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Introduction
Introduction
Foreign Direct Investment is an investment made by a
company or entity based in one country, into a
company or entity based in another country. Foreign
direct investments differ substantially from indirect
investments such as portfolio flows, wherein overseas
institutions invest in equities listed on a nation's stock
exchange. Entities making direct investments typically
have a significant degree of influence and control over
the company into which the investment is made. Open
economies with skilled workforces and good growth
prospects tend to attract larger amounts of foreign
direct investment than closed, highly regulated
economies. Foreign direct investment reflects the
objective of establishing a lasting interest by a resident
enterprise in one economy (direct investor) in an
enterprise (direct investment enterprise) that is
resident in an economy other than that of the direct
investor. The direct or indirect ownership of 10% or
more of the voting power of an enterprise resident in
one economy by an investor resident in another
economy is evidence of such a relationship. It is clear
that the central aspect of the operational FDI definition
is lasting interest to be captured through a foreign
Foreign Direct
Investment
Policy in
India
Attractive
Location in
Global FDI
Chart-3.2:-
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The
reason
could
be
bureaucratic
hurdles,
infrastructural problems, business environment, or
government stability. India has to consider the five
point strategy as put forward by the World Bank for
India, if India wants to be an attractive location of
global FDI in the coming years.
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Direct
Investment
Categories
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Permission
Routes
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Permission Routes
Why has this anomaly come about? This has to do with
the range of instruments through which FDI is allowed
in India. Under the FDI scheme in India, an Indian
entity/enterprise
can
issue
equity
shares/fully
convertible
preference
shares/fully
convertible
debentures to raise FDI and after such issuance the
company has to submit details about the above
mentioned instruments in the prescribed (FCGPR) form
to the Reserve Bank of India (RBI). However, a company
can also issue only fully convertible preference
shares/fully convertible debentures, without any equity
participation from the foreign investor. So, if a foreign
investor invests in fully convertible preference
shares/debentures without any equity participation (or
with equity participation below 10%), even then it is
included as part of FDI. Only non-convertible, optionally
convertible or partially convertible preference shares
for issue of which funds have been received on or after
May 1, 2007 are considered as debt (and accordingly,
all norms applicable to external commercial borrowings
or ECBs apply). Fully convertible preference shares are
not only considered as equity, but they are also
included when calculating the foreign direct investment
(FDI) cap in sectors where foreign equity limits apply.
While the finance ministry had made this differentiation
in April 2007 in order to reduce the large amount of
foreign capital (especially private equity) flowing into
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Dangers
Involved
Dangers Involved
What is the problem with the classification of an asset
class that is primarily portfolio investment as FDI in the
national FDI definition? First, the country is extending
the preferential conditions of entry and operations
that are offered to FDI to a class of investors whose
actual identity is often unknown and some of whom are
not regulated in their own home countries. Secondly,
despite the fact that these investors cannot be argued
to be either bringing in any intangible ownership
advantages to the host companies or contributing to
national investments in the medium term (since they
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liberalisation
using
bilateral
and
pluri-lateral
negotiations (FTAs, EPAs, etc.) as a means to eventually
re-introduce investment at the multilateral level
negotiations. Analysts studying investment issues in
Bilateral Investment Treaties (BITs), RTAs and
Comprehensive Economic Partnership Agreements
(CEPA) have in the recent years been warning of the
dangers involved in a broad definition of investment
while negotiating standards for entry and operation of
foreign enterprises in developing countries. Why
exactly has a broad definition of investment been
opposed in trade negotiations? It has been found that
North- South FTAs and BITs often have provisions
(typically under a Current Payments and Capital
Movements section) requiring all transfers relating to
the investment from the contracting parties to be
allowed without delay into and out of their territories.
