A Project Report on FDI and Its Impact in India

PROJECT REPORT ON

FDI INFLOWS AND ITS IMPACT IN INDIA A Project Report Submitted In Partial Fulfilment of the Requirements For The Award of the Degree of POST GRADUATE DIPLOMA IN MANAGEMENT TO M.S.RAMAIAH INSTITUTE OF MANAGEMENT BY BINIT CHOURARIA-101114 GAUTAM RAJ-101118 NIKHIL RANJAN-101131

Under the guidance of Prof. K N Sreekantan M.S.RAMAIAH INSTITUTE MANAGEMENT NEW BEL ROAD, BANGALORE-560054 DATE- 15March 2012

STUDENT’S DECLARATION I hereby declare that the Project Report conducted on “FDI INFLOWS AND ITS IMPACT IN INDIA” Under the guidance of Prof. K N Sreekantan Submitted in Partial fulfilment of the requirements for the Degree of POST GRADUATE DIPLOMA IN MANAGEMENT TO M.S.RAMAIAH INSTITUTE OF MANAGEMENT It is my original work and the same has not been submitted for the award of any other Degree/Diploma/Fellowship or other similar titles or prizes

Place: Bangalore Date: 15 March 2012

STUDENT NAME

Reg. No

BINIT CHOURARIA 101114 GAUTAM RAJ 101118 NIKHIL RANJAN 101131

CERTIFICATE This is to certify that the Project Report on “FDI INFLOWS AND ITS IMPACT IN INDIA” Submitted in partial fulfilment of the requirements for the award of the degree of POST GRADUATE DIPLOMA IN MANAGEMENT TO M.S.RAMAIAH INSTITUTE OF MANAGEMENT Is a record of bonafide study carried out by

Under my supervision and guidance and that no part of this report has been submitted for the award of any other degree/diploma/fellowship or similar titles or prizes. FACULTY GUIDE Signature: Name: Prof. K N Sreekantan Qualifications:

Seal of learning centre

ACKNOWLEDGEMENT I extend my special gratitude to our beloved Dean Shri Dr. M Chandrashekhar, & Academic Head Prof. V Narayanan & Programme Head Prof. Jayashree Kowtal for inspiring me to take up this project. I wish to acknowledge my sincere gratitude and indebtedness to my project guide Prof. K N Sreekantan of M.S. RAMAIAH INSTITUTE OF MANAGEMENT Bangalore for his valuable guidance and constructive suggestions in the preparation of project report.

STUDENTS NAME: BINIT CHOURARIA GAUTAM RAJ NIKHIL RANJAN

CONTENTS:-

Chapter-1

Page No.

1.0 Introduction 1.1 Types of FDI 1.2 Methods of FDI

1 1 3

Chapter-2 2.0 History of FDI in India 2.1 Investment routes for FDI in India 2.2 FDI policy in India 2.3 FDI promotional initiatives

5 8 9 17

Chapter-3 3.0 Statement of the problem 3.1 Objectives of the research 3.2 Methodology of data collection 3.3 Hypothesis 3.4 Scope of the study 3.5 Limitations of the study

19 19 19 20 20 20

Chapter-4 4.0 FDI inflows in the world 4.1 FDI inflows analysis in India year wise 4.2 FDI inflows analysis country wise in India 4.3 FDI inflows sector wise in India 4.5 Trends and patterns of FDI in different sectors 4.6 State wise FDI inflows analysis in India 4.7 Route wise FDI inflows analysis in India 4.8 FDI and economic development 4.9 Comparison of FDI between India and China

21 23 25 30 34 41 44 46 49

Chapter-5 5.0 Findings and conclusions

56

Chapter-6 6.0 Recommendations and suggestions

58

Bibliography

60 LIST OF TABLES:-

Table No. Table 1.1: Table 4.1: Table 4.2: Table 4.3: Table 4.4: Table 4.6 Table 4.7: Table 4.8: Table 4.9: Table 4.10: Table 4.11:

Title

Page No.

FDI policy in permitted sectors in India FDI inflows year wise in India FDI inflows country wise in India FDI inflows sector wise in India Ranking of sector wise FDI inflows from April 2000-Dec2011 State wise FDI inflows in India from April 2008-March 2011 Route wise FDI inflows in India 2000-11 FDI and GDP (fc) from 2006-11 Calculation of Karl Pearson’s co-efficient FDI inflow in China and India Comparison of facts between India and China

10 23 25 30 31 41 44 46 47 51 52

LIST OF CHARTS:Chart No. Chart 4.1 Chart 4.2 Chart 4.3 Chart 4.4 Chart 4.5 Chart 4.6 Chart 4.7 Chart 4.8: Chart 4.9 Chart 4.10 Chart 4.11

Title FDI inflows in the world % of total FDI inflows in different sectors Trends and patterns of FDI in service sector Trends and patterns of FDI in computer sector Trends and patterns of FDI in telecommunications Trends and patterns of FDI in housing and real estate Trends and patterns of FDI in construction activities FDI trends during 2006-11 GDP trends during 2006-11 FDI confidence index from 2007-12 Trend of FDI in India and China

EXECUTIVE SUMMARY

Page No. 21 31 34 35 36 38 39 47 48 51 52

Foreign direct investment (FDI) has played an important role in the process of globalisation during the past two decades. The rapid expansion in FDI by multinational enterprises since the mid-eighties may be attributed to significant changes in technologies, greater liberalisation of trade and investment regimes, and deregulation and privatisation of markets in developing countries like India. The title of the empirical study is “FDI inflows and its impact in India” during 2007 to 2011. The present study aims at providing detailed information about FDI inflows in India during the subsequent years. The analysis is fully based on secondary data collected through different website and journals. The project aims at providing information of present FDI policy, year wise FDI inflows, sector wise FDI inflows, countries contribution to maximum of FDI inflows, state wise FDI inflows, trends and patterns of FDI inflows in different sector, FDI comparison between India and China and so on. From the study it has been found out that total FDI inflows are estimated at US$19.43 billion during April 2010 to March 2011 and cumulative FDI inflows from 1991-2011 was $146319 million. The services sector, computer hardware & software, telecommunications, real estate, construction received maximum FDI inflows in India and Mauritius is the main source followed by Singapore, the US, the UK, the Netherlands and Japan for FDI inflows in India. From the hypothesis it has been found out that there is a positive relationship between FDI and economy growth of India. And thus different suggestion and recommendation are given to improve the present condition of FDI in India.

CHAPTER-1

1.0 INTRODUCITON TO FDI Foreign Direct Investment (FDI) broadly encompasses any long-term investments by an entity that is not a resident of the host country. Typically, the investment is over a long duration of time and the idea is to make an initial investment and then subsequently keep investing to leverage the host country’s advantages which could be in the form of access to better (and cheaper) resources, access to a consumer market or access to talent specific to the host country - which results in the enhancement of efficiency. This long-term relationship benefits both the investor as well as the host country. The investor benefits in getting higher returns for his investment than he would have gotten for the same investment in his country and the host country can benefit by the increased know how or technology transfer to its workers, increased pressure on its domestic industry to compete with the foreign entity thus making the industry improve as a whole or by having a demonstration effect on other entities thinking about investing in the host country. 1.1 Types of FDI’s By direction Outward FDI: An outward-bound FDI is backed by the government against all types of associated risks. This form of FDI is subject to tax incentives as well as disincentives of various forms. Risk coverage provided to the domestic industries and subsidies granted to the local firms stand in the way of outward FDIs, which are also known as 'direct investments abroad.' Inward FDIs: Different economic factors encourage inward FDIs. These include interest loans, tax breaks, subsidies, and the removal of restrictions and limitations. Factors detrimental to the growth of FDIs include necessities of differential performance and limitations related with ownership patterns. Horizontal FDI- Investment in the same industry abroad as a firm operates in at home. Vertical FDI • Backward Vertical FDI: Where an industry abroad provides inputs for a firm's domestic production process. • Forward Vertical FDI: Where an industry abroad sells the outputs of a firm's domestic production. BY TARGET Greenfield investment: - Direct investment in new facilities or the expansion of existing facilities. Greenfield investments are the primary target of a host nation’s promotional efforts because they create new production capacity and jobs, transfer

technology and know-how, and can lead to linkages to the global marketplace. The Organization for International Investment cites the benefits of Greenfield investment (or in sourcing) for regional and national economies to include increased employment (often at higher wages than domestic firms); investments in research and development; and additional capital investments. Disadvantage of Greenfield investments include the loss of market share for competing domestic firms. Another criticism of Greenfield investment is that profits are perceived to bypass local economies, and instead flow back entirely to the multinational's home economy. Critics contrast this to local industries whose profits are seen to flow back entirely into the domestic economy. Mergers and Acquisitions Transfers of existing assets from local firms to foreign firm takes place; the primary type of FDI. Cross-border mergers occur when the assets and operation of firms from different countries are combined to establish a new legal entity. Crossborder acquisitions occur when the control of assets and operations is transferred from a local to a foreign company, with the local company becoming an affiliate of the foreign company. Nevertheless, mergers and acquisitions are a significant form of FDI and until around 1997, accounted for nearly 90% of the FDI flow into the United States. Mergers are the most common way for multinationals to do FDI. BY MOTIVE FDI can also be categorized based on the motive behind the investment from the perspective of the investing firm: •Resource-Seeking Investments which seek to acquire factors of production those are more efficient than those obtainable in the home economy of the firm. In some cases, these resources may not be available in the home economy at all. For example seeking natural resources in the Middle East and Africa, or cheap labour in Southeast Asia and Eastern Europe. •Market-Seeking Investments which aim at either penetrating new markets or maintaining existing ones.FDI of this kind may also be employed as defensive strategy; it is argued that businesses are more likely to be pushed towards this type of investment out of fear of losing a market rather than discovering a new one. This type of FDI can be characterized by the foreign Mergers and Acquisitions in the 1980’s Accounting, Advertising and Law firms. •Efficiency-Seeking Investments which firms hope will increase their efficiency by exploiting the benefits of economies of scale and scope, and also those of common ownership. It is suggested that this type of FDI comes after either resource or market seeking

investments have been realized, with the expectation that it further increases the profitability of the firm 1.2 Methods of Foreign Direct Investments The foreign direct investor may acquire 10% or more of the voting power of an enterprise in an economy through any of the following methods: •By incorporating a wholly owned subsidiary or company • By acquiring shares in an associated enterprise •Through a merger or an acquisition of an unrelated enterprise •Participating in an equity joint venture with another investor or enterprise Foreign direct investment incentives may take the following forms: • Low corporate tax and income tax rates • Tax holidays • Preferential tariffs • Special economic zones • Investment financial subsidies • Soft loan or loan guarantees • Free land or land subsidies • Relocation & expatriation subsidies • Job training & employment subsidies • Infrastructure subsidies • R&D support

