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In partial fulfillment of the requirements of University of Toledo for the award of the

degree of

Master of Business Administration

PSG INSTITUTE OF ADVANCED STUDIES

PSG COLLEGE OF TECHNOLOGY

COIMBATORE - 641 004

October 2010

Submitted by

ABHISHEK

HARI BALAJI R S
Introduction
India has made many great improvements over the last decade in achieving economic growth and
poverty reduction. The most significant advancement came in 1991 when India removed
governmental obstacles and allowed its doors to open to foreign investment. Foreign Direct
Investment (FDI) has emerged as an eminent source of economic development and employment
generation for developing countries (including India) as it contributes in creating a more
competitive business environment, enhances enterprise development, human capital formation
and international trade integration. This paper is an attempt to throw light on the various
investment opportunities and challenges in INDIA.

Definition:

Investment is the commitment of money or capital to purchase financial instruments or other


assets in order to gain profitable returns in the form of interest, income or appreciation of the
value of the instrument(source: Wikipedia)

Various policies related to investments in INDIA as prescribed by Indian government:

I. Setting up as an Indian or a Foreign Company


A foreign company planning to set up business operations in India has the option of either setting
up as an Indian company or as a foreign company

1) As An Indian Company
A foreign company can commence operations in India by incorporating a company under the
Companies Act, 1956 through Joint Ventures (JV) or Wholly Owned Subsidiaries.

A) Joint Ventures
Foreign Companies can set up their operations in India by incorporating a JV Company with an
Indian partner and/or with the general public and operating either as a listed company or as an
unlisted company.
B) Wholly Owned Subsidiaries
Foreign companies can also set up wholly owned subsidiary in sectors where 100% foreign
direct investment is permitted under the FDI policy.

2) As A Foreign Company
Foreign Companies can set up their operations in India through

A) Liaison Office/Representative Office: It acts as a channel of communication between the


principal place of business or head office and entities in India.Its role is limited to collect
information about possible market opportunities and providing information about the company
and its products to prospective Indian customers. It can promote export/import from/to India and
also facilitate technical/financial collaboration between parent company and companies in
India.Approval for establishing a liaison office in India is granted by Reserve Bank of India
(RBI).

B) Project Office: Foreign Companies planning to execute specific projects in India can set up
temporary project/site offices in India. RBI has now granted general permission to foreign
entities to establish Project Offices subject to specified conditions.

C) Branch Office: Foreign companies engaged in manufacturing and trading activities abroad
are allowed to set up Branch Offices in India for the purposes of export/import of goods,
rendering professional or consultancy services, carrying out research work in which the parent
company is engaged.

D) Branch Office on Stand Alone Basis: Such Branch Offices would be isolated and restricted
to the Special Economic zone (SEZ) alone and no business activity/transaction will be allowed
outside the SEZs in India, which include branches/subsidiaries of its parent office in India.

II. Procedures prescribed for FDI

FDI in relation to control or ownership of a company in India takes one of two routes:

1) Procedure Under "Automatic Route"


FDI in sector/ activities to the extent permitted under automatic route does not require any prior
approval either by Government of India or RBI. The investor are only required to notify the
Regional office concerned of RBI and file the required documents with that office within 30 days
of receipt of inward remittances. This route is available to all sectors or activities that do not
have a sector cap i.e. where 100% foreign ownership is permitted, or for investments that are
within a sector cap and where the Automatic route is allowed.

2) Procedure Under "Government Approval"


FDI in activities not covered under the automatic route requires prior Government Approval and
are considered by the Foreign Investment Promotion Board (FIPB). Approvals of composite
proposals involving foreign investment/ foreign technical collaboration are also granted on the
recommendation of the FIPB.

3. FDI in the Small Scale Sector

Small Scale Undertakings (SSUs) are defined as units having investments in fixed assets in plant
and machinery of not more than INR 10 million. Under the small scale industrial policy, equity
holding by other units including foreign equity in a small scale undertaking is permissible up to
24 per cent.

