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Chapter 8: FDI Data Reporting and Classification 8.1 Backdrop The diverse nature and geographical spread of multinational enterprises within the economic territory of India has generated interest among policy makers and researchers in using FDI statistics for various purposes. This necessitates compiling FDI statistics according to a standard industrial classification that enables users to compare data across industry groups. Further, the regular analysis of investment trends, and identifying partner countries and industries should be part of macroeconomic policy planning. The timely availability of data helps in monitoring economic developments. In this context, the present chapter looks at the reporting and classification of FDI data in India. 8.2 Current System of FDI Classification in India The Department of Industrial Policy and Promotion (DIPP) compiles FDI data. The data is collected and reported by the Reserve Bank of India (RBI) as unit records of various FDI inflow transactions. These unit records provide information about the name of the Indian company, name of the foreign investor, amount of foreign direct investment, route of inflow and the receiving sector. DIPP processes these unit records into a usable form and presents them in different ways. In general, FDI inflows are presented by route (RBI Automatic, FIPB and acquisition of shares), by country of origin and by sector. DIPP follows the modified sectoral classification furnished in the Industries (Development and Regulation) Act, 1951 to present the FDI data by sector. The sectors of production/economic activity are classified into 43 main categories and 92 sub-categories (which include some of the main categories that do not have further sub-divisions). However, this classification constrains the effective use of FDI statistics in understanding the investment patterns by various industry groups, because the DIPP classification differs from the widely followed standard, namely, the National Industrial Classification (NIC), the latest one being NIC-2008. Some of the NIC categories are not included in DIPP 92 4-digit categories. It is, thus, desirable that FDI statistics should be presented according to a standard classification, which covers all fields of economic activity. To compile FDI statistics, the Government of India follows the methodology proposed by the Technical Monitoring Group (TMG) on Foreign Direct Investment. TMG (2003) submitted its First Action Taken Report in October 2002, which laid down the procedures for compiling FDI statistics that are comparable with international best practices. TMG identified 14 components to be included under three broader categories of FDI statistics: equity capital, reinvested earnings and other capital. Equity capital comprises equity in unincorporated entities; non-cash acquisition against technology transfer, plant and machinery, goodwill, business development and similar considerations, control premium and non-competition fee. Reinvested earnings include reinvested earnings of incorporated and unincorporated entities as well as reinvested earnings of indirectly held direct investment enterprises. Other capital comprises short-term and long-term borrowings, trade credit, suppliers’ credit, financial leasing, financial derivatives, debt securities, and land and buildings. The structure and functioning of multinational enterprises have changed with the increasing internationalisation of operations. This may impact the allocation of FDI in a particular economy or where FDI transactions taking place with 91
FDI IN INDIA AND ITS GROWTH LINKAGES a partner country may switch to another country. Thus, the current methodology to compile FDI statistics in India needs to be revised to better reflect foreign direct investment positions (stocks) and transactions (flows). 8.3 OECD Methodology In April 2008, the Organisation of Economic Cooperation and Development (OECD) brought out the fourth edition of the Benchmark Definition of Foreign Direct Investment. This incorporates recent changes in terms of the activities of multinational enterprises and types of investments these enterprises are undertaking across countries. According to OECD (2008), “foreign direct investment reflects the objective of establishing a lasting interest by a resident enterprise in one economy (direct investor) in an enterprise (direct investment enterprise) that is resident in an economy other than that of the direct investor” (p.15). The purpose of establishing a long-term relationship by a direct investor with the direct investment enterprise is to exercise a significant influence on the management of the direct investment enterprise. The “lasting interest” is acquired when the direct investor owns at least 10 per cent of the voting power in the direct investment enterprise. Though opinions are divided on the cut-off percentage of voting power to be held by the direct investor to have an effective voice in the management of the direct investment enterprise, the OECD recommends the 10 per cent threshold to ensure statistical consistency across countries. The OECD’s Benchmark Definition embraces the concepts and definitions of the International Monetary Fund’s Balance of Payments and International Investment Positions Manual (BPM) as well as the System of National Accounts of the Commission of the European Communities, the International Monetary Fund, OECD, the United Nations and the World Bank. 8.4 Concept of Economic Territory and Residence Foreign direct investment includes transactions/positions between a resident and a non-resident institutional unit. It excludes all transactions/positions between units that are residents of the same country. Thus, the concept of residence is important in determining cross-border investments between residents of two or more economic territories. Each institutional unit 1 is considered as a resident of one and only one economic territory. 