Report Fdi

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SIGNIFICANCE OF THE STUDY

The proposed study entitled, ‘FDI in Banking and Insurance

sector’ would prove significant in analyzing and critically examining

the latest trends and strategies of FDI in Banking and Insurance

Sector in India. Study on the basis of present scenario distinctively

approaches to highlight the future prospects for the upliftment of

FDI in the Banking and Insurance Sector in India. It would be

useful for the policy makers to draft suitable strategies to facilitate

FDI for the growth and development of Banking and Insurance

Sector. The study would also prove to be an asset for all those

researchers who would be interested to study the FDI in Banking

and Insurance Sector in the future. The proposed study will place

great importance to the researcher to acquire deep and thorough

knowledge about the topic.

FOCUS OF THE PROBLEM

The present study focuses on the trends and patterns of FDI in the

Banking and Insurance Sector in India. The study would be focus

on critically examine the FDI policies related to Banking Sector and

suggest policy reforms necessary to attract FDI in the specified

sector.

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OBJECTIVES OF THE STUDY

1. To analyse the trend and pattern of FDI.

2. To make an assessment of determinants of FDI.

3. To study the FDI policies / legislative framework.

4. To suggest policy reforms necessary for attracting FDI.

5. To recommend various measures to improve the FDI.

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RESEARCH METHODOLOGY

Research Methodology comprises of defining the problem,

collecting, organizing and evaluating data, making deductions,

reaching conclusions and suggesting solutions.

NATURE OF RESEARCH:

The proposed research will be of analytical and descriptive in

nature in which the facts and information already available

will be used by the researcher.

UNIVERSE AND SURVEY POPULATION SAMPLE:

In this study whole of the Banking and Insurance sector

represents universe and few Banking and Insurance firms (with in

Delhi Gurgaon region) will constitute the sample for the study.

DATA COLLECTION:

The study would be based on both Primary as well as Secondary

data.

The Secondary data would be collected to know the trends and

pattern of FDI and various policies of FDI related to Banking and

Insurance Sector.

In order to collect factual information and to know the ground

realities of existing FDI policies and the extent of thereeffectiveness, Primary data will be collected by the researcher.

• SOURCES OF DATA:

Secondary data will be collected through following sources:

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- Various reports of government like RBI reports, Planning

Commission reports, Reports on reforms in Banking and

Insurance sector etc.

- IMF reports, World Bank reports and UNCTAD reports.

- Reports of CII and Chamber Of Commerce.

- Various Newspaper, Journals, Magazines and Research

Articles.

- Internet.

Primary data will be collected through a survey of the executives

of selected Banking and Insurance companies.

• SAMPLING PLAN:

To conduct the proposed survey, researcher will make a list of

existing Banks and Insurance Companies operating in Delhi-Gurgaon region.

From the above list prepared, on the basis of convenient

sampling, five Banking and five Insurance companies would be

selected for the study.

•

RESEARCH INSTRUMENTS:

To conduct the survey, a structure questionnaire consisting both

Open-ended and Close-ended questions will be prepared which

will be filled through personal interview with the respondents by

the researcher.

ANALYSIS PATTERN:

In order to analyze the available data, the researcher will use

various statistical and geographical tools.

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LIMITATIONS OF THE STUDY

The study would include sample size of five Banking and five

Insurance companies.

• Time may be the biggest constraint as many times it will not be

possible to meet senior officials to collect such information. But

all efforts will be made to get all the relevant information

required for this study.

• There may be biases on the part of the Company Executive while

providing the information.

• Some of the respondents may be reluctant to provide theinformation.

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CONCEPTUALIZATION

Emerging markets possess a lot of potential for foreign direct

investment (FDI). FDI in India is on the increase but the country has

not experienced a rapid growth of FDI inflow. Theories of FDI

suggest that firm size, profitability, trade, interest rates, economy

and inflation wield significant influence in attracting FDI. This study

explores the factors that contribute to the explanation of FDI in

India.

FOREIGN INVESTMENT TRENDS

FDI approved in 2003 is US$ 3.1 billion as against US$ 4.43

billion in 2002.

FDI inflows approved in the period April 1991-April 2003 stood

at US$ 78 billion, of which US$ 35.5 billion has been realized.

USA accounted for $ 16 billion (24.9%). The other major

investor countries are Mauritius, UK, Japan, South Korea,

Germany, Netherlands, Australia, France, Malaysia, Singaporeand Italy in that order.

Even Chinese firms have started investing in India. For

example, ZTE of China is investing $ 50 million in the telecom

sector. Haier is investing 200 million dollars to manufacture

refrigerators and set up a Rand D facility.

Sector-wise break-up of FDI is as follows: fuels -26.7%,

telecom-19.6%, electrical equipments-9.9%, transportation-

7.5%, services-6.5% and metallurgical industry-5.3%

Major FDI destinations are Maharashtra-17.4%, Delhi-12%,

Tamilnadu-8.6%, Karnataka-8.2%, Gujarat-6.5%, and Andhra

Pradesh- 4.6%.

MNCs , which have invested in India include GE, Dupont, Eli

Lily, Monsanto, Caterpillar, GM, Hewlett Packard, Motorola,Bell Labs, Daimler Chrysler, Intel, Texas Instruments,

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Cummins, Microsoft, IBM, Toyota, Mitsubishi, Samsung, LG,

Novartis, Bayer, Nestle, Coca Cola and McDonalds.

FII investment increased by almost ten times in 2003 reaching

a record US$ 7.59 billion, as against a mere 739 million dollarsin 2002. FII investment in the first quarter of 2004 stood at $ 4

billion. Cumulative FII investment since the equity market was

opened in the early 1990s is $ 25 billion. The number of

registered FIIs in India is 540.

CALPERS (California Public Employees Retirement System ),

the world's biggest pension fund with a base of US$ 165 billion

has recently decided to include India in their list of countriesfor investment.

US$ 6.5 billion of the FII funds in 2003 went into equities FIIs

have 50 percent stake in one third of the 30 companies which

make up the BSE-30 Index and hold about 10 percent of the

stakes in public sector undertakings.

Foreign Investment - Policies and Procedures The Common Minimum Programme of the government states

that "FDI will continue to be encouraged and actively sought

particularly in areas of infrastructure, high technology and

exports where local assets and employment are created on a

significant scale. The country needs and can easily absorb at

least two to three times the present level of FDI inflows".

Foreign investment can be done in all sectors except foursectors: retail trade, housing and real estate, agriculture and

lottery and gambling. In most of the sectors foreign investors

can go through the Automatic Route without need for any

approvals. The investor has to merely keep the Reserve Bank

of India informed of the flow of funds and issue of shares. In

some sectors ( examples: courier services, gas pipelines and

trading ), prior approval is needed

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There are maximum limits on foreign investment in some

sectors. Examples: telecommunications (49%), insurance

(26%), banking (74%), mining (74%) aviation (40%),defence

equipments(26%), cable network(49%),trading (51%),printmedia(26%) and small-scale industries (24%). FDI in excess of

24% is permitted in small-scale industry at 50% export

obligation.

Prior approval of the government is needed for those cases,

which need industrial license ( examples: alcoholic beverages,

cigarettes,defence equipments, gunpowder and hazardous

chemicals. ) and those involving investment beyond themaximum limits. Such cases are cleared by the Foreign

Investment Promotion Board in a transparent, efficient, time-

bound and predictable manner. The FIPB meets once a week.

The Department of Industrial Policy and Promotion is the nodal

agency for information and assistance to foreign investors.

Their website www.dipp.nic.in has comprehensive information

for foreign investors and gives weekly update on proposals forforeign investment under consideration. It also gives

information on projects available for foreign investors and

contains online applications for clearances.

The Various state governments in India offer competitive

incentives and attractions to foreign investors.

Intellectual Property Rights Laws of India are well on track

with the rest of the world. With the third amendment to the

already substantially revised Patents Act by end 2004, India

would be TRIPS-Compliant before the deadline of 1st January,

2005.

Capital account convertibility for foreign investors.

Potential for investment in India

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The Government is focusing on expansion and modernization

of roads and has opened this up for private sector

participation. 48 new road projects worth US$ 12 billion are

under construction. Development and upgradation of roadswill require an investment of US$ 24 billion till 2008. Private

sector participation in road projects will grow significantly.

Special incentives and tax-breaks are given for certain sectors

such as power, electronics, telecom, software, hydrocarbons,

R&D and exports.

The railway sector will need an investment of US$ 22 billion

for new coaches, tracks, and communications and safetyequipment over the next ten years.

Upgradation and modernization of airports will require US$ 33

billion investment in the next ten years.

There is potential for investment in the expansion and

modernization of ports. The government has taken up a

US$22 billion 'Sagarmala' project to develop the Port andShipping sector under Public-Private Partnership. 100 percent

FDI is permitted for construction and maintenance of ports.

The government is offering incentives to investors.

The Ministry of Power has formulated a blueprint to provide

reliable, affordable and quality power to all users by 2012.

This calls for investment of US$ 73 billion in the next five

years. Opportunities are there for investment in powergeneration and distribution and development of non-

conventional energy sources.

There is potential for investment in urban infrastructure

projects. Water supply and sanitation projects alone offer

scope for annual investment of US$ 5.71 billion.

The entire gamut of exploration, production, refining,

distribution and retail marketing present opportunities for FDI.

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India has an estimated 85 billion tones of mineral reserves

remaining to be exploited. Potential areas for exploration

ventures include gold, diamonds, copper, lead zinc, cobalt

silver, tin etc. There is also scope for setting up manufacturingunits for value added products.

The telecom market, which is one of the world's largest and

fastest growing, has an investment potential of US$ 20-25

billion over the next five years. The telecom market turnover

is expected to increase from US$ 8.6 billion in 2003 to US$ 13

billion by 2007.

The IT industry and IT-enabled services, which are rapidlygrowing offer opportunities for FDI.

India has emerged as an important venue for the services

sector including financial accounting, call centers, and

business process outsourcing. There is considerable potential

for growth in these areas.

Biotechnology and Bioinformatics, which are in thegovernment's priority list for development, offer scope for FDI.

There are over 50 R&D labs in the public sector to support

growth in these areas.

The Indian auto industry with a turnover US $ 12 billion and

the auto parts industry with a turnover of 3 billion dollars offer

scope for FDI.

The government is encouraging the establishment of world-class integrated textile complexes and processing units. FDI is

welcome.

While India has abundant supply of food, the food processing

industry is relatively nascent and offers opportunities for FDI.

Only 2 percent of fruits and vegetables and 15 percent of milk

are processed at present. There is a rapidly increasing

demand for processed food caused by rising urbanization and

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income levels. To meet this demand, the investment required

is about US$28 billion. Food processing has been declared as

a priority sector.

The Healthcare industry is expected to increase in size fromits current US$ 17.2 billion to US$ 40 billion by 2012.

The Government has recently established Special Economic

Zones with the purpose of promoting exports and attracting

FDI. These SEZs do not have duty on imports of inputs and

they enjoy simplified fiscal and foreign exchange procedures

and allow 100% FDI.

The travel and tourism industry which has grown to a size of

US$ 32 billion offers scope for investment in budget hotels

and tourism infrastructure.

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INDIA’S SHARE

India’s share in FDI inflows among developing countries reached a

peak of 1.9 per cent in 1997. It declined sharply to 1 per cent in

1999 and 2000 but has recovered sharply to 1.7 per cent in

2001(Table 3.2). India’s performance on the FDI front has shown a

significant improvement since last year. FDI inflows grew by 65 per

cent to US$ 3.91 billion during 2001-02 thus exceeding the previous

peak of US $ 3.56 billion in 1997-98 (as per BOP accounts of RBI).

This growth of 65 per cent is particularly encouraging at a time

when global FDI inflows have declined by over 40 per cent.1 The

upward trend in FDI inflows has been sustained during the current

financial year with FDI inflows during April-June 2002 about double

that during the corresponding period of 2001 (as per DIPP data).

In 2000, China with 17 per cent had the highest share of developing

country FDI followed by Brazil with 13.9 per cent of developing

country FDI. The gap between the shares of these two countriesnarrowed during the nineties with Brazil gradually catching up with

China, but has again widened in 2001. Though the share of

Argentina, South Korea, Singapore, Malaysia and Taiwan is much

lower than that of China and Brazil, it was, till 2000 two to five times

that of India’s measured inflow.

The most remarkable transformation has occurred in South Korea,whose share in developing country FDI inflows was identical to that

of India in 1993, and which fell below that of India in 1994 and 1995,

but was four times that of India’s in 2000 (Figure 3.2). Because of

the Asian crisis in 1997-98 and the effect of sanctions on investor’s

sentiment, India’s share of developing country FDI fell at the end of

the nineties. There has however been a significant improvement

during 2001.

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India’s measured FDI as a percentage of total Gross Domestic

Product(GDP) is quite low in comparison to other competing

countries (Table 3.3). India the 12 th largest country in the world interms of GDP at current exchange rates is able to attract FDI equal

only to 0.9 per cent of its GDP in 2001. In contrast FDI inflows into

Vietnam were 6.8 per cent of its GDP in 2000. Even Malaysia, which

has recently developed an image of being somewhat against the

globalisation paradigm, receives FDI equal to 3.9 per cent of its

GDP. Similarly China attracts FDI equal to 3.8 per cent of its GDP.

Thailand, which has a relatively low FDI-GDP ratio among the majordeveloping country recipients of FDI, had a ratio four times that of

India in 2000. This gap probably narrowed in 2001 and could narrow

further in 2002 if the recent acceleration in growth of FDI into India

can be sustained.

India’s FDI inflow estimates, in the Balance of Payments do not

include reinvested earnings (by foreign companies), inter-company

debt transactions (subordinated debt) and overseas commercial

borrowings by foreign direct investors in foreign invested firms, as

per the standard IMF definitions. Methodologically, reinvested

earnings are required to be shown notionally as dividends paid out

under investment income in current account and as inflow of FDI.

The other capital, in turn, covers the borrowing and lending of funds

– including debt securities and suppliers’ credit – between direct

investors and direct investment enterprises. From a technical point

of view, it is well recognized that it is quite difficult to capture

‘reinvested earnings’ through the reporting arrangements for

foreign exchange transactions, mainly because such transactions do

not take place though it have to be imputed in the balance of

payments statistics. Direct investment, other capital transactions

between direct investors and direct investment enterprises,

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however, pass through the banking channel. There exists, however,

the problem of identifying and isolating mutual borrowing and

lending of funds among direct investors and direct investment

enterprises. Recognizing the above-mentioned constraints, greaterreliance needs to be placed on collection of such data through direct

investors’ survey. The proper coverage of such transactions in India

depends, therefore, upon the availability of information through the

survey. The data on inward FDI for India at present do not include

reinvested earnings and ‘direct investment other capital.’ In this

context, the National Statistical Commission recommended

conducting periodical surveys on dividends and profits arising out of

foreign direct investment and portfolio investment separately. In

pursuance of the recommendation, a survey is being launched by

the Reserve Bank of India to collect detailed information on FDI.

Some estimate on reinvested earnings and other capital would be

available from the survey and the data on inward FDI could be

subsequently revised to include the data on reinvested earnings and

other capital .

This issue has come into sharp focus because Dr. Guy Pfefferman,

Chief Economist of the IFC estimated that India’s actual FDI inflow

might be between US$ 5 billion and US$ 8 billion during 2001.

The upper limit of US$ 8 billion is based on the assumption of a 40

per cent return on equity to foreign investors, which seems on the

face of it to be somewhat high. It should be remembered, however,

that in contrast to several other countries in Asia FDI inflows into

India started over a half century ago. If the retained earnings from

all these are cumulated, then the current returns on the stock of

retained earnings would have to be added to the returns on

measured FDI. Added together, these total returns would be high

relative to the stock of measured FDI.

