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Abstract (With the initiation of new economic policy in 1991 and subsequent reforms process, India
: has
witnessed a change in the flow and direction of foreign direct investment (FDI) into the country. This
is
mainly due to the removal of restrictive and regulated practices. Foreign direct investment in
India
increased from US $ 129 millions in 1991-92 to US $ 40,885 million in March, 2005, an increase of
about
316.9 times. However, the country is far behind in comparison to some of the developing countries
like
China. In so far as growth trend of FDI is concerned, there has been quite impressive growth of FDI
inflow
into the country during this period. However, negative growth rate is noticed during the period 1998-
2000
primarily due to falling share of major investor countries, steep fall of approval by 55.7% in
1998
compared to 1997 and slackening of fresh equity. However, traditional industrial sectors like
food
processing industries, textiles, etc. which were once important sectors attracting larger FDI, have
given
way to modern industrial sectors like electronics and electrical equipments, etc. In this paper analysis
on
the factors affecting potentiality and challenges of FDI in the country is discussed and open a room
for
future
discussion.)
I.
Introduction
Foreign Direct Investment (FDI) is considered as an important agent in the process of
accelerated
economic growth in the developing countries. FDI is more attractive in compare to other forms
of
external finance since it is non-debt creating, non-volatile and the returns depend on
the
performances of the projects financed b y the investors (Planning Commission, 2003). With
the
Table 1: Year wise actual FDI Inflow and Annual Growth Rate of FDI inflow to
India
Year FDI Inflow (Amount in $ million) * (Percent
CAGR )
1991-1992 129 -
+
* CAGR Grand
stands Total 41050 50.93
for Compound Annual Growth
rate
+ CAGR for Au gust 1991- March 2005 4
Source: FDI Statistics, , Ministry of Ind ustry and
DIPP Commerce
Besides, FDI inflows from Japan also declined in 1999-00 compar ed to the previous period.
There
was steep fall of approvals in 1998 compared to 1997 (a reduction of 55.7 percent in dollar
terms).
It is worrying to note that India’s share in d evelop ing countries inflows declined from 1.9 per
cent
in 1997 to 1.4 percent in 1998. The reason of the overall decline in 2002-03 was
principally
slackening of fresh equity injected through FDI in the year 2002-03. During the year 2003-04
FDI
inflows has shown a negative growth rate of 7.2 percent. The reduction can be attributed to
a
decline of $ 379 million in fresh equity capital inflows in 2003-04. During the year growth
rate
was (-13.6) percent for equity capital and (-1.9) percent for reinvested
earnings.
II.1 Share of Merger and Acquisition (M&A) in FDI inf lows in
India
The value of cross border 3 , a key mode of global FDI since the late 1980s started to pick
M&A up
in 2004 following three years of decline, while their has been growing since 2002
number
(UNCTAD, 2006). From the perspective of developing host country like India, the
increasing
number of M&A is not beneficial to its economy. Th erefore, it is important to examine
whether
share of M&A has outperformed the share of Greenfield investment. Table 2 depicts the share
of
M&A in FDI inflow during 1997-1999 to ex amine the recent pattern of FDI
inflows.
Table 2: Share of Merger and Acquisitions (M&As) in FDI
inflow
Year FDI ($ Million) M&A Fund M&A as % of
FDI
1997 3200 1300 40.6
Majority o f Greenfield investment dominated the modes of FDI in India in the pre reform
period
(Kumar, 2005). However, FDI inflows in the post reform period take the form of M&A,
which
constituted 39.4 percent for the period 1997-19 99 as shown in table 2. Due to difficulties
in
5
getting data r egardin g M&A funds in time series, sales and purch ase data of M&A are taken
to
examine the recent trend in the mode of FDI inflows which is depicted in table
3.
The recent trend of sales and purchase of M&A as a percentage of FDI inflows in India
clearly
indicates that M&A sales has a dominant share in FDI inflows. It increased from a meager of
5.2
percent in 1990 to 96.7 percent in 2005. However, as in the case of FDI inflow there
are
fluctuations in the share of both sale and purchase of M&A in the FDI inflows for the
given
period. However, the sh are of M&A sale dominated the scenario for the overall period over
M&A
purchase
.
