion), Singapore (US$ 1.90 billion), U.S.A (US$ 1.25
billion), Cyprus (US$ 827 million), Netherlands (US$ 740 million), U.K ( US$ 701
million), Germany (US$ 538 million), France US$ 295 million), Japan (US$ 223
million), and UAE (US$ 186 million).

Sector-wise FDI:

The sectors bagging the maximum amount of FDI equity during April to October, 2008
are the Services Sector (US$ 3.35 billion), Computer Hardware and Software (US$
1.52 billion), Telecommunications (US$ 1.99 billion), Construction Activities (US$
1.74 billion), & Housing and Real Estate (US$ 1.82 billion) .

Now, global investors are also evincing interest in other sectors like telecommunication,
energy, construction, automobiles, electrical equipment apart from others.

Investment in the Indian realty market is set to increase to US$ 20 billion by

2010.
Many big names in international retail are also entering Indian cities. Global
players such as Wal Mart, Marks & Spencers, Rosebys etc., have lined up
investments to the tune of US$ 10 billion for the retail industry.

56
 According to Mines Minister, Mr Sis Ram Ola, "FDI of about US$ 2.5 billion
per annum is expected in the mining sector from the fifth year of implementation
of the new National Mineral Policy (NMP)."
The surge in mobile services market is likely to see cumulative FDI inflows
worth about US$ 24 billion into the Indian telecommunications sector by 2010,
from US$ 3.84 billion till March 2008.

Aggressive Investment Plans :

The surging economy has resulted in India emerging as the fastest growing market for
many global majors. This has resulted in many companies lining up aggressive
investment plans for the Indian market.

Footwear retail company, Pavers England Footprint, has plans to invest US$ 10
million for setting up 1,000 stores in India by 2013. Moreover, the company also
plans to invest US$ 3 million on an R&D facility in Chennai.
General Motors India plans to invest US$ 500 million, in addition to US$ 1
billion it has already committed to invest in India. General Motors will also
invest US$ 200 million in its Talegaon plant near Pune for its powertrain project.
American Tower Corporation (ATC) plans an investment of about US$ 500
million to buy a stake in an Indian telecom tower company.
Norway-based Telenor has acquired Unitech Wireless with a US$ 1.23 billion
investment for a 60 per cent stake.
Leading global multiplex player Cinepolis plans to start its India operations with
an investment of US$ 350 million.
Finnish engineering and technology group, Metso started the development of its
49-acre multi-functional industrial facility, in Rajasthan, with an investment of
around US$ 33.28 million over two years.
Swiss processing and packaging major, Tetra Pak International SA, plans to
invest US$ 100.85 million in its second plant in Maharashtra.
Japanese telecom major, NTT DoCoMo, will be buying 27.31 per cent equity
capital of Tata Teleservices for around US$ 2.48 billion.
The Goldman Sachs Group will be making an overall investment of almost US$
100 million in its wholly owned non-banking financial company, Pratham
Investments and Trading Private Ltd.
Ford Indias plans to expand its capacity in India will continue as per schedule.
The expansion programme entails doubling its car manufacturing capacity to
200,000 units per year and an engine manufacturing facility with a capacity of
producing 250,000 engines annually. The project will be completed by early
2010.
All Green Energy India, a subsidiary of Singapore-based All Green Energy Pvt
Ltd, will be investing around US$ 96.30 million for the development of 10
biomass-based renewable energy projects over the next three years.
StarragHeckert, a global company in the field of milling machine centres for the
aerospace, transport (automotive), energy and precision machinery markets, is
planning to invest US$ 31 million in two phases.
Socomec UPS India, part of Socemec, France, will be investing US$ 5.02
million over the next three years. Targetting a 10 per cent share of the US$ 600

57
 million - UPS market in India, Socomec has inked alliances with 24 new
business partners.
A joint venture by Punj Llyod and US-based Thorium Power will see an
investment of around US$ 1 billion for exploring commercial nuclear power
opportunities.
Singapore-based Universal Success Enterprises Ltd (USEL) has signed three
pacts with the Gujarat government for infrastructure projects and will be
investing about US$ 17.5 billion for the same.

Government Initiatives:

The government has taken significant steps to make foreign direct investment simpler,
and render caps on FDI redundant.

In a recent move, the government has announced that equity investments coming
through companies with Indians having majority ownership and control would be taken
as fully domestic equity.

With the changes in the FDI policy, sectors like retail, telecom and media amongst
others would benefit greatly.

The change in FDI norms will bring much respite to retailers who can now raise funds
through stake sale in subsidiaries, and also build closer alliances with their foreign
partners.

Furthermore, with the revised FDI norms, extensive re-organisation of company

finances across many sectors would be seen and companies would now be subject to
further dividend distribution tax of 15 per cent, including surcharges.

Additionally, the government has made new amendments to these revised norms.

Even indirect foreign investment would not be allowed in sectors where foreign
investment is barred, like multi-brand retail, agriculture, lottery and atomic energy.

The Department of Industrial Policy and Promotion (DIPP) and the Finance
Ministry are planning to remove the cap on FDI in single-brand retail and permit
up to 100 per cent foreign investments as against the 51 per cent currently.
The government is also considering the removal of the incentive cap in wind
energy which is restricted to projects up to 49 MW, presently.
The Reserve Bank of India (RBI) will now permit FDI up to 49 per cent in credit
information companies with voting rights up to 10 per cent.

The government is now planning to permit FDI in investment companies as well.

The government has also proposed wide-ranging modifications in the guidelines FDI
over various sectors.

58
 Investment by Indian companies in which foreign firms have beneficial
investment will account as direct FDI.
Direct investments made by NRIs to account as FDI.

Looking ahead :

With the government planning more liberalisation measures across a broad range of
sectors and continued investor interest, the inflow of FDI into India is likely to further
accelerate.

The Union Commerce and Industry Minister in India, Mr Kamal Nath, has assured that
India will not be greatly affected by the current global meltdown and has expressed
confidence about achieving the FDI target set for this year.

59
IV.

FDI AND ITS IMPACT ON INDIAN ECONOMIC

India is emerging as fast growing nation, contributing in world trade by bringing

reforms in its trade practices. The world's largest democracy, India, has emerged as a
new player on the international arena. From 3.5% growth at the time independence till
average growth of 9% in 2008, and now the India's economic growth rate slipped to 5.3 per
cent in the fourth quarter of 2011-12 , long closed to foreign competition, India has now
opened up its market to foreign companies. The major changes brought in by the Indian
government in International trade sweep away many archaic and burdensome
regulations and create a business-friendly environment for domestic and international
business.

The Indian economy

India: The promise of growth:

India is today one of the six fastest growing economies of the world. The country
ranked fourth in terms of Purchasing Power Parity (PPP) in 2001. The business and
regulatory environment is evolving and moving towards constant improvement. A
highly talented, skilled and English-speaking human resource base forms its backbone.

The Indian economy has transformed into a vibrant, rapidly growing consumer market,
comprising over 300 million strong middle class with increasing purchasing power.
India provides a large market for consumer goods on the one hand and imports capital
goods and technology to modernize its manufacturing base on the other.

An abundant and diversified natural resource base, sound economic, industrial and
market fundamentals and highly skilled and talented human resources, make India a
destination for business and investment opportunities with an assured potential for
attractive returns.

