EXECUTIVE SUMMARY

Foreign Direct investment plays a very important role in the development of the nation.
Sometimes domestically available capital is inadequate for the purpose of overall
development of the country. Foreign capital is seen as a way of filling in gaps between
domestic savings and investment. India can attract much larger foreign investments than
it has done in the past. The present study has focused on the trends of F.D.I Flow in India
during April 2000 to December 2017

The study also highlights country wise approvals of F.D.I inflows to India and the F.D.I
inflows in different sector for the period April 2000 to December 2017. The study based
on Secondary data which have been collected through reports of the Ministry of
Commerce and Industry, Department of Industrial Promotion and Policy, Government of
India, Reserve Bank of India, and World Investment Report. Foreign direct investment
(F.D.I) influences the host country’s economic growth through the transfer of
technologies and know-how, formation of human resources, integration in global
markets, increase of competition, and firms’ development and reorganization.
Empirically, a variety of studies considers that F.D.I generates economic growth in the
host country. However, there is also evidence that F.D.I is a source of negative effects.
Given this ambiguity of results, the present paper makes a review of the existing
theoretical and empirical literature on the subject, intending to shed light on the main
explanations for the divergence of results in different studies.

The main idea that stands out in this review is that the effects of F.D.I on economic
growth are dependent on the existing or subsequently developed internal conditions of the
host country (economic, political, social, cultural or other). Thus, the host countries
authorities have a key role in creating the conditions that allow for the leverage of the
positive effects or for the reduction of the negative effects of F.D.I on the host country’s
economic growth.

The study concludes that Mauritius emerged as the most dominant source of F.D.I
contributing. It is because the India has Double Taxation Avoidance Agreement (DTAA)
with Mauritius and most of the foreign countries like to invest in service sector.
INTRODUCTION

Foreign Direct Investment (F.D.I) is a type of investment in to an enterprise in a country

by other enterprises located in another country by buying a company in the target country
or by expanding operations of an existing business in that country. In the era of
globalization F.D.I takes vital part in the development of both developing and developed
countries.

F.D.I has been associated with improved economic growth and development in the host
countries which has led to the emergence of global competition to attract F.D.I. F.D.I
offers number of benefits like overture of new technology, innovative products, and
extension of new markets, opportunities of employment and introduction of new skills
etc., which reflect in the growth of income of any nation. Foreign direct investment is one
of the measures of growing economic globalization. Investment has always been an issue
for the developing economies such as India. The world has been globalizing and all the
countries are liberalizing their policies for welcoming investment from countries which
are abundant in capital resources. The countries which are developed are focusing on new
markets where there is availability of abundant labors, scope for products, and high
profits are achieved. Therefore, Foreign Direct Investment (F.D.I) has become a battle
ground in the emerging markets.

Foreign investment plays a significant role in development of any economy as like India.
Many countries provide many incentives for attracting the foreign direct investment
(F.D.I). Need of F.D.I depends on saving and investment rate in any country. Foreign
Direct investment acts as a bridge to fulfill the gap between investment and saving. In the
process of economic development foreign capital helps to cover the domestic saving
constraint and provide access to the superior technology that promote efficiency and
productivity of the existing production capacity and generate new production
opportunity.

India’s recorded GDP growth throughout the last decade has lifted millions out of poverty
& made the country a favored destination for foreign direct investment. A recent
UNCTAD survey projected India as the second most important F.D.I destination after
China for transnational corporations during 2010-2015. Services, telecommunication,
construction activities, computer software & hardware and automobile are major sectors
which attracted higher inflows of F.D.I in India. Countries like Mauritius, Singapore, US
& UK were among the leading sources of F.D.I in India.

Consistent economic growth, de-regulation, liberal investment rules, and operational

flexibility are all the factors that help increase the inflow of foreign direct investment or
F.D.I.F.D.I or Foreign Direct Investment is any form of investment that earns interest in
enterprises which function outside of the domestic territory of the investor. F.D.Is
requires a business relationship between a parent company and its foreign subsidiary.
Foreign direct business relationships give rise to multinational corporations. For an
investment to be regarded as an F.D.I, the parent firm needs to have at least 10% of the
ordinary shares of its foreign affiliates. The investing firm may also qualify for an F.D.I if
it owns voting power in a business enterprise operating in a foreign country.

