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Understanding FDI: What it means for India?

Foreign Direct Investment or FDI is any investment made by a foreign country in the domestic assets such as companies, organizations, buildings and factories. It provides foreign capital, funds, expertise and job opportunities to the host nation.

FDI flows to developing countries stood at $354 billion in 2009. UNCTADs FDI prediction for 2011 is between $1.3 trillion and $1.5 trillion. India not Happy about FDI:Foreign Direct Investment into India totaled only $23.7 billion during 2010-11 (according to UNCTAD). India is not much enthusiastic about FDI investments. At present, the country only allows 100% FDI in single-brand retail trade like Fendi, Jimmy Choo etc.

It was also reluctant to FDI in multi-brand retailers like Wal Mart, Carrefour etc. until recently. Currently, the government has allowed a 51% FDI in this sector.

India fears such FDIs could harm the domestic economy rather than uplift it. The main argument against multi-brand retailers is that it could destroy small retailers and manufacturers. Experts predict about 4 crore people will lose their employment once FDI in retail sector is allowed. Benefiting from FDI

Those who support FDI claim that the country which accepts FDI will benefit economically; increased job opportunities, higher standards of living and better infra structure are some of the positive that flows from FDI. A visible impact of FDI on the growing economy is that it gets a quick supply of money.

To back their claim they site the example of The Asian Tiger economies such as China, South Korea, Singapore and the Philippines that benefited from FDI in to their economy. In the case of China FDI has really been a better step for improving the

economy. Chinese economy has welcomed FDI since 1970 and the investment rose to a whopping $274.6 billion in 2010 (according to UNCTAD).

There are positives that India can benefit from by more FDI flows. Farmers tend to get higher prices for their products by direct purchase by these retail houses. Middlemen are notorious for keeping the prices given to farmers low. Big retail companies will find direct purchasing profitable thus farmers will get a better deal for their products. Consumers also stands to gain as prices will go down due to direct purchase and competition.

Though the inward FDI is showing a decline in India, it is estimated that Indian will soon be the source of outward FDI to other countries. Most of the outward investments are in the areas where India is successful i.e. Auto, IT, telecom to name a few. Outward FDI by Indian companies was $43 billion in 2010-2011. Why Companies Opt to Invest in Foreign Countries?

Companies go for FDI looking for cheaper resources and better operational benefits for production. This resource seeking FDIs eventually makes huge profit by moving their entire production line to the new country.

Companies look for optimizing the available opportunities and economies. And that result in transfer of strategic assets. This form of FDI aims at improving the overall efficiency.

A company that goes for Foreign Direct Investment could possibly enjoy many incentives in the new country. Some of the tax benefits or concessions like low corporate tax and income tax rates could invariably boost the companys profit.

Furthermore, the investing company could get hold on special economic zones and enjoy special tariffs. They could gather financial subsidies to improve the working environment. Some of them enjoy free land for setting up company and easy loans for renovations. Different Types of FDI

There are generally two types of FDI, outward FDI and inward FDI. Any investment made by a country in other countries will account for outward FDI. Where as, all the FDIs invested by other countries in that country is called inward FDI.These two forms account for the net FDI of the country. It could be either positive or negative. Both inward and outward FDIs are regulated by the governments of respective countries.

The FDIs are categorized into vertical and horizontal based on how the subsidiary company works in par with the parent investor.

Vertical FDIs happen when a corporation owns some share of the foreign enterprise. The local enterprise could either be supplying the input or selling finished goods to the parent corporation. The subsidiary here helps the parent company to grow more.

When the MNCs kick off similar business operations in different countries it becomes horizontal Foreign Direct Investment. It is actually a cloning that is happening here. Both the countries enjoy the same share of growth. How FDI is done?

A foreign country may carry out FDI in different ways depending on the requirement. An investment made by a country can be regarded as FDI is the company acquires 10% of the voting shares of the domestic company.

This could be achieved by incorporating an existing subsidiary or a wholly owned company. Or it could be done by acquiring majority of shares of an associated company.

Some companies go for a merger or acquisition of a completely different company. A few others happen by enrolling in an equity joint venture with other investors or companies. Overall the aim of these is to grab a quick 10% voting power.

Government Imposes Riders on FDI

India is divided when it comes to the question of FDI in retail. The decision by the government to allow FDI into the retail sector brought sharp criticism from the opposition. The question of losing jobs and break down of small business is a sensitive issue and needs to be addressed.

However the government has subjected foreign companies to some restrictions to protect the neighborhood stores. These include a minimum investment of $100 million of which 50% investment done in back-end infrastructure. The companies must also procure 30% of materials from small domestic industries. In addition, the companies can set up shop only in cities with a population of 1 million.

The impact of these policies will take time to show. Till the meantime we can only hope this decision will generate jobs and find alternatives employment opportunities for those who have lost because of this.

(A detailed review of the growth of FDI in India can be found at Department Of Industrial Policy & Promotion website. )

Foreign direct investment (FDI) or foreign investment refers to the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor.[1] It is the sum of equity capital,other long-term capital, and short-term capital as shown in the balance of payments. It usually involves participation in management, jointventure, transfer of technology and expertise. There are two types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in a net FDI inflow (positive or negative) and "stock of foreign direct investment", which is the cumulative number for a given period. Direct investment excludes investment through purchase of shares.[2] FDI is one example of international factor movement.


