1

TABLE OF CONTENTS

Chapter No Title Page No

1 EXECUTIVE SUMMARY 9-10

2 OBJECTIVES OF THE STUDY 11-12

3 RESEARCH METHODOLOGY 13-17

3.1 Primary data

3.2 Secondary data

4 LITERATURE REVIEW 18-19

5 INTRODUCTION OF FDI 20-83

5.1 Overall view

5.2 Inter country /industry studies

5.3 Trends and patterns of fdi

5.4 Sorces of fdi

5.5 Distribution of fdi

6 FDI IN INDIAN RETAIL SECTOR 84-95

6.1 Indian scenario

7 INDIA’S POLICY ON FDI 96-115

7.1 evolution

8 CASES OF FDI IN INDIAN RETAIL SECTOR 116-125

8.1 Foreign retail regroup in india

8.2 India to ease rules for foreign companies

2

CONT……..

Chapter No Title Page No

8.3 India suspends plan to let in foreign retail

India opens retail sector to foreign8.4 companies

FDI –INDIAN RETAIL BIDS FOR9 BRIGHT FUTURE 126-130

9.1 Evolution of Indian retail

9.2 Policy framework

9.3 Impact on retail sector

9.4 Road ahead

10 ANALYSIS OF QUESTIONNAIRE 131-136

11 CONCLUSION 137-138

12 SUGGESTION 139-141

13 BIBLIOGRAPHY 142-143

14 ANNEXURE 144-146

3

LIST OF ABBREVIATIONS

FDI FOREIGN DIRECT INVESTMENT

FPI FOREIGN PORTFOLIO INVESTMENT

FTZS FREE TRADE ZONES

IP INVESTMENT PROMOTION

MNCS MULTINATIONAL CORPORATIONS

FEMA FOREIGN EXCHANGE MANAGEMENT ACT

RBI RESERVE BANK OF INDIA

FIPB FOREIGN INVESTMENT PROMOTION BOARD

DEPARTMENT OF INDUSTRIAL POLICY ANDDIPP PROMOTION

BITS BILATERAL INVESTMENT TREATIES

SEBI SECURITIES AND EXCHANGE BOARD OF INDIA

FII FOREIGN INSTITUTIONAL INVESTORS

IPR INDUSTRIAL POLICY RESOLUTION

4

LIST OF CHARTS

1 AMOUNT OF FDI INFLOW

2 FDI INFLOWS IN THE WORLD

3 SHARE OF INDIA IN WORLD FDI

4 DISTRIBUTION OF RETAIL SECTOR’S SHARE

5

CHAPTER 1

EXECUTIVE SUMMARY

6

Definition of Retail

In 2004, The High Court of Delhi defined the term ‗retail‘ as a sale for final consumption in contrast to a sale for further sale or processing (i.e. wholesale). A sale to the ultimate consumer.Thus, retailing can be said to be the interface between the producer and the individual consumer buying for personal consumption. This excludes direct interface between the manufacturer and institutional buyers such as the government and other bulk customers retailing is the last link that connects the individual consumer with the manufacturing and distribution chain. A retailer is involved in the act of selling goods to the individual consumer at a margin of profit.

FDI Policy in India

FDI is defined as investment in a foreign country through the acquisition of a local company or the establishment there of an operation on a new site. To put in simple words, FDI refers to capital inflows from abroad that is invested in or to enhance the production capacity of the economy.Foreign Investment in India is governed by the FDI policy announced by the Government of India and the provision of the Foreign ExchangeManagement Act (FEMA) 1999. The Reserve Bank of India (‗RBI‘) in this regard had issued a notification,[4] which contains the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000. This notification has been amended from time to time.The Ministry of Commerce and Industry, Government of India is the nodal agency for motoring and reviewing the FDI policy on continued basis and changes in sectoral policy/ sectoral equity cap. The FDI policy is notified through Press Notes by the Secretariat for Industrial Assistance (SIA), Department of Industrial Policy and Promotion (DIPP).The foreign investors are free to invest in India, except few sectors/activities, where prior approval from the RBI or Foreign Investment Promotion Board (‗FIPB‘) would be required.

7

FDI Policy with Regard to Retailing in India

It will be prudent to look into Press Note 4 of 2006 issued by DIPP and consolidated FDI Policy issued in October 2010 which provide the sector specific guidelines for FDI with regard to the conduct of trading activities.

a) Up to 100% for cash and carry wholesale trading and export trading allowed under the automatic route.

b) FDI up to 51 % with prior Government approval (i.e. FIPB) for retail trade of ‗Single Brand‘ products, subject to Press Note 3 (2006 Series).

c) FDI is not permitted in Multi Brand Retailing in India.

8

CHAPTER 2

OBJECTIVE OF THE STUDY

9

1.TO STUDY THE TRENDS AND PATTERNS OF FLOW OF FDI IN INDIAN RETAIL SECTOR .

2. TO ASSESS THE DETERMINANTS OF FDI INFLOWS IN INDIAN RETAIL SECTOR .

3. TO EVALUATE THE IMPACT OF FDI ON THE INDIAN ECONOMY AND RETAIL SECTOR.

10

CHAPTER 3

RESEARCH METHODOLOGY

11

3.1PRIMARY DATA

The primary data is collected through personalized interview and the questionnaire from the respondents who is the common public.

3.2SECONDARY DATA

The research done on the desktop research by visiting various web sites and referring some of the books for understanding various concepts in fdi which is very important for this project. The consideration on some annual fdi inflow in India .As mentioned in bibliography.

12

CHAPTER 4

LITERATURE REVIEW

13

1) Foreign Direct Investment in India

by Lata M Chakravarth y summary: Foreign Direct Investment in India

Foreign direct investment is the catalyst to economic growth in developing countries. Countries should attract FDI for those areas in which they have a competitive edge. This book is a lively compilation of articles, dealing with this concept, trends and strategies in this area. Read about FDI in the print media, power sector, banks, retail and real estate in India.

2) Foreign Direct Investment in

India 1947 to 2007 : Policies,

Trends and Outlook

BookDetailsAuthor: Gakhar, Kamlesh

Contents : Preface / Foreign Direct Investment (FDI): nature and Scope / Motives and determinants of FDI: A Theoretical Survey / FDI in India: Policies and trends since Independence / Determinants and Deterrents of FDI Inflow in India / FDI Inflow in India: Sectoral and Firm Level determinants and Motives / FDI Policy Implications and Future Outlook / Sector-wise FDI Policy and Business Opportunities in India / Concluding Observations /

3) Foreign Direct Investment : Contemporary IssuesUsha Bhati, Deep

Contents: Preface. 1. Foreign Direct Investment: a theoretical and policy framework. 2. Studies on Foreign Direct Investment. 3. Problem and research. 4. Emerging trends in FDI: Indian evidence. 5. Emerging trends in FDI: global evidence. 6. Determinants of Foreign Direct Investment. 7.

14

An appraisal for Foreign Investment climate in India. Conclusions. Bibliography. Index."This book provides a comprehensive description and in-depth analysis of various contemporary issues in Foreign Direct Investment (FDI) in India. Divided into eight parts, the book discusses the following issues:Prevailing FDI policy framework in India since independence and how it is placed in terms of openness, competitiveness and other important aspects; Emerging dimensions of FDI inflows in India; Emerging scenario of FDI at the global level; Performance of India in comparison to developed ,developing ,Asian and SAARC countries withrespect to FDI in India;Factors having bearing on FDI flows;Legal, procedural, socio-economic and other important aspects influencing FDI in India; Foreign business investors' perceptions about India as an investment destiny. The book proves to be invaluable to the students of International business. Further it will be beneficial to the multiple group of people like the economic policy-makers related to institutions economy and regulatory bodies and the corporates willing to take advantage of foreign financial inflows." (jacket)

15

CHAPTER 5

INTRODUCTION OF FDI

16

INTRODUCTION

One of the most striking developments during the last two decades is the spectacular growth of FDI in the global economic landscape. This unprecedented growth of global FDI in 1990 around the world make FDI an important and vital component of development strategy in both developed and developing nations and policies are designed in order to stimulate inward flows. Infact, FDI provides a win – win situation to the host and the home countries. Both countries are directly interested in inviting FDI, because they benefit a lot from such type of investment. The ‗home‘ countries want to take the advantage of the vast markets opened by industrial growth. On the other hand the ‗host‘ countries want to acquire technological and managerial skills and supplement domestic savings and foreign exchange. Moreover, the paucity of all types of resources viz.financial, capital, entrepreneurship, technological know- how, skills and practices, access to markets- abroad- in their economic development, developing nations accepted FDI as a sole visible panacea for all their scarcities. Further, the integration of global financial markets paves ways to this explosive growth of FDI around the globe.

5.1 AN OVERALL VIEWThe historical background of FDI in India can be traced back with the establishment of East India Company of Britain. British capital came to India during the colonial era of Britain in India. However, researchers could not portray the complete history of FDI pouring in India due to lack of abundant and authentic data. Before independence major amount of FDI came from the British companies. British companies setup their units in mining sector and in those sectors that suits their own economic and business interest. After Second World War, Japanese companies entered Indian market and enhanced their trade with India, yet U.K. remained the most dominant investor in India.Further, after Independence issues relating to foreign capital, operations of MNCs, gained attention of the policy makers. Keeping in mind the national interests the policy makers designed the FDI policy which aims FDI as a medium for acquiring advanced technology and to mobilize foreign exchange resources. The first Prime Minister of India considered foreign investment as ―necessary‖ not only to supplement domestic capital but also to secure scientific, technical, and industrial knowledge and capital equipments. With time and as per economic and political regimes there have been changes in the FDI policy

17

too. The industrial policy of 1965, allowed MNCs to venture through technical collaboration in India. However, the country faced two severe crisis in the form of foreign exchange and financial resource mobilization during the second five year plan (1956 -61).Therefore, the government adopted a liberal attitude by allowing more frequent equity participation to foreign enterprises, and to accept equity capital in technical collaborations. The government also provides many incentives such as tax concessions, simplification of licensing procedures and de- reserving some industries such as drugs, aluminum, heavy electrical equipments, fertilizers, etc in order to further boost the FDI inflows in the country. This liberal attitude of government towards foreign capital lures investors from other advanced countries like USA, Japan, and Germany, etc. But due to significant outflow of foreign reserves in the form of remittances of dividends, profits, royalties etc, the government has to adopt stringent foreign policy in 1970s. During this period the government adopted a selective and highly restrictive foreign policy as far as foreign capital, type of FDI and ownerships of foreign companies was concerned. Government setup Foreign Investment Board and enacted Foreign Exchange Regulation Act in order to regulate flow of foreign capital and FDI flow to India. The soaring oil prices continued low exports and deterioration in Balance of Payment position during 1980s forced the government to make necessary changes in the foreign policy. It is during this period the government encourages FDI, allow MNCs to operate in India. Thus, resulting in the partial liberalization of Indian Economy. The government introduces reforms in the industrial sector, aimed at increasing competency, efficiency and growth in industry through a stable, pragmatic and non-discriminatory policy for FDI flow. Infact, in the early nineties, Indian economy faced severe Balance of payment crisis. Exports began to experience serious difficulties. There was a marked increase in petroleum prices because of the gulf war. The crippling external debts were debilitating the economy. India was left with that much amount of foreign exchange reserves which can finance its three weeks of imports. The outflowing of foreign currency which was deposited by the Indian NRI‘s gave a further jolt to Indian economy. The overallBalance of Payment reached at Rs.( -) 4471 crores. Inflation reached at its highest level of 13%. Foreign reserves of the country stood at Rs.11416 crores. The continued political uncertainty in the country during this period adds further to worsen the situation. As a result, India‘s credit rating fell in the international market for both short- term and long term borrowing. All these developments put the economy at that time on the verge of default in respect of external payments liability. In this critical face of Indian economy

18

the then finance Minister of India Dr. Manmohan Singh with the help of World Bank and IMF introduced the macro – economic stabilization and structural adjustment programme. As a result of these reforms India open its door to FDI inflows and adopted a more liberal foreign policy in order to restore the confidence of foreign investors.Further, under the new foreign investment policy Government of India constituted FIPB (Foreign Investment Promotion Board) whose main function was to invite and facilitate foreign investment through single window system from the Prime Minister‘s Office. The foreign equity cap was raised to 51 percent for the existing companies. Government had allowed the use of foreign brand names for domestically produced products which was restricted earlier. India also became the member of MIGA(Multilateral Investment Guarantee Agency) for protection of foreign investments.Government lifted restrictions on the operations of MNCs by revising the FERA Act 1973. New sectors such as mining, banking, telecommunications, highway construction and management were open to foreign investors as well as to private sector.

CHART 1)Amount Mid March March March March March Marchof FDI 1948 1964 1974 1980 1990 2000 2010In 256 565.5 916 933.2 2705 18486 1,23,378crores

Source: Kumar39 1995, various issues of SIA Publication.There is a considerable decrease in the tariff rates on various importable goods. shows FDI inflows in India from 1948 – 2010.FDI inflows during 1991-92 to March 2010 in India increased manifold as compared to during mid 1948 to march 1990 (Chart-1). The measures introduced by the government to liberalize provisions relating to FDI in 1991 lure investors from every corner of the world. There were just few (U.K, USA, Japan, Germany, etc.) major countries investing in India during the period mid 1948 to march 1990 and this number has increased to fifteen in 1991. India emerged as a strong economic player on the global front after its first generation of economic reforms. As a result of this, the list of investing countries to India reached to maximum number of 120 in 2008. Although, India is receiving FDI inflows from a number of sources but large percentage of FDI inflows is vested with few major countries. Mauritius, USA, UK, Japan, Singapore, Netherlands constitute 66 percent of the

19

entire FDI inflows to India.FDI inflows are welcomed in 63 sectors in 2008 as compared to 16 sectors in 1991.

FDI INFLOWS IN INDIA IN POST REFORM ERAIndia‘s economic reforms way back in 1991 has generated strong interest in foreign investors and turning India into one of the favorite destinations for global FDI flows. According to A.T. Kearney1, India ranks second in the World in terms of attractiveness for FDI. A.T. Kearney‘s 2007 GlobalServices Locations Index ranks India as the most preferred destination in terms of financial attractiveness, people and skills availability and business environment. Similarly, UNCTAD‘s76 World Investment Report, 2005 considers India the 2nd most attractive destination among the TNCS. The positive perceptions among investors as a result of strong economic fundamentals driven by 18 years of reforms have helped FDI inflows grow significantly in India. The FDI inflows grow at about 20 times since the opening up of the economy to foreign investment. India received maximum amount of FDI from developing economies (Chart – 1.2). Net FDI flow in India was valued at US$ 33029.32 million in 2008. It is found that there is a huge gap in FDI approved and FDI realized (Chart- 1.3). It is observed that the realization of approved FDI into actual disbursements has been quite slow. The reason of this slow realization may be the nature and type of investment projects involved. Beside this increased FDI has stimulated both exports and imports, contributing to rising levels of international trade. India‘s merchandise trade turnover increased from US$ 95 bn in FY02 to US$391 bn in FY08 (CAGR of 27.8%). US$ Millions amount of FDI realised amount of FDI approved No. of FDI approved realised to approved ratio.

Source: compiled and computed from the various issues SIA Bulletin, Ministry of Commerce, GOI India‘s exports increased from US$ 44 bn in FY02 to US$ 163 bn in FY08 (CAGR of 24.5%). India‘s imports increased from US$ 51 bn in FY02 to US$ 251 bn in FY08(CAGR of 30.3%). India ranked at 26th in world merchandise exports in 2007 with a share of 1.04 percent.Further, the explosive growth of FDI gives opportunities to Indian industry for technological upgradation, gaining access to global managerial skills and practices, optimizing utilization of human and natural resources and competing internationally with higher efficiency. Most importantly FDI is central for India‘s integration into global production chains which involves production by MNCs spread across locations all over the world. (Economic Survey 2003-04).16

20

IMPORTANCE OF THE STUDYIt is apparent from the above discussion that FDI is a predominant and vital factor in influencing the contemporary process of global economic development. The study attempts to analyze the important dimensions of FDI in India. The study works out the trends and patterns, main determinants and investment flows to India. The study also examines the role of FDI on economic growth in India for the period 1991-2008. The period under study is important for a variety of reasons. First of all, it was during July 1991 India opened its doors to private sector and liberalized its economy. Secondly, the experiences of South-East Asian countries by liberalizing their economies in 1980s became stars of economic growth and development in early 1990s. Thirdly, India‘s experience with its first generation economic reforms and the country‘s economic growth performance were considered safe havens for FDI which led to second generation of economic reforms in India in first decade of this century. Fourthly, there is a considerable change in the attitude of both the developing and developed countries towards FDI. They both consider FDI as the most suitable form of external finance. Fifthly, increase in competition for FDI inflows particularly among the developing nations.The shift of the power center from the western countries to the Asia sub – continent is yet another reason to take up this study. FDI incentives, removal of restrictions, bilateral and regional investment agreements among the Asian countries and emergence of Asia as an economic powerhouse (with China and India emerging as the two most promising economies of the world) develops new economics in the world of industralised nations. The study is important from the view point of the macroeconomic variables included in the study as no other study has included the explanatory variables which are included in this study. The study is appropriate in understanding inflows during 1991- 2008.

LIMITATIONS OF THE STUDYAll the economic / scientific studies are faced with various limitations and this study is no exception to the phenomena. The various limitations of the study are:1. At various stages, the basic objective of the study is suffered due to inadequacy of time series data from related agencies. There has also been a problem of sufficient homogenous data from different sources. For example, the time series used for different variables, the averages are usedat certain occasions. Therefore, the trends, growth rates and estimated regression coefficients may deviate from the true ones.

21

2. The assumption that FDI was the only cause for development of Indian economy in the post liberalised period is debatable. No proper methods were available to segregate the effect of FDI to support the validity of this assumption.

3. Above all, since it is a Ph.D. project and the research was faced with the problem of various resources like time and money.

Dunning John H.14 (2004) in his study ―Institutional Reform, FDI and European Transition Economics‖ studied the significance of institutional infrastructure and development as a determinant of FDI inflows into the European Transition Economies. The study examines the critical role of the institutional environment (comprising both institutions and the strategies and policies of organizations relating to these institutions) in reducing the transaction costs of both domestic and cross border business activity. By setting up an analytical framework the study identifies the determinants of FDI, and how these had changed over recent years.Tomsaz Mickiewicz, Slavo Rasosevic and Urmas Varblane73 (2005), in their study, ―The Value of Diversity: Foreign Direct Investment and Employment in Central Europe during Economic Recovery‖, examine the role of FDI in job creation and job preservation as well as their role in changing the structure of employment. Their analysis refers to Czech Republic, Hungary, Slovakia and Estonia. They present descriptive stage model of FDI progression into Transition economy. They analyzed the employment aspects of the model. The study concluded that the role of FDI in employment creation/ preservation has been most successful in Hungary than in Estonia. The paper also find out that the increasing differences in sectoral distribution of FDI employment across countries are closely relates to FDI inflows per capita. The bigger diversity of types of FDI is more favorable for the host economy. There is higher likelihood that it will lead to more diverse types of spillovers and skill transfers. If policy is unable to maximize the scale of FDI inflows then policy makers should focus much more on attracting diverse types of FDI. Iyare Sunday O, Bhaumik Pradip K, Banik Arindam28 (2004), in their work―Explaining FDI Inflows to India, China and the Caribbean: An Extended Neighborhood Approach‖ find out that FDI flows are generally believed to be influenced by economic indicators like market size, export intensity,

22

institutions, etc, irrespective of the source and destination countries. This paper looks at FDI inflows in an alternative approach based on the concepts of neighborhood and extended neighborhood. The study shows that the neighborhood concepts are widely applicable in different contexts particularly for China and India, and partly in the case of the Caribbean. There are significant common factors in explaining FDI inflows in select regions. While a substantial fraction of FDI inflows may be explained by select economic variables, country – specific factors and the idiosyncratic component account for more of the investment inflows in Europe, China,and India.Andersen P.S and Hainaut P.3 (2004) in their paper―Foreign Direct Investment and Employment in the Industrial Countries‖ point out that while looking for evidence regarding a possible relationship between foreign direct investment and employment, in particular between outflows and employment in the source countries in response to outflows. They also find that high labour costs encourage outflows and discourage inflows and that such effect can be reinforced by exchange rate movements. The distribution of FDI towards services also suggests that a large proportion of foreign investment is undertaken with the purpose of expanding sales and improving the distribution of exports produced in the source countries. According to this study the principle determinants of FDI flows are prior trade patterns, IT related investments and the scopes for cross – border mergers and acquisitions. Finally, the authors find clear evidence that outflows complement rather than substitute for exports and thus help to protect rather than destroy jobs.John Andreas32 (2004) in his work ―The Effects of FDI Inflows on Host Country Economic Growth‖ discusses the potential of FDI inflows to affect host country economic growth. The paper argues that FDI should have a positive effect on economic growth as a result of technology spillovers and physical capital inflows. Performing both cross – section and panel data analysis on a dataset covering 90 countries during the period 1980 to 2002, the empirical part of the paper finds indications that FDI inflows enhance economic Growth in developing economies but not in developed economies.This paper has assumed that the direction of causality goes from inflow of FDI to host country economic growth. However, economic growth could itself cause an increase in FDI inflows. Economic growth increases the size of the host country market and strengthens the incentives for market seeking FDI. This could result in a situation where FDI and economic growth are mutually supporting. However, for the ease of most of the developing economies growth is unlikely to result in market – seeking FDI due to the low income levels. Therefore, causality is primarily expected to run from

23

FDI inflows to economic growth for these economies. Klaus E Meyer34(2003) in his paper ―Foreign Direct investment in Emerging Economies‖ focuses on the impact of FDI on host economies and on policy and managerial implications arising from this (potential) impact. The study finds out that as emerging economies integrate into the global economies international trade and investment will continue to accelerate. MNEs will continue to act as pivotal interface between domestic and international markets and their relative importance may even increase further. The extensive and variety interaction of MNEs with their host societies may tempt policy makers to micro – manage inwards foreign investment and to target their instruments at attracting very specific types of projects. Yet, the potential impact is hard to evaluate ex ante (or even ex post) and it is not clear if policy instruments would be effective in attracting specifically the investors that would generate the desired impact. The study concluded that the first priority should be on enhancing the general institutional framework such as to enhance the efficiency of markets, the effectiveness of the public sector administration and the availability of infrastructure. On that basis, then, carefully designed but flexible schemes of promoting new industries may further enhance the chances of developing internationally competitive business clusters.Klaus E Meyer, Saul Estrin, Sumon Bhaumik, Stephen Gelb, Heba Handoussa, Maryse Louis, Subir Gokarn, Laveesh Bhandari, Nguyen, Than Ha Nguyen, Vo Hung35 (2005) in their paper―Foreign Direct Investment in Emerging Markets: A Comparative Study in Egypt, India, South Africa and Vietnam‖ show considerable variations of the characteristics of FDI across the four countries, all have had restrictive policy regimes, and have gone through liberalization in the early 1990. Yet the effects of this liberalization policy on characteristics of inward investment vary across countries. Hence, the causality between the institutional framework, including informal institutions, and entry strategies merits further investigation. This analysis has to find appropriate ways to control for the determinants of mode choice, when analyzing its consequences. The study concludes that the policy makers need to understand how institutional arrangements may generate favourable outcomes for both the home company and the host economy. Hence, we need to better understand how the mode choice and the subsequent dynamics affect corporate performance and how it influences externalities generated in favour of the local economy. Vittorio Daniele and UgoMarani78 (2007) in their study, ―Do institutions matter for FDI? A Comparative analysis for the MENA countries‖ analyse the underpinning factors of foreign Direct Investments towards the MENA countries. The

24

main interpretative hypothesis of the study is based on the significant role of the quality of institutions to attract FDI. In MENA experience the growth of FDI flows proved to be notably inferior to that recorded in the EU or in Asian economies, such as China and India. The study suggests as institutional and legal reform are fundamental steps to improve the attractiveness of MENA in terms of FDI.It is concluded from the above studies that market size, fiscal incentives, lower tariff rates, export intensity, availability of infrastructure, institutional environment, IT related investments and cross – border mergers and acquisitions are the main determinants of FDI flows at temporal level. FDI helps in creation/preservation of employment. It also facilitates exports. Diverse types of FDI lead to diverse types of spillovers, skill transfers and physical capital flows. It enhances the chances of developing internationally competitive business clusters (e.g. ASEAN, SAPTA, NAPTA etc.). The increasing numbers of BITs (Bilateral Investment Treaties among nations, which emphasizes non – discriminatory treatment of FDI) between nations are found to have a significant impact on attracting aggregate FDI flow as the concepts of neighbourhood and extended neighbourhood are widely applicable in different contexts for different countries. It is concluded that FDI plays a positive role in enhancing the economic growth of the host country.