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There is an additional problem of non-comparability when

comparing the FDI flows of different countries with China, which also

applies to China-India comparisons. According to Global

Development Finance, 2002, round tripping amounts to nearly 50per centof total FDI inflows into China in 1999 and 2000. This would

reduce China’s real FDI share to about 9 per cent of developing

country inflows and its adjusted FDI-GDP ratio to 1.8 per cent in

2000. Thus in 2000 the adjusted FDI-GDP ratio for China would be

only double the adjusted FDI-GDP ratio for India

Foreign Direct Investment is one of the key variables for achieving

an eight per cent growth during the Tenth Plan (2002-07). FDI isnecessary for achieving the growth targets of the Tenth Plan. The

Planning Commission constituted a Steering Committee on Foreign

Direct Investment in August 2001, to achieve these objectives.

Foreign Direct Investment (FDI) flows are usually preferred over

other forms of external finance because they are non-debt creating,

non-volatile and their returns depend on the performance of the

projects financed by the investors. FDI also facilitates international

trade and transfer of knowledge, skills and technology. In a world of

increased competition and rapid technological change, their

complimentary and catalytic role can be very valuable.

Foreign Direct Investment in India has constituted 1 per cent of Gross fixed capital formation in 1993, which went up to 4 per cent in

1997. The Tenth Plan approach paper postulates a GDP growth rate

of 8 percent during 2002-07. Given the Incremental Capital-Output

Ratio (ICOR) and the projected level of domestic savings it leaves a

savings gap/current account deficit of around 2.2 per cent. This

implies an increase in FDI from the present levels of $3.9 billion in

2001-02 to at least around US $8 billion a year during 2002-07.

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‘Recognizing the importance of making a quantum jump compared

with the past performance, the Prime Minister directed the Planning

Commission to examine the feasibility of doubling per capita incomein the next ten years. With the population expected to grow at about

1.6 per cent per annum, this target requires the growth of GDP to be

around 8.7 per cent over the Tenth and Eleventh Plan periods. The

growth rate of 8.7 per cent is needed to double per capita income

over the next ten years, but it can be viewed as an intermediate

target for the first half of the period ’. With the average ICOR around

4.0 as witnessed during the Eighth and Ninth Plan periods, thesaving- investment requirement for an 8 per cent annual growth

works out to 32 per cent of GDP, since, Gr = 100 × s/k, s = Gr × k ×

100 = .08 × 4 ×100= 32 per cent.

Where, Gr = Growth rate, s = average propensity to save / rate of

investment, k = incremental capita output ratio (ICOR).

The rate of domestic savings has been in the range of 22-24 per

cent of GDP during the last four years. These rates are lower than

the earlier years, presumably due to decline in government savings

on account of payment of arrears etc. arising from Fifth Pay

Commission Recommendations. The base line savings rate has,

therefore, been assumed to be 26.3 per cent . This still leaves a gap

of another 6.3 per cent to reach the 32.6 per cent of savings rate.

Assuming further improvement, it is projected a domestic savings

rate of 29.8 per cent of GDP, for the Tenth Plan period. This still

leaves a gap of 2.8 per cent for the required investment. Quite

obviously, this calls for sourcing foreign savings to bridge the gap.

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CAUSES OF LOW FDI

Though economic reforms welcoming foreign capital were

introduced in the nineties it does not seem so far to be really

evident in our overall attitude. There is a lingering perception

abroad that foreign investors are still looked at with some suspicion.

There is also a view that some unhappy episodes in the past have a

multiplier effect by adversely affecting the business environment in

India. Besides the “Made in India” label is not conceived by the

world as synonymous with quality.

When a foreign investor considers making any new investment

decision, it goes through four stages in the decision making process

and action cycle, namely, (a) screening, (b) planning, (c)

implementing and (d) operating and expanding. The biggest barrier

for India is at the first, screening stage itself in the action cycle.

“Often India looses out at the screening stage itself” (BCG). This is

primarily because we do not get across effectively to the decision-making “board room” levels of corporate entities where a final

decision is taken. Our promotional effort is quite often of a general

nature and not corporate specific.

India is, moreover, a multi-cultural society and a large number of

multinational companies (MNC) do not understand the diversity and

the multi-plural nature of the society and the different stakeholders

in this country. Though in several cases, the foreign investor isdiscouraged even before he seriously considers a project, 220 of the

Fortune 500 companies have some presence in India and several

surveys (JBIC, Japan Exim bank, A T Kearney) show India as the most

promising and profitable destination. On the other hand China is

viewed as ‘more business oriented,’ its decision-making is faster

and has more FDI friendly policies (ATK 2001). Despite a very similar

historical mistrust of foreigners and foreign investment arising fromcolonial experience, modern (post 1980 China) differs fundamentally

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from India. Its official attitude to FDI, reflected from the highest level

of government (PM, President) to the lowest level of government

bureaucracy (provinces) is one of consciously enticing FDI with a

warm welcome. They recognise the multifaceted and mutualbenefits arising from FDI.

All investments, foreign and domestic are made under the

expectation of future profits. The economy benefits if economic

policy fosters competition, creates a well functioning modern

regulatory system and discourages ‘artificial’ monopolies created by

the government through entry barriers. A recognition andunderstanding of these facts can result in a more positive attitude

towards FDI.

POLICY FRAMEWORK

Most of the problems for investors arise because of domestic policy,

rules and procedures and not the FDI policy per se or its rules and

procedures. The FDI policy, which has a lot of positive features, is

summarised first, before highlighting the domestic policy related

difficulties that are commonly the focus of adverse comment by

investors and intermediaries (Appendix section 8.3).

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FDI Policy

India has one of the most transparent and liberal FDI regimes

among the emerging and developing economies.8 By FDI regime we

mean those restrictions that apply to foreign nationals and entities

but not to Indian nationals and Indian owned entities. The

differential treatment is limited to a few entry rules, spelling out the

proportion of equity that the foreign entrant can hold in an Indian

(registered) company or business. There are a few banned sectors

(like lotteries & gaming and legal services) and some sectors with

limits on foreign equity proportion. The entry rules are clear and

well defined and equity limits for foreign investment in selected

sectors such as telecom quite explicit and well known. Most of the

manufacturing sectors have been for many years on the 100 per

cent automatic route. Foreign equity is limited only in production of

defence equipment (26 per cent), oil marketing (74 per cent) and

government owned petroleum refineries (26 per cent). Most of the

mining sectors are similarly on the 100 per cent automatic route,

with foreign equity limits only on atomic minerals (74 per cent), coal

& lignite (74 per cent), exploration for oil (51 per cent to 74 per

cent) and diamonds and precious stones (74 per cent). 100 per cent

equity is also allowed in non-crop agro-allied sectors and crop

agriculture under controlled conditions (e.g. hot houses). In the case

of infrastructure services, there is a clear dichotomy. While

highways and roads, ports, inland waterways and transport, and

urban infrastructure and courier services are on the 100 per cent

automatic route, telecom (49 per cent), airports (74 per cent), civil

aviation (40 per cent) and oil and gas pipelines (51 per cent) have

foreign equity limits.

India also has a clear policy of FDI in services, with 100 per centautomatic entry into many services such as construction,

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townships/resorts, hotels, tourism, films, IT/ISP/ email/voice mail,

business services & consultancy, renting and leasing, VCFs and

VCCs, medical/health, education, advertising and wholesale trade.

The financial intermediation section has sectoral caps like banking(49 per cent), insurance (26 per cent), as do some services like

professional services (51per cent).

Subject to these foreign equity conditions a foreign company can

set up a registered company in India and operate under the same

laws, rules and regulations as any Indian owned company would.

Unlike many countries including China, India extends National Treatment to foreign investors. There is absolutely no discrimination

against foreign invested companies registered in India or in favour

of domestic owned ones. There is however a minor restriction on

those foreign entities who entered a particular sub-sector through a

joint venture with an Indian partner. If they (i.e. the parent) want to

set up another company in the same sector it must get a no-

objection certificate from the joint-venture partner. This condition isexplicit and transparent unlike many hidden conditions imposed by

some other recipients of FDI. There are also a few prudential

conditions on the sale of shares in unlisted companies and the

above market price sale of shares in public companies.

Domestic Policy

The domestic policy framework affects all investment, whether the

investor is Indian or foreign. To an extent, foreign companies or

investors that have set up an Indian company or Joint Venture have

become indigenised and thus can operate more or less

competitively with other Indian company. They adjust themselves to

the milieu. This is not, however, true of foreign direct investors who

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are coming into India for the first time. To the uninitiated the

hurdles look daunting and the complexity somewhat perplexing.

Among the policy problems that have been identified by surveys as

acting as additional hurdles for FDI are laws, regulatory systems andGovernment monopolies that do not have contemporary relevance.

Illustratively, the outdated Food Price Order (FPO) and Prevention of

Food Adulteration Act are a major hurdle for FDI in food processing.

The latter makes even a technical or minor violation subject to

criminal liability. As a Task force had recommended some years

ago, that we need to formulate a single integrated Food Act

(including weights & measures). This should also make provision for

a modern Food Regulatory system with a single integrated

regulator. Based on the announcement in the last budget a Group of

Ministers has been constituted to evolve a modern food law. The

Essential Commodities Act adds to the difficulty of entering the food

processing industry by making the procurement, storage and

transport of agricultural produce subject to many vagaries and

undermining the competitive advantage that India possesses. The

Central government has recently taken steps to reduce the ambit of

this act and eliminate controls on movement and storage of food

grain. Initial steps have also been taken in the

direction of putting this act into suspended state to be invoked only

by a Central government notification to be applied only to well-

specified emergency conditions like drought, floods and other

natural disasters for a specific area and duration. Othersimplification measures announced in the last budget were the

amendment of the Milk and Milk products Control Order to remove

restrictions on milk processing capacity, decanalisation of the export

of agricultural commodities and phasing out of remaining export

controls, expansion of futures and forward trading to cover all

agricultural commodities and amendment to the Agriculture Produce

Marketing Acts to enable farmers to sell directly to potentialprocessors.

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Similarly labour laws discourage the entry of green field FDI because

of the fear that it would not be possible to downsize if and when

there is a downturn in business. Labour laws, rules and procedureshave led to a deterioration in the work culture and the comparative

advantage that is even beginning to be recognised by responsible

Trade Unions. Pursuant to the announcement in the 2001-02 budget

that labour laws would be reformed, a Group of Ministers was set up

to work out the modalities. The Labour Commission has in the

meanwhile also submitted its report. The Group of Ministers will

suggest specific changes in the laws for the approval of the Cabinet.SSI reservations further limit the possibility of entering labour

intensive sectors for export. Dereservation of readymade garments

during the year 2000 and de-reservation of fourteen other items

related to leather goods, shoes and toys during 2001 is a welcome

development. About 10 per cent of the items on the list of items

reserved for the small-scale sector have been freed over the past

few years. These two policy constraints are particularly relevant forexport oriented FDI . More flexible labour laws that improve work

culture and enhance productivity and SSI de-reservations will help

attract employment generating FDI inflows of the kind seen in South

East Asia in the seventies and eighties and in China since the

nineties.

The Urban Land Ceiling Acts and Rent Control Acts in States are a

serious constraint on the entire real estate sector. This is anothersector that has attracted large amounts of FDI in many countries

including China. Like the labour-intensive industrial sectors it can

also generate a large volume of productive employment. These Acts

need to be repealed if a construction boom is to be initiated that

would reverse the decline in overall investment, attract FDI,

generate employment and make rental accommodation available to

the poor. The Centre has already repealed the Urban Land Ceiling

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Act but each State has to issue a notification to repeal the Act in

that State. Rent Control is a State subject and each State would

have to reform its Rent control Act. The Central government has set

up an Urban Reform Facility to provide funds to States that repealthe State Land Ceiling Act, reform the Rent Control Act and carry

out other urban reforms. Weak credibility of regulatory systems and

multiple and conflicting roles of agencies and government has an

adverse impact on new FDI investors, which is greater than on

domestic investors. All monopolists have a strong self-interest in

preventing new entrants who can put competitive pressure. In the

past, government monopoly in infrastructure sectors has slowed

down policy reform. FDI was discouraged by the fear that pressure

exerted by government monopolies through their parent

departments would bias the regulatory system against new private

competitors. As regulatory systems and procedures move up the

learning curve, initial problems stemming from lack of regulatory

knowledge/experience in sectors such as Telecom have been

gradually overcome. Similarly, in the past, strategy and

implementation problems connected with dis-investment created

great uncertainty and increased policy/regulatory risk, resulting in a

lack of interest of FDI investors in bidding for these companies. With

a much clearer strategy and effective implementation over the past

year and a half, there should be better inflow on this account.

According to some consultants, in the banking sector, controls on

activity dampen FDI inflows. It is alleged that persistent fears of

impending “fiscal crisis” is another constraint, and that a well

articulated strategy for medium term fiscal consolidations would

address these concerns. The absence of product patents in the

chemicals sector has reduced inflows into the drugs and

pharmaceuticals sector.

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Though the foreign trade and tariff regime for Special Export Zones

(SEZs) approximates a genuine free trade zone, the other elements

of the policy framework and procedures remain virtually the same

as in the Domestic Tariff Area. The SEZs are therefore still not fullyon par with the Export Zones of China with respect to Labour

Intensive production (Appendix section 8.4).

PROCEDURES:

According to Boston Consulting Group, investors find it frustrating to

navigate through the tangles of bureaucratic controls and

procedures. McKinsey (2001) found that, the time taken for

application/bidding/approval of FDI projects was too long. Multiple

approvals, excessive time taken (2-3 years) such as in food

processing and long lead times of up to six months for licenses for

duty free exports, lead to “loss of investors’ confidence despitepromises of a considerable market size.”

Bureaucracy and red tape topped the list of investor concerns as

they were cited by 39 per cent of respondents in the A T Kearney

survey. Of the three stages of a project, namely general approval

(e.g. FDI, investment licence for items subject to licence), clearance

(project specific approvals e.g. environmental clearance for specific

location and product) and implementation, the second was the most

oppressive.12 Three-fourth of the respondents in the survey

indicated that (post-approval) clearances connected with

investment were the most affected by India’s red tape. According to

a CII study, a typical power project requires 43 Central Government

clearances and 57 State Government level (including the local

administration) clearances. Similarly, the number of clearances

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for a typical mining project are 37 at the Central Government level

and 47 at the State Government level. Though the number of

approvals/clearances may not always be much lower in the OECD

countries such as the USA and Japan the regulatory process istransparent with clear documentation requirements and decision

rules based largely on self-certification, and generally implemented

through the legal profession.

The Government has set up an inter-ministerial Committee to

examine the existing procedures for investment approvals and

implementation of projects and suggest measures to simplify andexpedite the process for both public and private investment. The

Committee, which was set up in September 2002, has submitted

Part I of its report (dealing with Public sector projects) to the

Government, which is under examination. A sub-Group of the

Committee is specifically looking into simplification of procedures

relating to private investment. The respondents of the ATK survey

also indicated that the divide between Central and Stategovernments in the treatment of foreign investors could undermine

the FDI promotion efforts of the Central Government. The FICCI

(2001) study similarly cites centre-state duality as creating

difficulties at both the approval and project implementation stages.

These studies find that the bureaucracy in general is quite unhelpful

in extending infra-structural facilities to any project that is being set

up. This leads to time and cost overruns . At an operational level,multiple returns have to be filed every month. One effect of these

bureaucratic delays is the low levels of realization of FDI inflows vis-

à-vis the proposals cleared (CII). Although the realization rate has

improved to 45 per cent in 2000-01 compared to 21 per cent in

1997, it remains a matter of concern. The precise reason for the low

levels of realization is the post approval procedures, which has in

the past played havoc with project implementation.

