TRENDS OF FDI IN INDIA AFTER 1991

DEFINATION OF FDI

FDI stands for Foreign Direct Investment, a component of a country's national financial accounts. Foreign direct investment is
investment of foreign assets into domestic structures, equipment, and organizations. It does not include foreign investment into
the stock markets. Foreign direct investment is thought to be more useful to a country than investments in the equity of its
companies because equity investments are potentially "hot money" which can leave at the first sign of trouble, whereas FDI is
durable and generally useful whether things go well or badly.

FDI IN RESPECT TO INDIA

FDI in India includes, FDI inflows as well as FDI outflow from India. Also FDI foreign direct investment and
FII foreign institutional investors are a separate case study while preparing a report on FDI and economic
growth in India. FDI and FII in India have registered growth in terms of both FDI flows in India and outflow
from India. The FDI statistics and data are evident of the emergence of India as both a potential investment
market and investing country.

The Foreign direct investment scheme and strategy depends on the respective FDI norms and policies in
India. The FDI policy of India has imposed certain foreign direct investment regulations as per the FDI
theory of the Government of India (GoI). These include FDI limits in India for example:

o Foreign direct investment in India in infrastructure development projects excluding arms and
ammunitions, atomic energy sector, railways system , extraction of coal and lignite and mining
industry is allowed upto 100% equity participation with the capping amount as Rs. 1500 crores.
o FDI figures in equity contribution in the finance sector cannot exceed more than 40% in banking
services including credit card operations and in insurance sector only in joint ventures with local
insurance companies.

FDI limit of maximum 49% in telecom industry especially in the GSM services

ADVANTAGES OF FDI FOR INDIA

 FDI inflows raise the capital for investment. Foreign capital has taken over the domestic capital in
terms of purchasing issue. Domestic capital is usually used or invested in other sectors of the Indian
market.
 Foreign Direct Investment in greenfield ventures, has introduced technological advancement and
contemporary techniques for management in India, which the country lacked badly before FDI made
its entry.
 The inflow of foreign capital in India has opened up a plethora of options in the Indian market by
ensuring foreign capital shares which stabilizes the country's economy
 India ranks 17th in terms of foreign direct investment inflows, and has 1.4 percent shares in FDI
inflows among all other developing nations

DISADVANTAGES
The FDI theories listing the FDI disadvantages include the increased liquidity and consequent inflation due to
excessive FDI inflow in India. In order to absorb the FDI entering the Indian economy, the rupee is being
pressurized. However the FDI benefits include better efficiency in funds management in India and thus
improvisations in the quality standards.

FDI IN INDIA PRIOR TO 1991

As against a highly suspicious attitude of these countries towards inward FDI in the past, most
countries towards inward FDI in the past, most countries now regard FDI as beneficial for their
development efforts and complete with each other to attract it. In India, prior to economic reforms
initiated in 1991, FDI was discouraged by (a) imposing severe limits no equity holdings by foreigners
and (b) restricting FDI to the production of only a few researched items

Fdi in India in 1991 was menial 2 billion rs

FDI TREND FROM 1991-2010

1 FDI EQUITY INFLOW

(A) CUMILATIVE AMOUNT OF FDI INFLOW IN INDIA FROM 1991-2010

CUMULATIVE AMOUNT OF FDI FLOWS - US$ 1,63,715

INTO INDIA million
(from April 2000 to April 2010)
(Equity inflows + including data on ‘Re-
invested earnings’ & ‘Other capital’, which is
available from April 2000 onwards. These are the
estimates on an average basis, based upon data
for the previous two years, published by RBI in
their Monthly Bulletin)
2. CUMULATIVE AMOUNT Rs. 5,86,962 US$ 1,34,642
OF FDI EQUITY crore million
INFLOWS
(from August 1991 to
April 2010)*

(B) FDI EQUITY INFLOWS(WITH COMPANY WISE DETAIL)

