Akhil Mehta11112001Ankit Agarwal 11112002Jasvinder Singh 11112016

FDI & ITS IMPACT ON INDIAN ECONOMY

What is FDI?

Foreign direct investment (FDI) is investment directly into production in a country by a company located in another country, either by buying a company in the target country or by expanding operations of an existing business in that country. It is cross border investment, where foreign assets are invested into the organizations of the domestic market excluding the investment in stock.

An Introduction

What is FDI?

• It brings private funds from overseas into products or services. The domestic company in which foreign currency is invested is usually being controlled by the investing foreign company.

• Foreign direct investment (FDI) plays an extraordinary and growing role in global business. It can provide a firm with new markets and marketing channels, cheaper production facilities, access to new technology, products, skills and financing.

• Avoiding foreign government pressure for local production.

• Circumventing trade barriers, hidden and otherwise.

• Making the move from domestic export sales to a locally-based national sales office.

• Capability to increase total production capacity.

• Opportunities for co-production, joint ventures with local partners, joint marketing arrangements, licensing, etc;

Why is FDI important for any consideration of going global?

The simple answer is that making a direct foreign investment allows companies to accomplish several tasks:

What is FDI?What is FDI?

How is FDI beneficial to the host nation…

For a host country or the foreign firm which receives the investment, it can provide a source of new technologies, capital, processes, products, organizational technologies and management skills, and as such can provide a strong impetus to economic development.

What is FDI?What is FDI?

Why India?• Liberal, largest democracy, Political Stability

• Second largest emerging market (US$ 2.4 trillion)

• Skilled and competitive labors force

• highest rates of return on investment

• one hundred of the Fortune 500 have R & D facilities in India

• Second largest group of software developers after the U.S.

• lists 6,500 companies on the Bombay Stock Exchange (only the NYSE has more)

Why India (cont.)• World's fourth largest economy & second largest

pharmaceutical industry

• growth over the past few years averaging 8%

• has a middle class estimated at 300 million out of a total population of 1 billion

• Destination for business process outsourcing, Knowledge processing etc.

• Second largest English-speaking, scientific, technical and executive manpower

• Low costs & Tax exemptions in SEZ

• Tax incentives for IT , business process outsourcing and KPO companies

• Sovereign Risks

• Political Risks

• Commercial Risks

• Risk due to Terrorism

INVESTMENT RISKS IN INDIA

Greenfield Investment• Direct investment in new facilities/ expansion of existing facilities.

• Objective to create new production capacity and jobs and to transfer technology.

• Profits from production do not feed back into local economy but to the MNC’s local economy.

Vertical FDI• Industry provides inputs for or sells output from a firm’s domestic

production processes.

Horizontal FDI• Investment in the same industry abroad as a firm operates in at

home.

Factors Affecting FDI• Financial incentives (Funds from local Government)

• Fiscal incentives (Exemption from import duties)

• Indirect incentives (Provides land and labour)

• Political stability

• Market potential & accessibility

• Large economy

• Market size

Liberalization in FDI

• In 1991 the government allowed FDI upto 51% wherein automatic permission was granted in high technology and high investment priority industries.

• The limit was raised from 51% to 74% and subsequently to 100%.

• The 1991 policy invited foreign equity holdings upto 51% by international trading companies.

Reforms in 2012

• On 14 September 2012, Government of India allowed FDI in aviation up to 49%, in the broadcast sector up to 74%, in multi-brand retail up to 51%, in single-brand retail up to 100%.

•  The choice of allowing FDI in multi-brand retail up to 51% has been left to each state. But the Government of India does not allow foreign e-commerce companies to pick-up 51% stake in multi-brand retail sector in business-to-consumer space citing regulatory issues, problems in checking inter-state transactions in e-commerce activities. 

• In its supply chain sector, the government of India had already approved 100% FDI for developing cold chain.

FDI Investment Sectors

Prohibited activities

• Atomic energy

• Arms and ammunition

• Lottery business

• Betting and Gambling

• Aircraft and warships

• Coal lignite

• Atomic minerals

• Mining

FDI Investment Sectors

Fully permitted Activities Cigar and cigarettes of tobacco Coal, Roads & Highways Diamond, Gold, Silver , Minerals Electricity Hotel, hospitals Retail I.T Oil & Energy Power sector Pharmaceuticals & Chemicals

Real state Mobile Sector Automobile Telecommunication

FDI IN RETAIL

FDI in Retail….WHY INDIA? Low share of organized retailing

Increase in disposable income and customer aspiration

Increase in expenditure for luxury items

FDI in Retail….Benefits Generate huge employment

Increased investment in technology

The huge tax revenue generated.