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FIPB

It should be noted, that the delays mentioned by foreign investors

are not at the stage of FDI approval per se i.e. at the entry point

whether through RBI automatic route or FIPB approval.14 The FIPB

considers application on the basis of notified guidelines and

disposes them within a 6-8 week timeframe, as has been laid down

by the Cabinet. The entire process of FIPB applications, starting

from their registration through to listing on FIPB agenda and their

final disposal and despatch on official communication is placed on

the website, which adds to the transparency of decision-making andenhances investor confidence. Similarly, the underlying advisory

support in the form of online chat facility and dedicated email

facility for existing and prospective investors has created an

investor friendly image. A FICCI Study on, “Impediments to

Investment” (January 2002) has acknowledged that the Central level

FIPB clearances have been successfully streamlined. The FIPB

approval system has also been rated as world class by independentsurveys conducted by CII and JICA. The FIIA framework has also

been strengthened recently by adoption of a six-point strategy. This

includes close interaction with companies at both operational and

board room level, follow up with administrative ministries, State

Governments and other concerned agencies and sector specific

approach in resolving investment related problems. The major

implementation problems are encountered at the state level, asproject implementation takes place at the state level. FICCI in its

study on “Impediments to Investment” has observed that the

Regional meetings for foreign investors under the FIIA chaired by

the Industry Secretary are now turning out to be problem-solving

platforms.

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Quality of Infrastructure

Poor infrastructure affects the productivity of the economy as a

whole and hence its GDP/per capita GDP.15 It also reduces the

comparative advantage of industries that are more intensive in the

use of such infrastructure. In the context of FDI, poor infrastructure

has a greater effect on export production than on production for the

domestic market. FDI directed at the domestic market suffers the

same handicap and additional costs as domestic manufacturers that

are competing for the domestic market. Inadequate and poor quality

roads, railroads and ports, however raise export costs vis-a-visglobal competitors

having better quality and lower cost infrastructure.16 As a foreign

direct investor planning to set up an export base in

developing/emerging economies has the option of choosing

between India and other locations with better infrastructure, India is

handicapped in attracting export oriented FDI. Poor infrastructure is

found to be the most important constraint for construction and

engineering industries. “Law, rules, regulations relating to

infrastructure are sometimes missing or unclear e.g. LNG and the

power sector is beset with multiple problems such as State

monopoly, bankruptcy and weak regulators” McKinsey 2001).

State Obstacles

Taxes levied on transportation of goods from State to State (such as

octroi and entry tax) adversely impact the economic environment

for export production. Such taxes impose both cost and time delays

on movement of inputs used in production of export products as

well as in transport of the latter to the ports. Differential sale andexcise taxes (States and Centre) on small and large companies are

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found to be a deterrent to FDI in sectors such as textiles (McKinsey

2001). Investments that could raise the productivity and Quality of

textiles and thus make them competitive in global markets remain

unprofitable because they cannot overcome the tax advantagegiven to small producers in the domestic market.

Globally the service sector received 43 per cent of total investment

in emerging markets in 1997 (ATK 2001). As this is a State subject,

the States have to take the lead in simplifying and modernising the

policy and rules relating to this sector. At the local level (sub-state)

issues pertaining to land acquisition, land use change, power

connection, building plan approval are sources of projectimplementation delay. The State level issues are also being

considered by the Govindarajan committee with a view to seeing

how they can be alleviated.

Legal Delays

Though India’s Anglo Saxon legal system as codified is considered

by many legal experts to be superior to that of many other

emerging economies it is often found in practice to be an obstacle

to investment. One of the reasons is the inordinate delay are the

interlocutory procedures that characterise judicial procedures. As a

result the “Rule of law,” which has often been cited as one of the

attractive features of the Indian economy for foreign investors, isfound to be a significant positive factor by only 3 per cent for FDI in

India. In contrast, 26 per cent of all those surveyed by ATK (2001)

cited this as an important factor in their global investment

decisions.

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There is scope for greater FDI inflow in the insurance sector if the

cap of 26 per cent foreign equity is raised. The experience of

opening up of this sector to FDI has set at rest the fears that were

expressed earlier regarding the effect of such opening. The publicinsurance monopolies have responded to private entry by trying to

increase their efficiency and effectiveness. This process would be

enhanced and sustained by more effective competition. The

regulatory system is in place and the Insurance Regulatory

Authority (IRDA) is functioning effectively. The Committee feels that

foreign equity cap can now be raised to 49 per cent.

With a large and mature banking system about 80 per cent of whoseassets are in the public sector, the entire private sector is a

relatively small player. Despite this the private sector has

introduced new products and processes into banking and forced the

public sector banks to compete in these areas. This process would

be accelerated and enhanced if the FDI limits for private banks are

raised from 49 per cent to 100 per cent, as few new foreign players

have entered so far. With RBI recognized as one of the mostcompetent regulators in the country, both domestic and foreign

entrants can be effectively regulated.

Given effective regulation, the entry of large foreign banks will

enhance competition in the private banking and eliminate any

temporary monopolies that may have arisen with innovation. The

minimum investment norms for FDI investment in Non-Bank

Financial

Companies no longer serve a useful purpose (as all NBFCs have to

satisfy regulatory norms) and should be deleted. Similarly the equity

limits on investing companies (for infrastructure and social sectors)

should be raised to 100 per cent (from 49 per cent) and put on the

automatic route. 100 per cent foreign equity is already allowed in

courier services and this can be transferred to the automatic route.

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plantations at and after Independence right till the forced dis-

investment in the seventies. Other (non-tea) plantations are

generally smaller with a much larger proportion owned by small

farmers. A gradual approach that allows these owners to bring inforeign equity while retaining majority ownership is therefore

preferable. There is currently a somewhat complicated regime for

FDI in non-retail trading. Automatic 100 per cent FDI is allowed in

bulk handling, storage and transport of food and 51 per cent in

export trading. 100 per cent equity is also allowed through the FIPB

route in SSI products, hi-tech products, e-commerce (with 26 per

cent disinvestments in 5 years), cash and carry wholesaling and

warehousing. At least as far as these permitted areas of trading are

concerned the regime should be simplified by allowing 100 per cent

foreign equity through the automatic route with clearly spelt out

conditions (if any). The retail sector in India is dispersed,

widespread, labour intensive and disorganised. In the light of this it

is not thought desirable at present to lift the ban on FDI in retail

trade

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LITERATURE REVIEW

Definition of Foreign Direct Investment

FDI is the process whereby residents of one country (the home

country) acquire ownership of assets for the purpose of controlling

the production, distribution and other activities of a firm in another

country (the host country).

IMF Definition

According to the BPM5, foreign direct investment is the category of

international investment that reflects the objective of obtaining a

lasting interest by a resident entity in one economy in an enterpriseresident in another economy. The lasting interest implies the

existence of a long-term relationship between the direct investor

and the enterprise and a significant degree of influence by the

investor on the management of the enterprise.

Benefits of FDI

Host countries derive several benefits from FDI.

o Additional equity capital from whose profits yield tax

revenues

o Transfer of patented technologies

o Access to scarce managerial skills

o Creation of new jobs

o Access to overseas market networks and marketing expertiseo Reduced flight of domestic capital abroad

o Long term commitment to successful completion of FDI

projects

o A catalyst for associated lending for specific projects, thus

increasing the availability of external funding.

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Foreign Direct Investment (FDI) has been one of the most

fascinating and intriguing topics among researchers in international

business. It is one significant form of rapid international expansion

to increase ownership of assets, derive location-specific advantagesand acquire additional knowledge. Many scholars have followed

either of two schools of thought in explaining FDI. The

microeconomic approach [Hymer 1976; Caves 1974; Kindleberger

1969] attempts to explain why firms of one country are successful in

penetrating into other markets while the macroeconomic approach

[Aliber 1970; Buckley and Casson 1976; Grosse and Trevino 1995]

tries to examine why firms seek international expansion. Our study

follows the latter approach, focuses on the impact of

macroeconomic variables on FDI and seeks to explain the recent

increase of inflow of FDI into India.

While studies of FDI in the US, Japan and Europe have been

prevalent, similar research on FDI in India is however limited.

Restricted policy environment towards FDI and weak property

protection rights have been described to cause significant R&Dspillovers in Indian pharmaceutical sector [Feinberg and Majumdar

2001]. The relatively slow growth of FDI from Japanese MNCs in

India as compared to China is attributed to the desire to gain only

market access in India [Anand and Delios 1996].

FOREIGN INVESTMENTS

Foreign investment can take two forms: foreign equity investors can

simply buy a stake in an enterprise or take a direct interest in its

management. The first, indirect form of investment is called foreign

portfolio investment. Foreign direct investment (FDI) involves

more than just buying a share or a security. It is the amount of

financing provided by a foreign owner who is also directly involved

in the management of the enterprise. For statistical purposes, the

International Monetary Find ( IMF ) defines foreign investment as

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(FDI) when the investor holds 10% or more of the equity of an

enterprise.

Foreign investment has clearly been a major factor in stimulating

economic growth and development in recent times. Thecontribution that transnational corporations can make as agents of

growth, structural change and international integration has made

FDI a coveted tool of economic development. Foreign Direct

Investment (FDI) is one of the most important sources of capital. FDI

links the host economy with the global markets and fosters

economic growth.

In India, too, there has been a growing recognition that any credibleattempt towards economic reforms must involve up gradation of

technology, scale of production and linkages to the integrated

global production system through the participation of transnational

corporations. In 1991, India began a liberalization process. The

government opened 33 sectors to majority- owned foreign

investment (up to 51%) with “automatic” approval by the Reserve

Bank of India (rather than an inter- ministerial committee managedby the Ministry of Industry). In addition, a cabinet-level Foreign

Investment Promotion Board (FIPB) was established in the Prime

Minister’s office to approve higher levels of foreign ownership in the

33 industries, as well as in other industries. The FIPB has now been

put under the Ministry of Industry.

FDI potential is determined by seven factors -- market, access to

resources, low production costs, access to export markets, cultural-

cum-geographic proximity, competitor presence and a host of

government incentives.

In India, Foreign Investment Promotion Board of India (FIPB) has

approved projects worth $54 billions till now, since the opening up

of the economy. However the actual investment that has flown into

the country till now is $ 17 billion. In 1998,the FDI inflows in India

fell by $1 billion to $2.3 billions.

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India figures at the bottoms rung of the transnational index of the

host countries. UNCTAD calculates this index. It is calculated as an

average of four factors: FDI inflows as a percentage of Gross fixed

capital formation for the last three years; FDI inward stock as apercentage of GDP; the value added by foreign affiliates measured

as a percentage of GDP; and employment by foreign affiliates as a

percentage of total employment.

The FDI policy determines the ease of accessing the domestic

market and the terms and conditions of entry. But the other policy

regimes and the operating environment are also very important.

Interface between Trade and FDI

Liberalization of external trade can provide a strong stimulus to and

growth rate can be a potent factor in attracting FDI. Market size and

growth rate are the principal determinants of FDI flows. On the

other hand, reduction in import duties, which is a crucial element of

the trade liberalization agenda, can have a dampening effect on FDI

inflows. This mainly occurs, as the foreign firms are able to service

these markets through exports rather than setting up production

capabilities overseas. However given the size of the Indian market

and an expectation of a reasonable rate of growth in personal

income, this danger may not be there for India.

Export expansion, an important element of the Economic Reforms

process, can get a strong boost from FDI, as the experiences of

China, Thailand and Malaysia reveal. FDI can help in achieving

international competitiveness by changing the scale of competition

in the domestic market, thereby forcing the local producers to

upgrade their product profile in a cost effective way. However it is

also possible that the inflow of FDI can throttle competition when

global brand-holders manage to acquire leading domestic brands or

drive them away. It may therefore be necessary to develop a

collateral legal system to prevent the occurrence of such events,

which will prove anti-competitive.

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ECONOMIC ADVANTAGES OF FDI

Foreign direct investment brings in investible resources to host

countries, introduces modern technologies and provides access to

export markets. The trans-national companies (TNCs/MNEs) are the

driving force behind foreign direct investment. They have large

internal (inter-firm) markets, access to which is available only to

affiliates. They also control large markets in unrelated parties

having established brand names and distribution channels spread

over several national locations. They can, thus, influence granting of

trade privileges in their home (or in third) markets. In other words,

they enjoy considerable advantages in creating an initial export

base for new entrants. While there are TNCs/MNEs with sales

turnover larger than the national incomes of many developing

countries, there are also many new entrants, which are small and

medium sized enterprises (SMEs) . Many of these firms find it

necessary to invest overseas to overcome lack of opportunities for

growth at home, access skilled labour abroad and reduce cost. An

increasing number of such firms are from developing countries.

Some of these firms belong to ‘economies in transition’ that

previously had isolated themselves from international investment.

As a result, the number of MNEs has increased substantially and is

estimated to have gone up to more than 50,000 by the end of the

1990’s. Between the end of 1960’s and the end of 1990’s, the

number of MNEs in fifteen of the most important developed

countries itself had gone up from 7000 to 40,000. FDI inflows mirror

this expansion that has gone up from an investment level of $ 56

billion at the beginning of the 1980’s to $ 693 billion in 1998. It

reached an investment level of $ 188 billion in developing countries

alone.

The changing context and the quest for location for manufacture

and trade have brought about a change in corporate strategies.

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According to the UNCTAD, United Nations (1999 ) , following

developments are particularly noteworthy:

A shift from stand-alone, relatively independent, foreign affiliates

to integrated international production systems relying on

specialized affiliates to service the entire TNC/MNE system.

Within the framework of this international intra-firm division of

labour, any part of the value-added chain of an enterprise can be

located abroad while remaining fully integrated into a corporate

network. Corporate strategies of this kind seek to exploit regional

or global economies of scale and a higher degree of functional

specialization.

This shift broadens the range of resources sought by MNEs in

host countries, making firms more selective in their choices.

However, it can also encourage FDI in countries that cannot

provide a wide range of resources but have some specific assets

that are sought by MNEs ( e.g. accounting or software skills).

A shift towards greater use of non-equity and cooperative

relationships with other enterprises, such as alliances,

partnerships, management contracts or sub-contracting

arrangements. These arrangements serve a variety of corporate

objectives. They can provide better access to technologies or

other assets allowing firms to share the cost and risk of

innovatory activities. They can reduce the production cost of labour-intensive products.

Emerging of a network type of organization. This expands the

scope of interactions between TNCs and enterprises from host

countries, and also the forms of these interactions. These

changing corporate strategies bring a different pattern of

international economic integration. Originally, this involved the

integration of markets through arm’s length trade – “shadow”

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integration. Integrated international production moves this

integration to the level of production in all its aspects – “deep”

integration.

In the process, a significant part of international transactionsbecomes internalized, i.e. takes the form of transactions between

various parts of transnational corporate systems located in different

countries. The ability of firms to allocate their economic assets

internationally, and the international production system created in

the process, have become themselves a part of the new context.

