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 STUDENT NAME Reg. No

Date: 15 March 2012 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
1.1 Types of FDI 1
1.2 Methods of FDI 3

Chapter-2
2.0 History of FDI in India 5
2.1 Investment routes for FDI in India 8
2.2 FDI policy in India 9
2.3 FDI promotional initiatives 17

Chapter-3
3.0 Statement of the problem 19
3.1 Objectives of the research 19
3.2 Methodology of data collection 19
3.3 Hypothesis 20
3.4 Scope of the study 20
3.5 Limitations of the study 20

Chapter-4
4.0 FDI inflows in the world 21
4.1 FDI inflows analysis in India year wise 23
4.2 FDI inflows analysis country wise in India 25
4.3 FDI inflows sector wise in India 30
4.5 Trends and patterns of FDI in different sectors 34
4.6 State wise FDI inflows analysis in India 41
4.7 Route wise FDI inflows analysis in India 44
4.8 FDI and economic development 46
4.9 Comparison of FDI between India and China 49

Chapter-5
5.0 Findings and conclusions 56

Chapter-6
6.0 Recommendations and suggestions 58

Bibliography 60
 LIST OF TABLES:-
Table No. Title Page No.

Table 1.1: FDI policy in permitted sectors in India 10

Table 4.1: FDI inflows year wise in India 23
Table 4.2: FDI inflows country wise in India 25
Table 4.3: FDI inflows sector wise in India 30
Table 4.4: Ranking of sector wise FDI inflows from April 2000-Dec2011 31
Table 4.6 State wise FDI inflows in India from April 2008-March 2011 41
Table 4.7: Route wise FDI inflows in India 2000-11 44
Table 4.8: FDI and GDP (fc) from 2006-11 46
Table 4.9: Calculation of Karl Pearson’s co-efficient 47
Table 4.10: FDI inflow in China and India 51
Table 4.11: Comparison of facts between India and China 52

LIST OF CHARTS:-

Chart No. Title Page No.

Chart 4.1 FDI inflows in the world 21

Chart 4.2 % of total FDI inflows in different sectors 31
Chart 4.3 Trends and patterns of FDI in service sector 34
Chart 4.4 Trends and patterns of FDI in computer sector 35
Chart 4.5 Trends and patterns of FDI in telecommunications 36
Chart 4.6 Trends and patterns of FDI in housing and real estate 38
Chart 4.7 Trends and patterns of FDI in construction activities 39
Chart 4.8: FDI trends during 2006-11 47
Chart 4.9 GDP trends during 2006-11 48
Chart 4.10 FDI confidence index from 2007-12 51
Chart 4.11 Trend of FDI in India and China 52
 EXECUTIVE SUMMARY

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. Cross-
border 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 products-
the 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) 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.
b) 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
c) 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.
4 Petroleum & Natural Gas
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.
5 Manufacturing
Manufacture of items reserved for production in Micro and
Small Enterprises (MSEs)
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.

6 Defence
Defence Industry subject to 26% Government
Industrial license under the
Industries (Development &
Regulation) Act 1951
7 Service Sector
a) 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 49% (FDI, Government
such guidelines/terms and NRI & PIO
conditions as specified from investments
time to time by Ministry of and portfolio
Information and investment)
Broadcasting 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
 (3) Up-linking a News & 26% (FDI & Government
Current Affairs TV Channel FII)
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
b) Print Media
Publishing of Newspaper and 26% (FDI and Government
periodicals dealing with news investment by
and current affairs NRIs/PIOs/FII)
Publication of Indian editions 26% (FDI and Government
of foreign magazines dealing investment by
with news and current affairs NRIs/PIOs/FII)
Publishing/printing of 100% Government
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 100% Government
edition of foreign newspapers
c) Civil Aviation
Airports
(a) Greenfield projects 100% Automatic
(b) Existing projects 100% Automatic up
to 74%
Government
route beyond
74%
d) Air Transport Services
 1) Scheduled Air Transport 49% FDI
Service/ Domestic Scheduled (100% for
Passenger Airline NRIs) Automatic
(2) Non-Scheduled Air 74% FDI Automatic up
Transport Service (100% for to 49%
NRIs) Government
route beyond
49% and up
to 74%
(3) Helicopter 100% Automatic
services/seaplane services
requiring DGCA approval
e) Other services under Civil Aviation sector
(1) Ground Handling 74% FDI Automatic up
Services subject to sectoral (100% for to 49%
regulations and security NRIs) Government
clearance route beyond
49% and up
to 74%
(2) Maintenance and Repair 100% Automatic
organizations; flying training
institutes; and technical
training institutions
Courier services for carrying 100% Government
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.
 Construction Development: Townships, Housing, Built-up
f) 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
g) existing
h) Satellites – Establishment and operation
Satellites – Establishment 74% Government
and operation, subject to the
sectoral guidelines of
Department of Space/ISRO
i) Private Security Agencies 49% Government
j) Telecom Services 74% Automatic up
to 49%
Government
route beyond
49% and up
to 74%
k) Trading
Cash & Carry Wholesale 100% Automatic
Trading/ Wholesale Trading
(including sourcing from
MSEs)
l) E-commerce activities 100% Automatic
 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%
m) 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 Government
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).
n) Banking –Private sector
Banking –Private sector 74% including Automatic up
investment by to 49%
FIIs Government
route beyond
49% and up
to 74%
Banking- Public Sector
 Banking- Public Sector 20% (FDI and Government
subject to Banking Portfolio
Companies (Acquisition & Investment)
Transfer of Undertakings)
Acts 1970/80. This ceiling
(20%) is also applicable to
the State Bank of India and
its associate Banks.
0) Policy for FDI in 49% (FDI & Government
Commodity Exchange FII)
[Investment by
Registered FII
under Portfolio
Investment
Scheme (PIS)
will be limited
to 23% and
Investment
under FDI
Scheme
limited to
26%)
p) 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 ]
q) Insurance 26% Automatic
Non-Banking Finance Companies (NBFC)
r) Foreign investment in NBFC 100% Automatic
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