5.2 INTER – COUNTRY STUDIESBhagwati J.N.7 (1978), in his study ―Anatomy and Consequences of Exchange Control Regimes‖ analyzed the impact of FDI on international trade. He concluded that countries actively pursuing export led growth strategy can reap enormous benefits from FDI.Crespo Nuno and Fontoura Paula Maria11 (2007) in their paper ―Determinant Factors of FDI Spillovers– What Do We Rally Know?‖ analyze the factors determining the existence, dimensions and sign of FDI spillovers. They identify that FDI spillovers depend on many factors like absorptive capacities of domestic firms and regions, the technological gap, or the export capacity. Gazioglou S. andMcCausland W.D.21 (2000), in their study ―An International Economic Analysis of FDI and International Indebtedness‖ developed a micro foundations framework of analysis of FDI and integrated it into a macro level analysis. They highlighted the importance of profit repatriation in generating different effects of FDI on net international debt, trade and real exchange rate in developed economies compared to less developed economies.Chen Kun- Ming, Rau Hsiu –Hua and Lin Chia – Ching10

25

(2005) in their paper ―The impact of exchange rate movements on ForeignDirect Investment: Market –Oriented versus Cost – Oriented‖, examine the impact of exchange rate movements on Foreign Direct Investment. Their empirical findings indicate that the exchange rate level and its volatility in addition to the relative wage rate have had a significant impact onTaiwanese firms‘ outward FDI into China. They concluded that the relationship between exchange rates and FDI is crucially dependent on the motives of the investing firms. Salisu A. Afees56 (2004) in his study ―TheDeterminants and Impact of Foreign Direct Investment on economicGrowth in Developing Countries: A study of Nigeria‖ examines the determinants and impact of Foreign Direct Investment on economic Growth in Developing Countries using Nigeria as a case study. The study observed that inflation, debt burden, and exchange rate significantly influence FDI flows into Nigeria. The study suggests the government to pursue prudent fiscal and monetary policies that will begeared towards attracting more FDI and enhancing overall domestic productivity, ensure improvements in infrastructural facilities and to put a stop to the incessant social unrest in the country. The study concluded that the contribution of FDI to economic growth in Nigeria was very low even though it was perceived to be a significant factor influencing the level of economic growth in Nigeria. Lisa De Propis and Nigel Driffield40 (2006) in their study ―The Importance of Cluster for Spillovers from Foreign Direct Investment and Technology Sourcing‖, examine the link between cluster development and inward foreign direct investment. They concluded that firms in clusters gain significantly from FDI in their region, both within the industry of the domestic firm and across other industries in the region.Miguel D.Ramirez42 (2006) in his study ―Is Foreign Direct Investment Beneficial for Mexico? An Empirical Analysis‖ examines the impact of Foreign Direct Investment on labour productivity function for the 1960- 2001 period is estimated that includes the impact of changes in the stock of private and foreign capital per worker. The error correction model estimates suggest that increase in both private and foreign investment per worker have a positive and economically significant effect on the rate of labour productivity growth. However, after taking into account the growing remittances of profits and dividends, there is a marked decrease in the economic effect of foreign capital per worker on the rate of labour productivity growth. The study assesses the short – term interactions of the relevant variables via impulse response functions and variance decompositions based on a decomposition process that does not depend on the ordering of the variables. Okuda Satoru48 (1994) in his study ―Taiwan‘s Trade and FDI

26

policies and their effect on Productivity Growth‖ reviewed the course of Taiwan‘s trade and FDI policies.The purpose of the study was to examine how these policies affected productivity of Taiwan‘s manufacturing sector. As an indicator of productivity, TEP indices of the Taiwan manufacturing were calculated at the subsector level. It is find out that the TEP growth for manufacturing as a whole was 2.6 per cent per annum the electronics and machinery maintained high productivity performance while examining the relationship between TEP and trade and FDI liberalization policies was examined. The study concludes that the policies of the Taiwan government have generally been relevant.Rhys Jenkins53 (2006) in his study―Globalization, FDI and Employment in Vietnam‖, examines the impact ofFDI on employment in Vietnam, a country that received considerable inflow of foreign capital in the 1990s as part of its increased integration with the global economy. The study shows that the indirect employment effects have been minimal and possibly even negative because of the limited linkages which foreign investors create and the possibility of ―crowding out of domestic investment‖. Thus, the study finds out that despite the significant share of foreign firms in industrial output and exports, the direct employment generated has been limited because of the high labour productivity and low ratio of value added to output of much of this investment. Emrah Bilgic18 (2006) in her study ―Causal Relationship between Foreign Direct Investment and Economic Growth in turkey‖, examines the possible causal relationship between FDI and Economic Growth in Turkey. The study finds out that there is neither a long run nor a short run effect of FDI on economic growth of Turkey. Thus the study could not find any patterns for each hypothesis of ―FDI led Growth‖ and ―Growth drivenFDI‖ in Turkey. The main reason of this result is that the country had unstable growth performances and very low FDI inflows for the period under analysis. The study suggests that in order to have a sustained economic development the government should improve the investment environment with the ensured political and economic stability in the country.Korhonen Kristina36 (2005) in her study ―Foreign Direct Investment in a changing Political Environment‖ compares Finnish Investment during the restrictive period in 1984- 1997, with the liberal period in 1998-2002. The study reveals that the political environment of the firm in the host country may have a special role among the other parts of the firm‘s environment because of the supremacy of the host government to use its political power in order to intervene in FDI. The study states that TNC may not need to bargain alone but may lobby from its home government. Therefore, the study adds the concept of authority services to the list of TNC‘s bargaining

27

techniques. The empirical results of the study suggest that the change in the political environment in Korea in 1998 had a clear impact on Finnish investment in Korea. The findings indicate that repeat investments had been engaged regardless of the investment policy liberalization, but the acquisitions had not taken place without the change in Korea‘s investment policy. The results also suggest that the modified strategy performance model can be successfully used to assess the impact of change in the firm‘s external environment. The results indicate that firms scan their political environment continuously in order to anticipate and respond to possible changes. Rydqvist Johan55 (2005), in his work ―FDI and Currency Crisis: Currency Crisis and the inflow of Foreign Direct Investment‖ analyse if there are any changes in the flow of FDI before, during and after a currency crisis. The study found that no similarities in regions or year of occurrence of the currency crisis. The depth, length and structure of each currency crisis together with using the right definition of a currency crisis are two important factors relating to the outcomes in this study. CharlottaUnden9 (2007) in his study ―Multinational Corporations and Spillovers in Vietnam- Adding Corporate Social Responsibility‖ focuses the presence ofMNCs and how they have influenced the Vietnamese economy is examined. Specifically, MNCs spillover effects on domestic enterprises are discussed. The paper also discussed the challenges and obstacles to implementation and development of corporate social responsibility policies. It shows that there is potential for positive spillover effects, such as production methods and information spread from MNCs to domestic suppliers. However, the company must be large enough to be contracted and there is a risk that the gap will widen between the few large strong suppliers and the huge number of small –and medium – sized companies that operate in Vietnam. The paper also shows that MNCs can work as catalysts by transferring CSR guidelines and a long – term way of thinking to domestic companies. Thai Tri Do72 (2005) in his study, ―The impact of Foreign Direct Investment and openness on Vietnamese economy‖ examines the impact of FDI on Vietnamese economy by using Partial Adjustment Model and time series data from 1976 to 2004. FDI is shown to have not only short run but also long run effect on GDP of Vietnam. The study also examines the impact of trade openness on GDP and it is found that trade is stronger than that of FDI. Alhijazi, Tahya Z.D2 (1999) in his work, ―Developing Countries and Foreign Direct Investment‖ analysed the pros and cons of FDI for developing countries and other interested parties. This thesis scrutinizes the regulation of FDI as a means to balance the interests of the concerned parties, giving an assessment of the balance of

28

interests in some existing and potential FDI regulations. The study also highlights the case against the deregulation of FDI and its consequences for developing countries. The study concludes by formulating regulatory FDI guidelines for developing countries.Johannes Cornelius Jordaan31(2005) in his study, ―Foreign Direct investment and neighbouring influences‖ evaluates the influences of a number of economic and socio – political influences of neighbouring countries on the host country‘s FDI attractiveness.Three groups, consisting of developed, emerging and African countries are evaluated, with the main emphasis on African countries. Results of the study indicate that an improvement in civil liberties and political rights, improved infrastructure, higher growth rate and a higher degree of openness of the host country, higher levels of human capital attract FDI to the developed countries but deter FDI in emerging and African countriesindicating cheap labour as a determinant of FDI inflows to these countries. Further, Oil –Owned countries in Africa‘s attract more FDI than non – oil endowed countries –emphasing the importance of natural resources in Africa. Pawin Talerngsri50 (2001) in his study, ―TheDeterminants of FDI Distribution across Manufacturing Activities in an Asian Industrializing Country: A Case of Japanese FDI in Thailand‖ identifies and investigates the ‗industry – level Determinants‘ of FDI in the context of Asian industrializing countries by using the data on Japanese FDI in Thailand. The study examines the influences of location – specific characteristics of host industries such as factor endowments, trade costs, and policy factors. More distinctively, it examines the effect of vertical (input-output) linkages among Japanese firms. The study finds out that Japanese FDI in Thailand was not evenly distributed across manufacturing activities. Some capital / technological – intensive industries like rail equipments and air crafts did not receive any FDI during a specified period. On the other hand, other relatively labour – intensive industries like TV Radio, and communications equipment industry and motor vehicle industry received disproportionately large values of FDI.Jainta Chomtoranin29(2004) in her study, ―A Comparative Analysis of Japanese and American Foreign Direct Investment in Thailand‖ assesses the determinants ofJapanese and American FDI in Thailand during 1970-2000. In this analysis, the short and long-term determinants of both FDI are estimated. This study concludes that, in the short and the long run, Japanese FDI is found to be driven by trade factors and the yen appreciation. While the American FDI is driven by market factor, specifically the income level of Thai people. Japanese FDI is trade – oriented, whereas the American FDI is market – seeking oriented. Khor Chia Boon33 (2001) in his study, ―Foreign Direct

29

Investment and EconomicGrowth‖ investigates the casual relationship between FDI and economic growth. The findings of this thesis are that bidirectional causality exist, between FDI and economic growth in Malaysia i.e. while growth in GDP attracts FDI, FDI also contributes to an increase in output. FDI has played a key role in the diversification of the Malaysian economy, as a result of which the economy is no longer precariously dependent on a few primarily commodities, with the manufacturing sector as the main engine of growth.Tatonga Gardner Rusike71 (2007) in his study, ―Trends and determinants of inward Foreign Direct Investment toSouth Africa‖ analyses Trends and determinants of inward Foreign Direct Investment to South Africa for the period 1975-2005. The analysis indicated that openness, exchange rate and financial development are important in long run determinants of FDI. Increased openness and financial development attract FDI. While an increase (depreciation) in the exchange rate deters FDI to South Africa. Market size emerges as a short run determinant of FDI although it is declining in importance. The analysis also showed that FDI itself, imports and exchange rate explain a significant amount of the forecast error variance. The influence of market size variable is small and declining over time.Belem Iliana Vasquez Galan6 (2006) in his study, ―The effect of Trade Liberalization and Foreign Direct Investment in Mexico‖ analyses the importance of liberalization and FDI on Mexico‘s economy. The major findings of the study demonstrated that the main determinants of GDP are capital accumulation, labour productivity and FDI. Further, findings confirm that exports, differences in relative wages and currency depreciation are explicative of FDI. Exports are highly dependent on the world economy and exchange rate fluctuations. Labour productivity and FDI improve human capital. Similarly GDP and human capital induce productivity gains and capital accumulations improve due to technology transfers, infrastructure, personal income and peso appreciation. The study showed that an expansionary monetary policy has the capacity to decelerate the interest rate and thereby to enhance FDI and its spillovers.Jing Zhang30 (2008) in his work, ―Foreign Direct Investment, Governance, and the Environment in China: Regional Dimensions‖ includes four empirical studies related to FDI, Governance, economic growth and the environment. The results of the thesis are, first, an intra-country pollution haven effect does exist in China. Second, FDI is attracted to regions that have made more effort on fighting against corruption and that have more efficient government. Third, government variables do not have a significant impact on environmental regulation. Fourth, economic growth has a negative effect on environmental quality at current income level in China.

30

Lastly, foreign investment has positive effects on water pollutants and a neutral effect on air pollutants Swapna S. Sinha69 (2007) in his thesis,‖Comparative Analysis of FDI in China and India: Can Laggards Learn fromLeaders?‖ focuses on what lessons emerging markets that are laggards in attracting FDI, such as India, can learn from leader countries in attracting FDI, such as China in global economy. The study compares FDI inflows in China and India. It is found that India has grown due to its human capital, size of market, rate of growth of the market and political stability. For china, congenial business climatefactors comprising of making structural changes, creating strategic infrastructure at SEZs and taking strategic policy initiatives of providing economic freedom, opening up its economy, attracting diasporas and creating flexible labour law were identified as drivers for attracting FDI.Samuel Adams57 (2009) in his paper, ―Can Foreign Direct Investment help topromote growth in Africa‖ provides a review of Foreign Direct Investment and economic growth literature in the context of developing countries and particularly Sub- Saharan Africa. The main findings of the study are as follows, first, FDI contribution to economic development of the host country in two main ways, augmentation of domestic capital and enhancement of efficiency through the transfer of new technology, marketing and managerial skills, innovation and best practices. Secondly, FDI has both benefits and costs and its impact is determined by the country specific conditions in general and the policy environment in particular in terms of the ability to diversify, the level of absorption capacity, targeting of FDI and opportunities for linkages between FDI and domestic investment.Yew Siew Youg85 (2007) in his study, ―Economic Integration,Foreign Direct Investment and Growth in ASEAN five members‖ examines the effects of economic integration on FDI flows and the effects of FDI flows on economic growth in ASEAN 5 countries. The study found that market size, economic integration, human capital, infrastructure and existing FDI stock are the important determinants of FDI for ASIAN countries. The study also found that FDI, economic integration and human capital are robustly significant to economic growth, manufacturing sector growth and high technology sector growth for ASEAN countries. The FDI flow into ASEAN countries was found to be inversely proportional to the per capita income of the five countries.It is concluded that the effect of FDI on economic growth of ASEANS countries was found to be higher for countries with higher per capita income. Coupled with strong intra – industry trade in the manufacturing sector of ASEAN countries an integrated approach to draw in FDI and promote manufacturing and high technology growth should be accelerated. The machinery and electrical

31

appliances industry contributes the highest trade in the region and is highly integrated in intra – industry trade within the region. The key hubs of the industry within the region are Malaysia and Singapore. Sasidharan Subash and Ramanathan A.59 (2007), study on ―Foreign Direct Investment and Spillovers: Evidence from Indian Manufacturing‖. It is an attempt to empirically examine the spillover effects from the entry of foreign firms using a firm level data of Indian manufacturing industries. Firm – level data of Indian manufacturing industries are used for the period 1994-2002. They consider both horizontal and vertical spillover effects of FDI. Consistent with the results of the previous studies, the study finds no evidence of horizontal spillover effects. However, the study finds negative vertical spillover effects.Diana Viorela Matei13 (2007) in her study, ―Foreign DirectInvestment location determinants in Central and Eastern EuropeanCountries‖ focuses on central and Eastern European former state – planned economies and investigates why multinationals chose to locate their investments in these countries. The main findings of the study are that market potential, privatization and agglomeration factors have significant effects upon FDI location choice, helping to explain the attractiveness for FDI of these host countries. Kostevc Crt, Tjasa Redek, Andrej Susjan37(2007) in their study ―Foreign Direct Investment and institutional Environment in Transition Economies‖ analysed the relation between FDI and the quality of the institutional environment in transition economies. The analysis confirmed a significant impact of various institutional aspects on the inflow of foreign capital. To isolate the importance of the institutional environment from the impact of other factors, a panel data analysis was performed using the data of 24 transition economies in the period 1995-2002. The findings showed that in the observed period the quality of the institutional environment significantly influenced the level of FDI in transition economies. Other variables that proved to have a statistically significant influence were budget deficit, insider privatization and labour cost per hour.Rudi Beijnen54 (2007) in his study, ―FDI in China: Effects on Regional Exports‖investigates the existence of a significant FDI – Export linkage in China, using panel data at the provincial level over the 1995 to 2003. The theory of FDI proposes the possibility of an export creating effect. However, the results show that if the model is correctly specified, there is no evidence for the existence of a significant FDI-export linkage. The study concluded that the claims of the reference studies concerning the presence of a FDI– export linkage are not valid. Taewon Suh, Omar J.Khan70 (2003) in their study, ―The effects of FDI inflows and ICT infrastructure on exporting in ASEAN/ATTA countries: A comparison with

32

other regional blocs in emerging markets‖, explores the impact of both the increase in FDI inflows and the increase in information and communication technology infrastructure investments on exporting in ASEAN nations (the trade bloc of which is known as AFTA) compared with two other major trade blocs: CEFTA and LAIA. The analysis is based on data from cross – section of countries (26 emerging markets from three trade blocs) over time (from 1995 to 2000). The results show that the increase of investment in ICT infrastructure yields positive and significant returns in the national exporting level only for the ASEAN / AFTA and CEFTA sample. The impact of the increase of FDI inflows on export is significant only in the CEFTA and LAIA samples. Garrick Blalock20 (2006) in his work, ―Technology adoption from Foreign Direct Investment and Exploring: Evidence from Indonesian Manufacturing‖ contains three essays on technology adoption from foreign direct investment and exploring. The first essay investigates how technology that accompanies FDI diffuses in the host economy and finds that multinationals wish to limit technology leakage to domestic rivals, they benefits from deliberate technology transfer to suppliers that may lower input prices or raise input quality. The second essay examines how firm attributes affect innovation by investing the adoption of technology brought with FDI. The findings suggest that the more competent firms have already adopted technologies with high returns and low costs,whereas less competent firms have room to catch up and can still benefit from the adoption of ‗low hanging fruit technology‘ the third essay asks whether firms acquire technology though exporting and find strong evidence that firms benefits from a one time jump in productivity upon entering export markets.Dexin Yang12 (2003) in his study, ―Foreign Direct Investment from Developing Countries: A case study of China‘s Outward Investment‖ presents an interpretation of FDI by Chinese firms. The research is motivated by the phenomenon that compared with foreign investment in China; direct investment from China has so far attracted relatively little attention from researchers. Given the difficulties in providing a convincing explanation of the patterns of China‘s outward FDI by using mainstream theories, this thesis develops a network model of FDI by formalizing network ideas from business analysis for application to economic analysis, and interprets China‘s outward FDI in terms of network model. This thesis holds that Chinese firms were engaged in FDI for various network benefits.Accordingly, the geographic distribution of China‘s outward FDI reflected the distribution of network benefits required by Chinese firms and the relevant cost saving effects for containing such benefits. As the functioning of networks relies on elements of market economies, the development of

33

China‘s outward FDI was affected by the progress of marketisation in China. Minquan liu, Luodan Xu, Liu Liu43 (2004) in their study, ―Wage related Labour standards and FDI in China: Some survey findings from Guangdong Province‖ presents findings from a Survey of Foreign Invested Enterprises (FIEs) in Guangdong China, on the relationship between Foreign Direct Investment and wage – related labour standards (regular wages, and compliance with official overtime and minimum wage) which show that wage – related standards are statistically high in FIEs whose home countries‘ standards are higher, after controlling for other influences. However, a cost – reduction FIE is more likely to be associated with inferior standards.D.N Ghosh22 (2005) in his paper ‗FDI and Reform: Significance and Relevance of Chinese Experience‖ finds that if India shed its inhibitions about FDI and follow in the footsteps of China, than India would be in a position to realize its full potential. China‘s FDI saga has been a textbook replay of what institutional economics would call ―adaptive efficiency‖ on the part of its political regime. The country made courageous but careful choices in difficult circumstances, signaling radical departure from the belief system it has been accustomed to for decades. The study concluded that both china and India have demonstrated that for a late industrializing country the Washington consensus is not necessarily a good model to follow. It might be appropriate for countries with a good institutional infrastructure and efficient private sector, but for others it can be a recipe for disaster. China seems to have discovered its own reform model with―Chinese Characteristics‖. A western observer calls it the ―Beijing Consensus‖. India is currently fumbling to validate a different kind of model– call it the ―India Consensus‖- for democrating country in a globally interdependent world. It is concluded from the analysis of the above studies that political environment, debt burden, exchange rate, FDUI spillovers significantly influence FDI flow to the developing countries. It is also observed that countries pursuing export led growth strategy and firms in clusters gain more benefits from FDI. It is also found that improve infrastructure, higher growth rate, higher degree of openness of the host economy and higher levels of human capital attract FDI to the developed as well as developing nations. It augments domestic savings and enhances efficiency of human capital (through transfer of new technology, marketing and managerial skills, innovation and best practices)

INTER – INDUSTRY STUDIESGuruswamy Mohan, Sharma Kamal, Mohanty Jeevan Prakash, Korah Thomas J.26 (2005) in their paper, ―FDI in India‘s Retail Sector:‖ More Bad

34

than Good‖, find that retail in India is severely constrained by limited availability of bank finance, dislocation of labor. The study suggests suitable measures like need for setting up of national commission to study the problems of the retail sector and to evolve policies that will enable it to cope with FDI. The study concludes that the entry of FDI in India‘s retailing sector is inevitable. However, with the instruments of public policy in its hands, the government can slow down the process. The government can try to ensure that the domestic and foreign players are more or less on an equal footing and that the domestic traders are not at a special disadvantage. The small retailers must be given the opportunity to provide more personalized service, so that their higher costs are taken advantage of by large supermarkets and hypermarkets. Park Jongsoo49 (2004) conducted a study on ―Korean Perspective on FDI in India: Hyundai Motors‘ Industrial Cluster‖ indicates that industrial clusters are playing an important role in economic activity. The key to promoting FDI inflows into India may lie in industries and products that are technology – intensive and have economies of scale and significant domestic content.Sarma EAS58 (2005) in his paper ‗Need for Caution in Retail FDI‖ examines the constraints faced by traditional retailers in the supply chain and give an emphasis on establishment of a package of safety nets as Thailand has done. India should also draw lessons from restrictions placed on the expansion of organized retailing, in terms of sourcing, capital requirement, zoning etc, in other Asian countries. The article comments on the retail FDI report that as commissioned by the Department of Consumer Affairs and suggests the need for a more comprehensive study. Gonzalez J.G25 (1988) in his study―Effect of Foreign Direct Investment in the presence of sector specific unemployment‖ extends the work done by Srinivasan68 (1983)―International factor movements, commodity trade and commercial policy in a specific factor model‖, by making an analysis of the welfare effects of foreign investment. The study shows that if there are no distortions, foreign investment enhances the social uplift of the people. The study strongly favours import substitution policies since such a strategy provides greater job opportunities to the people and consequently improves their standards of living. But the study finds that welfare effects of foreign Investment do not explain the pattern of trade in the economy. Thus, both Srinivasan (1983) and Gonzalez (1998) concluded that foreign direct investment and distortions of the labour market results in social uplift of the people.Sharma Rajesh Kumar67 (2006) in his article ―FDI in Higher Education: Official Vision Needs Corrections‖, examines the issues and financial compulsions presented in the consultation paper prepared by the

35

Commerce Ministry, which is marked by Shoddy arguments, perverse logic and forced conclusions. This article raises four issues which need critical attention: the objectives of higher education, its contextual relevance, the prevailing financial situation and the viability of alternatives to FDI. The conclusion of the article is that higher education needs long – term objectives and a broad vision in tune with the projected future of the country and the world. Higher education will require an investment of Rs. 20,000 to 25,000 crore over the next five or more years to expand capacity and improve access. For such a huge amount the paper argues, we can look to FDI.To sum up, it can be said that industrial clusters are playing a significant role in attracting FDI at Inter – industry level. It is argued that industries and products that are technology – intensive and have economies of scale and significant domestic content attract FDI at industrial level.

STUDIES IN INDIAN CONTEXT

Nayak D.N46 (2004) in his paper ―Canadian Foreign Direct Investment in India: Some Observations‖, analyse the patterns and trends of CanadianFDI in India. He finds out that India does not figure very much in the investment plans of Canadian firms. The reasons for the same is the indifferent attitude of Canadians towards India and lack of information of investment opportunities in India are the important contributing factor for such an unhealthy trends in economic relation between India and Canada. He suggested some measures such as publishing of regular documents like newsletter that would highlight opportunities in India and a detailed focus on India‘s area of strength so that Canadian firms could come forward and discuss their areas of expertise would got long way in enhancing Canadian FDI in India.Balasubramanyam V.N Sapsford David4(2007) in their article ―Does India need a lot more FDI‖ compares the levels of FDI inflows in India and China, and found that FDI in India is one tenth of that of china. The paper also finds that India may not require increased FDI because of the structure and composition of India‘s manufacturing, service sectors and her endowments of human capital. The requirements of managerial and organizational skills of these industries are much lower than that of labour intensive industries such as those in China. Also, India has a large pool of well – Trained engineers and scientists capable of adapting and restructuring imported know – how to suit local factor and product market condition all of these factors promote effective spillovers of

36

technology and know- how from foreign firms to locally own firms. The optimum level of FDI, which generates substantial spillovers, enhances learning on the job, and contributes to the growth of productivity, is likely to be much lower in India than in other developing countries including China. The country may need much larger volumes of FDI than it currently attracts if it were to attain growth rates in excess of 10 per cent per annum. Finally, they conclude that the country is now in a position to unbundle the FDI package effectively and rely on sources other than FDI for its requirements of capital. Naga Raj R45 (2003) in his article ―Foreign Direct Investment in India in the1990s: Trends and Issues‖ discusses the trends in FDI in India in the 1990s and compare them with China. The study raises some issues on the effects of the recent investments on the domestic economy. Based on the analytical discussion and comparative experience, the study concludes by suggesting a realistic foreign investment policy. MorrisSebastian44 (1999) in his study ―Foreign Direct Investment from India:1964-83‖ studied the features of Indian FDI and the nature and mode of control exercised by Indians and firms abroad, the causal factors that underlie Indian FDI and their specific strengths and weaknesses using data from government files. To this effect, 14 case studies of firms in the textiles, paper, light machinery, consumer durables and oil industry in Kenya and South East Asia are presented. This study concludes that the indigenous private corporate sector is the major source of investments. The current regime of tariff and narrow export policy are other reasons that have motivated market seeking FDI.Resources seeking FDI has started to constitute a substantial portion of FDI from India.Neither the ―advantage concept‖ of Kindlebrger, nor the concept of large oligopolies trying to retain their technological and monopoly power internationally of Hymer and Vaitsos are relevant in understanding Indian FDI, and hence are not truly general forces that underlie FDI. The only truly general force is the inexorable push of capital to seek markets, whether through exports or when conditions at home put a brake on accumulation and condition abroad permit its continuation.Nirupam Bajpai and Jeffrey D. Sachs47(2006) in their paper ―Foreign Direct Investment in India: Issues and Problems‖, attempted to identify the issues and problems associated with India‘s current FDI regimes, and more importantly the other associated factors responsible for India‘s unattractiveness as an investment location.Despite India offering a large domestic market, rule of law, low labour costs, and a well working democracy, her performance in attracting FDI flows have been far from satisfactory. The conclusion of the study is that a restricted FDI regime, high import tariffs, exit barriers for firms, stringent

40

37

labor laws, poor quality infrastructure, centralized decision making processes, and a very limited scale of export processing zones make India an unattractive investment location.Kulwinder Singh38 (2005) in his study―Foreign Direct Investment in India: A Critical analysis of FDI from 1991-2005‖ explores the uneven beginnings of FDI, in India and examines the developments (economic and political) relating to the trends in two sectors: industry and infrastructure.The study concludes that the impact of the reforms in India on the policy environment for FDI presents a mixed picture. The industrial reforms have gone far, though they need to be supplemented by more infrastructure reforms, which are a critical missing link. ChandanChakraborty, Peter Nunnenkamp8 (2004) in their study ―Economic Reforms, FDI and its Economic Effects in India‖ assess the growth implications of FDI in India by subjecting industry – specific FDI and output data to Granger causality tests within a panel co -integration framework. It turns out that the growth effects of FDI vary widely across sectors. FDI stocks and output are mutually reinforcing in the manufacturing sector. In sharp contrast, any causal relationship is absent in the primary sector. Most strikingly, the study finds only transitory effects of FDI on output in the service sector, which attracted the bulk of FDI in the post – reform era. These differences in the FDI – Growth relationship suggest that FDI is unlikely to work wonders in India if only remaining regulations were relaxed and still more industries opened up o FDI.Basu P., Nayak N.C, VaniArchana5 (2007) in their paper ―Foreign Direct Investment in India:Emerging Horizon‖, intends to study the qualitative shift in the FDI inflows in India in – depth in the last fourteen odd years as the bold new policy on economic front makes the country progress in both quantity and the way country attracted FDI. It reveals that the country is not only cost – effective but also hot destination for R&D activities. The study also finds out that R&D as a significant determining factor for FDI inflows for most of the industries in India. The software industry is showing intensive R&D activity, which has to be channelized in the form of export promotion for penetration in the new markets. The study also reveals strong negative influence of corporate tax on FDI inflows.To sum up, it can be said that large domestic market, cheap labour, human capital,are the main determinants of FDI inflows to India, however, its stringent labour laws, poor quality infrastructure, centralize decision making processes, and a vary limited numbers of SEZs make India an unattractive investment location.

38

CONCLUSIONS

The above review of literature helps in identifying the research issues and gaps for the present study. The foregoing review of empirical literature confirms/highlights the following facts1) Institutional infrastructure and development are the main determinants of FDI inflows in the European transition economies. Institutional environment (comprising both institutional strategies and policies of organizations relating to these institutions) plays critical role in reducing the transaction costs of both domestic and cross border business activity. 2) FDI plays a crucial role in employment generation/ preservation in Central Europe. It is found that bigger diversity of types of FDI lead to more diverse types spillovers and skill transfers which proves more favourable for the host economy. 3)It is also found that apart from market size, exports, infrastructure facilities,institutions, source and destination countries, the concept of neighborhood and extended neighborhood is also gaining importance especially in Europe, China and India. 4)In industrial countries high labour costs encourage outflows and discourage inflows of FDI. The principle determinants of FDI in these countries are IT –related investments, trade and cross – border mergers and acquisitions. 5)Studies which underlie the effects of FDI on the host countries economic growth shows that FDI enhance economic growth in developing economies but not in developed economies. It is found that in developing economies FDI and economic growth are mutually supporting. In other words economic growth increases the size of the host country market and strengthens the incentives for market seeking FDI. It is also observed that bidirectional causality exist between FDI and economic growth i.e. growth in GDP attracts FDI and FDI also contributes to an increase in output. 6) Studies on developing countries of South, East and South East Asia shows that fiscal incentives, low tariffs, BITs (Bilateral Investment Treaties) with developed countries have a profound impact on the inflows of aggregate FDI to developing countries. 7) Studies on role of FDI in emerging economies shows that general institutional framework, effectiveness of public sector administration and the availability of infrastructural facilities enhance FDI inflows to these nations. FDI also enhance the chances of developing internationally competitive business clusters

39

8)It is observed that countries pursuing export – led growth strategies reaps enormous benefits from FDI.9)The main determinants of FDI in developing countries are inflation, infrastructural facilities, debts, burden, exchange rate, FDI spillovers, stable political environment etc.10) It is found that firms in cluster gain significantly from FDI in their region, within industry and across other industries in the region.11)It is also observed that FDI have both short – run and long – run effect on the economy. So, regulatory FDI guidelines must be formulated in order to protect developing economies from the consequences of FDI flows.

RESEARCH ISSUES AND RESEARCH GAPS

The above review of literature proves beneficial in identifying the research issues and the research gaps, which are mainly the edifices on which the objectives of the present study are based on. There is hardly any study in India which has taken macroeconomic variables like foreign exchange reserves, total trade, financial position, research and development expenditure while assessing the determinants and impact of FDI on Indian economy. The present study tries to include these above said variables in assessing the determinants and impact of FDI in India at the macro – level. Further, there is hardly any study in India, which documents the trends and patterns of FDI at world level, Asian level and Indian level. Thus, the present study is an endeavor to discuss the trends and patterns of FDI, its determinants and its impact on Indian economy. The present study differs from the early studies in many ways and enriches the existing literature in the following ways: Firstly, it has included variables other than the variables included by other scholars. Secondly, the present study documents the trends and patterns of FDI at World, Asian and Indian level. Thirdly, the present study tries to highlight the changing attitude of developing countries towards FDI and attitude change of developed countries towards developing countries in understanding their contribution in contemporary international relations and development process. Fourthly, the study presents the experiences of first and second generation of economic reforms on Indian economy.