B. FDI EQUITY INFLOWS (WITH AMOUNT OF FDI Rs. 5,01,900 US$ 1,12,468
COMPANY-WISE DETAILS) EQUITY INFLOWS crore million
AVAILABLE FROM 2000-2010: 1. (from April 2000 to April
2010)
(excluding, amount
remitted through RBI’s-NRI
Schemes,
stock swapped & advances
pending for issue of shares)
FDI inflows do not include
data on ‘Re-invested
earnings’ & ‘Other
 capital’, as company-wise
details are not maintained
by RBI.
2. AMOUNT OF FDI Rs. 9,854 US$ 2,214
EQUITY INFLOWS crore million
DURING FINANCIAL
YEAR 2010-11 (for April
2010)*

C COUNTRY WISE FDI INFLOW

Ranks Country 1991-2000 2001-2006 2007-08 2008-09 2009-10 20

(April- (April- (April- (fo
March) March) March)

1. MAURITIUS 294323.16 44,483 50,794 49,633

(11,096) (11,208) (10,376)
(11.93)
2. SINGAPOR 12,319 15,727 11,295
E (3,073) (3,454) (2,379)
3. U.S.A. 4,377 8,002 9,230
(1,089) (1,802) (1,943)
4. U.K. 4,690 3,840 3,094
(1,176) (864) (657)
5. NETHERLA 2,780 3,922 4,283
NDS (695) (883) (899)
6. JAPAN 3,336 1,889 5,670
(815) (405) (1,183)
7. CYPRUS 3,385 5,983 7,728
(834) (1,287) (1,623)
8. GERMANY 2,075 2,750 2,980
(514) (629) (626)
9. FRANCE 583 2,098 1,437
(145) (467) (303)
10. U.A.E. 1,039 1,133 3,017
(258) (257) (629)
TOTAL FDI INFLOWS * 98,664 123,025 123,378
(24,581) (27,331) (25,888) (2
INDIA VS CHINA

Chinese and Indian economies are presently performing way ahead of many developing
economies of the world. However, performance of China in terms of attracting FDI is much
11
better than India. India has attracted more foreign direct investor countries after 1991 (from 86 in
1991 to 116 in 2007), which definitely enhance the stock of FDI inflow and placed India in 4th
position in 2006 among developing countries. However compared to China, both inflow and
stock
are not comparable in nature since FDI inflow to India in stock sense covered approximately
62.5
percent of FDI inflow to China in flow sense in 2005 (UNCTAD, 2006). Nevertheless, in terms
of
growth rate of FDI inflow India has recorded 20.54 percent of growth in 2005 as against 19
percent in China.
The relatively poor performance of India in attracting FDI as compared to China can be
attributed
to a number of factors. First, China initiated their economic reforms in 1979 as against 1991 in
India. The main drawback in Indian context is the misgivings towards foreign financing. This
was
rooted in the nationalistic Neheruvian principles, which shaped economic policies up to 1991.
(Rahman et al, 2006). Moreover, in relation to labour laws India has simply disadvantage
compared to China, as the laws are not MNE friendly and investor country always find it
difficult
to understand the clause.
Secondly, since growth of economy is a major point of attraction from the investors’ point of
view,
China has an edge over India in this regard. Since venturing on economic reforms two decades
ago, Chinese economy has managed remarkable 95% growth rate, doubling in the last decade
alone. On the other hand India’s economy is also accelerating and Duetsche Bank in Germany
has
projected that economic reforms and a growing work force will lead India to overtake China as
the
world’s fastest growing major economy over the next 15 years (Linda, 2006).
Thirdly, while India’s asset lies in the service sector with a huge base of well-educated
manpower
in IT segment with a strong communication power of English, China’s success has been built on
its booming manufacturing sector along with the skill and discipline of workers have besides low
wages.
Additionally, China has higher literacy rate, large natural resource endowments, more
competitive
physical infrastructure, which make it a more attractive destination for FDI, especially for skilled
labour intensive manufacturing sector (UNCTAD, 2003). Besides, policies and procedures in
China are more FDI friendly and more business- oriented. China is also found to be favourably
placed with respect to some other important determinants of FDI inflows namely, flexible labour
laws, better labour climate and better entry and exit procedures for business.