CHAPTER-2

2.0 HISTORY OF FDI IN INDIA India intent to open its markets to foreign investment can be traced back to the economic reforms adopted during two prime periods- pre- independence and post independence. Pre- independence, India was the supplier of foodstuff and raw materials to the industrialised economies of the world and was the exporter of finished productsthe economy lacked the skill and means to convert raw materials to finished products. Post independence with the advent of economic planning and reforms in 1951, the traditional role played changes and there was remarkable economic growth and development. International trade grew with the establishment of the WTO. India is now a part of the global economy. Every sector of the Indian economy is now linked with the world outside either through direct involvement in international trade or through direct linkages with export and import. Development pattern during the 1950-1980 periods was characterised by strong centralised planning, government ownership of basic and key industries, excessive regulation and control of private enterprise, trade protectionism through tariff and non-tariff barriers and a cautious and selective approach towards foreign capital. It was a quota, permit, licence regime which was guided and controlled by a bureaucracy trained in colonial style. This inward thinking, import substitution strategy of economic development and growth was widely questioned in the 1980’s. India’s economic policy makers started realising the drawbacks of this strategy which inhibited competitiveness and efficiency and produced a much lower growth rate that was expected. Consequently economic reforms were introduced initially on a moderate scale and controls on industries were substantially reduced by 1985 industrial policy. This set the trend for more innovative economic reforms and they got a boost with the announcement of the landmark economic reforms in 1991. After nearly five decades of insulation from world markets, state controls and slow growth, India in 1991 embarked on an accelerated process of liberalization. The 1991 reforms ensured that the way for India to progress will be through globalization, privatisation, and liberalisation. In this new regime, the government is now assuming the role of a promoter, facilitator and catalyst agent instead of the regulator and India has a number of advantages which make it an attractive market for foreign capital namely, political stability in democratic polity, steady and sustained economic growth and development, significantly huge domestic market, access to skilled and technical manpower at competitive rates, fairly well developed infrastructure. FDI has attained the status of being of global importance because of its beneficial use as an instrument for global economic integration.

Pre-Independence Reforms: Under the British colonial rule, the Indian economy suffered a major set-back. An economy with rich natural resources was left plundered and exploited to the hilt under the English regime. India is originally an agrarian economy. India’s cottage industries and trade were abused and exploited as means to pave the way for European manufactured goods. Under the British rule the economy stagnated and on the eve of independence India was left with a poor economy and the textile industry as the only life support of the industrial economy. Post-Independence Reforms: India’s struggle post independence has been an excruciating financial battle with a slow economic growth and development which were largely due to the political climate and impact of the economic reforms. The country began it transformation from a native agrarian to industrial to commercial and open economy in the post independence era. India in the post independence era followed what can be best called as a ‘trial and error’ path. During the post independence era, the Indian Economy geared up in favour of central planning and resource allocation. The government tailored policies that focussed a great deal on achieving overall economic self-reliance in each state and at the same time exploit its natural resource. In order to augment trade and investments, the government sought to play the role of custodian and trustee by intervening in the practice of crucial sectors such as aviation, telecommunication, banking, energy mainly electricity, petrol and gas. The policy of central planning adopted by the government sought to ensure that the government laid down marked goals to be achieved by the economy thereby establishing a regime of checks and balances. The government also encouraged self sufficiency with the intent to encourage the domestic industries and enterprises, thereby reducing the dependence on foreign trade. Although, initially these policies were extremely successful as the economy did have a steady economic growth and development, they weren’t sustained. In the early, 1970’s, India had achieved self sufficiency in food production. During the 1970’s, the government still continued to retain and wield a significant spectre of control over key In the Early 1980’s-Macro-Economic Policies were conservative. Government control of industries continued. There was marginal economic growth & development courtesy of the development projects funded by foreign loans. The financial crisis of 1991 compelled drafting and implementation of economic reforms. The government approached the World Bank and the IMF for funding. In keeping with their policies there was expectation of devaluation of the rupee. This

lead to a lack of confidence in the investors and foreign exchange reserves declined. There was a withdrawal of loans by Non Resident Indians. Economic reforms of 1991: India has been having a robust economic growth since 1991 when the government of India decided to reverse its socially inspired policy of a retaining a larger public sector with comprehensive controls on the private sector and eventually treaded on the path of liberalization, privatisation and globalisation. During early 1991, the government realised that the sole path to India enjoying any status on the global map was by only reducing the intensity of government control and progressively retreating from any sort of intervention in the economy – thereby promoting free market and a capitalist regime which will ensure the entry of foreign players in the market leading to progressive encouragement of competition and efficiency in the private sector. In this process, the government reduced its control and stake in nationalized and state owned industries and enterprises, while simultaneously lowered and deescalated the import tariffs. All of the reforms addressed macroeconomic policies and affected balance of payments. There was fiscal consolidation of the central and state governments which lead to the country viewing its finances as a whole. There were limited tax reforms which favoured industrial growth. There was a removal of controls on industrial investments and imports, reduction in import tariffs. All of this created a favourable environment for foreign capital investment. As a result of economic reforms of 1991, trade increased by leaps and bounds. India has become an attractive destination for foreign direct and portfolio investment. 2.1 Government Approvals for Foreign Companies Doing Business in India Government Approvals for Foreign Companies Doing Business in India or Investment Routes for Investing in India, Entry Strategies for Foreign Investors India's foreign trade policy has been formulated with a view to invite and encourage FDI in India. The Reserve Bank of India has prescribed the administrative and compliance aspects of FDI. A foreign company planning to set up business operations in India has the following options: 1. Automatic approval by RBI: The Reserve Bank of India accords automatic approval within a period of two weeks (subject to compliance of norms) to all proposals and permits foreign equity up to 24%; 50%; 51%; 74% and 100% is allowed depending on the category of industries and the sectoral caps applicable. The lists are comprehensive and cover most industries of interest to foreign companies. Investments in high-priority industries or for trading companies primarily engaged in exporting are given almost automatic approval by the RBI. 2. The FIPB Route – Processing of non-automatic approval cases:

FIPB stands for Foreign Investment Promotion Board which approves all other cases where the parameters of automatic approval are not met. Normal processing time is 4 to 6 weeks. Its approach is liberal for all sectors and all types of proposals, and rejections are few. It is not necessary for foreign investors to have a local partner, even when the foreign investor wishes to hold less than the entire equity of the company. The portion of the equity not proposed to be held by the foreign investor can be offered to the public. 2.2 FOREIGN DIRECT INVESTMENT POLICY IN INDIA FDI is prohibited in sectors like (a) Retail Trading (except single brand product retailing) (b) Lottery Business including Government /private lottery, online lotteries, etc. (c) Gambling and Betting including casinos etc. (d) Chit funds (e) Nidhi Company (f) Trading in Transferable Development Rights (TDRs) (g) Real Estate Business or Construction of Farm Houses (h) Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes (i) Activities / sectors not open to private sector investment e.g. Atomic Energy and Railway Transport (other than Mass Rapid Transport Systems). Foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for Lottery Business and Gambling and Betting activities. PERMITTED SECTORS In the following sectors/activities, FDI up to the limit indicated against each sector/activity is allowed, subject to applicable laws/ regulations; security and other conditionalities. In sectors/activities not listed below, FDI is permitted upto 100% on the automatic route, subject to applicable laws/ regulations; security and other conditionalities. Wherever there is a requirement of minimum capitalization, it shall include share premium received along with the face value of the share, only when it is received by the company upon issue of the shares to the non-resident investor. Amount paid by the transferee during post-issue transfer of shares beyond the issue price of the share, cannot be taken into account while calculating minimum capitalization requirement;

Table 1.1: FDI policies in permitted sectors in India % of FDI Sl.No Sector/Activity Cap/Equity Entry Route AGRICULTURE 1 Agriculture & Animal 100% Automatic Husbandry a) Floriculture, Horticulture, Apiculture and Cultivation of Vegetables & Mushrooms under controlled conditions. b) Development and production of Seeds and planting material. c) Animal Husbandry, Pisciculture, Aquaculture under controlled conditions and d) services related to agro and allied sectors Note- Besides the above, FDI is not allowed in any other agricultural sector/activity 2 Tea Plantation Tea sector including tea 100% Government plantations. Note- Besides the above, FDI is not allowed in any other plantation sector/activity Other conditions: 1) Compulsory divestment of 26% equity of the company in favour of an Indian partner/Indian public within a period of 5 years 3 Mining 100% Automatic

a)

b)

c)

4

Mining and Exploration of metal and non metal ores including diamond, gold, silver but excluding titanium bearing minerals and its ores; subject to Mines and Minerals (Development & Regulation) Act, 1957. Coal and Lignite 1) Coal and Lignite mining 100% Automatic for captive consumption by power projects, iron & steel and cements units and other eligible activities permitted under and subject to provisions of Coal and Mines (Nationalization) Act, 1973 2) Setting up coal processing 100% Automatic plants like washeries subject to the condition that co. shall not do coal mining and shall not sell washed coal from its processing unit in open market Mining and mineral separation of titanium bearing minerals and ores, its value addition and integrated activities. Mining and mineral 100% Government separation of titanium bearing minerals and ores, its value addition and integrated activities. Petroleum & Natural Gas

5

Exploration activities of oil 100% Automatic and natural gas fields, infrastructure related to marketing of petroleum products and natural gas, marketing of natural gas and petroleum products, petroleum product pipelines, natural gas/pipelines, LNG Regasification infrastructure, market study and formulation and Petroleum refining in the private sector, subject to the existing sectoral policy and regulatory framework in the oil marketing sector and the policy of the Government on private participation in exploration of oil and the discovered fields of national oil companies Petroleum refining by the 49% Government Public Sector Undertakings (PSU), without any disinvestment or dilution of domestic equity in the existing PSUs. Manufacturing Manufacture of items reserved for production in Micro and Small Enterprises (MSEs)

6

7 a)

FDI in MSEs will be subject to the sectoral caps, entry routes and other relevant sectoral regulations. Any industrial undertaking which is not a Micro or Small Scale Enterprise, but manufactures items reserved for the MSE sector would require Government route where foreign investment is more than 24% in the capital. Such an undertaking would also require an Industrial License under the Industries (Development & Regulation) Act 1951, for such manufacture. The issue of Industrial License is subject to a few general conditions and the specific condition that the Industrial Undertaking shall undertake to export a minimum of 50% of the new or additional annual production of the MSE reserved items to be achieved within a maximum period of three years. The export obligation would be applicable from the date of commencement of commercial production and in accordance with the provisions of section 11 of the Industries (Development & Regulation) Act 1951. Defence Defence Industry subject to 26% Government Industrial license under the Industries (Development & Regulation) Act 1951 Service Sector Broadcasting Terrestrial Broadcasting 26% (FDI, Government FM (FM Radio) subject to NRI & PIO such terms and conditions as investments specified from time to time and portfolio by Ministry of Information investment) and Broadcasting for grant of permission for setting up of FM Radio Stations Cable Network, subject to 49% (FDI, Government Cable Television Network NRI & PIO Rules, 1994 and other investments conditions as specified from and portfolio time to time by Ministry of investment) Information and Broadcasting