40

5.3TRENDS AND PATTERENS OF FDI INFLOWS

One of the most prominent and striking feature of today‘s globalised world is the exponential growth of FDI in both developed and developing countries. In the last two decades the pace of FDI flows are rising faster than almost all other indicators of economic activity worldwide. Developing countries, in particular, considered FDI as the safest type of external finance as it not only supplement domestic savings, foreign reserves but promotes growth even more through spillovers of technology, skills, increased innovative capacity, and domestic competition. Now a days, FDI has become an instrument of international economic integration.Located in South Asia, India is the 7th largest, and the 2nd most populated country in the world. India has long been known for the diversity of its culture, for the inclusiveness of its people and for the convergence of geography. Today, the world‘s largest democracy has come to the forefront as a global resource for industry in manufacturing and services. Its pool of technical skills, its base of an English – speaking Populace with an increasing disposable income and its burgeoning market has all combined to enable India emerge as a viable partner to global industry. Recently, investment opportunities in India are at a peak.This chapter covers the trends and patterns of FDI inflows at World, Asian and Indian level during 1991-2008.

TRENDS AND PATTERNS OF FDI FLOW IN THE WORLDThe liberalization of trade, capital markets, breaking of business barriers, technological advancements, and the growing internationalization of goods, services, or ideas over the past two decades makes the world economies the globalised one. Consequently, with large domestic market, low labour costs, cheap and skilled labour, high returns to investment, developing countries now have a significant impact on the global economy, particularly in the economics of the industrialized states. Trends in World FDI flows depict that developing countries makes their presence felt by receiving a considerable chunk of FDI inflows. Developing economies share in total FDI inflows rose from 26% in 1980 to 40% in 1997.

41

CHART 2)FDI INFLOWS IN THE WORLD

Years/ 19 96 97 98 99 20 20 20 20 20 20 20 200Countr 90- 00 01 02 03 04 05 06 7ies 95World 22 38 47 69 108 14 73 71 63 64 95 14 183FDI 5.3 6.1 8.1 4.5 8.3 92 5.1 6.1 2.6 8.1 8.7 11 3.3Devel 64. 57. 56 69. 77. 82 68. 76. 69. 58. 63. 66 68oped 4 1 7 1 .2 4 5 9 6 8 .7EconomiesshareinworldFDIDevel 33 39. 39. 27 20. 15 27. 21. 26. 36 33 29 27.oping 5 9 7 .9 9 7 3 .3 3EconomiesshareinworldFDISource: compiled from the various issues of WIR, UNCTAD, World Bank However, the share during 1998 to 2003 fell considerably but rose in 2004, again in 2006 and 2007 it reduces to 29% to 27% due to global economic meltdown. Specifically, developing Asia received 16 %, Latin America and the Caribbean 8.7 %, and Africa 2 %.On the other hand, developed economies show an increasing upward trend of FDI inflows, while developing economies show a downward trend of FDI inflows after 1995.Developed Economies's share in world FDI Developing Economies's share in world FDISource: compiled from the various issues of WIR, UNCTAD, World Bank However, India shows a steady pattern of FDI inflows during 1991-2007 (Chart- 2).The annual growth rate of developed economies was 33%, developing economies was 21% and India was 17% in 2007 over 2006. During 1991-2007 the compound annual growth rate registered by developed economies was 16%, developing economies was merely 2%, and that of India was 41%.

42

MOST ATTRACTIVE LOCATION OF GLOBAL FDIIt is a well-known fact that due to infrastructural facilities, less bureaucratic structure and conducive business environment China tops the chart of major emerging destination of global FDI inflows. The other most preferred destinations of global FDI flows apart from China are Brazil, Mexico, Russia, and India. The annual growth rate registered by China was 15%, Brazil was 84%, Mexico was 28%, Russia was 62%, and India was 17% in 2007 over 2006. During 1991-2007 the compound annual growth rate registered by China was 20%, Brazil was 24%, Mexico was 11%, Russia was 41% (from 1994), and India was 41%. India‘s FDI need is stood at US$15 bn per year in order to make the country on a 9% growth trajectory (as projected by the Finance Minister of India in the current Budget74). Such massive FDI is needed by India in order to achieve the objectives of its second generation economic reforms and to maintain the present growth rate of the economy. Although, India‘s share in world FDI inflows has increased from 0.3% to 1.3% from 1990-95 to 2007. Though, this is not an attractive share when it is compared with China and other major emerging destinations of global FDI inflows.

CHART 3)SHARE OF INDIA IN WORLD FDI

Years 19 96 97 98 99 20 20 20 20 20 20 20 200/ 90- 00 01 02 03 04 05 06 7Count 95riesWorld 22 38 47 69 10 14 73 71 63 64 95 14 183FDI 5.3 6.1 8.1 4.5 88 92 5 6.1 2.6 8.1 8.7 11 3.3India‘ 0.3 0.7 0.8 0.4 0.2 0.2 0.5 0.5 0.7 0.8 0.8 1.4 1.3sshareinworldFDI

india's share in world FDISource: compiled from the various issues of WIR, UNCTAD, World Bank (Table-3.3) reveals that during the period under review FDI inflow in India has increased from 11% to 69%. But when it is compared with China,

43

India‘s FDI inflows stand no where. And when it is compared with rest of the major emerging destinations of global FDI India is found at the bottom of the ladder.

Source: compiled from the various issues of WIR, UNCTAD, World Bank The reason could be bureaucratic hurdles, infrastructural problems, business environment, or government stability. India has to consider the five point strategy as put forward by the World Bank for India, if India wants to be an attractive location of global FDI in the coming years.

TRENDS AND PATTERNS OF FDI FLOW IN ASIAIn the South, East, and South – East Asia block India is at 3rd place after China and Singapore South, East, South – East Asia block registered an annual growth rate of 19% in 2007 over 2006 and compound annual growth rate of 17% on an annualized basis during 1991-2007. India‘s share has increased from 1.5% in 1990- 95 to 9.2% in 2007 while China‘s share was decreased to 33 per cent in 2007 from 43.4 per cent in 1990-95. It is found that there is an increment of 5.8% in case of India while there is a decrement of 9.8% in case of China. It is evident from that India‘s share among developing countries in FDI inflow was 1.4% in the last decade and 2.8% in

Source: Doing business in India: 2009, World Bank.The ―doing business84‖ conducted by World Bank put forward certain indicators (Table - 3.5) where China beats India in attracting high FDI inflows. High trade and transaction costs are mainly due to the country‘s lack of quality infrastructure. This lack of infrastructure discourages resource – seeking and export – oriented investment. The reason for the low level of FDI in India as compared to China could be any but the fact is that China opened its door to foreign investment in 1978 while India in 1991.There is an appreciable increase in the level of FDI inflows in the South Asian Region. Asia registered an annual growth rate of 17% in 2007 over 2006 and compound annual growth rate of 18% on an annualized basis during 1991-2007. India, Pakistan,Bangladesh are receiving higher volume of inflows since 1990. According to World Investment Report77 2007 (WIR), India has emerged as major recipient of FDI in South Asia. Its share is nearly 75% of total FDI flow to South Asia. Infact, the Comprehensive Economic Cooperation Agreement (CECA) with Singapore, Free Trade Agreements (FTAs) with Singapore and Thailand

44

and by becoming the member of ASEAN Regional Forum India has made its presence felt in East Asia region. India, is trying hard so that the largest free Trade Area, even larger than the existing EU-NAFTA combined area, could come up in the East Asia region. This suggested largest FTA would make the bilateral trade to the new heights in the coming years.Due to CECA and FTAs with Singapore, it emerged as the third biggest investing country in India. Its ranking improved by 4th place. And if this pace of investment continued from Singapore it is hoped that it will become the largest investing country in India in the coming years and Singapore may prove to be a Hong Kong or Taiwan to India.

TRENDS AND PATTERNS OF FDI FLOW IN INDIA

Economic reforms taken by Indian government in 1991 makes the country as one of the prominent performer of global economies by placing the country as the 4th largest and the 2nd fastest growing economy in the world. India also ranks as the 11th largest economy in terms of industrial output and has the 3rd largest pool of scientific and technical manpower. Continued economic liberalization since 1991 and its overall direction remained the same over the years irrespective of the ruling party moved the economy towards a market – based system from a closed economy characterized by extensive regulation, protectionism, public ownership which leads to pervasive corruption and slow growth from 1950s until1990s.In fact, India‘s economy has been growing at a rate of more than 9% for three running years and has seen a decade of 7 plus per cent growth. The exports in 2008 were $175.7 bn and imports were $287.5 bn. India‘s export has been consistently rising, covering 81.3% of its imports in 2008, up from 66.2% in 1990-91. Since independence,India‘s BOP on its current account has been negative. Since 1996-97, its overall BOP has been positive, largely on account of increased FDI and deposits from Non – Resident Indians (NRIs), and commercial borrowings. The fiscal deficit has come down from 4.5 per cent in 2003-04 to 2.7 per cent in 2007-08 and revenue deficit from 3.6 per cent to 1.1 per cent in 2007-08.As a result,India‘s foreign exchange reserves shot up 55 per cent in 2007-08 to close at US $309.16 billion – an increase of nearly US $110 billion from US $199.18 billion at the end of 2006-07. Domestic saving ratio to GDP shot up from 29.8% in 2004-05 to 37.7% in 2007-08. For the first time India‘s GDP crossed one trillion dollars mark in 2007. As a consequence of policy measures (taken way back in 1991) FDI in India has increased manifold since 1991 irrespective of the ruling party over the years, as there is a

45

growing consensus and commitments among political parties to follow liberal foreign investment policy that invite steady flow of FDI in India so that sustained economic growth can be achieved. Further, in order to study the impact of economic reforms and FDI policy on the magnitude of FDI inflows, quantitative information is needed on broad dimensions of FDI and its distribution across sectors and regions.Source: compiled & computed from the various issues of Economic Survey, RBI Bulletin, Ministry of Commerce The actual FDI inflows in India is welcomed under five broad heads: ( i ) Foreign Investment Promotion Board‘s (FIPB) discretionary approval route for larger projects,(ii) Reserve Bank of India‘s (RBI) automatic approval route, (iii) acquisition of shares route (since 1996), (iv)RBI‘s non – resident Indian (NRI‘s) scheme, and (v) external commercial borrowings (ADR/GDR) route. An analysis of the last eighteen years of trends in FDI inflows (Chart-3.5 and Chart-3.6) shows that there has been a steady flow of FDI in the country upto 2004, but there is an exponential rise in the FDI inflows from 2005 onwards.

Source: compiled & computed from the various issues of Economic Survey, RBI Bulletin, Ministry of Commerce Further, the actual inflows of FDI through various routes in India are described in Chart- 3.6. The FIPB route– represents larger projects which require bulk of inflows and account for government‘s discretionary approval. Although, the share of FIPB route is declining somewhat as compared to RBI‘s automatic route and acquisition of existing shares route. Automatic approval route via RBI shows an upward trend of FDI inflows since 1995. This route is meant for smaller sized investment projects. Acquisition of existing shares route and external commercial borrowing route gained prominence (in 1999 and 2003) and shows an upward increasing trend. However, FDI inflows through NRI‘s route show a sharp declining trend. It is found that India was not able to attract substantial amount of FDI inflow from 1991-99. FDI inflows were US$ 144.45 million in1991 after that the inflows reached to its peak to US$ 3621.34 million in 1997.Subsequently, these inflows touched a low of US $2205.64 million in 1999 but then shot up in 2001. Except in 2003, which shows a slight decline in FDI inflows, FDI has been picking up since 2004 and rose to an appreciable level of US$ 33029.32 million in 2008. The annual growth rate was 107% in 2008 over 2007, and compound annual growth rate registered was 40% on an annualized basis during 1991-2008. The increase in FDI inflows during 2008 is due to increased economic growth and sustained developmental process of the country which restore foreign investor‘s confidence in Indian economy despite global economic

46

crisis. However, the pace of FDI inflows in India has definitely been slower than China, Singapore, Russian Federation, and Brazil. A comparative analysis of FDI approvals and inflows reveals that there is a huge gap between the amount of FDI approved and its realization into actual disbursements. A difference of almost 40 per cent is observed between investment committed and actual inflows during the year 2005-06. All this depends on various factors, namely regulatory, procedural, government clearances, lack of sufficient infrastructural facilities, delay in implementation of projects, and non- cooperation from the state government etc.Source: compiled & computed from the various issues of Economic Survey, RBI Bulletin, Ministry of Commerce Infact, many long term projects under foreign collaborations get delayed considerably, or in some cases, they may even be denied in the absence of proper and sufficient infrastructural support and facilities. These are perhaps some reasons that could be attributed to this low ratio of approvals vs. actual inflows.Source: compiled & computed from the various issues of Economic Survey, RBI Bulletin, Ministry of Commerce Although, total number of foreign collaborations has increased since 1991. It is evident from that financial collaborations have gradually outnumbered the technical collaborations which indicate that investors are more interested in financial collaborations rather than technical ones. The increase in financial collaboration could be because of the relaxation given by government in the investment norms for financial collaborations.Source: compiled & computed from the various issues of Economic Survey, RBI Bulletin, Ministry of CommerceThe major sectors attracting FDI inflows in India have been Services and Electrical & electronics amounting US$ 30,421millions or 32 % of total FDI. Service sector tops the chart of FDI inflows in 2008 with India emerged as a top destination for FDI in services sector. Services exports are the major driving force in promoting exports. Keeping in mind the rising service sector India should open doors to foreign companies in the export – oriented services which could increase the demand of unskilled workers and low skilled services and also increases the wage level in these services. Data in reveal that the top 5 sectors in aggregate for FDI inflows constitute US$ 50,479 millions during August 1991 to Dec. 2008 which accounts for 53.2% of total FDI inflow. Out of this, nearly 40.8% of FDI inflows are in high priority areas like Services, Electrical Equipments, Telecommunication, etc.

47

SOURCES OF FDI IN INDIAIndia has broadened the sources of FDI in the period of reforms. There were 120 countries investing in India in 2008 as compared to 15 countries in 1991. Thus the number of countries investing in India increased after reforms. After liberalization of economy Mauritius, South Korea, Malaysia, Cayman Islands and many more countries predominantly appears on the list of major investors apart from U.S., U.K., Germany, Japan, Italy, and France which are not only the major investor now but during

MAJOR SOURCES OF FDI IN INDIAMauritius,USA, Singapore ,UK ,Netherlands, Japan ,Germany ,Cyprus, France ,SwitzerlandSource: compiled & computed from the various issues of Economic Survey, RBI Bulletin, Ministry of Commerce pre- liberalizations era also. The analysis in (Table-3.6) presents the major investing countries in India during 1991-2008. Mauritius (Chart- 3.11) is the largest investor in India during 1991-2008. FDI inflows from Mauritius constitute about 39.9% of the total FDI in India and enjoying the top position on India‘s FDI map from1995. This dominance of Mauritius is because of the Double Taxation Treaty i.e. DTAA- Double Taxation Avoidance Agreement between the two countries, which favours routing of investment through this country. This (DTAA) type of taxation treaty has been made out with Singapore also. Source: compiled & computed from the various issues of Economic Survey, RBI Bulletin, Ministry of Commerce The US is the second largest investing country in India. While comparing the investment made by both (Mauritius and US) countries one interesting fact comes up which shows that there is a huge difference (between FDI inflows to India from Mauritius and the US) in the volume of FDI received from Mauritius and the US. FDI inflow from Mauritius is more than double then that from the US. The other major countries are Singapore with a relative share of 7.2% followed by UK, Netherlands, Japan, Germany, Cyprus, France, and Switzerland.Thus, an analysis of last eighteen years of FDI inflows shows that only five countries accounted for nearly 66% of the total FDI inflows in India. India needs enormous amount of financial resources to carry forward the agenda of transformation (i.e. from a plannedeconomy to an open market), to tackle imbalance in BOP, to accelerate the rate of economic growth and have a sustained economic growth.

48

5.5 DISTRIBUTION OF FDI WITHIN INDIAFDI inflows in India are heavily concentrated around two cities, Mumbai (US$ 26899.57million) and Delhi (US$ 12683.24 million). Bangalore, Ahmedabad and Chennai are also receiving significant amount of FDI inflows. These five cities together account for 69 per cent of total FDI inflows to India. Mumbai and Delhi together received 50 per cent of total FDI inflows to India during 2000 to 2008.

Source: compiled and computed from the various issues SIA Bulletin, Ministry of Commerce, GOI Mumbai received heavy investment from Mauritius (29%), apart from U.K. (17%), USA(10%), Singapore (9%) and Germany (4%).The key sectors attracting FDI inflows to Mumbai are services (30%), computer software and hardware (12%), power (7%),metallurgical industry (5%) and automobile industry (4%). Mumbai received 1371numbers of technical collaborations during 1991-2008. Delhi received maximum investment from Mauritius (58%), apart from Japan (10%), Netherlands (9%), and UK (3%).While the key industries attracting FDI inflows to Delhi region are telecommunications (19%), services (18%), housing and real estate (11%), automobile industry (8%) and computer software and hardware (6%). As far as technical collaborations are concerned Delhi received 315 numbers of technical collaborations during 1991- 2008. Heavy investment in Bangalore came from Mauritius (40%) alone. The other major investing countries in Bangalore are USA (15%), Netherlands (10%), Germany (6%), and UK (5%). Top sectors reported the FDI inflows are computer software and hardware (22%), services (11%), housing and real estate (10%), telecommunications (5%), and fermentation industries (4%). Bangalore received 516 numbers of technical collaborations during 1991-2008. Chennai received FDI inflows from Mauritius (37%), Bermuda (14%), USA (13%), Singapore (9%) and Germany (4%). The key sectors attracting FDI inflows are construction activities (21%), telecommunications (10%),services (10%), computer software and hardware (7%), automobile industry (7%), As far as technical collaborations are concerned, Chennai received 660 numbers of technical collaborations during 1991-2008.

TRENDS AND PATTERNS OF FDI FLOW AT SECTORAL LEVEL Infrastructure Sector

FDI up to 49% is allowed for investing companies in infrastructure/ services sector (except telecom sector) through FIPB route. The infrastructure sector constitutes Power, Non-conventional energy, Petroleum and natural

49

gas, Telecommunication, Air Transport, Ports, Construction activities and (including roads and highways), real estate. The infrastructure sector accounted for 28.62% of total FDI inflows from 2000 to 2008.Initially the inflows were low but there is a sharp rise in investment flow from 2005 onwards Telecommunication received the highest percentage (8.05%) followed by construction activities (6.15%), real estate (5.78%), and power (3.16%). The major investment comes from Mauritius (56.30%) and Singapore (8.54%). In order to attract the investment, New Delhi (23.2%) and Mumbai (20.47%) enjoy the top two positions in India. Infrastructure sector received 2528 numbers of foreign collaborations with an equity participation of US$ 111.0 bn; 41.15% of the total investment. Out of 2528 foreign collaborations 633 were technical and 2795 are financial collaborations during 1991- 2008. The top Indian companies which received FDI inflows in Infrastructure sector during 2000 to 2008 are IDEA, Cellule Ltd, Bhaik Infotel P.Ltd, Dabhol Power Company Ltd, Aircel Ltd, Relogistics Infrastructure P.Ltd.

Actual values Trend lineSource: compiled and computed from the various issues SIA Bulletin, Ministry of Commerce, GOI India has encouraged FDI in infrastructure sector from the very initiation of its economic reforms, but the demand for it is still not being fulfilled. In fact, investment is heavily concentrated in consumer durables sector rather than in long – term investment projects such as power generation, maintaining roads, water management and on modernizing the basic infrastructure. Maitra41 (2003) reveals that the shortage of power is estimated at about 10% of the total electrical energy and approximately 20% of peak capacity requirement. However, insufficient and poor conditions of India‘s infrastructure are the major factors to the slowdown in growth which reduces the trust and enthusiasm for FDI from investors and economic growth of the country. Further, insufficient power supply, inadequate and unmaintained roads, an over- burdened railway system, severely congested urban areas, may continue to plague the Indian economy in the coming years.

Services SectorServices sector puts the economy on a proper glide path. It is among the main drivers of sustained economic growth and development by contributing 55% to GDP. There is a continuously increasing trend of FDI inflows in services sector with a steep rise in the inflows from 2005 onwards Service sector received an investment of US$ 19.2 bn which is

50

19.34% of the total FDI inflows from 1991-2008 from FIPB/SIA,acquisition of existing shares and RBI‘s automatic routes only. However, this amount does not include FDI inflows received through acquisition route prior to Jan. 2000.Among the subsectors of services sectors, financial services attract 10.25% of total FDI inflows followed by banking services (2.22%), insurance (1.60%) and non- financial services (1.62%) respectively. Outsourcing, banking, financial, information technology oriented services make intensive use of human capital. FDI would be much more efficient and result oriented in these services vis- a-vis services which make intensive use of semiskilled and unskilled labour.Actual Values Trend LineSource: compiled and computed from the various issues SIA Bulletin, Ministry of Commerce, GOI In India, FDI inflows in services sector are heavily concentrated around two major cities- Mumbai (33.77%) and Delhi (16.14%). Mauritius top the chart by investing 42.52% in services sector followed by UK (14.66%), Singapore (11.18%). The total number of approvals for services sector (financial non-financial) have been of the order of 1626 (5.78% of the total approvals) with an equity participation of US$ 8.7 bn, 10.28% of the total investment. Services sector ranks 3rd in the list of sectors in terms of cumulative FDI approved from August 1991 to Dec 2008. Out of 1626 numbers of foreign collaborations, 77 are technical and 1549 are financial in nature. Majority of collaborations in technology transfers are from USA (30) and UK (8).the leading Indian companies which received FDI inflows in services sector are: Cairn (I) Ltd, DSP Merrill Lynch Ltd, AAA Global Ventures Pvt. Ltd., Kappa Industries Ltd, Citi Financial Consumer Finance (I) Ltd, Blue Dart Express Ltd, Vyasa Bank Ltd, CRISIL Ltd, Associates India Holding Co. Pvt. Ltd, Housing Development Finance Corp. Ltd.

Trading SectorTrading sector received 1.67% of the total FDI inflows from 1991-2008. Trading(wholesale cash and carry) received highest percentage (84.25%) of total FDI inflow to this sector from 2000-2008 followed by trading (for exports) with 9.04%, e-commerce with (2.38%). Trading sector shows a trailing investment pattern upto 2005 but there is an exponential rise in inflows from 2006 onwards Further, major investment inflows came from Mauritius (24.69%), Japan (14.81%), and Cayman Island (14.60%) respectively from 2000-2008. Investment in India is heavily concentrated in

51

three cities viz. Mumbai (40.76%), Bangalore (15.97%), and New Delhi (12.05%). As far as Actual Values Trend LineSource: compiled and computed from the various issues SIA Bulletin, Ministry of Commerce, GOI technology transfers are concerned, total numbers of 20 technical and 1111 financial collaborations have been approved for Trading sector from 1991-2008. Maximum numbers of technology transfers are approved from USA (5), Japan (3) and Netherlands.The top five Indian companies which received FDI inflows are Multi Commodity Exchanges of India Ltd, Anchor Electricals, Multi Commodity Exchanges of India Ltd, Metro Cash and Carry India Pvt. Ltd, Essilor India Pvt. Ltd.

Consultancy SectorConsultancy Sector received US$ 1.1 bn which is 1.14% of total inflows received from 2000-2008 through FIPB/SIA route, acquisition of existing shares and RBI‘s automatic route. Management services received an investment of US$ 737.6 million, marketing US$138.65 million and Design and Engineering services constitute an investment of US$110.43.

Source: compiled and computed from the various issues SIA Bulletin, Ministry of Commerce, GOI Major share of investment in consultancy services comes from Mauritius with 37.2%, USA (25.47%) and Netherlands 6.63% respectively. FDI inflows in consultancy sector registered a continuous increasing trend of FDI inflows from 2005 onwards Further, in India Mumbai (38.76%) and New Delhi (13.01%) received major percentages of FDI inflow for consultancy sector from 2000-2008. Total numbers of technology transfers in consultancy services are 125, out of which 40 technical collaborations are approved with USA, 21 with UK, and 14 with Germany from 1991-2008.

Education SectorFDI up to 100% is allowed in education sector under the automatic route. Education sector received US$ 308.28 million of FDI inflow from 2004-2008. Education sector shows a steep rise in FDI inflows from 2005 onwards Heavy investment in education sector came from Mauritius with 87.95%, followed by Netherlands (3.76%), USA (2.93%) respectively.Source: compiled and computed from the various issues SIA Bulletin, Ministry of Commerce, GOI In India, Bangalore received 80.14% of total

52

FDI inflow followed by Delhi (6.45%),Mumbai (5.58%) respectively. As far as technology transfer and financial collaborations are concerned, total number of 2 technical and 112 financial collaboration are approved for education sector. Out of 2 technical collaborations, USA and Japan begged one each during 1991-2008. Further, India is endowed with a large pool of skilled people with secondary and tertiary level of education. India with this level of education attracts foreign firms in science, R & D, and high technology products and services. The endowment of science, engineering, and technology oriented people facilitate the spillovers of technology and know – how. Moreover, the medium of instruction at these education levels is English – the lingua franca of business. India with this added advantage benefits in attracting foreign firms in education sector.

Housing and Real Estate sectorHousing and Real Estate sector accounts US$ 4.7 bn of FDI inflows which is 5.78% of the total inflows received through FIPB/SIA route, acquisition of existing shares and RBI‘s automatic route during 2000 – 2008. There is an exponential rise in the amount of FDI inflows to this sector after 2005.Source: compiled and computed from the various issues SIA Bulletin, Ministry of Commerce, GOI Heavy investment i.e. 61.96% came from Mauritius. In terms of most attractive locations in India New Delhi and Mumbai with 34.7% and 29.8% shares are on the first and second positions. The total numbers of foreign collaborations in Housing and Real Estate sector is 18 with an equity participation of US$1.0 bn during 1991-2008. Maximum numbers of foreign collaborations in Housing and Real Estate sector is with Mauritius (7), Singapore (2), and U.K (2). The top five Indian companies which received maximum FDI inflows in this sector are: Emaar MGF Land P. Ltd, Emaar MGF Land P. Ltd, Shivaji Marg Properities, Shyamaraju & Company (India) Pvt. Ltd, and India Bulls Infrastructure Development.

Construction activities sectorConstruction activities Sector includes construction development projects viz. housing,commercial premises, resorts, educational institutions, recreational facilities, city and regional level infrastructure, township. The amount of FDI in construction activities during Jan 2000 to Dec. 2008 is US$ 4.9 bn which is 6.15% of the total inflows received through FIPB/SIA route, acquisition of existing shares and RBI‘s automatic route. The

53

construction activities sector shows a steep rise in FDI inflows from 2005 onwards Major investment in construction activities is received from Mauritius which is accounted nearly 58.61% of total FDI inflows during 2000-2008. In India Delhi,Mumbai, and Hyderabad receives maximum amount (viz. US$ 1245.61, 1000.5, and 943.22 bn) of investment. As far as technology transfers are concerned, total numbers of 9 technical and 223 numbers of financial collaborations have been approved for construction activities, which accounts for 0.11% of the total collaborations approved during August 1991 to December 2008.Source: compiled and computed from the various issues SIA Bulletin, Ministry of Commerce, GOI Maximum numbers of technical collaborations are approved with France (3) and USA(2). The top five Indian companies‘ which received FDI inflows in this sector are: W.S Electric Ltd, Carmen Builders & Construction Pvt. Ltd, Caitlin Builders & Developers Pvt. Ltd, W.S. Electric Ltd, and PVP Ventures Pvt. Ltd.

Automobile IndustryAutomobile Industry Sector comprises Passenger cars, auto ancillaries etc. FDI inflows in the automobile Industry sector, during Jan 2000 to Dec. 2008 is US$ 3.2 bn which is 4.09% of the total inflows received through FIPB/SIA route, acquisition of existing shares and RBI‘ automatic route. The trends in automobile sector show that there is acontinuous increase of investment in this sector after 2005 onwards Major investment came from Japan (27.59%), Italy (14.66%), USA (13.88%) followed by Mauritius(7.77%) and Netherlands (6.91%). in India Mumbai, New Delhi and Ahmedabad received major chunks of investment i.e. 36.98%, 26.63% and 9.47%). The total numbers of approvals for automobile industry have been of the order of 1611 with an equity participation of US$ 6.1 bn, which is 7.01% of the total investment. Automobile industry sector ranks 5th in the list of sectors in terms of cumulative FDI approved from August 1991 to Dec 2008. Out of 1611 numbers of foreign collaborations approved 734 are technical and 877 are financial in nature.Source: compiled and computed from the various issues SIA Bulletin, Ministry of Commerce, GOI Highest numbers of technical collaborations with Japan in automobile Industry.Major Indian companies which received highest percentage of FDI inflows in automobile industry are Escorts Yamaha Motor Ltd, Yamaha Motors India Pvt. Ltd, Punjab Tractors Ltd., Yamaha Motor Escorts Ltd, Endurance Technologies P. Ltd, General Motors India Ltd, and Fiat India Automobile P. Ltd.