The global FDI inflows have been on an increasing trend and have increased from a low of US$ 209 bn
in 1995 to US$ 612 bn in 2005. Though the major share of FDI inflows was always into developed
countries, but an important feature was that all developing regions including Africa lately saw an
increase in inflows. Among the individual countries, China has been particularly active and successful
in attracting large FDI inflows since the beginning of its economic reforms in 1979. On the contrary,
India has been successful in attracting large inflows of FDI, though at a slower rate in comparison to
China, since the reforms that began in 1990. One of the most visible reasons for China having an upper
hand in attracting FDI is that the country started its reform process much earlier than India. During
the beginning of 1990s, India had only US$0.097 bn FDI inflows while China had US$3.5 bn and the
ratio of FDI inflows between the two countries was about 36:1. Both the Asian neighbors were
progressing at a faster rate during the 1990s for attracting more and more FDI inflows into the
economy. In the turn of the century, China attracted an amount of US$40.7 bn FDI, while India
attracted US$2.3 bn only but substantially high in comparison to its earlier period. The increase in the
FDI inflows led to the decline of FDI ratio between the countries to about 17:4. At present, China's FDI
inflows have increased to US$62 bn, while India's FDI inflows are in the region of US$6 bn and have, in
the process, contributed to the decline of the ratio between the two countries to 10:3. It is predicted that
if this declining ratio continues, India can level its FDI inflows with China within a couple of years. But
the question is why is China very successful in attracting FDI inflows and how can India level its
position with China?

There are large numbers of factors that affect the substantial inflows of FDI into Chinese economy and
can be roughly grouped under three broad heads: Economic structure, open economic policies and
cultural and legal environment. Under economic structure, China is very successful for its market
potentiality. As we know, market size is considerably an important factor in attracting more FDI from
Europe and USA. In fact, many MNCs of USA and Europe have been India can attract more FDI and
can compete with China, if it can create a favorable environment similar to that of China. – Rudra
Prakash Pradhan Faculty, Economics and Finance Group, Birla Institute of Technology and Science
(BITS), Pilani, Rajasthan. Chartered Financial Analyst December 2005 13 The FDI Inflows: China vs.
India setting up their factories in China with the aim of producing goods for domestic market. Another
factor that is favorable for China's FDI inflows is its cheap, skilled labor force. The low wage costs
appear to have played a significant role in attracting export-oriented FDI to China and in the
distribution of FDI flows across its provinces. This has contributed to China's rapid emergence as an
important global competitor in laborintensive manufacturing. Empirical studies have already
 confirmed that a region with more developed infrastructure tends to receive more FDI. China is no
exception to it and is successfully attracting more FDI inflows because of its excellent infrastructure. If
we look into the Chinese economy, the FDI inflows are substantially high in eastern coastal-China
because of this region's superior infrastructure and transport links to external markets. Taking the
advantage of positive impact of infrastructure on FDI inflows, China classified its economy into certain
special economic zones as per the availability of infrastructure and made the local governments to put
an effort to upgrade the infrastructure in order to attract more FDI. China is substantially advanced in
transport, electricity, gas, water, posts and telecommunication, which all have a positive impact on FDI
inflows.

China has strong scale effects. It suggests that once a province has attracted a critical mass of FDI, it
finds easier to attract more. This is because foreign investors perceive the presence of other foreign
investors as a positive signal. Additionally, economies of scale make it more efficient for MNCs to locate
in the same area, allowing them to share information and facilities (like education and health) for
expatriate workers. The coastal provinces of China particularly the southern provinces of Guangdong
and Fujian, which are close to Hong Kong SAR and Taiwan, have been the largest recipient of FDI and
have acquired an important advantage over the inland provinces in attracting FDI over the past two
decades.