Table 3: FDI Inflows and Sales and Purchase of
M&A
Year M&A Sale M&A Purchase FDI
Inflow
1990 5 (5.2) - 97
1995 276 (13.4) 29 (1.4) 2065.4
(Figures in the parentheses indicate M & A as a percentage o f FDI inflow for respective
years)
Source: Statistical Database Online,
UNCTAD
II.2 Country wise FDI Inf lows to
India:
Since 1991, USA has been playing a major role in FDI inflows to India by accounting for
19.31
percent of the total FDI inflows. Mauritius (15.25) and United Kingdom (7.71 percent) are
the
other two major contributors. Out of the total FDI inflow of Rs. 3329948.28 million during
the
period 1991-2005, the share of top ten investor countries was 62 percent. For a better reflection
of
the direction of countr y wise inflow of FDI to India during the period 1991-05, the period is
sub-
divided into two periods 1991-2000 and 2001-2005. This is due to - first to ex amine the trend
, of
emerging investor countries in the st century compared to the 90s secondly data on FDI
21 and ,
have been revised since 2000-01 with expanded coverage to approach international
best
practices, which will reflect a large FDI inflows since reinvested earnings and other 6
capital
components were included. Table 4 shows the share of Top-Ten Investing C ountries in FDI
Inflow
to India during 1991 to 2005.
Table 4 clearly depicts that USA continued as a key source country for the period 1991-2000
with
20.41 percent followed by Mauritius (11.93 percent), U.K. (6.64 percent), Japan (4.03
percent),
and Netherlands (1.90) respectively. The cumulative share of these top five countries in the
total
FDI inflow to India for the period 1991-2000 was 44.91 percent. The share in FDI
inflows
declined for this period for counties like Japan, USA, German y and more noticeably of
South
Korea’s. On the other hand, share of Netherlands and Singapore has increased. The
combined
share of the top ten countries increased from 57.4 percent during 1991-2000 to 75.2 percent
during
2001-05 signifying more importance of the top ten countries in the countr y’s FDI
inflows.
Moreover, during the above-mentioned period share of top five investors countries increased
from
44.91 percent in 1991-2000 to 50.1 percent in 2001-05.
Table 4: Share FDI Inflow of Top-Ten Investing Countries in India during 1991 to
2005
(Amount in Rs.
million)
9 Cement and Gypsum products 12166.66 (1.16) 20145.87 (4.50) 32312.53 (2.16)
10 Metallurgical industries 10590.68 (1.01) 16360.3 (3.65) 26950.98 (1.80)
Top ten sectors 596240.88 (56.78) 318397.4 (71.10) 914638.3 (61.06)
Grand total (all 1050092 (100.0) 447847.17 (100.0) 1497939.17
sectors) (100.0)
(Figures in parentheses indicate share of different sectors to total sectoral FDI inflow in
percent)
Source: SIA News Letter April 2006 DIPP, Ministr y of Industr y and Commerce,
GoI
Transportation sector realized second highest inflow (8.79 percent) of FDI followed b y
service
sector (8.19 percent) for the given period. It is clear from table 5 that share of electrical sector
was
double in the period 2003-05, which has risen from 10.56 percent in 1991 -2002 to 22.14 in 2003-
05. During the period 1991-2002 shares of telecommunications (9.43 percent) was second high
est,
followed by transportation sector (9.41 percent), fuels (8.55 percent) and service sectors
(6.28 8
percent). It is observed from table that service sector which occupied third place in terms of
FDI
inflow to India fo r the period 2003-2005 emerged as a major FDI attracting sector with
12.68
percent share of FDI inflow, which is nex t best to electrical sector. The shares of drugs
and
pharmaceuticals (5.27 percent), cement and gypsum (4.50 percent) and metallurgical
industries
(3.65 percent) increased in the period 2003-05 over the previous period, which were 1.61, 1.16
and
1.01 percents
respectively.
On the other hand shares of transportation sector (7.34 percent), telecommunication (5.14
percent),
fuel sector (3.87), chemical (4.59) and food processing industries have gone down in 2003-
2005
from 9.41, 9.43, 8.55, 5. 14 and 3.64 percents respectively during the period 1991-2002. Thus, it
may infer that sectoral direction of FDI has changed towards electrical and service sector
during
the recent
past.