Crowding-in and crowding-out impacts of FDI

Crowding-in is said to take place when foreign direct investment

stimulates new investment in downstream or upstream production

by other foreign or domestic producers. While investments in the

export sector has the potential for encouraging downstream

production, investments in infrastructure encourage upstreamproduction. The TNCs/MNEs may provide preferential opportunity for

exports through access to large internal (inter-firm) markets, which

is available only to affiliates set up in host countries. The capital-

flow induced growth and the accompanying higher efficiency of the

economy may, in turn, induce higher investments. However, if FDI

comes in sectors in which the domestic firms are themselves

contemplating investment, the very act of foreign investment maytake away the investment opportunities that were open to domestic

enterprises. Moreover, if the TNCs/MNEs raised funds for their

expansion programmes from the host country, this might out-

compete the domestic firms in the financial markets and thus

compete them out. The decision of TNCs/MNEs for acquisition (M&A)

of domestic firms might similarly lead to large inflow of foreign

exchange, appreciating in the process the exchange rate. Thismight in turn make the host country’s export less competitive and

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thus discourage domestic investment for export markets. All these

imperatives may have crowding-out impact on domestic firms. In

regard to the net impact of the crowding-in and crowding-out of FDI,

the UNCTAD, United Nations (1999) observed, ‘In an early example,relating to Canada, of the few studies addressing the question,

some regression coefficient, taken at face value implied that $1 of

direct investment led to $3 of capital formation’ (Lubitz, 1966). A

later study of FDI in Canada (Van Loo, 1977), with somewhat

different methods, a slightly longer time span and annual rather

than quarterly data, found a positive direct effect on capital

formation greater than the amount of the FDI. That is, in addition, to

FDI effect on investment, there was some complimentary effect on

fixed investment by domestic firms. However, when indirect effects

through other variables, such as exports (negative), imports

(positive) and consumption (negative), operating through the

accelerator was added, the addition to total capital formation was

much smaller, a little over half the inflow’. It has been, further

observed, ‘A recent study of the impact of FDI on economic growth,

utilizing data on FDI inflows from developed countries to 69

developing countries on a yearly basis from 1970 to 1989, has

found, among others, that FDI has stimulated domestic investment:

“a one dollar increase in the net flow of FDI is associated with an

increase in total investment in the host economy of more than one

dollar. The value of the point estimates place the total increase in

investment between 1.5 and 2.3 times the increase in the flow of

FDI” (Borensztain, et al, 1995). In view of the double edged nature

of FDI, namely, the crowding-out and crowding-in effects on

domestic industries, the host economies especially the developing

countries have been imposing some kind of performance

requirements in regard to: (a) local content (b) export commitment

(c) technology transfer (d) dividend balancing and (e) foreign

exchange neutrality. These regulations have been there to enhance

the quality of FDI against the simple increase in the quantity of FDI

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inflow. Imposition of performance criteria , however, comes in the

way of the relative openness of the trade regime and may make FDI

less attractive for MNEs while deciding the location for their

operations. In other words, a trade-off is involved betweenPERFORMANCE and OPENNESS.

Crowding-in took place in the case of Argentina’s communications

privatisation, where the development of domestic sub contractors

was part and parcel of the privatisation agreement with foreign

investors and appears to be working well. Countries in East Asia,

namely, Indonesia, Malaysia and Thailand encouraged FDI inmicroelectronics related items like toys and other consumer goods

for export markets. Many of these foreign affiliates were essentially

assemblers with few linkages to the rest of the economy . Overtime,

however, domestic suppliers of services and inputs have emerged.

The UNCTAD, United Nations (1999), nevertheless, further remarked

there are also examples of economies that have chosen to stimulate

domestic investment in new activities rather than to rely on FDI. This was the rationale for limiting FDI in certain high-technology

industries in the Republic of Korea and Taiwan Province of China . In

these cases, the vision by policy makers that domestic firms could

in fact emerge paid off. In many cases, however, the emergence of

successful domestic producers in a new, technologically advanced

industry is unlikely or might take a long time with uncertain results.

An example of a costly intervention in favour of domestic firms inhigh-technology industries is the Brazilian Informatics policy of the

early 1980’s, which involved restrictions on FDI in information

technology activities’.

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REVIEW OF EXISTING LITERATURE

Y V Reddy: India and the global economy

The presence of foreign banks in India has benefited the financial

system by enhancing competition, resulting in higher efficiency.

There has also been transfer of technology and specialised skills

which has had some “demonstration effect” as Indian banks too

have upgraded their skills, improved their scale of operations and

diversified into other activities. At a time when access to foreigncurrency funds was a constraint for the Indian companies, the

presence of foreign banks in India enabled large Indian companies

to access foreign currency resources from the overseas branches of

these banks. Creating inter-bank markets in money and foreign

exchange is a challenge in several developing countries. In India,

however, the presence of foreign banks, as borrowers in the money

market and their operations in the foreign exchange market,resulted in the creation and deepening, in terms of both volumes

and products, of the inter-bank money market and forex market

though by virtue of their skills and resources, the foreign banks tend

to dominate in some financial markets. In the days ahead, the

challenge for the supervisors would be to maximise the advantages

and minimise the disadvantages of the foreign banks' local presence

by synchronising the emerging dominance of their local operationswith the progress in the domestic financial markets as well as in

liberalisation of capital account.

Gramm-Leach-Bliley

The purpose of this paper is to investigate the impact of the Gramm-

Leach-Bliley Act (GLBA) on the insurance industries of developed

countries. We find that the insurance industries of most of the

developed countries in our sample have significant negative

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spillover effects from the GLBA. Further, we find that the impact of

this deregulation on the insurance industries of any two countries is

not same. After controlling for country specific effect we find that

only profitability can explain the impact of the GLBA on insurancecompanies of developed countries. This result is robust whether we

use OLS or bootstrap as the estimation technique. However, we

don’t find any evidence that the impact of the GLBA is statistically

different for firms that are from a EU member country versus those

that are not.

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1. Atomic Energy.

2. Railway Transport.

Highlights of the Foreign Direct Investment Policy

India welcomes foreign investment in virtually all sectors except

defence, railway transport and atomic energy.

No government approval required for FDI except for the small

negative list notified by the government.

• Sector specific guidelines for FDI ( As on 26 June 2002 )

• The Foreign Investment Promotion Board (FIPB), considers

proposals for foreign participation that do not qualify for

automatic route. Decisions are usually taken within 30 days of

application.

• Free repatriation of capital investment and profits thereon is

permitted, provided the original investment was made in

convertible foreign exchange.

• Use of foreign brand names/trade marks for sale of goods in

India is allowed.

• Indian capital markets are open to foreign institutional

investors.

• Indian companies are permitted to raise funds from

international capital markets.

• Agreements with over 88 countries to avoid double taxation.

• Bilateral investment protection agreements with 37 countries.

• Special investment and tax incentives for exports and for

certain sectors like power, electronics, software and food

processing.

Single window clearance facility provided in certain states to

simplify the approval process for new ventures.

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FINANCIAL SERVICES (BANKING AND NON-BANKING)

• India has one of the most developed financial markets in the

developing world. Tremendous scope exists for both banking and

non-banking financial institutions from other countries. The

insurance sector, nationalised since 1971, has been opened up

according to an announcement made in November 1998.

Legislation to this effect is expected by early 1999.

• Top companies from the United Kingdom and the United

States among others are already active in India's financial markets.

Some of the big names are: Merrill Lynch, Oppenheimer, J.P.

Morgan, Morgan Stanley, Grindlays, Standard Chartered, Hong

Kong and Shanghai Banking Corporation among others.

• Foreign institutional investors (FIIs) have been allowed to

invest in the stocks and securities markets with rights of full

repatriation and withdrawal. Their presence has added a new

dynamism to the market.

• India already has foreign exchange reserves of US$27 billionwhich is considered very comfortable, but the country needs to use

foreign skills and networks to be able to manage the huge sums for

its development needs.

• Local financial Institutions such as the Industrial

Development Bank of India (IDBI), Industrial Credit and Investment

Corporation of India (ICICI), Industrial Finance Corporation of India ,

Unit Trust of India and the Shipping Credit and InvestmentCorporation of India have raised billions through the most

sophisticated financial instruments including Deep Discount Bonds.

• Indian firms are showing increasing liking for Global

Depository Receipts (GDR) listed in London. American institutions

are trying to promote American Depository Receipts (ADR) listed in

New York.

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• After much dithering, India has finally opened up the

insurance sector to private and foreign investors.

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INDIAN BANKING SECTOR SCENARIO

In India there are 100 commercial banks, 196 regional rural banks

(RRB), 51 urban cooperative banks (UCB) and 16 state cooperative

banks (SCB) at the end fiscal year 2000-01 (March to April is India’s

fiscal year).

The central banking authorities are in phases implementing

prudential and supervisory norms matching the best international

practices.

The on-going economic reforms in the country aim at ensuringgreater operational flexibility to commercial banks. Total

investments of banks in shares, convertible debentures/bonds and

bonds of equity-oriented mutual funds should not exceed 20 percent

of their net worth.

A consolidated balance sheet of Indian banking sector reveals that

scheduled commercial banks (excluding RRBs) closed FY 2000-01

with higher operating expenses leading to fall in net profits, lower

‘other income’ and higher provisions for bad doubtful accounts

(normally known as sticky accounts) and contingencies.

Indian banking sector registered 14.9 percent growth in income and

16.7 percent growth in expenditure during 2000-01 FY. Growth in

other income which constitutes a big chunk of banking sector’s total

income, suffered significantly with 8.8 percent compared with 23.5

percent in 1999-2000 FY. On the other hand operating expenditures

shot up by 23.9 percent from 8.8 percent.

The State bank group and state-run banks registered 15.8 percent

and 12.7 percent, respectively, growth in income during FY 2000-01.

While foreign banks witnessed 16 percent growth in income, new

and old and private sector Indian banks recorded income growth of

38.8 percent and 9.8 percent, respectively.

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commercial banks increased to 1.79 percent in FY 2000-01 from

1.67 percent in FY 1999-2000. Foreign banks however could lower

the wage bill to asset ratio to 1.23 percent in FY 2000-01 from 1.39

percent in FY 1999-2000.Assets of scheduled commercial banks (excluding RRBs) have

increased by 17.1 percent in 2000-01 FY- up by 0.8 percent over

previous fiscal’s 16.3 percent. In terms of assets holding, the public

sector banks account for 48.4 percent and the State Bank of India

31.1 percent. Foreign banks account for 7.9 percent and the Indian

private sector banks (old and new) hold 12.6 percent.

Shares of investments in total assets during FY 2000-01 stood at 38percent and loans and advances together at 40.6 percent.

Capital of scheduled commercial banks in total liabilities declined by

0.2 percent at 1.5 percent during 2000-01 FY from previous fiscal’s

1.7 percent. Reserves and surplus dropped marginally by 0.1

percent at 3.8 percent from 3.9 percent in FY 1999-2000.

There was decline in banks’ cash-reserve ratio during the fiscal2000-01 at 6.8 percent from 7.7 percent in fiscal 1999-2000. The

credit-deposit ration as per sanctions) was higher at 58.5 percent in

FY 2000-01 compared with 56 percent. Scheduled commercial banks

registered 18.4 percent growth in deposits in FY 2000-01 which is

about 5 percent higher than previous fiscal’s 13.9 percent.

The deposit growth include the inflow of Rs 25,662 crore under the

India Millennium Deposits (IMD) schemes. The IMD deposit accountsfor 3.2 percent of total bank deposit growth in FY 2000-01.

Total bank credit extended by the scheduled commercial bank in FY

2000-01 was up by 17.3 percent against 18.2 in FY 1999-2000. Food

credit increased by 55.7 percent and non-food credit by 14.9

percent. Credit-deposit ratio in terms of outstanding stood

marginally lower at 53.1 percent compared with 53.6 percent in

previous fiscal.

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Investments of banks in government and other approved securities

increased by 19.8 percent against 21.3 percent in FY 1999-2000.

On incremental basis, investments were up by 41 percent. The

investment-deposit ratio, on an outstanding basis, was marginallyup at 38.5 percent against 38 percent in FY 1999-2000.

Total flow of resources from scheduled commercial banks to the

commercial sector (excluding food credit) was up by 16.1 percent.

The increase was however lower than 17.8 percent growth

registered in FY 1999-2000.

Industrial credit as a percentage to net bank credit in FY 2000-01

declined by over 3 percent to 46.8 percent from 50.3 percent.Growth in industrial credit decelerated to 9.3 percent from 11.8

percent in FY 1999-2000.

Bank credit to medium and large industries together was lower by

10.5 percent in FY 2000-01 compared with 12.9 percent in the

previous fiscal year. Credit to wholesale trade significantly

decelerated to 6.1 percent against 20.4 percent in FY 1999-2000.

Credit to real estate sector accelerated. Credit to priority sector

increased by 17.1 percent in FY 2000-01 against 15 percent in FY

1999-2000.

In terms of credit growth, infrastructure tops the list with 56.7

percent followed petroleum 29 percent, gems and jewelleries 21.7

percent, electricity 15.5 percent and cotton textiles 13.4 percent.

Among 7 industries that witnessed major declines in bank credit

absorption include ‘other textiles’ (7.6 percent), drugs and

pharmaceuticals (5.3 percent).

Bank credit to sick/weak industries in FY 2000-01 was higher at 11.9

percent compared with previous fiscal year’s 10.9 percent.

The operating profit of all scheduled commercial banks together

increased by 7.9 percent. Operating profits by public sector banks

was up by 5.8 percent but State Bank group registered 1.7 percent

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decline in operating profit. Profits of old banks increased by 11

percent and new banks by 10.1 percent. Foreign banks operating in

India registered 15.6 percent increase in operating profit.

Scheduled commercial banks’ net profit dropped by 11.3 percent inFY 2000-01. The decline in case of public sector banks and foreign

banks was 15.6 percent and 2.4 percent, respectively. Only the new

private sector banks registered 12.3 percent in net profits.

The ratio of net profit to total asset declined further to 0.50 percent

in FY 2000-01 from 0.66 percent in 1999-2000. The decline in case

of public sector bank was 0.15 percent, in the case of old bank

decline was 0.19 percent. In respect of foreign banks net profit tototal asset ratio declined to 0.93 in FY 2000-01 from 1.17 percent in

FY 1999-2000.

The Indian government has decided to dilute its stake in public

sector banks to 33 percent. The Narasimhan Committee had

suggested mergers among strong Indian banks, both public and

private. The Committee also suggested merger with financial

institutions and non-banking financial institutions (NBFCs). Among

banks whose shares are being traded, Karur Vysya Bank's scrip

registered highest growth of 47.48 percent followed by Corporation

Bank's 44.11 percent and Bank of Baroda's 31.41 percent in 2000-

01 compared with previous year's. Among those whose share prices

nosedived include Global trust Bank (-56.65 percent) followed by

IndusInd Bank (-49.64 percent).

The Reserve Bank of India has decided to divest its stake in various

public sector institutions. These institutions include State Bank of

India (SBI), National Housing Bank (NHB), Infrastructure

Development Finance Company (IDFC), Deposit Insurance and

Credit Gurantee Corporation (DICGC), NABARD, Bharatiya Reserve

Bank Note Mudran Ltd, Discount and Finance House of India (DFHI),

and Securities and Trading Corporation of India (STCI). RBI Deputy

http://www.indiaonestop.com/#share

http://www.indiaonestop.com/#share

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Governor Y V Reddy suggested formation of a holding company for

public sector banks.

Privatisation of public sector banks would take off once the existing

banking Acts (Reserve Bank of India Act, 1934 and BankingRegulation Act, 1949) are amended. RBI has already sent

recommendations to the federal government to this effect.

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FDI IN BANKING

THE presence of foreign players in India's banking sector is set to

increase. As the competition unleashed by financial liberalisation

squeezes margins and forces banks to build their bottom line by

expanding the volume of their business, a process of consolidation

in the banking business seems inevitably under way. And since

financial liberalisation has permitted an increase in the stake held

by foreign investors in Indian banks from 20 to 49 per cent, the

expectation is that this consolidation would also see an increase in

the presence of foreign banks in the domestic market.

Foreign banks have existed in the domestic market, with some like

Citibank and Standard Chartered (which through a global

arrangement acquired ANZ Grindlays in India) having seen a

substantial expansion of their operations in recent years. But these

have largely been in the nature of subsidiaries with a focus on

corporate and merchant banking. The presence of these banks in

the retail market has been limited. However, the new liberalised

environment, in which entry conditions are easier and profits

depend on expansion, is seeing a change in strategy.

The most recent indication of this was Hong Kong and Shanghai

Banking Corporation's (HSBC) acquisition in early December of a 20

per cent stake in UTI (Unit Trust of India) Bank from the

Commonwealth Development Corporation (CDC). HSBC is

understood to have bought the 20.08 per cent stake from two

private funds - 12.37 per cent from CDC Financial Services

(Mauritius) Ltd and 7.71 per cent from the CDC-controlled South

Asia Regional Fund. Though this was a transfer from one foreign

investor to another, the implications were significant because HSBC

is a foreign bank looking to expand its presence in the Indian

market. UTI Bank's Chairman and Managing Director P.J. Nayak

optimistically declared that he believed that HSBC's picking up stake

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in the bank was "an investment" and that UTI Bank would prefer to

remain a standalone bank.