However  a huge amount of China's FDI monies is a round tripping domestic money
sent out and then brought back to take advantage of the liberal FDI norms. This is no
new outside money. It is local profits making a round trip. If you strip away these
monies then a third of the FDI amounts reported by China will disappear. Round
tripping reduces taxes; hence it is a great advantage for non-resident Chinese
community in Hong Kong and Macao. Not a cent is paid in taxes. On the other hand
its arrival is facilitated.

Again China reports imported equipment as FDI.  Imported equipment builds

factories. Factories supply the global economy and the global economy keeps the
commerce and trade going. In a true sense, the forgoing can be classified as FDI and
should be under this heading. It makes no sense why India reports this under import
heading and not as FDI. The forgoing also applies to short-term and long-term loans,
trade credits, grants, bonds, re-invested earnings, and many other items. China very
willingly includes all these as FDI. Again in a true sense it does fall under the
umbrella of FDI. Hence again it defies description that these are excluded from India's
reported FDI data.
CHALLENGES & ISSUES

UNCTAD Confidence Index placed India in 82nd rank in terms of FDI potentiality and 112th rank
in terms of performance during the period of 2002-2004 out of a survey of 141 economies. It can
be inferred that despite its potentiality, performance is not satisfactory and challenges are still
ahead of India, which is highlighted with the help of survey report of GoI and other
organizations
as follows:
Ground level hassles continue to be a major impediment for foreign investors. 88 percent
respondents rated this problem as ‘medium to high’ category (FICCI, 2004), which shows a
marginal improvement of 3 percent over previous survey (FICCI, 2003). According to the
corruption perception index 2006 of Transparency International India ranked 74th with a score of
3.33 out of 10, which is same as China and Brazil.
Transport, Road, Power and Water availability continue to remain a cause of concern for
investors, as revealed in the survey of FICCI, 2004. National Highway Authority of India
reported
that 6942 Km four-lane highway has been completed under highway development project. Out of
a total 24971 Km, 7892 Km is under implementation and 9975 Km is still to be completed.
Though the per capita peak demand is less than per capita installed capacity in India7, it is not
equally surplus for all states in the country (indiasta.com). Kearney Confidence Index reflects
that
while Indian infrastructure is attractive to 36 percent, Chinese infrastructure is attractive to 64
percent of respondents.
Approval procedure of FDI in India is time consuming. The biggest barrier for India at first is the
screening stage itself 8. This is because we do not get across effectively to the decision-making
“board room” levels of corporate entities where a final decision is taken. On the other hand,
China
is viewed as ‘more business oriented’, its decision-making is faster and has more FDI friendly
policies (GoI, 2003).
One of the most prominent hurdles in attracting FDI inflow to India is it’s stringent labour laws,
which discourage the entry of Greenfield FDI because of the fear that the company concerned
would not be possible to downsize the labour strength in the time of downturn of business.
15
(Planning Commission, 2002). The impediment was sounded in FICCI’s survey report 2004
where
69 percent of the respondents assessed the problem of FDI investment in India because of labour
laws. Moreover, high rate of tariff barriers9, excessive red-tapism and bureaucracy and barriers
of
perception pose as a challenge in realizing FDI inflow in India

The FDI scenario in the buzzing Indian retail sector

It is submitted that retail trading in India constitutes as one of those few sectors where FDI is not
freely and healthily allowed. Although, FDI is fully admissible in ‘cash and carry’ wholesale
(back-end retail), it is admissible only up to 51 per cent in single-brand front-end retail.

Importantly, there is a complete ban on foreign investment in multi-brand, front-end retail. This

has resulted in keeping all the giant corporate – backed retailers of the world like Walmart
(USA), Carrefour (France), Tesco (UK), and Metro (Germany), who are very keen to foray into
India’s retail sector, away from entering into the country. All of these retailers, therefore, to
make their presence felt  in the country, have either tied-up or trying to tie-up with local
corporates, to offer their services for back-end operations like sourcing, logistics, inventory
management, among others, for front-end, multi-brand retail operations of such corporates.

