FLOW of

FOREIGN
DIRECT
INVESTMENT
In INDIA
Submitted To: Under the guidance of:
Ms. Renu Agarwal Mr. S.C. Malhotra
Head of Commerce Department Associate Professor
Shri Ram College of Commerce Shri Ram College of Commerce
University of Delhi University of Delhi
 ACKNOWLEDGEMENT

I take immense pleasure in thanking Shri Ram College of Commerce, along

with Delhi University for having permitted me to carry out this project
work.

I wish to express my deep sense of gratitude to my Internal Guide, Mr.

S.C.Malhotra (Associate Professor, Shri Ram College of Commerce) for his
able guidance and useful suggestions, which helped me in completing the
project work, in time.

Words are inadequate in offering my thanks to the all the other faculty of
this college for their encouragement and cooperation in carrying out the
project work.

Finally, yet importantly, I would like to express my heartfelt thanks to my

beloved parents for their blessings, my friends/classmates for their help
and wishes for the successful completion of this project.

Ankita Nirola
 DECLARATION
I hereby declare that that the project work titled “Flow of Foreign Direct
Investment in India”, submitted to Shri Ram College of Commerce, Delhi
University, is a record of original work done by me under the guidance of
Mr. S.C. Malhotra ( SRCC) and this project work has not performed the
basis for the award of any degree/ diploma/ associate ship/ fellowship and
similar project if any. However, any citations, references and quotations
that may be taken directly from any source have been clearly mentioned as
footnotes on the concerned pages.

ANKITA NIROLA

B.COM(HONS.)-III

ROLL NO-106

SECTION-H

SHRI RAM COLLEGE OF COMMERCE

UNIVERSITY OF DELHI
 FLOW OF FOREIGN DIRECT INVESTMENT IN
INDIA

Once unlocking up of the Indian economy to the world economy, the country
witnessed crowd stream of foreign capital into the economy. In the era of
globalization foreign direct investment (FDI) takes vital part in the
development of both developing and developed countries. Foreign Direct
Investment (FDI) offers a number of profits like overture of new technology,
innovative products, extension of new markets, and introduction of new skills
etc., which reflect in the growth of Nation’s Income. India is ranked as the
most favored end for foreign direct investment showing a remarkable
growth rate year by year. India is in the midst of a retail boom. The sector
witnessed significant transformation in the past decade from small-unorganized
family-owned retail formats to organized retailing. Many international brands
have entered the market. With the growth in organized retailing, unorganized
retailers are fast changing their business models. However, retailing is one of
the few sectors where foreign direct investment (FDI) is not allowed at present.
This project tries to analyze the trends of flow of foreign direct investment
in India.

Objectives of the Study

The objective of the study is to throw light on the following aspects of foreign
direct investment:

 Foreign Market Entry Modes

 Advantages of allowing Foreign Direct Investment in India

 Drawbacks of Foreign Direct Investment in India

 View by Mr. Biyani: Confederation of Indian Industry (CII) Chairman
 Sectors not allowing Foreign Direct Investment
 Foreign Direct Investment in major sectors in India

 Foreign Direct Investment in Retail Sector - Impact and analysis

 Trends of Foreign Direct Investment in India

  Country wise presentation of Foreign Direct Investment in India
(monetary terms) and

 Inflow of Foreign Direct Investment in various sectors (monetary terms).

Methodology of the Study

To study the trends of Foreign Direct Investment in India (country wise and
sector wise), the required data has been collected from the secondary source and
used. This data has been collected from the websites of Reserve Bank of India
(RBI). The required information is also gathered from the publications of
Department of Industrial Policy and Promotion and Ministry of Finance. To
analyze this data, simple statistical techniques like percentages, averages are
applied.

India has been ranked at the third place in global foreign direct investments in
2009 and will continue to remain among the top five attractive destinations for
international investors during 2010-11, according to United Nations
Conference on Trade and Development (UNCTAD).

Globalization
The concept of globalization has increased across the world in recent years due
to the fast progress that has been made in the field of technology especially in
communications and transport. In India globalization started when the
government of India opened the country's markets to foreign investments in the
early 1990s through changes in its economic policy in 1991. As a result of this,
globalization of the Indian Industry took place on a major scale. Globalization
means the dismantling of trade barriers between nations and the integration of
the nations economies through financial flow, trade in goods and services, and
corporate investments between nations. Globalization of the Indian Industry
took place in its various sectors such as steel, pharmaceutical, petroleum,
chemical, textile, cement, retail, BPO etc.
As far as the Indian economy is concerned the impact of globalization has been
highly effective and positive in all spheres of economic and social life and
virtually no negative effect. It is only because of opening the earlier closed,
tyrannical policies to globalization that has helped the Indian economy to
develop rapidly since the last 15 years. India's economic growth has been high,
exports have boomed, incidence of poverty has been reduced, India's companies
are setting up their business units abroad. India has better technological
spreading out for the benefit of the common man in terms of mobiles, road
transport, cheap clothes, chemicals, medicines, electronic and electrical gadgets
etc., only because of globalization.