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, event-
driven 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 1991-
March 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 ‘10-
March’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
2007- Cumulati
08 ve
(Apri 2008- 2009- 2010- 2011- Inflows
l- 09(Apr 10(Apr 11(Apr 12(Apr (April % to
Marc il- il- il- il- '00 Total
h) March March March August August Inflo
Rank Country ) ) ) ) '11) ws
1 Mauritius 4448 50794 49633 31855 26634 269395 41
3
2 Singapore 1231 15727 11295 7730 13350 66407 10
9
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 1133 3017 1569 376 8968 1
Total FDI 9866 12302 12337
Inflows 4 5 8 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 $45–50 billion. A large
share of that total is destined for infrastructure, including a 4,000 MW power plant,
3 ports, and 6 airports, along with additional connections to existing ports. Private
investment is expected to fund 10-12 new industrial zones, upgrade 5–6 existing
airports, and set up 10 logistics parks. The Indian government expects that by
2020, the industrial corridor will contribute to employment growth of 15 percent in
the region, 28 percent growth in industrial output, and 38 percent growth in
exports.
 4.3 Analysis of sector wise inflows of FDI in India
Table 4.3
Sector 2007-08 2008-09 2009-10 2010-11 2011-12 Cumulativ % age
(April- (April- (April- ( April- (April- e to total
March) March) March) March) Dec.) Inflows Inflows
(April 2000 (In
- terms
Dec. 11) of US$)
SERVICES SECTOR 26,589 28,411 19,945 15,053 21,431 142,539 20%
(financial & non-financial) (6,615 (6,116) (4,176) (3,296) (4,575) (31,710)
COMPUTER SOFTWARE & 5,623 7,329 4,127 3,551 2,626 48,940 7%
HARDWARE (1,410) (1,677) (872) (780 (564) (10,973
TELECOMMUNICATIONS 5,103 11,727 12,270 7,542 8,969 57,035 8%
(radio paging, cellular mobile, (1,261) (2,558) (2,539) (1,665) (1,989) (12,544)
basic telephone services
HOUSING & REAL ESTATE 8,749 12,621 14,027 5,600 2,544 48,819 7%
(2,179) (2,801 (2,935) (1,227) (551) (10,933
CONSTRUCTION ACTIVITIES 6,989 8,792 13,469 4,979 7,635 46,216 6%
(including roads & highways) (1,743) (2,028) (2,852) (1,103) (1,602) (10,239
POWER 3,875 4,382 6,138 5,796 6,639 32,176 4%
(967) (985) (1,272) (1,272) (1,447) (7,094
AUTOMOBILE INDUSTRY 2,697 5,212 5,893 5,864 2,785 29,224 4%
(675) (1,152) (1,236) (1,299) (610 (6,444
METALLURGICAL 4,686 4,157 1,999 5,023 6,881 25,469 4%
INDUSTRIES (1,177) (961) (420) (1,098) (1,495) (5,750
PETROLEUM & NATURAL GAS 5,729 1,931 1,297 2,543 920 14,581 2%
(1,427) (412) (266) (556) (196) (3,333)
DRUGS & NA NA 1,006 961 14,405 42,668 4%
PHARMACEUTICALS (213) (209) (3,193) (9,155)