But there are a number of factors that militate against this prsopect.

First, HSBC's stake is likely to exceed 20 per cent soon since itwould, as per Securities and Exchange Board of India guidelines,

have to make an open offer to other minority shareholders, and

could end up acquiring another bunch of shares. At the time of

acquisition the shareholding pattern of the bank included the

following players: Citicorp Banking Corporation 3.83 per cent,

Chryscapital 3.83 per cent, Karur Vysya Bank 1 per cent, South Asia

Regional Fund 7.71 per cent and 16.91 per cent with the public.Second, if acquisition aimed at realising economies of scale is an

objective that is driving banking strategy in India then HSBC would

have an interest in merging its operations with UTI Bank. When such

considerations lead to a reverse merger even between ICICI and

ICICI Bank, it would be naive not to expect it to happen with the

more aggressive foreign banks, if circumstances permit.

Third, indications are that the government would be soon revisingupwards the cap on foreign shareholding in private banks from the

prevailing 49 per cent (raised from 20 per cent in 2001). In a reply

to Parliament on December 16, Finance Minister Jaswant Singh said

that the government has in principle decided to enhance the limit of

foreign direct investment (FDI) in banking companies. This, he felt,

would invite greater foreign investment in private banks. Though he

did not indicate any fresh limit, the government had announced inits 2003-04 Budget that non-resident equity in private banks could

be raised to 74 per cent. In fact, this is known to have triggered the

interest of foreign banks in the acquisition of a stake in private

Indian entities. Finally, other experiences suggest that once the

acquisition process begins in a particular bank, it is bound to

continue.

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A classic case is that of the acquisition of a stake by ING Bank in

Vysya Bank. The ING Group initially acquired 54.36 lakh fully paid-

up equity shares of Rs 10 each of Vysya Bank, representing 23.99

per cent, from GMR group. These shares were purchased by itswholly-owned subsidiary - Banque Brusells Lambert (BBL) Mauritius

Holdings. In September 2002, following the revision in the foreign

equity cap in banking to 49 per cent, ING increased its equity share

to that level. Since then the effort has been to convince the

government to permit an increase in equity holding initially to 51

per cent, so as to ensure full Dutch control and then to 74 per cent,

as and when the new regulations announced in the 2003-04 budget

are put in place.

There is no reason to expect that HSBC's strategy would be any

different. In fact, when recently asked whether HSBC's stake in UTI

Bank would increase, Niall S.K. Booker, CEO, India Region, HSBC,

reportedly said: "Quoting Mark Twain, let me say, as facts change so

will our opinions." On a more cautious note he indicated: "The

legislation would have to change and there should also beshareholders' consent from the Indian promoters, UTI, Life Insurance

Corporation and General Insurance Corporation for HSBC to increase

stake. The FDI limit should ideally be lifted to 74 per cent and voting

rights should be aligned with it." Voting rights are currently

restricted to 10 per cent.

Based on the premise that such expectations regarding policy would

be realised, there is a growing interest in private bank acquisition byforeign firms. Development Bank of Singapore (DBS) is at an

advanced stage of discussions with the Global Trust Bank (GTB) to

pick up 49 per cent equity holding. DBS has thus far just one branch

in Mumbai, which is primarily engaged in the corporate and treasury

businesses. Similarly, Bank Muscat is reportedly merging operations

with Centurion Bank.

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THE acquisition drive by foreign players is increasing the pressure

on other banks, including the public sector banks to look to business

expansion, capital infusion and mergers. There is talk of a merger of

Ashok Leyland Finance with IndusInd Bank and the entry of RelianceCapital into the banking business. These marriages between non-

banking financial companies (NBFC) and banks are problematic

inasmuch as the existing law does not impose any obligation on the

part of either the bank or the NBFC to seek the Reserve Bank of

India's approval before filing the scheme of amalgamation in the

courts. This, RBI Governor Y. Venugopal Reddy admitted, is a lacuna

that needs to be redressed and RBI has proposed amendments to

the Banking Regulation Act, which require that amalgamation of an

NBFC with a banking company is on the same lines and requires the

same clearances as the merger of two banking companies.

The spate of mergers has resulted in a rise in the value of bank

stocks, with investors expecting to make a profit when any acquiring

institution makes an open offer. The speculative factor cannot be

ruled out here, as indicated by a number of large "block deals" inshares of banking companies. In early December, on a single day

there occurred block deals in ICICI Bank stock valued at Rs.700

crores. That was possibly the largest transaction to take place in

any one scrip on a single day. There were four deals involved: one

for 15 lakh shares, the second for 1.99 crore shares, the third for 40

lakh shares and the last for 9.98 lakh shares. A total of around 2.63

crore shares of ICICI Bank were traded in these transactionsaccounting for 4.28 per cent of the bank's equity.

A few days later, as many as 20,00,800 shares of Global Trust Bank

changed hands in the Bombay Stock Exchange in a single

transaction. Overall, as many as 35,94,686 shares were traded on

BSE at a value of Rs.10.09 crores while 28,65,546 shares changed

hands on the National Stock Exchange amounting to Rs.8.09 crore.

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These transactions occurred at prices that were the highest they

had touched over a whole year.

Thus, clearly, trading in bank shares, often through proxy buyers, is

on the increase, indicating strong buyer interest. While thoselooking for speculative gains are partly responsible, the whole

process is being driven by the interest in acquisitions that

accompanies the consolidation wave in the banking sector. That

consolidation has been unleashed by the process of liberalisation,

which is also easing the conditions for entry of foreign players and

paving the way for foreign acquisitions of private Indian banks.

While these changes are currently restricted to the private banks,changes in policy are likely to see the process affecting the public

sector banks as well. In the months to come, therefore, a significant

change in the institutional structure of the Indian banking system is

likely.

These developments are occurring at a time when the build up of

reserves owing to large inflows of foreign capital is leading to a

substantial relaxation of restrictions on foreign exchange utilisation.With a much larger international network, foreign banks would be in

a position to facilitate foreign exchange transactions to a much

greater degree, exploiting the loopholes available under the diluted

regulations governing foreign exchange use. This would render the

fine distinction the government makes between partial and full

convertibility difficult to sustain. Since the resulting larger outflows

are not likely to be covered by foreign exchange earnings alone,India's dependence on foreign capital inflows would be substantial.

Unfortunately the full implications of this would emerge only when

unforeseen conditions generate a climate encouraging capital flight.

But, as experience the world over indicates, that would be too late.

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MISPLACED OPTIMISM

Public sector banks are now in euphoria of mergers and acquisitions,

concerned more about size than synergy. Liberalisation of the

Indian banking sector seems to be entering into a new phase with

the Union finance minister’s announcement of allowing the foreign

banks to own up to 51 per cent of the private sector banks. Low

capital base of most of the older private sector banks is a very

conspicuous weakness of these banks. A few of them have

unsatisfactory levels of capital adequacy ratios and NPA ratios

slightly higher than the tolerable level. How far the influx of foreign

capital would be able to improve the financial strength andoperational efficiency of these banks is a moot question.

Foreign banks in India

The rapidly changing banking scenario since the dawn of public

sector banking era, saw the foreign banks here attuning themselves

to deal with domestic borrowers. They have entered into retail credit

in a big way recently. At present there are 33 foreign banksoperating in India with 222 branches.

These banks are interested in class banking and not mass banking.

They have a profit ratio (ratio of operating profit to total assets)

higher than that of Indian banks as a whole. It is 3.79 per cent

against 2.87 per cent as on March 2004. It may also be noted that

six of them have incurred losses during FY2004.

Based on the type of banking business entertained by these foreignbanks, it could be observed that they prefer to handle only those

advances, where the interest spread is high. There are instances

when the blue chip companies financed by them turn red; they have

expressed their desire to write-off the amount, than to rehabilitate

the ill-fated company. Even now, some of them prefer to walk out of

the corporate debt restructuring schemes, than fall in line with other

banks to make some sacrifices. Sick units, rightly or wrongly have

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THE FUTURE AND IMPACT

It is a matter of time before foreign banks can move into India, with

the government appearing intent on raising the foreign investment

cap in banking to 74 percent regardless of objections from its

Communist allies. The issue is expected to be addressed in the Feb

28 budget presentation by the finance minister.

The Left parties, which support the Congress-led United Progressive

Alliance (UPA) from outside, had in a draft note specified their

objections to increasing foreign investment in banking citing

guidelines of the Reserve Bank of India (RBI), India's central bank,

among other things.

Under existing norms foreign banks cannot pick up more than 49

percent equity in the private banks. However, the previous National

Democratic Alliance (NDA) regime had announced that the FDI cap

would be raised to 74 percent in the interim budget of February

2004.

There are 30 privately owned banks in India, and American banks

are reportedly waiting to move in once the rules are liberalised. The

government is under pressure to ensure against hostile takeovers of

domestic private banks.

The Left has also strongly opposed the move to amend the Banking

Regulation Act to grant greater voting rights to foreign investors in

private banks, which is pending before the cabinet, and hasdemanded a "status quo".

The Budget is expected to focus on the financial sector in a big way.

Sources close to the developments said the government was

expected to outline its plan for raising the foreign direct investment

(FDI) in private banks to 74 per cent and sort out the voting rights

issue, announce guidelines for mergers and acquisitions and a

package for managerial autonomy for public sector banks.

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Banking industry sources said the government might go ahead with

its plan for lifting the 10 per cent cap on voting rights in private

sector banks if it managed to convince all its constituents over the

next fortnight.

The NDA government last year had notified the hike in FDI in private

banks but the guidelines were never made public. The current

government, in consultation with the Reserve Bank of India, has now

finalised the norms and they are expected to be announced in the

Budget. This will give an opportunity to foreign banks to pick up a

limited stake in an Indian entity and raise it gradually.

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ANALSYIS

The RBI's decision to allow foreign direct investment in Indian banks,

the lifting of sectoral caps on foreign institutional investors and a

series of other policy measures could ultimately lead to the

privatisation of public sector banks.

THE series of policy announcements in recent weeks promises to

unleash a shakeout in the Indian banking industry. A major policy

change, effected through an innocuous "clarification" issued by the

Reserve Bank of India (RBI) a few weeks ago, set the stage for the

increased presence of foreign entities in the industry. The RBI's

move to allow foreign direct investment (FDI) in Indian banks, has

been followed by the announcement in the Union Budget lifting

sectoral caps on foreign institutional investors (FII). There are also

reports that the RBI's forthcoming credit policy may feature more

sops for private and foreign banks.

These changes are likely to hasten the process of consolidation of

the banking industry. Although there is some doubt over whetherthe moves will have any immediate impact, there is consensus that

the changes are merely a prelude to the wholesale privatisation of

the public sector banks (PSBs). IDBI, the promoter of IDBI Bank, has

already announced its intention to relinquish control of the bank.

Foreign banks have also mounted pressure on the Finance Ministry,

seeking the removal of legislative hurdles that set limits to private

and foreign holdings in PSBs.

In the short term, the action is likely to be focussed on the Indian

private banks. Of the 100 banks in India, 27 are PSBs (including

eight in the State Bank of India group). There are 31 private sector

banks, of which eight are of recent vintage (for example, ICICI Bank

and HDFC Bank); and there are 42 foreign banks with branches in

India.

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The RBI's decision is seen as enabling foreign banks to extend their

operations, primarily by acquiring other banks. Initially, foreign

banks are likely to acquire control of private banks. The PSBs are

likely to be put on the block after their balance sheets have beencleaned up and the workforce trimmed to meet the demands of

their foreign suitors.

The private banks are a mixed bag. Many of the older private banks

cater to niche markets. Some of these banks have played a useful

role because they have adapted to local and regional requirements.

It is likely that a few of the international banks are knocking at the

doors of these banks. However, takeovers may not be easy. Thepromoters of especially the older private banks, who have a long

tradition of banking and linkages with local communities, may resist

takeover bids. It is contended by some of the respondents that the

government's "negative attitude" to small savings and provident

funds may pave the way for foreign financial institutions to extend

their operations to include pension funds.

The banking industry is likely to undergo consolidation. Some of theprivate banks are already wooing foreign banks. Vysya Bank, whose

promoters have sold 20 per cent stake to Bank Brussels Lambert

(BBL), part of the Dutch ING Group, is likely to offer a controlling

stake to the foreign bank. Vysya Bank already has a tie-up with ING

to sell insurance products in India. Since the International Finance

Corporation, promoted by the World Bank, has a 10 per cent stake

in the bank, BBL can increase its stake by only 19 per cent becauseof the 49 per cent ceiling on foreign stake in Indian banks. However,

banking industry sources say that even if BBL has a stake of 39 per

cent, it can control the private bank effectively. In fact there have

been suggestions that the RBI "clarification" came mainly because

BBL decided to test the regulatory regime governing FDI in banking

after acquiring 20 per cent of the stake in Vysya Bank.

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in new areas. Incidentally, this has also been the route pursued by

some of the new generation private banks like ICICI Bank and HDFC

Bank. While ICICI Bank took over Bank of Madura, HDFC Bank

bought Times Bank. The current market capitalisation (market value of a company's

stock) of the 11 private banks whose shares are listed is about

Rs.1,600 crores. The under-capitalised old private banks are clearly

vulnerable. A 49 per cent stake in each of these banks can be

bought by foreign banks at a total cost of less than Rs.800 crores. A

49 per cent stake in Dhanalakshmi Bank would cost Rs.13 crores; in

Nedungadi Bank Rs. 21 crores; in Lakshmi Vilas Bank Rs.28 crores;in United Western Bank Rs.32 crores; in City Union Bank Rs.27

crores; and in Federal Bank Rs.73 crores. Although the CARs of

many of these banks are higher than the RBI-stipulated norm, it is

argued that this alone does not offer them protection. The private

banks are "certainly easy takeover targets" owing to the fact that

the money required for such takeovers is "piffling amounts, by the

standards of foreign banks". However, foreign banks will examinethe quality of the targeted banks' assets before making their moves.

It is argued by some respondents that although the minimum CAR of

10 per cent may be the norm, in reality banks may need to maintain

it at about 12 per cent to enjoy some measure of comfort.

Some respondents prefers to look at financial sector reforms in

terms of how they address the question of economic development.

They argue that ten years of reforms have failed. "Every indicator of

banking," suggests that there has been a serious setback." Foreign

capital, has a "certain management culture, a certain method of

operation and certain types of customers that they would like to

cultivate". "Rural and urban employment cannot be sustained

without credit. Economic development needs institutional

instruments. Neither the foreign banks nor the private banks are

likely to be the right instruments for the objective of development."

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The structure of the Indian economy and its needs dictate a

different approach to banking. Foreign banks, are not increasing

their share of deposits. Instead, their profits are mainly on account

of "playing in the money market and external transactions".Although the new private banks have increased their deposits, their

influence is limited.

The real significance of the RBI announcement is widely perceived

to be in terms of what is in store for the PSBs, which are at the core

of Indian banking. The financial sector reforms have had a pincer

effect on the PSBs. They have been under pressure to carry the

burden of another era - one in which banks were seen as essentialinfrastructure in the task of economic development. A perverse

result of that era was the parasitism of Indian industry, which

siphoned off funds on a massive scale from these publicly-owned

institutions. Since liberalisation, banks have been forced to set aside

a large proportion of their profits to cover the losses arising out of

the banks' devalued assets, euphemistically termed non-performing

assets (NPA).Liberalisation also forced the PSBs to generate quicker profits,

compelling them to behave like clones of their private counterparts.