The consumer gains from the wide variety of choices and a

more diversified basket.

The indirect benefits like better roads, online marketing,

expansion of telecom sector etc. Will give a ‘big push’ to

other sectors like agriculture, small and medium size

enterprises.

FDI in Retail….DrawbacksForeign Players would displace the unorganized

retailers because of their superior financial strengths.

The entry of large global retailers such as Wal-Mart would kill local shops and millions of jobs.

Induce unfair trade practices like predatory pricing, in the absence of proper regulatory guidelines.

Increase in real estate prices and marginalize domestic entrepreneurs

TELECOMMUNICATION

• FDI inflow from 1991 to 2010 in telecommunication sector amounted to US$ 131,220 million.

• Third largest sector to attract FDI in India.

• India has 100% FDI allowed in networking components and 74% FDI in telecommunication services.

FDI in telecommunication sector

• FDI in telecom services has been raised to 74%.

• Introduction of unified access licencing for telecom services on a pan- India basis.

• Foreign telecom companies can bid for 3G spectrum without partnering with Indian companies

Government Initiatives

1. Network expansion

• 800 million connections by the year 2012.

2. Rural telephony

• 200 million rural subscribers by 2012

3. Broadband

• 20 million Broadband connections by 2010.

• Broadband coverage for all secondary & higher secondary schools and public health care centres by the end of year 2010.

• Broadband coverage for all Grampanchayats by the year 2010

Targets set by the Government

4. Manufacturing

• Making India a hub for telecom manufacturing by facilitating more and more telecom specific SEZs.

•  Quadrupling production in 2010.

5. Research & Development 

• Pre-eminence of India as a technology solution provider.

• Comprehensive security infrastructure for telecom network.

• Tested infrastructure for enabling interoperability in Next Generation Network.

6. International Bandwidth 

• Facilitating availability of adequate international bandwidth at competitive prices to drive ITES sector at faster growth.

FDI in Real Estate

FDI in Real Estate Second-most favoured destination for FDI in the world

Norms to allow 100% FDI Mar 2005

100 acre criterion to 25 acre criterion

FDI in Real Estate….Why Invest??

India produces an estimated 2 million new graduates

Presence of a large number of Fortune 500

Real estate investments in India yield huge dividends

FDI IN TOURISM

Tourism Raised to $120mn

Major source of employment

Third largest earner of foreign exchange

Private investments through public private partnership

Need for FDI in Tourism Foreign tourist arrivals are expected to grow to 10 million by

2012-14

Estimated that tourism in India could contribute Rs.8,50,000 crores to the GDP by 2020

Reasons for low FDI Multitude of taxes

High Taxes

Highest import duty on imported liquor used in hotels

Service Tax on Tour Operators

Inland Air Travel Tax

Attract more FDI in Tourism Sector

Rationalize the taxation on the hotel industry

Service Tax should be computed based on the value of service provided

Inland Air Travel Tax should be applied at the rate of 5% of the basic ticket price

FDI in Power Sector

Incentives for Investment in Power Sector

• New Legal Regime: Electricity Act, 2003

• The Act provides for: Multiple Buyer Model, Independent Regulatory Body, Open Access, Power Trading as an independent business, delicensing of generation

• 100% FDI Automatic Route in:

• Hydro-electric power plants;

• Coal/lignite based thermal power plants;

• Oil/gas based thermal power plants.

• Other investment incentives:• New Power Projects eligible for 100% tax holiday in

any block of ten years, within first fifteen years of operation.

• The Deadline for income tax exemption for new power projects extended from 2006 to 2012.

• Various indirect tax incentives:• Concessional rate of import duties• Special project import scheme• Deemed export benefit for certain categories of

power projects.