A foreign direct investor may be classified in any sector of the economy and could be any one of the following:[citation needed]

an individual; a group of related individuals; an incorporated or unincorporated entity; a public company or private company; a group of related enterprises; a government body; an estate (law), trust or other social institution; or any combination of the above. [edit] Methods

The foreign direct investor may acquire 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:[citation needed] low corporate tax and income tax rates tax holidays other types of tax concessions preferential tariffs special economic zones EPZ Export Processing Zones Bonded Warehouses Maquiladoras

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 derogation from regulations (usually for very large projects) [edit] Global foreign direct investment

The United Nations Conference on Trade and Development said that there was no significant growth of Global FDI in 2010. In 2010 was $1,122 billion and in 2009 was $1,114 billion. The figure was 25 percent below the pre-crisis average between 2005 to 2007. NEW DELHI: The civil aviation ministry is likely to drop its opposition to higher investment by foreign airlines in the aviation sector and agree to let them hold up to 49% in domestic carriers, handing out a possible lifeline to cash-strapped airlines.

At present, foreign carriers such as British Airways, Singapore Airlines and Emirates are banned from directly pumping money into the aviation sector, although financial and other non-airline investors can invest up to 49% in Indian airlines.

The aviation ministry had traditionally been opposed to allowing international airlines to invest in local carriers, but had relaxed its opposition, partly as a result of hectic lobbying by some loss-making players such as Kingfisher Airlines and GoAir. After first saying global carriers should not be allowed to hold beyond 24%, the ministry had relented to allow them to pick up to 26% stake.

"We may further relax our stance on allowing foreign carriers to invest in Indian airlines. There is no difference between 26% and 49% because the rights of the

shareholders remain the same at these two different levels of shareholding. But if we do allow 49%, we will impose some restrictions," said a senior civil aviation ministry official, on condition of anonymity.

The official added that new Civil Aviation Minister Ajit Singh was of the view that international carriers could be allowed to hold more than 26%, and was likely to give a clear direction in this regard.

An investor with 26% and more stake in a company has the power to veto special resolutions of the company, an important tool to exercise influence over key corporate decisions. But while the rights of the investor do not change unless its shareholding crosses 50%, a higher foreign investment ceiling permits the Indian company to access more funds without any dilution of its rights.

Cabinet to Take Final Call

Access to funds is a critical issue for the aviation industry, with most domestic airlines registering huge losses in the first half of the current financial year and industry association Assocham estimating total losses of the industry for the whole year at as high as Rs 15,000 crore. The cumulative debt of the industry has risen to Rs 70,000 crore, raising concerns about loan repayment defaults, and rising nonperforming assets (NPAs) for banks.

"Given the financial state of the industry, if the civil aviation ministry recommends 49%, it should be strongly welcomed," said Kapil Kaul, the South Asia CEO of the Centre for Asia Pacific Aviation, an aviation consulting firm.

But the final decision to allow foreign airlines to invest in local carriers will be taken by the cabinet, and after the recent debacle on the retail front, it remains to be seen whether the government will have the appetite or the inclination to pitch for another set of liberal FDI norms, albeit in a different sector.

The Department of Industrial Policy and Promotion had in an inter-ministerial note last October proposed that international carriers be allowed to hold a 26% stake in

local airlines. Recently, the Working Group on Civil Aviation (WGCA) comprising secretaries of various ministries recommended that the FDI limit be imposed at 49%. NEW DELHI: Against the backdrop of stiff opposition by Trinamool Congress to various key issues, Prime Minister Manmohan Singh today expressed confidence that "temporary problems" would be overcome.

"We have our problems but I am confident that if we have the will and determination, we will overcome these temporary problems," he said here. He was responding when asked at a joint press interaction with Trinidad and Tobago Prime Minister Kamla Persad-Bissessar whether the UPA government's development agenda was being affected as its coalition partners appeared to create problems.

Turning philosophical, Singh said, "Life would not be worth living if it were not beset with one problem or the other. We are a large country with great complexity and great diversity." His statement assumes sigificance as the stiff opposition by Trinamool Congress has led the government to put on hold the decision to allow FDI in retail and scuttled attempts to pass the Lokpal Bill in Rajya Sab NEW DELHI: The government will be able to move ahead with the economic reforms programme, including FDI in retail, with some tweaking after the Assembly elections, said Chief Economic Adviser Kaushik Basu.

"The elections are now around the corner...Once the rush of politics is over and then with some tweaking, it is basically responsiveness to opinion across the board in the country, we will be able to take some of the things forward," Basu said in an interview.

The Assembly elections are scheduled to be held in five states of Uttar Pradesh, Punjab, Uttarakhand, Goa and Manipur between January 30 and March 3.

He said the government has to go slow on reforms programme because of political compulsion. "It is a coalition government and you have to carry a body of opinion...," he said.

The government had to put on hold the Cabinet decision to allow 51 per cent foreign direct investment (FDI) in multi-brand retail due to stiff opposition of UPA ally Trinamool Congress and Opposition parties.

Earlier even Finance Minister Pranab Mukherjee had said that the FDI in retail was very much on the government's reform agenda and it will try to build a consensus on the issue.

The Department of Industrial Policy and Promotion (DIPP) has already started wider consultations with stakeholders and the Consumer Affairs Ministry is also working to bring all consumer organisations on board.

The government was keen to introduce a slew of economic reform Bills in the Winter session of Parliament which ended last week, to put to rest the prevailing notion about a 'policy paralysis' in certain sections.

However, it failed to push the key legislation like PFRDA and Companies Bill, in the Winter Session because of resistance from Trinamool Congress and Opposition parties.