Foreign Market Entry Modes

The decision of how to enter a foreign market can have a significant impact on
the results. Expansion into foreign markets can be achieved via the following
four mechanisms:

• Exporting
• Licensing
• Joint Venture
• Direct Investment

Exporting

Exporting is the marketing and direct sale of domestically-produced goods in

another country. Exporting is a traditional and well-established method of
reaching foreign markets. Since exporting does not require that the goods be
produced in the target country, no investment in foreign production facilities is
required. Most of the costs associated with exporting take the form of marketing
expenses.

Exporting commonly requires coordination among four players:

 • Exporter
• Importer
• Transport provider
• Government

Licensing

Licensing essentially permits a company in the target country to use the

property of the licensor. Such property usually is intangible, such as trademarks,
patents, and production techniques. The licensee pays a fee in exchange for the
rights to use the intangible property and possibly for technical assistance.

Because little investment on the part of the licensor is required, licensing has
the potential to provide a very large ROI. However, because the licensee
produces and markets the product, potential returns from manufacturing and
marketing activities may be lost.

Joint Venture

There are five common objectives in a joint venture: market entry, risk/reward
sharing, technology sharing and joint product development, and conforming to
government regulations. Other benefits include political connections and
distribution channel access that may depend on relationships.

Such alliances often are favorable when:

• the partners' strategic goals converge while their competitive goals

diverge;
• the partners' size, market power, and resources are small compared to the
industry leaders; and
• Partners are able to learn from one another while limiting access to their
own proprietary skills.

The key issues to consider in a joint venture are ownership, control, length of
agreement, pricing, technology transfer, local firm capabilities and resources,
and government intentions.
Potential problems include:

• conflict over asymmetric new investments

• mistrust over proprietary knowledge
• performance ambiguity - how to split the pie
• lack of parent firm support cultural clashes
• if, how, and when to terminate the relationship

Joint ventures have conflicting pressures to cooperate and compete:

• Strategic imperative: the partners want to maximize the advantage gained

for the joint venture, but they also want to maximize their own
competitive position.
• The joint venture attempts to develop shared resources, but each firm
wants to develop and protect its own proprietary resources.
• The joint venture is controlled through negotiations and coordination
processes, while each firm would like to have hierarchical control.

Foreign Direct Investment

Foreign direct investment (FDI) is the direct ownership of facilities in the target
country. It involves the transfer of resources including capital, technology, and
personnel. Direct foreign investment may be made through the acquisition of an
existing entity or the establishment of a new enterprise.

Direct ownership provides a high degree of control in the operations and the
ability to better know the consumers and competitive environment. However, it
requires a high level of resources and a high degree of commitment.

The Case of Euro Disney

Different modes of entry may be more appropriate under different

circumstances, and the mode of entry is an important factor in the success of the
project. Walt Disney Co. faced the challenge of building a theme park in
Europe. Disney's mode of entry in Japan had been licensing. However, the firm
chose direct investment in its European theme park, owning 49% with the
remaining 51% held publicly.
Besides the mode of entry, another important element in Disney's decision was
exactly where in Europe to locate. There are many factors in the site selection
decision, and a company carefully must define and evaluate the criteria for
choosing a location. The problems with the Euro Disney project illustrate that
even if a company has been successful in the past, as Disney had been with its
California, Florida, and Tokyo theme parks, future success is not guaranteed,
especially when moving into a different country and culture. The appropriate
adjustments for national differences always should be made.

Comparison of Market Entry Options

The following table provides a summary of the possible modes of foreign

market entry:

Comparison of Foreign Market Entry Modes

Conditions Favoring
Mode Advantages Disadvantages
this Mode

Limited sales potential in

target country; little
product adaptation Trade barriers & tariffs
required Minimizes risk and add to costs.
investment.
Distribution channels Transport costs
Exporting close to plants Speed of entry
Limits access to local
High target country information
Maximizes scale; uses
production costs existing facilities.
Company viewed as an
Liberal import policies outsider

High political risk

Licensing Import and investment Minimizes risk and Lack of control over use
barriers investment. of assets.