54

Computer Software and Hardware SectorComputer Software and Hardware sector received US$ 8.9 bn which constitute 11.43% of the total FDI inflows during the period Jan 2000 to Dec 2007. Computer Software and Hardware sector shows a continuous increasing trend of FDI inflows Mauritius with an investment of US$ 4789 bn remained at the top among the investing countries in India in this Sector. Other major investing countries in this sector are USA(12.88%), Singapore (10.07%) etc. Among Indian locations Mumbai received 22.44% of investment followed by Bangalore (10.8%), and Chennai (9.90%). actual data trend lineSource: compiled and computed from the various issues SIA Bulletin, Ministry of Commerce, GOI Computer Software and Hardware industry fetched 3636 numbers of foreign collaborations. Out of 3636, 125 are technical and 3511 are financial in nature with an equity participation of US$ 3.0bn. Major technological transfers come from USA (43.2%) and Japan (10.4%). The top Indian companies which received FDI inflows in this sector are: I Fliex Solutions Ltd, I Flex Solutions ltd, Tata Consultancy Services Ltd,Infrasoft Technologies Ltd, Mphasis BFL Ltd, I- Flex Solutions Ltd, Digital Global Soft Ltd, India Bulls Financials Services P. Ltd, IFLEX Solutions Ltd, Unitech Reality Projects Ltd.

Telecommunications SectorTelecommunications Sector comprises Telecommunications, Radio Paging, Cellular Mobile/ Basic Telephone Services etc. India received cumulative FDI inflows of US$ 100.4 bn during 1991-2008. Out of this, Telecommunications Sector received an inflow of US$ 8.2 bn, which is 8.4% of the total FDI inflows during August 1991 to December 2008. There has been a steady flow of FDI in telecommunications from 1991 to 2005, but there is an exponential rise in FDI inflows after 2005 Mauritius with 82.22% of investment remains on the top among the investing countries in this sector. Other investing countries in the telecom sector are Russia (5.41%) and USA (2%). New Delhi attracts highest percentage (32.58%) of FDI inflows during Jan 2000 to Dec 2008. The total numbers of approvals for telecommunications Industry have been of the order of 1099 with an equity participation of US$ 13.3 bn, 14.34% of the total investment.Telecommunication sector ranks 2nd in the list of sectors in terms of cumulative FDI approved from August 1991 to Dec 2008.Source: compiled and computed from the various issues SIA Bulletin, Ministry of Commerce, GOI Out of 1099 foreign collaborations, 139 are technical and 960 are financial in nature. Highest numbers (32) of technical

55

collaborations are approved with USA followed by Japan (19), U.K. (12), Canada (12) and Germany (12). The leading Indian companies which received FDI inflows in this sector are: Bhaik Infotel p. Ltd, Aircel Ltd, Bharti Tele Ventures Ltd, Bharti Telecom ltd, Flextronics Software Systems Ltd, Hathway Cable & Data Com. Pvt. Ltd, Unitech Developers & Projects Ltd, Hutchison Essar South Ltd. Etc.

INTERNATIONAL INVESTMENT AGREEMENTSIndia is the founding member of GATT (General Agreement on Trade and Tariffs). India is also a signatory member of South Asian Free Trade Agreement (SAFTA). India has signed BITs (Bilateral Investment Treaties) with both developed and developing nations. India has concluded 57 numbers (upto 2006) of BITs, out of which 27 are with developed nations and majority of them, are with developing countries of Asia (16), the Middle East (9), Africa (4), and Latin America (1). India also maintains double tax avoidance agreements (tax treaties) with 70 countries (upto 2006). Apart from BITs and tax treaties India is the member of many FTAs (Free Trade Area, nearly 17 in numbers, upto 2006)).

CONCLUSIONSThe above analysis of Trends and Patterns of FDI inflows reveals the following facts:-1) FDI has gained momentum in the economic landscape of world economies in the last three decades. It had outpaced almost all other economic indicators of economic transactions worldwide. 2) FDI is considered as the safest type of external finance both by the developed and developing nations. So, there is growing competition among the countries in receiving maximum inward FDI. 3)Trends in world FDI inflows shows that maximum percentage of global FDI is vested with the developed nation. But in the last two decades, developing countries by receiving 40% of global FDI in 1997 as against 26% in 1980 make waves in the economics of developed nations. 4) Among developing nations of the world, the emerging economies of the Asian continent are receiving maximum share (16%) of FDI inflows as against other emerging countries of Latin America (8.7%) and Africa (2%). 5) In the last two decades, India has significantly increased its share of world FDI from 0.7% in 1996 to 1.3% in 2007. 6) China is the major recipient of global FDI flows among the emerging economies of the world. It is also the most preferred destination of global

56

FDI flow. India is at 5th position in the category of most attractive location of global FDI.7) It is found that FDI flows to India have increased from 11% in 1991-99 to 69% in2000-2007.8)In the South, East and South-East Asia block India is at 3rd place after China and Singapore in receiving FDI inflows.9)India is the major recipient of FDI inflows in South-Asia region. It constitutes 75% of total FDI inflows to this region.10)In order to have a generous flow of FDI, India has maintained Double Tax Avoidance Agreements (DTAA) with nearly 70 countries of the world.11) India is the signatory member of south Asian Free Trade Agreement (SAFTA). Apart from SAFTA, India is also the member of many (of nearly 17) Free Trade Agreements (FTAs). 12) It is found that China‘s share is 21.7% and India‘s share is miniscule (i.e. 2.8%) among the emerging economies of the world in the present decade. 13)India has considerably decreased its fiscal deficit from 4.5 percent in 2003-04 to 2.7 percent in 2007-08 and revenue deficit from 3.6 percent to 1.1 percent in 2007-08. 14) India has received increased NRI‘s deposits and commercial borrowings largely because of its rate of economic growth and stability in the political environment of the country. 15) Economic reform process since 1991 have paves way for increasing foreign exchange reserves to US$ 251985 millions as against US$ 9220 millions in 1991- 92. 16) During the period under study it is found that India‘s GDP crossed one trillion dollar mark in 2007. Its domestic saving ratio to GDP also increases from 29.8 percent in 2004-05 to 37 percent in 2007-08. 17) FDI in India has increased manifold since 1991. FDI inflows in India have increased from US$ 144.45 millions in 1991to US$ 33029.32 millions in 2008. 18) An analysis of last eighteen years of trends in FDI inflows in India shows that initially the inflows were low but there is a sharp rise in investment flows from 2005 onwards. 19) Although there has been a generous flow of FDI in India but the pace of FDI inflows has been slower in India when it is compared with China, Russian federation, Brazil and Singapore. 20) The study reveals that there is a huge gap (almost 40%) between the amount of FDI approved & its realization into actual disbursement in India.

57

21)It is also found that investors in India are inclined toward having more financial collaborations rather than technical ones.22)Among sectors, Services sector tops the chart of FDI inflows in India in 2008. Nearly, 41% of FDI inflows are in high priority areas like services, electrical equipments, telecommunication etc.23) The sources of FDI inflows are also increased to 120 countries in 2008 as compared to 15 countries in 1991 and a few countries (UK, USA, Germany, Japan, Italy, and France etc.) before 1991. Mauritius, South Korea, Malaysia, Cayman Islands and many more countries appears for the first time in the source list of FDI inflows after 1991.24)Mauritius is the major investing country in India during 1991-2008. Nearly 40% of FDI inflows came from Mauritius alone.25)The other major investing countries are USA, Singapore, UK, Netherlands, Japan, Germany, Cypress, France and Switzerland.26) An analysis of last eighteen years of FDI inflows in the country shows that nearly66% of FDI inflows came from only five countries viz. Mauritius, USA, Singapore, UK, and Netherlands. 27) Mauritius and United states are the two major countries holding first and the second position in the investor‘s list of FDI in India. While comparing the investment made by both countries, one interesting fact comes up which shows that there is huge difference in the volume of FDI received from Mauritius and the U.S. It is found that FDI inflows from Mauritius are more than double from that of U.S. 28) FDI inflows in India are concentrated around two cities i.e. Mumbai and New Delhi. Nearly 50 percent of total FDI inflows to India are concentrated in these two cities. Apart from Mumbai and Delhi Bangalore, Ahemdabad, and Chennai also received significant amount of FDI inflows in the country. 29) It is observed that among Indian cities maximum (1371) foreign collaborations were received Mumbai. 30)The Infrastructure sector received 28.62% of total FDI inflows in the present decade. This sector received maximum member (2528) of foreign collaboration among sectors. Although this sector received the maximum amount of FDI Inflows, but the demand of this sector are still unfulfilled. So, investment opportunities in this sector are at its peak. Trend in infrastructure shows that FDI inflows were low initially but there is a sharp rise in investment flow from 2005 onwards. 31) Services sector received 19.34% of total FDI inflows from 1991-2008. This sector is the main driver of economic growth by contributing 55% to GDP. Services sector shows a continuously increasing trend of FDI inflows with a steep rise in the inflows from 2005 onwards.

58

32)Trading sector received 1.67% of total FDI inflows from 1991-2008. Major investment (25%) in this sector came from Mauritius. Trading sector shows a trailing investment pattern up to 2005 but there is an exponential rise in FDI inflows from 2006 onwards.33) Consultancy Sector received 1.14% of total inflows from 2000-2008. FDI inflows in consultancy sector registered a continuous increasing trend of FDI inflows from 2005 onwards. 34) Education sector received US $308.28 million of FDI inflows from 2004-2008. The sector shows a steep rise in FDI inflows from 2005 onwards. 35) Housing and Real Estate Sector accounts for 5.78% of total FDI inflows during 2000-2008. There is an exponential rise in the amount of FDI inflows to this sector after 2005. 36) Construction Activities Sector received 6.15% of the total inflows during 2000 to Dec. 2008. The Construction Activities Sector shows a steep rise in FDI inflows from 2005 onwards. 37)Automobile Industry received US $3.2 billion of total FDI inflows to the country during 2000 to 2008. The trends in automobile sector show that there is a continuous increase of investment in this sector after 2005 onwards. 38) Computer Software and Hardware sector received US $8.9 billion of total FDI inflows during 2000 to Dec. 2007. This sector shows a continuous increasing trend of FDI inflows. 39) Telecommunications Sector received an inflow of US $8.2 billion during 1991 to 2008. There has been a steady flow of FDI in the telecommunication from 1991 to 2005, but there is an exponential rise in FDI inflows after 2005. 40)It is observed that major investment in the above sectors came from Mauritius and investments in these sectors in India are primarily concentrated in Mumbai and New Delhi. 41) Maximum numbers (3636) of foreign collaborations during 1991-2008 are concluded in the computer software and hardware sector. 42) It is found that maximum (i.e. 734) technical collaborations are concluded in automobile sector while computer software and hardware sector fetched maximum (3511) financial collaborations during 1991-2008. 43) It is observed that major FDI inflows in India are concluded through automatic route and acquisition of existing shares route than through FIPB, SIA route during 1991-2008. 44) It is found that India has signed 57 members of Bilateral Investment Treaties up to 2006. Maximum numbers of BITS are signed with developing

59

countries of Asia (16), the Middle East (9), Africa (4) and Latin America (1) apart from the developed nation (i.e. 27 in numbers).

FDI AND INDIAN ECONOMY INTRODUCTION

Nations‘ progress and prosperity is reflected by the pace of its sustained economic growth and development. Investment provides the base and pre-requisite for economic growth and development. Apart from a nation‘s foreign exchange reserves, exports, government‘s revenue, financial position, available supply of domestic savings, magnitude and quality of foreign investment is necessary for the well being of a country. Developing nations, in particular, consider FDI as the safest type of international capital flows out of all the available sources of external finance available to them. It is during 1990s that FDI inflows rose faster than almost all other indicators of economic activity worldwide. According to WTO83, the total world FDI outflows have increased nine – fold during 1982 to 1993, world trade of merchandise and services has only doubled in the same. Since 1990 virtually every country- developed or developing, large or small alike have sought FDI to facilitate their development process. Thus, a nation can improve its economic fortunes by adopting liberal policies vis-à-vis by creating conditions conducive to investment as these things positively influence the inputs and determinants of the investment process. This chapter highlights the role of FDI on economic growth of the country.

FDI AND INDIAN ECONOMYDeveloped economies consider FDI as an engine of market access in developing and less developed countries vis-à-vis for their own technological progress and in maintaining their own economic growth and development. Developing nations looks at FDI as a source of filling the savings, foreign exchange reserves, revenue, trade deficit, management and technological gaps. FDI is considered as an instrument of international economic integration as it brings a package of assets including capital, technology, managerial skills and capacity and access to foreign markets. The impact of FDI depends on the country‘s domestic policy and foreign policy. As a result FDI has a wide range of impact on the country‘s economic policy. In order to study the impact of foreign direct investment on economic growth, two models were framed and fitted. The foreign direct investment model shows the factors influencing the foreign direct

60

FOREIGN DIRECT INVESTMENT (FDI): It refers to foreign direct investment.Economic growth has a profound effect on the domestic market as countries with expanding domestic markets should attract higher levels of FDI inflows. The generous flow of FDI is playing a significant and contributory role in the economic growth of the country. In 2008-09, India‘s FDI touched Rs. 123025 crores up 56% against Rs. 98664 crores in 2007-08 and the country‘s foreign exchange reserves touched a new high of Rs.1283865 crores in 2009-10. As a result of India‘s economic reforms, the country‘s annual growth rate has averaged 5.9% during 1992-93 to 2002-03.FDI FlowSource: various issues of SIA Bulletin.Notwithstanding some concerns about the large fiscal deficit, India represents a promising macroeconomic story, with potential to sustain high economic growth rates. According to a survey conducted by Ernst and Young19 in June 2008 India has been rated as the fourth most attractive investment destination in the world after China, Central Europe andWestern Europe. Similarly, UNCTAD‘s World Investment Report76 2005 considers India the 2nd most attractive investment destination among the Transnational Corporations (TNCs). All this could be attributed to the rapid growth of the economy and favourable investment process, liberal policy changes and procedural relaxation made by the government from time to time.GROSS DOMESTIC PRODUCT (GDP): Gross Domestic Product is used

as one of the independent variable. The tremendous growth in GDP since 1991 put the economy in the elite group of 12 countries with trillion dollar economy. India makes its presence felt by making remarkable progress in information technology, high end services and knowledge process services. By achieving a growth rate of 9% in three consecutive years opens new avenues to foreign investors from 2004 until 2010,India‘s GDP growth was8.37 percent reaching an historical high of 10.10 percent in2006.India‘s diverse economy attracts high FDI inflows due to its huge market size, low wage rate, large human capital (which has benefited immensely from outsourcing of work from developed countries). In the present decade India has witnessed unprecedented levels of economic expansion and also seen healthy growth of trade. GDP reflects the potential market size of Indian economy. Potential market size of an economy can be measured with two

61

variables i.e. GDP (the gross domestic product) and GNP (the gross national product).GNP refers to the final value of all the goods and services produced plus the net factor income earned from abroad. The word ‗gross‘ is used to indicate the valuation of the national product including depreciation. GDP is an unduplicated total of monetary values of product generated in various kinds of economic activities during a given period, i.e. one year. It is called as domestic product because it is the value of final goods and services produced domestically within the country during a given period i.e. one year.Hence in functional form GDP= GNP-Net factor income from abroad. In India GDP is calculated at market price and at factor cost. GDP at market price is the sum of market values of all the final goods and services produced in the domestic territory of a country in a given year. Similarly, GDP at factor cost is equal to the GDP at market prices minus indirect taxes plus subsidies. It is called GDP at factor cost because it is the summation of the income of the factors of production Further, GDP can be estimated with the help of either (a) Current prices or(b) constant prices. If domestic product is estimated on the basis of market prices, it is known as GDP at current prices. On the other hand, if it is calculated on the basis of base year prices prevailing at some point of time, it is known as GDP at constant prices. Infact, in a dynamic economy, prices are quite sensitive due to the fluctuations in the domestic as well as international market. In order to isolate the fluctuations, the estimates of domestic product at current prices need to be converted into the domestic product at constant prices. Any increase in domestic product that takes place on account of increase in prices cannot be called as the real increase in GDP. Real GDP is estimated by converting the GDP at current prices into GDP at constant prices, with a fixed base year. In this context, a GDP deflator is used to convert the GDP at current prices to GDP at constant prices. The present study uses GDP at factor cost (GDPFC) with constant prices as one of the explanatory variable to the FDI inflows into India for the aggregate analysis. Gross Domestic Product at Factor cost (GDPFC) as the macroeconomic variable of the Indian economy is one of the pull factors of FDI inflows into India at national level. It is conventionally accepted as realistic indicator of the market size and the level of output. There is direct relationship between the market size and FDI inflows. If market size of an economy is large than it will attract higher FDI inflows and vice versa i.e. an economy with higher GDPFC will attract more FDI inflows. The relevant data on GDPFC have been collected from the various issues of Reserve bank of India (RBI) bulletin and Economic Survey of India.

62

TOTAL TRADE (TRADEGDP): It refers to the total trade as percentage of GDP. Total trade implies sum of total exports and total imports. Trade, another explanatory variable in the study also affects the economic growth of the country. The values of exports and imports are taken at constant prices. The relationship between trade, FDI and growth is well known. FDI and trade are engines of growth as technological diffusion through international trade and inward FDI stimulates economic growth. Knowledge and technological spillovers (between firms, within industries and between industries etc.) contributes to growth via increasing productivity level. Economic growth, whether in the form of export promoting or import substituting strategy, can significantly affect trade flows. Export led growth leads to expansion of exports which in turn promote economic growth by expanding the market size for developing countries.Source: various issues of RBI Bulletin India prefers export stimulating FDI inflows, that is, FDI inflows which boost the demand of export in the international market are preferred by the country as it nullifies the gap between exports and imports. Since liberalization, the value of India‘s international trade has risen to Rs. 2072438 crores in 2008-09 from Rs. 91892 crores in 1991-92. As exports from the country have increased manifolds after the initiation of economic reforms since 1991 India‘s major trading partners are China, United States of America, United Arab Emirates, United Kingdom, Japan, and European Union. Since 1991, India‘s exports have been consistently rising although India is still a net importer. In 2008-09 imports were Rs. 1305503 crores and exports were Rs. 766935 crores. India accounted for 1.45 per cent of global merchandise trade and 2.8 per cent of global commercial services export. Economic growth and FDI are closely linked with international trade. Countries that are more open are more likely to attract FDI inflows in many ways: Foreign investor brings machines and equipment from outside the host country in order to reduce their cost of production. This can increase exports of the host country. Growth and trade are mutually dependent on one another. Trade is a complement to FDI, such that countries tending to be more open to trade attract higher levels of FDI.

FOREIGN EXCHANGE RSERVES (RESGDP): RESGDP represents Foreign Exchange Reserves as percentage of GDP. India‘s foreign exchange reserves comprise foreign currency assets (FCA), gold, special drawing rights (SDR) and Reserve Tranche Position (RTP) in the International Monetary Fund. The emerging economic giants, the BRIC (Brazil, Russian Federation, India, and China) countries, hold the largest

63

foreign exchange reserves globally and India is among the top 10 nations in the world in terms of foreign exchange reserves. India is also the world‘s10th largest gold holding country (Economic Survey 2009-10)17. Stock of foreign exchange reserves shows a country‘s financial strength. India‘s foreign exchange reserves have grown significantly since 1991. The reserves, which stood at Rs. 23850 crores at end march 1991, increased gradually to Rs. 361470 crores by the end of March 2002, after which rose steadily reaching a level of Rs. 1237985 crores in March 2007. The reserves stood at Rs. 1283865 crores as on March 2008 .Source: various issues of RBI Bulletin Further, an adequate FDI inflow adds foreign reserves by exchange reserves which put the economy in better position in international market. It not only allows the Indian government to manipulate exchange rates, commodity prices, credit risks, market risks, liquidity risks and operational risks but it also helps the country to defend itself from speculative attacks on the domestic currency. Adequate foreign reserves of India indicates its ability to repay foreign debt which in turn increases the credit rating of India in international market and this helps in attracting more FDI inflows in the country. An analysis of the sources of reserves accretion during the entire reform period from 1991 onwards reveals that increase in net FDI from Rs. 409 crores in 1991-92 to Rs. 1,23,378 crores by March 2010. NRI deposits increased from Rs.27400 crores in 1991-92 to Rs.174623 by the end of March 2008. As at the end of March 2009, the outstanding NRI deposits stood at Rs. 210118 crores. On the current account, India‘s exports, which were Rs. 44041 crore during 1991-92 increased to Rs. 766935 crores in 2007-08. India‘s imports which were Rs. 47851 crore in 1991-92 increased to Rs. 1305503 crores in 2008-09. India‘s current account balance which was in deficit at 3.0 percent ofGDP in 1990-91 turned into a surplus during the period 2001-02 to 2003-04. However, this could not be sustained in the subsequent years. In the aftermath of the global financial crisis, the current account deficit increased from 1.3 percent of GDP in 2007-08 to 2.4 percent of GDP in 2008-09 and further to 2.9 percent in 2009-10. Invisibles, such as private remittances have also contributed significantly to the current account. Enough stocks of foreign reserves enabled India in prepayment of certain high – cost foreign currency loans of Government of India from Asian Development Bank (ADB) and World Bank (IBRD) Infact, adequate foreign reserves are an important parameter of Indian economy in gauging its ability to absorb external shocks. The import cover of reserves, which fell to a low of three weeks of imports at the end of Dec 1990, reached a peak of 16.9 months of imports at the end of March 2004. At the end of March 2010, the import

64

cover stands at 11.2 months. The ratio of short – term debt to the foreign exchange reserves declined from 146.5 percent at the end of March 1991 to 12.5 percent as at the end of March 2005, but increased slightly to 12.9 percent as at the end of March 2006. It further increased from 14.8 percent at the end of March 2008 to 17.2 percent at the end of March 2009 and 18.8 percent by the end of March 2010. FDI helps in filling the gap between targeted foreign exchange requirements and those derived from net export earnings plus net public foreign aid. The basic argument behind this gap is that most developing countries face either a shortage of domestic savings to match investment opportunities or a shortage of foreign exchange reserves to finance needed imports of capital and intermediate goods.

RESEARCH & DEVELOPMENT EXPENDIYURE (R&DGDP): It refers to the research and development expenditure as percentage of GDP . India has large pool of human resources and human capital is known as the prime mover of economic activity. India has the third largest higher education system in the world and a tradition of over 5000 year old of science and technology. India can strengthen the quality and affordability of its health care, education system, agriculture, trade, industry and services by investing in R&D activities. India has emerged as a global R&D hub since the last two decades. There has been a significant rise in the expenditure of R&D activities as FDI flows in this sector and in services sector is increasing in the present decade. R&D activities (in combination with other high – end services) generally known as ―Knowledge Process Outsourcing‖ or KPO are gaining much attention with services sector leading among all sectors of Indian economy in receiving / attracting higher percentage of FDI flows. It is clear from that the expenditure on R&D activities is rising significantly in the present decade. India has been a centre for many research and development activities by many TNCs. Today, companies like General Electric, Microsoft, Oracle, SAP and IBM to name a few are all pursuing R&D in India. R&D activities in India demands huge funds thus providing greater opportunities for foreign investors.

FINANCIAL POSITION (FIN. Position): FIN. Position stands for Financial Position. Financial Position is the ratio of external debts to exports. It is a strong indicator of the soundness of any economy. It shows that external debts are covered from the exports earning of a country.External debt of India refers to the total amount of external debts taken by India in a particular year, its repayments as well as the outstanding debts amounts, if any. India‘s external debts, as of march 2008 was Rs. 897955, recording

65

an increase of Rs.1169575 crores in march 2009 mainly due to the increase in trade credits. Among the composition of external debt, the share of commercial borrowings was the highest at 27.3% on March 2009, followed by short – term debt (21.5%), NRI deposits (18%) and multilateral debt (17%).Due to arise in short – term trade credits, the share of short – term debt in the total debt increased to 21.5% in march 2009, from 20.9% in march 2008. As a result the short – term debt accounted for 40.6% of the total external debt on March 2009. In 2007 India was rated the 5th most indebted country according to an international comparison of external debt of the twenty most indebted countries. The ratio of short – term debt to foreign exchange reserves stood at 19.6% in March 2009, higher than the 15.2% in the previous year. India‘s foreign exchange reserves provided a cover of 109.6% of the external debt stock at the end of March 2009, as compared to 137.9% at the end of March 2008. An assessment of sustainability of external debt is generally undertaken based on the trends in certain key ratios such as debt to GDP ratio, debt service ratio, short – term debt to total debt and total debt to foreign exchange reserves. The ratio of external debt to GDP increased to 22% as at end march 2009 from 19.0% as at end – March 2008. The debt service ratio has declined steadily over the year, and stood at 4.8 % as at the end of March 2009.However, the share of concessional debt in total external debt declined to 18.2% in 2008-2009 from 19.7 % in 2007-2008.Concessional Debt as % of Total Debt Short - Term Debt as % of Total DebtSource: various issues of RBI Bulletin Large fiscal deficit has variety of adverse effects: reducing growth, lowering real incomes, increasing the risks of financial and economic crises and in some circumstances it can also leads to high inflation.Recently the finance minister of India had promised to cut its budget deficit to 5.5% of the GDP in 2010 from 6.9% of GDP in 2009. As a result the credit – rating outlook was raised to stable from negative by standard and poor‘s based on the optimism that faster growth in Asia‘s third largest and world second fastest growing economy will help the government cut its budget deficit. The government also plans to cut its debt to 68% of the GDP by 2015, from its current levels of 80%. In order to reduce the ratio of debt to GDP there must be either a primary surplus (i.e. revenue must exceed non interest outlays) or the economy must grow faster than the rate of interest, or both, so that one must outweigh the adverse effect of the other.

EXCHANGE RATES (EXR): It refers to the exchange rate variable. Exchange rate is a key determinant of international finance as the world

66

economies are globalised ones. There are a number of factor which affect the exchange rate viz. government policy, competitive advantages, market size, international trade, domestic financial market, rate of inflation, interest rate etc. Exchange rate touched a high of Rs. 48.4 in 2002-03 Since 1991 Indian economy has gone through a sea change and that changes are reflected on the Indian Industry too. There is high volatility in the value of INR/USD. There is high appreciation in the value of INR from 2001-02 which has swept away huge chunk of profits of the companies.

GROSS DOMESTIC PRODUCT GROWTH (GDPG): It refers to the growth rate of gross domestic product. Economic growth rate have an effect on the domestic market, such that countries with expanding domestic markets should attract higher levels of FDI. India is the 2nd fastest growing economy among the emerging nations of the world. It has the third largest GDP in the continent of Asia. Since 1991 India has emerged as one of the wealthiest economies in the developing world. During this period, the economy has grown constantly and this has been accompanied by increase in life expectancy, literacy rates, and food security. It is also the world most populous democracy. The Indian middle class is large and growing; wages are low; many workers are well educated and speak English. All these factors lure foreign investors to India. India is also a major exporter of highly – skilled workers in software and financial services and provide an important ‗back office destination‘ for global outsourcing of customer services and technical support. The Indian market is widely diverse. The country has 17 official languages, 6 major religion and ethnic diversity. Thus, tastes and preferences differ greatly among sections of consumers.

FOREIGN DIRECT INVESTMENT GROWTH (FDIG): In the last two decade world has witnessed unprecedented growth of FDI. This growth of FDI provides new avenues of economic expansion especially, to the developing countries. India due to its huge market size, diversity, cheap labour and large human capital received substantial amount of FDI inflows during 1991-2008. India received cumulative FDI inflows of Rs. 577108 crore during 1991 to march 2010. It received FDI inflows of Rs. 492303 crore during 2000 to march 2010 as compared to Rs. 84806 crore during 1991 to march 99.During 1994-95, FDI registered a 110% growth over the previous year and a 184% age growth in 2007-08 over 2006-07. FDI as a percentage of gross total investment increased to 7.4% in 2008 as against 2.6% in 2005. This increased level of FDI contributes towards increased

67

foreign reserves. The steady increase in foreign reserves provides a shield against external debt. The growth in FDI also provides adequate security against any possible currency crisis or monetary instability. It also helps in boosting the exports of the country. It enhances economic growth by increasing the financial position of the country. The growth in FDI contributes toward the sound performance of each sector (especially, services, industry, manufacturing etc.) which ultimately leads to the overall robust performance of the Indian economy.

