FDI in India

Presentation Write-up
Business Environment
MGT 554

Submitted to: Miss Jeschatan Deep Kaur

Submitted By: Ishfaq Shah - A15

12 Feb12

MEANING and DEFINITION Foreign investment refers to any type of funds coming from foreign countries to a home country, either from the various corporates or the individual and institutional investors. FDI is a type of investment that involves the injection of foreign funds into an enterprise, new or existing, that operates in a different country of origin from the investor. To put in simple words, FDI refers to capital inflows from abroad that is invested in or to enhance the production capacity of the economy. The country from which the investment comes is called the home country and the country in which the investment is done is referred as the host country. Foreign direct investment can include buying shares of an enterprise in another country, reinvesting earnings of a foreign- owned enterprise in the country where it is located, and parent firms extending loans to their foreign affiliates. NEED OF FOREIGN INVESTMENT

Raising the level of investment: The foreign investment helps in introducing more and more investment in the country, in addition to, the domestic investment sources. Upgradation of technology: The foreign investment, especially the FDI, helps bringing in the foreign technology which helps in the upliftment of various industries and raising them to the optimum level of competition. Exploitation of natural resources: The investment is required to make use of the resources present in the country and the foreign investment helps to tap these resources. Development of basic economic infrastructure: It helps in the development of the basic economic infrastructure of a country Benefits to consumers: It allows access to the low cost methods and materials which helps in providing the consumers with the low price but high quality products and services. Revenue to government: It increases the sources of the revenue for the government. Scope of Employment: It increases the avenues of employment for the host country.

DETERMINANTS OF FOREIGN INVESTMENT

Political stability Legal and regulatory framework Size of market

Prices and exchange rate Access to basic inputs

EFFECT OF LIBERALISATION ON FDI Economic liberalisation in India: It refers to loosening or removal of controls so that economic development gets encouragement. The economic liberalization in India refers to economic reforms in India that started on 24 July 1991. After Independence in 1947, India adhered to socialist policies. In the 1980s, Prime Minister P. V. Narasimha Rao initiated some reforms. In 1991, after India faced a balance of payments crisis, it had to pledge 20 tons of gold to Union Bank of Switzerland and 47 tons to Bank of England as part of a bailout deal with the International Monetary Fund (IMF). In addition, IMF required India to undertake a series of structural economic reforms As a result of this requirement, the government of P. V. Narasimha Rao and his finance minister Manmohan Singh (the present Prime Minister of India) started breakthrough reforms, although they did not implement many of the reforms IMF wanted. The new neo-liberal policies included opening for international trade and investment, deregulation, initiation of privatization tax reforms, and inflationcontrolling measures. THE FIRST PHASE (PRE LIBRALIZATION) The economy was characterized as Command and Control Economy. The various activities carried on by government were as:

Allocation of resources by the Government Government took active part in setting priorities for the economy Self-Reliance was the buzz word Nationalization of Banks Limited scope for private participation

PRE LIBRALIZATION POLICIES

First plan (Industrial policy 1948) Second plan (Main focus - increasing foreign exchange) Foreign investment policy was framed.

IMPACT BEFORE 1991

Large fiscal deficits emerged as a result of mounting government expenditures, particularly during the second half of the 80s. Government expenditure in India grew at a phenomenal rate, faster than what government earns as a revenues Infrastructure investment was poor because of the public sector monopoly License Raj established the irresponsible and corruption flourished under this system. Low annual growth rate of the economy stagnated at around 3.5% from 1950s to 1980s.

THE SECOND PHASE (POST LIBRELIZATION) Liberalization and Globalization of Indian Economy

Increased emphasis on private sector participation. FDI participation took place. Gradual improvement in the enabling environment.

IMPACT AFTER 1991

There has been a steady build up in the actual FDI inflows in the postliberalization period. Actual inflows have steadily increased from US $143.6 million in 1991-US $37,763 million in 2010. The pace of FDI inflows to India has definitely been slower than some of the smaller developing countries like Indonesia, Thailand, Malaysia and Vietnam. FDI was routed through Mauritius. Investments in India with Rs 65.46 billion or nearly 18 per cent. The Double Taxation Avoidance Agreement signed between Mauritius and India during the 1990s that enables foreign investors to minimize their tax liability given the tax haven status of Mauritius.

NEW POLICIES The government has permitted, except for a small negative list, an access to the automatic route for FDI. The Automatic Route: The automatic route means that FDI need only to inform the RBI within 30 days of bringing in their investment, and again within 30 days of issuing any share. Changes in the process of libralization of FDI policy

100% FDI that is permitted for B-B e-commerce. Condition of dividend balancing on 22 consumer items that are removed forthwith. Removal of cap on the foreign investment in the power sector. 100% FDI that is permitted in oil refining.

FOREIGN TRADE POLICY 2004-2009 The New Foreign Trade Policy (NFTD) was aimed to boost foreign trade and double Indias share of foreign trade from 0.7% in 2003 to 1.5% by 2009. It focused mainly on areas such as agriculture, handlooms, handicrafts , gems, jewelry , footwear , and leather. Aims of the policy:

Generate employment opportunities in the semi-urban and rural areas. Set up free trade zones and warehousing zones by allowing a100% FDI in them. Set up SEZs that will help to boost the handicraft exports. Provide a boost for the export industry by exempting all the exported goods and services from service tax.

LATEST POLICY The Government of India has reviewed the extant policy on FDI and decided that FDI, up to 100%, under the government approval route, would be permitted in Single-Brand Product Retail Trading and 51% in Multi-Brand Retail Trading subjected to some conditions.

NEED FOR FOREIGN CAPITAL

Domestic capital is inadequate. Essential for temporary measures during the capital markets is in the process of development. Bring with it other productive factors: Technical know how Business experience Knowledge and expertise

BENEFITS OF FDI

Play a complementary role in overall capital formation. Employment generation and productivity enhancement. Encourage transfer of management skills, intellectual property, and technology. Improve Forex position of the country. Promotion of the competition within the local input market. Development of the human capital resources. Increase in tax revenues.

THE ENTRY STAGE Forms in which Business can be conducted in India

Wholly owned subsidiary Joint Venture Company Branch Office Project Office

SECTOR WISE LIMITS OF INVESTMENTS

Banking - 74%

Non-Banking Financial Companies (Stock Broking, Credit Cards, Financial Consulting, Etc.) - 100% Insurance - 26% Telecommunications - 74% Private Petrol Refining - 100% Construction Development - 100% Coal & Lignite - 74% Trading - 51% Electricity - 100% Pharmaceuticals - 100% Transportation Infrastructure - 100 % Tourism - 100% Mining - 74% Advertising - 100% Airports - 74% Films - 100% Domestic Airlines - 49% Mass Transit - 100% Pollution Control - 100% Print Media - 26% for Newspapers and Current Events, 100 % for Scientific and Technical Periodicals.