The reorganisation of banking operations has effectively reduced

the spread of the activity of these banks. The recent statement by a

senior RBI official that banks need to concentrate on their main

areas of business - in terms of geographical coverage as well as

profitability - bears the imprint of this mindset. The new regime,with its emphasis on "virtual banking, instead of brick-and-mortar

banking", has caused banks to indulge in "mindless downsizing".

Despite this, the 27 PSBs account for 81 per cent of all bank

deposits; the 31 private banks account for 13 per cent; and the

foreign banks 6 per cent. The position is almost similar in the case

of advances by banks. The profitability of PSBs is lower not merely

because of higher wage costs, but because of their lower per-branch

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business. This, in turn, is largely on account of the extensive reach

of their business, particularly in the rural areas.

Banking statistics reveal several disquieting trends in the last few

years. For instance, the credit-deposit (CD) ratio in the rural areashas declined significantly. The combined CD ratio of the rural

branches of all banks in India has declined from about 65 per cent to

40 per cent between 1996 and 2001. This implies that a diminishing

proportion of rural deposits is being ploughed back as credit in rural

areas. This tendency is particularly adverse in States like Bihar,

Uttar Pradesh and Madhya Pradesh.

The sharp decline in interest rates on bank deposits implies adverseconsequences for rural savings. There is evidence to show that rural

and agricultural credit, and lending to small-scale industries, have

suffered seriously since the 1990s. The evidence from diverse

sources indicates that the squeeze on rural credit has forced rural

borrowers to seek credit from moneylenders and other informal

sources of finance. In short, while high-street urban banking has

been on the rise, aimed at skimming the cream of the market, theuse of rural credit as a lever for economic development has been

seriously undermined.

The entry of foreign banks is likely to have serious implications for

balanced regional development and also widen the rural-urban

divide.

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Till end of 1999-2000 fiscal year, two state-run insurance

companies, namely, Life Insurance Corporation (LIC) and General

Insurance Corporation (GIC) were the monopoly insurance (both

life and non-life) providers in India. Under GIC there were foursubsidiaries-- National Insurance Company Ltd, Oriental Insurance

Company Ltd, New India Assurance Company Ltd, United India

Assurance Company Ltd. In fiscal 2000-01, the Indian federal

government lifted all entry restrictions for private sector

investors. Foreign investment insurance market was also allowed

with 26 percent cap.

GIC was converted into India’s national reinsurer from December2000 and all the subsidiaries working under the GIC umbrella

were restructured as independent insurance companies.

Indian Parliament has cleared a Bill on July 30,2002 delinking the

four subsidiaries from GIC. A separate Bill has been approved by

Parliament to allow brokers, cooperatives and intermediaries in

the sector.

Currently insurance companies- both private and public-- has to

cede 20 percent of its reinsurance with GIC. GIC is planning to

increase re-insurance premium by 20 percent which works out at

Rs 3000 cr. GIC is actively considering entry into overseas

markets including West Asia, South-east Asia and SAARC region.

To regulate, promote and ensure orderly growth of the insurance

business and re-insurance business, a regulatory authority --

Insurance Regulatory and Development Authority (IRDA) -- was

set up under IRDA Act, 1999. IRDA is composed of a chairman,

five whole time members and four part-time members. There are

four types of Indian insurance business: Life, Fire, Marine, and

Miscellaneous. In life insurance more than 80 percent business

relates to Endowment Assurance (Participating) and Money Back

(participating). Motor Vehicles insurance is compulsory in India.

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In India, motor vehicle insurance premium is 2.5 percent of the

vehicle cost against international standard of 6 percent.

The Indian insurance regulatory authorities has asked the insurance

companies operating in the country to take into account theinvestment income earned on the funds earmarked for outstanding

claims, unreported claims and unexpired risks while calculating the

underwriting margins. These funds are called technical funds

belonging to the policyholders. Hence the income earned on such

funds should be considered as contributions from the policyholders

of the concerned insurance companies.

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FDI IN THE INSURANCE SECTOR

The Finance Minister, while presenting the first Budget of the UPA

government, has proposed to raise the FDI cap in three sectors.

Elaborating upon the decision he said, “The NCMP declares that FDI

will continue to be encouraged and actively sought, particularly in

areas of infrastructure, high technology and exports. Three sectors

of the economy fully meet this description. They are

telecommunications, civil aviation and insurance.” The specific

proposal for the insurance sector is to raise the FDI cap from 26 to

49 percent.

The IRDA supports a hike in the FDI limit in the insurance sector to

49 percent and also encouraging health insurance. According to

IRDA, the opening of the sector to private insurers has only helped

companies to become more competitive and come out with

innovative products not to mention the growth in GDP from 2.32 per

cent in 2000 to 2.88 per cent in 2003.It is also to be noted that there has been a strong revival of interest

by global insurance majors to set up life insurance venture in India.

AXA, Mitsubishi and Samsung have sent feelers in the Indian

market, and made enquiries with the regulator, the Insurance

Regulatory and Development Authority.

The life insurance industry has witnessed growth rates in excess of

65 per cent during the current fiscal. Life insurance premium in thefirst six months rose to Rs 8,425 crore as per Irda's figures.

The US-based Principal has also applied to the IRDA for a licence to

set up a life insurance entity in India. Samsung has obtained a

licence from the regulator to set up a liaison office in Mumbai, as it

hunts for a joint venture partner.

The IRDA has not received any interest from reinsurance companiesor global non-life players. Samsung Life Insurance is the largest

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insurer in South Korea, controlling almost one-third of the Korean

market.

Global players are not waiting for a hike in the FDI (foreign direct

investment) to 49 per cent. The problem today stems on their abilityto find good Indian partners having a strong marketing presence.

Ability of Indian players to bring in capital is also another problem

area. A key hurdle many global players face here is the difficulty in

finding an Indian entity that is willing to commit capital without

expecting any returns for the next 7-8 years, which is seen as the

break-even point.

Currently, global insurance companies can commence operations in

the country only through joint ventures, where the foreign entity

can hold a maximum of 26 per cent.

This means Indian partners have to shell out 74 per cent of the

funds into an entity that has a strong appetite for capital.

The Union budget had proposed a hike in FDI to 49 per cent, but

with the Left, a key ally of the Central government, opposing themove, FDI remains at current levels.

Private Players, Foreign Equity and Profitability

The Union Government had opened up the insurance sector for

private participation in 1999, also allowing the private companies to

have foreign equity up to 26 per cent. Following the opening up of

the insurance sector, 12 private sector companies have entered the

life insurance business. Apart from the HDFC, which has foreign

equity of 18.6%, all the other private companies have foreign equity

of 26 per cent. In general insurance 8 private companies have

entered, 6 of which have foreign equity of 26 per cent.

Among the private players in general insurance, Reliance and

Cholamandalam does not have any foreign equity. The following

table gives an aggregate picture of the current scenario of the

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insurance sector in India. (A full list of private companies in life and

non-life insurance is given in the Appendix).

TYPEOF

BUSINESS

NOS. OFPUBLIC

SECTORCOMPANIES

NOS. OFPRIVATE

SECTORCOMPANIES

TOTAL

LifeInsurance

01 12 13

GeneralInsurance

06 08 14

ReInsurance

01 0 01

Total 08 20 28

According to the Annual Report of the IRDA, 9 out of the 12 private

companies in life insurance suffered losses in 2002-03. The

aggregate loss of the private life insurers amounted to Rs. 38633

lakhs in contrast to the Rs.9620 crores surplus (after tax) earned by

the LIC. In general insurance, 4 out of the 8 private insurers suffered

losses in 2002-03, with the Reliance, a company with no foreign

equity, emerging as the most profitable player. In fact the 6 private

players with foreign equity made an aggregate loss of Rs. 294 lakhs.

On the other hand the public sector insurers in general insurance

made aggregate after tax profits of Rs. 62570 lakhs.

Not only are the public sector insurance companies more profitable

than the private ones, the private insurer which is most profitable

(Reliance) is one which has no foreign equity. If profitability is taken

to be an important indicator of efficiency, it is clear that the case for

further hike in the FDI cap in the insurance sector cannot be made

on efficiency grounds.

Questionable Reputation of the Foreign Partners

The record of some of the foreign companies who have started

operating in India is being questioned abroad. A recent article

published in The Economist (May 4, 2004) on ‘AIG’s Accounting

Lessons’ (AIG is Tata’s partner in India)came with the screaming

headline which said it all: “ The world’s largest insurance company

shows how to polish profits statement” . The Prudential Financial

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Services (ICICI’s partner in India) is facing an enquiry by the

securities and insurance regulators in the U.S. based upon

allegations of having falsified documents and forged signatures and

asking their clients to sign blank forms (New York Times, May 31,2003 and Wall Street Journal, May 31, 2003). This follows a payment

of $2.6 billion made by Prudential to settle a class-action lawsuit

attacking abusive life insurance sales practices in 1997 and a $ 65

million dollar fine from state insurance regulators in 1996. It is

evident that the questionable activities of these insurance

companies are not deterred by state imposed penalties and

litigations. The financial health of many of the foreign insurance

companies operating in India is also a cause of serious concern. The

Economist (April 1, 200 4) reports the sorry plight of Standard Life of

UK (HDFC’s partner in India), which is unable to remain afloat

without the possibility of raising money in debt or equity markets.

AMP closed its life operations for new business in June 2003. Royal

Sun Alliance also shut down their profitable businesses in 2002. A

recent report by Mercer Oliver Wyman, a consultancy, found that

European life insurance companies are short of capital by a

whopping 60 billion euros. The reason for the short fall in

capitalization, among other things, is due to European Unions’ new

regulation on solvency called ‘Solvency 2’ that will be enforced

across Europe from 2005 through 2007.

According to the Mercer Oliver Wyman Report the German, Swiss,

French and British insurers suffer from severe capital inadequacy,which is a result of undertaking risky investments in equity and debt

instruments in the past. Several issues of Sigma , a reputed Swiss

journal on insurance, have reported that the U.S. and Europe based

insurance companies are faced with gloomy growth prospects in the

advanced country markets, with several companies experiencing

negative growth in the recent past. Moreover, tighter capital

adequacy norms and other regulations that are currently beingimposed in the advanced countries are forcing these insurance

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companies to seek less regulated markets in developing countries to

undertake their high-risk ventures. Raising the FDI cap in India at

this juncture would expose our financial markets to the dubious and

speculative activities of the foreign insurance companies at a timewhen the virtues of regulating such activities are being rediscovered

in the advanced countries.

Competition in the Insurance Sector

Even after the liberalisation of the insurance sector, the public

sector insurance companies have continued to dominate the

insurance market, enjoying over 90 per cent of the market share. In

fact, the LIC, which is the only public sector life insurer, enjoys over98 per cent of the market share in Life insurance.

Market Share of Life and non-Life Insurance Sectors

(as % of total premium underwritten by insurers)

Insurance Sector 2001-2002 2002-2003

Life

Insurance

Private sector 0.54 1.99

Public Sector 99.46 98.01

General

Insurance

Private sector 3.68 8.64

Public Sector 96.32 91.36

Source: IRDA Annual Report, 2002-03

Given the huge market share enjoyed by the public sector

companies, the argument, which is often made by advocates of greater liberalisation, that the entry of private players would bring

down the cost of insurance due to enhanced competition, does not

seem to be convincing. The price making capacity of the market

leaders in the public sector is likely to remain intact for the time

being. The foreign insurance companies do have the reputation of

charging less premium compared to the risks involved and

promising abnormally high returns, in order to grab greater marketshare. Such competition, however, although capable of bringing

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down the ‘cost’ of insurance for a while, has often led to gigantic

frauds and bankruptcies.

Moreover, as is the case in other markets, the initial flurry of entries

into the Indian insurance market would invariably be followed by aphase of mergers and acquisitions that would lead to cartelisation,

precluding the possibility of competition driving down the costs in

the medium run. In the long run, other forms of non-price

competition like aggressive advertisement wars, are likely to lead to

increasing costs, eventually harming the interests of the consumers.

These phenomena in the insurance market have been observed in

several advanced countries. If the public sector companies startimitating the strategies of the foreign insurance companies in order

to defend their market shares, it would be at the cost of

undermining their important social objectives, which they have been

fulfilling so impeccably till date.

Implications for Resource Mobilisation

A major role played by the insurance sector is to mobilize national

savings and channelise them into investments in different sectors of

the economy.

However, no significant change seems to have occurred as far as

mobilizing savings by the insurance sector is concerned, following

the liberalisation of the insurance sector in 1999. Data from the RBI

show that the trend of the savings in life insurance by the

households to GDP ratio, while showing a clear upward trend

through the 1990s signifying increasing business for the insurance

sector, does not show any structural break after 1999 (see chart

below). It can be inferred therefore that the foreign capital which

flowed in after the opening up of the insurance sector has not been

accompanied by any technological innovation in the insurance

business, which would have created greater dynamism in savings

mobilization.

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Ratio of Savings in Life Insurance by Household to GDP

Years Ratio of Savings in Life Insurance to GDP

1992-93 0.011993-94 0.013

1994-95 0.014

1995-96 0.0145

1996-97 0.0146

1997-98 0.0148

1998-99 0.015

1999-00 0.017

2000-01 0.018

2001-02 0.02

0

0.005

0.01

0.015

0.02

0.025

Ratio of Savings in Life Insurance toGDP

Source: Handbook of Statistics, Reserve Bank of India

Far from expanding the market for the insurance sector, the

business activities of the private companies are limited in urban

areas, where a fairly good market network of the public sector

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market has remained by and large the same and from this market

the private companies are picking up the creamy sections in the

metros seriously eroding the ability of public sector to cross

subsidize its products in the rural areas.Flow of funds for infrastructure a myth:

Life insurance is all about mobilising the savings for long term

investment in social and infrastructure sectors. It was also argued

that opening up of insurance market would enable huge flow of

funds into infrastructure. The record of private companies on this is

dismal. More than fifty percent of the policies they sell are unit-

linked insurance where the decision on investment of savingselement in insurance is taken by the policyholders. In fact as per a

press report, ninety five percent of policies sold by Birla Sun Life and

over 80 percent of policies sold by ICICI Prudential were unit-linked

policies during 2003-04. Under these schemes, nearly 50 percent of

the funds are invested in equities thus limiting the fund availability

for infrastructural investments. As against this, the LIC has invested

Rs.40, 000 crores as at 31.3.2003 in power generation, roadtransport, water supply, housing and other social sector activities.

The Law Commission of India released a consultation paper on 16th

June 2003 on the revision of the Insurance Act, 1938. The

consultation paper proposes a suitable amendment to Section of

27C of Insurance Act allowing insurers especially carrying on

general insurance business to invest funds outside India. So, once

the law is amended to allow insurers to invest funds abroad, the

exports that these private companies would generate, would be the

export of savings of the people.

Raising the FDI cap also does not seem justifiable as far as

channelising savings into investments are concerned. The life

insurance sector invested a total of Rs. 31335.89 crores in the

infrastructure sector in 2002-03. Out of this the contribution of the

LIC was Rs. 30998.16 crores, which was 98.92 per cent of the total

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investment in infrastructure by the entire life insurance sector. The

figures provided by the IRDA Reports further suggest that the share

of the public sector life and non-life insurance companies in

investment in infrastructure is greater than their market share.Despite the FDI cap being set at 26%, the investment from the

insurance sector to the infrastructure sector was predominantly

from the public sector companies. Therefore, the argument that

raising the FDI cap in the insurance sector would help in mobilizing

resources for infrastructure, does not hold. On the other hand,

greater foreign control is more likely to lead to a decline in the share

of investment of the private insurance companies into the

infrastructure sector, given the record of the foreign insurance

companies in siphoning resources for speculative financial ventures.

