Foreign Direct Investment in India.

Introduction
Foreign investment can be defined as an investment of funds abroad in exchange of financial
returns. Foreign Investment can be of two types:
i. Portfolio Investment: A foreign portfolio investment is a grouping of assets such as
stocks, bonds, and cash equivalents. Portfolio investments are held directly by an
investor or managed by financial professionals. In economics, foreign portfolio
investment is the entry of funds into a country where foreigners deposit money in a
country's bank or make purchases in the country’s stock and bond markets, sometimes
for speculation.
ii. Direct Investment: Foreign direct investment (FDI) is an investment made by a firm or
individual in one country into business interests located in another country. Generally,
FDI takes place when an investor establishes foreign business operations or acquires
foreign business assets, including establishing ownership or controlling interest in a
foreign company.
Foreign direct investment (FDI) in India is a major monetary source for economic development
in India. Foreign companies invest directly in fast growing private Indian businesses to take
benefits of cheaper wages and changing business environment of India. Economic liberalization
started in India in wake of the 1991 economic crisis and since then FDI has steadily increased in
India, which subsequently generated more than one crore jobs. According to the Financial
Times, in 2015 India overtook China and the US as the top destination for the Foreign Direct
Investment.
Strategically, FDI comes in three types −
Horizontal − In case of horizontal FDI, the company does all the same activities abroad as at
home. For example, Toyota assembles motor cars in Japan and the UK.
Vertical − In vertical assignments, different types of activities are carried out abroad. The
following can be further classified into two types:
Forward vertical FDI: Here FDI brings the company nearer to a market (for example, Toyota
buying a car distributorship in America).
Backward Vertical FDI: Here, international integration goes back towards raw materials (for
example, Toyota getting majority stake in a tire manufacturer or a rubber plantation).

Conglomerate − In this type of investment, the investment is made to acquire an unrelated

business abroad. It is the most difficult form of FDI.
FDI can take the form of greenfield entry or takeover.
Greenfield entry refers to activities or assembling all the elements right from scratch as Honda
did in the UK.
Foreign takeover means acquiring an existing foreign company – as Tata’s acquisition of Jaguar
Land Rover. Foreign takeover is often called mergers and acquisitions (M&A).

Sector-vise FDI limits:

i. Agriculture and animal husbandry: 100%

ii. Plantation Sector: 100%

iii. Mining: 100%

iv. Petroleum and Natural Gas: 49%

v. Print Media: 26%

vi. Private Security Agencies: 74%

vii. Telecom: 100%

viii. E-Commerce: 100%

ix. Multi Brand Retail: 51%

x. Banking: Public (20%); Private (74%)

FDI is restricted in:

i. Real Estate.
ii. Tobacco (and related products) manufacturing
iii. Casino’s and Gambling
iv. Chit Fund and Lottery
v. Nidhi Companies
Aims and Objectives (Of topic selection)
i. To analyze the FDI inflows in India, with special reference to sector wise inflows.
ii. To identify the sector attracting maximum FDI inflow.
iii. To understand what except for finances does inflow of FDI bring.
iv. Its effects on every sectors of the market and on all sizes.
v. To understand not only the advantages but also the disadvantages of the inflow as well
as outflow of FDI.
Need of FDI
SUSTAINING HIGH LEVEL OF INVESTMENT:- As India is a developing country, it need certain
amount of saving to invest for its development This gap between investment and saving is filled
by foreign capital.
TECHNOLOGICAL GAP:- India has lower level of technology as compare to developed nations
which is very necessary for industrial and other development so it need technology transfer
which comes with FDI when it assumes the form of private foreign investment.
EXPLOITATION OF NATURAL RESOURCES:- India is full with natural resource but it has no
required technical skill and expertise to exploit it so India need foreign capital to undertake the
exploitation of its mineral wealth.
DEVLOPMENT OF ECONOMIC INFRASTRUCTURE:- Domestic capital of developing countries like
India is too low to build up its economic infrastructure so it need some foreign capital to
develop its economic infrastructure.
Importance of FDI
An increase in FDI may be associated with improved economic growth due to the influx of
capital and increased tax revenues for the host country. Host countries often try to channel FDI
investment into new infrastructure and other projects to boost development. Greater
competition from new companies can lead to productivity gains and greater efficiency in the
host country and it has been suggested that the application of a foreign entity’s policies to a
domestic subsidiary may improve corporate governance standards. Furthermore, foreign
investment can result in the transfer of soft skills through training and job creation, the
availability of more advanced technology for the domestic market and access to research and
development resources. The local population may benefit from the employment opportunities
created by new businesses.
Methodology
Types of Data collection:
1. Primary Data: A primary data source is an original data source, that is, one in which the
data are collected firsthand by the researcher for a specific research purpose or project.
Primary data can be collected in a number of ways. Primary data collection is quite
expensive and time consuming compared to secondary data collection.
2. Secondary Data: Secondary data refers to data which is collected by someone who is
someone other than the user. Common sources of secondary data for social science
include censuses, information collected by government departments, organizational
records and data that was originally collected for other research purposes.
One of the most noticeable advantages of using secondary data analysis is its cost effectiveness.
Because someone else has already collected the data, the researcher does not need to invest
any money, time, or effort into the data collection stages of his or her study. While sometimes
secondary data must be purchased by a researcher looking to use it to inform a study they’re
working on, these costs are almost always lower than what the expenses would be if the
researcher were to create the same data set from scratch. Also, the data from a secondary data
set is typically already cleaned and stored in an electronic format, so the researcher can spend
his or her time rolling up their sleeves and analyzing the data instead of spending time having
to prepare the data for analysis.
 Presentation
To analyze the FDI inflows in India, with special reference to sector wise inflows.
Before the introduction of economic reforms in the 1990's, FDI inflows were concentrated in
the manufacturing activities in India, which was due to the import substituting industrialization
programs that encouraged the tariff-jumping investments to capture the protected domestic
market. However, the trends clearly changed towards an increase in FDI in the territory sector
that encompassed mainly the services'.
The sector-wise analysis of FDI inflow in India shows that a maximum FDI inflow has taken place
in the services sector. The services sector has topped the list with US $37,235 million (12.83 per
cent) followed by Construction sector with US $22,080 million (7.61 million),
Telecommunication sector with US $12,856 million (4.43 per cent), Computer software and
Hardware with US $11,691 million (4.03 per cent), Drugs and Pharmaceuticals with US $10,318
million (3.56 per cent), Chemical sector with US $8,881 million (3.05 per cent), Automobile
industry with US $8,295 million (2.86 per cent), Power sector with US $7,834 million (2.71 per
cent), Metallurgical industry with US $7,507 million (2.59 per cent) and Petroleum sector with
US $5,382 million (1.86 per cent). . Inflows of FDI in India have been uniform across all services
sectors. The top ten sectors have collectively accounted to 45.52 per cent (US $132,079 million)
of total FDI inflows into India during the period of study from 2000-01 to 2012-13. In India there
are more than 63 sectors that attract FDI inflows during the period. Other than top ten sectors
are Hotel and Tourism sector, Food processing Industry, Agricultural sector, Trading,
Information and Broadcasting, Electrical Equipment’s, Cement and Gypsum products, Non
Conventional Energy, Education sector, Gold and silver ornament sector and Paper and Pulp
sector. The other than top ten sectors have attracted 54.47 per cent of total FDI inflows into
India.
Table of Sector wise FDI from 2012-13 to 2016-17 (Source: RBI Annual Report)