4. Other Modes of Foreign Direct Investments

a. Global Depository Receipts (GDR)/American Deposit Receipts (ADR)/Foreign Currency


Convertible Bonds (FCCB).

b. Minority stakes in host-country firms

5. Investment in a Firm or a Proprietary Concern By NRIs


A Non-Resident Indian or a Person of Indian Origin resident outside India may invest by way of
contribution to the capital of a firm or a proprietary concern in India on a non-repatriation basis
provided.
6. List of Sectors where FDI is restricted.

Sectors where FDI is not permitted are restricted to Railways, Atomic Energy and Atomic
Minerals, Postal Service, Gambling and Betting, Lottery and basic Agriculture or plantations
activities or Agriculture and Plantations.

7. Sectors which attract Ceiling on Foreign Ownership Sector


Telecom, Coal and lignite, Mining, Private sector banking, Insurance, Domestic airlines,
Petroleum, Refining, Investing companies/ Services sector, Atomic minerals, Defence industry
sector, Broadcasting, Setting up hardware, facilities such as uplinking, HUB, etc., Cable
network, Direct-to-Home, Terrestrial Broadcasting FM, Small scale industries (SSI) sector,
Satellites, Tea sector, Print Media.

Foreign direct investment

Foreign direct investment (FDI) refers to long term participation by country A into country B.
It usually involves participation in management, joint-venture, transfer of
technology andexpertise. Direct investment excludes investment through purchase of shares.

India has been emerging as the next market for foreign direct investments. The reason behind the
success is the rules and regulations framed by the various ministries of government of India as
well as the regulators from SEBI, RBI. 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. 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.

India has been ranked at the third place in global foreign direct investments in 2009 and will
continue to remain among the top five attractive destinations for international investors during
2010-11, according to United Nations Conference on Trade and Development (UNCTAD) in a
report on world investment prospects titled, 'World Investment Prospects Survey 2009-2011'
released in July 2009. The 2009 survey of the Japan Bank for International Cooperation released
in November 2009, conducted among Japanese investors continues to rank India as the second
most promising country for overseas business operations, after China. according to the Asian
Investment Intentions survey released by the Asia Pacific Foundation in Canada, more and more
Canadian firms are now focussing on India as an investment destination. From 8 per cent in
2005, the percentage of Canadian companies showing interest in India has gone up to 13.4 per
cent in 2010.

India attracted FDI equity inflows of US$ 2,214 million in April 2010. The cumulative amount
of FDI equity inflows from August 1991 to April 2010 stood at US$ 134,642 million, according
to the data released by the Department of Industrial Policy and Promotion (DIPP). During April
2010, Mauritius invested US$ 568 million in India, followed by Singapore which invested US$
434 million and Japan that invested US$ 327 million, according to latest data released by DIPP.
In May 2010, the government cleared 24 foreign investment proposals, worth US$ 304.7 million.
These include:

• Asianet's proposal worth US$ 91.7 million to undertake the business of broadcasting non-
news and current affairs television channels.
• Global media magnate Rupert Murdoch-controlled Star India holdings' investment of
US$ 70 million to acquire shares of direct-to-home (DTH) provider Tata Sky.
• AIP Power will set up power plants either directly or indirectly by promotion of joint
ventures at an investment of US$ 24.4 million.
Sector wise challenges and opportunities

1. Automobile sector

India is an emerging global manufacturing hub for low-cost compact cars. It is Asia’s
third-largest passenger vehicle market and the world’s second-largest two-wheeler market. It is
also the world’s fourth-largest commercial vehicle market. Changing demographics, rising
disposable income and entry of several new players has expanded the domestic market for
passenger vehicles. Low manufacturing costs due to economies of scale, low R&D and sourcing
costs, are increasing affordability and driving domestic demand.