II.4 Regional Distribution of FDI inflow to
India:
Regional distribution of FDI is probably o ne of the prominent indicators to gauge the
local
business investment climate with a strong implication for the state policy maker. FDI
inflow
besides other regional d istribution of FDI inflow shows disparity in regional level, which
is
evident from table 6. During the period August 1991 to December 2004, a total number of
22404
approvals received with an amount of Rs.1800761.04 million. The share of major FDI
attracting
ten states was 90.86 percent in terms of FDI approved amount and 78.74 in terms of number
of
approval. Maharashtra to ps the list with a share of 20.61 percent o f the total approved amount
of
FDI to India followed by Delhi (16.95 percent) and Tamil Nadu (12.58 percent). Out of
thirty-
four regions as mentioned in the annexure 1, nine states are above the average level for
the
mentioned period, which comprises 88.17 percent share of total FDI approved amount.
Rest
twenty-five regions have shared only 11.83 percent of total FDI approved amount. One
interesting
fact of the regional distribution of FDI to India is that twenty one regions, (from serial number
14
to 34 in the annexure 1) which has individual share of less than one percent attract only
4.2
percent of total FDI approved
amount.
It is observed from table 6 that states like Madhya Pradesh and Orissa, which shared a
small
number of approvals (1.2 percent and 0.7 percent respectively), attracted above average level
of
FDI approval amount (5.15 percent and 4.57 percent respectively) fo r the period. Moreover,
share
of North Eastern states excluding Sikkim in the total amount of approved FDI was only
0.04
9
percent, which is depicted in annexure 1, implies pathetic condition of local business
environment.
Foreign investors are attracted towards developed states like Maharashtra and Karn ataka due to
a
number of reasons (Narayana, 2006 and Business Today, 2003). Availability of power
at
affordable rate, availability of raw materials, availability of labour, proximity to
markets,
connectivity to international flexibility of state government policies, advance
cities, banking
facilities, telecom facilities, hassle free regulation, overall business environment, developed
IT
sector, etc. are some factors which attract FDI to these states. Above all investment incentives
are
very much attractive to conduct a business in these
regions.
12
IV. Sound economic Indian economy is growing at 7 percent annual average
performance: growth
rate from the 1993. According to an estimation done by the Central Statistical Organization,
GDP
growth rate was 6.5 percent for period 1993-03 and were 8.2 and 6.9 percent for the year 2003-
04
and 2004-05 respectively. Most recently, GDP growth rate increased to 9.2 percent for the
second
quarter of 2006-07. Definitely, this is a good sign because investors are attracted towards
rapidly
growing countries. Besides, interest rate has declined from 20.0 percent in 1991-92 to 11.1
percent
in 2004-05. Though inflation rate varied year to year, comparatively it was decreased from
10.6
percent in 1991-96 to 6.5 percent in 2004-05.
V. Tax : Double taxation avoidance treaty is one of the main achievements in the field
Measures of
tax regime, which is at present implemented with 79 nations. It will definitely boost
up
confidence of foreign investors since tax on both corporate profit and dividends are treated
as
disincentive by investors. Moreover, corporate tax rate has b een slashed down from 74.75
percent
in 1992 to 40 percent in 2004-05 and custom duties have also been reduced from 42 percent
in
1997 to 15 percent in 2005 as reported by Federation of Indian Chambers of Commerce
(FICCI).
VI. Liberalized Investment The policy on FDI has been progressively liberalized
policy: since
1991. Today, the FDI policy in India is widely reckoned to be among the most liberal in
the
emerging economies and FDI up to 100% is allowed under the automatic route in most sectors
and
activities. Recently, FDI up to 100 percent has been permitted under automatic route in
civil
aviation, automobiles, telecommunication, power and road sectors. Moreover, in some sectors
a
tax holiday for 10 years is also offered as an incentive to
FDI.
VII. FICCI had conducted a survey in 2004 on the experience of investment b y the
foreign
investors in India. According to them India’s strengths as FDI destination lies in
following:
The respondents had identified market size, highly skilled manpower and low cost
of
infrastructure and operation as important motivating factors for their entr y into Indian market.