ROLE OF FDI ON ECONOMIC GROWTHIn order to assess the role of FDI on economic growth, two models were used. The estimation results of the two models are supported and further analysed by using the relevant econometric techniques viz. Coefficient of determination, standard error, f- ratio,t- statistics, D-W Statistics etc. In the foreign direct investment model, the main determinants of FDI inflows to India are assessed. The study identified the following macroeconomic variables: TradeGDP, R&DGDP, FIN.Position, EXR, and ReservesGDP as the main determinants of FDI inflows into India. And the relation of these variables with FDI is specified and analysed in equation 4.1. In order to study the role of FDI on Indian economy it is imperative to assess the trend pattern of all the variables used in the determinant analysis. It is observed that FDI inflows into India shows a steady trend in early nineties but shows a sharp increase after 2005, though it had fluctuated a bit in early 2000. However, Gross domestic product shows an increasing trend pattern since 1991-92 to 2007-08 Another variable i.e.trade GDP maintained a steady trend pattern upto 2001-02, after that it shows a continuous increasing pattern upto 2008-09. ReservesGDP, another explanatory variable shows low trend pattern upto 2000-01 but gained momentum after 2001-02 and shows an increasing trend. In addition to these trend patterns of the variables the study also used the multiple regression analysis to further explain the variations in FDI inflows into India due to the variations caused by these explanatory variables.

4.4 CONCLUSIONSIt is observed from the results of above analysis that TradeGDP, ReservesGDP, Exchange rate, FIN. Position, R&DGDP and FDIG are the main determinants of FDI inflows to the country. In other words, these macroeconomic variables have a profound impact on the inflows of FDI in India. The results of foreign Direct Investment Model reveal that TradeGDP, ReservesGDP, and FIN. Position variables exhibit a positive

68

relationship with FDI while R&DGDP and Exchange rate variables exhibit a negative relationship with FDI inflows. Hence, TradeGDP, ReservesGDP, and FIN. Position variables are the pull factors for FDI inflows to the country and R&DGDP and Exchange rate are deterrent forces for FDI inflows into the country. Thus, it is concluded that the above analysis is successful in identifying those variables which are important in attracting FDI inflows to the country. The study also reveals that FDI is a significant factor influencing the level of economic growth in India. The results of Economic Growth Model and Foreign Direct Investment Model show that FDI plays a crucial role in enhancing the level of economic growth in the country. It helps in increasing the trade in the international market.However, it has failed in raising the R&D and in stabilizing the exchange rates of the economy. The positive sign of exchange rate variables depicts the appreciation of Indian Rupee in the international market. This appreciation in the value of Indian Rupee provides an opportunity to the policy makers to attract FDI inflows in Greenfield projects rather than attracting FDI inflows in Brownfield projects. Further, the above analysis helps in identifying the major determinants of FDI in the country. FDI plays a significant role in enhancing the level of economic growth of the country. This analysis also helps the future aspirants of research scholars to identify the main determinants of FDI at sectoral level because FDI is also a sector – specific activity of foreign firms‘ vis-à-vis an aggregate activity at national level. Finally, the study observes that FDI is a significant factor influencing the level of economic growth in India. It provides a sound base for economic growth and development by enhancing the financial position of the country. It also contributes to the GDP and foreign exchange reserves of the country.

Trends and Patterns of FDI flows at World level:1) It is seen from the analysis that large amount of FDI flows are confined to the developed economies. But there is a marked increase in the FDI inflows to developing economies from 1997 onwards. Developing economies fetch a good share of 40 percent of the world FDI inflows in 1997 as compared to 26 percent in 1980s. 2) Among developing nations, Asian countries received maximum share (16%) of FDI inflows as compared to other emerging developing countries of Latin America (8.7 %) and Africa (2%).

69

3) India‘s share in World FDI rose to 1.3% in 2007 as compared to 0.7% in 1996.This can be attributed to the economic reform process of the country for the last eighteen years. 4) China is the most attractive destination and the major recipient of global FDI inflows among emerging nations. India is at 5th position among the major emerging destinations of global FDI inflows. The other preferred destinations apart from China and above to India are Brazil, Mexico and Russia. It is found that FDI inflows to India have increased from 11% in 1990-99 to 69% in 2000-2007.

Trends and patterns of FDI flows at Asian level:1) India, with a share of nearly 75% emerged as a major recipient of global FDI inflows in South Asia region in 2007. 2) As far as South, East and South – East block is concerned India is at 3rd place with a share of 9.2% while China is at number one position with a share of 33% in 2007. Other major economies of this block are Singapore, South Korea, Malaysia,Thailand and Philippines. 3)While comparing the share of FDI inflows of China and India during this decade(i.e. 2000-2007) it is found that India‘s share is barely 2.8 percent while china‘s share is 21.7 percent.

Trends and patterns of FDI flows at Indian level:1) Although India‘s share in global FDI has increased considerably, but the pace of FDI inflows has been slower than China, Singapore, Brazil, and Russia. 2) Due to the continued economic liberalization since 1991, India has seen a decade of 7 plus percent of economic growth. Infact, India‘s economy has been growing more than 9 percent for three consecutive years since 2006 which makes the country a prominent performer among global economies. At present India is the 4th largest and 2nd fastest growing economy in the world. It is the 11th largest economy in terms of industrial output and has the 3rd largest pool of scientific and technical manpower. 3)India has considerably decreased its fiscal deficit from 4.5 percent in 2003-04 to 2.7 percent in 2007-08 and revenue deficit from 3.6 percent to 1.1 percent in 2007-08. 4) There has been a generous flow of FDI in India since 1991 and its overall direction also remained the same over the years irrespective of the ruling party.

70

5) India has received increased NRI‘s deposits and commercial borrowings largely because of its rate of economic growth and stability in the political environment of the country. 6) Economic reform process since 1991 have paves way for increasing foreign exchange reserves to US$ 251985 millions as against US$ 9220 millions in 1991-92. 7) During the period under study it is found that India‘s GDP crossed one trillion dollar mark in 2007. Its domestic saving ratio to GDP also increases from 29.8 percent in 2004-05 to 37 percent in 2007-08. 8) An analysis of last eighteen years of trends in FDI inflows in India shows that initially the inflows were low but there is a sharp rise in investment flows from 2005 onwards. 9) It is observed that India received FDI inflows of Rs.492302 crore during 2000- 2010 as compared to Rs. 84806 crore during 1991-1999. India received a cumulative FDI flow of Rs. 577108 crore during 1991to march 2010. 10) A comparative analysis of FDI approvals and inflows reveals that there is a huge gap between the amount of FDI approved and its realization into actual disbursements. A difference of almost 40 percent is observed between investment committed and actual inflows during the year 2005-06. 11) It is observed that major FDI inflows in India are concluded through automatic route and acquisition of existing shares route than through FIPB, SIA route during 1991-2008. 12) In order to have a generous flow of FDI, India has maintained Double Tax Avoidance Agreements (DTAA) with nearly 70 countries of the world. 13) India has signed 57 (upto 2006) numbers of Bilateral Investments Treaties (BITs). Maximum numbers of BITS are signed with developing countries of Asia (16), the Middle East (9), Africa (4) and Latin America (1) apart from the developed nation (i.e. 27 in numbers). India has also become the member of prominent regional groups in Asia and signed numbers of Free Trade Area (nearly 17 in number). 14) Among the sectors, services sector received the highest percentage of FDI inflows in 2008. Other major sectors receiving the large inflows of FDI apart from services sector are electrical and electronics, telecommunications, transportations and construction activities etc. It is found that nearly 41 percent of FDI inflows are in high priority areas like services, electrical equipments, telecommunications etc. 15) India has received maximum number of financial collaborations as compared to technical collaborations.

71

16) India received large amount of FDI from Mauritius (nearly 40 percent of the total FDI inflows) apart from USA (8.8 percent), Singapore (7.2 percent), U.K (6.1 percent), Netherlands (4.4 percent) and Japan (3.4 percent). 17) It is found that India has increased its list of sources of FDI since 1991. There were just few countries (U.K, Japan) before Independence. After Independence from the British Colonial era India received FDI from U.K., U.S.A., Japan, Germany, etc. There were 120 countries investing in India in 2008 as compared to 15 countries in 1991. Mauritius, South Korea, Malaysia, Cayman Islands and many more countries predominantly appears on the list of major investors in India after 1991. This broaden list of sources of FDI inflows shows that India is successful in restoring the confidence of foreign investors through its economic reforms process. 18)It is also found that although the list of sources of FDI flows has reached to 120 countries but the lion‘s share (66 percent) of FDI flow is vested with just five countries (viz. Mauritius, USA, UK, Netherlands and Singapore). 19) Mauritius and United states are the two major countries holding first and the second position in the investor‘s list of FDI in India. While comparing the investment made by both countries, one interesting fact comes up which shows that there is huge difference in the volume of FDI received from Mauritius and the U.S. It is found that FDI inflows from Mauritius are more than double from that of the U.S. 20) State- wise FDI inflows show that Maharashtra, New Delhi, Karnataka, Gujarat and Tamil Nadu received major investment from investors because of the infrastructural facilities and favourable business environment provided by these states. All these states together accounted for nearly 69.38 percent of inflows during 2000-2008. 21) It is observed that among Indian cities Mumbai received maximum numbers (1371) of foreign collaborations during 1991-2008. Trends and patterns of FDI flows at Sectoral level of Indian Economy: Infrastructure Sector: Infrastructure sector received 28.6 percent of total FDI inflows from 2000 to 2008. Initially, the inflows were low but there is a sharp rise in FDI inflows from 2005 onwards. Among the subsectors of Infrastructure sector, telecommunications received the highest percentage (8 percent) of FDI inflows. Other major subsectors of infrastructure sectors are construction activities (6.15 percent), real estate (5.78 percent) and power (3.16 percent). Mauritius (with 56.3 percent) and Singapore (with 8.54 percent) are the two major investors in this sector. In India highest percentage of FDI inflows for infrastructure sector is with New Delhi (23.2 percent) and Mumbai (20.47 percent). Infrastructure sector received a total

72

of. 2528 numbers of foreign collaborations in India. Out of 2528 numbers of foreign collaborations 633 were technical and 2795 were financial collaborations, which involves an equity participation of US$ 111.0 bn. The top five Indian companies which received FDI inflows in Infrastructure sector during 2000 to 2008 are IDEA, Cellule Ltd.,Bhaik Infotel P. Ltd., Dabhol power Company Ltd., and Aircel Ltd.

Services sector: In recent years Services sector puts the economy on a proper gliding path by contributing 55 percent to GDP. There is a continuously increasing trend of FDI inflows in services sector with a steep rise in the inflows from 2005 onwards. Services sector received an investment of 19.2 bn from 1991 to 2008. Among the subsectors of services sector, financial services attract 10.2 percent of total FDI inflows followed by banking services (2.22 percent), insurance (1.6 percent) and non- financial services (1.62 percent). In India, Mumbai (with 33.77 percent) and Delhi (with 16 percent) are the two most attractive locations which receives heavy investment in services sector. It is found that among the major investing countries in India Mauritius tops the chart by investing 42.5 percent in services sector followed by U.K (14.66 percent) and Singapore (11.18 percent). During 1991 to Dec 2008 services sector received 1626 numbers of foreign collaborations, out of which 77 are technical and 1549 are financial in nature.

Trading sector: Trading sector received 1.67 percent of the total FDI inflows from 1991-2008. The sector shows a trailing pattern upto 2005 but there is an exponential rise in inflows from 2006 onwards. Trading sector received 1130 (1111 numbers of financial collaborations and 20 numbers of technical collaborations) numbers of foreign collaborations during 1991-2008. Major investment in this sector came from Mauritius (24.69 percent), Japan (14.81 percent) and Cayman Island (14.6 percent) respectively during 2000-2008. In India, Mumbai (40.76 percent), Bangalore (15.97 percent) and New Delhi (12.05 percent) are the top three cities which have received highest investment in trading sector upto Dec. 2008. Trading of wholesale cash and carry constitute highest percentage (84 percent of total FDI inflows to trading sector) among the subsectors of trading sector.Consultancy Sector: Consultancy sector received 1.14% of total FDI inflows during 2000 to 2008. Among the subsectors of consultancy sector management services received highest amount of FDI inflows apart from marketing and design and engineering services. Mauritius invest heavily

73

(37%) in the consultancy sector. In India Mumbai received heavy investment in the consultancy sector. Consultancy sector shows a continuous increasing trend of FDI inflows from 2005 onwards.

Education sector: Education sector attracts foreign investors in the present decade and received a whopping 308.28 million of FDI inflows during 2004-2008. It registered a steep rise in FDI inflows from 2005. Mauritius remains top on the chart of investing countries investing in education sector. Bangalore received highest percentage of 80.14% of FDI inflows in India.Housing and Real Estate Sector: Housing and Real Estate sector received 5.78% of total FDI inflows in India upto 2008. Major investment (61.96%) in this sector came from Mauritius. New Delhi and Mumbai are the two top cities which received highest percentage of (34.7% and 29.8%) FDI inflows. Housing sector shows an exponentially increasing trend after 2005.Construction Activities Sector: Construction Activities sector received US$ 4.9 bn of the total FDI inflows. Mauritius is the major investment country in India. New Delhi and Mumbai are the most preferred locations for construction activities in India.Automobile Sector: Earlier Automobile Industry was the part of transportation sector but it became an independent sector in 2000. During Jan 2000 to dec. 2008 this industry received an investment of US$ 3.2 bn which is 4.09 % of the total FDI inflows in the country. Japan (27.59%), Italy (14.66%) and USA (13.88%) are the prominent investors in this sector. In India Mumbai and New Delhi with 36.98 % and 26.63 percent of investment becomes favourite‘s destination for this sector. Maximum numbers of technical collaborations in this sector are with Japan.Computer Hardware and Software Sector: Computer Software and Hardware sector received an investment of US$ 8.9 bn during Jan 2000 to Dec. 2008. From 1991 to Dec. 1999 computer software and hardware was the part of electrical and electronics sector. However, it was segregated from electrical and electronics sector in 2000. This sector received heavy investment from Mauritius apart from USA and Singapore.

It is observed that major investment in the above sectors came from Mauritius and investments in these sectors in India are primarily concentrated in Mumbai and New Delhi.

Maximum numbers (3636) of foreign collaborations during 1991-2008 are concluded in the computer software and hardware sector.

74

It is found that maximum (i.e. 734) technical collaborations are concluded in automobile sector while computer software and hardware sector fetched maximum (3511) financial collaborations during 1991-2008. FDI and Indian Economy

The results of Foreign Direct Investment Model shows that all variables included in the study are statistically significant. Except the two variables i.e. Exchange Rate and Research and Development expenditure (R&DGDP) which deviates from their predicted signs. All other variables show the predicted signs.

Exchange rate shows positive sign instead of expected negative sign. This could be attributed to the appreciation of Indian Rupee in international market which helped the foreign firms to acquire the firm specific assets at cheap rates and gain higher profits.

Research and Development expenditure shows unexpected negative sign as of expected positive sign. This could be attributed to the fact that R&D sector is not receiving enough FDI as per its requirement. but this sector is gaining more attention in recent years.

Another important factor which influenced FDI inflows is the TradeGDP. It shows the expected positive sign. In other words, the elasticity coefficient between TradeGDP and FDI inflows is 11.79 percent which shows that one percent increase in TradeGDP causes 11.79 percent increase in FDI inflows to India.

The next important factor which shows the predicted positive sign is ReservesGDP. The elasticity coefficient between ReservesGDP and FDI inflows is 1.44 percent which means one percent increase in ReservesGDP causes an increase of 1.44 percent in the level of FDI inflows to the country.

Another important factor which shows the predicted positive sign is FIN. Position i.e. financial position. The elasticity coefficient between financial position and FDI inflows is 15.2 percent i.e. one percent increase in financial position causes15.2 percent increase in the level of FDI inflows to the country.

In the Economic Growth Model, the variable GDPG (Gross Domestic Product Growth i.e. level of economic growth) which shows the market size of the host economy revealed that FDI is a vital and significant factor influencing the level of economic growth in India. In a nutshell, despite troubles in the world economy, India continued to attract substantial amount of FDI inflows. India due to its flexible investment regimes and policies prove to be the horde for the foreign investors in finding the investment opportunities in the country.

75

SUGGESTIONSThus, it is found that FDI as a strategic component of investment is needed by India for its sustained economic growth and development. FDI is necessary for creation of jobs, expansion of existing manufacturing industries and development of the new one. Indeed, it is also needed in the healthcare, education, R&D, infrastructure, retailing and in long term financial projects. So, the study recommends the following suggestions:

The study urges the policy makers to focus more on attracting diverse types of FDI.

The policy makers should design policies where foreign investment can be utilised as means of enhancing domestic production, savings, and exports; as medium of technological learning and technology diffusion and also in providing access to the external market.

It is suggested that the government should push for the speedy improvement of infrastructure sector‘s requirements which are important for diversification of business activities.

Government should ensure the equitable distribution of FDI inflows among states.The central government must give more freedom to states, so that they can attract FDI inflows at their own level. The government should also provide additional incentives to foreign investors to invest in states where the level of FDI inflows is quite low.

Government should open doors to foreign companies in the export – oriented services which could increase the demand of unskilled workers and low skilled services and also increases the wage level in these services.

Government must target at attracting specific types of FDI that are able to generate spillovers effects in the overall economy. This could be achieved by investing in human capital, R&D activities, environmental issues, dynamic products, productive capacity, infrastructure and sectors with high income elasticity of demand.

The government must promote policies which allow development process starts from within (i.e. through productive capacity and by absorptive capacity).

It is suggested that the government endeavour should be on the type and volume of FDI that will significantly boost domestic competitiveness, enhance skills, technological learning and invariably leading to both social and economic gains.

76

It is also suggested that the government must promote sustainable development through FDI by further strengthening of education, health and R&D system,political involvement of people and by ensuring personal security of the citizens.

Government must pay attention to the emerging Asian continent as the new economic power – house of business transaction and try to boost the trade within this region through bilateral, multilateral agreements and also concludes FTAs with the emerging economic Asian giants.

FDI should be guided so as to establish deeper linkages with the economy, which would stabilize the economy (e.g. improves the financial position, facilitates exports, stabilize the exchange rates, supplement domestic savings and foreign reserves, stimulates R&D activities and decrease interest rates and inflation etc.) and providing to investors a sound and reliable macroeconomic environment.

As the appreciation of Indian rupee in the international market is providing golden opportunity to the policy makers to attract more FDI in Greenfield projects as compared to Brownfield investment. So the government must invite Greenfield investments.

Finally, it is suggested that the policy makers should ensure optimum utilization of funds and timely implementation of projects. It is also observed that the realisation of approved FDI into actual disbursement is quite low. It is also suggested that the government while pursuing prudent policies must also exercise strict control over inefficient bureaucracy, red - tapism, and the rampant corruption, so that investor‘s confidence can be maintained for attracting more FDI inflows to India. Last but not least, the study suggests that the government ensures FDI quality rather than its magnitude.Indeed, India needs a business environment which is conducive to the needs of business. As foreign investors doesn‘t look for fiscal concessions or special incentives but they are more of a mind in having access to a consolidated document that specified official procedures, rules and regulations, clearance, and opportunities in India. In fact, this can be achieved only if India implements its second generation reforms in totality and in right direction. Then no doubt the third generation economic reforms make India not only favourable FDI destination in the world but also set an example to the rest of the world by achieving what is predicted by Goldman Sachs23,24 (in 2003, 2007) that from 2007 to 2020, India‘s GDP per capita in US$ terms will quadruple and the Indian economy will overtake France and Italy by 2020, Germany, UK and Russia by 2025,Japan by 2035 and US by 2043.

77

CHAPTER 6

FDI IN INDIAN RETAIL SECTOR

78

Retailing is the interface between the producer and the individual consumer buying for personal consumption. This excludes direct interface between the manufacturer and institutional buyers such as the government and other bulk customers. A retailer is one who stocks the producer‘s goods and is involved in the act of selling it to the individual consumer, at a margin of profit. Assuch, retailing is the last link that connects the individual consumer with the manufacturing and distribution chain.The retail industry in India is of late often being hailed as one of the sunrise sectors in the economy. AT Kearney, the well-known international management consultancy, recently identified India as the ‗second most attractive retail destination‘ globally from among thirty emergent markets. It has made India the cause of a good deal of excitement and the cynosure of many foreign eyes. With a contribution of 14% to the national GDP and employing 7% of the total workforce (only agriculture employs more) in the country, the retail industry is definitely one of the pillars of the Indian economy.

6.1The Indian Scenario:Trade or retailing is the single largest component of the services sector in terms of contribution to GDP. Its massive share of 14% is double the figure of the next largest broad economic activity in the sector.1 Singhal, Arvind, Indian Retail: The road ahead, Retail biz, The retail industry is divided into organised and unorganised sectors.Organised retailing refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc.These include the corporate-backed hypermarkets and retail chains, and also the privately owned large retail businesses. Unorganised retailing, on the other hand, refers to the traditional formats of low-cost retailing, for example, the local kirana shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart and pavement vendors, etc. Unorganized retailing is by far the prevalent form of trade in India –constituting 98% of total trade, while organised trade accounts only for the remaining 2%. Estimates vary widely about the true size of the retail business in India. AT Kearney estimated it to be Rs. 4,00,000 crores and poised to double in2005.2 On the other hand, if one used the Government‘s figures the retail trade in 2002-03 amounted to Rs. 3,82,000 crores. One thing all consultants are agreed upon is that the total size of the corporate owned retail business was Rs. 15,000 crores in 1999 and poised to grow to Rs.35,000 crores by 2005 and keep growing at a rate of 40% per annum.3 In a recent presentation, FICCI has estimated the total retail business to be

79

Rs.11,00,000 crores or 44% of GDP4. According to this report dated Nov. 2003,sales now account for 44% of the total GDP and food sales account for 63%of the total retail sales, increasing to Rs.100 billion from just Rs. 38.1 billion in 1996. Food retail trade is a very large segment of the total economic activity of our country and due to its vast employment potential, it deserves very special focused attention. Efficiency enhancements and increase in the food retail sales activity would have a cascading effect on employment and economic activity in the rural areas for the marginalized workers. Thus even without FDI driving it, the corporate owned sector is expanding at a furious rate. The question then that arises is that since there is obviously no dearth of indigenous capital, what is the need for FDI? It is not that retailing in Indiais in the need of any technology special to foreign chains.

2 Ganguly, Saby, Retailing Industry in India, www.indiaonestop.co m

3 Singhal, Arvind, Technopak Projections, 1999, Changing Retail Landscape, www.ksa-technopak.co m .

4 Chengappa, P.G, Achoth, Lalith, Mukherjee, Arpita, Ramachandra Reddy B.M. & Ravi, P.C, Evolution of Food Retail Chains: The Indian Context, 5-6th Nov. 2003, www.ficci.com

Employment in Retailing:

A simple glance at the employment numbers is enough to paint a good picture of the relative sizes of these two forms of trade in India – organised trade employs roughly 5 lakh people whereas the unorganized retail trade employs nearly 3.95 crores5! According to a GoI study the number of workers in retail trade in 1998 was almost 175 lakhs. Given the recent numbers indicated by other studies, this is only indicative of the magnitude of expansion the retail trade is experiencing, both due to economic expansion as well as the ‗jobless growth‘ that we have seen in the past decade. It must be noted that even within the organised sector, the number of individually-owned retail outlets far out number the corporatebacked institutions. Though these numbers translate to approximately 8% of the workforce in the country (half the normal share in developed countries) there are far more retailers in India than other countries in absolute numbers, because of the demographic profile and the preponderance of youth, India‘s workforce is proportionately much larger. That about 4% of

80

India‘s population is in the retail trade says a lot about how vital this business is to the socio-economic equilibrium in India. Organised retail is still in the stages of finding its feet in India even now. Though organised trade makes up over 70-80% of total trade in developed economies, India‘s figure is low even in comparison with other Asian developing economies like China, Thailand, South Korea and Philippines, all of whom have figures hovering around the 20-25% mark. These figures quite accurately reveal the relative underdevelopment of the retail industry in India. (Here development is used in the narrowest sense of the term, implying lean employment and high automation)

Retail as a ‘Forced Employment’ Sector:

It is important to understand how retailing works in our economy, and what role it plays in the lives of its citizens, from a social as well as an economic perspective. India still predominantly houses the traditional formats of retailing, that is, the local kirana shop, paan/beedi shop, hardware stores, weekly haats, convenience stores, and bazaars, which together form the bulk. Most importantly, Indian retail is highly fragmented, with about 11 million outlets operating in the country and only 4% of them being larger than 500 square feet in size. Compare this with the figure of just 0.9 million in the US, yet catering to more than 13 times of the Indian retail market size. Figures quoted from Anil Sasi‘s article ―Indian Retail Most Fragmented‖(Aug. 18, 2004) The Hindu Business Line.The Indian retail industry was, and continues to be, highly fragmented. According to the global consultancy firms AC Neilsen and KSA Technopak, India has the highest shop density in the world. In 2001 they estimated there were 11 outlets for every 1,000 people.7 Further, a report prepared by McKinsey & Company and the Confederation of Indian Industry (CII) predicted that global retail giants such as Tesco, Kingfisher, Carrefour and Ahold were waiting in the wings to enter the retail arena. This report also states that the Indian retail market holds the potential of becoming a $300 billion per year market by 2010, provided the sector is opened up significantly.8 It does not talk about creating additional jobs however, which should be the prime concern of the policy maker. One of the principal reasons behind the explosion of retail and its fragmented nature in the country is the fact that retailing is probably the primary form of disguised unemployment/underemployment in the country. Given the already over-crowded agriculture sector, and the stagnating manufacturing sector, and the hard nature and relatively low wages of jobs in both, many million

81

Indians are virtually forced into the services sector. Here, given the lack of opportunities, it is almost a natural decision for an individual to set up a small shop or store, depending on his or her means and capital. And thus, a retailer is born, seemingly out of circumstance rather than choice. This phenomenon quite aptly explains the millions of kirana shops and small stores. The explosion of retail outlets in the more busy streets of Indian villages and towns is a visible testimony of this.

Singhal, Arvind, ― A Strong Pillar of Indian Economy,‖ www.ksa - technopak.co m

Iyengar, Jayanthi China, India Confront the Wal-Marts, Online Asia Times, www.atimes.com, January,31,2004.

The presence of more than one retailer for every hundred persons is indicative of the lack of economic opportunities that is forcing people into this form of self-employment, even though much of it is marginal. Because of this fragmentation, the Indian retail sector typically suffers from limited access to capital, labour and real estate options. The typical traditional retailer follows the low-cost-and-size format, functioning at a small-scale level, rarely eligible for tax and following a cheap model of operations. As on January 1st of this year, there were 413.88 lakhs job seekers registered at the Employment Exchange9. They register at the exchange, to enjoy the benefits and security that a job in the organised sector provides – lifetime employment, pension, and union membership etc. But over the period 1992- 93 to 2001-02, only a total of 30,000 jobs have been added in the organized sector in the whole country10 A vast majority is aware of what these figures signify – that they are most unlikely to get such jobs. Therefore, they find jobs in the informal sector, mostly in retail. Retailing is by far the easiest business to enter, with low capital and infrastructure needs, and as such, performs a vital function in the economy as a social security net for the unemployed. India, being a free and democratic country, provides its people with this cushion of being able to make a living for oneself through self-employment, as opposed to an economy like China, where employment is regulated. Yet, even this does not annul the fact that a multitude of these so-called ‗self-employed‘ retailers are simply trying to scrape together a living, in the face of limited opportunities for employment. In this light, one could brand this sector as one of ―forced As per figures given in www.tn.gov.in 10 Monthly abstract of Statistics, Volume

82

57, No.7, July 2004, Central Statistical Organisation, GOI employment‖, where the retailer is pushed into it, purely because of the paucity of opportunities in other sectors.