It is also worth mentioning that the only insurance company

involved in insuring Indian exports is the Export Credit Guarantee

Corporation of India, which provides insurance cover to export

credit. The ECGC has been in existence since 1957. It is functioning

under the United India Insurance Co. No private player with foreign

partnership has ventured into this area. Moreover, the LIC and other

public sector units are the only ones to undertake overseas

operations, as reported by the Annual Reports of the IRDA. Foreign

participation has also not helped in marketing Indian insurance

products abroad.

Governments of the advanced countries like the U.S. continue to

applypressure on developing countries to open up their insurance sectors.

China, for instance was pressurized to open up its insurance sector,

in return of its entry into the WTO. However, the existing regulations

on foreign capital in the insurance sector in China has been a source

of continuing debate in the U.S.- China Economic and Security

Review Commission, where the Chinese side has resisted attempts

to force further deregulation. The unilateral move to further

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liberalize the insurance sector in India is unjustifiable. Events over

the decade of the 1990s have borne out the fact that financial

liberalisation does not contribute positively to investment and

economic growth. Countries which enthusiastically opened up theirfinancial sectors in order to attract capital inflows often experienced

enhanced volatility in their financial markets and speculative

attacks on their currency.

Further opening up of the insurance sector to foreign capital, which

serves as a vital financial intermediary of the national economy, is

therefore not warranted.

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CEO’S VIEW

CEOs of insurance companies are still to make up their minds

whether raising foreign direct investment limits in the sector is a

good move or not.

It is like being a child torn between two parents, one living in India

and the other overseas. Chief executive officers today are a

perplexed lot. When asked to give their views on foreign direct

investment in the pension industry, they simply cannot take a stand.

There are sub-plots within the main story, as the insurance industry

considers whether or not the FDI cap in the insurance sector willactually be raised.

The common man's picture of the fight for FDI was seen solely as a

political one -- where the Left is acting spoilsport in raising the FDI

cap from the current 26 per cent to 49 per cent.

The reality, however, is that the industry is as divided as the

political parties. Indian corporate chiefs like Deepak Parekh and

Rahul Bajaj are keen to dilute their holding in their respective

insurance joint ventures.

At the same time, they want to maintain their majority stakes. Says

Bajaj: "I do not support FDI beyond 49 per cent as I want control."

Bajaj Auto has two insurance joint ventures in partnership with

Allianz.

Parekh shares a similar view, stating that Housing DevelopmentFinance Corporation is bound to its foreign partners to sell up to 49

per cent. HDFC has signed MoUs with Standard Life for the life

insurance venture, and Chubb for the non-life entity.

India's financial and corporate giants will not let go of more; not

now, when life insurance companies are expected to break even in

the next couple of years. "I would rather dilute our stake [in SBI Life]

to the general public," says A K Purwar, chairman, State Bank of India.

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It is the smaller players who are eager for a hike in the FDI cap. The

current FDI limit will restrict the growth of private insurance players

because a sizeable working capital is required, points out Philip G

Scott, group executive director, Aviva Plc. He admits that growth atAviva could suffer.

"We have contingency plans in place but in a worst-case scenario,

business will need to grow much more slowly if FDI is not raised," he

adds. Aviva is a 26:74 joint venture with the Dabur group. The two

partners will proportionately infuse an additional Rs 77 crore (Rs

770 million) in January 2005 for this year's business growth.

Max India managed to take care of the want of capital for its lifeinsurance venture, Max New York Life. It raised Rs 200 crore (Rs 2

billion) by divesting 29 per cent equity in favour of a private equity

investor Warburg Pincus group and associates, through a

preferential equity offering.

The fresh infusion of funds will be deployed to meet Max's

investment in the life insurance and healthcare businesses, points

out the company's chairman Analjit Singh.

Foreign partners are equally keen to increase their share in

insurance joint ventures to make current investments worthwhile.

"Raising the FDI cap will give confidence to foreign investors to do

business on a scale that is not restrictive," says Sunil Mehta, country

head, AIG.

His view is shared by a number of global chiefs who have of latevisited India and met the regulator. There is some hesitancy among

international investors who have a limited appetite to invest in

equity capital, bring in the necessary IT and expertise, when they

can have only 26 per cent stake.

"There are many more choices for us [globally] to deploy capital

where we can best achieve the interest of shareholders," says

Aviva's Scott.

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entity could well have been on the block; or the Indian partner

would have been on the prowl for a new foreign partner.

At the moment, Indian promoters are apprehensive that should FDI

be raised, foreign partners will have an upper hand in the 10th yearof operation. Their concern follows the Insurance Act dictating the

dilution of Indian promoters' stake in favour of the general public.

This means that while Indian promoters would end up holding 26 per

cent according to the IRDA Act, their foreign counterpart could have

a higher stake of 49 per cent.

"Indian promoters have been absorbing a large portion of the losses

over the past three years. So the government will have to ensure

that at the time of reducing the shareholding in favour of the public,

the residual shareholding pattern ought to mirror the 51:49 ratio,

favouring Indian promoters," points out Deepak Satwalekar,

managing director HDFC Standard Life Insurance Company.

C S Rao, chairman of Insurance Regulatory and Development

Authority, says in response to industry's apprehensions that theclause would necessarily be amended, "else both the shareholders

will need to bring down their respective holding to 26 per cent." The

IRDA Act had not visualised foreign holding rising from the current

26 per cent to 49 per cent.

At the same time, India Inc hopes to make a killing when it sells its

stakes to foreign partners. "Dilution of shareholding will be at a

premium. I cannot see Indian promoters diluting at par after havingput in the majority of funds in the beginning when the venture was

taking off," says Shikha Sharma, managing director, ICICI Prudential

Life Insurance Company.

Foreign partners have already indicated their keenness to raise their

stakes, even if it is at a premium. Prudential Plc, the foreign joint

venture partner of ICICI, has beefed up plans to hike its stake in

ICICI Prudential Life Insurance Company.

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It has mopped up £1 billion through a rights issue from its investors

in the UK, which is aimed to fund expansion plans. The company has

the highest paid-up capital base in the industry at Rs 825 crore (Rs

8.25 billion), and is second to Life Insurance Corporation of India. The industry agrees that divestment of stake will only take place at

"the right price". However, what could be the fair price is currently

under dispute.

"If divestment has to happen, you want that to happen at a fair

value. This value cannot be determined unless you have greater

clarity on some of the issues of taxation....else you might end up

forcing an Indian promoter to sell his company cheap," saysSharma.

The next moot point is: what will happen to the shareholding pattern

on further dilution to the public? Some insurance companies feel

divestment to the general public will become irrelevant once the FDI

ceiling is raised.

"There is no need to take the company public if the idea is to ensureavailability of capital when both partners can easily bring in funds. If

foreign equity is raised to 49 per cent, the issue needs to be

approached differently and the clause will need to be amended,"

says Venkatesh Mysore, managing director, MetLife India.

Until a final decision is taken by the Centre on raising the FDI cap in

the insurance sector, many of the joint ventures will come under

pressure. This will largely be on the inability of shareholders to feed the

growing appetite for capital, although friction betweenshareholders could also be an issue.

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CONCLUSION

China’s roaring success in past twenty years is on the back of

Foreign Direct Investment (FDI). Chinese smartened up in 1980 and

enacted rules and regulations to welcome it. India, belatedly, has to

copy this concept. Initially FDI was thought to be Western economic

imperialism in modern times. Leaders brought up with Nehruvian

economic mould spurned upon it. Hence India missed the

investment bus for almost 25 years.

India needs FDI, and India needs it now. It needs it to boost the

economic growth, which is stuck at 6.5% (2004-05). A bigger

economic revival is possible if, money, technology and humanexpertise arrive from abroad on a much larger scale than it has

been coming in last few years. As the eighties progressed,

commercial bank lending, to fund economic growth in the third

world countries, declined. Instead the donors in the West promoted

FDI. Asian countries (with the exception of India) understood this

change and devised rules and regulations to attract it. China and

Asian Tigers (Thailand, Singapore, Malaysia, South Korea etc.) werethe net beneficiaries. The West did not care, whether the recipients

were a former enemy or a friend. Money saw no enemies or friend,

instead it moved in the direction of minimum rules, pro-active

government help, lower wages, low priced products and an

understanding to deposit the proceeds of the export boom in

American Banks or bonds. China attracted about $20 Billion a year

from 1984 to 1997 and thereafter $40 Billion till 2003. Last year’sstatistics are still preliminary, but a momentous increase to $60

billion is indicated. The latter is a huge percentage of total of about

$150 Billion FDI spent all over the world. Asian Tigers received a fair

share but not as much as the Chinese did.

India received a meager $4.3 Billion. Although, Indians are rejoicing

at this amount, which is 40% higher than previous years, but it is a

drop in the bucket.

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What Does FDI Do the Manufacturing Economy?

It transforms the local economy into an export lead zero capital

cost growth wonder. FDI also brings with it expertise which is as

much important as the capital itself. Since, it is the multinationals,which are at the leading edge of the FDI lead exports, they ensure

free access to the market place. In other words these exports are

free from quotas and restrictions. As the exports grow, the brand

popularity grows. The consumer nations start to trust the quality

and reliability of the supply. It leads to more and more exports and

more incoming FDI. China is in that mode, currently. The Asian

Tigers were in that mode until 1998-99. India is nowhere near inattracting FDI compared to both the aforementioned economies.

That is why the Shanghai skyline resembles the West and Indian

cities present a dull and dreary look with lack of water and

restricted power supply. It is for IT and BPO boom that some

semblance of respectability exists for India in the world. Otherwise,

India as a nation would have disappeared from the mindset of the

West.FDI in India

Election of AB Vajpayee as Prime Minister of India in 1998 with his

right wing agenda was a welcome change. His prescription to speed

up economic progress included solution of all outstanding problems

with the West (Cold War related) and then opening gates for FDI

investment. In three years, the West was developing a bit of a

fascination to India’s brainpower, powered by IT and BPO. By 2004,

the West would consider investment in India, should the conditions

permit. By the end of Vajpayee’s term as Prime Minister, a

framework for the foreign investment had been established. The

new incoming government of Professor Manmohan Singh in 2004 is

further strengthening the required infrastructure to welcome the

FDI.

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Today, fascination with India is translating into active consideration

of India as a destination for FDI. The A T Kearney study is putting

India second most likely destination for FDI in 2005 behind China. It

has displaced US to the third position. This is a great leap forward.India was at the 15 th position, only a few years back. Thanks to the

hard work of the politicians in control in Delhi for the last five years.

A lot of politicians of the Nehruvian culture believe that outside

money will dominate the politics and may result in the rebirth of the

colonial past. It is untrue and is a figment of their imagination.

Colonialism is born with instability and disunity. British gained full

control of India, because the strong Mogul empire broke away.Piecemeal, the British were able to defeat everybody. Today, the

colonialists of the past in Europe are weak and disunited. They

cannot repeat the successes of the past. Iraq is a key example. The

world in two hundred years has changed so much that technology is

no longer monopoly of the West. The latter is well aware of it and

wishes to trade with former colonies and prosper. In return the

former colonies will have to prosper too.In addition, the economic management of the West under free

market system, need to be learnt and copied. This is possible only if

we eject the colonial rebirth mentality out of our mind set.

Agriculture & Manufacturing for Fuller Employment

Unemployment and under-employment is key cause of political

unrest in third world countries, India included. There are only two

known ways to tackle it. First is to make agriculture profitable and

more rewarding and the second is to industrialize speedily.

Agricultural reforms have been largely successful in India. These

have resulted in green revolution and food self-sufficiency. Fifty

percent of the population makes it’s living on it. Higher outputs with

additional investments will make agriculture and agro-industries

provide better returns and greater prosperity. But, it cannot provide

the clout, which India seeks. This has to come from India’s industrial

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FIPB. Township development qualifies for 100 percent through FIPB.

Telecom also qualifies for 74 percent through FIPB, 49 percent

through automatic approval already being permitted thanks to

India's WTO commitments. As reform signals, these changes areindeed welcome and the opening up of defense production reflects a

change in the mindset that the Left parties are likely to see red

over.

The moot question is whether these changes will lead to a surge in

FDI inflows, even if they do not touch the avowed target inflow of

U.S. $10 billion a year. India has fallen off the FDI map and inflows

haven't quite recovered since 1998, after the nuclear tests, relatedsanctions, and, perhaps, the East Asian currency crisis. Recognized

constraints remain and the fresh round of reforms, though welcome,

don't do much to remove these constraints. First, consumer goods

are plagued by excess capacity and there is no reason why such FDI

inflows should increase, especially since two dysfunctional

conditions remain -- in the case of existing joint ventures with Indian

companies, 100-percent foreign subsidiaries require no objectionsfrom existing joint venture partners, and mergers and acquisitions

(hostile as well as friendly) are frowned down upon. Second, if

defense production is being opened up, is there any sense in

retaining print media or broadcasting on the negative list? Third,

infrastructure projects have been plagued by flip-flops in policy --

power and telecom being two examples. Fourth, bureaucratic

procedures and red tape continue to be pervasive. After FIPB orautomatic approval clearance, an additional 40 to 60 clearances are

required at the state level. This explains why conversion ratios (ratio

of inflows to approvals) vary widely across states. Fifth, there are

serious problems with land acquisition (public interest,

compensation, resettlement) and environmental considerations.

Until these are resolved, FDI inflows are unlikely to shoot up

dramatically. However, the government should be applauded on twocounts. First, for the intent to reform, even though implementation

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may fall short. Second, for explicitly targeting services -- most

global FDI flows now relate to services, not manufacturing.

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APPENDIX

List of Private Companies in Life Insurance

Name of the Pvt. LifeInsurance Company % of Foreign Equity Name of the Foreign partner

Allianz Bajaj Life InsuranceCo. Ltd

26 Allianz

Birla Sunlife Insurance Co.Ltd

26 Sunlife

HDFC Standard LifeInsurance Co. Ltd.

18.6 Standard Life

ICICI Prudential LifeInsurance Co. Ltd.

26 Prudential

ING Vysya Life Insurance Co.Ltd.

26 ING

Max New York Life InsuranceCo. Ltd.

26 New York Life

MetLife India Insurance Co.Ltd.

25.99 Metlife

Om Kotak Mahindra Life

Insurance Co. Ltd.

26 Old Mutual

SBI Life Insurance Co. Ltd. 26 Cardiff

Tata-AIG Life Insurance Co.Ltd.

26 AIG

AMP Sanmar Life InsuranceCo. Ltd.

26 Sanmar Life Insurance Co.

Dabur-CGU Life InsuranceCo. Ltd.