Direct–to-Home subject to such guidelines/terms and conditions as specified from time to time by Ministry of Information and Broadcasting

49% (FDI, Government NRI & PIO investments and portfolio investment) Within this limit, FDI component not to exceed 20% Headend-In-The-Sky (HITS) Broadcasting Service refers to the multichannel downlinking and distribution of television programme in C-Band or Ku Band wherein all the pay channels are downlinked at a central facility (Hub/teleport) and again uplinked to a satellite after encryption of channel. At the cable headend these encrypted pay channels are downlinked using a single satellite antenna, transmodulated and sent to the subscribers by using a land based transmission system comprising of infrastructure of cable/optical fibres network. FDI limit in (HITS) 74% (total Automatic up Broadcasting Service is direct and to 49% subject to such indirect foreign Government guidelines/terms and investment route beyond conditions as specified from including 49% and up time to time by Ministry of portfolio and to 74% Information and FDI Broadcasting. Setting up hardware facilities such as up-linking, HUB etc. 1) Setting up of Up-linking 49% (FDI & Government HUB/ Teleports FII) (2) Up-linking a Non-News 100% Government & Current Affairs TV Channel

b)

c)

d)

(3) Up-linking a News & Current Affairs TV Channel subject to the condition that the portfolio investment from FII/ NRI shall not be ―persons acting in concert‖ with FDI investors, as defined in the SEBI(Substantial Acquisition of Shares and Takeovers) Regulations, 1997 Print Media Publishing of Newspaper and periodicals dealing with news and current affairs Publication of Indian editions of foreign magazines dealing with news and current affairs Publishing/printing of Scientific and Technical Magazines/specialty journals/ periodicals, subject to compliance with the legal framework as applicable and guidelines issued in this regard from time to time by Ministry of Information and Broadcasting. Publication of facsimile edition of foreign newspapers Civil Aviation Airports (a) Greenfield projects (b) Existing projects

Air Transport Services

26% (FDI & Government FII)

26% (FDI and Government investment by NRIs/PIOs/FII) 26% (FDI and Government investment by NRIs/PIOs/FII) 100% Government

100%

Government

100% 100%

Automatic Automatic up to 74% Government route beyond 74%

1) Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline (2) Non-Scheduled Air Transport Service

49% (100% NRIs) 74% (100% NRIs)

(3) Helicopter 100% services/seaplane services requiring DGCA approval e)

FDI for Automatic FDI Automatic up for to 49% Government route beyond 49% and up to 74% Automatic

Other services under Civil Aviation sector (1) Ground Handling 74% FDI Services subject to sectoral (100% for regulations and security NRIs) clearance (2) Maintenance and Repair 100% organizations; flying training institutes; and technical training institutions Courier services for carrying 100% packages, parcels and other items which do not come within the ambit of the Indian Post Office Act, 1898 and excluding the activity relating to the distribution of letters.

Automatic up to 49% Government route beyond 49% and up to 74% Automatic

Government

f)

g) h)

i) j)

k)

l)

Construction Development: Townships, Housing, Built-up infrastructure Townships, housing, built-up 100% Automatic infrastructure and construction-development projects (which would include, but not be restricted to, housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure) Industrial Parks – new and 100% Automatic existing Satellites – Establishment and operation Satellites – Establishment 74% Government and operation, subject to the sectoral guidelines of Department of Space/ISRO Private Security Agencies 49% Government Telecom Services 74% Automatic up to 49% Government route beyond 49% and up to 74% Trading Cash & Carry Wholesale 100% Automatic Trading/ Wholesale Trading (including sourcing from MSEs) E-commerce activities 100% Automatic

m)

n)

Test marketing of such 100% Government items for which a company has approval for manufacture, provided such test marketing facility will be for a period of two years, and investment in setting up manufacturing facility commences simultaneously with test marketing. Single Brand product Government trading 51% Financing Services Foreign investment in other financial services , other than those indicated below, would require prior approval of the Government:

Asset Reconstruction Companies Asset Reconstruction 49% of paid-up Company‘ (ARC) means a capital of ARC company registered with the Reserve Bank of India under Section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). Banking –Private sector Banking –Private sector 74% including investment by FIIs

Banking- Public Sector

Government

Automatic up to 49% Government route beyond 49% and up to 74%

0)

p)

q)

BankingPublic Sector subject to Banking Companies (Acquisition & Transfer of Undertakings) Acts 1970/80. This ceiling (20%) is also applicable to the State Bank of India and its associate Banks. Policy for FDI in Commodity Exchange

20% (FDI and Government Portfolio Investment)

49% (FDI & Government FII) [Investment by Registered FII under Portfolio Investment Scheme (PIS) will be limited to 23% and Investment under FDI Scheme limited to 26%) Infrastructure Company in the Securities Market 49% (FDI & Government FII) [FDI limit ( For FDI) Infrastructure companies in of 26 per cent Securities Markets, namely, and an FII stock exchanges, depositories limit of 23 per and clearing corporations, in cent of the compliance with SEBI paid-up Regulations capital ] Insurance 26% Automatic Non-Banking Finance Companies (NBFC)

r)

Foreign investment in NBFC 100% is allowed under the automatic route in only the following activities: (i) Merchant Banking (ii) Under Writing (iii) Portfolio Management Services (iv) Investment Advisory Services (v) Financial Consultancy (vi) Stock Broking (vii) Asset Management (viii) Venture Capital (ix) Custodian Services (x) Factoring (xi) Credit Rating Agencies (xii) Leasing & Finance (xiii) Housing Finance (xiv) Forex Broking (xv) Credit Card Business (xvi) Money Changing Business (xvii) Micro Credit (xviii) Rural Credit

Automatic

2.3 FDI promotion initiatives (a) On the policy front, the FDI policy is already very liberal & it is being further progressively rationalized, on the basis of an exercise initiated for integration of all prior regulations on FDI, contained in FEMA, RBI circulars, various Press Notes etc., into one consolidated document, so as to reflect the current regulatory framework. The latest consolidated FDI policy document has been launched by Department of Industrial Policy & Promotion on 30.09.2010, which is available at DIPP’s website (www.dipp.nic.in) for public domain. (b) On the investment promotion front, the Department organises ‘Destination India’ and ‘Invest India’ events in association with CII and FICCI. (c) DIPP has been undertaking concerted efforts for improving the business environment in the country. The business reforms aimed at improving the business environment include setting up of single windows, online registrations,

computerization of information, simplification of taxes and payments, reduction of documents through developing single forms for various licences/permissions and reduction of inspections etc. (d) As a step towards promoting an online single window at the national level for business users, the Department has undertaking e-Biz project, which is one of Mission Mode Projects (MMPs) under the National eGovernance Plan (NeGP). The objectives of setting up of the e-Biz Portal are to provide a number of services to business users covering the entire life cycle on their operations. The project aims at enhancing India’s business competitiveness through a service oriented, eventdriven G2B interaction. (e) The National Manufacturing Competitiveness Council (NMCC) has been set up to provide a continuing forum for policy dialogue to energise and sustain the growth of manufacturing industries. (f) The Department has regular interaction with foreign investors. Such interactions have been held in bilateral/regional/international meets such as Indo-ASEAN, Indo-EU, Indo-Japan, etc. Meetings with individual investors were also held on a regular basis. (g) The Department website (www.dipp.nic.in) has been made both comprehensive and informative, with an online chat facility.

CHAPTER-3 Research Design 3.0 Statement of the problem: There are many factors that influence the economic condition. One of them is FDI. Hence there is a need to study the impact of FDI on the change in economy. 3.1 Objectives of the research: The study covers the following objective 1. To study the trends and patterns of flow of FDI. 2. To evaluate the impact of FDI on the economy. 3.2 Methodology and Data collection: AIM: To establish the relationship between FDI and growing trends in the Indian economy. PRIMARY SOURCE: Not Applicable in this research SECONDARY SOURCE: The present study is of analytical nature and makes use of secondary data. The relevant secondary data has been collected from reports of the Ministry of Commerce and Industry, Government of India, Centre for Monitoring Indian Economy, Reserve Bank of India, World Investment Report. It is a time series data and the relevant data has been collected for the period 2007-2011. 3.3 Hypothesis: The study has been taken up for the period 2007-2011 with the following hypothesis Ho: FDI doesn’t affect the economic growth of the country (India). H1: FDI affect the economic growth of the country (India). 3.4 Scope of the study: 1) The study is aimed to understand the flow of FDI in the Indian economy. 2) Finding out the reason for the difference in FDI inflows 3) How FDI is affecting various sector of economy. 3.5 Limitations of the study: 1) It’s not only FDI that effects the growth of economy there are other factors such as FII, monetary policy and government policies. 2) FDI data keeps on changing. 3) Time limitation.ANALYSIS AND INTERPRETATION

4) 4.0 Analysis of FDI inflows global and by group of economies

Chart 4.1

Global foreign direct investment (FDI) inflows grew in 2007 to an estimated US$1.5 trillion, surpassing the previous record set in the year 2000. It was due to continuous rise in FDI in all of three groups of economies -- in developed countries, developing economies and in South-East Europe and the Commonwealth of Independent States (CIS) -- largely reflecting the high-growth propensities of transnational corporations (TNCs) and strong economic performance in many parts of the world. Increased corporate profits and an abundance of cash boosted the value of the cross-border mergers and acquisitions (M&A’s) that constitute a large portion of FDI flows, although the value of M&A’s in the latter half of 2007 declined. The financial and credit crisis that began in the latter half of 2007 has not affected the overall volume of FDI inflows. Even with a slowdown of the United States economy, the depreciation of the US dollar may have helped to maintain high levels of FDI flows into the country, in particular from countries with appreciating currencies, such as Europe and developing Asia. While sub-prime loan problems have impinged on the lending capabilities of banks, new capital injections from various funds, including sovereign wealth funds, have helped alleviate some of the problems. FDI flows to developed countries in 2007 grew for the fourth consecutive year, reaching US$1 trillion. The European Union (EU) as a whole continued to be the largest host region, attracting almost 40% of total FDI inflows in 2007. FDI inflows to developing countries and economies in transition (the latter comprising