Legal protection possible Licensee may become

 in target environment.
Speed of entry competitor.
Low sales potential in
target country.
Able to circumvent Knowledge spillovers
trade barriers
Large cultural distance
License period is
High ROI limited
Licensee lacks ability to
become a competitor.
Import barriers

Large cultural distance Overcomes ownership

restrictions and Difficult to manage
Assets cannot be fairly
cultural distance
priced
Dilution of control
High sales potential Combines resources
Joint of 2 companies. Greater risk than
Ventures Some political risk exporting a & licensing
Potential for learning
Knowledge spillovers
Government restrictions
on foreign ownership Viewed as insider
Partner may become a
Less investment competitor.
Local company can
provide skills, resources, required
distribution network,
brand name, etc.
Greater knowledge of
Import barriers Higher risk than other
local market
modes
Small cultural distance
Can better apply
Direct Requires more
specialized skills
Assets cannot be fairly resources and
Investment priced commitment
Minimizes knowledge
spillover
High sales potential May be difficult to
manage the local
Can be viewed as an
Low political risk resources.
insider

Investment is putting money into something with the hope of profit. More
specifically, investment is the commitment of money or capital to the purchase
of financial instruments or other assets so as to gain profitable returns in the
form of interest, income {dividend}, or appreciation of the value of the
instrument.

Foreign Direct Investment

Foreign Direct Investment (FDI) in India has played an important role in the
development of the Indian economy. FDI in India has - in a lot of ways -
enabled India to achieve a certain degree of financial stability, growth and
development. This money has allowed India to focus on the areas that may have
needed economic attention, and address the various problems that continue to
challenge the country.
Foreign Direct Investment (FDI) is normally defined as a form of investment
made in order to gain unwavering and long-lasting interest in enterprises that
are operated outside of the economy of the shareholder or depositor. In other
words it is the investment made by an enterprise of the one nation in an
enterprise in another country. In FDI, there is a parent enterprise and a foreign
associate, which unites to form a Multinational Corporation (MNC). In order to
be deemed as a FDI, the investment must give the parent enterprise power and
control over its foreign affiliate. As a source of capital to the corporate it effects
the development of nation’s economy by the way of overture of new
technology, innovative products, extension of new markets, introduction of new
skills etc. It also effects positively on business environment. With the flow of
FDI, the nation can develop the infrastructural facilities which are key to rapid
industrialization of the country. It has the direct effect on the nation’s balance
of payments (BoP). It considered as the device of development which helps in
achieving the self-reliance in all segments of the economy. It had been rightly
recognized by the government of India, in the year 1948 itself and prepared a
separate policy to satisfy the interest of foreign investors and gave the strong
bigotry on foreign capital.

Advantages of FDI
Foreign Direct Investment in India is allowed through four basic routes namely,
financial collaborations, technical collaborations and joint ventures, capital
markets via Euro issues, and private placements or preferential allotments.
Foreign Direct Investment plays a pivotal role in the development of India's
economy. It is an integral part of the global economic system. Advantages of
FDI can be enjoyed to full extent through various national policies and
international investment architecture. Both the factors contribute enormously to
the maximum FDI inflows in India, which stimulates the economic
development of the country. FDI inflow helps the developing countries to
develop a transparent, broad, and effective policy environment for investment
issues as well as, builds human and institutional capacities to execute the same.
Attracting foreign direct investment has become an integral part of the
economic development strategies for India. FDI ensures a huge amount of
domestic capital, production level, and employment opportunities in the
developing countries, which is a major step towards the economic growth of the
country. FDI has been a booming factor that has bolstered the economic life of
India, but on the other hand it is also being blamed for ousting domestic
inflows. FDI is also claimed to have lowered few regulatory standards in terms
of investment patterns. The effects of FDI are by and large transformative. The
incorporation of a range of well-composed and relevant policies will boost up
the profit ratio from Foreign Direct Investment higher. Some of the biggest
advantages of FDI enjoyed by India have been listed as under:

Economic growth: This is one of the major sectors, which is enormously

benefited from foreign direct investment. A remarkable inflow of FDI in
various industrial units in India has boosted the economic life of country.

Trade: Foreign Direct Investments have opened a wide spectrum of

opportunities in the trading of goods and services in India both in terms of
import and export production. Products of superior quality are manufactured by
various industries in India due to greater amount of FDI inflows in the country.

Employment and skill levels: - FDI has also ensured a number of

employment opportunities by aiding the setting up of industrial units in various
corners of India.

Technology diffusion and knowledge transfer: - FDI apparently helps

in the outsourcing of knowledge from India especially in the Information
Technology sector. It helps in developing the know-how process in India in
terms of enhancing the technological advancement in India.

Linkages and spillover to domestic firms: - Various foreign firms are

now occupying a position in the Indian market through Joint Ventures and
collaboration concerns. The maximum amount of the profits gained by the
foreign firms through these joint ventures is spent on the Indian market.