FOREIGN DIRECT INVESTMENT FLOWS TO INDIA: INDUSTRY-WISE

(US $ million)
Source/Industry 2012-13 2013-14 2014-15 2015-16 2016-17 P
1 2 3 4 5 6
Total FDI 18,286 16,054 24,748 36,068 36,317
Sector-wise Inflows
Manufacturing 6,528 6,381 9,613 8,439 11,972
Communication Services 92 1,256 1,075 2,638 5,876
Financial Services 2,760 1,026 3,075 3,547 3,732
Retail & Wholesale Trade 551 1,139 2,551 3,998 2,771
Business Services 643 521 680 3,031 2,684
Computer Services 247 934 2,154 4,319 1,937
Miscellaneous Services 552 941 586 1,022 1,816
Electricity and other Energy Generation, Distribution & Transmission 1,653 1,284 1,284 1,364 1,722
Construction 1,319 1,276 1,640 4,141 1,564
Transport 213 311 482 1,363 891
Restaurants and Hotels 3,129 361 686 889 430
Education, Research & Development 150 107 131 394 205
Mining 69 24 129 596 141
Real Estate Activities 197 201 202 112 105
Trading 140 0 228 0 0
Others 43 292 232 215 470
P: Provisional.
Note: Includes FDI through SIA/FIPB and RBI routes only.
To identify the sector attracting maximum FDI inflow.
The services sector is one of the largest and fastest-growing sectors in the
global market. Over the past two decades, the services sector has expanded
rapidly and has come to play an increasingly important role in national
economy and in the international economy. Services accounts for large shares
of production and employment in most economies around the world. The share
of services in world trade and investment too has been increasing. The structure
of FDI worldwide has also shifted towards services. ln the early 1990s’ services
sector accounted for only one quarter of the world FDI inflows. In the year
1990 the share was less than one half and by 2013, it has risen to about 70 per
cent. Its contribution to the Indian economy is particularly significant, with
regard to employment potential and impact on national income. Services sector
in India contributes to about 60 per cent of the country's Gross Domestic
Product (GDP), 35 per cent of employment, a quarter of the total trade.
Keeping in mind the rising services sector, India opens doors to foreign
companies in the export-oriented services which could increase the demand of
unskilled workers and low skilled services and also increase the wage level in
these services. As many services are neither tradable nor storable, but must be
produced where they are consumed FDI is the dominant means of delivering
them to foreign markets.
FDI inflows to service sector have been phenomenal in the past few years. Since the
onset of the liberalization of the Indian economy in the year 1990, the country has
experienced a huge increase in the inflow of FDI. The service sector in India has
tremendous growth potential and as such it has attracted huge FDI inflows.
To understand what except for finances does inflow of FDI bring.

1. It provides local economic benefits in multiple locations.

The companies or individuals that participate in FDI can stimulate community economic
growth on the local level for their headquarters or home. Profits are often reinvested
into workers or increasing organizational opportunities, which can create new jobs,
which then creates new FDI opportunities. The investments do the same for the home
market of the foreign organization as well.

2. It makes international trade easier to complete.

Many countries have import tariffs that must be paid for goods and services.
Import/Export businesses can struggle to keep products at affordable prices for
customers because of these taxes. Through FDI, it becomes possible to limit or eliminate
these tariffs since a minimum stake in a foreign organization occurs. That gives the local
business more control over the market while maintaining price competition.

3. It improves human resources.

Businesses are successful because humans have expertise. In the under-developed and
developing world, human skills are limited to basic labor, agricultural work, and other
entry-level skills. Foreign direct investment creates educational opportunities so that
people can improve their personal skill base. With better skills, higher wages can be
earned. Greater productivity levels are achieved. The company benefits, as does the
individual, and that trickles down to each community.

4. It provides a foreign company with needed experience.

Investors bring more than money to an FDI relationship. They can also bring their
personal experiences within a specific industry. For the foreign company, such an
investment can create an immediate surge in productivity. Investments can also provide
better facilities for the foreign organization, better equipment assets, and improved
vendor access if contact access from the investor is permitted in the relationship.

5. It creates new opportunities for workers.

Workers who are employed by the investing company can travel overseas and
experience new cultures and ideas. That can make them more productive at home.
Foreign workers have better access to the best practices that have been developed,
which helps them to create new opportunities as well. This process helps both parties
grow faster than if they were on their own.
Its effects on every sectors of the market and on all sizes.

The impact of FDI on employment in India is phenomenal. Beyond reasonable doubt,

the unconstrained flow of FDI has accelerated the growth dynamics of the nation
generating enormous employment especially in the tertiary sector. The agricultural
sector has not been significantly transformed by the FDI inflow. However, the long-run
implications are uncertain. Is the quick generation of jobs in BPO sectors snatching away
the skills of the Indian youth? Is the less dominance of FDI on agricultural sector is not
so harmful for the sector’s socio-economic benefit in the future? These questions need
judicious justifications both from short-run as well as from long run perspectives.

The involvement of primary sector in output generation in India has been the highest
and not much has been done to transform the agricultural sector via FDI. There has
been no significant impact of FDI on the sector.