Far-reaching measures introduced by the government over the past few years to
liberalise the Indian market and integrate it with the global economy are widely
acknowledged.

The tenth five year plan document targets a healthy growth rate of 6.9 % for the Indian
economy during the plan period 2011 12.

60
Selected Economic Indicators :

India remained relatively unscathed from the 1997-98 Asian financial sector crisis and
has maintained a healthy growth rate of over 5 per cent despite recession in major
world economies over the past two years. This demonstrates the size, strength and
resilience of the Indian economy.

Indias GDP for the year 2001-02 was US$ 422 billion. The real GDP growth varied
between 6 to 8 per cent per annum (average 6.5 per cent per annum), during the 1990s.

Were it not for the resilience of China and India, the world economy would have been
in deep recession in 2002.

Source: Morgan Stanley Dean Witter report.

The sectoral composition of GDP reflects a transition. While the agricultural and
industrial sectors have continued to grow, the services sector has grown at a
significantly higher pace - it currently contributes nearly half of Indias GDP.

On the external front, cumulative foreign investment inflows have been US$ 50 billion
since 1991. This includes over US$ 28 billion of Foreign Direct Investment (FDI) and
about US$ 22.6 billion in portfolio investment.

Licensing has been removed from all but six sectors. The Indian government is
determined to remove any remaining road blocks, real or perceived. India has one of the
most transparent and liberal FDI regimes among the emerging developing economies.
The Union government has been continuously opening up new sectors to foreign
investment, while enhancing FDI limits in others. The year 2002 saw the opening up of
the defence, print media, housing and real estate and urban mass transportation sectors.
Some of the key aspects of FDI in the country include:

100 per cent FDI is allowed in most sectors except telecommunications (49 per
cent), insurance (26 per cent), banking (49 per cent), aviation (40 per cent) and
small scale industries (24 per cent). FDI in excess of 24% is permitted in SSI
sector on 50% export obligation.

FDI inflows grew by 65 per cent over the previous year to reach US$ 3.91
billion during 2001-02. The growth of 65 per cent is encouraging at a time when
global FDI inflows have declined by 40 per cent.

The upward trend in FDI inflows has been sustained with FDI inflows during
April-June 2002 being double that of the corresponding period in 2001.

An Economist Intelligence Unit (EIU) report on World investment prospects

2002 projects an annual average FDI inflow of US$ 5.3 billion into India during
2002-2006.

61
External sector :

Indias external sector posted significant gains during 2001-02, despite the deepening of
the global slowdown and uncertainties owing to September 11, 2001 terrorist attacks.
The current account registered a surplus after a period of more than two decades. The
buoyancy in capital flows bolstered the foreign exchange. Indicators of liquidity and
sustainability of external debt improved further. The exchange rate of the rupee
remained broadly stable during the year.

FDI flows to India will go up: UNCTAD

Worldwide FDI flows will decline this year - 25 per cent in developing and 31 per
cent in developed countries - but India is one of the few countries where it will go up,
Karl Sauvant, Director, UNCTAD told UNI.

Source: News reports, 25 November 2002.

According to a recent report on global foreign direct investment inflows, India has been
rated the seventh most attractive destination in the world for FDI for 2001.

Weak external demand adversely affected Indias export performance during 2001-02.
This was counterbalanced by the listless domestic demand for imports and the softness
in international oil prices for a greater part of the year. As a result, the trade deficit, on
balance of payments basis, declined from US$ 14.4 billion during 2000-01 to US$ 12.7
billion during 2001-02. The invisible account continued to provide support to the
balance of payments with the surplus increasing from US$ 11.8 billion during 2000-01
to US$ 14.1 billion during 2001-02. The current account recorded a surplus of US$ 1.4
billion. Net capital flows were higher at US$ 9.5 billion during 2001-02.

MNCs happy operating in India, 61% in black :

"A survey on FDI conducted by FICCI shows that the performance of 385 foreign
investors operating in India was satisfactory, with 61 per cent reporting profits or break-
even. And around 51 percent of the respondents have expansion plans on the cards.
Despite the overall conditions of slowdown, over 71 per cent respondents reported a
capacity utilization of 50-75 per cent.

As many as 93 per cent of the respondents find the handling of approvals and
applications at the Centre to be good to average. The simplification of the approval
procedure at the Centre can be gauged by the fact that the number of applications going
through the automatic route has risen from 16 per cent in 2000 to 29 per cent in 2001.
Also the ratio of FDI inflows to approvals had gone up to 52.8 per cent in 2000
compared to 29 per cent in 1996.

Around 63 percent find the overall policy framework to be good to average. "The
apparent increase in the FDI inflow shows that the improved policy environment is
having a positive impact," says a senior official at FICCI. FDI this year has risen by 61

62
per cent to US$ 2.37 billion in April- November 2001 compared to US$ 1.47 billion in
the corresponding period last year. Besides 70 per cent feel that bringing funds into the
country is relatively easy and 69 per cent say that funds repatriation can be carried out
fairly easily"

Source: India Business World, April 2002.

Indias foreign exchange reserves have risen significantly to over US$ 68 billion by the
end of December 2002. This has provided the much needed stability to the exchange
rate and strengthening of the rupee.

The external debt to GDP ratio of the country has improved significantly from 38.7 per
cent in 1992 to around 22.3 percent in 2001. Among developing countries, India has
one of the lowest external debt to GDP ratios.

The value of foreign trade has increased substantially. Both exports from and imports
into India are increasing. The total volume of foreign trade in 2001-02 was over US$ 95
billion. In order to boost exports and attract foreign investments, the government had
announced in April 2000 the establishment of Special Economic Zones (SEZs) policy.
The SEZs would offer world class infrastructure, attractive financial and tax incentives
and procedural ease of a duty-free trading area. For all practical purposes, units located
in the SEZs are given deemed foreign territory treatment.

A unique feature of the transition of the Indian economy has been an element of high
growth with stability. Both at the central and state levels and across political affiliations
of the Indian federal and state polity, there is consensus on further economic
liberalisation. The reforms programme and the market oriented policies of the
government are irreversible.

Sectoral overview

Agriculture :

Two thirds of Indias population lives in rural areas. Agriculture and related activities
are the main source of livelihood for them. The performance of the agricultural sector
has continuously been improving (over many decades), helping the country achieve a
surplus in food grains production. This has been facilitated through new agricultural
techniques and tools acquired by Indian farmers, mechanisation, use of high yielding
varieties of seeds, increasing use of fertilizers and irrigation facilities, on-going
operational research in the countrys numerous agricultural universities and colleges,
etc. With liberalisation of trade in agricultural commodities, India enjoys a competitive
advantage in a number of agricultural and processed food products exports.

While the share of agriculture in GDP (26.6 per cent in 2000-01) is declining because
of faster growth of the services sector, production in absolute terms has been steadily
rising. Agriculture accounts for 62 per cent of total employment. Some other key
highlights include:

63
 India had a buffer stock of foodgrains (wheat and rice) of nearly 50 million
tonnes (Dec. 02) as against the target of 20 million tonnes at any given point in
time. This has helped India enter the foodgrains export market in a significant
way.

India is the largest producer and consumer of tea in the world and accounts for
28 per cent of world production and 15 per cent of world trade.

Agri-exports account for 13-18 per cent of total annual exports of the country.
Agri-exports amounted to over US$ 6 billion in 2000-01.