FDI inflows raise the capital for investment: - Foreign capital has
taken over the domestic capital in terms of purchasing issue. Domestic capital is
usually used or invested in other sectors of the Indian market.

Foreign Direct Investment in green field ventures has introduced technological

advancement and contemporary techniques for management in India, which the
country lacked badly before FDI made its entry.

The inflow of foreign capital in India has opened up a surfeit of options in the
Indian market by ensuring foreign capital shares which stabilizes the country's
economy.

Drawbacks of FDI
The disadvantages of foreign direct investment occur mostly in case of matters
related to operation, distribution of the profits made on the investment and the
personnel. One of the most indirect disadvantages of foreign direct investment
is that the economically backward section of the host country is always
inconvenienced when the stream of foreign direct investment is negatively
affected.

The situations in countries like Ireland, Singapore, Chile and China corroborate
such an opinion. It is normally the responsibility of the host country to limit the
extent of impact that may be made by the foreign direct investment. They
should be making sure that the entities that are making the foreign direct
investment in their country adhere to the environmental, governance and social
regulations that have been laid down in the country.

The various disadvantages of foreign direct investment are understood where

the host country has some sort of national secret – something that is not meant
to be disclosed to the rest of the world. It has been observed that the defense of
a country has faced risks as a result of the foreign direct investment in the
country.

At times it has been observed that certain foreign policies are adopted that are
not appreciated by the workers of the recipient country. Foreign direct
investment, at times, is also disadvantageous for the ones who are making the
investment.

Foreign direct investment may entail high travel and communications expenses.
The differences of language and culture that exist between the country of the
investor and the host country could also pose problems in case of foreign direct
investment.

Yet another major disadvantage of foreign direct investment is that there is a

chance that a company may lose out on its ownership to an overseas company.
This has often caused many companies to approach foreign direct investment
with a certain amount of caution.

At times it has been observed that there is considerable instability in a particular

geographical region. This causes a lot of inconvenience to the investor.

The size of the market, as well as, the condition of the host country could be
important factors in the case of the foreign direct investment. In case the host
country is not well connected with their more advanced neighbors, it poses a lot
of challenge for the investors.

At times it has been observed that the governments of the host country are
facing problems with foreign direct investment. It has less control over the
functioning of the company that is functioning as the wholly owned subsidiary
of an overseas company.

This leads to serious issues. The investor does not have to be completely
obedient to the economic policies of the country where they have invested the
money. At times there have been adverse effects of foreign direct investment on
the balance of payments of a country. Even in view of the various disadvantages
of foreign direct investment it may be said that foreign direct investment has
played an important role in shaping the economic fortunes of a number of
countries around the world.

The global investors would collude and exercise monopolistic power to raise
prices and monopolistic (big buying) power to reduce the prices received by the
suppliers.

Hence, both the consumers and the suppliers would lose, while the profit
margins of such chains would go up.
Thus, it would lead to lopsided growth in cities, causing discontent and social
tension elsewhere.
View by Mr. Biyani
The foreign direct investment (FDI) in Indian should be allowed in a phased
manner so that it could serve the purpose of much-needed capital and bring
boom in various sectors, according to Confederation of Indian Industry (CII)
Chairman Kishore Biyani.
1. FDI should be gradually allowed first in relatively less sensitive sectors like
garments, lifestyle products, house ware and entertainment.
2. Alternative funding mechanisms and investment opportunities should be
considered like FIIs and venture capital in the primary market, besides FDI.
Hence they should be legalized and encouraged in the primary market.
3. He said the industries needed time for capital formation, which would take at
least two-three years. The gradual inflow of FDI should not be a hindrance
for the growth of the various sectors.

Flow of FDI in India

In the year 1991, the government of India was sanctioned in its new Industrial
Policy, large number of concessions and incentives, to attract the flow of the
foreign capital to India. Factors like prospect opportunities in industries,
favorite government policy, political stability in the country etc., were ranked
India as second favorite country in the world, following China, in terms of
attractiveness of FDI. AT Kearney’s 2007 Global Services Location Index
ranked India as the most preferred destination in terms of financial
attractiveness, people and skills availability and business environment. The
positive perceptions as a result of strong economic fundamentals driven by 19
years of reforms has helped FDI inflows grow at about 20 times since the
opening up of the economy to foreign investment since 1991.