FDI IN AGRICULTURE

Allowed up to 100%

Contributes 16% to the

GDP

Pilot programme

for delivering subsidy

directly to farmer

FDI in Agriculture

FDI in Agriculture….Developments

To connect 66,800 habitations

To construct 1,46,000Km of new rural roads

To Upgrade and modernize 1,94,000Km of existing rural roads

To provide corpus of Rs. 8000 crore RIDF

39

Major Investments

Companies Sector Investment

Wal mart,Marks Retail US$ 10 Billion

Intel Corp. I.T US$ 40 Billion

British & cairn Oil & Energy US$ 2 Billion

Essar power Power sector US$ 2 Billion

Toyota Automobile US$ 10.51 Billion

Panasonic Telecommunication US$ 200 million

FDI INFLOWS (Year-Wise)

2000-2001

2001-2002

2002-2003

2003-2004

2004-2005

2005-2006

2006-2007

2007-2008

2008-2009

2009-2010

2010-2011

2011-2012

24634062

2705 21883219

5540

12492

24575

31396

25834

19427

28403

Year

US

$ m

illi

on

FDI INFLOWS (Country-Wise)

Mauritius; 38.2

Singapore; 9.9U.K.; 9.2

Japan; 7.4

U.S.; 5.8

Netherlands; 4.4

Others; 25.1

Country wise investment

FDI INFLOWS (Sector-Wise)

SERVIC

ES SE

CTOR

CON

STRU

CTION

DEVELO

PMEN

T:

TELE

COM

MUN

ICATI

ON

S

COM

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WARE &

HARD

WARE

DRU

GS

& P

HARM

ACEUTI

CALS

CHEM

ICALS

POW

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AUTO

MOBIL

E INDUST

RY

HOTE

L &

TOURIS

M

OHERS

0

5

10

15

20

25

30

35

40

PROS of FDI• It reduces the gap between farm prices and retail

prices.

• Gives best management practices from all over the world.

• It makes market intelligent and also provides good understanding and practical knowledge to he domestic retailers.

• To achieve expected growth in India GDP: India is targeting for its GDP to grow by 8 to10 percent per year. This requires raising the rate of investment as well as generating demand for the increased goods and services produced.

• Provide an aid to Indian agriculture to become lowest cost source of farm produce.

• To bring trade balance and to increase liquidity by the way of foreign exchange reserves .

• The status of the human resources in a country is also instrumental in attracting direct investment from overseas countries like China that have taken an active interest in increasing the quality of their workers and have made compulsory for every Chinese citizen to receive at least nine ears of education. This has helped in enhancing the standards of the laborers in China.

• If a particular country has plenty of natural resources it always finds investors willing to put their money in them. A good example would be Saudi Arabia and other oil rich countries that have had overseas companies investing in them in order to tap the unlimited oil resources at their disposal.

• Infrastructure is very important for FDI. So if a country keens to have overseas investors they have to focus on infrastructure.

• Threats on organized and unorganized retail players

• Replacement of established national brands by the brands of the retail gains. For e.g Wal-Mart is committed to buying the best goods at the cheapest prices to give its customers the best value for money. That is why it sources so heavily from China. 70% of merchandise in Wal-Mart contains components made in China. Even though Wal-mart may not continue heavy operations in china but would continue heavy sourcing from china market to cater to the world markets at lower prices. Low prices of Chinese products can easily convince Indian price consciousness mentality. Acceptance towards Chinese brands can create a direct threat on Indian established brands providing best quality products with reasonable prices.

CONS OF FDI

• While the levels of FDI tend to be resilient during periods of economic uncertainty, it has the potential of adversely affecting the net capital flow of a developing economy especially if it does not have a healthy and sustainable FDI schedule.

• FDIs may enter the host country for unique strategic reasons but there is ultimately the need to achieve returns on investments. For e.g. paying a premium for the price of labor may improve the consumption power of workers, but it also has the detrimental ability of disrupting the local employment market. When prices rise, supply increases while demand falls. Similarly, when the price of labor increase, wage premiums in this case, this creates a distortion and creates disequilibrium in he labor market. Job matching stops being efficient and may even create unemployment. 

What is an FII??• An investor or investment fund that is from or registered

in a country outside of the one in which it is currently investing. Institutional investors include hedge funds, insurance companies, pension funds and mutual funds.

• The term is used most commonly in India to refer to outside companies investing in the financial markets of India.

• International institutional investors must register with the Securities and Exchange Board of India to participate in the market.

• One of the major market regulations pertaining to FIIs involves placing limits on FII ownership in Indian companies.