The value of agricultural imports of inputs like fertilizers, etc. are

approximately one-fourth the value of exports.

Manufacturing :

India has moved from an agrarian to a manufacturing and services led economy. The
manufacturing sector contributes around one-fourth of the total GDP. The country has
built a diversified industrial base comprising traditional handicrafts, small, medium and
large manufacturing companies and high technology-oriented products. The industrial
output has grown to approx US$ 65 billion.

The country has emerged as an important global manufacturing hub - many

multinational corporations (MNCs) like Pepsi, General Electric (GE), General Motors
(GM), Ford, Suzuki, Hyundai, Gillette, LG, etc. have followed Indias economic
liberalisation process from close quarters and set up successful operations in the
country in recent years. They have been able to leverage cost advantages while
adhering to global manufacturing facilities.

Companies in the manufacturing sector have consolidated around their area of core
competence by tying up with foreign companies to acquire new technologies,
management expertise and access to foreign markets. The cost benefits associated with
manufacturing in India, have positioned India as a preferred destination for
manufacturing and sourcing for global markets.

Services :

The services sector currently accounts for almost half of the countrys GDP. Expanding
at a rate of 8-10 per cent per annum, services is the fastest growing sector in the Indian
economy. In fact, the growth in Indias GDP, despite the global slowdown, is attributed
largely to its strong performance.

Availability of highly skilled workers has encouraged many international companies to

carry out their research and development activities in India. IT, biotech, tourism, health,
financial services and education hold the promise of sustainable high growth. To give a
perspective:

64
 The Indian IT industry has grown from US$ 0.8 billion in 1994-95 to US$ 10.1
billion in 2001-02. Domestic software has grown at 46 per cent while software
exports have grown at 62 per cent over the last 5 years.

The last decade has seen the Indian entertainment industry grow exponentially.
The key drivers for this have been technology and the governments recognition
of the importance of the sector. The industry is expected to grow at a compound
annual growth rate (CAGR) of 27 per cent. Revenues are projected to increase
from US$ 3 billion in 2002 to US$ 10 billion in 2005.

Information Technology enabled Services (ITeS) with elements like call

centres, back office processing, content development and medical transcription
are key to rapid growth. The sector has an employment potential of 1.1 million
by 2008.

Infrastructure :

The infrastructure sector in India, traditionally reserved for the government, is

progressively being opened up for private sector participation.

Ports :

The country has a 7500 km long coastline dotted with numerous major and minor ports.
The areas that have been identified for participation and investment by the private
sector include leasing out existing assets of the ports, construction of additional assets
such as container terminals, cargo berths, handling equipment, repair facility, captive
power plants and captive facilities for port based industries. Foreign investment up to
100 per cent equity participation is permitted in ports through the automatic route for
construction and maintenance of ports and harbours.

A number of private companies have already set up port facilities in the country. Two
greenfield ports i.e. Pipavav and Mundra in Gujarat have been set up through private
participation and these have been able to compete with existing major ports. Many
multinational and domestic players have taken over existing port facilities and are
operating them. Recently the container terminal at Chennai port has been taken over by
an Australian port major.

Roads :

India has the second largest road network in the world, spanning 3.3 million kilometres.
Most of the private investment in this sector has traditionally been through the build-
operate-transfer schemes. However, now many new projects are being bid out on toll
collection mechanism.

Currently, the National Highways Authority of India (NHAI) is implementing the

National Highways Development Project (NHDP). NHDP is the largest ever highway
development project to be undertaken in the country. The project involves widening of
over 13,000 km of highways in the country. The investment for this project is estimated

65
at US$ 13.2 billion at 1999 prices. The project has been broken up into a large number
of smaller segments, many of which have been commissioned. Currently work has been
completed on 1976 kilometers and another 5222 kilometers of length is under
construction.

Airports :

India has 122 airports, controlled by the Airports Authority of India (AAI). The total
passenger traffic handled by these airports in 2001-02 was over 40 million, while the
cargo traffic handled was around 854,000 tonnes. The government is in the process of
leasing out the four major international airports at Delhi, Mumbai, Chennai and Kolkata
to private operators.

Power :

Power Sector, hitherto, had been funded mainly through budgetary support and external
borrowings. But given the budgetary support limitation due to growing demands from
other sectors, particularly social sector and the severe borrowing constraints, a new
financing strategy was enunciated in 1991 allowing private enterprise a larger role in
the power sector.

The all India installed capacity of electric power generating stations under utilities was
104917 MW as on March 2002 consisting of 26261 MW hydro, 74428 MW thermal,
2720 MW nuclear and 1507 MW wind. A capacity addition target of 4764 MW
consisting of 1536 MW of Hydro and 3228 MW of thermal was envisaged for the year
2001-02 of which 3115 MW consisting of 1106 MW of hydro and 2009 MW of thermal
was achieved.

Presently, restructuring and regulatory reforms include bringing about reforms in the
State Electricity Boards (SEBs) through establishment of the State Electricity
Regulatory Commissions. Reforms are progressing steadily in the sector and
privatisation of SEBs have already begun. The government is also planning a massive
restructuring of the finances of SEBs and is looking at a one-time settlement of dues of
SEBs. In effect, a large amount of liquidity will be injected in the sector.

The Ministry of Power has also formulated a Blue Print to provide reliable, affordable
and quality power to all users in the country i.e. power on demand by 2012. This
requires huge increase in generation capacity, upgradation of existing generation
facilities and also the transmission and distribution network.

Telecommunications :

Indias telecommunications network ranks among the top ten countries in the world.
One of the worlds largest and fastest growing telecom markets, the country has an
investment potential estimated at US$ 39 billion by 2005 and US$ 69 billion by 2010.

Despite a strong base of a billion people, the country has a low telephone density of
approximately 5 per cent, estimated to grow to 7 per cent by 2005 and 15 per cent by

66
2010. The government had allowed private participation in cellular services in 1992.
The sector witnessed partial de-regulation between 1994 and 1999. The government
announced the New Telecom Policy (NTP) in 1999 to further de-regulate the sector
with respect to services like basic, international long distance (ILD), national long
distance (NLD) and Wireless in Local Loop (WLL) among others.

Financial sector :

The Indian financial sector reforms aim at improving the productivity and efficiency of
the economy. It remained stable, even when other markets in the Asian region were
facing a crisis. The opening of the Indian financial market to foreign and private Indian
players, has resulted in increased competition and better product offerings to
consumers.

The financial sector has kept pace with the growing needs of corporates and other
borrowers. Banks, capital market participants and insurers have developed a wide range
of products and services to suit varied customer requirements. A trend towards mergers
and acquisitions is expected in the near future due to the compulsions of size and
limitations of growth of business on its own vis--vis growth through acquisitions. The
recent favourable government policies for enhancing limits of foreign investments in
the banking sector have generated interest from global banking majors.

The Reserve Bank of India (RBI) has ushered in a regime where interest rates are more
in line with market forces. This has increased the credit disbursements in the economy
which, in turn, will boost industry. Banks and trade financiers have also played an
important role in promoting foreign trade of the country.

The potential of the sector is evident from existing and projected estimates:

Presently the total asset size of the Indian banking sector is US$ 270 billion
while the total deposits amount to US$ 220 billion in a banking network of over
66,000 branches across the country.