98
percent of the respondents had rated India’s attractiveness as an export platform as ‘medium
to
high’. India as an “off-shoring” destination has been highly attracted by 63 percent of
the
respondents. 86 percent respondents rated India as highly attractive destination in terms
of
availability of ‘skilled workforce’ in Information Technology ( IT) and Business
Process
Outsourcing (BPO)
industries.
Besides, findings of a joint UNCTAD-Corporate Location Survey in April 2004 had shown
that
top three investment hot spots for the next four years are China, India and the United 13
States.
The report on FDI C onfidence Index has ranked India sixth in the confidence Index and
rated
India as one of the tops 10 most preferred investment locations (Kearney,
2003).
IV.
Challenges
UNCTAD Confidence Index placed India in nd rank in terms of FDI potentiality and th rank
82 112
in terms of performance during the period of 2002-2004 out of a survey of 141 economies. It
can
be inferred that despite its potentiality, performance is not satisfactor y and challenges are
still
ahead of India, which is highlighted with the help of survey report of GoI and other
organizations
as
follows:
Ground level hassles continue to be a major impediment for foreign investors. 88
percent
respondents rated this problem as ‘medium to high’ category (FICC I, 2004), which shows
a
marginal improvement of 3 percent over previous survey (FICCI, 20 03). According to
the th
corruption perception index 2006 of Transparency International India ranked with a score
74 of
3.33 out of 10, which is same as China and
Brazil.
Transport, Road, Power and Water availability continue to remain a cause of concern
for
investors, as revealed in the survey of FICCI, 2004. National Highway Authority of India
reported
that 6942 Km four-lane highway has been completed under highway development project. Out
of
a total 24971 Km, 7892 Km is under implementation and 9975 Km is still to be
completed. 7 , it is not
Though the per capita peak demand is less than per capita installed capacity in
India
equally surplus for all states in the country (indiasta.com). Kearney Confidence Index reflects
that
while Indian infrastru cture is attractive to 36 percent, Chinese infrastructure is attractive to
64
percent of
respondents.
Approval procedure of FDI in India is time consuming. The biggest barrier for India at first is
the
screening stage 8 . This is because we do not get across effectively to the decision-
itself making
“board room” levels of corporate entities where a final decision is taken. On the other hand,
China
is viewed as ‘more business oriented’, its decision-making is faster and has more FDI
friendly
policies (GoI,
2003).
One of the most prominent hurdles in attracting FDI inflow to India is it’s stringent labour
laws,
which discourage the entry of Greenfield FDI because of the fear that the company
concerned
would not be possible to downsize the labour strength in the time of d ownturn of
business. 14
(Planning Commission, 2002). The impediment was sounded in FICCI’s su rvey report 2004
where
69 percent of the respondents assessed the p roblem of FDI investment in India because of
labour 9
laws. Moreover, high rate of tariff , ex cessive red-tapism and bureaucracy and barriers
barriers of
perception pose as a challenge in realizing FDI inflow in India (House of Commons
2006).
V.
Conclusions:
Removing its long held restrictive foreign investment policy in 1991, India sought to compete
with
the successful Asian economies to get a greater share of wo rld’s FDI. Ongoing initiatives such
as
further simplification of rules and regulations, improvement in infrastructure are expected
to
provide necessary impetus to increase FDI inflows in future. The inflows of FDI would dep end
on
domestic economic conditions, world economic trends, and strategies of global
investors.
Government, on its part is fully committed to creating strong economic fundamentals and
an
increasingly proactive FDI policy
regime.
Moreover, various governmental and non-governmental organizations’ report revealed
India’s
potentiality as a FDI destination in developin g countries next to China, but performance is
still
very poor. The prospects of India as a FDI destination would be realized if some of its
constraints
could be
overcame.
Although FDI inflow to India has been increasing, regional distribution of the same is found to
be
more inequitable. To ensure a more equitable regional distribution of such flows both central
and
state government should take concerted strategy for improvement in infrastructure facilities
and
creation of sound economic and political environment. Moreover, state governments have to
take
attractive investment policy in the line of Maharashtra and Karnataka to invest in less
attracting
states or regions. Political willingness hence seems to be a major step in this
direction.