26 CGU Life Assurance

Company

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List of Private Companies in General Insurance

Name of the Pvt. GeneralInsurance Company

% Of Foreign Equity Name of the Foreign partner

Royal Sundaram AllianceInsurance Co. Ltd

26 Royal Sun Alliance

Reliance General InsuranceCo. Ltd

Nil

IFFCO-Tokio General

Insurance Co. Ltd

26 Tokio Marine

Tata-AIG General InsuranceCo. Ltd

26 AIG

Bajaj Allianz GeneralInsurance Co. Ltd

26 Allianz

ICICI Lombard GeneralInsurance Co. Ltd

26 Lombard

Cholamandalam General

Insurance Co. Ltd

Nil

HDFC-CHUBB General

Insurance Co. Ltd

26 CHUBB

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Insurance Regulatory and Development Authority (IRDA)

Pasisrama Bhavanam5-9-58/B Basheer Bagh

Hyderabad - 500 004

Phone: +91 (040) 6820964

Fax: +91 (040) 6823334

Life Insurers

Life Insurance Corporation of India Yogakshema

Jeevan Bima Marg

Post Box No: 19953

Mumbai - 400 021

Phone: +91 (022) 2021383/2022151

Fax: +91 (022) 2824386

SBI Life Insurance Co. Ltd

2 nd Floor, APEEJAY House

3, Dinsha Vachha Road

Churchgate

Mumbai – 400 020

Phone: +91 (022) 2351000-07

Fax: +91 (022) 2351009

Allianz Bajaj Life Insurance Co. Ltd

GE Plaza

Airport Road

Yerawada

Pune - 411 006

Phone: +91 (020) 4026666

Fax: +91 (202) 4026667

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Om Kotak Mahindra Life Insurance Co. Ltd

Peninsula Chambers, Peninsula Corporate Park

6th floor, Ganpatrao Kadam Marg, Lower ParelMumbai - 400 013

Phone: +91 (022) 56635000

Fax: +91 (022) 56635111

ICICI Prudential Life Insurance Co Ltd

ICICI Prulife Towers

1089, Appasaheb Marathe Marg

Prabhadevi

Mumbai – 400 025

Phone: +91 (022) 462 1600

Fax: +91 (022) 437 6638

HDFC Standard Life Insurance Co. Ltd

5 th Floor, IL&FS Financial Centre, Plot C-22

“G” Block, Bandra-Kurla Complex

Bandra (E)

Mumbai – 400 051

Phone: +91 (022) 6533666

Fax: +91 (022) 6533661

Birla Sunlife Insurance Co. Ltd

1 st Floor, Ahura Centre, ‘B’ Wing

Mahakali Caves Road

Andheri (E)

Mumbai - 400 093

Phone: +91 (022) 6928300

Fax: +91 (022) 6928301

ING Vysya Life Insurance Co. Ltd

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14, Sankey Road

Sadashivanag

Bangalore – 560 006

Phone: +91 (080) 3318300-312Fax: +91 (080) 3318305

Tata-AIG Life Insurance Co.Ltd

4 th Floor, Ahura Centre

82 Mahakali Caves Road

Andheri (E)

Mumbai - 400 093

Phone: +91 (022) 6930000

Fax: +91 (022) 6938265

Metlife India Insurance Co. Pvt. Ltd

Brigade Seshamahal, No. 5

Vani Vilas Road

Basavanagudi

Bangalore – 560 004

Phone: +91 (080) 6678617/18

Fax: +91 (080) 652 1970

AMP Sanmar Assurance Co. Ltd

9, Cathedral Road

Chennai - 600 086

Phone: +91 (044) 811 8411

Fax: +91 (044) 811 7669

Dabur CGU Life Insurance Co. Pvt. Ltd

5 th Floor, JMD Regent Square

Mehrauli Road

Gurgaon - 122 001

Phone: +91 (0124) 680 4141

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Fax: +91 (0124) 680 4151

Max New York Life Insurance Co. Ltd

11th

Floor, DLF Square Jacaranda Marg

DLF City, Phase-II

Gurgaon - 122 002

Phone: +91 (0124) 6561717

Fax: +91 (0124) 6561764

Non-Life Insurers

National Insurance Co. Ltd

3 Middleton Street

Kolkata - 700 071

Phone: +91 (033) 2472130/2401634

Fax: +91 (033) 2402369/2408744

New Indian Assurance Co. Ltd

New Indian assurance Bldg.

87 MG Road, Fort

Mumbai - 400 001

Phone: +91 (022) 2674617-22

Fax: +91 (022) 2672286

Oriental Insurance Co. Ltd

A-25/27, Asaf Ali Rd

New Delhi - 110 002

Phone: +91 (011) 3279221-25

Fax: +91 (011) 3287192/7193

United India Insurance Co. Ltd

24 Whites Road

Chennai - 600 014

http://www.indiaonestop.com/insurance/nonlifenews.htm#National

http://www.indiaonestop.com/insurance/nonlifenews.htm#National

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Phone: +91 (044) 8520161

Fax: +91 (044) 8524227

Tata AIG General Insurance Co. LtdAhura Centre

4 th Floor, 82 Mahakali Caves Road

Andheri (East)

Mumbai - 400 093

Phone: +91 (022) 6930000

Fax: +91 (022) 8305888

Bajaj Allianz General Insurance Co. Ltd

GE Plaza

Airport Road, Yerawada

Pune - 411 006

Phone: +91 (020) 4026666

Fax: +91 (020) 4026667

IFFCO Tokio General Insurance Co. Ltd

Palm Court, 4 th Floor, Plot No. 20/4

Sukhrali, Chowk, Mehrauli-Gurgaon Road

Gurgaon - 122 001

Phone: +91 (0124) 6220889/6220893

Fax: +91 (0124) 6220887

ICICI Lombard General Insurance Co. Ltd

ICICI Towers, Bandra-Kurla Complex

Bandra (East)

Mumbai - 400 051

Phone: +91 (022) 6531414

Fax: +91 (022) 6531111

Reliance General Insurance Co. Ltd

http://www.indiaonestop.com/insurance/nonlifenews.htm#Bajaj

http://www.indiaonestop.com/insurance/nonlifenews.htm#Bajaj

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Direct Investment vs Portfolio Investment (U.S. $ million)

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1997-

98

(April

-Dec)

1998-

99

(April-

Dec)

DirectInvestment

129 315 586 1314 2133 2696 3197 2511 1562

Portfolio

Investment4 224 3567 3824 2748 3312 1828 1742 -682

Total

foreign

investment

133 559 4153 5138 4881 6008 5025 4253 880

Source: Reserve Bank of India

Foreign Direct Investment (FDI) inflows to developing countries are

estimated to have gone up to U.S.$ 149 billion in 1997 from U.S.$

130 billion in 1996. India’s share of global FDI flows rose from 1.8per cent in 1996 to 2.2 per cent in 1997. On the other hand, India’s

share in net portfolio investment flows to the developing countries

declined to 5.1 per cent in 1997 after increasing to 8.7 per cent in

1996.

FDI in India in 1997-98 was lower at U.S.$ 5,025 million compared to

U.S.$ 6,008 million in 1996-97 because of a decline in portfolio

investment (Table 6.9). Although foreign direct investment (FDI)

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FDI has been widely seen as one of the most positive forces in

recent economic globalisation, with the supposed potential to

transform productive structures in developing countries and bring

about economic convergence across the different regions of the

world.

It has been one of the great beliefs of the age of globalisation: the

belief that foreign investment _ and foreign direct investment inparticular _ could and would transform the world by bringing more

capital to capital-scarce economies and causing great changes in

the productive structures of developing economies.

In this context, the actual evidence on the role of foreign

investment comes as something of a surprise. It turns out that

aggregate net capital inflows into developing countries have not

been all that significant as a share of developing country GNP in the

1990s. In fact, the average for the 1990s is only marginally higher

than that for the period 1975-82, and only stands out because of

the much lower net inflows during the period 1983-89, i.e. when the

external debt crisis was working itself out. Indeed, if China is

excluded, then it turns out that the 1990s shows a lower

quantitative significance for net foreign capital inflow, in all other

developing countries combined, the late 1970s turns out to havebeen the time when foreign capital was most significant relative to

national income, and the globalising 1990s comes a rather poor

second.

The big change across the different time periods has been in the

nature of the capital inflow. In the period 1975-82, half the net

inflow consisted of bank loans; official flows, including development

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assistance, amounted to another 32 per cent. FDI and portfolio

inflows together amounted to a measly 11 per cent.

By the 1990s, the picture had changed dramatically. All official

flows were down to 20 per cent, and bank loans to 24 per cent.Instead, portfolio inflows had increased to 21 per cent and FDI to 34

per cent of the net inflow.

External savings have contributed rather little to the development

process for all developing countries (including China) taken

together. Net resource transfer was actually negative in the 1980s,

but even in the period 1990-98, they amounted to only 2.65 per

cent of the GNP of developing countries, just slightly above thatratio for the late 1970s and early 1980s.

One of the reasons for this less than wonderful performance of net

transfer in the 1990s has been the change in the pattern of net

capital flows over the 1990s. Around 1992-93, a number of

developing countries across Asia and Latin America went in for

substantial financial liberalization, including deregulation of capital

account transactions.

In consequence, while capital inflow increased, so did capital

outflow, as more and more domestic residents found it both more

possible and more attractive to hold foreign assets.

Of course, the really big change in the pattern of capital flows, as

was mentioned earlier, is in the shift towards more FDI, especially

from the early years of the 1990s. Especially in the last three yearsunder consideration, FDI inflows to all developing countries has

reached quite impressive levels, in excess of $150 billions in each

year. And this is really what has excited the proponents of

globalisation, because FDI is seen as the most positive of the non-

debt creating capital flows. Not only does it not involve repayment

of principal and interest, it is supposedly long-term in orientation,

rather than short-term and possibly speculative like portfoliocapital.

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But there may be a need to rethink the effects of FDI as well, or at

least to examine more closely its nature and implications. While FDI

does not involve direct repayment of interest and other forms of

debt servicing, it is not without future foreign exchange costs. Itleads to foreign exchange outflow in the form of outward

remittances of profits and dividends; it can also mean large

payments of royalties and technical fees abroad; MNCs typically

have a production profile which is more import-intensive and in any

case can manipulate such production-related foreign exchange

flows through transfer pricing of subsidiaries.

All this means that the initial inflow of foreign resources can berapidly counterbalanced by the foreign exchange payments of

various sorts that are additionally made because of MNC operations.

This is especially the case when the FDI enters sectors in which

exports are not the main avenue of sales generation. As more and

more FDI is devoted to the services sectors, this becomes even

more the case, since the output is not exported but foreign

exchange outgo increases nonetheless.Even without this stark aspect, there are other features of current

FDI, which call for a more measured look at its nature and

implications.

These relate to its geographical concentration and sectoral

distribution, the fact that more of it comes in the form of mergers

and acquisitions rather than productive or `Greenfield' investment,

and so on.

Given all this, it may appear quite paradoxical world FDI flows

increased so sharply in 1998. But a more disaggregated analysis

can help explain this. Almost all of this increase in FDI was

concentrated in developed countries. Thus FDI inflows to developed

countries went up to $460 billions _ an increase of 68 per cent over

1997. This dramatic growth was essentially fuelled by a huge boom

in cross-border mergers and acquisitions. These amounted to as

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much as $544 billions in 1998, that is, $202 billions more than in

1997.

Since most M&As actually occurred between the developed

countries, this means that such cross-border M&As were effectivelymore than the total value of FDI flows. This is possible because

many large M&A deals do not necessarily require cash or new funds,

especially if they are based on mutual exchange of stock. Similarly,

payment for acquisition can be spaced out over several years, as in

the case of the privatization and sale to MNCs of the Brazilian

telecom giant, Telebras System, which involved only 10 per cent

transfer of cash for shares in the first year.Some of these M&As in the past year have been huge deals

involving major MNCs, which then dominate international industry in

that sector. T, that is, new creation of productive assets (greenfield

investment) rather than mere acquisition of already created local

assets. In addition, it can involve balance of payment problems in

future because of large invisible outflows associated with it. But

perhaps most important of all is the evidence that even FDI tends tobe strongly positively correlated with domestic savings rates. In

other words, only when the host country is already one with high

domestic savings and investment rates (and therefore with high

overall economic growth rates), does much FDI feel sufficiently

attracted to come in. And even then, it has contributed relatively

little to the process of industrialization. Thus, in the petroleum

sector there was a takeover by BP of Amoco for the record amountof $55 billions, creating the third largest Petroleum Company in the

world, following the Shell Group and Exxon. Similarly, in the

automobile industry, the latest in a wave of international mergers

involved the acquisition of Chrysler by Daimler-Benz for $44.5

billions. The sheer size of some of the larger merger deals has

contributed to the substantial increase in FDI flows, although, for

reasons mentioned above, it is difficult to quantify the exact extent

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yet. But this represents no increase in the net contribution of FDI to

domestic investment in host countries. Instead, it indicates a

change in management and control, and most importantly, an

increase in the concentration of production internationally.With this concentration, which is increasingly being forced upon

even very large MNCs as part of a wave of mergers resulting from

heightened international competition, the nature of international

production is likely to change dramatically. More and more, both

manufacturing and services sectors are being dominated by a

smaller and smaller number of companies. This has important

implications for consumers as well as workers. For consumers, theemergence of humongous international corporations controlling

huge shares of production and markets not just in one country but

internationally means that monopoly power of sellers has gone up.

For governments, the sheer size of the newly merged entities and

their market power makes their relative bargaining power that

much more skewed and difficult to countervail.

Also, typically with such merger, profits may go up, but typicallyemployment stagnates or falls. This often counterbalances or even

negates the increase in employment of MNC affiliates, so that

employment increase tends to be the least buoyant of all the major

variables associated with MNC production. From 1986 onwards, the

growth rate of employment of the foreign affiliates of MNCs has

been consistently lower than that of other important indicators such

as assets and sales.

Turning now to the FDI flows specifically to developing countries,

the pattern is not only one where mergers and acquisitions have

become more important, it is also one of continuing regional

concentration. In 1998, for the first time in the decade, FDI inflows

recorded a lower rate of growth than FDI inflows into developed

countries. Indeed, inward FDI flows actually fell by 4 per cent, from

$173 billions in 1997 to $166 billions in 1998.

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FDI inflows to developing countries have been dominated by Asia,

which has accounted for around half of all such FDI on average. The

second place is taken by Latin America, which has also shown

substantial inflows in the 1990s. Africa remains heavily under-represented as a host region for FDI.

Even within these broad categories, there has been very significant

concentration. A major role has been played by China, which in the

1990s became the second largest host nation for FDI, second only

to the US in the entire world economy. FDI inflows into China as a

share of FDI into all developing countries increased from just over

one-tenth in the late 1980s to between one-fourth and one-thirdover the 1990s.

Similarly, a group of five economies - that is, China, Singapore,

Hong Kong, Mexico and Brazil - accounted for well above half of the

FDI inflows to all developing countries over the 1990s. In 1998, the

top five countries received 55 per cent of all developing country FDI

inflows. The 48 least developed countries continued to receive

abysmal levels of FDI inflow of less than $43 billions for all of themput together. This amounts to only 1.8 per cent of the flow to all

developing countries and just 0.5 per cent of world FDI flows. This

despite a very liberal policy framework with numerous incentives for

FDI.

One important change in FDI to developing countries over the past

decade has been the change in its composition. The share of

manufacturing activity in total FDI inflows has declined considerably

between 1988 and 1997. By contrast, there has been a substantial

increase in the share of services in such FDI, to the point where

they accounted for more than 40 per cent of such FDI in 1997.

This has very important, and potentially negative implications, for

host developing countries. As mentioned above, services production

typically falls in the non-tradable sectors, and most of the

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investment has been concentrated in areas such as telecom, energy

and finance, which are definitely not tradable.

As a consequence, these activities generate no foreign exchange

either in the form of export incomes or import substituting activity.However, like all FDI, such MNC-based production involves

substantial foreign exchange outflow over time in the form of

increased imports of inputs and working capital, more royalty

payments and repatriation of profits and other incomes. This can

add to balance of payments problems in certain developing

countries.

All this suggests that FDI is not necessarily the universal panacea toensure development that it is often presented as. Not only does it

not go where it is most required, it is increasingly not in a form that

is desired by developing countries in attracting FDI rather than

being mainly concerned with ways of increasing domestic savings

rates, are not likely to be very successful in terms of achieving

industrial transformation.

Source: “FDI in developing countries - How much? How

effective?”Business Line, October 5, 1999 (taken verbatim)

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BIBLIOGRAPHY

• BOOKS:

KOTHARI C.R, RESEARCH METHODOLOGY, 2002

SETH A.K, INTERNATIONAL FINANCIAL MANAGEMENT

CHERUNILUM FRANCIS, BUSINESS ENVIRONMENT

• NEWSPAPER AND MAGAZINES:

THE BUSINESS INDIA

THE ECONOMIC TIMES

THE FINANCIAL EXPRESS

• WEBSITES:

www.ciionline.org

www.google.com

www.valuenotes.com

http://www.ciionline.org/

http://www.google.com/

http://www.valuenotes.com/

http://www.ciionline.org/

http://www.google.com/

http://www.valuenotes.com/

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“A STUDY OF FDI IN BANKING &INSURANCE SECTOR”

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