India now with consistent growth performance and abundant high-skilled affordable
manpower provides enormous opportunity for investment both domestic and foreign.
Foreign direct investment (F.D.I) causes a flow of money into the economies which
stimulates economic activity, increases employment and induces the long run aggregate
supply and brings in best practices. The F.D.I policy was liberalized progressively
through review of the policy on an ongoing basis and allowing F.D.I in more industries
under the automatic route.

Market size

According to Department of Industrial Policy and Promotion (DIPP), the total FDI
investments in India during April-December 2017 stood at US$ 35.94 billion, indicating
that government's effort to improve ease of doing business and relaxation in FDI norms is
yielding results.

Data for April-December 2017 indicates that the telecommunications sector attracted the
highest FDI equity inflow of US$ 6.14 billion, followed by computer software and
hardware – US$ 5.16 billion and services – US$ 4.62 billion. Most recently, the total FDI
equity inflows for the month of December 2017 touched US$ 4.82 billion.

During April-December 2017, India received the maximum FDI equity inflows from
Mauritius (US$ 13.35 billion), followed by Singapore (US$ 9.21 billion), Netherlands
(US$ 2.38 billion), USA (US$ 1.74 billion), and Japan (US$ 1.26 billion).

Indian impact investments may grow 25 per cent annually to US$ 40 billion from US$ 4
billion by 2025, as per Mr Anil Sinha, Global Impact Investing Network's (GIIN’s)
advisor for South Asia.

FDI CAN TAKE THE FORM OF GREENFIELD ENTRY OR TAKEOVER.

Greenfield entry implies assembling all the elements from scratch as Honda did in the
UK, whereas foreign takeover means the acquisition of an existing foreign company - as

Tata’s acquisition of Jaguar Land Rover illustrates. Foreign takeover is often covered by
the term 'mergers and acquisitions’ (M&As) but internationally, mergers are vanishingly
small, accounting for less than 1 per cent of all foreign acquisitions.

This choice of entry mode interacts with ownership strategy – the choice of wholly
owned subsidiaries versus joint ventures to give a 2x2 matrix of choices – Greenfield
wholly owned ventures, Greenfield joint ventures, wholly owned takeovers and joint
foreign acquisitions - giving foreign investors choices that they can match to their own
capabilities and foreign conditions
FDI IS NOT PERMITTED IN THE FOLLOWING INDUSTRIAL SECTORS:

o Arms and ammunition.

o Atomic Energy,
o Railway Transport.
o Coal and lignite.
o Mining of iron, manganese, chrome, gypsum, sculpture, gold, diamonds, copper,
zinc.
o Lottery Business
o Gambling and Betting
o Business of Chit Fund
o Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal
Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under
controlled conditions and services related to agro and allied sectors) and
Plantations activities (other than Tea Plantations)
o Housing and Real Estate business.
o Trading in Transferable Development Rights (TDRs).
o Manufacture of cigars, cheroots, cigarillos and cigarettes, of tobacco or of
tobacco substitutes.

FDI POLICY FRAMEWORK IN INDIA

Policy regime is one of the key factors driving investment flows to a country. Apart from
underlying overall fundamentals, ability of a nation to attract foreign investment
essentially depends upon its policy regime -

of India’s FDI policy framework. There has been a sea change in India’s approach to
foreign investment from the early 1990s when it began structural economic reforms about
almost all the sectors of the economy whether it promotes or restrains the foreign
investment flows.