The Waiting Foreign Juggernaut:

The largest retailer in the world ‗Wal-Mart‘ has a turnover of $ 256 bn. and is growing annually at an average of 12-13%. In 2004 its net profit was $ 9,000 mn. It had 4806 stores employing 1.4 mn persons. Of these 1355 were outside the USA. The average size of a Wal-mart is 85,000 sq.ft and the average turnover of a store was about $ 51 mn. The turnover per employee averaged $ 175,000. In 2004 Wal-Mart had a 9% return on assets and 21% return on equity.By contrast the average Indian retailer had a turnover of Rs. 186,075. Only 4% of the 12 million retail outlets were larger than 500 sq.ft in size. The total turnover of the unorganized retail sector was Rs. 735,000 crores employing 39.5 mn persons. Let alone the average Indian retailer in the unorganized sector, no Indian retailer in the organised sector will be able to meet the onslaught from a firm such as Wal-Mart – when it comes. With its incredibly deep pockets Wal-Mart will be able to sustain losses for many years till its immediate competition is wiped out. This is a normal predatory strategy used by large players to drive out small and dispersed competition. This entails job losses by the millions.India has 35 towns each with a population over 1 million. If Wal-Mart were to open an average Wal-Mart store in each of these cities and they reached the average Wal-Mart performance per store – we are looking at a turnover of over Rs. 80,330 mn with only 10195 employees. Extrapolating this with the average trend in India, it would mean displacing about 4,32,000 persons.If large FDI driven retailers were to take 20% of the retail trade, as the now somewhat hard-pressed Hindustan Lever Limited anxiously anticipates, this would mean a turnover of Rs.800 billion on today‘s basis. This would mean an employment of just 43,540 persons displacing nearly eight million persons employed in the unorganized retail sector. With possible implications of this magnitude, a great deal of prudence should go into policymaking. Rather we seem to moving towards a policy steamrolled obviously by vested interests acting in concert with the CII &FICCI. We need to take a deep hard look at FDI in the retail sector. In thi context we must be concerned about the statement the Finance Minister, Mr.P. Chidambaram, made while making the mid year review for 2004-05. ―On retail, the review notes that creating an effective supply chain from the producer to the consumer is critical for development of many

83

sectors, particularly processed and semi-processed agro-products. In this context, it says, the role that could be played by organised retail chains, including international ones merits careful attention.‖

The Question of Foreign Direct Investment (FDI) in Retail:

Given this backdrop, the recent clamour about opening up the retail sector to Foreign Direct Investment (FDI) becomes a very sensitive issue, with arguments to support both sides of the debate. It is widely acknowledged 12 Review hints at FDI in retail, pp 1-15, Times of India, 14 Dec.2004 that FDI can have some positive results on the economy, triggering a series of reactions that in the long run can lead to greater efficiency and improvement of living standards, apart from greater integration into the global economy. Supporters of FDI in retail trade talk of how ultimately the consumer is benefited by both price reductions and improved selection, brought about by the technology and know-how of foreign players in the market. This in turn can lead to greater output and domestic consumption.But the most important factor against FDI driven ―modern retailing‖ is that it is labour displacing to the extent that it can only expand by destroying the traditional retail sector. Till such time we are in a position to create jobs on a large scale in manufacturing, it would make eminent sense that any policy that results in the elimination of jobs in the unorganised retail sector should be kept on hold.Though most of the high decibel arguments in favour of FDI in the retail sector are not without some merit, it is not fully applicable to the retailing sector in India, or at least, not yet. This is because the primary task of government in India is still to provide livelihoods and not create so called efficiencies of scale by creating redundancies. As per present regulations, noFDI is permitted in retail trade in India. Allowing 49% or 26% FDI (which have been the proposed figures till date) will have immediate and dire consequences. Entry of foreign players now will most definitely disrupt the current balance of the economy, will render millions of small retailers jobless by closing the small slit of opportunity available to them. Imagine if Wal-Mart, the world‘s biggest retailer sets up operations in India at prime locations in the 35 large cities and towns that house more than 1 million people13. The supermarket will typically sell everything, from vegetables to the latest electronic gadgets, at extremely low prices that will most likely undercut those in nearby local stores selling similar goods. Wal-Mart would be more likely to source its raw materials from abroad, and procure goods like vegetables and fruits directly from farmers at preordained quantities and specifications. This

84

means a foreign company will buy big from India and abroad and be able to sell low – severely undercutting the small retailers. Once a monopoly situation is created this will then turn into buying low and selling high. Such re-orientation of sourcing of materials will completely disintegrate the already established supply chain. In time, the neighbouring traditional outlets are also likely to fold and perish, given the ‗predatory‘ pricing power that a foreign player is able to exert. As Nick Robbins wrote in the context of the East India Company, ―By controlling both ends of the chain, the company could buy cheap and sell dear‖14. The producers and traders at the lowest level of operations will never find place in this sector, which would now have demand mostly only for fluent English-speaking helpers. Having been uprooted from their traditional form of business, these persons are unlikely to be suitable for other areas of work either. It is easy to visualise from the discussion above, how the entry of just one big retailer is capable of destroying a whole local economy and send it hurtling down a spiral. One must also not forget how countries like China, Malaysia and Thailand, who opened their retail sector to FDI in the recent 13 Census 2001, Registrar of Census, GOI 14 Robbins, Nick, ―The World‘s First Multinational.‖ The New Statesman, (Dec. 13, 2004) past, have been forced to enact new laws to check the prolific expansion of the new foreign malls and hypermarkets15. Given their economies of scale and huge resources, a big domestic retailer or any new foreign player will be able to provide their merchandise at cheaper rates than a smaller retailer. But stopping an Indian retailer from growing bigger is something current public policy cannot do, whereas the State does have the prerogative in whether foreign entry in the retail sector should be stalled or not. It is true that it is in the consumer‘s best interest to obtain his goods and services at the lowest possible price. But this is a privilege for the individual consumer and it cannot, in any circumstance, override the responsibility of any society to provide economic security for its population. Clearly collective well-being must take precedence over individual benefits.

Disturbing the Hornet’s Nest:If you assume 40 mn adults in the retail sector, it would translate into around 160 million dependents using a 1:4 dependency ratio. Opening the retailing sector to FDI means dislocating millions from their occupation, and pushing a lot of families under the poverty line. Plus, one must not forget that the western concept of efficiency is maximizing output while minimizing the number of workers involved – which will only increase social tensions in a poor and yet developing country like India, where tens of millions are still

85

seeking gainful employment. Vijay, Tarun, ―Debate: Should FDI Be Allowed In Retail Branding?‖, The Financial Express, (Dec. 6, 2004) This dislocated and unemployed horde has to be accommodated somewhere else. But if you look at the growth rates of labour in manufacturing and industry, you wonder where this new accommodation can be found? Agriculture already employs nearly 60% of our total workforce, and is in dire need of shedding excess baggage. That leaves us with manufacturing as the only other alternative. With only 17% of our total workforce already employed in industry, which contributes altogether only 21.7% of our GDP, this sector can hardly absorb more without a major expansion. So far Indian economy has been heavily geared towards the service sector that contributes 56% of our GDP. The service sector‘s contribution to the increase in GDP over the last 5 years has been 63.9%. Having a high contribution from services is an attribute that is characteristic of developed economies. What is anomalous in the Indian case is the fact that in other fast developing economies, say China, manufacturing accounts for a significant share of GDP, whereas in India, manufacturing contributes a mere 23.1% of the GDP. It is evident that the manufacturing sector has been the engine for economic growth in China, which has been growing at 10.1% since 199116. In India,the credit for its 5.9% growth over the corresponding period goes mostly to the service sector. Ironically it would seem that the Indian economy is getting a post-industrial profile without having been industrialised! Retailing is not an activity that can boost GDP by itself. It is only an intermediate value-adding process. If there aren‘t any goods being manufactured, then there will not be many goods to be retailed! This underlines the importance of manufacturing in a developing economy. One could argue that the alarmingly low contribution of industry is attributable to the structural adjustments going on the sector, getting rid of the flab and getting ready to compete, but that still cannot undermine the seriousness of 16 Calculated from World Development Indicators 2003.the issue at hand, in that only 6.215 million out of productive cohort of 600 million is employed in organised manufacturing.Only until the tardy growth of the manufacturing sector is addressed properly and its productivity chart starts to look prettier, could one begin thinking of dislocating some of the retailing workforce into this space. Until that day, disturbing the hornet‘s nest would be one very painful experience for the economy.

86

Recommendations:1. The retail sector in India is severely constrained by limited availability of bank finance. The Government and RBI need to evolve suitable lending policies that will enable retailers in the organised and unorganised sectors to expand and improve efficiencies. Policies that encourage unorganised sector retailers to migrate to the organised sector by investing in space and equipment should be encouraged. 2. A National Commission must be established to study the problems of the retail sector and to evolve policies that will enable it to cope with FDI as and when it comes. 3. The proposed National Commission should evolve a clear set of conditionalities on giant foreign retailers on the procurement of farm produce, domestically manufactured merchandise and imported goods. These conditionalities must be aimed at encouraging the purchase of goods in the domestic market, state the minimum space, size and specify details like, construction and storage standards, the ratio of floor space to parking space etc. Giant shopping centres must not add to our existing urban snarl. 4. Entry of foreign players must be gradual and with social safeguards so that the effects of the labour dislocation can be analysed & policy finetuned.Initially allow them to set up supermarkets only in metros. Make the costs of entry high and according to specific norms and regulations so that the retailer cannot immediately indulge in ‗predatory‘ pricing. 5. In order to address the dislocation issue, it becomes imperative to develop and improve the manufacturing sector in India. There has been a substantial fall in employment by the manufacturing sector, to the extent of 4.06 lakhs over the period 1998 to 2001, while its contribution to the GDP has grown at an average rate of only 3.7%17. If this sector is given due attention, and allowed to take wings, then it could be a source of great compensation to the displaced workforce from the retail industry. 6. The government must actively encourage setting up of co-operative stores to procure and stock their consumer goods and commodities from small producers. This will address the dual problem of limited promotion and marketing ability, as well as market penetration for the retailer. The government can also facilitate the setting up of warehousing units and cold chains, thereby lowering the capital costs for the small retailers. 7. According to IndiaInfoline.com, agro products and food processing sector in India is responsible for $69.4 billion out of the total $180 billion retail sector (these are 2001 figures). This is more than just a sizeable portion of the pie and what makes it even more significant is the

87

fact that in this segment, returns are likely to be much higher for any retailer. Prices for perishable goods like vegetables, fruits, etc. are not fixed (as opposed to, say, branded textiles) and therefore, this is where economies of scale are likely to kick in and benefit the consumer in the 17 Calculated from Monthly abstract of Statistics, Volume 57, No.7, July 2004,Central Statistical Organisation, GOI, GDP figures from India Observer Statistical Handbook (2004). form of lower prices. But due attention must be given to the producer too.Often the producer loses out, for example, when the goods are procured at Rs.2 and ultimately sold to the consumer at about Rs.15 as in the case of tomatoes now. The Government themselves can tap into the opportunities of this segment, rather than letting it be lost to foreign players. And by doing so, they can more directly ensure the welfare of producers and the interest of the consumers.8. Set up an Agricultural Perishable Produce Commission (APPC), to ensure that procurement prices for perishable commodities are fair to farmers and that they are not distorted with relation to market prices.Recommendations for the Food Retail Sector: With 3.6 million shops retailing food and employing 4% of total workforce and contributing 10.9% to GDP18, the food-retailing segment presents a focused opportunity to the Government to catalyze growth & employment.1. Provision of training in handling, storing, transporting, grading, sorting, maintaining hygiene standards, upkeep of refrigeration equipment, packing, etc. is an area where ITI‘s and SISI‘s can play a proactive role. 2. Creation of infrastructure for retailing at mandis, community welfare centers, government and private colonies with a thrust on easier logistics and hygiene will enable greater employment and higher hygiene consciousness, and faster turnaround of transport and higher rollover of produce.18 Chengappa, P.G., Achoth, Lalith, Mukherjee, Arpita, Reddy, B.M. Ramachandra, Ravi, P.C. – ―Evolution of Food Retail Chains: The Indian Context‖ (Nov. 2003) 3. Quality regulation, certification & price administration bodies can be created at district and lower levels for upgrading the technical and human interface in the rural to urban supply chain. 4. Credit availability for retail traders must be encouraged with a view to enhancing employment and higher utilization of fixed assets. This would lead to less wastage (India has currently the highest wastage in the world) of perishables, enhance nutritional status of producers and increase caloric availability. 5. Several successful models of integrating very long food supply chains in dairy, vegetable, fish and fruit have been evolved in India. These

88

one off interventions can be replicated in all states, segments and areas. Cross integrations of these unique food supply chains will provide new products in new markets increasing consumer choice, economic activity and employment.6. Government intervention in food retail segment is necessitated by:a) The lack of any other body at remote/grassroots level. b) Need to provide market for casual and distant self-employed growers and gatherers. c) Maintain regulatory standards in hygiene. d) Seek markets in India and abroad (provide charter aircrafts, freeze frying, vacuuming, dehydrating, packing facilities for small producers at nodal points). e) Provide scope and opportunity for productive self-employment (since Govt. can‘t provide employment). At a subsequent stage, these interventions can be integrated into the supply chains of the foreign retailers in India and abroad, creating 20 synergy between national priorities, market realities, globalization, and private-public cooperation. In this fashion, the Government can try to ensure that the domestic and foreign players are approximately on an equal footing and that the domestic traders are not at an especial disadvantage. The small retailers must be given ample opportunity to be able to provide more personalized service, so that their higher costs are not duly nullified by the presence of big supermarkets and hypermarkets.

89

CHAPTER 7

INDIAS POLICY ON FDI

90

India‘s conscious shift in the early 1990s from an inward-looking development strategy to a globalized market-based approach resulted in significant changes in its foreign investment policy. Till the 1990s, the policy was heavily restrictive with majority foreign equity permitted only in a handful export-oriented, high technology industries. Outward-oriented reforms radically changed such perceptions with foreign investment policy becoming progressively liberal following steady withdrawal of external capital controls and simplification of procedures. Enabling policies have resulted in aggregate foreign investment into India increasing from US$103 million in 1990-91 to US$61.8 billion in 2007-2008.1 India is variously identified as one of the most attractive long-term investment locations.2 It can attract much larger foreign investments given its distinct virtues of large domestic market, rising disposable incomes, developed financial architecture and skilled human resources. But transforming the potential to actual will depend significantly upon further liberalization of its foreign investment policy. This paper outlines salient aspects of India‘s foreign investment policy and traces the evolution of the same. It follows up with a critical evaluation of the policy from a political economy perspective. Structurally the paper is divided into three sections with the first and second dealing with features of the investment policy and its evolution and the third attempting to outline the unfinished policy agenda and the constraints on further liberalization from a political economy perspective. Amitendu Palit is a visiting research fellow at the Institute of South Asian Studies (ISAS) at the National University of Singapore (NUS). Comments and feedback on the paper may kindly be sent to isasap@nus.edu.sg or amitendu@gmail.com. The views expressed in the paper are entirely personal to the author. Usual disclaimers apply.1 Total of foreign direct investment and foreign portfolio investment. Estimates obtained from the Handbook of Statistics on Indian Economy, Reserve Bank of India (RBI), Table 159, p. 264. Available at: http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/87541.pdf [Accessed on June 5, 2009].2 Observations from UNCTAD‘s World Investment Report (2007) and ‗Foreign Direct Investment Confidence Index‘ of A.T. Kearney. See Foreign Direct Investment inIndia: Policies and Procedures, Government of India, p. 6; available at:A.Palit/India’s Foreign Investment PolicyOperational Features

91

Foreign investment comprises foreign direct investment (FDI) and foreign portfolio investment (FPI). The two categories are conceptually distinct in several respects. FDI represents a long-term vision and strategic commitment of the investors to the recipient economy. In contrast, FPI is intrinsically short-term aiming to maximize risk-return payoffs from capital markets. While both FDI and FPI are reflected in capital structures of resident enterprises as equity held by non-resident entities, FDI is distinguished by the investor‘s desire to hold a controlling stake in the enterprise.3 In this respect, foreign investment policies of host economies usually refer to FDI policies with operational procedures for portfolio investment being functionally inclusive aspects of such policies. India‘s present policy framework for inward FDI was introduced by the Industrial Policy Statement of July 24, 1991. The framework has subsequently evolved and enlarged in line with reforms and structural developments in the economy. The present policy allows foreign investors to invest in resident entities through either the automatic route or the government-administered route. Most sectors and activities qualify for the automatic route. This route allows investors to bring in funds without obtaining prior permission from the Government, RBI, or any other regulatory agency. However, invested enterprises are required to inform RBI within 30 days of receipt of funds and also comply with documentation requirements within 30 days of issue of shares to foreign investors.4 Certain investment intentions do not qualify under automatic route and require prior permission from the government. There are also sectors/activities where despite being eligible for automatic route, foreign investment is subject to other caveats. A detailed http://www.dipp.nic.in/manual/FDI_Manual_Latset.pdf [Accessed on June 2, 2009]. 3 Both IMF and OECD define FDI as investment for ‗obtaining a lasting interest by resident entity of one economy in an enterprise that is resident in another economy.‘The ‗lasting interest‘ symbolizes a desire to exert significant influence in managerial control of the invested enterprise. The IMF‘s Balance of Payment Manual (1993, 5th edition) defines a ‗direct investor as one owning 10% or more of an enterprise‘s capital.' See Duce, M. and Espana, B. (2003), ‗Definitions of Foreign Direct Investment: A Methodological Note,‘ July 31; See also http://www.bis.org/ publ/cgfs22bde3.pdf [Accessed on June 19, 2009] 4 These apply to non-resident Indians (NRIs), Persons of Indian Origin (PIOs) and Overseas Corporate Bodies (OCBs) as well.A.Palit/India’s Foreign Investment Policyillustration of these sectors and associated conditions is at Appendix 1. Appendix 1 also indicates extant restrictions on degree of foreign

92

investment permitted in various sectors. Though almost all of manufacturing is fully open to foreign investment, limitations on extent of foreign ownership (measured by proportion of equity capital belonging to non-resident entities) prevail in several services. Most of India‘s agriculture is closed to foreign investment, while it is prohibited in atomic energy, lottery business, gambling & betting and retail trading (except single-brand retailing). The present policy permits foreign investors to collaborate with local partners as well as establish wholly owned subsidiaries (WOSs). Both joint ventures and WOSs can be incorporated as resident enterprises under the Indian Companies Act (1956). Foreign-owned enterprises can also be unincorporated entities such as liaison/project/branch offices. Commercial scopes of unincorporated entities, however, are narrower compared to their incorporated counterparts.5 India does not restrict repatriation of investments, dividends and profits. Non-resident investors can dispose equity shares without prior government permission. They are also allowed to purchase immovable property in India after acquiring permission for doing business as incorporated/unincorporated entities.6 Such acquisition, however, needs to be brought to the notice of the RBI within 90 days. Furthermore, according to the Foreign Exchange Management Act (FEMA) of 2000, acquired property cannot be transferred without permission of RBI.7 Other than funding new ventures, foreign investors can acquire stakes in existing resident companies. Equity transfer from residents to non-residents in such instances of mergers and acquisitions (M&A) is usually permitted under the automatic route. However, if the M&As are in sectors and activities requiring prior government permission (Appendix 1) then transfer can proceed only after such permission. The foreign investment policy offers some additional benefits to expatriate Indian investors (NRIs, PIOs and OCBs)8 including permission to invest more than the prescribed foreign equity ceilings in specific sectors such as domestic scheduled passenger airlines, ground handling and cargo services where expatriates can invest up to 100 percent under the automatic route as opposed to non-5 Liaison and project offices cannot carry out exclusive commercial activities except for facilitating export-import business, technical/financial collaborations and activities incidental to projects. Branch offices, besides acting as buying/selling agents of parent companies, can render consultancy services and research work. Source is as cited in 3 above, p. 24-25. 6 Liaison offices cannot acquire immovable property. 7 Refer Notification No. FEMA 21/2000-RB dated May 3, 2000. 8 Companies or other entities owned directly or indirectly to the extent of at least 60 percent by NRIs. expatriate investment ceiling of 49 percent.9

93

Expatriate investors also enjoy more liberal facilities with respect to transfer of immovable property acquired in India.Short-term portfolio investors, primarily foreign institutional investors (FIIs)10, can invest in equity shares and convertible debentures of resident enterprises. They, however, need to register with the Securities and Exchange Board of India (SEBI) - India‘s capital market regulator. FIIs can split capital portfolios in 70:30 ratios between equity and debt. Though they can transact on notified stock exchanges without prior permission of RBI, individually, they cannot own more than 10 percent equity in paid-up capitals of Indian enterprises, while aggregate FII holding is capped at 24 percent. In this respect, the foreign investment policy shows a clear preference for longer-term FDI, which is allowed up to 100 percent in most areas, rather than short-term portfolio flows. Small scale enterprises11 can attract FDI up to 24 percent of their total capital. Higher levels of foreign equity require the enterprises to surrender their ‗small‘ status. Small enterprises cannot remain ‗small‘ even if ‗non-small‘ domestic investors pick up more than 24 percent of their capitals. Foreign investors seeking more than 24 percent equity holding in enterprises manufacturing items reserved for small industries require prior government approval. Infusion of such equity also requires the small enterprise to obtain an industrial license for continuing to produce items reserved for small industries. Investing in Special Economic Zones (SEZs) attracts a slew of incentives for foreign investors with such investments exempt from practically all taxes, including those on export profit, capital gains, dividend distribution as well as customs duties on imported goods and local excise. In addition, investments in specific segments of infrastructure such as roads, airports, seaports, inland waterways,sanitation and sewage systems, solid waste management, electricity generation, transmission & distribution and housing and hospital development are eligible for full income-tax exemptions. India has double tax avoidance agreement (DTAA) with 69 countries enabling foreign investors to choose their preferred taxation turfs.9 Press Note 7 (2008), Department of Industrial Promotion and Policy (DIPP),Government of India. Available at: http://siadipp.nic.in/policy/ changes.htm [Accessed on June 3, 2009].10 FIIs include asset management companies (AMCs), pension and mutual funds,investment trusts, endowment foundations, university funds, charitable trusts and societies. Further details on portfolio investment scheme are available at source cited in 3 above, p. 32-33.11 An enterprise whose investment in plant and machinery does not exceed Rs 10 million.

94

7.1Gradual Evolution

India‘s approach to foreign investment during the 1950s and 1960s was cautiously pragmatic. It was ensured that ownership and enterprise control remained primarily with resident investors. Within such limitations, foreign investment was sought to be utilized in a manner beneficial for the economy. The official position on foreign investment was articulated in a statement12 made to the Constituent Assembly on April 6, 1949, by Jawaharlal Nehru. Foreign capital was recognized as an important supplement to domestic savings for facilitating national economic and technological progress. Foreign investors were allowed full freedom of repatriation with the assurance of compensation in the unforeseen event of nationalization. Foreign investment proposals, however, were sanctioned only after careful scrutiny necessitated by India‘s fragile balance of payments (BOP) and scarce foreign exchange reserves. Authorities did not wish to aggravate BOP difficulties given the unconditional assurance of repatriation and foreign investment therefore was channelized mostly into‗essential‘ industries. The tight monitoring ensured that there was hardly much FDI in the economy (except in the oil sector) till the middle of the 1950s. The situation changed from India‘s 2nd Five-Year Plan (1956- 1961) that awarded high priority to rapid industrialization. The Industrial Policy Resolution (IPR) of 1956 emphasized on increasing technological capabilities of indigenous industry for producing highquality capital, intermediate and consumer goods. The thrust on technological self-reliance increased the importance of FDI with the latter expected to be a key conduit for transfer of advanced technology. At the same time, while foreign exchange difficulties had earlier forced rationing of FDI, aggravation of the same difficulties increased its acceptance13, as it was realized that foreign exchange resources were inadequate for importing large-scale machinery and equipment for domestic industry. Foreign investment began to be12 See IIC (1965), India Welcomes Foreign Investment by India Investment Centre 13 Kidron, M. (1965), Foreign Investments in India, Oxford University Press (OUP),London.encouraged with fiscal incentives14 during the late 1950s and 1960s with foreign capital also allowed in industries reserved exclusively for the public sector.15 The 1970s kicked off an inward-looking phase that led to foreign investment getting heavily regulated. The scope of foreign investment was not only confined to industries requiring sophisticated technology, but was accompanied by a deliberate attempt to divert FDI from consumer goods to capital and

95

intermediate goods.16 Restricting FDI was a part of efforts aiming to extend state control in various sectors of the economy and was consistent with promulgation of restrictive legislations such as Monopolies and Restrictive Trade Practices (MRTP) Act (1969), the Patent Act (1970) and allied measures such as nationalization of banks, insurance companies and coal mines.The Industrial Policy Resolution (IPR) of 1973 limited foreign participation to export-oriented industries that were strategically important for long term growth prospects of the country. The most restrictive controls were enforced through the Foreign Exchange Regulation Act (FERA) of 1973. FERA consciously discriminated between domestic and foreign investors making it mandatory for branches and subsidiaries of foreign firms to convert foreign equities to minority holdings.17 There were, however, some exceptions such as predominantly export-oriented firms, or those producing items requiring sophisticated technology. But even these firms had to fulfill export obligations by exporting certain minimum parts of their annual turnovers. The Industrial Policy Resolution (IPR) of 1977 further indicated industries where no foreign collaboration (financial or technical) was considered necessary. Foreign companies, which had already diluted foreign ownership to 40 percent or less in line with the FERA, were assured treatment on par with their Indian counterparts. However, despite imposition of such sweeping controls, it is noteworthy that no restrictions were imposed on remittance of profits, royalties, dividends and repatriation of capital. The year 1991 marked a key transition in India‘s foreign investment policy. The transformation was induced by the government‘s decision to encourage stable non-debt creating long- 14 These included concessional rates of dividend tax for foreign investors and lowering of taxes on technical service fees and income from royalties. 15 Phillips Petroleum of USA had a minority stake in Cochin Refinery Ltd. – a public sector undertaking. The International Telephone and Telegraphs Corporation of the US also collaborated with the Government in a similar manner for manufacturing telephone equipment. See IIC (1965), p. 9. 16 Martinussen, J. (1998), Transnational Corporations in a Developing Country: The Indian Experience, New Delhi, Sage. 17 Section 29 of FERA dealt with branches of foreign companies in India and Indian joint stock companies having foreign participation. The FERA stipulated: 1. Branches of foreign companies were to convert to Indian companies with minimum 60% equity participation. 2. Subsidiaries of foreign companies were to reduce foreign equity to 40% or less. term capital flows as a major source of funds for supplementing domestic savings. This was a significant departure from the overt reliance on debt-creating flows during the 1970s

96

and 1980s. Such reliance was instrumental in creating structural imbalances in the economy that manifested in a serious balance of payments crisis in 1991. The crisis precipitated a paradigmatic shift in the policy perspective on future development of the country resulting in reforms aiming to move away from a rigidly controlled, inward-looking, statedominated economic framework to a decontrolled, outward-oriented and market-friendly system. The positive outlook towards FDI was a key part of this shift. The foreign investment policy for a reforming Indian economy was articulated in the new industrial policy announced on July 24, 1991. The latter differed significantly different from its predecessors in its emphasis on private entrepreneurship. Entry barriers to private participation in different industries were sought to be removed by reducing the scope of industrial licensing, restricting the public sector to areas of vital national importance, and withdrawing several prohibitions under the MRTP Act of 1969, which constrained expansion of industrial investment. The industrial policy allowed foreign investment in thirty five high-priority industries while removing several procedural controls on inflow of FDI.18 The policy introduced the ‗automatic‘ route for FDI. Sectors opened to FDI included almost the entire gamut of machineries (e.g. rubber, printing, electrical, industrial and agricultural), processed food, oil extraction, cement, metallurgical industries, chemical, ceramics, paper, fibres, pharmaceuticals, fertilizers, automobiles & auto components, electrical equipment,hotels & tourism and software.19 The thrust was clearly on attracting foreign capital and technology in large segments of manufacturing with FDI in services remaining restricted to tourism and software.Easy entry of foreign capital in notified industries was accompanied by some limiting restrictions. Foreign ownership was capped at a maximum of 51 percent of enterprise capital. Automatic approval was contingent upon the proposed foreign equity covering the foreign exchange requirement for imported capital goods. 18 ‗Statement on Industrial Policy', July 24, 1991, paragraph 1.25 as reproduced in Handbook of Industrial Policy and Statistics (2006-2007), Office of Economic Adviser, Ministry of Commerce and Industry, Government of India; p. 6; available at: http://eaindustry.nic.in/2008_handout.htm [Accessed on June 2, 2009].19 Press Note No. 10 (1992 series), DIPP, Government of India; pp. 60-81; Available at: http://siadipp.nic.in/policy/changes.htm [Accessed on June 2, 2009]. A.Palit/India’s Foreign Investment PolicyFurthermore, companies receiving automatic approval for FDI up to 51 percent were required to ‗balance‘ their dividend payments by export earnings over a period of seven years.20 Entry of foreign investment was

97

streamlined in two distinct channels. Apart from the automatic route, an empowered Board was set up for negotiating with investors and approving investments in select areas. This board –the Foreign Investment Promotion Board (FIPB) – administers the government channel of foreign investments.21 Subsequent developments in FDI policy have focused on altering the scale and scope of foreign investment between these two routes. Since 1991, FDI policies and procedures have been progressively relaxed at different points in time. A major policy revamp occurred in February 2000. The automatic route was significantly expanded to make FDI in all items/activities eligible for the route except a well-defined ‗negative list‘. The latter included industries requiring licenses under the Industries (Development and Regulation) Act of 1951 and in terms of locational policy requirements of the Industrial Policy of 1991, proposals involving FDI higher than 24 percent of equity in small-scale enterprises, instances where foreign collaborator had previous venture/tie-up in India, cases relating to acquisition of shares in resident Indian companies in favor of foreign/NRI/OCB investors and all proposals falling outside notified sectoral policy/caps relating to the automatic route, or in sectors where FDI was not permitted. The ‗negative list‘ proposals were to be examined by FIPB. Liberalization of FDI policies has been a part of reforms aiming to remove controls on industrial output. A key reform in this regard has been reduction of the scope of the public sector. India‘s industrialization during the first four decades of its planned development was led by the public sector. Public enterprises dominated the basic and heavy segments of manufacturing (e.g. steel, cement and coal). While consumer goods and intermediates had sizeable presence of small and medium private enterprises, key services (e.g. electricity, telecommunication, road transport, aviation,shipping, banking, insurance) were monopolized by state agencies. Effective entry of foreign investors in the Indian economy was inconceivable till the scope of the public sector was reduced and private enterprise allowed to fill up the vacuum. The Industrial Policy of 1991 limited public sector monopoly to only eight activities while 20 Source is as cited in 18 above; pp. 15-16. 21 The FIPB is located in the Department of Economic Affairs, Ministry of Finance.The Board includes Secretaries of the Department of Economic Affairs, Department of Industrial Policy & Promotion, Department of Commerce, Department of Economic Relations, Ministry of External Affairs and Ministry of Overseas Affairs. The Board is chaired by the Secretary, Department of Economic Affairs. Source is as in 3 above; freeing up the rest. 22 Subsequently state monopoly has beencramped to only sectors of strategic importance such as atomic

