A Study on FDI & FII impact on Indian Economy

1
K.V.R.SATYA KUMAR
AsstProfessor, Dept. of Management Studies, St.Peters Engineering College, Hyderabad.
satyakumar.kolla@gmail.com
2
Dr.B.RADHA
Associate Professor, PG Department of Commerce VRS&YRN College, Chirala.
3
G.SREEVANI
AsstProfessor, Dept. of Management Studies, Anurag Group of Institutions, Hyderabad

ABSTRACT
The investment strategies in India have a very interesting progress as the investment was on a
wide spread into different sectors and in to different industries and could gain a good amount of
attraction in each and every sector. The growth in textile industries, pharmacy industries
automobile industries communication insurance & retail industries and other industries has
attracted the FDI at positive level from its start. Apart from all these the role of government plays
a vital role in pooling the FDI and as India is the world’s largest democratic country with open
markets and with governing the markets in well-structured rules it has placed a base platform for
the investors to find a safe place to invest without any much restrictions. The study also
discusses the investment climate in India, Indian government incentives to foreign investors, the
Indian regulatory environment as it affects investment, and the effect of India’s global, regional,
and bilateral trade agreements. Finally, the study examines global FDI in India’s and its impact
on Indian economy.
Key Words: Investment, Bilateral Trade Agreements
‘Investment’ is usually understood as financial contribution to the capital of an enterprise or
purchase of shares in the enterprise. ‘Foreign investment’ is investment in an enterprise by a
Non-Resident irrespective of whether this involves new capital or re-investment of earnings.

Foreign investment is of two kinds

(i) Foreign Direct Investment (FDI) and

(ii) Foreign Portfolio Investment.

International Monetary Fund (IMF) and Organization for Economic Cooperation and
Development(OECD) define FDI similarly as a category of 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 an economy other than that of
the direct investor.

The Foreign direct investment (FDI) and foreign institutional investment (FII) flows are usually
Preferred over the other form of external finance, because they are not debt creating, nonvolatile
in nature and their returns depend upon the projects financed by the investor. The Foreign direct
Investment (FDI) and foreign institutional investment (FII) would also facilitate international
trade and transfer of knowledge, skills and technology.

The Foreign direct investment (FDI) and foreign institutional investment (FII) is the process by
Which the resident of one country (the source country) acquire the ownership of assets for the
purpose of controlling the production, distribution and other productive activities of a firm in
another country (the host country).
According to the international monetary fund (IMF), foreign direct investment (FDI) and foreign
Institutional investment (FII) is defined as “an investment that is made to acquire a lasting
interest in an enterprise operating in an economy other than that of investor”.

Determinants of FDI

 One of the most important determinants of foreign direct investment is the size as well as
the growth prospects of the economy of the country where the foreign direct investment
is being made. It is normally assumed that if the country has a big market, it can grow
quickly from an economic point of view and it is concluded that the investors would be
able to make the most of their investments in that country.

 In case of foreign direct investments that are based on export, the dimensions of the host
country are important as there are opportunities for bigger economies of scale, as well as
spill-over effects.
 The population of a country plays an important role in attracting foreign direct investors
to a country. In such cases the investors are lured by the prospects of a huge customer
base.
  Now if the country has a high per capita income or if the citizens have reasonably good
spending capabilities then it would offer the foreign direct investors with the scope of
excellent performances.

 The status of the human resources in a country is also instrumental in attracting direct
investment from overseas. There are certain countries like China that have taken an active
interest in increasing the quality of their workers.

 They have made it compulsory for every Chinese citizen to receive at least nine years of
education. This has helped in enhancing the standards of the laborers in China.
 If a particular country has plenty of natural resources it always finds investors willing to
put their money in them. A good example would be Saudi Arabia and other oil rich
countries that have had overseas companies investing in them in order to tap the
unlimited oil resources at their disposal.

 Inexpensive labor force is also an important determinant of attracting foreign direct

investment. The BPO revolution, as well as the boom of the Information Technology
companies in countries like India has been a proof of the fact that inexpensive labor force
has played an important part in attracting overseas direct investment.

 Infrastructural factors like the status of telecommunications and railways play an

important part in having the foreign direct investors come into a particular country.

 It has been observed that if the infrastructural facilities are properly in place in a country
then that country receives a substantial amount of foreign direct investment.
 If a country has extended its arms to overseas investors and is also able to get access to
the international markets then it stands a better chance of getting higher amounts of
foreign direct investment.

 It has been observed in the recent years that a couple of countries have altered their
stance vis-a-vis overseas investment. They have reset their economic policies in order to
suit the interests of the overseas investors.