The secondary or the industrial sector received a massive thrust from FDI. The
employment generation has been also brisk. In the first decade of trade liberalization
i.e. from 1991 to 1999, the industries that received maximum FDI inflows in secondary
sector were automobile, air and sea transport, railways and ports. The automobile
industry by far has received the maximum boost from FDI giving employment to
approximately 25 million people directly and indirectly in the year 2016 rising from only
1.8 million people in the year 1991.

The ‘software revolution’ or ‘Information Technology (IT) revolution’ in India can be

attributed majorly to the FDI inflow in India. Before 2000-01, software business and
communication services fell under the category of miscellaneous services. The software
industry in India in the current scenario is the vehicle of enormous employment. The
BPO (Business Process Outsourcing) industry, an integral part of IT/ ITeS sector provided
mass scale employment to the Indian youth. The Indian youth got a fresh lease of life
through ‘BPO boom’ as bagging a job with a handsome salary after passing out of
college has become a sought after trend.
To understand not only the advantages but also the disadvantages of the inflow as well as
outflow of FDI.

Advantages of FDI in India:

1. Promotion of investment in key areas.
2. New technologies.
3. Increase in Capital inflow.
4. Increase in Exports.
5. Promotion of Employment opportunities.
6. Promotion of financial services.
7. Exchange rate stability.
8. Development of backward areas.
9. Utilization of natural resources.
10. Change in the lifestyle of people.
Disadvantages of FDI in India:
Disappearance of cottage and small scale industries: Some of the products produced in cottage
and village industries and also under small scale industries had to disappear from the market
due to the onslaught of the products coming from FDIs. Example: Multinational soft drinks.
Contribution to the pollution: Foreign direct investments contribute to pollution problem in the
country. The developed countries have shifted some of their pollution-borne industries to the
developing countries. The major victim is automobile industries. Most of these are shifted to
developing countries and thus they have escaped pollution.
Cultural erosion: In all the countries where the FDls have made an inroad, there has been a
cultural shock experienced by the local people, adopting a different culture alien to the country.
The domestic culture either disappears or suffers a setback. This is felt in the family structure,
social setup and erosion in the value system of the people.
Political corruption: In order to capture the foreign market, the FDIs have gone to the extent of
even corrupting the high officials or the political bosses in various countries. Lockheed scandal
of Japan is an example.
Inflation in the Economy: The presence of FDIs has also contributed to the inflation in the
country. They spend lot of money on advertisement and on consumer promotion. This is done
at the cost of the consumers and the price is increased.
Trade Deficit: The introduction of TRIPs (Trade Related Intellectual Property Rights) and TRIMs
(Trade Related Investment Measures) has restricted the production of certain products in other
countries. For example, India cannot manufacture certain medicines without paying royalties to
the country.
World Bank and lMF Aid: Some of the developing countries have criticized the World Bank and
IMF (International Monetary Fund) in extending assistance. There is a discrimination shown by
these international agencies. Only those countries which accommodate FDIs will receive more
assistance from these international institutions.
Data Analysis
The inflows to the Telecommunication sector doesn't present a cozy picture as it fell
drastically in the year 2015-16 from USS 2895 to USS 1324 million. The silver lining,
however, comes by viewing the influx of inflows lined up for the next year. This
happened after the huge investment made by Vodafone. Now this industry is moving
towards 5G. The major boost to this industry has also been provided by the
government's digital India move also. The telecom industry is considered to be one of
the swiftly growing industries in India.

The Indian pharmaceutical industry has also grown albeit, from different contributing
factors as incentives provided by the government and investment by foreign firms in the
industry. Skilled labour, huge population and a sturdy production base in the
pharmaceutical industry1161 help in enticing FDI into India. A weak patent regime, price
control and rigid labour laws are identified as the main factors that forced a majority of
the global pharmaceutical firms to outsource a large part of their production and not
invest much in R&D in India. The government on its part has gone all ballistic with the
liberalization of policies for the industry so that more foreign capital could be attracted.

Now with the government allowing 100% in food processing, the inflows to this sector
are likely to increase further. The increased FDI inflows helped the chemical industry
grow, develop and expand in India which in turn enhanced the product quality produced
by the industry.