[3]The retail industry in India is of late often being hailed as one of the sunrise sectors in the
economy. AT Kearney, the well-known international management consultancy, recently
identified India as the ‘second most attractive retail destination’ globally from among thirty
emergent markets. It has made India the cause of a good deal of excitement and the cynosure of
many foreign investors’ eyes. With a contribution of an overwhelming 14% to the national GDP
and employing 7% of the total workforce (only agriculture employs more) in the country, the
retail industry is definitely one of the pillars of the Indian economy.

[4]The Indian retail sector is very different from that of the developed countries. In the
developed countries, products and services normally reach consumers from the
manufacturer/producers through two different channels: (a) via independent retailers (‘vertical
separation’) and (b) directly from the producer (‘vertical integration’). In the latter case, the
producers establish their own chains of retail outlets, or develop franchises. 

On the other hand, Indian retail industry is divided into organised and unorganised sectors.
Organised retailing refers to trading activities undertaken by licensed retailers, that is, those who
are registered for sales tax, income tax, etc. These include the corporate-backed supermarkets
and retail chains, and also the privately owned giant retail businesses. Unorganised retailing, on
the other hand, refers to the traditional formats of low-cost retailing, for example, the local
kirana shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart and
pavement vendors, etc.Unorganized retailing is by far the prevalent form of trade in India –
constituting 98% of total trade, while organised trade accounts only for the remaining 2% – and
this is projected to increase to 15-20 per cent by 2010.

[5] Needless to say, the Indian retail sector is overwhelmingly swarmed by the unorganized
retailing with the dominance of small and medium enterprises in contradiction to the presence of
few giant corporate retailing outlets. The trading sector is also highly fragmented, with a large
number of intermediaries who operate at a strictly local level and there is no ‘barrier to entry’,
given the structure and scale of these operations.

Moreover, the retail sector also acts as an important employment absorber for the present social
system. Thus, when a factory shuts down rendering workers jobless; or peasants find themselves
idle during part of the year or get evicted from their land; or the stagnant manufacturing sector
fails to absorb the fresh entrants into the job market, the retail sector absorbs them all.
According to the Investment Commission of India, the retail sector is expected to grow almost
three times its current levels to $660 billion by 2015. It is expected that India will be among the
top 5 retail markets then. The organized sector is expected to grow to $100 bn and account for
12-15% of retail sales by 2015.

 [6]According to Subha Kalathur, analyst at Valuenotes, there is certainly a lucrative opportunity

for foreign players to enter the Indian terrain. Growth rates of the industry both in the past and
those expected for the next decade coupled with the changing consumer trends such as increased
use of credit cards, brand consciousness, and the growth of population under the age of 35 are
factors that encourage a foreign player to establish outlets in India. However, it is not out of
place to mention here that the government policies towards FDI are the only hindering factors
that do not make this a fairy tale for foreign players.

The recent developments contemplating a sea change in the Indian retail sector

[7]The history has witnessed that the concern of allowing unrestrained FDI flows in the retail
sector has never been free from controversies and simultaneously has been an issue for
unsuccessful deliberation ever since the advent of FDI in India. Where on one hand there has
been a strong outcry for the unrestricted flow of FDI in the retail trading by the ruling UPA
government and by an overwhelming number of both domestic and as well as foreign corporate
retail giants; to the contrary, the Left wing along with the critics of unrestrained FDI have always
fiercely retorted by highlighting the adverse impact, the FDI in the retail trading will have on the
unorganized retail trade, which is the source of employment to an enormous amount of the
population of India.