Foreign Direct Investment in India

India has continually sought to attract FDI from the world’s major investors. In
1998 and 1999, the Indian national government announced a number of reforms
designed to encourage FDI and present a favorable scenario for investors. In
India, Foreign Direct Investment Policy allows for investment only in case of
the following form of investments:
• Through financial alliance
• Through joint schemes and technical alliance
• Through capital markets, via Euro issues
• Through private placements or preferential allotments

Foreign Direct Investment in India is not allowed under the

following industrial sectors:
• Arms and ammunition
• Atomic Energy
• Coal and lignite
• Rail Transport
• Mining of metals like iron, manganese, chrome, gypsum, sulfur, gold,
diamonds, copper, zinc

A number of projects have been announced in areas such as electricity

generation, distribution and transmission, as well as the development of roads
and highways, with opportunities for foreign investors.

The Indian national government also provided permission to FDIs to provide up

to 100% of the financing required for the construction of bridges and tunnels,
but with a limit on foreign equity of INR 1,500 crores, approximately $352.5m.
Currently, FDI is allowed in financial services, including the growing credit
card business. These services include the non-banking financial services sector.
Foreign investors can buy up to 40% of the equity in private banks, although
there is condition that stipulates that these banks must be multilateral financial
organizations. Up to 45% of the shares of companies in the global mobile
personal communication by satellite services (GMPCSS) sector can also be
purchased.

FDI in major sectors in India

The major sectors of the Indian economy that have benefited from FDI in India
are -
• Financial sector (banking and non-banking).
• Insurance
• Telecommunication
• Hospitality and tourism
 • Pharmaceuticals
• Software and Information Technology.

Private Sector Banking:

FDI up to 74% from all sources will be permitted in private sector banks on the
automatic route, subject to conformity with the guidelines issued by the RBI
from time to time.

Non-Banking Financial Companies (NBFC)

49% FDI is allowed from all sources on the automatic route subject to
guidelines issued from RBI from time to time.

Insurance Sector: FDI in Insurance sector in India

FDI up to 26% in the Insurance sector is allowed on the automatic route subject
to obtaining license from Insurance Regulatory & Development Authority
(IRDA)

Telecommunication: FDI in Telecommunication sector

Proposals for FDI beyond 49% shall be considered by FIPB on case to case
basis.

Hotel & Tourism: FDI in Hotel & Tourism sector in India

100% FDI is permissible in the sector on the automatic route.

Drugs & Pharmaceuticals

FDI up to 100% is permitted on the automatic route for manufacture of drugs

and pharmaceutical, provided the activity does not attract compulsory licensing.

Software and Information Technology

FDI up to 100 percent is permitted for E-Commerce activities subject to the

condition that such companies would divest 26 percent of their equity in favor
of the Indian public in five years, if these companies are listed in other parts of
the world.

Some other sectors benefited by FDI in India are as follows:

Business Process Outsourcing BPO in India

FDI up to 100% is allowed subject to certain conditions.

Pollution Control and Management

FDI up to 100% in both manufacture of pollution control equipment and

consultancy for integration of pollution control systems is permitted on the
automatic route.

Call Centers in India / Call Centres in India

FDI up to 100% is allowed subject to certain conditions.

Roads, Highways, Ports and Harbors

FDI up to 100% under automatic route is permitted in projects for construction

and maintenance of roads, highways, vehicular bridges, toll roads, vehicular
tunnels, ports and harbors.

Power: FDI in Power Sector in India

Up to 100% FDI allowed in respect of projects relating to electricity generation,

transmission and distribution, other than atomic reactor power plants.

Trading: FDI in Trading Companies in India

FDI up to 100% permitted for e-commerce activities subject to the condition

that such companies would divest 26% of their equity in favor of the Indian
public in five years, if these companies are listed in other parts of the world.
Such companies would engage only in business to business (B2B) e-commerce
and not in retail trading

Foreign Direct Investment in Small Scale Industries (SSI's) in India

Recently, India has allowed Foreign Direct Investment up to 100% in many

manufacturing industries which were designated as Small Scale Industries

India Further Opens up Key Sectors for Foreign Investment

India has liberalized foreign investment regulations in key sectors, opening up

commodity exchanges, credit information services and aircraft maintenance
operations. The foreign investment limit in Public Sector Units (PSU) refineries
has been raised from 26% to 49%.

The Indian government made several reforms in the economic policy of the
country in the early 1990s. This helped in the liberalization and deregulation of
the Indian economy and also opened the country's markets to foreign direct
investment.
As a result of this, huge amounts of foreign direct investment came into India
through non- resident Indians, international companies, and various other
foreign investors. The growth of FDI in India boosted the economic growth of
the country. Major advantages of FDI in India have been in terms of
• Increased capital flow.
• Improved technology.
• Management expertise.
• Access to international markets.