98

energy. Private initiative and foreign investment has been allowed in most of the erstwhile domain of the public sector including ‗sensitive‘ segments such as defense, insurance, petroleum & natural gas.Industrial licenses were widely perceived as critical entry barriers for private enterprise. It was evident that mere opening up of the economy to foreign investment was unlikely to see such investment materializing unless entry barriers were removed. Thus while limiting the public sector increased potential for competition, withdrawal of licenses facilitated competition. The Industrial Policy of 1991 confined mandatory licensing to 18 manufacturing industries. These included minerals and natural resource-based products,chemicals, alcoholic beverages, tobacco and consumer durables. 23Licensing continued even in some high-priority industries made eligible for FDI up to 51 percent through automatic route (e.g.pharmaceuticals and automobiles). These were, however, freed soon after. While automobiles were de-licensed in April 1993, most bulk drugs and formulations were freed from licensing in 1994.24 The measures have yielded dividends with leading global automobile assemblers (e.g. Benz, Honda, Hyundai, Toyota) setting up production facilities in India and the pharmaceutical & biotechnology industries witnessing entry of major global players such as GlaxoSmithKline, Eli Lily, Monsanto and Wockhardt. Progressive de-licensing has resulted in licensing now being confined to five activities: alcoholic beverages, electronic aerospace and defense equipment, cigarettes & tobacco, industrial explosives and hazardous chemicals.25 FDI is permitted in these industries, though proposals for manufacture of cigarettes and defense equipment require clearance from the FIPB, while the remaining is eligible for the automatic route. The industrial policy of 1991 justified entry of foreign investment by citing the intrinsic virtues of FDI such as advanced technology, proven managerial expertise and modern marketing 22 These areas were arms & ammunition, atomic energy, coal and lignite, mineral oils, mining of iron and manganese, mining of copper, lead, zinc and tin, minerals specified in the Schedule to Atomic Energy and railway transport.23 Coal & lignite, petroleum, alcoholic drinks, animal fats & oils, sugar, cigarettes & tobacco, asbestos, plywood and other wood-based products, raw hides & skins & leather, tanned and dressed fur skins, motor cars, paper and newsprint, electronic aerospace and defense equipment, industrial explosives, hazardous chemicals, drugs & pharmaceuticals, Entertainment electronics (e.g. television, tape recorders), white goods (refrigerators, washing machines, microwave ovens, air conditioners etc). See Annex II, Press Note No. 9 (1991 series),

99

DIPP, Government of India, available at: http://siadipp.nic.in/policy/changes.htm [Accessed on June 3, 2009].24 Press Note No. 5 (1996) series, DIPP, Government of India; Source as in 23 above. 25 Source is as cited in 3 above, p. 14. techniques.26 New export possibilities were also underlined as one of the likely spin-offs from such investment. It was therefore natural that FDI be initially allowed only in sectors where advanced technology and other attributes could make a significant difference to industrial capacities and competitiveness, both in domestic and overseas markets. More industries have been subsequently opened to FDI. Almost the entire sweep of manufacturing ranging from basic and capital goods to intermediates and consumer durables are now open to foreign investment. But the across-the-board opening up in manufacturing has not been accompanied by similar moves in services and agriculture. Over time India‘s foreign investment policy has steadily enlarged the scope of foreign ownership in resident enterprises. The 1991 policy made a rather cautious beginning in this respect, which was fully in sync with the calibrated approach characterizing India‘s economic reforms. With FDI ceiling frozen at 51 percent, foreign investors, while aspiring to become majority stakeholders, had to still have local partners and could not establish WOSs. Foreign equity remained capped at 51 percent for quite a few years and it was only in January 1997 that nine industries were allowed to increase FDI to 74 percent27 under the automatic route. The bulk of the expanded list comprised services including mining, electricity generation and transmission, non-conventional energy generation and distribution, construction, land transport, water transport, storage and warehousing. Only two industries – basic metals & alloys and other manufacturing industries – were manufacturing. In a significant move, 100 percent foreign ownership under automatic route was allowed in electricity generation, transmission, and distribution in June 1998. However, the projects were capped at a maximum of Rs 15 billion (approximately US$300 million @1USD=Rs 50). Within less than a year in January 1999, projects for construction and maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels, ports and harbours were permitted 100 percent FDI under automatic route subject to same limitations on size.28 Permission of full foreign ownership underlined the urgency of inviting funds in India‘s infrastructure. Since then, almost all manufacturing activities and several services have been allowed to access 100 percent FDI under automatic route. The gradual ease of entry enabled to foreign investors through the automatic route marks another key reform in India‘s foreign investment policy. The automatic route is a simpler route than the

100

government-administered (FIPB) process 26 Source is as cited in 18 above, p. 11. 27 Press Note No. 2 (1997 series), DIPP, Government of India; Source is as cited in 23 above. 28 Press Note No. 1 (1999 series), DIPP, Government of India. Source is as cited in 23 above. acquiring prior permission before the investor can bring in funds, there are more procedures involved entailing greater transaction costs. For almost a decade, however, the scope of the automatic route remained relatively restricted. It is interesting to note that though bulk drugs figured in Annexure III of the industrial policy of 1991, which specified industries eligible for FDI under automatic route, investment proposals in drugs continued to be guided by restrictive provisions of the Drug Policy of 1986. It was only in October 1994 that FDI in bulk drugs, intermediates and formulations were granted automatic approval.29 The coverage of the automatic route remained restricted till January 1997, when thirteen new industries were permitted FDI up to 51 percent under automatic route.30 Ease of entry for foreign investors were greatly expanded in February 200031 with FDI in all industries channelized to the automatic route barring activities attracting provisions of the ‗Negative List‘ mentioned earlier. The scopes of the Negative List and intervention by FIPB have narrowed over time. Much of the contraction has come from increases in FDI limits for automatic route as well as wider structural facilitations. A key step in this respect has been simplification of rules relating to foreign investment in instances where the investor had a previous tie-up with a local partner. Foreign investors with previous tie-ups were required to justify why the new venture will not be injurious to the existing collaboration.32 The current rules specify the onus of justification on both the foreign investor as well as the local partner. All proposals of this nature now qualify under the automatic route unless the proposed venture is exactly in the ‗same‘ field.33 The FIPB is also no longer required to decide on proposals pertaining to transfer and acquisition of resident shares by nonresidents with the process now being delegated to the automatic route. 34 Indeed, except for segments where FDI has equity caps (Appendix 1) and the narrowly defined premise of new ventures in 29 Press Note No. 4 (1994 series), DIPP, Government of India. Source is as cited in 23 above. 30 Same as in 27 above. 31 Press Note No. 2 (2000 series), DIPP, Government of India. Source is as cited in 23 above. 32 Press Note no. 18 (1998 series); DIPP, Government of India. Source is as cited in 23 above. 33 Press note no. 1 (2005 series); DIPP, Government of India. Source is as mentioned in 19 above.34 Press note No. 4 (2006 series); DIPP, Government of India. Source is as mentioned in 23 above. However, FIPB‘s approval is required

101

for transfer of shares in sectors where FDI is not permitted up to 100% under automatic route (Appendix 1). For all these industries, FIPB approval is required in instances where an Indian company is being incorporated with foreign funds and such a company is either owned/controlled by non-resident entities, or where ownership/control of Indian companies resting with resident Indian entities is being transferred to non-resident entities on account of merger, amalgamation or acquisition. Press Note No. 3 (2009 series), DIPP, Government of India. Source again is as in 23 above. fields where investors have existing collaborations, the FIPB‘s role is confined to cases where investment proposals involve more than 24 percent equity in small enterprises.

The Unfinished AgendaIndia‘s present foreign investment policy facilitates easy entry of foreign capital in most areas subject to specific limits on extent of foreign ownership. Entry options have not only become procedurally simpler, but prospects for higher yields from investment have also become brighter with withdrawal of restrictive provisions such as balancing dividend payouts by exports. In hindsight, the balance of payments crisis in 1991 left little option for India other than adopting an accommodating policy towards foreign investment. The crisis was largely a result of the economy‘s heavy reliance on high-cost external debt for financing balance of payments deficits. While hefty inflows of concessional assistance covered these deficits during the 1950s, 1960s, and 1970s, non concessional loans on market terms were the main sources of finance during the 1980s leading to sharp increase in debt-service obligations.35 The imperative for the economy was to urgently reduce reliance on debt flows in favour of stable, non-debt capital like FDI. The importance of foreign investment in revitalizing the economy also fitted well with the spirit of market-oriented economic restructuring initiated from early 1990s. A liberal foreign investment policy was consistent with simultaneous measures aiming for greater integration with the world economy: removal of import restrictions, introduction of a market-based exchange rate management system, convertibility of the Indian Rupee in the current account of the balance of payments, phased withdrawal of restrictions on capital account transactions and replacement of FERA (1973) by the Foreign Exchange Management Act (FEMA) of 2000.36 Though FDI inflows have responded positively to policy changes by increasing from US$ 97 million in 1990-1991 to US$ 32.4 billion in 2007-2008, they might have been much more had foreign investment not been

102

regulated in some key areas. Activities promising high returns on investment yet being of a strategic nature35 Jalan, B. (1992), ―Introduction‖, in Jalan, B. (ed.), The Indian Economy: Problems and Prospects, New Delhi, Viking. 36 FEMA (2000) has replaced FERA (1973) from June 1, 2000. Under FEMA (2000), there are no restrictions on current account transactions involving foreign exchange. Capital account transactions (e.g. investment by non-resident entities in India and investment by Indian entities abroad) continue to be regulated by the RBI. FEMA indicates a move away from a regulatory arrangement in the Indian foreign exchange market to a management mechanism.A.Palit/India’s Foreign Investment Policy(e.g. telecommunications, defense production, broadcasting, print media

and satellite operations) have limitations on foreign ownership and require government sanctions. Such concerns, however, should not apply to agriculture. Nonetheless foreign investment can only be in a few value-additive agricultural activities like aquaculture, floriculture, pisciculture, horticulture, development of seeds, animal husbandry and cultivation of vegetables and mushrooms. While these are eligible for 100 percent FDI under automatic route, investment in tea plantations is regulated by the FIPB and is subject to the restrictive condition of divestment of equity in favour of local partners (Appendix 1). Closed policies for FDI in agriculture can partly be explained on account of the latter figuring primarily in administrative domains of states. Article 246 in the Seventh Schedule of the Indian Constitution divides responsibilities between the central government (Union List), state governments (State List) and jointly between centre and states (Concurrent List). This vests agriculture, water, and land with states37 enabling state governments to frame their own policies in these subjects. On the other hand, external trade & commerce and industries rest with the central government. The Constitutional separation of responsibilities implies that framing an overarching foreign investment policy in agriculture requires close coordination between individual states, as well as between the centre and states.Such coordination is difficult to achieve in a large and complex federal administrative set-up like India‘s. In addition, foreign investment in key agricultural activities such as procurement is not possible unless individual states reform their marketing and procurement policies.The fate of foreign investment in India‘s agriculture will depend upon political management of domestic sensitivities. Several segments of India‘s agriculture remain protected from imports. This inward-looking attitude seems to have influenced the outlook towards foreign investment as well. Potential welfare gains (or losses) associated

103

with greater market access to imports in a sector providing livelihood to around two-third of the country‘s population (despite contributing only 17 percent of national output) is debatable. Nonetheless, resistance to market access and antipathy to foreign investment has overlooked the positive difference which such investment can make to agricultural productivity and infrastructure. But given the political sensitivity associated with impacts of economic policies on farming livelihoods, a circumspect approach to foreign goods and capital looks set to prevail in the foreseeable future. Service reforms have progressed far slowly than those in manufacturing. Public services in India were state monopolies for decades. Even now, rail transport, electricity generation, airports . 37 Seventh Schedule (Article 246) of the Constitution of India, available at: http://indiacode.nic.in/coiweb/fullact1.asp?tfnm=00%2051 seaports, banking and insurance have overarching state presence. Opening up most services to foreign investment had to be preceded by domestic reforms enabling private entry and competition. Such reforms took considerable time in sectors like electricity and telecommunication due to efforts requiring establishment of independent regulators for creating appropriate incentive structures for private investment. With the exception of telecommunications, regulatory frameworks for most public services are still trying to come to terms with the complex challenges arising from nascent growth of competition in historically controlled territories. Decisions relating to removal of industrial licenses and entry of foreign investment in manufacturing could be taken relatively easily since both figured under the operational purview of the DIPP in the Ministry of Industry. However, foreign investment decisions in services entailed extensive consultations between DIPP and individual ministries in charge of specific services adding to delays in arriving at decisions. Though the DIPP notifies policies on foreign investment in services, investment guidelines are usually accompanied by specifications issued by nodal ministries. FDI in power and airports, for example, despite being allowed up to 100 percent under automatic route is subject to provisions of the Electricity Act of 2003 and departmental regulations of the Ministry of Civil Aviation respectively.Slow progress in domestic reforms in competition and regulation has resulted in FDI remaining restrictive in several services. These include domestic passenger airlines, FM radio and cable network services, publishing of newspapers and retail trading (except single brand)38. However, in services such as telecommunication and the internet, mining, road transport, electricity and non-passenger aviation services, FDI policies are more liberal (Appendix 1). Energy, road transport and mining were among

104

the earliest to be opened up to foreign investment on account of pressing investment needs for augmenting capacities. Within financial services, liberal policies for non-banking services are accompanied by relatively restrictive regulations in insurance and banking. India‘s foreign investment regime has experienced a gradual pace of liberalization in line with the caution and calibration characterizing India‘s economic reforms. The latter have never been overly aggressive. Measures to decontrol and introduce competition have usually been accompanied by conditions aiming to temper the initial intensity of such competition. The earliest efforts to invite foreign capital in July 1991 were accompanied by the dividend balancing condition. The condition of foreign equity covering foreign exchange requirements for import of capital goods – applicable to automatic approvals for 51 percent FDI in high-priority industries – was withdrawn much later. Similar moves in the later years pertain to 38 NRIs can invest up to 100 percent in scheduled domestic passenger airlines. limitation on project sizes in electricity and road transport despite allowing 100 percent FDI and minimum capitalization norms for nonbanking financial companies (NBFCs). The caveats reflect caution arising from concerns over maintaining stable levels of foreign exchange reserves as well as avoiding marginalization of domestic producers in different segments. Calibrated policy moves have been aimed at assuaging political opposition as well. Introduction of economic reforms generated intense debates in an economy accustomed to decades of controls and planned development. Controls had produced pressure lobbies enjoying political patronage and influence. Opposition to reforms were spearheaded by these segments, which included domestic producers benefitting from high import tariffs and entry barriers like industrial licensing. Indeed, early moves to open up manufacturing to FDI evoked a chorus of protests from many of India‘s leading industrialists – popularly christened the ‗Bombay Club‘ – demanding a ‗level playing field‘ between domestic and foreign investors.39 In the years that followed, there were attempts to exploit the emotive

‗imperial‘ aspect of foreign investment by highlighting its allegedly adverse effects on indigenous producers and industries. Agitations against foreign investment with pronounced nationalistic hues and arguing for discrimination between domestic and foreign investors were led by organisations like the Swadeshi Jagaran Manch (SJM). The SJM was born in the early 1990s in response to India‘s efforts to globalize and is dedicated to fighting economic ‗imperialism‘ for protecting indigenous industries. On the other hand, the Left parties (e.g. Communist Party of India (CPI) and the Communist Party of India (Marxist) (CPI-M) have been

105

equally hostile to foreign investment. Their opposition stems from antipathy to private investment per se and is an extension of the ‗infant industry‘ argument defending import-substitution and protectionist policies. Political opposition to FDI has had a symbiotic association with interest groups with each trying to support the other on common grounds. In telecom and finance, stakeholders earning rents from monopolistic ‗virtues‘ could hardly be expected to support competition, private entry and foreign investment. These specifically include employee federations affiliated to mainstream political parties and representing interests of India‘s over-protected organized sector workers.40 Such groups are still active and resistant explaining why 39 See a) Boquerat, G. (2003), ‗Swadeshi in the Throes of Liberalization,‘ in Landy, F.and Chaudhuri, B.(eds.), Examining the Spatial Dimension: Globalization and Local Development in India, New Delhi, Manohar Publications and b) Thakore, D (1998), ‗Congress More Likely to Sustain Liberalization‘, Business Commentary, February 26, available at: http://www.rediff.com/money/1998/feb/ 26dilip.htm [Accessed on June 17,2009].40 India‘s labor market is characterized by dualism where stringent labour laws on ‗exit‘ in the formal organized sector co-exist with minimum regulations protecting India‘s insurance sector which allowed maximum foreign ownership of 26 percent way back in October 2000 has not experienced any further increase in scope of such ownership after almost nine years and two different governments. The role of politically motivated pressure lobbies in restricting FDI is best understood from the virulent opposition to foreign entry in retail trade. A modern, efficient and technologically advanced organized retail industry has never been welcomed by India‘s huge unorganized retail trade. Such opposition has enjoyed covert political support given the significance of the 13 million strong small unorganized retailers as a political constituency. In this respect the run-up to the latest Parliamentary elections held during April- May 2009 witnessed an interesting political consensus. Despite being at opposite extremes of the ideological spectrum, election manifestos of the right-wing Bharatiya Janata Party (BJP) and the Left parties were common in resisting foreign entry in retail.41 The rather paradoxical similarity in agendas was clearly on account of both viewing unorganized retail as a ‗core‘ constituency and advocating protectionist policies for safeguarding economic interests of small retailers.The success of the Congress-led coalition at the elections is unlikely to change the prospects of foreign capital in retail since political opposition continues to remain significant within the legislature. A Parliament Committee has recently opined that foreign retail firms are likely to inflict significant welfare losses by creating

106

large-scale unemployment through predatory pricing policies.42 Though this has not stopped Wal-Mart from commencing India operations,43 any precipitate move to encourage further foreign entry in retail appears remote at this juncture. This is in spite of the latest employee interests in the unorganized sector. See Kumar, Palit and Singh (2007), ‗Sustainability of Economic Growth in India‘, Working Paper No. 25, Centre for International Governance Innovation (CIGI), May, available at:http://www.cigionline.org/sites/default/files/Paper%2025_India.pdf [Accessed on June 21, 2009]. 41 ‗Party manifestos seek to axe FDI in retail‘, Business Line, April 21, 2009, available at: http://www.thehindubusinessline.com/2009/04/21/storie s /2009042151381500.htm [Accessed on June 16, 2009]. 42 ‗House Panel Applies Brakes on FDI in retail‘, The Times of India, June 9, 2009, available at: http://timesofindia.indiatimes.com/articleshow/ msid-4632751,prtpage-1.cms [Accessed on June 16, 2009]. 43 Wal-Mart and Bharti Group opened their first cash and carry store in the city of Amritsar in Punjab on May 30, 2009. Story available at: http://www.bloomberg.com/apps/news?pid=20601205&sid=a5I J nEEOESTo [Accessed on June 21, 2009]. pre-budget Economic Survey of the Ministry of Finance making a strong pitch for FDI in multi-format retail, particularly in distribution of food items.44 Influential groups also continue to block entry of foreign capital in broadcasting, print media and aviation. In these areas, as well as in education, legal and accountancy services, which till now have almost entirely inward-looking foreign investment policies, complexities involved in multilateral trade negotiations have also, influenced investment policies. Restrictions on foreign entry in these sectors have been partly due to India‘s unwillingness to offer deeper commitments in services negotiations on account of lukewarm responses to its own demands for enhanced market access elsewhere. Reluctance to offer deeper market access commitments, however, has often been influenced by domestic protectionist pressures. Fortunately, India‘s foreign investment policy has progressed in spite of political opposition and lobbyist pressures. This is primarily due to favorable dispositions of key decision-makers towards foreign investment. In more recent times, however, political resistance is turning out to be more successful in blocking reforms than in the past. This could be due to the complex nature of the turfs where foreign capital still has limited access. Agriculture, education, retail, media etc are sectors where policy consensus between centres and states – a difficult mission to accomplish in the first place – needs to be followed by effective coordination between central and state

107

agencies. Reforms in many of these segments entail involvement of state legislatures as well. Matters are not helped by management compulsions of coalition politics, where minority partners hold considerable sway and can stall decisions on reforms and foreign investment. 44 Economic Survey 2008-2009; Box 2.6; p. 32, available at: http://www.indiabudget.nic.in/es2008-09/chapt2009/ chap24.pdf [Accessed on July 2, 2009].

ConclusionWhile India has an overall market-friendly and liberal policy towards foreign investment, foreign capital still does not enjoy equally porous access in all parts of the economy. Fairly unhindered access to manufacturing is accompanied by conspicuous lack of access in certain services and agriculture. India‘s future foreign investment policy faces the critical challenge of increasing access of foreign capital to these segments for enhancing inward FDI. The existing pattern of inward FDI into India does point to the possibility of substantive increase in investment following further liberalization. FDI inflows in India have been concentrating mostly in services. Financial and non-financial services, computer software, telecommunications, housing and construction have been the top drawers of FDI during April 2000 – March 2009.45 The servicesorientation of inward FDI vindicates arguments for greater liberalization of foreign investment policies in services. Despite being relatively more restricted than manufacturing, India‘s services are drawing significant FDI due to undisputed virtues of large domestic market and skilled human resources. Manufacturing is unable to do so in spite of more liberal entry rules primarily on account of persistence of high transaction costs arising from poor infrastructure, inflexible labor policies in the formal sector and opaque land markets. Structural changes within the economy also point to a larger role of foreign investment in some sectors. Insurance is a key area in this respect. Rising life expectancy and greater healthcare costs have increased demand for a variety of life and non-life, equity marketlinked insurance products. Global insurance majors with a diverse product portfolio can make a major difference in this regard.46 India‘s aviation industry, particularly the low-cost segment, can benefit from foreign funds and managerial expertise at a time when it is struggling to recover from financial difficulties. India‘s agriculture, on the other hand, is in dire need of investments for enhancing productivity and 45 Fact Sheet on Foreign Investment; May 28, 2009; DIPP, Government of India; p. 2, available at:

108

http://www.dipp.nic.in/fdi_statistics/india_FDI_ March2009.pdf [Accessed on June 5, 2009]. 46 The Economic Survey 2008-2009 argues for 100 percent foreign equity in special insurance companies providing all insurance products to rural residents and in agriculture-related activities. Otherwise, it favors increasing FDI cap to 49 percent in insurance. Source is as in 45 earlier. improving infrastructure, particularly in storage, conservation and transmission of farm produce. Foreign investment again can play a critically important role in augmenting capacities. India has been able to provide an enabling environment to foreign investors in several respects. Deep reforms in capital markets aided by an efficient regulatory architecture have facilitated portfolio investments. Transfer and acquisition of shares are taking place according to investor-friendly guidelines. Foreign exchange regulations have been aligned to global standards courtesy FEMA. But these facilitations need to be matched by a more open foreign investment policy for increasing FDI inflows to a level higher than their current share of only 3 percent of India‘s GDP. A more open policy calls for committed political consensus on foreign investment. Such an accord has proved elusive so far. However, given that India‘s reforms have been irreversible notwithstanding political discord, hopes of further reforms in foreign investment are not entirely farfetched

109

CHAPTER 8

CASES ON FDI IN INDIAN

RETAIL SECTOR

110

8.1Foreign Retailers Regroup in India

THE WALL STREET JOURNAL

The potential of the booming Indian market is captivating to the world‘s biggest store chains, which long to make it a linchpin of their growth strategies. Now, with the Indian government backtracking from retail liberalization, retailers like Wal-Mart Stores Inc. and Tesco PLC are retooling their plans.The political backlash against foreign retailers was a major setback for Wal-Mart, which for years lobbied Indian officials to change the rules, arguing that allowing international retailers to run their own stores in the country would not only improve shopping options for the public, but modernize the entire economy.The world‘s largest retailer also has been vocal about India‘s potential impact on its bottom line. Executives of U.S.-based Wal-Mart said during a March investors‘ conference on its international business that the company expected to turn a profit more quickly in India than in China, where the process took a dozen years.The enormity of the Indian retail market has dazzled major corporations: Consulting firm A.T. Kearney, which has been polling companies about global-expansion aspirations for more than a dozen years, said India now ranks only below China on their priority lists, ahead of markets like Brazil and the U.S.But public opposition to the move in India remains rife. Radha Krishna Store in Bengali Market in central Delhi is typical of the mom-and-pop stores the Indian government wants to protect from big-box retailers like Wal-Mart. The small store‘s shelves are stacked with items as diverse as shampoos, cooking oils, diapers and milk. Kamlesh Gupta and her husband have been operating the store for 25 years.If chains like Wal-Mart and Tesco are permitted to operate in India, ―everything will be over,‖ Mrs. Gupta said. ―If they sell goods cheaper than us, who will come here? Already, we have lost 20% of our business since Big Bazaar and Reliance started operating in the last two years,‖ she said, referring to two Indian retailers.To protect stores like these, Uma Bharti, a leader of the main opposition party, the right-of-center Bharatiya Janata Party, had threatened that she would personally set fire to any Wal-Mart stores if they were allowed to enter India. She

111

said she was prepared to go to prison for it. This party‘s voting constituency includes small retailers.The political opposition to loosening the foreign-investment rules ensures that, for now, Wal-Mart‘s only way to grab a piece of the lucrative market is through a partnership with Bharti Enterprises Ltd. to operate wholesale-style ―cash and carry‖ shops selling bulk items to small-business owners. The joint venture only had nine stores as of the end of October, a minuscule presence for a retail giant with more than 9,000 shops in 28 countries.Carrefour SA, the world‘s second-largest retailer behind Wal-Mart, has long pegged India as a strategic market. For years, the French company has been seeking a local partner with whom to launch a chain of supercenters. A person close to Carrefour said the company is unswayed in its quest, regardless of whether the retail law goes into effect or not, though this person added that having a majority stake would be important ―symbolically.‖Impatient to get its business started in India, Carrefour has opened two wholesale cash-and-carry stores in the meantime. The first opened in Delhi a year ago, and the second opened in Jaipur in November. The opening of the second store coincided with the passing of the retail law, and protesters demonstrated outside the store against the new law. Carrefour intends to open more wholesale stores next year but hasn‘t detailed its plans.The Indian government‘s decision to put the proposal for multibrand retailers on ice came also as a blow to Tesco, which along with other British businesses has advocated changing the regulations. Tesco has been unable to open stand-alone retail stores in India and instead operates through a franchise deal with Tata Group unit Trent. ―The decision to defer [foreign direct investment] is a missed opportunity for Indian producers, farmers and consumers,‖ Tesco said.Saloni Nangia, senior vice president and head of retail and consumer goods at Technopak, a consulting firm based in New Delhi, is hopeful that the decision to allow foreign retailers to open supermarkets in India might still happen.―A number of brands were already in the country and will continue to believe and be a part of the India opportunity,‖ Ms. Nangia said. ―While the discussion has been put on hold, it will come back in due course of time and the government will come up with a plan.‖

112

The door remains open to ―single brand‖ retailers in India, like Ikea Group of Sweden, Nike Inc. of the U.S. and Marks and Spencer Group PLC of the U.K. Until now, single-brand foreign retailers like Nike could only hold 51% of an Indian joint venture. Now, the government is allowing 100% foreign investment in single-brand retail, which is attractive to companies like Ikea that have publicly said that they weren‘t interested in partnerships.Brands like Levi Strauss & Co., Nike and Reebok International Ltd. have been in India for several years. Their products have been popular among a brand-conscious generation and were being sold in India initially through department stores and more recently through their stand-alone stores operated via joint ventures or franchisees. Marks & Spencer entered the market in 2001, initially as a franchise business. In 2008, the company, which has 23 stores in India, signed a joint-venture agreement with the Indian company Reliance Retail Ltd., a unit of Reliance Industries Ltd., which has allowed Marks & Spencer to open larger stores and tap into local sourcing.More recently, brands like Tommy Hilfiger, Zara, Mango and French Connection have set up stores in the bigger cities, offering more choice and providing more competition to increasingly discerning consumers.These brands, under the new policy, will now have the opportunity to buy out their partners or franchisees with the condition that they source at least 30% of their future products from Indian small and midsize enterprises.But this requirement poses a problem for companies in the luxury-goods sector, many of which make their products in Europe and export them to markets like India.An example is Burberry Group PLC, the British trench-coat maker. The company has seven stores in India, all of which are operated as a joint venture with the Indian company Genesis Colors Pvt. Ltd. Burberry, which opened its first store in India in 2008, owns 51% of the venture.Burberry faces high import duties in India because many of its products fall under a so-called luxurytax on high-end goods. The company would face difficulty satisfying the sourcing requirements if it decided to take full ownership of its Indian operation. Burberry‘s traditional raincoats are made in England, and most of its leather products come from Italy.