The size of the insurance market with only 20 per cent of the insurable
population currently insured, presents an immense opportunity to new players.
Foreign insurance majors have entered the country in a big way and started joint
ventures in both life and non-life areas.

Disinvestment :

The government over the past decade has been increasingly redefining its role from
being a provider of goods and services to that of a policy maker and facilitator. Towards
this objective, the government has been consistently divesting its stake in various public
sector undertakings (PSUs).

Between 1991 and 2002, the government divestment process had yielded US$
6.3 billion to the national exchequer.

67
Policy Initiatives :
There has been a paradigm shift in the governments approach to selling its
stake since 31 March, 2000. From selling minority stakes, the government has
started divesting majority holdings and transferring management control to
strategic investors in profitable undertakings.

The government had set up a separate ministry in late 1999 to facilitate the
divestment process. It has also set up a cabinet committee and an inter-
ministerial group to consider and facilitate specific divestment proposals.

Some of the key highlights of the disinvestment policy are:

The 1991-92 budget considered divestment of 20 per cent government

equity in select PSUs in favour of public sector institutional investors,
mutual funds and workers.

The Disinvestment Commission (1997-99) made specific

recommendations on 58 specific PSUs with respect to disinvestment
feasibility and the methodology to be adopted.

The second phase of disinvestment started in 1998-99. Each year since

1999, the government is pushing ahead with reforms and disinvestments.
The government has now declared its willingness to reduce its stake
below 26 per cent in non-strategic PSUs.

Opportunities :

The successfully privatised projects during 2002-03 include the long-distance

international telecom carrier Videsh Sanchar Nigam Limited (VSNL); petroleum
marketing company IBP; petrochemical company Indian Petrochemicals Limited
(IPCL); metal manufacturing companies Hindustan Zinc Limited and Bharat
Aluminium Company; hotels belonging to India Tourism Development Corporation
(ITDC) and the countrys largest small and medium car manufacturing company
Maruti.

The government is now considering disinvestments of the Shipping Corporation of

India and two state trading corporations (STC and MMTC) among others. One of the
biggest privatisation projects that the government has initiated is the leasing of
international airports at the four metropolitan cities of Delhi, Mumbai, Chennai and
Kolkata. The privatisation mandates will provide a good opportunity to both domestic
and foreign investors to pick up stakes in well-performing assets.

http://www.divest.nic.in

68
Actual Disinvestment from April 1991 onwards and :

Methodologies Adopted

Year No. of cos. In Actual Methodology which equity sold receipts

(INR bn)
2002-03 6 47.48 # Strategic sale of JESSOP-72%, HZL 26%, MFIL-26%, IPCL 26% and
other modes : HCI, ITDC and Maruti

2001-02 10 56.32 # Strategic sale of CMC 51%, HTL 74%, VSNL 25%, IBP 33.58%,
PPL 74%, and other modes: ITDC, HCI, STC, MMTC

2000-01 4 18.70 Strategic sale of BALCO, LJMC; KRL (CRL), CPCL (MRL)

1999-00 2 18.29 GDRGAIL VSNL-domestic issue, BALCO restructuring, MFILs strategic

sale and others

1998-99 5 53.71 GDR (VSNL) / Domestic offerings with the participation of FIIs
(CONCOR, GAIL). Cross purchase by 3 Oil sector companies i.e. GAIL, ONGC & Indian Oil
Corporation

1997-98 1 9.02 GDR (MTNL) in international market.

1996-97 1 3.80 GDR (VSNL) in international market.

Year No. of cos. In Actual Methodology which equity sold receipts

(INR bn)
1995-96 5 3.62 Equities of 4 companies auctioned and Government followed the IDBI fixed
price offering for the fifth company.

1994-95 13 48.43 Sale through auction method, in which NRIs and other persons legally
permitted to buy, hold or sell equity, allowed to participate.

1993-94 Nil Equity of 7 companies sold by open auction but proceeds received in 94-95.

1992-93 35 (in 3 19.13 Bundling of shares abandoned. tranches) Shares sold separately for
each company by auction method.

1991-92 47 (31 in one 30.38 Minority shares sold by auction tranche and method in bundles of
"very good", 16 in other) "good", and "average" companies.

Note: - * and # indicate estimated and expected figures

Source: Ministry of Disinvestment
1 US$ = INR 49 approx.

Trade Balance :

69
The trade deficit for April- February, 2007 was estimated at US $ 55858.54 million
which was higher than the deficit of US $ 37575.61(P)million during April- February,
2006.

Table n o4.6
Import and Export Trend

DEPARTMENT OF COMMERCEECONOMIC DIVISION

IMPORTS & EXPORTS: (PROVISIONAL) (US $ Million)
February April February
Provisional Provisionally Provisional Provisionally
Revised** Revised**
EXPORTS (incl.re-exports)
2005-2006* 7834.49 8993.67 88760.40 91499.99
2006-2007 9701.71 109126.78
%Growth 2006- 23.83 7.87 22.95 19.26
2007/2005-2006
IMPORTS
2005-2006* 11040.09 11480.03 126336.01 129118.77
2006-2007 14362.69 164985.32
%Growth 2006- 30.10 25.11 30.59 27.78
2007/ 2005-2006
TRADE BALANCE
2005-2006* -3205.60 -2486.35 -37575.61 -37618.78
2006-2007 -4660.98 -55858.54

Table no 4.7
India's Exports of Principal Commodities

India's Exports of Principal Commodities

70
(US $ million)
Commodity Group April-October Percentage
Variation
2006-07
2004-05 2005-06 (3)/(2) (4)/(3)
P
1 2 3 4 5 6
I. Primary Products 6,200.9 8,355.5 9,717.1 34.7 16.3
(14.6) (14.7) (13.7)
A. Agricultural & Allied 4,202.9 5,247.7 6,355.5 24.9 21.1
Products
of which : (9.9) (9.3) (9.0)
1. Tea 237.1 233.6 269.1 1.5 15.2
2. Coffee 125.6 203.8 260.7 62.3 27.9
3. Rice 595.5 799.7 828.6 34.3 3.6
4. Wheat 244.7 120.2 6.8 50.9 94.3
5. Cotton Raw incl. 48.2 151.4 366.6 214.3 142.1
Waste
6. Tobacco 150.7 171.7 196.6 14.0 14.5
7. Cashew incl. CNSL 284.9 358.7 319.6 25.9 10.9
8. Spices 238.9 272.5 356.2 14.0 30.7
9. Oil Meal 328.6 361.4 441.1 10.0 22.0
10. Marine Products 680.1 882.1 937.7 29.7 6.3
11. Sugar & Mollases 17.3 19.2 525.0 11.0 2637.0
B. Ores & Minerals 1,998.0 3,107.8 3,361.6 55.5 8.2
of which : (4.7) (5.5) (4.7)
1. Iron Ore 1,190.5 1,928.7 1,776.5 62.0 7.9
2. Processed Minerals 414.1 591.3 762.2 42.8 28.9
II. Manufactured Goods 31,341.3 40,692.6 46,336.1 29.8 13.9
of which : (74.0) (71.8) (65.3)
A. Leather & 1,320.3 1,559.5 1,625.0 18.1 4.2
Manufactures
B. Chemicals & Related 6,128.2 7,926.3 9,088.1 29.3 14.7
Products