Foreign Direct Investment in Retail Sector- Impact and

Analysis
After considerable deliberation, the Government had opened FDI up to 51
per cent under single-brand retail trading, and 100 per cent in cash-and-carry
wholesale formats under the automatic route.

However, FDI in retailing of goods under several brands, even if the goods
are produced by the same manufacturer, is still prohibited under the current
guidelines. The industry has constantly advocated that FDI should be
allowed in multi-brand retailing, as it believes it would speed up the growth
of organized formats in the country, leading to lowering of prices, improving
the quality of products and widening the choice of products available to
consumers.

Additionally, the industry has long demanded that the Government give
retail its due and recognize it as an industry, something that the Government
has not paid heed to for decades.

Foreign players can use the following routes to enter India:

• Franchisee route — Pizza Hut, Domino's, Marks & Spencer, Tommy

Hilfiger, Subway

• Cash and carry wholesale retailing — Metro, ShopRite

 • Manufacturing — Bata, United Colors of Benetton

• Distribution — Swarovski, Hugo Boss, Mango

• Joint ventures — Reebok, Miss 60

Market liberalization, a growing middle-class, and increasingly assertive

consumers are sowing the seeds for a retail transformation that will bring more
Indian and multinational players on the scene. The big Indian retail players
looking to expand their operations include Shopper's Stop, Pantaloon, Lifestyle,
Subhiksha, Food World, Vivek's, Nilgiris, Ebony, Crosswords, Globus, Barista,
Qwiky's, Café Coffee Day, Wills Lifestyle, Raymond, Titan, Bata and
Westside. Well-established business houses such as Wadia, Godrej, Tata, Hero,
Malhotras, etc., are drawing up plans to enter the fast-growing organized retail
market in India. The international players currently in India include
McDonald's, Pizza Hut, Dominos, Levis, Lee, Nike, Adidas, TGIF, Benetton,
Swarovski, Sony, Sharp, Kodak, and the Medicine Shoppe. Global players are
entering India indirectly, via the licensee/franchisee route, since Foreign Direct
Investment (FDI) is not allowed in the sector.
Despite all these developments, the organized retail business still comprises a
small proportion of the total size of the Rs 9,00,00-crore ($200 billion) retail
sector. Retail business growing at 5-6 per cent per annum. The size of organized
retailing was estimated around Rs 26,000 crore in 2004, about three per cent of
the total. However, it is now set to grow at 25-30 per cent per annum. In
developed countries, organized retailing makes for over 70 per cent of the total
business.
Even as the government is debating the level FDI in of retail, a number of
foreign players, including the world's largest corporation, the $288- billion Wal-
Mart Stores, Inc., have announced their intention to enter India in a big way.
With the impending opening up of the sector to overseas investment, they are
now keen on forays into the sector in partnership with multinational chains.
According to industry analysts, as many as 20 big Indian companies are
working on plans to enter the sector in partnership with foreign investors.
For instance, it has opened up the real estate sector by allowing 100 per cent
FDI in the construction projects. The move is expected to attract foreign funds
and new technology into the market. Second, Foreign Trade Policy 2005-06 has
extended the benefit of the export promotion capital goods (EPCG) scheme to
the real estate sector. This is expected to tremendously boost the organized
retail sector by enabling it to create better and modern infrastructure. Also, the
extension of concessional duty scheme for import of capital goods by retailers
with minimum area of 1,000 square meters and implementation of VAT will
significantly help organized retailing.
Despite all these favorable developments, the Government appears to be still
dithering in giving a green signal to FDI in this sector in view of the opposition
from Left parties and some sections within the Congress. It is indeed
unfortunate that this issue is hanging fire for nearly four years now, even as the
government has allowed foreign investment in a number of sectors including
banking, telecom and insurance. As of now, the Indian retail sector, largely due
to its fragmented structure, suffers from limited access to capital, labor and
suitable real estate options. In contrast, China, which allowed 49 per cent FDI in
the retail sector since 1992, benefited immensely with foreign players bringing
capital and new technologies and growing export market for domestic products.
At present, around 40 foreign retail players account for almost 20 per cent of
the organized retailing in that country. India is tipped as the second largest retail
market after China, and the total size of the Indian retail industry is expected to
touch the $300 billion mark in the next five years from the current $200 billion.
The size of organized retailing is expected to touch $30 billion by 2010 or
approximately 10 per cent of the total. Various retailers from across the word
have been visiting India over the past few months with a view to establishing
their presence in a market that is expected to witness exiting developments.
On the contrary, the opening up of the sector to FDI will lead new economic
opportunities and there will be more employment generation. According to a
policy paper prepared by the Department of Industrial Policy and Promotion
(DIPP), FDI in retail must result in backward linkages of production and
manufacturing and spur domestic retailing as well as exports.
According to sources in the PMO, the opening up of retail to FDI would be
designed in a such as way that many sectors — including agriculture, food
processing, manufacturing, packaging and logistics — reap benefits. It is
understood that the multinationals that invest in retail business in India would
also source Indian goods for their international outlets in a big way and thus
provide a boost to Indian exports. Indian retail chains would get integrated with
global supply chains since FDI will bring in technology, quality standards and
marketing.
According to the World Bank, opening the retail sector to FDI would be
beneficial for India in terms of price and availability of products. Experience
everywhere has shown that organized retailing tends to have a major controlling
effect on inflation because large organized retailers are able to buy directly from
producers at most competitive prices. The scale of operation and technology
help organized retailers score over the unorganized players, giving the
consumers both cost and service advantages.
Government has opened up the real estate sector by allowing 100 per cent FDI
in the construction projects. The move is expected to attract foreign funds and
new technology into the market. Second, Foreign Trade Policy 2005-06 has
extended the benefit of the export promotion capital goods (EPCG) scheme to
the real estate sector.
This is expected to tremendously boost the organized retail sector by enabling it
to create better and modern infrastructure. Also, the extension of concessional
duty scheme for import of capital goods by retailers with minimum area of
1,000 square meters and implementation of VAT will significantly help
organized retailing.