113

8.2) THE NEW YORK TIMES

India to Ease Retail Rules for Foreign CompaniesBy VIKAS BAJA J Published: November 24, 2011

MUMBAI — The Indian government decided on Thursday to allow foreign retailers like Wal-Mart and Tesco to open stores in the country, the first time that policy makers have moved to open India‘s vast and fast-growing retail market to outsiders.

NIKE In c Wal-Mart Stores In c

The long-awaited decision by the cabinet of Prime Minister Manmohan Singh will allow retailers who sell multiple brands of products to own 51 percent of their Indian operations, with the rest held by an Indian partner. Previously, such retailers were not allowed to conduct retail business in the country.Companies like Apple and Nike that sell only one brand of product in their retail operations will now be allowed to own 100 percent of their stores, up from 51 percent.A spokesman for the governing Congress Party confirmed the move on Indian television but provided no details about the decision, which is opposed by small-store owners and many political parties, including one that supports Mr. Singh‘s government. A senior minister was expected to make a statement about the decision in Parliament on Friday.Wal-Mart, Tesco, Carrefour and Ikea are among the multinational retailers that had expressed interest in investing in India if the rules were changed.On Thursday, Wal-Mart welcomed the move as ―a first, important step,‖ adding that the company would study ―the conditions and the finer details of the new policy and the impact that it will have on our ability to do business in India.‖Analysts said the fact that policy makers opened the retail market despite of opposition from other parties suggested they might be more willing to open up the broader economy further.In the last seven years, the coalition government led by the Congress Party has delayed many proposals to open domestic industries like insurance and

114

aviation to greater foreign investment and competition.―One had almost given up hope that the government would make a big move,‖ said Arvind Singhal, chairman of Technopak Advisors, a consulting firm that specializes in the retailing industry. ―There is a big sense of relief.‖Mr. Singhal and other analysts say India needs significant foreign investment to help establish a modern retail industry and a more efficient supply system.Modern stores make up about 5 percent of India‘s $500 billion retail industry, with the rest made up of corner stores and other small enterprises.Analysts have estimated that up to 35 percent of Indian fruits and vegetables spoil before they get to market, largely as a result of an antiquated supply system that includes many wholesale markets and middlemen.Partly as a result, Indian food prices often rise quickly when there are minor disruptions in the supply or harvest of staple crops like onions and potatoes. Food inflation in recent months has been hovering near 10 percent.While some companies have begun building supply networks in parts of India, Mr. Singhal said it would take three to five years of investment to establish a more efficient supply chain. Companies will need to work from the ground up, setting up warehouses, buying trucks and establishing relationships with farmers and other suppliers.―I don‘t see any immediate impact in the next six months,‖ Mr. Singhal said. ―Supply chain development takes its own time. It moves from one state to another.‖For the last two years, Wal-Mart, the giant American retailer, has been operating wholesale stores in India that sell only to other businesses; it now has nine such outlets. It has also established relationships with farmers in some states like Punjab to supply vegetables and other produce to the retail supermarkets of its Indian partner Bharti Retail. Metro, a German retail chain, has also opened wholesale stores in India.The move will also help Indian companies like the Future Group, the country‘s largest retailer, and FlipKart.com, a fast-growing online store, that would like to raise money from foreign investors to expand their operations.In many cases, Indian retailers, especially those that operate online stores, have been setting up separate retail and wholesale companies to get around the restrictions on foreign investment. Their American venture capital partners invest in the wholesale operations, which sell goods and services to the retail firms.The decision will face stiff opposition from political parties, including partners of the Congress Party like the Trinamool Congress, an

115

important party in the eastern part of the country.The lead opposition party in Parliament, the Bharatiya Janata Party, said before the decision was announced that foreign retailers would merely displace domestic stores.―Foreign direct investment with deep pockets entering this segment will have an adverse impact on our domestic retail sector, which is growing,‖ the party said.

8.3)THE NEW YORK TIMES

India Suspends Plan to Let in Foreign RetailKuni Takahashi for The New York Times

Customers shop at Best Price, a store jointly owned by Wal-Mart and Bharti Enterprise, in India.By JIM YARDLE Y Published: December 7, 2011

NEW DELHI — Facing a harsh political reaction that has paralyzed the Indian Parliament, the governing Congress Party announced on Wednesday that it would suspend plans to allow foreign multibrand retailers like Wal-Mart to open stores in India.Related Wal-Mart Debate Rages in Indi a (December 6, 2011)

Wal-Mart Stores In c

The decision, announced in Parliament, was a setback for Prime Minister Manmohan Singh and seemed certain to deepen criticism that his administration had become increasingly adrift and ineffective. Foreign corporations eager to enter the Indian retail market must now also put aside any expansion plans.―Government will take a decision after a consensus is developed,‖ Pranab Mukherjee, the Indian finance minister, said in announcing the suspension.The question is whether thegovernment will try to resurrect the plan in the weeks or months ahead. The Indian economy has been slowing in recent months, partly because of the global economic downturn but also, many analysts say, because of the inability of the government to pass crucial reforms, including on foreign retail

116

investment.For months, Mr. Singh has taken a political battering. His administration has been beset by scandals, and opposition leaders have succeeded in stalling the Congress Party‘s agenda in Parliament. When Mr. Singh‘s cabinet approved the foreign retail measure on Nov. 24, business groups and many economists hailed the decision as a bold reform that would benefit consumers and farmers while providing a much-needed jolt to the Indian economy.No parliamentary vote was required for the executive decision to take effect, but loud resistance quickly arose from both political allies and opponents of the Congress Party. Mamata Banerjee, a powerful ally, threatened to withdraw her Trinamool Congress Party from the coalition national government.Opposition parties blocked all debate in Parliament for days and condemned the proposal as a direct threat to millions of small businesses across India. Political resistance from Indian traders and shop owners has blocked previous efforts to push through similar measures.By Wednesday, with other important pieces of legislation stalled, Mr. Mukherjee announced the government‘s retreat on foreign retail as part of a deal with opposition leaders to restart Parliament.Analysts and newspaper editorials have excoriated Congress Party leaders, saying they mishandled the issue by failing to consult in advance with allies like Ms. Banerjee and for making the announcement while Parliament was in session — even though parliamentary approval was not required.―The political handling is extraordinarily inept,‖ said PratapBhanu Mehta, a political analyst in New Delhi.Mr. Mehta said the decision by Congress Party leaders to push aside the foreign retail measure had most likely been linked to an important election early next year in the state of Uttar Pradesh. Rahul Gandhi, regarded as the party‘s prime minister in waiting, has staked his reputation on making sizable gains in that state,India‘s most populous.The political maneuverings of the Congress Party were secondary on Wednesday for many business leaders who regarded the retreat on foreign retail investment as a major blow. ―Deeply disappointing,‖ said Rajiv Kumar, secretary general of the Federation ofIndian Chambers of Commerce and Industry, a leading business group.The retail measure, which would have allowed multi-brand stores like Wal-Mart to open stores with a minority Indian partner, was indefinitely tabled. however, the measure also opened the door for single-brand retailers like Ikea and Gap to enter the Indian market. On Thursday morning, Indian

117

media quoted unnamed government sources saying that type of foreign retail investment might still be allowed to move forward.Mr. Kumar noted that Congress Party leaders had not rescinded the executive order on foreign retail but had merely suspended the plan and thus left open the possibility that it could be resuscitated. Still, Mr. Kumar was skeptical that any action would be taken before the Uttar Pradesh elections and possibly even after that.―It‘s going to take a long time to come back,‖ he said. ―This waiting for a ‗consensus‘ — I can‘t see it happening now.‖

8.4)THE ECONOMIC TIMES

India opens retail sector to foreign brands like Adidas, Ikea and others

NEW DELHI: Government has allowed foreign brands such as Adidas or home furnishings giant Ikea to open 100-percent owned shops, but will continue to block the entry of supermarkets. The retail reform allowing wholly foreign-owned "single brand stores" into the country was announced late Tuesday by the left-leaning government, which had initially announced sweeping plans to throw open the sector. In December, it said it planned to allow in foreign supermarket chains such as Wal-Mar t , but it backtracked two weeks later amid parliamentary opposition and protests from small shopkeepers. Major Western brands such as Adidas already own shops in the booming retail centres and shopping malls of major cities, but they are currently obliged to operate with a local partner. "Foreign direct investment (FDI) up to 100 per cent, under the government approval route, would be permitted in single brand product retail trading," the Department of Industria l Policy and Promotion ( DIP P ) said late Tuesday. The condition is that the foreign companies owning more than 51 percent of their shops in India source a minimum of 30 percent of their products from small-scale local "cottage industry" suppliers. "The move will not only mean more FDI but lead to employment and also lead to more choices for consumers," the secretary general of business lobby group FICC I , Rajiv Kumar, said in a statement. "The sourcing clause will lead to a direct benefit for the SME (small and medium-sized enterprises) sector," he added. But Arvind Singhal, chairman of Gurgaon-based retail consultancy Technopark, told AFP he was sceptical that foreign companies would be rushing to open 100-percent owned stories because of the local supplier condition.

118

"This is an unfeasible demand. If a foreign brand like Ikea comes to India they want their own suppliers, who are very efficient," he said. The insistence that the suppliers be small in scale also limits the options of large companies such as Ikea. "If they come here and do find good local suppliers, what happens when those suppliers soon become too big to be included? This means that the reform will not mean very much," he said. The change to the foreign direct investment rule does not require parliamentary approval. The government U-turn on allowing in supermarkets was forced after an ally in the ruling coalition threatened to quit over the move. "I wonder about the government's real intention to reform the retail sector," Singhal said. "On this thinking, multi-brand supermarkets will never be allowed here." Other analysts said brands like Adidas, Louis Vuitton or Gucci, which are already in India, might look to expand their presence, while others would be unlikely to jump in with a 100-percent owned store. "Action may not come from new players. Only those who understand the Indian markets and its challenges and policies will be interested," Anil Talreja, a partner with consultancy Deloitte India, said.

119

CHAPTER 9

FDI –INDIAN RETAIL BIDS FOR A BRIGHTER FUTURE

120

In a landmark decision for the Indian retail industry, the cabinet finally gave its nod to allow Foreign Direct Investment (FDI) in multibrand retail segment and even raised the bar for FDI in single brand retail. Although, FDI in multibrand retail is still under consideration by the Government, 100% FDI in single brand retail has become a reality allowing foreign brands to finally have the ownership on their Indian business. This comes as a strong indication of a futuristic approach from the Indian Government.The policy, most certainly, will have a long term impact on retail and retail real estate developments in the country.The policy is expected to enable the growth of organized retail as it will open up the door for a number of prominent global retail brands. Hence, the retail sector is poised to see some significant changes in its current dynamics. In this paper, Cushman & Wakefield Research presents a snapshot of the impact of the new policy on Indian retail real estate sector.

INDIA ADVANTAGE1) India has a relatively younger population in the age bracket of 15-64 with

a median age of 26.2 years, lowest among the BRIC countries. Moreover, 29.7% of the population is in between the age group of 0-14 which is the highest among the BRIC.

2) India is the ninth largest in the world by nominal GDP and the fourth largest by Purchasing Power Parity (PPP). (Source: International Monetary Fund) India's per capita income has tripled from USD 423 in 2002-03 to USD 1,219 in 2010-11, averaging 14.4% growth over these eight years. (Source: World Bank) Service industry accounts for 54.7 % of the GDP, although agriculture is the predominant occupation in India. Dependency on agriculture has reduced and share of services and industry sector has increased.

9.1)EVOLUTION OF INDIAN RETAIL

The story of Indian retail has been an intriguing one with diverse opportunities and challenges. Till the 1990's Indian retail market was primarily dominated by traditional neighborhood retailers or 'kirana' (Mom & Pop) stores. However with the economic progression, India has accepted the exposure of organized retail in the last decade. The transition was gradual, with 100% FDI in cash and carry / wholesale format allowed in 1997 and 51% FDI in single brand retail permitted in 2006. As a result, cumulative FDI in retail trading (single brand) till April 2011 is estimated at

121

approximately USD 61 million which represents 0.05% of the total FDI inflow. The growth of organized retail was further propelled on account of the demand generated by the rise of Indian middle class, a fast changing consumer mindset and increasing disposable incomes. Riding on the favorable demographics and a steady economic growth, Indian retail sector soon emerged as one of the fastest growing sectors in the domestic economy. With 100% FDI in Cash & Carry format, India witnessed the entry of retail giants like Metro AG and Walmart. The growth was also fuelled by retail real estate and infrastructure developments in the country. A wide range of retail categories and innovative formats like supermarket, hypermarket, and Cash & Carry categories evolved across india

9.2)FDI POLICY FRAMEWORK

Although Indian economy demonstrated resilience in recessionary conditions primarily due to its inherent strength, it must also be noted that the sustenance of its economic growth calls for the next round of reforms – of which Retail FDI, Land Acquisition Rehabilitation & Resettlement Bill, Public Private Partnership Bill are the key milestones. Despite the fact that there are diverse opinions on almost all of these in the society, the only apparent way for the economic growth down the road is through these reforms. While analysts continue to observe this vast maze of socio-economic landscape in India with deep interest, there is no denying that the country needs to implement second generation reforms for inclusive and sustainable growth.

Source: Technopak Advisors Pvt Ltd

Manufacturers opening their own outlets Pure play Retailers, realizing the potential start to test waters, stall most of them in apparel segment Large Investment Commitments by large Indian corporate Entry in food and general merchandise category Investments in the Back End Pan India Expansion but still limited to top 100 cities Repositioning Existing Players Entry of large global retailers Competition beginning to increase Fringe Players getting Marginalised Specialty formats based on finer segmentation of the market Private brands getting established More aggression from International Players More than 5-6 players with Revenues in excess of US$ 700mm Movement to smaller cities and rular areas Large scale consolidation Stiff competition Pre 1995‘s 1995 to 2005 2005 to 2010 2010Onwards Size of Industry

122

1)The Cabinet has approved 100% FDI in single brand retail and 51% FDI in multi-brand retail.

2)Government stipulates that the minimum capital for investment required shall be USD 100 million and 50% of the investment should be in the backend infrastructure.

3)Investments should be restricted to cities with population over 1 million

4)In January 2012, the government notified its earlier decision of permitting 100% FDI in single-brand product retail trading. For investing in single-brand retail, the government has made it mandatory for the retailer to source atleast 30% of the products sold from small industries/village and cottage industries, artisans and craftsman.

The Cabinet approval for FDI in multi-brand retail and raising the cap in single brand retail came as the next big move for Indian retail. However, while the proposed FDI in multibrand retail has been temporarily suspended due to disagreement between political parties, the Congress led Government has been able to pave the way for 100% FDI in single brand retail segment. The decision is expected to create a healthy growth situation for retailers across categories.After much deliberation Department of Industrial Policy and Promotion has permitted FDI upto 100% under the Government approved route. There are certain conditions that are highlighted in the notification which have to be complied for foreign investments in single brand. Of them, it is mandatory to source of atleast 30% of the value of products sold from domestic small and cottage industries which have a maximum investment of INR 5 crores in plant and machinery. This is expected to provide stimulus for the manufacturing sector that will get exposed to global technologies, design and business practices.

9.3)IMPACT ON RETAIL SEGMENT

1) 100% FDI in single brand retail would allow many foreign brands to take full ownership of their Indian business. This would increase foreign investment along with providing the domestic industries an exposure to superior technology, research, design and business practices.

123

2) In the case of Indian corporate retail chains, the policy will hopefully, make them more efficient due to the increased competition from foreign brands and companies.

3) The penetration of organized retail will improve and the development of modern retail will be spread out beyond the traditional cities. As per the Census 2011, India has 33 cities which have a population of 1 million or more that are expected to witness increased penetration of organized retail.

4) With global retail players and practices coming into the market, the retail industry is expected to witness many innovations in formats and strategies changing the dynamics of the retail sector.

5) With the advent of international brands in various formats and categories, the market will experience international retail practices. As a result Indian retail will get exposure to the world's best retail services and practices from across the globe.

6) Food and Grocery segment which holds a significant share in the average consumer's total household spending, will witness significant impact. Government's recommendation to invest 50% of the total investment into the back end infrastructure will improve the supply chain efficiency. Thus with better supply chain mechanism and bigger scale of operations, retailers in this category will see profitability.

7) Better back-end infrastructure and supply chain efficiency will result in reducing the involvement of intermediaries which will ultimately benefit the farmer as well as the end consumers. While the increased profitably will be passed on to end consumer, the farmer will gain by getting justified pricing for their product and a direct access to the market. The Government also expects almost 10 million jobs to be created through the retail segment.Hence, in all probability, it would be incorrect to deduce that FDI in retail will sound a deathknell for the traditional 'kirana' operation in Indian cities and towns.

Chart 4)Food and Grocery Retail 1)Business Monitor International (BMI) forecast

that sales through Mass

Grocery Retail outlets to reach to USD 27.67 billion by 2015

124

2)According to industry estimates,lack of supply chain infrastructureresults in 40% loss of farm produce;investment in back-endinfrastructure should help reducingthis3)Sourcing of processed food fromSMEs could result in higher margins4)Political support for FDI in foodand grocery may face challengesandmany state may not allow FDI orelse allow with more restriction5)Hypermarkets and supermarketsare the best suited retail structure forthe segment

Apparel Retail 1)Readymade and western outfitsare growing at 40-45% annually2)Opening of multi-brand apparelretail for FDI is not expected to facemajor political deliberations3)For apparel retail, investment inback-end infrastructure lies increation of warehouses4)Manufacturing facilities (for privatelabel brand) and logistics is mostlikely to be outsourced5)International retailer could haveprivate label brand sourced fromSME segment6)Departmental store is the bestsuited retail structure for thissegmentFDI: Indian Retail Bids for a BrighterFuture

Furniture and Furnishings 1) For furniture retail, options forinvestment in back-endinfrastructure lies in creation of

manufacturing facilities/

125

126

warehouses2)Some of the furniture productscould be sourced from the SMEsegment3)FDI in furniture retail is notexpected to face major politicaldeliberations4)Specialty retail outlet is best suitedstructure for this segment

Beauty and Wellness 1)Penetration level of modern retailis just 4% and there is a hugeuntapped potential in this segment2)Private label brands in some of theproduct categories can be sourcedfrom the SME segment3)FDI in multi-brand beauty andwellness stores is not expected toface major political deliberations4)Specialty retail outlet is the bestsuited structure for this segment

Gems and Jewelry 1)Branded jewelry has rapidlyacquired a niche over the past fewyears.Increasing purchasing powerand disposable income of India'smiddle class has resulted in growthof this industry2)Opening of multi-brand gems andjewelry stores is not expected toface major political deliberations3)Special design products could besourced from the SME segment4)Target segment for retailers arelargely in the metros and tier-1

127

citiesConsumer Durables 1)Traditionally market is largely

dominated by branded store,penetration of modern retail is 12%in consumer electronics segment2)Consumers are brand consciousfor consumer durables hencesourcing

128

of products from SME the segment is not favorable3)Target segment for retailers would not just be restricted in the metros and tier-1 cities, it would also include tier-2 cities4)FDI in consumer durables sector too is not expected to face any major

political deliberation

9.4)THE ROAD AHEAD

The Cabinet approval for FDI in multibrand and the government notification for single brand retail appears to be a natural step in the forward direction for the Indian economy. It holds significant scope and opportunities for the Indian retail revolution which started more than a decade ago. In the last five years, India has witnessed retail sector being redefined and now the improvised FDI policy definitely has the ability to push India's growth story to new heights. The policy has been hailed by India Inc. and when rolled out, the retail history of India will have a new chapter to it.

130

129

CHAPTER 10

ANALYSIS OF PRIMARY DATA

130

a) ARE YOU AWARE OF RECENT FDI INFLOW IN INDIA?

Sales

YES

NO

YES 62%NO 38%

In the above question ,62% of the respondents were aware of the fdi inflow to india.

b) DO YOU REALLY THINK INDIA NEED FDI

Sales

YES

NO

131

YES 62%NO 38%

In the above question 62% of the respondents felt that india seriously need fdi whereas 38% felt the our country doesnot require fdi

c) WHAT IS YOUR OPINION ON RECENT FDI

Most of the respondents said they are not satisfied with the way the fdi in india is handled . our country should handle fdi in a more appropriate and transparent manner.

d) DON’T YOU THINK FDI HAS DONE MORE HARM THAN GOOD ,COMMENT

Most of the respondents felt that fdi have done more harm than good.fdi has resulted in a stiff competition for local retailers and local retailers are finding it difficult to compete with huge giants.hence .fdi are a harm for local retailers.

e) ARE YOU AWARE OF RETAIL SECTOR IN INDIA?

132

Sales

YES

NO

YES 99%NO 1%

This question was added to know the retail knowledge of the respondents.99% of the respondents were well aware of the retail sector.

f) DOES RETAIL SECTOR REALLY NEED FDI?

Sales

YES

NO

YES 46%NO 54%

133

In this question 46% of the respondents felt that retail sector needed fdi where as 54% of the respondents felt that indian retail sector doesnot need fdi.

g) AS A CITIZEN ARE YOU CONTENT WITH THE WAY FDI ARE MANAGED

Sales

YES

NO

YES 38%NO 62%

In this qestion 62% of the respondents felt that they are not happy with the way fdi are handled by the government and it can be handled in a far better way where as 38% felt that they are satisfied with the way fdi are managed.

h) ANY SUGGESTIONS ON FD

Number of daily responses

134

135

CHAPTER 11

CONCLUSION

136

Finally, it may be concluded that developing countries has make their presence felt in the economics of developed nations by receiving a descent amount of FDI in the last three decades. Although India is not the most preferred destination of global FDI, but there has been a generous flow of FDI in India since 1991. It has become the 2nd fastest growing economy of the world. India has substantially increased its list of source countries in the post – liberalisation era. India has signed a number of bilateral and multilateral trade agreements with developed and developing nations. India as the founding member of GATT, WTO, a signatory member of SAFTA and a member of MIGA is making its presence felt in the economic landscape of globalised economies. The economic reform process started in 1991 helps in creating a conducive and healthy atmosphere for foreign investors and thus, resulting in substantial amount of FDI inflows in the country. No doubt, FDI plays a crucial role in enhancing the economic growth and development of the country. Moreover, FDI as a strategic component of investment is needed by India for achieving the objectives of its second generation of economic reforms and maintaining this pace of growth and development of the economy. This chapter highlights the main findings of the study and sought valuable suggestions

137

CHAPTER 12

SUGGESTIONS

138

Thus, it is found that FDI as a strategic component of investment is needed by India for its sustained economic growth and development. FDI is necessary for creation of jobs, expansion of existing manufacturing industries and development of the new one. Indeed, it is also needed in the healthcare, education, R&D, infrastructure, retailing and in longterm financial projects. So, the study recommends the following suggestions:

The study urges the policy makers to focus more on attracting diverse types ofFDI.

The policy makers should design policies where foreign investment can be utilised as means of enhancing domestic production, savings, and exports; as medium of technological learning and technology diffusion and also in providing access to the external market.

It is suggested that the government should push for the speedy improvement of infrastructure sector‘s requirements which are important for diversification of business activities.

Government should ensure the equitable distribution of FDI inflows among states. The central government must give more freedom to states, so that they can attract FDI inflows at their own level. The government should also provide additional incentives to foreign investors to invest in states where the level of FDI inflows is quite low.

Government should open doors to foreign companies in the export – oriented services which could increase the demand of unskilled workers and low skilled services and also increases the wage level in these services.

Government must target at attracting specific types of FDI that are able to generate spillovers effects in the overall economy. This could be achieved by investing in human capital, R&D activities, environmental issues, dynamic products, productive capacity, infrastructure and sectors with high income elasticity of demand.

The government must promote policies which allow development process starts from within (i.e. through productive capacity and by absorptive capacity).

It is suggested that the government endeavour should be on the type and volume of FDI that will significantly boost domestic competitiveness, enhance skills, technological learning and invariably leading to both social and economic gains.

It is also suggested that the government must promote sustainable development through FDI by further strengthening of education, health and

139

R&D system, political involvement of people and by ensuring personal security of the citizens.

Government must pay attention to the emerging Asian continent as the new economic power – house of business transaction and try to boost the trade within this region through bilateral, multilateral agreements and also concludes FTAs with the emerging economic Asian giants.

FDI should be guided so as to establish deeper linkages with the economy, which would stabilize the economy (e.g. improves the financial position, facilitates exports, stabilize the exchange rates, supplement domestic savings and foreign reserves, stimulates R&D activities and decrease interest rates and inflation etc.) and providing to investors a sound and reliable macroeconomic environment.

As the appreciation of Indian rupee in the international market is providing golden opportunity to the policy makers to attract more FDI in Greenfield projects as compared to Brownfield investment. So the government must invite Greenfield investments.

Finally, it is suggested that the policy makers should ensure optimum utilisation of funds and timely implementation of projects. It is also observed that the realisation of approved FDI into actual disbursement is quite low. It is also suggested that the government while pursuing prudent policies must also exercise strict control over inefficient bureaucracy, red - tapism, and the rampant corruption, so that investor‘s confidence can be maintained for attracting more FDI inflows to India. Last but not least, the study suggests that the government ensures FDI quality rather than its magnitude.Indeed, India needs a business environment which is conducive to the needs of business. As foreign investors doesn‘t look for fiscal concessions or special incentives but they are more of a mind in having access to a consolidated document that specified official procedures, rules and regulations, clearance, and opportunities in India. In fact, this can be achieved only if India implements its second generation reforms in totality and in right direction. Then no doubt the third generation economic reforms make India not only favourable FDI destination in the world but also set an example to the rest of the world by achieving what is predicted by Goldman Sachs23,24 (in 2003, 2007) that from 2007 to 2020, India‘s GDP per capita in US$ terms willquadruple and the Indian economy will overtake France and Italy by 2020, Germany, UK and Russia by 2025,Japan by 2035 and US by 2043.

140

CHAPTER 13

BIBLIOGRAPHY

141

1. A.T. Kearney‘s (2007): Global Services Locations Index‖, www.atkearney.com 2. Alhijazi, Yahya Z.D (1999): ―Developing Countries and Foreign Direct Investment‖, digitool.library.mcgill.ca.8881/dtl_publish/7/21670.htm. 3. Andersen P.S and Hainaut P. (2004): ―Foreign Direct Investment and Employment in the Industrial Countries‖, http:\\www.bis\pub\work61.pdf. 4. Balasubramanyam V.N, Sapsford David (2007): ―Does India need a lot more FDI‖, Economic and Political Weekly, pp.1549-1555. 5. Basu P., Nayak N.C, Archana (2007): ―Foreign Direct Investment in India:Emerging Horizon‖, Indian Economic Review, Vol. XXXXII. No.2, pp. 255-266. 6. Belem Iliana Vasquez Galan (2006): ―The effect of Trade Liberalization and Foreign Direct Investment in Mexico‖, etheses.bham.ac.uk/89/1/vasquezgalan06phd.pdf. 7. Bhagwati J.N. (1978), ―Anatomy and Consequences of Exchange Control Regime‖, Vol 1, Studies in International economies Relations No.10, New York, ideas-repec.org/b/nbr/nberbk/bhag78-1.html.

Newspapers1. The economic times 2. Business standard 3. Business lines

Search engines

1) www.google.co m

2) www.wikipedia.co m

142

CHAPTER 14

ANNEXURE

143

a) ARE YOU AWARE OF RECENT FDI INFLOW IN INDIA?

Yes

No

b) DO YOU REALLY THINK INDIA NEED FDI

Yes

No

c)WHAT IS YOUR OPINION ON RECENT FDI

SUGGESTION

d) DON‘T YOU THINK FDI HAS DONE MORE HARM THAN GOOD , COMMENT

e) ARE YOU AWARE OF RETAIL SECTOR IN INDIA?

Yes

144

No

f) DOES RETAIL SECTOR REALLY NEED FDI?

Yes

No

g) AS A CITIZEN ARE YOU CONTENT WITH THE WAY FDI ARE MANAGED

Yes

No

h) ANY SUGGESTIONS ON FDI