This section undertakes a review.

a) Pre-Liberalization Period:

Historically, India had followed an extremely careful and selective approach while
formulating FDI policy in view of the governance of „import-substitution strategy‟ of
industrialization. The regulatory framework was consolidated through the enactment of
Foreign Exchange Regulation Act (FERA), 1973 wherein foreign equity holding in a
joint venture was allowed only up to 40 per cent. Subsequently, various exemptions were
extended to foreign companies engaged in export oriented businesses and high
technology and high priority areas including allowing equity holdings of over 40 per cent.
Moreover, drawing from successes of other country experiences in Asia, Government not
only established special economic zones (SEZs) but also designed liberal policy and
provided incentives for promoting FDI in these zones with a view to promote exports.
The announcements of Industrial Policy (1980 and 1982) and Technology Policy (1983)
provided for a liberal attitude towards foreign investments in terms of changes in policy
directions. The policy was characterized by de-licensing of some of the industrial rules
and promotion of Indian manufacturing exports as well as emphasizing on modernization
of industries through liberalized imports of capital goods and technology. This was
supported by trade liberalization measures in the form of tariff reduction and shifting of
large number of items from import licensing to Open General Licensing (OGL).

b) Post-Liberalization Period:

major shift occurred when India embarked upon economic liberalization and reforms
program in 1991 aiming to raise its growth potential and integrating with the world
economy. Industrial policy reforms slowly but surely removed restrictions on investment
projects and business expansion on the one hand and allowed increased access to foreign
technology and funding on the other.

These efforts were boosted by the enactment of Foreign Exchange Management Act
(FEMA), 1999 [that replaced the Foreign Exchange Regulation Act (FERA), 1973]
which was less stringent. In 1997, Indian Government allowed 100% FDI in cash and
carry wholesale and FDI in single brand retailing was allowed 51% in June, 2006. After a
long debate, further amendment was made in December, 2012 which led FDI to 100% in
single brand retailing and 51% in multiple brand retailing.

SECTOR SPECIFIC FOREIGN DIRECT INVESTMENT IN INDIA

CURRENT STATUS OF FDI IN INDIA RETAIL SECTOR: -

As of December 2017, the Government of India allowed FDI in single and multi-brand
retailing along with the following conditions: -

1) Up to 100% FDI in single brand retail trading.

➢ By only one non-resident entity whether owner or the brand or otherwise.

➢ 30% domestic sourcing requirement eased to preferable sourcing rather than
compulsory.
➢ Further clarification on FDI companies that cannot engage in B2C e-commerce.
➢ Products to be sold should be of a “single brand”. Product should be sold under
the same brand internationally.
➢ “Single brand” product retailing would cover only products, which are branded
during manufacturing.

2) Up to 51% FDI in multi brand retail trading.

➢ At least 100 million US$ must be invested into Indian company.

➢ At least 50% of the total FDI is to be invested in back end infrastructure within 3
years.
 ➢ At least 30% of the value of procurement of processed product shall be sourced
from Indian small industry.
➢ Fresh agriculture produce is permitted to be sold unbranded.
➢ Indian states have been given the discretion to accept of refuse the
implementation of FDI.
➢ Retail outlets can be set up in cities having population of at least 1 million.
➢ Application needs to be approved by two levels at Department of Industrial Policy
and Promotion and Foreign Investment Promotion Board.

CURRENT STATUS OF FDI IN INDIA SERVICE SECTOR:-

FDI plays a major role in the dynamic growth of the service sector. The service sector
in India has tremendous growth potential and as a result it attracts huge FDI.

➢ The Computer Software and Hardware enjoy the permission of 100% FDI under
automatic route.
➢ The limit of FDI in Telecom sector was increased from 49% to 74%. FDI up to
49% is permissible under automatic route but FDI in the licensee company/Indian
promoters including their holding companies shall require approval of FIPB.

CURRENT STATUS OF FDI IN HOTEL & TOURISM SECTOR IN INDIA

100% FDI is permissible in the sector on the automatic route. The term hotels include
restaurants, beach resorts, and other tourist complexes providing accommodation and/or
catering and food facilities to tourists. Tourism related industry include travel agencies,
tour operating agencies and tourist transport operating agencies, units providing facilities
for cultural, adventure and wild life experience to tourists, surface, air and water transport
facilities to tourists, leisure, entertainment, amusement, sports, and health units for
tourists and Convention/Seminar units and organizations.

For foreign technology agreements, automatic approval is granted if

i. Up to 3% of the capital cost of the project is proposed to be paid for technical

and consultancy services including fees for architects, design, supervision, etc.
ii. Up to 3% of net turnover is payable for franchising and marketing/publicity
support fee, and up to 10% of gross operating profit is payable for management
fee, including incentive fee.