Trends of FDI in India Table No. 1

CUMULATIVE FDI EQUITY INFLOWS
India has continually sought to (1991-2009)
attract FDI from the world’s (Rs.in crores)
major investors. Indian national Cumulative amount of FDI
Rs.
government announced a number A inflows (from Aug. 1991 -
5,86,962
of reforms designed to encourage Oct. 2009)
FDI and present a favorable Cumulative amount of FDI
Rs.
B.1 inflows (from April 2000 to
scenario for investors. The trend 5,01,900
March 2009)
of FDI inflow in India has
Amount of FDI inflows
presented in the following two B.2 during 2010-11 (for April Rs. 9,854
tables. The table no.1 depicts 2010)
that the cumulative FDI flows in Cumulative amount of FDI
Rs.5,11 ,
the country. The total inflow of B.3 inflows (updated up to Oct.
754
FDI up to October 2009 2009)
amounted to Rs. 5, 86,962 crore.
Source: RBI Reports 2010-11
Cumulative amount of FDI
inflows from April 2000 to March 2009 were Rs. 5, 01,900 crore. For the
month of April the flow of FDI amounted to Rs. 9,854 crores. The year wise
analysis of inflow of FDI was presented in the following lines with help of table
no.2.
The year wise trend of inflow of FDI in India and rate of growth over the 10
years are shown in the table 2. It can be observed from the table that the
maximum growth rate recorded in the year 2006-07 with 186.96 percent growth
over the previous year amounting Rs. 70,630 crore. Due to 100 percent FDI
allowed in many industrial sectors and an automatic approval was given. With
this reason this year showed highest growth rate of FDI inflows. This is the
most favored year in respect of FDI inflow. Following this 2001-02, 2005-06
and 2004-05 also recorded better growth rate showing 53.11 percent, 43.61
percent and 41.44 percent respectively. It is also found those two years i.e.
2002-03

Table No.2
and 2003-04 showed negative growth Trend of FDI in India
rate representing (29.66percent) and Inflow
(18.85percent) respectively. The main Growth
Yea (Rs.in
(%)
reason behind this decrease had found crores)
that the prohibition of FDI in some 1991-2000
sensitive sectors like agriculture, (Aug.1991 60,604 -
- March00)
railways, retail industry, real estate etc.
2000-01 12,646 22.64
Yearly average of FDI based on the 10
2001-02 19,361 53.11
years amounted to Rs. 53,366.55 crore 2002-03 14,932 -29.66
i.e. 35 percent of the total. It can be 2003-04 12,117 -18.85
concluded, from the above analysis, 2004-05 17,138 41.44
that the FDI growth rate is not constant 2005-06 24,613 43.61
since 1991, when the market was 2006-07 70,630 186.96
opened to the world. This gone up to 2007-08 98,664 39.69
Rs. 5, 87,032 crore with an average 2008-09 1,23,025 24.70
growth rate of 35 percent irrespective 2009-10 1,23,378 0.30
of up and down movements. 2009-10
11,708 -
(for April)
Country Wise Share of FDI: 2010-11
The inflow of Foreign Direct (For 9,854 -18.81
Investment (FDI) in India from the April’10)
Total 5,87,032 345.13
Average of
10 years
53,366.55 35.00
(2000 -
2009)
Source: RBI Reports 2010-11
 highest investment inflow of 10 countries are selected for the study and
presented in the table no. 3. The table presents the amount of money invested
by the top 10 countries during the last three years period, averages inflow