Typically, these transfers cover contributions to capital,
profits, capital gains, dividends, interest, loan
repayments, etc. Use of capital controls as a policy
measure is allowed only as defined under the safeguard
measures in each agreement. In most investment
agreements with developed countries, safeguard
measures through restriction on capital flows are by
definition to be used only under an emergency
situations in case of serious difficulties with monetary
or exchange rate policy or balance of payments and
can only be used temporarily. Clearly, this prevents
countries from utilising different capital control
measures in order to prevent a BoP crisis. In this
context, it is interesting to note that some years back,
the IMF staff report for the 2003 Article IV consultation
for the United States had questioned whether the
investment provisions in US preferential trade
agreements (PTAs) could leave the partner countries
too vulnerable to surges in capital inflows. Apart from
the US FTAs, the EU FTAs and Japans Economic
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Indias
Foreign
Direct Investment
Trends
and
Analysis
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Location
determinants
investment:-
of
foreign
direct
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Real FDI is Increasing in India:An annual FDI inflow indicates that FDI went up from
around negligible amounts in 1991-92 to around US$9
billion in 2006-07. It then hiked to around US$22 billion
in 2007-08, rising to around US$37 billion by 2009-10.
It is now clear that FDI was related to the recessionary
conditions in the western economies. In other words,
the stock of FDI has jumped by almost US$100 billion
since 2006-07. The recent flattening of monthly FDI
flows is a sign more of recovery in the western
economies than any loss of long term interest in the
Indian economy. The monthly figure only shows that the
incremental FDI is going back to the prerecession years
rather than indicating decline of FDI into India. In fact, a
monthly inflow of US$1.1 billion is about 30 percent
higher than pre-recession years.
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Foreign Direct
Investment in
Indian
Retail Sector
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Organised
and
FDI Policy with Regard to retailing in India:It will be prudent to look into Press Note 4 of 2006
issued by DIPP and consolidated FDI Policy issued in
October 2010 which provide the sector specific
guidelines for FDI with regard to the conduct of trading
activities.
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FDI in Single Brand Retail:The Government has not categorically defined the
meaning of Single Brand anywhere neither in any of
its circulars nor any notifications.
In single-brand retail, FDI up to 51 per cent is allowed,
subject to Foreign Investment Promotion Board (FIPB)
approval and subject to the conditions mentioned in
Press Note 3 that:
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FDI in Multi Brand Retail:The government has also not defined the term Multi
Brand. FDI in Multi Brand retail implies that a retail
store with a foreign investment can sell multiple brands
under one roof.
In July 2010, Department of Industrial Policy and
Promotion (DIPP), Ministry of Commerce circulated a
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No Global Reach:
The Micro Small & Medium Enterprises (MSME) sector
has also suffered due to lack of branding and lack of
avenues to reach out to the vast world markets. While
India has continued to provide emphasis on the
development of MSME sector, the share of unorganized
sector in overall manufacturing has declined from
34.5% in 1999-2000 to 30.3% in 2007-08. This has
largely been due to the inability of this sector to access
latest technology and improve its marketing interface.
Rationale behind Allowing FDI in Retail Sector:
FDI can be a powerful catalyst to spur competition in
the retail industry, due to the current scenario of low
competition and poor productivity.
The policy of single-brand retail was adopted to allow
Indian consumers access to foreign brands. Since
Indians spend a lot of money shopping abroad, this
policy enables them to spend the same money on the
same goods in India. FDI in single-brand retailing was
permitted in 2006, up to 51 per cent of ownership.
Between then and May 2010, a total of 94 proposals
have been received. Of these, 57 proposals have been
approved. An FDI inflow of US$196.46 million under the
category of single brand retailing was received between
April 2006 and September 2010, comprising 0.16 per
cent of the total FDI inflows during the period. Retail
stocks rose by as much as 5%. Shares of Pantaloon
Retail (India) Ltd ended 4.84% up at Rs 441 on the
Bombay Stock Exchange. Shares of Shoppers Stop Ltd
rose 2.02% and Trent Ltd, 3.19%. The exchanges key
index rose 173.04 points, or 0.99%, to 17,614.48. But
this is very less as compared to what it would have
been had FDI upto 100% been allowed in India for
single brand.