However, it is to be noted that lately there has been an remarkable surge in the demand for the
liberalization of the Indian retail sector both  by at the domestic and as well as at the international
front and it seems that the government is giving the matter a very pensive and careful
consideration. Some of the factors that have contributed to this trend are the evident profits in the
ever growing but conserved Indian retails sector, reduction in tariff, cheaper real time
communications, and cheaper transport. The main reasons for such an unequivocal demand
stems from the realisation that (i) while the retail sector requires heavy investment for expansion,
there is hardly any local capital left in the capital markets as a consequence
of global financial meltdown, and (ii) efficient management of multi-brand, multi-product, multi
location retail, especially in the area of back-end operations, require heavy dose of technology,
which over the years has been developed and perfected by foreign players.

In wake of relentless protests for the opening up of the Indian retail market for the reception of
unrestrained FDI, the Investment Commission in July, 2006, suggested that 49% FDI be allowed
in the Indian retail sector without any restrictions on the number of outlets or location of stores.
The Indian retail boom and the Investment Commission’s suggestions renewed the debate on the
issue of allowing FDI in the retail sector. The Commission opined that that foreign investment
would help in improving the retail and supply chain infrastructure, and generate large-scale
employment in the country. In addition, the Indian retailers could absorb some of the best
operational practices of these international retailers and gain in experience. Ultimately, the
consumers would benefit due to the availability of more product offerings, lower prices, and
efficient service.

[8]The recommendations of the Investment Commission proved to be very promising and paved
the way for a positive feedback by then ruling UPA government and also the BJP government on
the issue of liberalization of the retail sector. It is interesting to note that Prime Minister Dr.
Manmohan Singh while speaking on the occasion of the mid term appraisal of the Tenth Five
Year Plan of the Government announced that his Government has been considering permitting
FDI in retail sector ostensibly to attain the target of employment generation.

[9]Moreover, the Indian Council for Research on International Economic Relations (ICRIER)
drafted a report which suggested that the opening up of the FDI regime should be gradual—over
a 3 to 5 year timeframe – to give the domestic industry enough time to adjust to the changes. In
the initial stage FDI up to 49 per cent should be allowed which can be raised to 100 per cent in 3
to 5 years (depending on the growth of the sector). FDI cap below 49 per cent (i.e., 26 per cent)
would not bring in the desired foreign investment collaboration

[10].Furthermore, very lately in her address to Parliament in June, 2009, President Pratibha Patil,
had said, “Our country has benefited from large foreign investment flows in recent years. These
flows, especially FDI, need to be encouraged through an appropriate policy regime”.

[11]However, unfortunately the issue still remains nebulous; with only evident positive thinking
on part of the government and with no final affirmative or negative decision on the same
whatsoever.

CONCLUSION

Removing its long held restrictive foreign investment policy in 1991, India sought to compete
with
the successful Asian economies to get a greater share of world’s FDI. Ongoing initiatives such as
further simplification of rules and regulations, improvement in infrastructure are expected to
provide necessary impetus to increase FDI inflows in future. The inflows of FDI would depend
on
domestic economic conditions, world economic trends, and strategies of global investors.
Government, on its part is fully committed to creating strong economic fundamentals and an
increasingly proactive FDI policy regime.
Moreover, various governmental and non-governmental organizations’ report revealed India’s
potentiality as a FDI destination in developing countries next to China, but performance is still
very poor. The prospects of India as a FDI destination would be realized if some of its
constraints
could be overcame.
Although FDI inflow to India has been increasing, regional distribution of the same is found to
be
more inequitable. To ensure a more equitable regional distribution of such flows both central and
state government should take concerted strategy for improvement in infrastructure facilities and
creation of sound economic and political environment. Moreover, state governments have to take
attractive investment policy in the line of Maharashtra and Karnataka to invest in less attracting
states or regions. Political willingness hence seems to be a major step in this direction.
Development of infrastructure, especially power and transport network is an immediate need of
the time since it is basic for industrialization. Bureaucratic hassles, corruption and time
consuming
procedures should be reduced to attract more FDI inflow. After all a more transparent investment
system will benefit and secure future prospect of FDI inflow in India