Ranking of Sector wise FDI inflows in India since April 2000- Dec 2011
Table 4.4

Industrial Sector Rank

Service Sector 1
Telecommunication 2
Computer Hardware & Software 3
Housing and Real Estate 4
Construction Activities 5
Drugs and Pharmaceuticals 6
Automobile Industry 7
Metallurgical Industry 8
Power 9
Petroleum and Natural Gas 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 well-
developed 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 2009-
10. 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 2009-
10. 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 Table 4.6
Amou RBI’s - State covered 2008- 2009- 2010- Cumulati %ag
nt Regional 09 10 11 ve e to
Rupee Office2 (Apr. - (Apr.- ( Apr.- Inflows total
s in Mar.) Mar.) March (April ’00 Infl
Crores ) – ows
(US$ March (in
in ‘11) term
millio s
n) S. of
No. US$
)
1 MUMBAI MAHARAS 57,066 39,409 27,669 201,471 35
HTRA, (12,431 (8,249) (6,097) (45,068)
DADRA & )
NAGAR
HAVELI,
DAMAN &
DIU
2 NEW DELHI, 7,943 46,197 12,184 113,689 19
DELHI PART OF UP (1,868) (9,695) (2,677) (25,088)
AND
HARYANA
3 BANGAL KARNATAK 9,143 4,852 6,133 36,657 6
ORE A (2,026) (1,029) (1,332) (8,229)
4 AHMEDA GUJARAT 12,747 3,876 3,294 31,693 6
BAD (2,826) (807) (724) (7,156)
5 CHENNAI TAMIL 7,757 3,653 6,115 30,848 5
NADU, (1,724) (774) (1,352) (6,851)
PONDICHE
RRY
6 HYDERA ANDHRA 5,406 5,710 5,753 26,562 5
BAD PRADESH (1,238) (1,203) (1,262) (5,961)
7 KOLKATA WEST 2,089 531 426 6,368 1
BENGAL, (489) (115) (95) (1,488)
SIKKIM,
ANDAMAN
& NICOBAR
ISLANDS
8 CHANDIG CHANDIGA - 1,038 1,892 4,685 1
ARH` RH, (224) (416) (1,024)
PUNJAB,
HARYANA,
HIMACHAL
PRADESH
9 PANAJI GOA 134 808 1,376 3,326 1
(29) (169) (302) (725)
10 BHOPAL MADHYA 209 255 2,093 3,009 0.5
PRADESH, (44) (54) (451) (654)
CHATTISG
ARH
11 JAIPUR RAJASTHA 1,656 149 230 2,450 0.4
N (343) (31) (51) (520)
12 KOCHI KERALA, 355 606 167 1,658 0.3
LAKSHAD (82) (128) (37) (368)
WEEP
13 BHUBAN ORISSA 42 702 68 1,207 0.2
ESHWAR (9) (149) (15) (261)
14 KANPUR UTTAR - 227 514 812 0.1
PRADESH, (48) (112) (177)
UTTRANCH
AL
15 GUWAHA ASSAM, 176 51 37 316 0.1
TI ARUNACHA (42) (11) (8) (72)
L
PRADESH,
MANIPUR,
MEGHALAY
A,
MIZORAM,
NAGALAND
, TRIPURA
16 PATNA BIHAR, - - 25 27 0
JHARKHAN (5) (6)
D
17 REGION NOT 18,300 15,056 20,543 115,943 20
INDICATED3 (4,181) (3,148) (4,491) (26,070)
Sub. Total 123,02 123,12 88,520 580,722 100
 5 0 (19,427 (129,716)
(27,331 (25,834 )
) )
18 RBI’S-NRI SCHEMES 0 0 0 533 -
(from 2000 to 2002) (121)
GRAND TOTAL 4 123,025 123,120 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) Invest
ial ment
Year by
(April- FII's
Equity Re- Othe FDI
March fund
inves r Flo
) (net)
ted capit ws
earni al+ into
ngs + Indi
a
 FIPB Equity Tota %age
route/RBI's capital of l grow
Automatic unincorp FDI th
Route/Acq orated Flo over
uisition bodies# ws previ
Route ous
year(
in
US$
terms
)
Financi
al Year
(2000-
2011)
1 2000- 2339 61 1350 279 4029 1847
01
2 2001- 3904 191 1645 390 6130 (+) 1505
02 52%
3 2002- 2574 190 1833 438 5035 (-) 377
03 18%
4 2003- 2197 32 1460 633 4322 (-) 10918
04 14%
5 2004- 3250 528 1904 369 6051 (+) 8686
05 40%
6 2005- 5540 435 2760 226 8961 (+) 9926
06 48%
7 2006- 15585 896 5828 517 2282 (+) 3225
07 6 146
%
8 2007- 24573 2291 7679 292 3483 (+) 20328
08 5 53%
9 2008- 27329 702 9030 777 3783 (+) ) (-)
09 8 9% 15017
10 2009- 25609 1504 8669 194 3776 (-) 29048
10 (P) 5 3 0.2%
(+)(+
+)
11 2010- 19430 657 6703 234 2702 (-) 29422
 11 (P) 4 28%
(+)
Cumul 132330 7523 4886 610 1948 100265
ative 1 0 14
Total
(from
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
2010-11Table88,520 7306990
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 7306990 6,46,81,47,54,800 7,83,57,90,400 5,33,92,10,28,60,100

Total 4,89,697 27255969 27,26,55,41,61,464 51,03,95,51,689 15,55,18,68,20,68,56

sum x * sum
y/N 13347166251393 2224527708565.50
sum x^2/N 39967191968
sum y^2/N 123814641021493
Numerator 502026452899
Denominator 351038547077197000000000 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 China India
2002 49.31 5.62
2003 47.07 4.32
2004 54.93 5.77
2005 117.20 7.60
2006 124.08 20.33
2007 160.05 25.48
2008 175.14 43.40
2009 114.21 35.59
2010 185.08 24.15
All fig. in US billion $

Chart 4.11
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 mid-
1980s. 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 websites-
www.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