2 According to the System of National Accounts, there are two types of institutional units, viz., households, and legal and social entities. Households can be direct investors but not direct investment enterprises. Legal and social entities include governments, corporations and non-profit institutions; they also include quasi-corporations, which are unincorporated enterprises belonging to households or government units, and they may behave in much the same ways as corporations. While only business enterprises can be both direct investors and direct investment enterprises, government and non-profit organisations can be direct investors but not direct investment enterprises. Though some units like households may have links with more than one economy, for statistical consistency they are attached to a single economic territory. The Benchmark Definition does not classify foreign direct statistics by institutional sectors, i.e., enterprise (legal and social entities) types including corporations, quasi-corporations, branch, estates, other trusts and partnerships and special corporate structures. 3 However, it is important to understand these institutional structures in determining whether a particular transaction or position should be included in foreign direct investment statistics. The classification of resident or non-resident institutional sectors is based on the principal product or products produced or distributed or service rendered by various enterprise types. Five institutional sectors are classified by the Benchmark Definition and are the same sectors that are reported by the System of National Accounts. These are the non-financial corporation sector, financial corporation sector, government 1. Institutional unit is an economic entity that is capable, in its own right, of owning assets, incurring liabilities and engaging in economic activities and in transactions with other entities. 2. In the Benchmark Definition, "economic territory" has the dimension of physical location as well as legal jurisdiction and is under the economic control of a single government. The Benchmark also considers economic territory as country. However, it does not adhere to any legal (nationality) or statistical (economy) definition. 3. For definitions of these terms, see OECD (2008), Chapter 3. 92
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FDI IN INDIA AND ITS GROWTH LINKAGE
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PROJECT TEAM Study Team Project Lea
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linkages with the economy. The sect
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Contents Executive Summary Chapter
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Chapter 5: FDI: Linkages with the E
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Executive Summary Foreign direct in
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EXECUTIVE SUMMARY petroleum product
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Chapter 1: Introduction 1.1 Backdro
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section industry data. However, the
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in India stood at $23 billion, show
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viii) Backward and Forward Linkages
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Chapter 2: FDI Scenario in India: T
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Secretariat for Industrial Assistan
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Table 2.2 shows that FDI outflows f
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at about 2 per cent or less of the
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Table 2.5 Sector-wise Break-up of F
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Table 2.7 FDI in India in the Servi
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Figure 2.4 Country-wise FDI Inflows
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2.10 Foreign Technology Transfers A
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Chapter 3: Mergers & Acquisitions a
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Table 3.2 Short-term effects of FDI
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proportion of foreign investment in
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Chapter 4: Special Economic Zones (
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4.4 Management of SEZs SEZs are und
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in the eight major SEZ’s exports
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Foreign Direct Investment in SEZs S
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In a span of a few years, there hav
Page 60 and 61: SPECIAL ECONOMIC ZONES (SEZS) AND F
Page 62 and 63: existing infrastructure, (b) exploi
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Page 70 and 71: construction (4200); fuels, includi
Page 72 and 73: FDI: LINKAGES WITH THE ECONOMY S. N
Page 74: Table 5.5 Sector-wise FDI in India
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Page 92 and 93: Chapter 7: Primary Survey: Analysis
Page 94 and 95: the North and South zones, whereas
Page 96 and 97: PRIMARY SURVEY: ANALYSIS AND RESULT
Page 98 and 99: Table 7.1a Distribution of Surveyed
Page 100 and 101: Table 7.2b Zone-wise Distribution o
Page 102 and 103: Table 7.3b Zone-wise Distribution o
Page 104 and 105: Table 7.6a Number of Employees in S
Page 106 and 107: Table 7.7a Mode of Transport from F
Page 108 and 109: Table 7.8a Number of FDI-enabled Fi
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Page 114 and 115: three categories, namely, (i) inves
Page 116 and 117: Table 8.1 Trends in FDI Inflows to
Page 118 and 119: FDI DATA REPORTING AND CLASSIFICATI
Page 120 and 121: Table 8.3 Trends in FDI Inflows by
Page 122 and 123: Table 8.5 DIPP Classification of FD
Page 124 and 125: SECTOR-WISE CODE 3700 DEFENCE INDUS
Page 126 and 127: FDI DATA REPORTING AND CLASSIFICATI
Page 128 and 129: S. No. DIPP DIPP Activity NIC 2-Dig
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Page 154 and 155: Findings � About half the total o
Page 156 and 157: 7. Forex Implications: To understan
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References Australian Bureau of Sta
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for economic growth and poverty all
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Tables for Chapter 6
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Questionnaires
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QUESTIONNAIRE 257
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