South-East Europe and CIS) rose by 16% and 41% respectively, and reached new record levels. In Africa, FDI inflows in 2007 remained relatively strong. The unprecedented level of inflows (US$36 billion) was supported by a continuing boom in global commodity markets. FDI inflows to Latin America and the Caribbean, meanwhile, rose by 50% to a record level of US$126 billion. FDI inflows to South, East and South-East Asia, and Oceania maintained their upward trend in 2007, reaching a new high of US$224 billion, an increase of 12% over 2006. In West Asia, overall FDI inflows declined by 12%. FDI to South-East Europe and the CIS, or transition economies, expanded significantly, by 41%, to a new record of US$98 billion. Despite some unfavourable economic projections for 2008 and potential tightening of rules for foreign investment in natural resources and related industries, high demand for natural resources around the world -- and, as a result, the opening up of new potentially profitable opportunities in the primary sector - are likely to boost FDI in the extractive industries. And later during 2008 due to subprime crisis in US led to decline in FDI of the world. However global FDI inflows in 2010 reached an estimated $1,244 billion from the above figure– a small increase from 2009’s level of $1,185 billion. How- ever, there was an uneven pattern between regions and also between sub regions. FDI inflows to developed countries and transition economies contracted further in 2010. In contrast, those to developing economies recovered strongly, and together with transition economies – for the first time – surpassed the 50 per cent mark of global FDI flows. FDI flows to developing economies raised by 12% (to $574 billion) in 2010, due to their relatively fast economic recovery, the strength of domestic demand. The value of cross-border M&A’s into developing economies doubled due to attractive valuations of company assets, strong earnings growth and robust economic fundamentals (such as market growth). As more international production moves to developing and transition economies, TNCs are increasingly investing in those countries to maintain cost-effectiveness and to remain competitive in the global production networks. This is now mirrored by a shift in international consumption, in the wake of which market-seeking FDI is also gaining ground. This changing pattern of FDI inflows is confirmed also in the global ranking of the largest FDI recipients: In 2010, half of the top 20 host economies were from developing and transition economies, compared to seven in 2009.In addition, three developing economies ranked among the five largest FDI recipients in the world. While the United States and China maintained their top position, some European countries moved down in the ranking. Indonesia entered the top 20 for the first time.

4.1Analysis of FDI in India year wise Table 4.1: FDI inflows year wise in India Amount % change Financial Year (US $ over previous (April-March) million) year August 1991March 2000 14485 2000-01 2,463.00 2001-02 4,065.00 65% 2002-03 2,705.00 -50% 2003-04 2,188.00 -19% 2004-05 3,219.00 47% 2005-06 5,540.00 72% 2006-07 12,492.00 125% 2007-08 24,575.00 97% 2008-09 27,330.00 11% 2009-10 25,834.00 -5% 2010-11 19,427.00 -25% Total 146319 According to the statistics released by India’s Ministry of Commerce and Industry, the country has received US $19.43 billion in FDI during the last fiscal (April ‘10March’11), compared to US $25.83 billion that came in the previous financial year. Although it is a significant dip (-25%), the government is confident that the trend will be reversed. Cumulative FDI inflows received during the post liberalization period i.e. 1991-2011 were to the tune of US $146,319 million as per the above table. From the year 2000 up to 2002, investments into India grew 65% but declined during the subsequent two years from 2002 to 2004. 2004 to 2006, India once again experienced a surge in investments, growing 47% in 2004-05 and 72% in 2005-06 respectively. The year 2006-07 was an exceptional year with a 125% growth in FDI inflows. The subsequent year was again very good, where investment inflows gained 97%, followed by an increase of 11% during 2008-09. During the year of the financial crisis, Apr’09-Mar’10, foreign direct investments suffered a slight setback with inflows declining a little over 5% over the previous year. Last year (Apr’10-Mar’11) FDI into India declined further by 25% to US $19,427 million. Foreign direct

investment (FDI) in India’s services sector, which contribute over 50 per cent in the country’s economic growth, declined by 22.5 per cent to USD 3.4 billion in 2010-11, according to the industry ministry’s latest data. The services sector (financial and non-financial services) had attracted FDI worth USD 4.39 billion during 2009-10. According to experts, global financial problems, particularly in the European markets are making players cautious of undertaking overseas investments. Mauritius, Singapore, the US, UK, Netherlands, Japan, Germany and the UAE, among other countries, are the major investors in India. “The decline is mainly because of global financial problems and it was a worldwide downfall. Also the setback in attracting FDI was partly due to macroeconomic concerns such as a high current account deficit and inflation, as well as to delays in the approval of large FDI projects.

4.2 Analysis of country wise inflows of FDI in India Table4.2 200708 (Apri 2008- 2009- 2010l09(Apr 10(Apr 11(Apr Marc ilililh) March March March Rank Country ) ) ) 1 Mauritius 4448 50794 49633 31855 3 2 Singapore 1231 15727 11295 7730 9

Cumulati ve 2011- Inflows 12(Apr (April il'00 August August ) '11) 26634 269395

% to Total Inflo ws 41

13350

66407

10

3

USA

4377

8002

9230

5353

2066

44609

7

4

UK

4690

3840

3094

3434

11311

40744

6

5

Japan

3336

1889

5670

7063

7855

31813

5

6

Netherlands 2780

3922

4283

5501

3207

28834

4

7

Cyprus

3385

5983

7728

4171

1830

23778

4

8

Germany

2075

2750

2980

908

5737

19113

3

9

France

583

2098

1437

3349

1668

11936

2

10

UAE 1039 Total FDI 9866 Inflows 4

1133 12302 5

3017 12337 8

1569

376

8968

1

88520

77864

658586

India’s 83% of cumulative FDI is contributed by ten countries while remaining 17 per cent by rest of the world. The analysis of country wise inflows of FDI in India indicates that during 2007-2010, the total amount of Rs 526537 of FDI was received from 113 countries including NRI investments. India’s perception abroad has been changing steadily over the years. This is reflected in the ever growing list of countries that are showing interest to invest in India. Mauritius emerged as the most dominant source of FDI contributing 44 % of the total investment in the country. Singapore was the second dominant source of FDI inflows with 9% of the total inflows. However, USA slipped to third position by contributing 7% of the total inflows. They maintained continuous increasing trend under the period of study. UK occupied fourth position with 5%followed by Netherlands with 4%, Japan with 4%, Cyprus with 4%, Germany with 3%, France with 1%, UAE with 1%. It has been observed that some of the countries like Israel, Thailand, Hong Kong, South Africa and Oman increased their share gradually during the period under study. It is also interesting to note that some of the new countries such as Hungary, Nepal, Virgin Islands, and Yemen are making significant investments in India. Mauritius: After 1991-2011, Mauritius have always topped the position for FDI inflows in India with FDI on 2011-12 standing at 26634 US $ million, consisting of 41% of total FDI inflows. The inordinately high investment from Mauritius is due to routing of international funds through the country given significant tax advantages; double taxation is avoided due to a tax treaty between India and Mauritius, and Mauritius is a capital gains tax haven, effectively creating a zero-taxation FDI channel. The India-Mauritius Double Taxation Avoidance Agreement (DTAA) was signed in 1982 and has played an important role in facilitating foreign investment in India via Mauritius. It has emerged as the largest source of foreign direct investment (FDI) in India, accounting for 50 per cent of inflows

between August 1991 and 2008. A large number of foreign institutional investors (FIIs) who trade on the Indian stock markets operate from Mauritius. According to the DTAA between India and Mauritius, capital gains arising from the sale of shares are taxable in the country of residence of the shareholder and not in the country of residence of the company whose shares have been sold. Therefore, a Company resident in Mauritius selling shares of an Indian company will not pay tax in India. Since there is no capital gains tax in Mauritius, the gain will escape tax altogether. The DTAA has, however, recently been in the news, with Indian left-wing parties demanding a review of the treaty. They argue that businessmen are misusing the provisions of the treaty to evade taxes. The Mauritius stock market was opened to foreign investors following the lifting of foreign exchange controls in 1994. No approval is required for the trading of shares by foreign investors, unless investment is for the purpose of legal and management control of a Mauritian company or for the holding of more than 15 per cent in a sugar company. Incentives to foreign investors include free repatriation of revenue from the sale of shares and exemption from tax on dividends and capital gains. Mauritius has an active offshore financial sector, which is a major route for foreign investments into the Asian subcontinent. Foreign direct investment transiting through the Mauritian offshore sector to India has been considerably increasing in the recent years, according to figures released by the Indian Ministry of Commerce and Industry. Major US corporations use the Mauritius offshore sector to channel their investment to India. Singapore: Singapore has become a rapidly growing source of investment funds to India in the past few years. In fact, the data above shows that investment from Singapore has grown to very high levels. Singapore has become India’s second largest source of FDI inflow for the period April 2011 till August 2011, with a cumulative amount of Rs. 66407 crore. Its share has gone up from less than 1% of total FDI inflow in 2003-04, to 13% in 2007-08. For the past two years, it has overtaken even large developed economies like US, UK and Japan which are normally viewed as the most important places to look for funds. FDI increased from Rs. 172 crore 2003-04 to Rs. 822 crore in 2004-05, a jump of 378%! A major reason for this, as was seen with Indo- Singaporean trade, probably was the anticipation for CECA’s signing that boosted investment.30 Another major boost arrived in 2007-08, when FDI increased by 370%. Since 2004-05, Singapore has been consistently in the top few ranks since 2004-05, a situation not seen prior to this. Although FDI inflow from most countries has grown in the past few years, the pace of growth in Singapore’s investment has made others look surprised.