Foreign Institutional Investors (FII)• FIIs may invest in:

• securities in the primary and secondary markets (shares, debentures, warrants of listed and unlisted companies)

• units issued by domestic mutual funds

• dated Government securities

• derivatives traded on a recognized stock exchange

• commercial paper

• debt instruments – provided a 70/30 equity/debt ratio is maintained

Foreign Institutional Investors (FII)• Limits on the type and amount of investments

apply to FIIs• no more than 10% of the equity in any one company• no more than 10% in the equity in any one company

on behalf of a fund sub-account• no more than 5% in the equity in any one company

on behalf of a corporate/individual sub-account• no more than 24% in the aggregate of the total

issued capital of a company to be held by FIIs

FDI Vs FII

• FDI is an investment that a parent company makes in a foreign country. On the contrary, FII is an investment made by an investor in the markets of a foreign nation.

• FII can enter the stock market easily and also withdraw from it easily. But FDI cannot enter and exit that easily.

• Foreign Direct Investment targets a specific enterprise. The FII increasing capital availability in general.

• The Foreign Direct Investment is considered to be more stable than Foreign Institutional Investor.

• The outward FDI of developing and transition companies has risen tremendously over the last few years. For India the absolute terms of FDI have risen, but compared to the GDP of India there is still a lot of potential for more outward FDI, according to the World Investment Report 2006 by the United Nations Conference on Trade and Development.

OUTWARD FLOW OF FDI

The main reasons for Indian companies to engage in outward FDI are-

Market related factors, more and more companies are looking for a niche market for their product, and especially the IT-sector finds a growing market abroad.

More companies realize that they operate in a global economy and not in a domestic one. Therefore specialization from abroad are used to improve the way of doing business of the company.

Supportive host-governments. Most host-governments are very supportive towards incoming FDI because it adds to their economy.

There is a growing concern about running short of key resources and inputs for the company’s economic expansion.

OUTWARD FLOW OF FDI (REASONS)

OUTWARD FLOW OF FDI CONTD..RANGE FDI INFLOWS FDI OUTFLOWS

Over $ 50 billion China

$ 10-$ 49 billion Hong Kong ( China ) and Singapore

Hong Kong ( China ) and China

$ 1.0- $ 9.9 billion

India , Republic of Korea, Indonesia, Malaysia, Thailand, Pakistan, Vietnam, Taiwan Province of China and Philippines

India , Taiwan Province of China , Singapore , Republic of Korea , Indonesia and Malaysia

$ 0.1- $ 0.9 billion

Macao ( China ), Bangladesh , Cambodia , Myanmar , Brunei , Darussalam , Sri Lanka , Mongolia , Marshall Islands and New Caledonia .

Less than $ 0.1 billion

French Polynesia, Papua New Guinea, Lao People’s Democratic Republic, Kiribati, Vanuatu, Maldives, Tuvalu, Nepal, Tonga,

Pakistan, Sri Lanka, Fiji, Bangladesh, New Caledonia, Cambodia, Papua New Guinea, Vanuatu,

• The companies that invested overseas in the month of July included JSW Steel, Bharti Airtel, Tata Steel, Global Green Company, Religare Capital Markets, Reliance Industries, Spice Invest and Finance Advisors.

• JSW Steel invested $163.39 million through its wholly-owned subsidiaries and joint-venture in Mauritius, the Netherlands and the US for its businesses in manufacturing, wholesale and retail trade besides the hotel segment.

• Bharti Airtel invested $150.01 million through its wholly owned unit in Mauritius in the areas of communication, storage and transportation.

• Tata Steel made an investment of $96.79 million via its wholly owned subsidiary in Singapore in financial services, insurance and real estate business.

INDIAN INVESTORS IN FOREIGN MARKET

• Global Green Company, which is into wholesale, retail trade, restaurants and hotels invested $70.73 million through its joint venture in Belgium.

• Religare Captial Markets invested $64.11 million in its wholly owned business in Mauritius. The subsidiary is into financial, insurance, real estate and business services.

• Reliance Industries undertook an investment of $45.15 million in its wholly owned subsidiaries in the United Arab Emirates and Australia. The subsidiaries are into financial services, insurance, real estate and business services.

• Spice Invest and Finance Advisors invested $37.55 million through its wholly owned subsidiary in Singapore in the areas of financial, insurance, real estate services.

INDIAN INVESTORS IN FOREIGN MARKET CONTD..