PRIVATE SECTOR BANKING:

Non-Banking Financial Companies (NBFC)

49% FDI is allowed from all sources on the automatic route subject to guidelines issued
from RBI from time to time.
 a. FDI/NRI/OCB investments allowed in the following 19 NBFC activities shall be as
per levels indicated below:

1. Merchant banking
2. Underwriting
3. Portfolio Management Services
4. Investment Advisory Services
5. Financial Consultancy
6. Stock Broking
7. Asset Management
8. Venture Capital
9. Custodial Services etc.

FDI in Telecommunication sector

i. In basic, cellular, value added services and global mobile personal

communications by satellite, FDI is limited to 49% subject to licensing and
security requirements and adherence by the companies (who are investing and
the companies in which investment is being made) to the license conditions for
foreign equity cap and lock- in period for transfer and addition of equity and
other license provisions.
ii. ISPs with gateways, radio-paging and end-to-end bandwidth, FDI is permitted
up to 74% with FDI, beyond 49% requiring Government approval. These
services would be subject to licensing and security requirements.
iii. No equity cap is applicable to manufacturing activities. iv. FDI up to 100% is
allowed for the following activities in the telecom sector :

Proposals for FDI beyond 49% shall be considered by FIPB on case to case basis.

CURRENT SENARIO

Investments/ developments of india

India has become the fastest growing investment region for foreign investors in 2016, led
by an increase in investments in real estate and infrastructure sectors from Canada,
according to a report by KPMG.

Some of the recent significant FDI announcements are as follows:

• In February 2018, Ikea announced its plans to invest up to Rs 4,000 crore (US$
612 million) in the state of Maharashtra to set up multi-format stores and
experience centres.
• In November 2017, 39 MoUs were signed for investment of Rs 4,000-5,000 crore
(US$ 612-765 million) in the state of North-East region of India.
• In December 2017, the Department of Industrial Policy and Promotion (DIPP)
approved FDI proposals of Damro Furniture and Supr Infotech Solutions in retail
 sector, while Department of Economic Affairs, Ministry of Finance approved
two FDI proposals worth Rs 532 crore (US$ 81.4 million).
• The Department of Economic Affairs, Government of India, closed three foreign
direct investment (FDI) proposals leading to a total foreign investment worth Rs
24.56 crore (US$ 3.80 million) in October 2017.
• Singapore's Temasek will acquire a 16 per cent stake worth Rs 1,000 crore (US$
156.16 million) in Bengaluru based private healthcare network Manipal
Hospitals which runs a hospital chain of around 5,000 beds.
• France-based energy firm, Engie SA and Dubai-based private equity (PE) firm
Abraaj Group have entered into a partnership for setting up a wind power
platform in India.
• US-based footwear company, Skechers, is planning to add 400-500 more
exclusive outlets in India over the next five years and also to launch its apparel
and accessories collection in India.
• The government has approved five Foreign Direct Investment (FDI) proposals
from Oppo Mobiles India, Louis Vuitton Malletier, Chumbak Design, Daniel
Wellington AB and Actoserba Active Wholesale Pvt Ltd, according to
Department of Industrial Policy and Promotion (DIPP).
• Cumulative equity foreign direct investment (FDI) inflows in India increased 40
per cent to reach US$ 114.4 billion between FY 2015-16 and FY 2016-17, as
against US$ 81.8 billion between FY 2011-12 and FY 2013-14.
• Walmart India Pvt Ltd, the Indian arm of the largest global retailer, is planning to
set up 30 new stores in India over the coming three years.
• US-based ecommerce giant, Amazon, has invested about US$ 1 billion in its
Indian arm so far in 2017, taking its total investment in its business in India to
US$ 2.7 billion.
• Kathmandu based conglomerate, CG Group is looking to invest Rs 1,000 crore
(US$ 155.97 million) in India by 2020 in its food and beverage business, stated
Mr Varun Choudhary, Executive Director, CG Corp Global.
• International Finance Corporation (IFC), the investment arm of the World Bank
Group, is planning to invest about US$ 6 billion through 2022 in several
sustainable and renewable energy programmes in India.
• SAIC Motor Corporation is planning to enter India’s automobile market and
begin operations in 2019 by setting up a fully-owned car manufacturing facility
in India.
• SoftBank is planning to invest its new US$ 100 billion technology fund in market
leaders in each market segment in India as it is seeks to begin its third round of
investments.