The Indian automotive industry is expected to be the world’s seventh-largest automobile market
by 2016 and the third largest by 2030, only behind China and the US. Recent acquisition of
Jaguar and Land Rover brands by Tata Motors and launch of world’s cheapest car, Tata Nano,
has placed the Indian automobile market on the global automotive map. Total value of vehicle
exports is estimated to reach US$ 8 billion to US$ 10 billion by 2015. The industry turnover is
estimated to reach a level of US$ 155 billion by 2016. Overall production of automobiles
increased from 8.7 million units in 2004–05 to 11.4 million units in 2008–09. Between 2000 and
2009, the industry witnessed a cumulative foreign direct investment (FDI) flow worth US$ 4.3
billion accounting for 4 per cent of the total FDI into the country.
Opportunities

• Govt policies including weighted tax deduction has deduced upto 200% for inhouse R&D
activities in the country.
• Increasing production cost, shorter product life cycle and increasing trends of
geographical expansion to deresk dependence on one market are key factors that
influence companies to outsource.
• Availability of low cost skilled and educated manpower; proven product development
capabilities and location advantage due to India’s proximity to emerging markets.
• Revenues are estimated to increase from US$ 40 billion in 2002 to US$ 300 billion in
2015, thereby increasing its share from 0.8 percent to 3.5 per cent.

Challenges
• Accelerated modification and diversification of the product portfolio
• Pervasion of automobiles with digital technology
• Increased pressure for innovation and flexibility in development and manufacturing
2. Textile and apparels
The textile industry in India provides direct employment to more than 35 million people
and is the second-largest employment generator after agriculture. The textiles industry accounts
for 14 per cent of the total industrial production in India. At current prices, it accounts for 4 per
cent of the gross domestic product (GDP)—US$ 51.36 billion. Textiles and apparel industry
exports, valued at US$ 20.02 billion (INR 963.05 billion), contributed about 11.5 per cent to the
country’s total exports in 2008–09. In addition to the four functional SEZs, there are 13 in-
principle approved, 19 formally approved and 12 notified SEZs in India.

Opportunities
material for industrial, agricultural and consumer goods.
• According to the Confederation of Indian Textile Industry (CITI), the potential size of the
Indian textiles industry is expected to reach US$ 110 billion by 2012.
• With consumerism and disposable income on the incline, the retail sector has witnessed
rapid growth in the past decade. Several international retailers are also focusing on India
due to its emergence as a potential sourcing destination.
• The packtech segment constitutes 38 per cent of the total technical textiles production in
India (2007–08). This industry includes the production of flexible packaging
Challenges
Scale: Indian firms are typically smaller than their Chinese or Thai counterparts and there are
fewer large firms in India. Some of the Chinese large firms have 1.5 times higher spinning
capacity, 1.25 times denim (and 2 times gray fabric) capacity and about 6 times more revenue in
garment than their counterparts in India thereby affecting the cost structure as well as ability to
attract customers with large orders.
Skills :
1. There is a paucity of technical manpower
2. Indian firms invest very little in training its existing workforce and the skills are
limited to existing proceses.
3. There is an acute shortage of trained operators and supervisors in India.
Domestic Market
The Indian domestic market for all textile and apparel products is estimated at $26 bn and
growing. While the market is very competitive at the low end of the value chain, the mid or
higher ranges are over priced.

3. Healthcare sector

India’s growing population and increasing preference for private health services over
public services is augmenting the growth of the healthcare delivery market. Among countries
outside the US, India has one of the largest numbers of Joint Commission International (JCI)
approved hospitals. The country has 0.5 million doctors, 0.9 million nurses and about 1 million
beds. These factors have transformed it into a leading medical tourism destination. Healthcare
expenditure in India is expected to increase by 15 per cent per annum. This segment is expected
to constitute 6.1 per cent of the country’s GDP and employ around nine million people in 2012.
The share of tertiary care in the total healthcare market is currently about 11 per cent.
Opportunities
• An additional 1.75 million beds are needed for India to achieve the target of two beds per
1,000 population by 2025.
• To maintain the current doctor-to-nurse ratio of 2.2, an additional 1,600,000 nurses will
have to be trained by 2025.
• India’s changing demographics and the increasing incidence of non-communicable and
lifestyle-related diseases is expected to trigger the need for more tertiary care hospitals to
cater to this demand.
• The potential increase in the penetration rate of medical insurance and employer plans
could result in a higher demand for premium healthcare services in India, and
consequently, increase the demand for hospital beds and medical equipment.