 These companies have increased the transparency of the legal frameworks in place. This
has been done so that the overseas companies can understand the implications of their
investment in a particular country and take the appropriate decisions.

FDI Policies

 The foreign direct investment policies are the various rules and regulations that have been
laid down by the various countries in order to regulate the overseas investment that is
being made in a country.

 The foreign direct investment policies take an important part in determining the amount
of foreign direct investment that comes in a country. These policies play an important
part in the decision making process of the foreign direct investors.
 They are normally affected by the foreign direct investment policies that are in place in a
country and make their decision based on these policies. If the policies are suitable
enough for the companies they go ahead with their investment.
 The foreign direct investment policies provide the various conditions under which foreign
direct investment may be made in a country. They also state the various situations where
exception would be made to the allowances that are provided to the foreign direct
investors.

 The foreign direct investment policies are reviewed on a regular basis. The changes that
are made to the policies are also notified through a variety of means like the press notes
for example. There is also some mention in the policies about the various ways in which
foreign direct investment may be made in various sectors.

 There are certain conditions where the investors need to seek permission from the various
authoritative figures like the national government or any other entity that is responsible
for looking after the various affairs that are related to foreign direct investment.

 The foreign direct investment policies are made mainly by entities that are responsible for
looking after the matters related to foreign direct investment in a country. The policies
may also be formulated by organizations that are meant to promote the country as foreign
direct investment destination. There are certain objectives behind the foreign direct
investment policies. The makers of these policies have two broad objectives – to promote
the investment opportunities that are present in the country to the overseas investors and
strike a balance between the overseas and local investors.

 These policies also have various proposals that are made in order to improve the policies
that are in place for administering the foreign direct investment policies. These proposals
are important as they help in improving the foreign direct investment policy situations
and amend them so that they can appeal to the overseas investors.

 This would lead to an increase in the foreign direct investment that is coming into the
country. The foreign direct investment policies also state the various areas where a
country's government would not allow foreign direct investment to be made. Some of
those areas are real estate and housing, gambling, lottery business, betting and chit funds
for example.

 Certain countries have formulated a number of foreign direct investment acts. These acts
lay down the various conditions where certain companies have to seek permission from
important authorities in order to receive foreign direct investment of any form and shape.
There are certain companies that are granted such permissions but only after they
complete certain formalities.

 These formalities also need to be observed even after the permission has been provided to
these companies as far as foreign direct investment is concerned. The various options in
which an overseas investor can gain entry into the market of a country for the purposes of
 making foreign direct investment are also mentioned in these foreign direct investment
policies.

Methods of Foreign Direct Investments

The foreign direct investor may acquire 10% or more of the 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:

 low corporate tax and income tax rates

 tax holidays
 preferential tariffs& other types of tax concessions
 special economic zones
 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)

The manner in which a firm chooses to enter a foreign market through FDI:
– International franchising
– Branches
– Contractual alliances
– Equity joint ventures
– Wholly foreign-owned subsidiaries
Investment approaches:
– Greenfield investment (building a new facility)
– Cross-border mergers
– Cross-border acquisitions
– Sharing existing facilities

Objective of the Study:

• To Study the trends and patterns in the foreign direct investment (FDI)across different
sectors and from different countries in India during 1991-2014 period means during post
liberalization period
 • This study is to review why India has been a preferred destination for FDI and study the
impact of FDI on the Indian economy

SHARE OF TOP INVESTING COUNTRIES FDI EQUITY INFLOWS (Financial years):