The power sector in India has grown significantly and now assumes the utmost
significance in infrastructure. Owing to its large market size and returns on invested
capital, power sector of India has enormous investment potential, also as it is the
elementary requirement for various sectors like residential, commercial, industrial,
agricultural, and institutional. A look at India's development and with it the improved
lifestyle makes a case for an escalation of demand for energy in coming times. The
sectors based on renewable sources of energy have witnessed immense growth in the
past few years.

The massive upsurge in the hotel industry has been witnessed with respect to
occupancy ratios and average room rates in India leading to flourishing growth in the
tourism industry. Tourism presents itself as the industry to look out for. Huge
investment has been made into the industry by large scales global chains like the Hilton,
Accor, Marriott International, Cabana Hotels, Premier Travel Inn (PTI) and
InterContinental Hotels. In comparison to any other sector of the economy, the sector is
capable of generating more jobs per million rupees of investment and providing
employment to a wide range of job seekers, even in the far-flung parts of the country.
Varying trend was observed after analyzing the sector-wise inflow of FDI to India
indicating impetus to quality maintenance, growth and development of Indian
Industries. Besides operational efficiency, managerial efficiency, employment
opportunities and infrastructure development, technology transfer has been viewed as
one of the significant change.

According to United Nations Conference on Trade and Development (UNCTAD) World

Investment Report 2015, India ranked ninth among the top 10 countries receiving
highest FDI in 2014 in comparison to 151st position the previous year. The report states,
amongst others, FDI inflows to India would manifest a rising trend due to economic
recovery. Among 140 countries, India ranks 55 in the World Economic Forum's Global
Competitiveness Index that ranks countries on the basis of parameters such as
institutions, macroeconomic environment, education, market size and infrastructure
among others. To fund infrastructure growth covering sectors such as highways, ports
and airways, India would require efforts to the tune of US$ 1 trillion in the 12th Five-
Year Plan (2012-17).
Conclusion

FDI provides India with stability in inflow of funds, access to international markets,
export growth, transfer of technology and skills and improves balance of payments.
More FDI does not necessarily guarantee high growth rates. The relative emphasis must
shift from a broad (scatter shot) approach to one of targeting specific companies in
specific sectors. Socially responsible FDI should be encouraged through the
development of national and international investment guidelines and regulations. FDI is
beneficial to India’s growth and India’s growth is beneficial for FDI. India needs to create
a talent pool suitable for the investors and it needs to develop infrastructure that will
encourage the investors. These steps taken by India to bring FDI will also help India to
grow on its own. FDI if monitored and nurtured in such a way that it will bring more
skills and resources to India will be mutually beneficial.
Personal Opinion.
At the first sight, we can see that benefits are more in numbers, but I think detriments
are more serious.
As Indian government’s condition, companies will buy 30% from small industries of
India, but what about the other 70%? Walmart and all these big giants import their
majority goods from China. If we consider Walmart as a country then Walmart will be
the one of the top-10 countries which is importing goods from china. These giants will
dump goods from China. We can’t stop them for doing this.
Our PM is saying that allowing this major FDI will bring new technology to India and it
will bring proper refrigeration technology so that wastage of food/grains can be
stopped. But don’t you think India itself is capable for that? Why can’t our government
build storages for refrigeration of food? Is it ok to open our country’s gates for foreign
giants just because of this reason? Why we are not passing ‘Food Security Bill’, which is
still in the parliament? If government is not capable of building a supply chain and
infrastructure, we can open this field for Indian entrepreneurs.
Government is saying the cities which have a population of more than 1 million are open
for these foreign companies. This is totally illogical. I bet, in the next 10 years they will
open their stores in small cities, after opening their stores in metros first and so on.
Today, when the American President is requesting their citizens to buy goods from small
retailers, we are inviting them to our country. These companies have ruined their own
country and we are expecting that they will save our farmers and food. We are
expecting that they will give new technology and will invest in India to help our poor
fellas. Argument that only foreign companies can create the supply chain for farm
produce is totally illogical. International retail players have no role in building roads or
generating power. They are only required to create storage facilities and cold chains.
This could be done by government of India also. I think there is no need to allow 51%
FDI in India at this point. No need to go so fast.
Bibliography
Annexures