Development of infrastructure, especially power and transport network is an immediate need
of
the time since it is basic f or industrialization. Bureaucratic hassles, corruption and time
consuming
procedures should be reduced to attract more FDI inflow. After all a more transparent
investment
system will benefit and secure future prospect of FDI inflow in
India.
Notes:
1. Although DIPP has published data on FDI for the 2006-07, due to provisional nature it is excluded for present study.
2. Though we draw some table in respect of the above mention reasons for decline of FDI it doesn’t clearly express the reasons. For a better
inquiry of the negative growth, we rely on various issues of Economic Census. (2000, 2001, 2003, 2004).
15
3. Greenfield FDI, or FDI in new projects, adds directly to the stock of productive capital in the host country, while a merger or acquisition
represents a change in ownership that does not necessarily involve any immediate additions to investment or employment in the host country.
4. NCAER conducted market information survey of households in association with business Standard in 2005.
6. The World Fact Book of Central Intelligence Agency disclosed that Indian mean working age was 25 years compared to 43,36 and 32 years for
Japan, USA and China respectively.
7. The per capita peak demand at an all India average was 84.27 watt for the period 2005-2006 against peak installed capacity of 111.86 watt. The
scenario is opposite in case of some regions like Punjab, Haryana, Chandigarh, Daman and Diu, etc.
8. When a foreign investor consider any new investment decision, it goes through four stages in the decision-making process and action cycle,
namely- a) screening, b) planning, c) implementing and d) operating and expanding. (Planning Commission, GoI)
9. The average applied tariff for industrial imports into India is around 16% and the bound rate is around 35% for industrial products.
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17
Annexure 1:
Table-4: State-wise Amount Approved and Number of Approvals of Foreign Direct Investment
in India (August, 1991 to December
2004)
Sl.No. Approved Amount Total
State/R (Rs. Approval
egion371077.94 (20.61) 5064
1 Maharashtra Million)
(24.8)
2 Delhi 305226.3 (16.95) 2816 (13.8)
3 Tamil Nadu 226512.88 (12.58) 2686 (13.2)
4 Karnataka 190963.88 (10.60) 2649 (13.0)
5 Gujarat 124625.13 (6.92) 1242 (6.1)
6 Andhra Pradesh 116344.43 (6.46) 1296 (6.4)
7 Madhya Pradesh 92714.08 (5.15) 243 (1.2)
8 Orissa 82293.13 (4.57) 141 (0.7)
9 West Bengal 77971.3 (4.33) 689 (3.4)
10 Uttar Pradesh 48365.63 (2.69) 815 (4.0)
11 Haryana 38763.08 (2.15) 882 (4.3)
12 Rajasthan 29112.11 (1.62) 344 (1.7)
13 Punjab 21303.54 (1.18) 203 (1.0)
14 Kerala 17815.42 (0.99) 336 (1.6)
15 Pondicherry 12861.53 (0.71) 130 (0.6)
16 Himachal Pradesh 12266.45 (0.68) 102 (0.5)
17 Goa 9993.78(0.55) 285 (1.4)
18 Bihar 7397.05 (0.41) 49 (0.2)
19 Chattisgarh 6363.03 (0.35) 48 (0.2)
20 Chandigarh 3241.7 (0.18) 86 (0.4)
21 Jharkhand 1465.15 (0.08) 81 (0.4)
22 Uttaranchal 1256.49 (0.07) 52 (0.3)
23 Dadra & Nagar Haveli 1239.8 (0.07) 72 (0.4)
24 Daman & Diu 590.34 (0.03) 44 (0.2)
25 Meghalaya 529.6 (0.03) 5 (0.01)
26 Andaman & Nicobar 137.87 (0.01) 8 (0.01)
27 Arunachal Pradesh 110.6 (0.01) 2 (0.0)
28 Jammu and Kashmir 84.1 (0.0) 5 (0.01)
29 Nagaland 36.8 (0.00) 2 (0.0)
30 Manipur 31.85 (0.0) 2 (0.0)
31 Tripura 30.88 (0.00) 4 (0.0)
32 Mizoram 15.22 (0.00) 1 (0.0)
33 Assam 14.95 (0.0) 19 (0.1)
34 Lakshadweep 5 (0.00) 1 (0.0)
Grand Total 1800761.04 (100.0) 22404 (100.0)