U.S.A: The United States is the third largest source of FDI in India (7 % of the total), valued at 44609 crore in cumulative inflows between April 2000 and August 2011. According to the Indian government, the top sectors attracting FDI from the United States to India during 1991–2011 are fuel (36 percent), telecommunications (11 percent), electrical equipment (10 percent), food processing (9 percent), and services (8 percent). According to the available M&A data, the two top sectors attracting FDI inflows from the United States are computer systems design and programming and manufacturing. Since 2002, many of the major U.S. software and computer brands, such as Microsoft, Honeywell, Cisco Systems, Adobe Systems, McAfee, and Intel have established R&D operations in India, primarily in Hyderabad or Bangalore. The majority of U.S. electronics companies that have announced Greenfield projects in India are concentrated in the semiconductor sector. By far the largest such project is AMD’s chip manufacturing facility in Hyderabad, Andhra Pradesh. The largest share (36 percent) was found in the manufacturing sector, most prominently in the machinery, chemicals, and transportation equipment manufacturing segments. Other important categories of employment are professional, scientific, and technical services; and wholesale trade, with 29 percent and 18 percent of U.S. affiliate employment, respectively. European Union: Within the European Union, the largest country investors were the United Kingdom and the Netherlands, with 40744 crore and 28834 crore, respectively, of cumulative FDI inflows between April 2000 to August 2011. The United Kingdom, the Netherlands, Germany and France together accounted for almost 15% of all FDI flows from the EU to India. FDI from the EU to India is primarily concentrated in the power/energy, telecommunications, and transportation sectors. The top sectors attracting FDI from the European Union are similar to FDI from the United States. Manufacturing; information services; and professional, scientific, and technical services have attracted the largest shares of FDI inflows from the EU to India since 2000. Unilever, Reuters Group, P&O Ports Ltd, Vodafone, and Barclays are examples of EU companies investing in India by means of mergers and acquisitions. European companies accounted for 31 percent of the total number and 43 percent of the total value for all reported Greenfield FDI projects. The number of EU Greenfield projects was distributed among four major clusters: ICT (17 percent), heavy industry (16 percent), business and financial services (15 percent), and transport (11 percent). However, the heavy industry cluster accounted for the majority (68 percent) of the total value of these projects.

Japan: Japan was the fifth largest source of cumulative FDI inflows in India between April and August 2011, i.e. the cumulative flow is 31813 crore and it is 5% of total inflow. FDI inflows to India from most other principal source countries have steadily increased since 2000, but inflows from Japan to India have decreased during this time period. There does not appear to be a single factor that explains the recent decline in FDI inflows from Japan to India. India is, however, one of the largest recipients of Japanese Official Development Assistance (ODA), through which Japan has assisted India in building infrastructure, including electricity generation, transportation, and water supply. It is possible that this Japanese government assistance may crowd out some private sector Japanese investment. The top sectors attracting FDI inflows from Japan to India are transportation (54 percent), electrical equipment (7 percent), telecommunications, and services (3 percent). The available M&A data corresponds with the overall FDI trends in sectors attracting inflows from Japan to India. Companies dealing in the transportation industry, specifically automobiles, and the auto component/peripheral industries dominate M&A activity from Japan to India, including Yamaha Motors, Toyota, Kirloskar Auto Parts Ltd., and Mitsubishi Heavy Industries Ltd. Japanese companies have also invested in an estimated 148 Greenfield FDI projects valued at least at $3.7 billion between 2002 and 2006. In April 2007, Japanese and Indian officials announced a major new collaboration between the two countries to build a new Delhi-Mumbai industrial corridor, to be funded through a public-private partnership and private-sector FDI, primarily from Japanese companies. The project was begun in January 2008 with initial investment of $2 billion from the two countries. The corridor will cross 6 states and extend for 1,483 km, in an area inhabited by 180 million people. At completion in 2015, the corridor is expected to include total FDI of $45–50 billion. A large share of that total is destined for infrastructure, including a 4,000 MW power plant, 3 ports, and 6 airports, along with additional connections to existing ports. Private investment is expected to fund 10-12 new industrial zones, upgrade 5–6 existing airports, and set up 10 logistics parks. The Indian government expects that by 2020, the industrial corridor will contribute to employment growth of 15 percent in the region, 28 percent growth in industrial output, and 38 percent growth in exports.

4.3 Analysis of sector wise inflows of FDI in India Table 4.3 Sector

2007-08 (AprilMarch)

2008-09 (AprilMarch)

2009-10 (AprilMarch)

2010-11 2011-12 ( April- (AprilMarch) Dec.)

Cumulativ e Inflows (April 2000 Dec. 11)

% age to total Inflows (In terms of US$)

SERVICES SECTOR (financial & non-financial) COMPUTER SOFTWARE & HARDWARE TELECOMMUNICATIONS (radio paging, cellular mobile, basic telephone services HOUSING & REAL ESTATE

26,589 (6,615 5,623 (1,410) 5,103 (1,261)

28,411 (6,116) 7,329 (1,677) 11,727 (2,558)

19,945 (4,176) 4,127 (872) 12,270 (2,539)

15,053 (3,296) 3,551 (780 7,542 (1,665)

21,431 (4,575) 2,626 (564) 8,969 (1,989)

142,539 (31,710) 48,940 (10,973 57,035 (12,544)

20%

8,749 (2,179) CONSTRUCTION ACTIVITIES 6,989 (including roads & highways) (1,743)

12,621 (2,801 8,792 (2,028)

14,027 (2,935) 13,469 (2,852)

5,600 (1,227) 4,979 (1,103)

2,544 (551) 7,635 (1,602)

48,819 (10,933 46,216 (10,239

7%

POWER

4,382 (985) 5,212 (1,152) 4,157 (961) 1,931 (412) NA

6,138 (1,272) 5,893 (1,236) 1,999 (420) 1,297 (266) 1,006 (213)

5,796 (1,272) 5,864 (1,299) 5,023 (1,098) 2,543 (556) 961 (209)

6,639 (1,447) 2,785 (610 6,881 (1,495) 920 (196) 14,405 (3,193)

32,176 (7,094 29,224 (6,444 25,469 (5,750 14,581 (3,333) 42,668 (9,155)

4%

3,875 (967) AUTOMOBILE INDUSTRY 2,697 (675) METALLURGICAL 4,686 INDUSTRIES (1,177) PETROLEUM & NATURAL 5,729 GAS (1,427) DRUGS & NA PHARMACEUTICALS

Ranking of Sector wise FDI inflows in India since April 2000- Dec 2011

7% 8%

6%

4% 4% 2% 4%

Table 4.4 Industrial Sector Service Sector Telecommunication Computer Hardware & Software Housing and Real Estate Construction Activities Drugs and Pharmaceuticals Automobile Industry Metallurgical Industry Power Petroleum and Natural Gas

Rank 1 2 3 4 5 6 7 8 9 10

Chart 4.2 Pie chart representing % of total FDI inflows in different sectors

The Sector wise Analysis of FDI Inflow in India reveals that maximum FDI has taken place in the service sector including the telecommunication, information technology, travel and many others. The service sector is followed by the computer hardware and software in terms of FDI. High volumes of FDI take place in telecommunication, real estate, construction, power, automobiles, etc. The rapid development of the telecommunication sector was due to the FDI inflows in form of international players entering the market and transfer of advanced technologies. The telecom industry is one of the fastest growing

industries in India. With a growth rate of 45%, Indian telecom industry has the highest growth rate in the world. During the year 2009 government had raised the FDI limit in telecom sector from 49 per cent to 74 per, which has contributed to the robust growth of FDI. The telecom sector registered a growth of 103 per cent during fiscal 2008-09 as compared to previous fiscal. FDI inflows to real estate sector in India have developed the sector. The increased flow of foreign direct investment in the real estate sector in India has helped in the growth, development, and expansion of the sector. FDI Inflows to Construction Activities has led to a phenomenal growth in the economic life of the country. India has become one of the most prime destinations in terms of construction activities as well as real estate investment. The FDI in Automobile Industry has experienced huge growth in the past few years. The increase in the demand for cars and other vehicles is powered by the increase in the levels of disposable income in India. The options have increased with quality products from foreign car manufacturers. The introduction of tailor made finance schemes, easy repayment schemes has also helped the growth of the automobile sector. The basic advantages provided by India in the automobile sector include, advanced technology, cost-effectiveness, and efficient work force. Besides, India has a welldeveloped and competent Auto Ancillary Industry along with automobile testing and R&D centres. The automobile sector in India ranks third in manufacturing three wheelers and second in manufacturing of two wheelers. Opportunities of FDI in the Automobile Sector in India exist in establishing Engineering Centres, Two Wheeler Segment, Exports, Establishing Research and Development Centres, Heavy truck Segment, Passenger Car Segment. The increased FDI Inflows to Metallurgical Industries in India has helped to bring in the latest technology to the industries. Further, the increased FDI Inflows to Metallurgical Industries in India has led to the development, expansion, and growth of the industries. All this has helped in improving the quality of the products of the metallurgical industries in India. The increased FDI Inflows to Chemicals industry in India has helped in the growth and development of the sector. The increased flow of foreign direct investment in the chemicals industry in India has helped in the development, expansion, and growth of the industry. This in its turn has led to the improvement of the quality of the products from the industry. Based upon the data given by department of Industrial Policy and Promotion, in India there are sixty two (62) sectors in which FDI inflows are seen but it is found that top ten sectors attract almost seventy percent (70%) of FDI inflows. The cumulative FDI inflows from the above results reveals that service sector in India attracts the maximum FDI inflows amounting to Rs. 106992 Crores, followed by Computer Software and Hardware amounting to

Rs. 44611 Crores. These two sectors collectively attract more than thirty percent (30%) of the total FDI inflows in India. The housing and real estate sector and the construction industry are among the new sectors attracting huge FDI inflows that come under top ten sectors attracting maximum FDI inflows. Thus the sector wise inflows of FDI in India shows a varying trend but acts as a catalyst for growth, quality maintenance and development of Indian Industries to a greater and larger extend. The technology transfer is also seen as one of the major change apart from increase in operational efficiency, managerial efficiency, employment opportunities and infrastructure development. 4.5 Trends and Patterns of FDI in different sectors Service Sector: Chart 4.3

India stands out for the size and dynamism of its services sector. The importance of the services sector can be gauged by looking at its contributions to different aspects of the economy. The share of services in India’s GDP at factor cost (at current prices) increased rapidly: from 30.5 per cent in 1950-51 to 55.2 per cent in 200910. The overall growth rate (compound annual growth rate) of the Indian economy from 5.7 per cent in the 1990s to 8.6 per cent during the period 2004-05 to 2009-10 was to a large measure due to the acceleration of the growth rate (CAGR) in the services sector from 7.5 per cent in the 1990s to 10.3 per cent in 2004- 05 to 200910. The services sector growth was significantly faster than the 6.6 per cent for the combined agriculture and industry sectors annual output growth during the same

period. In 2009-10, services growth was 10.1 per cent and in 2010-11 it was 9.6 per cent. India’s services GDP growth has been continuously above overall GDP growth, pulling up the latter since 1997- 98, It has also been more stable. An international comparison of the services sector shows that India compares well even with the developed countries in the top 12 countries with highest overall GDP. The two broad services categories, namely trade, hotels, transport, and communication; and financing, insurance, real estate, and business services have performed well with growth of 11 per cent and 10.6 per cent, respectively in 2010-11(with reference to table 4.3). Only community, social and personal services have registered a low growth of 5.7 per cent due to base effect of fiscal stimulus in the previous two years, thus contributing to the slight deceleration in growth of the sector. Among the subsectors of services sectors, financial services attract of total FDI inflows followed by banking services, insurance and non- financial services respectively. Outsourcing, banking, financial, information technology oriented services make intensive use of human capital. The trend in this sectors first declines till 2011 and increases in 2012 due to strong RBI policy and increase in consultancy services and devaluation of rupees against dollar. Computer Software and Hardware: Chart 4.4