Challenges:
1. cutting edge technology
2. Research and development
3. new innovate treatment
4. customer service quality

4. IT and ITES sector


Total revenues in India’s IT industry touched US$ 70.5 billion in 2008–09 as compared
to US$ 64 billion in 2007–08, growing at more than 12 per cent. The Indian IT & ITeS industry
is primarily concentrated in seven clusters—Bengaluru, NCR-Delhi, Hyderabad, Chennai, Pune,
Mumbai and Kolkata. The contribution of IT industry to India’s gross domestic product (GDP)
has grown from 1.2 per cent in 1997–2008 to an estimated 5.8 per cent in 2008–09. Total
revenues in India’s IT industry touched US$ 70.5 billion in 2008–09 as compared to US$ 64
billion in 2007–08, growing at more than 12 per cent. The Indian IT industry has been growing
at a compound annual growth rate (CAGR) of 27 per cent from 2003 to 2008. India’s software
and services exports, including its ITeS-BPO exports, touched US$ 47.3 billion in 2008–09, as
compared to US$ 40.4 billion in 2007–08, an increase of 14.3 per cent.

Opportunities

• It is estimated that the overall size of the domestic market grew by 20 per cent in 2008–
09 to reach US$ 24.3 billion by 2010.
• Domestic IT BPO spending grew by 40 per cent in 2008–09.
• The government is taking up e-governance initiatives and increasing its IT spend/outlay
with an allocation of more than US$ 400 million for the Unique Identification Authority
of India (UIDAI) in 2010–11.
• The labour cost arbitrage in this sector is about 60 per cent of that in the US.
• The growth drivers include the high productivity of India’s human resources and
outsourcing of knowledge processes by SMEs.

Challenges
1. Dependency on US
2. Indian IT firms are outsourced and off- shored
3. Rupee appreciation and FII
4. Diversification in verticals

5. Power sector
Thermal power accounts for 64.2 per cent of the power produced in India, followed by
hydro-electric power. India’s total installed capacity, as on March 31, 2010, has been estimated
at 159,398.49 MW. The outlay for the sector is US$ 115.56 billion (INR 5,547 billion),
according to the Eleventh Plan. The government has launched an initiative for the development
of coal-based ultra mega power projects (UMPPs), each with a capacity of about 4000 MW. The
states contributed 79,391.85 MW to the total installed capacity, while the Central and private
sectors contributed 50,992.63 MW and 29,014.01 MW, respectively, as of March 2010. The
installed capacity of the renewable energy industry has been estimated at 13,242 MW (as on
July 31, 2009), which constitutes 9 per cent of the country’s total installed capacity.
Opportunities

• Construction, operation and maintenance of transmission lines by private players.


• Private transmission facilities to be either set up and operated by independent power
transmission companies or joint ventures with state-owned transmission utilities.
• Competitive bidding for multiple transmission projects.

Challenges

• Avoiding misconception of the new market arrangements


• Keeping anticipation capabilities to adapt and correct policies and processes (avoiding
myopia and sheep behaviour)
• Saving minimum core business competency at decision-making level
• The environment laws will increase the restrictions to electric engineering
• The automation and smart instrumentation presence will be increased
• New materials and processes will force a permanent knowledge update
• The demand of technical and financial management will increase
• The professional competition will increase
• The legal aspects will increase in professional activities

6. Financial services sector


The Indian financial market is growing rapidly, with significant potential for further
growth (National Stock Exchange is ranked 18th in terms of value of shares traded in the world).
India has a strong financial regulatory system, administered by Reserve Bank of India (RBI) and
supported by regulatory body such as Securities and Exchange Board of India (SEBI), which
govern capital markets and mutual funds, among other financial institutions. India’s high savings
rate offers significant opportunity for channelising resources into the financial markets. The NSE
and the BSE are the main exchanges, with the NSE contributing over 70 per cent of the turnover.
There are more than 8,000 brokers in addition to about 44,000 sub-brokers registered with SEBI.
Mutual funds in India had assets under management to the tune of US$165 billion (INR 7,944
billion) as of December 2009. More than 11,000 non-banking financial companies (NBFCs) are
registered with the RBI. The microfinance segment in India too is witnessing rapid growth.
Market capitalisation of Indian companies on the stock exchange has more than tripled between
2004–05 and 2009–2010.
Opportunities

• High GDP growth rate, driven by significant corporate earnings, is expected to create the
need for more intermediaries in the capital market.
• Large number of mutual funds and increasing AUM require more distribution
intermediaries and schemes for better market penetration.
• Unorganised money lending is a general practice in micro-credit. High level of
professionalism, more transparency and low interest rates brought in by organised
microfinance firms, is expected to expand the market.