71
 1. Basic Chemicals, 3,521.2 4,780.8 5,583.2 35.8 16.8
Pharmaceuticals &
Cosmetics
2. Plastic & Linoleum 1,481.9 1,620.1 1,766.6 9.3 9.0
3. Rubber, Glass, Paints 874.1 1,149.1 1,310.0 31.5 14.0
& Enamels etc.,
4. Residual Chemicals & 251.0 376.3 428.4 49.9 13.8
Allied Products
C. Engineering Goods 8,560.8 11,761.5 16,045.0 37.4 36.4
of which :
1. Manufactures of 1,740.7 2,320.1 2,783.3 33.3 20.0
metals
2. Machinery & 1,782.7 2,739.2 3,640.0 53.7 32.9
Instruments
3. Transport equipments 1,524.8 2,407.2 2,722.7 57.9 13.1
4. Iron & steel 1,789.4 1,981.8 2,934.8 10.8 48.1
5. Electronic goods 985.9 1,153.6 1,537.9 17.0 33.3
D. Textiles and Textile 7,304.5 9,037.6 9,533.8 23.7 5.5
Products
1. Cotton Yarn, Fabrics, 1,885.0 2,197.9 2,366.6 16.6 7.7
Made-ups, etc.,
2. Natural Silk Yarn, 224.2 257.4 239.7 14.8 6.9
Fabrics, Madeups etc.
(incl.silk waste)
3. Manmade Yarn, 1,124.1 1,101.2 1,205.6 2.0 9.5
Fabrics, Made-ups, etc.,
4. Manmade Staple Fibre 26.8 43.5 93.8 62.3 115.9
5. Woolen Yarn, Fabrics, 38.3 50.8 49.4 32.6 2.8
Madeups etc.
6. Readymade Garments 3,478.0 4,667.5 4,820.2 34.2 3.3
7. Jute & Jute 147.9 173.7 169.2 17.4 2.6
Manufactures
8. Coir & Coir 55.9 78.6 80.9 40.7 2.9
Manufactures

72
 9. Carpets 324.4 467.0 508.4 44.0 8.9
(a) Carpet Handmade 315.5 456.0 500.3 44.5 9.7
(b) Carpet Millmade 0.0 0.0 0.0
(c) Silk Carpets 8.9 11.1 8.1 24.6 26.9
E. Gems & Jewellery 7,366.0 9,547.8 9,132.3 29.6 4.4
F. Handicrafts 226.9 288.9 190.7 27.3 34.0
III. Petroleum Products 3,664.5 6,119.0 11,308.5 67.0 84.8
(8.7) (10.8) (15.9)
IV. Others 1,127.6 1,502.1 3,633.1 33.2 141.9
(2.7) (2.7) (5.1)
Total Exports 42,334.3 56,669.2 70,994.8 33.9 25.3

Provisional.
Note : Figures in brackets relate to percentage to total exports for the period.
Source : DGCI&S.

Table no 4.8

Direction of India's Foreign Trade Exports

Direction of India's Foreign Trade - Exports

(US $ million)
Group/Country April-October Percentage
Variation
2004-05 2005-06 2006-07 (3)/(2) (4)/(3)
P
1 2 3 4 5 6
I. O E C D Countries 19,178.5 25,330.5 29,380.1 32.1 16.0
A. E U 8,836.2 12,183.5 14,301.3 37.9 17.4
of which:
1. Belgium 1,329.0 1,610.3 1,886.3 21.2 17.1
2. France 857.7 1,170.5 1,199.7 36.5 2.5
3. Germany 1,450.5 1,914.3 2,235.6 32.0 16.8

73
 4. Italy 1,090.3 1,324.1 1,961.7 21.4 48.2
5. Netherland 764.4 1,314.5 1,383.7 72.0 5.3
6. U K 1,863.6 2,816.8 3,167.9 51.1 12.5
B. North America 8,137.5 10,329.6 11,642.3 26.9 12.7
1. Canada 458.0 571.0 657.1 24.7 15.1
2. U S A 7,679.6 9,758.6 10,985.2 27.1 12.6
C. Asia and Oceania 1,448.6 1,928.8 2,479.1 33.1 28.5
of which:
1. Australia 385.3 488.0 523.1 26.7 7.2
2. Japan 1,012.3 1,343.4 1,507.1 32.7 12.2
D. Other O E C D 756.2 888.6 957.4 17.5 7.7
Countries
of which:
1. Switzerland 318.6 275.9 239.0 13.4 13.4
II. O P E C 6,496.6 8,024.7 12,025.5 23.5 49.9
of which:
1. Indonesia 638.4 733.8 1,013.5 15.0 38.1
2. Iran 682.9 580.7 977.5 15.0 68.3
3. Iraq 70.2 53.0 111.5 24.6 110.5
4. Kuwait 225.1 294.0 351.5 30.6 19.5
5. Saudi Arabia 773.9 1,025.1 1,391.4 32.5 35.7
6. U A E 3,562.5 4,513.0 7,141.9 26.7 58.2
III. Eastern Europe 942.8 1,109.0 1,344.5 17.6 21.2
of which:
1. Romania 41.6 46.6 70.5 11.9 51.4
2. Russia 327.2 417.1 488.5 27.5 17.1
IV. Developing Countries 15,425.2 22,051.9 28,094.6 43.0 27.4
of which:
A. Asia 12,037.9 17,221.2 20,742.8 43.1 20.4
a) SAARC 2,337.4 3,062.9 3,562.0 31.0 16.3
1. Bangladesh 803.8 901.5 895.9 12.2 0.6

74
 2. Bhutan 51.7 58.7 27.7 52.7
3. Maldives 25.6 41.8 39.4 63.1 5.6
4. Nepal 445.1 482.7 546.7 8.4 13.3
5. Pakistan 271.3 327.0 789.1 20.6 141.3
6. Sri Lanka 739.9 1,251.3 1,263.1 69.1 0.9
b) Other Asian 9,700.5 14,158.2 17,180.7 46.0 21.3
Developing
Countries of
which:
1. Peoples Rep of 2,012.1 3,382.3 4,015.4 68.1 18.7
China
2. Hong Kong 1,957.6 2,722.6 2,633.4 39.1 3.3
3. South Korea 526.6 899.8 1,265.4 70.9 40.6
4. Malaysia 614.9 606.7 686.9 1.3 13.2
5. Singapore 1,895.0 3,284.2 3,872.7 73.3 17.9
6. Thailand 442.8 584.5 795.1 32.0 36.0
B. Africa 2,231.8 3,048.2 4,973.7 36.6 63.2
of which:
1. Benin 24.4 56.3 82.7 131.0 46.9
2. Egypt Arab 217.3 341.3 379.5 57.1 11.2
Republic
3. Kenya 237.8 269.9 876.9 13.5 224.9
4. South Africa 575.4 872.2 1,366.0 51.6 56.6
5. Sudan 132.5 177.4 234.8 33.9 32.4
6. Tanzania 92.4 138.0 169.3 49.4 22.7
7. Zambia 22.4 38.5 68.0 71.9 76.7
C. Latin American 1,155.6 1,782.6 2,378.1 54.3 33.4
Countries
V. Others 36.8 57.4 61.0 55.9 6.2
VI. Unspecified 254.3 95.6 89.1 62.4 6.7
Total Exports 42,334.3 56,669.2 70,994.8 33.9 25.3
Source : DGCI&S.