Over the past few years the computer software industry has been one of the fastest growing sectors in Indian economy. FDI Inflows to Computer Software and Hardware Industry in India have been significant. 100 percent FDI is permitted under automatic route to the E-Commerce activities in India. Software Technology Parks (STP) have been a major initiative in India to drive in Foreign Direct Investment in the computer software industry. These Software Technology Parks provide highly developed infrastructure and facilities that attract foreign investors. Regulatory measures by the Indian government have also played a positive role in this regard. Measures like increased freedom of recruiting and laying-off employees, tax benefits and easing of export producers have contributed to the growth of FDI in this sector. FDI is permitted under automatic route in the computer hardware industry in India. The huge market for computer hardware in India, coupled with the availability of skilled workforce in this sector has boosted the inflow of FDI. High growth prospects, in terms of increased consumption in the India as well as increasing demand for exports are expected to lead to more Foreign Direct Investments in this sector. Computer Software and Hardware sector received US$ 564 million which constitute 11% of the total FDI inflows during the period Jan2000-Dec2011 (with reference to table 4.3). The maximum of FDI in this sector was received from Mauritius which was followed by USA and so on. Among Indian locations Mumbai received of investment followed by Bangalore, and Chennai. However the trend in this sector is declining from 2008 due to economy crisis, recession and due to greater oppurtunity in countries like China and Korea in respect of labour and technology.

Telecommunication: Chart 4.5

Telecom is one of the fastest growing industries in India, and everyone, including foreign players and investors, are eager to be a part of this growth. The last few years have witnessed many activities on the foreign direct investment front with world's leading telecom operators picking up large stakes in domestic operators. The telecom services industry registered a growth of 20.7 percent clocking revenues of 1, 57,542 crore in 2008-09 compared to Rs 130561 Crore in the previous year. During the year 2005, government had raised the FDI limit in telecom sector from 49 percent to 74 percent, which has contributed to the robust growth of FDI in the sector. In February 2009, the Government has further revised the methodology of calculation of indirect foreign investment, according to which FDI of less than 50% in investing company is not counted in the licensee company if the investing company is ‘owned’ and ‘controlled’ by resident Indian citizens. This change of methodology of calculation of indirect foreign investment from earlier proportionate basis to ‘owned’ and ‘controlled’ basis has brought down composite FDI in some of the licensee companies and have given more room to bring in further investment. However, actual foreign investment requirement of a licensee company depends on its business case. FDI in Indian Telecommunications Industry is one of the most crucial parts that have caused such a hike in the telecom market so far. Inflow of FDI into India’s telecom sector during April 2000 to Dec. 2010 was about US $ 57035 million which constitute 8% of total FDI inflows and is second after FDI in services (with reference to table 4.3). The trend in telecom sector due to above reasons remains almost stable in 2008-10 but declines in 2011 due to 2G scam and again increases in 2012.

Housing and Real Estate: Chart 4.6

The housing and real estate sector in India witnessed foreign direct investment (FDI) of US $ 5600 million in April-September 2010-11, according to the Department of Industrial Policy and Promotion (DIPP). Housing and real estate sector including Cineplex, multiplex, integrated townships and commercial complexes etc, attracted a cumulative foreign direct investment (FDI) worth US $ 48819 million from April 2000 to Dec 2010 (with reference to table 4.3). Foreign investors have so far contributed significant capital to India’s real estate market. Aggregate FDI inflows into the real estate sector are recorded at approximately 7% of the total inflows. The relaxed FDI rules implemented by India last year has invited more foreign investors and real estate sector in India is seemingly the most lucrative ground at present. Private equity players are considering big investments, banks are giving loans to builders, and financial institutions are floating real estate funds. Indian property market is immensely promising and most sought after for a wide variety of reasons. However the trend in this sector is declining from year 2010-12 due to current FDI regulations for the sector stipulate certain conditions, such as minimum area of 50000 square metres to be developed, minimum capitalisation requirements, lock-in period of 3 years, due to economic debt crisis in Europe and America and also due to higher interest rate on loans that have been put in place from the perspective of preventing growth in the sector. Such conditions, however, pose challenges for FDI inflows into

various projects, where given the nature of projects, it may not be possible to comply with such conditions. Construction Activities: Chart 4.7

Construction 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. 2011 is US$ 46216 million which is 6% (with reference to table 4.3) of the total inflows received through FIPB/SIA route, acquisition of existing shares and RBI’s automatic route. The construction activities sector shows a steep rise in FDI inflows from 2007 onwards. Major investment in construction activities is received from Mauritius which is accounted for maximum of total FDI inflows during 2000-2010. In India Delhi, Mumbai, and Hyderabad receives maximum amount of investment. The trend in this sector has declined from 2010-11 due to RBI policy, financial debt crisis and there has been increase from 2011 because of the Government acceded to a long-pending demand and permitted 100 percent foreign direct investment (FDI) in construction housing and commercial premises, including hotels, resorts, hospitals, educational institutions, recreational facilities, and city and regional level infrastructure. According to the new norms, the existing 100-acre minimum area stipulation has been reduced to 25. As of now, all such projects needed mandatory clearance from the Union Government. With the power to approve being vested with the local Governments, FDI projects will now be treated on par with any other project. Also India has several joint construction agreements with Japan and Russia to develop infrastructure and transportation facilities in India.

4.6 Analysis of State wise inflows of FDI in India Amou RBI’s - State covered 2008nt Regional 09 Rupee Office2 (Apr. s in Mar.) Crores (US$ in million ) S. No. 1

MUMBAI

2

NEW DELHI

3

BANGAL ORE AHMEDA BAD CHENNAI

4 5

6 7

HYDERA BAD KOLKAT A

MAHARAS HTRA, DADRA & NAGAR HAVELI, DAMAN & DIU DELHI, PART OF UP AND HARYANA KARNATAK A GUJARAT TAMIL NADU, PONDICHE RRY ANDHRA PRADESH WEST BENGAL, SIKKIM, ANDAMAN & NICOBAR ISLANDS

200910 (Apr.Mar.)

Table 4.6 2010Cumulati 11 ve Inflows ( Apr.- (April ’00 March) – March ‘11)

%ag e to total Infl ows (in term s of US$ ) 35

57,066 39,409 (12,431 (8,249) )

27,669 (6,097)

201,471 (45,068)

7,943 (1,868)

46,197 (9,695)

12,184 (2,677)

113,689 (25,088)

19

9,143 (2,026) 12,747 (2,826) 7,757 (1,724)

4,852 (1,029) 3,876 (807) 3,653 (774)

6,133 (1,332) 3,294 (724) 6,115 (1,352)

36,657 (8,229) 31,693 (7,156) 30,848 (6,851)

6

5,406 (1,238) 2,089 (489)

5,710 (1,203) 531 (115)

5,753 (1,262) 426 (95)

26,562 (5,961) 6,368 (1,488)

5

6 5

1

8

CHANDIG CHANDIGA ARH` RH, PUNJAB, HARYANA, HIMACHAL PRADESH 9 PANAJI GOA 134 (29) 10 BHOPAL MADHYA 209 PRADESH, (44) CHATTISG ARH 11 JAIPUR RAJASTHA 1,656 N (343) 12 KOCHI KERALA, 355 LAKSHAD (82) WEEP 13 BHUBAN ORISSA 42 ESHWAR (9) 14 KANPUR UTTAR PRADESH, UTTRANCH AL 15 GUWAHA ASSAM, 176 TI ARUNACHA (42) L PRADESH, MANIPUR, MEGHALA YA, MIZORAM, NAGALAND , TRIPURA 16 PATNA BIHAR, JHARKHAN D 17 REGION NOT 18,300 INDICATED3 (4,181) Sub. Total 123,02

1,038 (224)

1,892 (416)

4,685 (1,024)

1

808 (169) 255 (54)

1,376 (302) 2,093 (451)

3,326 (725) 3,009 (654)

1

149 (31) 606 (128)

230 (51) 167 (37)

2,450 (520) 1,658 (368)

0.4

702 (149) 227 (48)

68 (15) 514 (112)

1,207 (261) 812 (177)

0.2

51 (11)

37 (8)

316 (72)

0.1

-

25 (5)

27 (6)

0

15,056 (3,148) 123,12

20,543 (4,491) 88,520

115,943 (26,070) 580,722

20

0.5

0.3

0.1

100

18

RBI’S-NRI SCHEMES (from 2000 to 2002) GRAND TOTAL 4

5 (27,331 ) 0

0 (19,427 (129,716) (25,834 ) ) 0 0 533 (121) 123,025 123,120 88,520 581,255 (27,331) (25,834) (19,427) (129,837 )

The choice of location of projects depends on the commercial judgement of investors based on factors such as market size and growth potential, availability of skilled man-power; availability and reliability of infrastructure facilities; fiscal and other incentives provided by State Governments; etc. The Central Government supplements the efforts of the State Governments by providing fiscal incentives for investments in core and infrastructure sectors as also high priority industries such as information technology and through specific schemes such as the Growth Centre Schemes, Transport Subsidy Schemes, New Industrial Policy for the North-East and other hill States, Electronic Hardware Technology Park (EHTP), Software Technology Park (STP), Export Promotion Zones (EPZs), Special Economic Zones (SEZs), etc. Maharashtra, Delhi, Karnataka, Gujarat, Tamil Nadu, Andhra Pradesh, West Bengal, Punjab, Goa accounted for major portion of FDI investment approvals during the cumulative period. The Mumbai/Maharashtra region continues to attract maximum foreign investments, which is 35% of total investments since April 2000. Delhi and its neighbouring area, which includes part of Uttar Pradesh like Noida and Haryana like Gurgaon, was the next most important region for foreign investments with a share of 19%. Bangalore and Ahmedabad followed in the 3rd and 4th place accounting for up to 6% of foreign investments since April 2000. The top 3 Indian Regions attracting the highest FDI (April 2000 to January 2010) have been Mumbai Region (representing with US$ 38,074 million (INR 169,691 Crores) followed by Delhi Region with US$ 21,460 million (INR 97,125 Crores) and Karnataka Region with US$ 6,750 million (INR 29,850 Crores). The three put together have accounted for nearly 62% of the total FDI inflows received over the last 10 years. Other Regions like Gujarat and Tamil Nadu are also beginning to attract FDI inflows in the last 5 years and are currently not far behind Karnataka Region at US$ 6,382 (INR 28,171 Crores) million and US$ 5,309 (INR 23,864 Crores) million respectively In the last financial year (Apr.’10 to Mar’11), Maharashtra and Delhi though still occupying the first and second position respectively, saw decline in investments, particularly the Delhi area which saw a decline of over 72%. The third most important region for foreign investments