Ranks Country 2012-13 2013-14 2014-15 Cumulative %age to
( April - (April – Inflows total
March) March) (April- (April ’00 - Inflows
November, November ‘14) (in
2014) terms
of US
$)
51,654 29,360 31,336 401,821
1. MAURITIUS 35 %
(9,497) (4,859) (5,205) (83,730)
12,594 35,625 22,698 148,504
2. SINGAPORE 12 %
(2,308) (5,985) (3,747) (29,193)
5,797 20,426 5,971 106,856
3. U.K. 9%
(1,080) (3,215) (998) (21,761)
12,243 10,550 7,789 88,433
4. JAPAN 7%
(2,237) (1,718) (1,289) (17,557)
10,054 13,920 14,690 70,988
5. NETHERLANDS 6%
(1,856) (2,270) (2,429) (13,665)
3,033 4,807 8,248 63,978
6. U.S.A. 6%
(557) (806) (1,358) (13,286)
2,658 3,401 2,837 38,567
7. CYPRUS 3%
(490) (557) (470) (7,916)
4,684 6,093 3,725 35,331
8. GERMANY 3%
(860) (1,038) (615) (7,134)
3,487 1,842 3,229 21,935
9 FRANCE 2%
(646) (305) (530) (4,409)
987 2,084 1,116 14,264
10. SWITZERLAND 1%
(180) (341) (184) (2,892)
TOTAL FDI INFLOWS 121,907 147,518 114,047 1,158,477
FROM ALL COUNTRIES (22,423) (24,299) (18,884) (236,586) -
*
Amount Rupeesin crores (US$ in million)
*Includes inflows under NRI Schemes of RBI.
Note: (i) Cumulative country-wise FDI equity inflows (from April, 2000 to November, 2014) are at – Annex-‘A’.
(ii) %age worked out in US$ terms & FDI inflows received through FIPB/SIA+ RBI’s Automatic Route + acquisition of
existing shares only.
 SECTORS ATTRACTING HIGHEST FDI EQUITY INFLOWS:
Ranks Sector 2012-13 2013-14 2014-15 Cumulative % age to total
( April - (April- (April- Inflows Inflows
March) March) November, (April ’00 - (In terms of
2014) November US$)
‘14)
1. SERVICES SECTOR ** 26,306 13,294 11,189 196,759
18 %
(4,833) (2,225) (1,847) (41,307)
2. CONSTRUCTION 7,248 7,508 4,240 112,797
DEVELOPMENT: (1,332) (1,226) (703) (24,009)
TOWNSHIPS, HOUSING, 10 %
BUILT-UP
INFRASTRUCTURE
3. TELECOMMUNICATIONS 1,654 7,987 14,726 81,446 7%
(radio paging, cellular (304) (1,307) (2,472) (16,635)
mobile, basic telephone
services)
4. COMPUTER SOFTWARE & 2,656 6,896 5,241 64,911
6%
HARDWARE (486) (1,126) (862) (13,679)
5. DRUGS & 6,011 7,191 6,903 62,974
5%
PHARMACEUTICALS (1,123) (1,279) (1,154) (12,751)
6. AUTOMOBILE INDUSTRY 8,384 9,027 9,379 57,575
5%
(1,537) (1,517) (1,539) (11,351)
7. CHEMICALS (OTHER 1,596 4,738 2,830 48,063
4%
THAN FERTILIZERS) (292) (878) (470) (10,137)
8. POWER 2,923 6,519 3,317 45,972
4%
(536) (1,066) (550) (9,450)
9. METALLURGICAL 7,878 3,436 1,323 39,572 4%
INDUSTRIES (1,466) (568) (219) (8,294)
10 17,777 2,949 3,288 39,496
HOTEL & TOURISM 3%
(3,259) (486) (544) (7,662)
Amountin Rs. crores (US$ in million)
Note:(i)** Services sector includes Financial, Banking, Insurance, Non-Financial / Business, Outsourcing, R&D, Courier, Tech. Testing and
Analysis
– Cumulative Sector- wise FDI equity inflows (from April, 2000 to November, 2014) are at - Annex-‘B’.
– FDI Sectoral data has been revalidated / reconciled in line with the RBI, which reflects minor changes in the FDI figures
(increase/decrease) as compared to the earlier published sectoral data.

FINANCIAL YEAR-WISE FDI EQUITY INFLOWS:

(As per DIPP’s FDI data base – equity capital components only):
S. Nos Financial Year Amount of FDI Inflows %age growth
(April – March) over previous
FINANCIAL YEARS 2000-01 to 2014-15 (up to In Rscrores In US$ million year (in terms
November, 2014) of US $)
1. 2000-01 10,733 2,463 -
2. 2001-02 18,654 4,065 ( + ) 65 %
3. 2002-03 12,871 2,705 ( - ) 33 %
4. 2003-04 10,064 2,188 ( - ) 19 %
5. 2004-05 14,653 3,219 ( + ) 47 %
6. 2005-06 24,584 5,540 ( + ) 72 %
7. 2006-07 56,390 12,492 (+ )125 %
8. 2007-08 98,642 24,575 ( + ) 97 %
9. 2008-09 142,829 31,396 ( + ) 28 %
10. 2009-10 # 123,120 25,834 ( - ) 18 %
11. 2010-11 # 97,320 21,383 ( - ) 17 %
12. 2011-12 # ^ 165,146 35,121 (+) 64 %
13. 2012-13 # 121,907 22,423 (-)
36 %
14. 2013-14 147,518 24,299 (+) 8%
15. 2014-15 (Apr - Nov, 2014) 114,047 18,884 -
CUMULATIVE TOTAL 1,158,478 236,587 -
(from April, 2000 to November, 2014)
Note: (i) includingamount remitted through RBI’s-NRI Schemes (2000-2002).
(ii) FEDAI (Foreign Exchange Dealers Association of India) conversion rate from rupees to US dollar applied, on the basis of
monthly average rate provided by RBI (DEPR), Mumbai.
# Figures for the years 2009-10, 2010-11, 2011-12, 2012-13, 2013-14 and 2014-15 (from April to November, 2014) are
provisional subject to reconciliation with RBI.
^ Inflows for the month of March, 2012 are as reported by RBI, consequent to the adjustment made in the figures of
March, ‘11, August, ’11 and October, ‘11.