Global Foreign Direct Investment Inflows

The Current Scenario - 2017

Foreign direct investment (FDI) inflows declined globally by approximately 10–15 per
cent in 2016, owing to the vulnerability of the world economy and the persistent fragility
of aggregate demand. Moreover, stagnant growth in commodity exporting countries, the
lack of effective policies to restrict tax inversion deals and a downtrend in the profits of
Multinational Enterprises (MNEs) also contributed to the slump in FDI inflows. Global
FDI flows regained some growth in 2017 and are expected to post a strong recovery in
2018 at US$1.8 trillion.

CONCLUSION

The present study throws light on the trends and pattern of FDI in India. The changes in
the FDI policy in India have helped to attract a sizeable inflow of FDI but, unfortunately
not to the desirable extent. It implies that the Government of India has to pursue a steady
but a cautious approach along with efficiently implementing and effectively monitoring
mechanisms. The sector wise analysis of FDI inflow in India, maximum FDI has taken
place in the service sector including telecommunication and many others. The service
sector is followed by manufacturing sector in terms of FDI. High volumes of FDI take
place in Metallurgical industry, Drugs and Pharmaceutical industry, Electrical Equipment
sector and other manufacturing sector. The Indian sectors have been growing
continuously with the help of more inflow of FDI. The Government policies have also to
encourage the investment of the foreign investor in these sectors.

Now these Indian sectors are found in the growing path and it would continue in the
future also. Factors such as market size, foreign exchange reserves, export and cost of
labour were found to be statistically significant and had a positive sign in explaining the
variations in FDI inflows except cost of labour and export. The cost of labour has a
negative relation with FDI. Even though, FDI has increased due to low labour cost, the
Government has to take necessary steps to increase the cost of labour to the optimum
level inorder to protect the labour welfare. The additional benefits and labour laws have
to be enforced in MNCs, to provide job security. Government has to give emphasis and
give priority in the approval for export oriented FDI but at the same time it must also be
less import-intensive. The present study has also found that the economic growth of India
is independent of foreign direct investment. Hence, India must take multidimensional
policy measures to accelerate the pace of economic growth, which in turn would attract
FDI and ensure further economic growth. Hence, right policies and proper execution
could help India to maximize the benefits and minimise the cost of inflows of FDI and
other related problems to promote economic stability in our country.

Thus, the sector-wise inflows of FDI in India shows a varying trend but acts as 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 changes apart from
increase in operational efficiency, managerial efficiency, employment opportunities and
infrastructure development. India needs high and advanced technology use in production
and marketing for improving efficiency and competitiveness in the industrial sector and it
would, therefore, be analytically useful if sectoral pattern of FDI was one that was biased
in favor of technology-intensive sectors. The Government of India has to welcome inflow
of foreign investment in such way that is to be convenient and favorable for Indian
economy and enable to achieve cherished goal like rapid economic development, removal
of poverty, enhancing exports, removing internal disparity in the development and
making our Balance of Payment favorable. FDI is an engine of economic growth and
development of Indian economy but in this respect proper direction
Reference
• https://www.ibef.org/economy/foreign-direct-investment.aspx
• Media Reports, Press Releases, Press Information Bureau, Press Trust of
India
• United Nations Conference on Trade and Development (UNCTAD) Business
Survey based on Responses of Top Multi National Executives (MNEs), 2016 &
Frost & Sullivan Analysis
• Survey based on Responses of Top MNEs, 2016 & Frost & Sullivan Analysi
• United Nations Conference on Trade and Development (UNCTAD) Business
Survey based on Responses of Top Multi National Executives (MNEs), 2016 &
Frost & Sullivan Analysis