during the last year was Chennai (US $1,352) followed closely by Bangalore (US $1,332) in the fourth place. The regions which saw increased investment inflows during the last financial year were Tamil Nadu, Karnataka, Chandigarh, Goa and noticeably Madhya Pradesh/Chhattisgarh. More software companies are in Mumbai and Bangalore where the Indian industry originally developed, but they are also developing quickly in Delhi and its surroundings as well as in Andhra Pradesh and Tamil Nadu. As to the main poles of competitiveness, they are mainly concentrated in the South on the axis of Chennai and Bangalore, and around Delhi and Mumbai. Gujarat, in particular, has grabbed the attention of foreign investors due to the presence of strong road and rail network, availability of skilled manpower (presence of academic and research institutions like IIM, NIFT, NID, CEPT etc), proactive governance model and investor friendly regulations go in favour of this state. Some of the leading Indian and Multinational companies including Reliance, Adani, Essar, Aditya Birla, ABG shipyard, Tata, Zydus Cadila, Welspun, Torrent, Amul, Bombardier (Canada), Matsushita (Japan), McCain Foods (Canada), Alstom (France), Shell (Netherlands) General Motors (USA), Linde ( Germany) have set up their operations in the state. 4.7 Financial Year and Route Wise FDI Inflows Data Table 4.7 Sl.No Financ Foreign Direct Investment In INDIA (FDI) ial Year (AprilEquity ReOthe FDI March inves r Flo ) ted capit ws earni al+ into ngs + Indi a FIPB Equity Tota route/RBI's capital of l Automatic unincorp FDI Route/Acq orated Flo uisition bodies# ws Route

Invest ment by FII's fund (net)

%age grow th over previ ous year( in US$

terms )

Financi al Year (20002011) 1 200001 2 200102 3 200203 4 200304 5 200405 6 200506 7 200607 8 9 10

11 Cumul ative Total (from

200708 200809 200910 (P) (+)(+ +) 201011 (P) (+)

2339

61

1350 279 4029

3904

191

1645 390 6130

2574

190

1833 438 5035

2197

32

1460 633 4322

3250

528

1904 369 6051

5540

435

2760 226 8961

15585

896

5828 517 2282 6

24573

2291

27329

702

25609

1504

19430 132330

1847 1505

7679 292 3483 5 9030 777 3783 8 8669 194 3776 5 3

(+) 52% (-) 18% (-) 14% (+) 40% (+) 48% (+) 146 % (+) 53% (+) ) 9% (-) 0.2%

657

6703 234 2702 4

(-) 28%

29422

7523

4886 610 1948 1 0 14

377 10918 8686 9926 3225 20328 (-) 15017 29048

100265

April 2000 to March 2011) Above table represents the inflows data for the 11-year period 2000-01 to 2010-11. The data presented in the table are comparable since India adopted the international norms for presenting FDI statistics, alluded to in the earlier section, from 2000-01. The change in the reporting practice which introduced new items, especially reinvested earnings of the already established enterprises, contributed significantly to the upward revision of total inflows. As compared to the earlier methodology, the new approach resulted in increasing FDI inflows by 44 per cent for the period 2000-01 to 2004-05 and nearly 31 per cent for the period 2005-06 to 2009-10. As can be seen from the Table, the dramatic rise in the inflows after 2005-06 was also a result of rapid increases in equity inflows (comprising of inflows on account of (i) government approvals, (ii) acquisitions and (iii) through the automatic route). The FDI Equity inflows during the five years 2005-06 to 2009-10 were almost seven times those of the previous years. The increase in inflows since 2005 resulted from a number of policy initiatives taken by the government to attract FDI. In March 2005, the government announced a revised FDI policy, an important element of which was the decision to allow FDI up to 100 per cent foreign equity under the automatic route in townships, housing, built-up infrastructure and construction-development projects. The year 2005 also witnessed the enactment of the Special Economic Zones Act, which opened further avenues for the involvement of foreign firms in the Indian economy.

4.8 FDI and Economic Development FDI is considered to be the lifeblood and an important vehicle of for economic development as far as the developing nations are concerned. The important effect of FDI is its contribution to the growth of the economy. FDI has an important impact on country’s trade balance, increasing labour standards and skills, transfer of technology and innovative ideas, skills and the general business climate. FDI also provides opportunity for technological transfer and up gradation, access to global managerial skills and practices, optimal utilization of human capabilities and natural resources, making industry internationally competitive, opening up export markets, access to international quality goods and services and augmenting employment opportunities. Here we are trying to show the effect of FDI on economic growth with the help of Karl Pearson co relation. Karl Pearson co relation The Correlation between two variables X and Y, which are measured using Pearson’s Coefficient, give the values between +1 and -1. When measured in population the Pearson’s Coefficient is designated the value of Greek letter rho (ρ). But, when studying a sample, it is designated the letter r. It is therefore sometimes called Pearson’s r. Pearson’s coefficient reflects the linear relationship between two variables. As mentioned above if the correlation coefficient is +1 then there is a perfect positive linear relationship between variables, and if it is -1 then there is a perfect negative linear relationship between the variables. And 0 denotes that there is no relationship between the two variables. The degrees -1, +1 and 0 are theoretical results and are not generally found in normal circumstances. That means the results cannot be more than -1, +1. These are the upper and the lower limits. Pearson’s Coefficient computational formula

Here the two variables are FDI(x) and GDPfc (y) GDP fc: -GDP at Factor cost means, money value of everything produced in India, without counting Government's role in it i.e. indirect tax and subsidies.

Table 4.8 FDI and GDP(fc) Year FDI (Rs Crores) (x) GDP fc (Rs Crores)(y) 2006-07 56,390 3952241 2007-08 98,642 4581422 2008-09 1,23,025 5282086 2009-10 1,23,120 6133230 2010-11 88,520 7306990 Table 4.9 Calculation of Karl Pearson’s co-efficient X

Y

XY

X^2

Y^2

56,390

3952241

2,22,86,68,69,990

3,17,98,32,100

1,56,20,20,89,22,081

98,642

4581422

4,51,92,06,28,924

9,73,02,44,164

2,09,89,42,75,42,084

1,23,025 5282086

6,49,82,86,30,150

15,13,51,50,625 2,79,00,43,25,11,396

1,23,120 6133230

7,55,12,32,77,600

15,15,85,34,400 3,76,16,51,02,32,900

88,520

6,46,81,47,54,800

7,83,57,90,400

7306990

Total 4,89,697 27255969 27,26,55,41,61,464 sum x * sum y/N sum x^2/N sum y^2/N Numerator Denominator

13347166251393 39967191968 123814641021493 502026452899 351038547077197000000000

5,33,92,10,28,60,100

51,03,95,51,689 15,55,18,68,20,68,56 2224527708565.50

592485060636.30

After putting all the value in the equation, we get the value of Karl Pearson co relation(r) is found to be +.85. It means that there is high degree positive correlation between the FDI and GDP at factor cost. Hence H1 hypothesis is accepted. Chart 4.8

Chart 4.9

With the help of both the data and the chart we can see the trend line of GDP and FDI are increasing rapidly which tells us about the positive relationship between GDP and FDI and it is also resembles with Karl Pearson co relation. Conclusion Foreign direct investment has continued to play a significant role in the India’s economy. From the above calculation, the analysis shows that there is a positive relationship between the FDI and economic growth, which the relationship is found to be significant. These findings have important policy implication where the government has to concern the importance of the FDI contributed to economic growth. Economy development of a country can be achieve by encourage more foreign direct investment, which it can help to create more employment in the

country. In addition, advance technology in production will trained more skilled labour; therefore it will enhance the productivity and fulfil the satisfaction and demand from the consumers. But, there is negative effect on domestic producer, because they losing the market power, since the foreign investor become monopoly in the market. This indirectly will make the domestic producer facing the difficulties to survive in the market in the long term as foreign companies can achieve economy of scale with advance technology.

4.9 Comparison of FDI between India and China China has been receiving substantial FDI compared to India. Although prior to 1980s India received higher FDI than China but because of the liberalization policy adopted by China in 1978, turned the tables in favour of China. Since late eighties and throughout nineties China has been in forefront of the developing world in terms of FDI inflows and hence economic development. Foreign Direct Investment (FDI) Confidence Index The Foreign Direct Investment Confidence Index is a regular survey of global executives conducted by A.T. Kearney. The Index provides a unique look at the present and future prospects for international investment flows. Companies participating in the survey account for more than $2 trillion in annual global revenue FDI Confidence Index examines future prospects for FDI flows as the world seeks to recover from the global recession and continued economic uncertainty in Europe and the United States. The Asia Pacific region remains the top destination for investors, attracting about one-fifth of global FDI in 2010. Supported by strong growth and political stability, China tops the Index once again. India moves up a spot to second place. Southeast Asia performs particularly well on the back of soaring inflows, with its five major economies ranking in the top 20. CHINA China has held the top position since 2002, when it took the spot from the United States. Rising incomes, urban migration, and increased demand for consumer goods in the world's most populous consumer market are surely contributing to continued increased foreign investment. Inflows rose 6 percent to $185 billion in 2010, $10 billion above the previous peak in 2008. With this growing emphasis on domestic consumption comes a shift toward services, FDI flows into China's services sector grew faster than any other industry.

