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Chapter 2: FDI Scenario in India: Trends and Policies 2.1 Introduction Foreign direct investment (FDI) refers to cross-border investment made by a resident in one economy (the direct investor) with the objective of establishing a lasting interest in an enterprise (the direct investment enterprise) that is resident in a country other than that of the direct investor (OECD 2008). The motivation of the direct investor is strategic “lasting interest” in the management of the direct investment enterprise with at least 10 per cent voting power in decision making. The host country aspires to receive FDI inflows because of the potential benefits, the most established benefit being that FDI supplements the domestic savings of a nation. Other payoffs include access to superior international technologies, exposure to better management and accounting practices, and improved corporate governance. FDI is likely to expand and/or diversify the production capacity of the recipient country which, in turn, is expected to enhance trade. 1 On the other side, foreign investors are motivated by profits and access to natural resources. Therefore, large and growing domestic markets are likely to receive more FDI. Countries with abundant natural resources such as mines, oil reserves and manpower appear prominently on the investment maps of foreign investors. While the objectives of FDI can be different from the home and the host country’s perspectives, one of the major aims of attracting FDI is overall development of the recipient country keeping some specific strategy in view. This can be done by achieving higher FDI inflows (China, Malaysia and Singapore), maximising technology spill-over into the domestic economy (South Korea and Taiwan), or imposing local content requirements (East and South-East Asia). The year 2007 posted 30 per cent growth in global FDI inflows, which touched $1,833 billion, i.e., about $400 billion above the previous record in the year 2000 (Figure 2.1). About two-third of the inflows ($1,248 billion) was received by developed economies, while developing economies received about $500 billion FDI inflows – a 21 per cent increase over the year 2006. $500 billion FDI inflows into developing countries included about $13 billion for the least developed countries (LDCs). The transition economies of South-East Europe and the Commonwealth of Independent States (CIS) received about $86 billion worth of FDI. India received $23 billion of FDI inflows in 2007, up from $20 billion in 2006. India has inward FDI stock worth $76.2 billion (compared with $327.1 billion in China) and outward FDI stock of $29.4 billion (compared with $95.8 billion of China). The FDI inflows received by India accounted for 3 per cent of gross fixed capital formation (GFCF) in 2005, 6.6 per cent in 2006 and 5.8 per cent in 2007. The corresponding figures for China are 7.7, 6.4 and 5.9 per cent, respectively. Thus, the share of FDI in GFCF for India in 2007 was almost the same as that of China. The share of inward FDI stock of India was 0.5 per cent of GDP in 1990, 3.7 per cent in 2000 and 6.7 per cent in 2007. The corresponding figures are much higher for China, viz., 5.1, 16.2 and 10.1 per cent, respectively. The sales of India’s mergers and acquisitions (M&A) reached $5,580 million in 2007 and stood at $2,254 million in January–June 2008. Similarly, India’s purchases of M&As reached $30,414 million 2007 and stood at $8556 million in January–June 2008. 1. Exports are expected to increase if FDI occurs in an industry with high export potential, while imports would increase if the foreign investor imports inputs for domestic production of goods. 9
FDI IN INDIA AND ITS GROWTH LINKAGES 2.2 FDI Policy Framework Prior to 1991, the FDI policy framework in India was highly regulated. The government aimed at exercising control over foreign exchange transactions. All dealings in foreign exchange were regulated under the Foreign Exchange Regulation Act (FERA), 1973, the violation of which was a criminal offence. Through this Act, the government tried to conserve foreign exchange resources for the economic development of the nation. Consequently the investment process was plagued with many hurdles including unethical practices that became part of bureaucratic procedures. Under the deregulated regime, FERA was consolidated and amended to introduce the Foreign Exchange Management Act (FEMA), 1999. The new Act was less stringent and aimed at improving the capital account management of foreign exchange in India. The Act sought to facilitate external trade and payments and to promote orderly development and maintenance of the foreign exchange market in India. It resulted in improved access to foreign exchange. FDI-related Institutions There are three primary institutions in India that handle FDI-related issues: the Foreign Investment Promotion Board (FIPB), the Secretariat for Industrial Assistance (SIA), and Foreign Investment Implementation Authority (FIIA). Foreign Investment Promotion Board (FIPB) The Foreign Investment Promotion Board (FIPB), Department of Economic Affairs (DEA), Ministry of Finance is the nodal single-window agency for all matters relating to FDI as well as promoting investment in the country. It is chaired by the Secretary, Industry (Department of Industrial Promotion and Policy). Its objective is to promote FDI in India: i) by undertaking investment promotion activities in India and abroad; ii) by facilitating investment in the country by international companies, non-resident Indians and other foreign investors; iii) through purposeful negotiations/discussions with potential investors; iv) through early clearance of proposals submitted to it; and v) by reviewing policies and putting in place appropriate institutional arrangements, transparent rules and procedures and guidelines for investment promotion and approvals. 10 Figure 2.1 FDI inflows: Global Trends (1999-2007) Source: UNCTAD (various years), World Investment Report.
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Page 18 and 19: EXECUTIVE SUMMARY petroleum product
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Page 46 and 47: Table 3.2 Short-term effects of FDI
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Page 60 and 61: SPECIAL ECONOMIC ZONES (SEZS) AND F
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FDI IN INDIA AND ITS GROWTH LINKAGE
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Chapter 7: Primary Survey: Analysis
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the North and South zones, whereas
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PRIMARY SURVEY: ANALYSIS AND RESULT
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Table 7.1a Distribution of Surveyed
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Table 7.2b Zone-wise Distribution o
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Table 7.3b Zone-wise Distribution o
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Table 7.6a Number of Employees in S
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Table 7.7a Mode of Transport from F
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Table 7.8a Number of FDI-enabled Fi
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Chapter 8: FDI Data Reporting and C
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sector, non-profit institutions ser
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three categories, namely, (i) inves
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Table 8.1 Trends in FDI Inflows to
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FDI DATA REPORTING AND CLASSIFICATI
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Table 8.3 Trends in FDI Inflows by
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Table 8.5 DIPP Classification of FD
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SECTOR-WISE CODE 3700 DEFENCE INDUS
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S. No. DIPP DIPP Activity NIC 2-Dig
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Chapter 10: Key Findings and Salien
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Findings � About half the total o
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7. Forex Implications: To understan
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manufacturing firms taken together.
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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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