75
 Table no 4.9
India's Imports of Principal Commodities

India's Imports of Principal Commodities

(US $ million)
Commodity Group April-October Percentage
Variation
2004-05 2005-06 2006-07 P (3)/(2) (4)/(3)
1 2 3 4 5 6
I. Bulk Imports 23,856.1 34,700.6 49,389.4 45.5 42.3
(41.8) (42.1) (47.4)
A. Petroleum, Petroleum 17,249.3 24,392.2 35,120.8 41.4 44.0
Products & Related (30.2) (29.6) (33.7)
Material
B. Bulk Consumption Goods 1,789.7 1,881.5 1,964.7 5.1 4.4
1. Wheat 0.0 0.0 189.3
2. Cereals & Cereal 14.3 16.3 21.2 13.8 29.9
Preparations
3. Edible Oil 1,463.2 1,374.5 1,359.4 -6.1 -1.1
4. Pulses 228.1 344.1 394.1 50.8 14.5
5. Sugar 84.0 146.6 0.7
C. Other Bulk Items 4,817.1 8,426.9 12,304.0 74.9 46.0
1. Fertilisers 671.5 1,214.5 1,896.9 80.9 56.2
155.1 191.7 212.8 23.6 11.0
a) Crude
70.3 85.7 61.3 21.9 -28.5
b) Sulphur &
Unroasted Iron
Pyrites
446.0 937.1 1,622.8 110.1 73.2
c)
Manufactured
2. Non-Ferrous Metals 687.1 1,024.7 1,473.4 49.1 43.8
3. Paper, Paperboard & Mgfd. 393.4 555.3 750.9 41.2 35.2

76
 incl. Newsprint
4. Crude Rubber, incl. 224.2 265.7 337.8 18.5 27.1
Synthetic & Reclaimed
5. Pulp & Waste Paper 273.0 345.9 362.4 26.7 4.8
6. Metalliferrous Ores & 1,245.0 2,183.0 4,049.2 75.3 85.5
Metal Scrap
7. Iron & Steel 1,323.0 2,837.9 3,433.4 114.5 21.0
II. Non-Bulk Imports 33,204.0 47,670.5 54,730.7 43.6 14.8
(58.2) (57.9) (52.6)
A. Capital Goods 11,395.3 16,928.1 23,162.8 48.6 36.8
1. Manufactures of Metals 474.9 691.6 840.8 45.7 21.6
2. Machine Tools 280.5 569.6 800.8 103.1 40.6
3. Machinery except 3,204.4 5,380.5 7,466.8 67.9 38.8
Electrical & Electronics
4. Electrical Machinery 639.9 811.1 1,115.2 26.8 37.5
except Electronics
5. Electronic Goods incl. 5,659.7 7,536.2 9,735.6 33.2 29.2
Computer Software
6. Transport Equipments 896.7 1,479.0 2,204.7 64.9 49.1
7. Project Goods 239.3 460.1 998.8 92.3 117.1
B. Mainly Export Related 8,440.7 11,857.5 10,390.8 40.5 -12.4
Items
1. Pearls, Precious & Semi- 4,530.4 6,197.0 4,254.5 36.8 -31.3
Precious Stones
2. Chemicals, Organic & 2,870.6 4,120.0 4,544.7 43.5 10.3
Inorganic
3. Textile Yarn, Fabric, etc. 794.3 1,227.1 1,308.6 54.5 6.6

4. Cashew Nuts, raw 245.4 313.5 282.9 27.8 -9.8

C. Others 13,368.0 18,885.0 21,177.2 41.3 12.1
of which :
1. Gold & Silver 5,159.4 7,396.2 8,936.2 43.4 20.8
2. Artificial Resins & Plastic 767.3 1,374.9 1,522.5 79.2 10.7
Materials

77
 3. Professional Instruments 775.0 1,114.0 1,320.5 43.7 18.5
etc. except electrical
4. Coal, Coke & Briquittes 1,608.6 2,101.0 2,543.4 30.6 21.1
etc.
5. Medicinal & 381.1 564.0 662.3 48.0 17.4
Pharmaceutical Products
6. Chemical Materials & 463.3 635.4 798.9 37.1 25.7
Products
7. Non-Metallic Mineral 359.9 444.4 46.6 23.5
Manufactures
245.5
Total Imports 57,060.1 82,371.2 104,120.2 44.4 26.4
Memo items
Non-Oil Imports 39,810.8 57,979.0 68,999.4 45.6 19.0
Non-Oil Imports excl. Gold & Silver 34,651.4 50,582.8 60,063.2 46.0 18.7

Mainly Industrial Inputs* 31,640.8 46,650.2 55,155.3 47.4 18.2

* Non oil imports net of gold and silver,bulk consumption goods, manufactured
fertilizers and professional instruments.
Note : Figures in brackets relate to percentage to total imports for the period.
Source : DGCI & S.

Table no 4.10

Direction of India's Foreign Trade Imports

Direction of India's Foreign Trade Imports

(US $ million)
Group/Country April-October
2004-05 2005-06 2006-07 P
1 2 3 4

78
I O E C D Countries 19,245.3 27,569.6 33,616.6
A. E U 9,125.9 12,912.3 14,561.2
Of which:
1. Belgium 2,386.2 2,976.5 2,285.8
2. France 651.4 886.1 1,198.8
3. Germany 1,993.9 3,286.3 4,151.2
4. Italy 681.1 1,020.7 1,460.8
5. Netherland 380.8 620.9 624.5
6. U K 1,705.9 2,387.6 2,292.9
B. North America 3,658.5 5,118.8 6,667.0
1. Canada 314.8 559.2 731.9
2. U S A 3,343.7 4,559.6 5,935.2
C. Asia and Oceania 3,511.3 5,007.4 6,792.3
Of which:
1. Australia 1,840.8 2,891.9 4,099.7
2. Japan 1,602.8 2,016.8 2,534.7
D. Other O E C D Countries 2,949.6 4,531.1 5,596.0
Of which:
1. Switzerland 2,816.8 4,309.5 5,274.2
II. O P E C 4,733.1 6,669.3 33,602.9
Of which:
1. Indonesia 1,419.3 1,733.1 2,092.5
2. Iran 187.8 430.9 4,491.6
3. Iraq 0.5 1.2 3,517.8
4. Kuwait 121.9 231.2 3,472.0
5. Saudi Arabia 656.9 870.8 8,491.6
6. U A E 1,960.1 2,864.7 4,991.6
III. Eastern Europe 1,326.2 2,341.3 2,406.1
Of which:
1. Romania 99.2 192.6 121.3
2. Russia 704.9 1,260.1 1,059.9