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Objectives
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Objectives
To determine the Foreign Direct Investment
inflows in India.
To understand the Foreign Direct Investment
trends and its changes in India.
To understand the Foreign Direct Investment
policy in India.
To understand the government concerns for
allowing Foreign Direct Investment in India.
To understand the relationship between the
Foreign Direct Investment and the Retail
sector in India.
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Research
Methodology
Research Methodology
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Re s e a rc h
process
consists
of
series
of
a c t i o n s o r s t e p s n e c e s s a r y t o effectively
carryout the study. Knowledge of how to do research
will indicate its evaluation and enable the users of
the study to use the research results with
reasonable confidence. It enables to make
intelligent decisions concerning problems facing
us in practical life at different stages of time.
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effi ciently
as
possible
to
yield
maximum
information with minimum efforts of time and
money.
Research design stands for advance planning of the
methods to be adopted for collecting relevant data
and techniques to be used in their analysis,
keeping in view the objective of research and
availability of staff, time and money. Preparation of
Research design should be done with great care as any
error in it may upset the entire project.
Fundamental to the success of any research
project is sound research design. Research design
is purely and simply the work or plan for a study that
guides the collection and analysis of the data. A good
research design has the characteristics of analysis,
time required for research project and estimate of
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Findings and
Analysis
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Conclusion
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Conclusion
A start has been made:Walmart has a joint venture with Bharti Enterprises for
cash-and-carry (wholesale) business, which runs the
Best Price stores. It plans to have 15 stores by March
and enter new states like Andhra Pradesh, Rajasthan,
Madhya
Pradesh
and
Karnataka.
Duke, Wallmarts CEO opined that FDI in retail would
contain inflation by reducing wastage of farm output as
30% to 40% of the produce does not reach the endconsumer. In India, there is an opportunity to work all
the way up to farmers in the back-end chain. Part of
inflation is due to the fact that produces do not reach
the end-consumer, Duke said, adding, that a similar
trend was noticed when organized retail became
popular in the US.
Many of the foreign brands would come to India if FDI in
multi brand retail is permitted which can be a blessing
in disguise for the economy.
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Suggestions
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Suggestions
Thus, it is found that FDI as a strategic component of
investment is needed by India for its sustained
economic growth and development. FDI is necessary
for
creation
of
jobs,
expansion
of
existing
manufacturing industries and development of the new
one. Indeed, it is also needed in the healthcare,
education, R&D, infrastructure, retailing and in long
term financial projects. So, the study recommends the
following suggestions: The study urges the policy makers to focus more
on attracting diverse types of FDI.
The policy makers should design policies where
foreign investment can be utilised as means of
enhancing domestic production, savings, and
exports; as medium of technological learning and
technology diffusion and also in providing access to
the external market.
It is suggested that the government should push
for the speedy improvement of infrastructure
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Limitations
Limitations
At various stages, the basic objective of the study
is suffered due to inadequacy of time series data
from related agencies. There has also been a
problem of sufficient homogenous data from
different sources. For example, the time series
used for different variables, the averages are used
at certain occasions. Therefore, the trends, growth
rates etc may deviate from the true ones.
The assumption that FDI was the only cause for
development of Indian economy in the post
liberalised period is debatable. No proper methods
were available to segregate the effect of FDI to
support the validity of this assumption.
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Bibliography
Bibliography
Books: Chandan Chakraborty, Peter Nunnenkamp (2006):
Economic Reforms, FDI and its Economic Effects in
India.
Economic Survey, (1992-93): Ministry of Finance,
Government of India, New Delhi.
Goldman Sachs (2007): Global Economic Papers
No.99.
Handbook of Industrial Policy and Statistics (200708), Government of India.
Nirupam Bajpai and Jeffrey D. Sachs (2006):
Foreign Direct Investment in India: Issues and
Problems, Harvard Institute of International
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Websites: www.imf.org
www.rbi.org
www.eximbank.com
www.wto.org
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Thanks!