China has also shown strong leadership and the ability to move up the value chain in the technology sector. It has improved R&D capabilities and better educated its workforce while also successfully creating vast technology clusters that are important nodes in the global technology supply chains. INDIA India moves up one spot to 2nd place this year, passing the United States, as investors return to India after a few years of soft inflows. In 2008, India attracted $43 billion in overseas investment. The following year FDI dipped to $36 billion, and then to $25 billion in 2010. A significant portion of this decline was due to weak inflows into service spaces such as computer software and hardware, financial services, banking, and construction, industries where the global economic crisis led firms to scale back their overseas operations. Persistent local challenges, including the slow pace of reform and poor governance, may also be at play. Senior government officials have acknowledged that the country needs to improve its business climate, particularly as other emerging markets craft investor-friendly policies

Chart 4.10 Chart 4.10

FDI

inflow in China and India Table 4.10 Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 All fig. in US billion $

Chart 4.11

China 49.31 47.07 54.93 117.20 124.08 160.05 175.14 114.21 185.08

India 5.62 4.32 5.77 7.60 20.33 25.48 43.40 35.59 24.15

India vs. China Economy Making an in depth study and analysis of India vs. China economy seems to be a very hard task. Both India and China rank among the front runners of global economy and are among the world's most diverse nations. Both the countries were among the most ancient civilizations and their economies are influenced by a number of social, political, economic and other factors. However, if we try to properly understand the various economic and market trends and features of the two countries, we can make a comparison between Indian and Chinese economy. Going by the basic facts, the economy of China is more developed than that of India. While India is the 11th largest economy in terms of the exchange rates, China occupies the second position surpassing Japan. Compared to the estimated $1.3123 trillion GDP of India, China has an average GDP of around $4909.28 billion. In case of per capital GDP, India lags far behind China with just $1124 compared to $7,518 of the latter. To make a basic comparison of India and China Economy, we need to have an idea of the economic facts of the countries. Table 4.11 Facts

India

China

GDP

around $1.3123 trillion

around 4909.28 billion

GDP growth

8.90%

9.60%

Per capital GDP

$1124

$7,518

Inflation

7.48 %

5.1%

Labour Force

467 million

813.5 million

Unemployment

9.4 %

4.20 %

Fiscal Deficit

5.5%

21.5%

Foreign Direct Investment

$12.40

$9.7 billion

Gold Reserves

15%

11%

Foreign Exchange Reserves

$2.41 billion

$2.65 trillion

World Prosperity Index

88th Position

58th Position

Mobile Users

842 million

687.71 million

Internet Users

123.16 million

81 million.

If we make the analysis of the India vs. China economy, we can see that there are a number of factors that has made China a better economy than India. First things first, India was under the colonial rule of the British for around 190 years. This drained the country's resources to a great extent and led to huge economic loss. On the other hand, there was no such instance of colonization in China. As such, from the very beginning, the country enjoyed a planned economic model which made it stronger. Top sectors that attracted FDI equity inflows (from April 2000 to January 2011), from China, are: • • • • •

Metallurgical industries (76%) Chemicals (other than fertilizers) (7%) Trading (3%) Industrial machinery (3%) and Computer software & hardware (2%)

Agriculture Agriculture is another factor of economic comparison between India and China. It forms a major economic sector in both the countries. However, the agricultural sector of China is more developed than that of India. Unlike India, where farmers still use the traditional and old methods of cultivation, the agricultural techniques used in China are very much developed. This leads to better quality and high yield of crops which can be exported.

IT/BPO One of the sectors where Indi enjoys an upper hand over China is the IT/BPO industry. India's earnings from the BPO sector alone in 2010 are $49.7 billion while China earned $35.76 billion. Seven Indian cites are ranked as the world's top ten BPO's while only one city from China features on the list. Liberalization of the market In spite of being a Socialist country, China started towards the liberalization of its market economy much before India. This strengthened the economy to a great extent. On the other hand, India was a little slow in embracing globalization and open market economies. While India's liberalization policies started in the 1990s, China welcomed foreign direct investment and private investment in the mid1980s. This made a significant change in its economy and the GDP increased considerably. Difference in infrastructure and other aspects of economic growth Compared to India, China has a much well developed infrastructure. Some of the important factors that have created a stark difference between the economies of the two countries are manpower and labour development, water management, health care facilities and services, communication, civic amenities and so on. All these aspects are well developed in China which has put a positive impact in its economy to make it one of the best in the world. Although India has become much developed than before, it is still plagued by problems such as poverty, unemployment, lack of civic amenities and so on. In fact unlike India, China is still investing in huge amounts towards manpower development and strengthening of infrastructure. Company Development Tax incentives are one area where China is lagging behind India. The Chinese capital market lags behind the Indian capital market in terms of predictability and transparency. The Indian capital or stock market is both transparent and predictable. India has Asia's oldest stock exchange which is the BSE or the Bombay Stock Exchange. Whereas China is home to two stock exchanges, namely the Shenzhen and Shanghai stock exchange. As far as capitalization is concerned the Shanghai Stock Exchange is larger than the BSE since the SSE has US$1.7 trillion with 849 listed companies and the BSE has US$1 trillion with 4,833 listed companies. But more than the size what makes both these stock exchanges different is that the BSE is run on the principles of international guidelines and is more stable due to the quality of the listed companies. In addition to this the

Chinese government is the major stake holder of most of its State-owned organizations hence the listed firms have to run according to the rules and regulations lay down by the government. Hence India is ahead of China in matters of financial transparency. Company Management Capabilities It is said that Indians have great managerial skills. India also leaves China behind as far as management abilities are concerned. As compared to China India has better managed companies. One of the major reasons for this is that management reform training in China began 30 years ago and sadly the subject has still not picked up as a matter of interest by the citizens of the country. Another important factor behind China not doing well in the business forefront is that most of the countries came to China and manufactured their goods. It was not Chinas exports that drove the economy instead it were the export products of outsiders. Even in the case of mergers and acquisitions China still has not managed to do too well. On the other hand Indian companies are rapidly expanding mergers and acquisitions. Some of the recent examples include; Tata Steel's $13.6 Billion Acquisition of Corus, Tata Tea's purchase of a controlling stake in Britain's Tetley for US$407 million, Indian Pharmaceutical giant Ranbaxy's acquisition of Romania's Terapia etc.

CHAPTER-5 5.0 Findings and Conclusion 1. Global foreign direct investment (FDI) inflows grew in 2007 to an estimated US$1.5 trillion, surpassing the previous record set in the year 2000. It was due to continuous rise in FDI in all of three groups of economies - in developed countries, developing economies and in South-East Europe. 2. However there was declining of global FDI in 2008 due to financial crisis in US but in 2010 FDI was $1,244 billion, where developing economies contributed to more than 50% of the share in global FDI. 3. From 2004 onwards FDI in India increases tremendously and in 2006-2007 there was a growth of 125% in FDI inflow. The subsequent year was again very good, where investment inflows gained 97%, but due to global financial crisis FDI declined from 2008 onwards. In 2010-11 the decline was 25% due to decline in FDI in service sector because of debt crisis in Europe and US. 4. Mauritius, Singapore, the US, UK, Netherlands, Japan, Cyprus, Germany, France and the UAE, among other countries, are the major investors in India. Where India’s 83% of cumulative FDI is contributed by ten countries while remaining 17 per cent by rest of the world. 5. After 1991-2011, Mauritius have always topped the position for FDI inflows in India with FDI on 2011-12 standing at 26634 US $ million, consisting of 41% of total FDI inflows. The inordinately high investment from Mauritius is due to routing of international funds through the country given significant tax advantages; double taxation is avoided due to a tax treaty between India and Mauritius, and Mauritius is a capital gains tax haven, effectively creating a zero-taxation FDI channel. This is the main reason why most of the countries invest in India through Mauritius. 6. Singapore however was very behind among the major investor in India but during the year 2010-11 it came to second position because of CECA agreement between India & Singapore. 7. Service Sector contribute maximum of FDI inflow in India of about 20% of total inflow which is followed by tele communications, computer hardware & software, housing and construction activities. 8. The increase in service sector is because of increase in BPO services, consultancy services and also devaluation of rupee against dollar resulting to more inflows of funds to software industries. 9. There has been decline in computer hardware & software sector due to global financial crisis and due to greater opportunity in countries like China and Korea.

10. In tele communication sector there has been increase in FDI inflows due to

change in FDI limit from 49% to 74%. 11. Due to various government policies as to maintain minimum capitalization requirement, 3 yrs lock in period minimum area requirement had led to decline in housing and real estate sector. 12. However in construction activities due to relaxation of government policies and also due to improvement in infrastructure through agreement between India and Japan there has been increase in FDI inflows. 13. Top three states which got the maximum FDI inflow are Maharashtra, New Delhi and Karnataka. The top 3 Indian Regions attracting the highest FDI (April 2000 to January 2010) have been Mumbai Region (representing with US$ 38,074 million (INR 169,691 Crores) followed by Delhi Region with US$ 21,460 million (INR 97,125 Crores) and Karnataka Region with US$ 6,750 million (INR 29,850 Crores). 14. The three states together have accounted for nearly 62% of the total FDI inflows received over the last 10 years, because of better infrastructure, more number of mergers and acquisition of companies in these regions, more number of software companies. 15. More of FDI inflows are through automatic route because of government policies and enactment of SEZ Act which attracted a lot of foreign companies to India. 16. Because of China adopting policies regarding FDI in various sectors starting from 1978 it is at present a top destination of FDI investment in the world. Because of improved R&D, skilled manpower, technological advancement China is far more ahead than India. 17. FDI in China was 185.08 US billion $ which was very higher than that of India which was only 24.15 billion US $. With metallurgical industries being a top sector attracting FDI followed by chemicals, trading, industrial machinery and computer software and hardware.

CHAPTER-6 6.0 Suggestion and Recommendations Thus, it is found that FDI as a strategic component of investment 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: 1. This study states that policy makers should focus more on attracting diverse types of FDI. Like the policy makers should design policies where foreign investment can be utilized 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. 2. Indian economy is largely agriculture based. There is plenty of scope in food processing, agriculture services and agriculture machinery. FDI in this sector should be encouraged. 3. India has a huge pool of working population. However, due to poor quality primary education and higher there is still an acute shortage of talent. This factor has negative repercussion on domestic and foreign business. FDI in Education Sector is less than 1%. Given the status of primary and higher education in the country, FDI in this sector must be encouraged. However, appropriate measure must be taken to ensure quality. The issues of commercialization of education, regional gap and structural gap have to be addressed on priority. 4. It can also be suggested that the government should invest more for improvement of infrastructure sectors, R&D activities, human capital, education sector, technological advancement to attract more of FDI. 5. 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.

6. India has a well developed equity market but does not have a well developed debt market. Steps should be taken to improve the depth and liquidity of debt market as many companies may prefer leveraged investment rather than investing their own cash. 7. Though service sector is one of the major sources of mobilizing FDI to India, plenty of scope exists. Still we find the financial inclusion is missing. Large part of population still doesn’t have bank accounts, insurance of any kind, underinsurance etc. These problems could be addressed by making service sector more competitive. Removal of sectoral cap in insurance is still awaited. 8. 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. 9. FDI can be instrumental in developing rural economy. There is abundant opportunity in Greenfield Projects. But the issue of land acquisition and steps taken to protect local interests by the various state governments are not encouraging. 10. It is also suggested that the government while pursuing prudent policies must

also exercise strict control over inefficient bureaucracy and the rampant corruption, so that investor’s confidence can be maintained for attracting more FDI inflows to India.(According to JP Morgan risk index of India)

Bibliography: The necessary data were collected through following websiteswww.rbi.org.in www.worldbank.org.in www.dipp.nic.in http://indiahighcom-mauritius.org www.docs.google.com www.imf.org www.uscc.gov