FINDINGS
 India is established as one of the top tier world destinationsfor FDI. In the Asia-Pacific
region,the country consolidated its second top position, besides China, after a lull in 2009
because of financial crisis. To augment, India’s inward investment rule went through a
series of changes since economic reforms were escorted in two decades back. The
cumulative amount of FDI inflows into India were US$3,14,902 million for the period
April 2000 – December 2013, including data of‘re-invested earnings’ & ‘other capital’ of
equity inflows. These are the estimates on an average basis, based upon data for the
previous two years, published by RBI in Monthly Bulletin. Mauritius, Singapore and UK
are the top three contributors of FDI into India while Services, Construction and Telecom
sectors attracted the major capital.
 As per the recent survey done by the United National Conference on Trade and
Development, India will emerge as the third largest recipient of FDI for the three-year
 period ending 2013. As per the study, the sectors which attract highest FDI were services,
telecommunications, construction activities, and computer software and hardware.
 There has been a continuing and sustained effort to make the FDI policy more liberal and
investor-friendly. Significant rationalisation and simplification of the policy has,
therefore, been carried out in the recent past. DIPP, in its consultation paper titled ‘FDI
Policy—rational and relevance of caps’ has, as a landmark initiative, accepted that up to
49% foreign investment is indirectly possible in all sectors. This effectively means that an
Indian owned and controlled company can make downstream investments even in
prohibited sectors such as multibrand retail trading etc. It is important here to note that
foreign investment for this purpose includes not only strategic foreign investment but also
FII under portfolio investment schemes, NRI, GDR, ADR etc.

SUGGESTIONS

 It is important to consider whether the FDI that is attracted is beneficial to the economy.
There is already a substantial body of research into the effects of FDI generally and the
factors that can make FDI more or less beneficial.

 FDI can make a positive contribution to economic growth, by providing additional capital and
facilitating technology transfers.

 A further potential advantage of FDI is the possibility of technology spillovers, which can
potentially enable the recipient country to benefit from advanced technologies developed
overseas.

 To pursue a growth of around 7 percent in the Gross Domestic Product of India, the net
capital flows should increase by at least 28 to 30 percent on the whole.

 The savings of the country stood at 24 percent. The gap formed between intended investment
and the actual savings of the country was lifted up by portfolio investments by Foreign
Institutional Investors, loans by foreign banks and other places, and foreign direct
investments. Among these three forms of financial assistance, India prefers as well as
possesses the maximum amount of Foreign Direct Investments.

 As largely debated FDI has both positive and negative factors. These factors should be
properly studied before allowing any FDI into a particular sector or the country.
CONCLUSION

 The GDP growth in India is anticipated to hover around 7% yearly and the number of people
in the Indian middle class is set to triple over the next 15 years, the domestic demand is
expected to grow exponentially. India’s young demographic profile also helps it in providing
an increasingly well-educated and cost-competitive labor force. These factors put India in a
good position to attract an increasing proportion of global FDI going forward.

BIBLIOGRAPHY

Books:

 Foreign direct investment in India by Lata Chakravarthy.

 FDI (issues in emerging economies) by K. Seethe Pathi.
 Foreign institutional investors by G Gopal Krishna Murthy.

Websites

 http://dipp.nic.in/Fdi_Circular/FDI_Circular_012011_31March2011.pdf
 http://www.ibef.org/artdispview.aspx?in=36&art_id=29000&cat_id=140&page=1

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 Acocella, N., Strategic Foreign Direct Investment in EC., Economic Notes, Vol. 20, No. 2,
1991, pp. 279-302.
 Adiseshiah, Malcolm S., Foreign Investment and Liberalization, Yojana, Vol. 38, No. 14 &
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 Agarwal, Manju, International Finance, IIFP, New Delhi, 1994.