Challenges
• Adept to face increasing transaction volumes, regulation and the integration of previously
disparate global markets
• Agile at identifying and managing risk
• Operationally efficient
• Customer – centric
• Optimized in both business & technology

7. Steel sector
India is the fifth-largest producer of crude steel in the world (2008), with a production
volume of 54.5 million tonnes. 222 memoranda of understanding (MoUs) have been signed by
various states with an intended capacity of about 275.7 million tonnes and an investment of more
than US$ 229 billion (INR 11,000 billion). India and China are the only countries to have
registered positive growth in steel production in the period between January and March 2009.
The steel production capacity is estimated to reach 124 million tonnes by 2011–12. In 2008–09,
the installed capacity for crude steel was estimated at 64.4 million tonnes, while production was
estimated at 54.5 million tonnes, resulting in an 85 per cent capacity utilisation. Long-products
constituted 57 per cent of the total finished steel consumption, while the remaining 43 per cent
was constituted by flat-products in 2007–08.
Opportunities

• The rising costs of coal and crude oil have resulted in a shift towards the use of alternate
fuels. To leverage this opportunity, companies are investing in building a pipeline
network for gas distribution.
• The increasing investments by the state governments in water and sewage pipes
infrastructure management are also expected to augment the anticipated demand.

Challenges
• The condition of the infrastructural facilities of the steel industry in India is not at all
conducive to a sustainable growth and development of the steel industry of the India.
• Even though India is capable of producing steel at a good rate and also increase the
volume of production there is not enough land available to support such activities. the
design institutions in India have not been successful at recruiting the best of engineers
and metallurgists in India. This has affected the technological aspect of the Indian steel
industry.

8. Telecommunication sector

India is one of the biggest telecom markets in the world with 581.81 million
subscribers as on January 31, 2010, which are estimated to reach approximately 700
million by 2012. At the end of January 2010, the overall tele-density was recorded at 49.5
per cent with a total telephone subscriber base of 581.81 million. The telecom sector is
one of the highest FDI attracting sectors in India, and has recorded FDI inflows worth
over US$ 8.8 billion between 2000 and 2010. Multiple factors including low tariffs, low
handset prices, effective government regulations, higher incomes and changes in
customer behaviour are the key drivers for growth. Broadband subscribers are expected
to grow to 30 million, while Internet subscribers are expected to grow to 45 million by
2012.
Opportunities

• By 2012, total telecom penetration in the largely untapped potential rural markets of India
is expected to reach to about 40 per cent as compared to the current tele-density of about
16.61 per cent as of June 2009.
• Despite the low penetration of internet services in the Indian market, it is expected to
grow in the next decade in terms of number of subscribers. India is expected to feature
among the top 10 broadband markets by 2013.
• The expansion of wireless networks and growth in subscriber base, both in urban and
rural areas, has led to a boost in the sale of mobile handsets across India. The mobile
handsets sale grew by 7.9 per cent in 2008–09.

Challenges
1. advanced technology for authentication and e-purchase
2. security measures
3. efficient use of bandwith.
Conclusion

Through this paper we have seen the various investments in India in different sectors. These
sectors are the core sectors apart from these there are many more areas where investments can be
made. As India is fast emerging as an developed nation the FDIs are the most important areas
from where revenues can be earned. Therefore India’s opportunity for building up a strong base
for investments particularly FIIs is very much higher and the Government of India is supporting
this move. We hope to see move FDIs in India for the betterment of the trade as well as for the
country and its economy.

Bibliography

Ministry of finance (www.finmin.nic.in)

Indian brand equity foundation

www.managementfunda.com

www.economywatch.com

www.siam.org