79
IV. Developing Countries 14,414.4 21,225.6 34,189.2
Of which:
A. Asia 11,429.6 16,963.9 27,143.7
a) S A A R C 447.9 748.9 856.8
1. Bangladesh 23.9 59.3 139.5
2. Bhutan 35.8 39.2 67.7
3. Maldives 0.3 1.0 1.9
4. Nepal 177.4 221.5 162.1
5. Pakistan 53.8 100.6 187.9
6. Sri Lanka 156.7 327.3 297.7
b) Other Asian Developing 10,981.7 16,215.0 26,286.9
Countries
Of which:
1. Peoples Rep of China 3,550.2 5,990.3 9,471.6
2. Hong Kong 869.1 1,296.2 1,425.9
3. South Korea 1,707.0 2,483.2 2,816.9
4. Malaysia 1,231.7 1,388.8 3,185.4
5. Singapore 1,353.4 1,789.8 3,206.2
6. Thailand 431.5 711.3 953.6
B. Africa 1,948.7 2,806.1 4,281.3
Of which:
1. Benin 56.8 65.9 64.5
2. Egypt Arab Republic 92.7 163.2 1,106.9
3. Kenya 25.4 29.0 33.3
4. South Africa 985.2 1,501.5 1,639.8
5. Sudan 15.3 19.3 48.9
6. Tanzania 41.2 32.4 24.6
7. Zambia 15.9 21.7 71.4
C. Latin American Countries 1,036.1 1,455.6 2,764.3
V. Others 7.1 17.8 35.3
VI. Unspecified 17,334.0 24,547.4 270.1

80
 Total Imports 57,060.1 82,371.2 104,120.2

Note : The figures for 2006-07, which include country-wise distribution of petroleum
imports, are not strictly comparable with the data for previous years.
Source : DGCI&S.

CONCLUSIONS AND SUGGESIONS

India, among the European investors, is believed to be a good investment despite

political uncertainty, bureaucratic hassles, shortages of power and infrastructural
deficiencies. India presents a vast potential for overseas investment and is actively
encouraging the entrance of foreign players into the market. No company, of any size,
aspiring to be a global player can, for long ignore this country which is expected to
become one of the top three emerging economies.

Success in India will depend on the correct estimation of the country's potential,
underestimation of its complexity or overestimation of its possibilities can lead to
failure. While calculating, due consideration should be given to the factor of the
inherent difficulties and uncertainties of functioning in the Indian system. Entering
India's marketplace requires a well-designed plan backed by serious thought and careful
research.

India has emerged as one of the potential Market and is ranked as the fifth
largest economy in the world (ranking above France, Italy, the United Kingdom, and
Russia) and has the third largest GDP in the entire continent of Asia. It is also the
second largest among emerging nations. (These indicators are based on purchasing
power parity.) India is also one of the few markets in the world which offers high
prospects for growth and earning potential in practically all areas of business. Yet,
despite the practically unlimited possibilities in India for overseas businesses, the

81
world's most populous democracy has, until fairly recently, failed to get the kind of
enthusiastic attention generated by other emerging economies such as China. The some
of the important reasons of lack of the higher FDI can be highlighted as:

Lack of enthusiasm among investors:

The reason being, after independence from Britain 50 years ago, India developed a
highly protected, semi-socialist autarkic economy. Structural and bureaucratic
impediments were vigorously fostered, along with a distrust of foreign business. Even
as today the climate in India has seen a seachange, smashing barriers and actively
seeking foreign investment, many companies still see it as a difficult market. India is
rightfully quoted to be an incomparable country and is both frustrating and challenging
at the same time. Foreign investors should be prepared to take India as it is with all of
its difficulties, contradictions and challenges.

The Indian middle class is large and growing; wages are low; many workers are well
educated and speak English; investors are optimistic and local stocks are up; despite
political turmoil, the country presses on with economic reforms.But there is still cause
for worries-

Infrastructural hassles:

The rapid economic growth of the last few years has put heavy stress on India's
infrastructural facilities. The projections of further expansion in key areas could snap
the already strained lines of transportation unless massive programs of expansion and
modernization are put in place. Problems include power demand shortfall, port traffic
capacity mismatch, poor road conditions (only half of the country's roads are surfaced),
low telephone penetration (1.4% of population).

Indian Bureaucracy:

Although the Indian government is well aware of the need for reform and is pushing
ahead in this area, business still has to deal with an inefficient and sometimes still slow-
moving bureaucracy.

82
Diverse Market :

The Indian market is widely diverse. The country has 17 official languages, 6 major
religions, and ethnic diversity as wide as all of Europe. Thus, tastes and preferences
differ greatly among sections of consumers.

Therefore, it is advisable to develop a good understanding of the Indian market and

overall economy before taking the plunge. Research firms in India can provide the
information to determine how, when and where to enter the market. There are also
companies which can guide the foreign firm through the entry process from beginning
to end --performing the requisite research, assisting with configuration of the project,
helping develop Indian partners and financing, finding the land or ready premises, and
pushing through the paperwork required.

Developing up-front takes

Market Study:

Is there a need for the products/services/technology? What is the probable market for
the product/service? Where is the market located? Which mix of products and services
will find the most acceptability and be the most likely to generate sales? What
distribution and sales channels are available? What costs will be involved? Who is the
competi

Check on Economic Policies:

The general economic direction in India is toward liberalization and globalization. But
the process is slow. Before jumping into the market, it is necessary to discover whether
government policies exist relating to the particular area of business and if there are
political concerns which should be taken into account.

In sum, Indian government is trying very aggressively to attract foreign direct

investment (FDI) and FDI is coming into India these days in a satisfactory way the
argument that India should attract large volumes of FDI if only because other countries
has done so may be misconceived. The structure, stage of development, sources of FDI

83
and historical factors set India apart from other countries. The optimum level of FDI a
country should harbour is a function of the structure, stage of development, sources of
FDI it has access to and the volume of co-operant factors it possess. And so too would
be the contractual forms of foreign enterprise participation the country should opt for.
None of these factors underlie the recent exhortations such as "in terms of foreign
investment, it is the direct investment that should be actively sought for and doors
should be thrown wide open for foreign direct investment. FDI brings huge advantages
(new capital, technology, managerial expertise, and access to foreign markets) with
little or no downside . The open door policies advocated include relaxation of limits
on foreign equity participation, reduction of corporate tax rates, relaxation of labour
laws which at present do not allow retrenchment of workers or closure of loss making
enterprises, and promotion of export processing zones (EPZs).

The empirical research and finding on the basis of various studies indicates that
there are many economic and non economic factors directing the amount of FDI ,
Export and Import situation and inturn Balance of Payment of the country. However
FDI and Balance of payment trend of last 15 year shows a healthy sign and need to be
strengthen further to improve the balance of payment situation of the country.

84
 BIBLIOGRAPHY:

Agarwal, J. (1980) Determinants of Foreign Direct Investment: A Survey,

Weltwirtschaftliches Archiv 116, 739-773.
Athreye S and Kapur S. (2001) Private Foreign Investment In India: pain or
Panacea, World Economy, 24, 399-424.

Bajpai. N. and Sachs.J.D. (2000) Foreign Direct Investment in India: Issues and
Problems, Development Discussion Paper No 759, Harvard Institute For
International Development.

, 12, 343-369.

Kidron, M. (1965) Foreign Investments In India, London, Oxford University Press

Kokko, A. (1994), Technology, Market Characteristics, and Spillovers, Journal of

Development Economics, 43, 279-293

Kumar, N. (1990) Multinational Enterprises in India (Routledge: London)

Kumar, N. (1994) Multinational Enterprises and Industrial Organization: The Case

of India, New Delhi: Sage

Kumar, N. (1995) Industrialization, Liberalization and Two Way Flows of Foreign

Direct Investments: The Case of India, INTECH discussion Paper Series 9504

Lall, S. (1980) Vertical Inter-firm Linkages In LDCs: An Empirical Study, Oxford

Bulletin of Economics and Statistics, 42, 203-226

Lall, S. and Kumar, R (1981) Firm- Level Export Performance in an Inward

Looking Economy: The Indian Engineering Industry, World Development, 9, 453-
463.

85
 Lall, S. (1983) Technological Change, Employment Generation and Multinationals:
A Case Study of a Foreign Firm and a Local Multinational In India (International
Labour Office, Geneva)

Websites:
1. http://commerce.nic.in/pr_archive.htm
2. https://www.imf.org/external/pubs/ft/bop/2006/06-09.pdf.
3. www.ficci.com
4. www.rbi.com
5. www.ministryofcommerce.com
6. www.itpo.nic.in

86
 Annexures
Table no 4.11

Overall Balance of Payments (In Rupees) of India

(2003-2004 to 2005-2006)

Overall Balance of Payments (In Rupees) of India

(2003-2004 to 2005-2006)
(Rs. in Crore)
2005-06 (PR) 2004-05 (R) 2003-04 (R)
Items
Credit Debit Net Credit Debit Net Credit Debit Net
A. Current
Account
I. Merchandise 465705 695131 -229426381785 533550 -151765 303915 367301 -63386
II. Invisibles
409200 220496 188704 311550 171959 139591 245413 118044 127369
(a+b+c)
a) Services 272220 166601 105619 193711 124880 68831 123175 76794 46381
i) Travel 34871 28673 6198 29858 23571 6287 23054 16534 6520
ii) Transportation 27874 34746 -6872 21021 20363 658 14714 10688 4026
iii) Insurance 4641 4572 69 3913 3249 664 1922 1672 250
iv) G.n.i.e. 1374 2243 -869 1797 1843 -46 1105 976 129
v) Miscellaneous 203460 96367 107093 137122 75854 61268 82380 46924 35456
of which :
Software
104632 5954 98678 79404 3579 75825 58781 2175 56606
Services
Business Services57124 46630 10494 23067 32807 -9740 - - -
Financial
7551 5799 1752 2279 3735 -1456 - - -
Services
Communication
9695 3610 6085 6191 3298 2893 - - -
Services
b) Transfers 111856 4183 107673 97201 4066 93135 104329 2633 101696
i) Official 2965 2152 813 2762 1598 1164 2531 - 2531
ii) Private 108891 2031 106860 94439 2468 91971 101798 2633 99165
c) Income 25124 49712 -24588 20638 43013 -22375 17909 38617 -20708
i) Investment
24344 46313 -21969 18538 36947 -18409 17314 34586 -17272
Income
ii) Compensation
780 3399 -2619 2100 6066 -3966 595 4031 -3436
of Employees
Total Current
874905 915627 -40722 693335 705509 -12174 549328 485345 63983
Account (I+II)

87
B. Capital
Account
1. Foreign
Investment 337301 260982 76319 210205 152148 58057 149465 86623 62842
(a+b)
a) Foreign Direct
35213 14251 20962 27392 10647 16745 20484 9540 10944
Investment (i+ii)
i) In India 34240 273 33967 27234 287 26947 19830 - 19830
Equity 25822 273 25549 17028 287 16741 10213 - 10213
Reinvested
7420 - 7420 8555 - 8555 6710 - 6710
Earnings
Other Capital 998 - 998 1651 - 1651 2907 - 2907
ii) Abroad 973 13978 -13005 158 10360 -10202 654 9540 -8886
Equity 973 9142 -8169 158 7517 -7359 654 5809 -5155
Reinvested
- 1612 -1612 - 1114 -1114 - 2536 -2536
Earnings
Other Capital - 3224 -3224 - 1729 -1729 - 1195 -1195
b) Portfolio
302088 246731 55357 182813 141501 41312 128981 77083 51898
Investment
In India 302088 246731 55357 182813 141394 41419 128981 77083 51898
Abroad - - - - 107 -107 - - -
2. Loans (a+b+c)166208 139650 26558 135685 87090 48595 90303 109916 -19613
a) External
16116 8611 7505 16988 8463 8525 15311 28343 -13032
Assistance
i) By India 89 460 -371 108 576 -468 110 589 -479
ii) To India 16027 8151 7876 16880 7887 8993 15201 27754 -12553
b) Commercial
Borrowings (MT 64387 52925 11462 40679 17566 23113 23979 37239 -13260
& LT)
i) By India - 1058 -1058 - 1036 -1036 14 - 14
ii) To India 64387 51867 12520 40679 16530 24149 23965 37239 -13274
c) Short Term To
85705 78114 7591 78018 61061 16957 51013 44334 6679
India
3. Banking
95988 90193 5795 65278 48238 17040 88321 60539 27782
Capital (a+b)
a) Commercial
91200 89569 1631 64038 46532 17506 86767 56833 29934
Banks (i+ii)
i) Assets 3369 17711 -14342 2276 2481 -205 4345 733 3612
ii) Liabilities 87831 71858 15973 61762 44051 17711 82422 56100 26322
of which : Non-
Resident 79190 66733 12457 36225 40664 -4439 65739 48870 16869
Deposits

88
b) Others 4788 624 4164 1240 1706 -466 1554 3706 -2152
4. Rupee Debt
- 2557 -2557 - 1858 -1858 - 1756 -1756
Service
5. Other Capital 28979 32125 -3146 30507 26974 3533 19885 11913 7972
Total Capital
628476 525507 102969 441675 316308 125367 347974 270747 77227
Account (1 to 5)
C. Errors &
3649 - 3649 2714 - 2714 2783 - 2783
Omissions
D. Overall
Balance (Total
Capital Account,
Current
1507030 1441134 65896 1137724 1021817 115907 900085 756092 143993
Account and
Errors &
Omissions
(A+B+C))
E. Monetary
Movements - 65896 -65896 - 115907 -115907 - 143993 -143993
(i+ii)
i) I.M.F. - - - - - - - - -
ii) Foreign
Exchange
Reserves - 65896 -65896 - 115907 -115907 - 143993 -143993
(Increase - /
Decrease +)

Abbr. : PR : Partially Revised.

R : Revised.

89
Table no 4.13

A comprensive view of FDI and amount of Balance of Payment

Sl.NO Year(Apr- Amount of FDI Inflow Amount of Balance of

March) Payment
In Rupees Growth in In Growth in
Crore Percentage Rupees Percentage
Crore
1 1991-1992 409
-17367
2 1992-1993 1094
167.4817 -2235 -87.1308
3 1993-1994 2018
84.46069 -12764 471.0962
4 1994-1995 4312
113.6769 -3634 -71.5293
5 1995-1996 6916
60.38961 -10585 191.2768
6 1996-1997 9654
39.58936 -19646 85.60227
7 1997-1998 13548
40.33561 -16283 -17.118
8 1998-1999 12343
-8.8943 -20883 28.25032
9 1999-2000 10311
-16.4628 -16789 -19.6045
10 2000-2001 12645
22.63602 -20331 21.09715
11 2001-2002 19361
53.1119 -16401 -19.3301
12 2002-2003 14932
-22.8759 +3734 -122.767
13 2003-2004 12117
-18.8521 +30660 721.1034
14 2004-2005 17138
41.43765 +63983 108.6856
15 2005-2006 24613
43.61652 -24786 -138.738

Source: rbi.com

90