Table - No. 3

COUNTRY WISE INFLOW OF FDI

2007-08 2008-09 2009-10 2010-11

% of % of % of Cumulative % of
Coutry (April - (April - (April - (for Ranks
Total Total Total Inflows Total
March) March) March) April'10)

Mauritius 44,483 45.09 50,794 41.29 49,633 40.23 2,528 2,13,434 43% 1

Singapore 12,319 12.49 15,727 12.78 11,295 9.15 1,900 47,080 9% 2

U.S.A. 4,377 4.44 8,002 6.50 9,230 7.48 404 37,593 7% 3

U.K. 4,690 4.75 3,840 3.12 3,094 2.51 265 26,263 5% 4

N.Lands 2,780 2.82 3,922 3.19 4,283 3.47 312 20,438 4% 5

 Japan 3,336 3.38 1,889 1.54 5,670 4.60 1,455 18,350 4% 6

Cyprus 3,385 3.43 5,983 4.86 7,728 6.26 123 17,900 4% 7

Germany 2,075 2.10 2,750 2.24 2,980 2.42 102 12,571 3% 8

France 583 0.59 2,098 1.71 1,437 1.16 184 7,102 1% 9

U.A.E. 1,039 1.05 1,133 0.92 3,017 2.45 31 7,054 1% 10

TOTAL 98,664 123,025 123,378 9,854 526,357

Source: RBI Reports 2009-10

along with the proportion a country has in the total FDI in any particular year.
Mauritius was stood at top in all four years of the study. It had made substantial
share of an average of 43 percent of total FDI of 10 countries of the study. The
above table also showed that the inflow from this country was Rs. 28,759 crores
in 2006-07, Rs. 44,483 crores in 2007-08, Rs. 50,794 crores in 2008-09,
Rs.49,633 crore in 2009-10 and Rs. 2,528 crore in the month of April 2010
respectively. As far as second position concerned, contributors kept on
changing. Singapore stood in the second position in 2007-08, 2008-09 and
2009-10 with contribution of 15.58 percent, 16.36 percent and 9 percent
respectively and in the year 2006-07 U.K occupied this position with 16.96
percent. During the study France and UAE countries stood in last position in
contributing the FDI to India. The share of these two countries was just one
percent of the total cumulative investment.

Sector - Wise Inflow of FDI:

Having discussed the country FDI inflow into India and attempt is made to
focus the sectors that are attracted highest part of FDI are studies further
analysis. For this the sector-wise amount of FDI along with their proportion,
average annual investment is presented in the Table-4.
 TABLE – 4
SECTROS ATTRACTING HIGHEST FDI EQUITY INFLOWS
Cummulative
2007-08 2008-09 2009-10 2010-11 % to
inflows
Ranks Sector (April- (April- (April- (for total
(April'00-
March) March) March) April'10) Inflows
April10)
SERVICE SECTOR 28,41 20,95
26,589 1,581 106,992 21%
1 (Financial & Non-financial) 1 8
COMPUTER SOFTWARE &
5,623 7,329 4,350 765 44,611 9%
2 HARDWARE
TELECOMMUNICATIONS
11,72 12,33
(Radio,Paging, CellularMobile, 5,103 1,914 42,620 8%
7 8
3 Basic Teleohonic Services)
12,62 13,58
HOUSING & REAL ESTATE 8,749 246 37,615 77%
4 1 6
CONSTRUCTION
13,54
ACTIVITES (Including Roada 6,989 8,792 345 36,066 7%
4
5 and Highways)
6 POWER 3,875 4,382 6,908 547 21,466 4%

7 AUTOMOBILE INDUSTRY 2,697 5,212 5,609 187 20,864 4%

METALLURGICAL
4,686 4,157 1,935 404 13,845 3%
8 INDUSTRY
PETROLEUM & NATURAL
5,729 1,931 1,328 522 12,026 2%
9 GAS
CHEMICALS
920 3,427 1,707 115 11,390 2%
10 (Other than Fertilizers)
Source: RBI Reports 2009-10

The major portions of FDI was attracted by the service sector representing 21
percent of the total FDI inflow amounting to Rs.109,992 crores. Following
computers software and hardware and telecommunication sector occupied the
second and third position in attracting the FDI inflows registering 9 and 8.5
percent of total FDI inflow representing RS.41,888 crores and Rs.38,345 crores
respectively. Petroleum & Natural Gas and Chemicals sectors registered only
two percent of total FDI inflows into India.

Conclusion
Indian government had set the path for attracting the copious open flow of FDI
with its globalization and liberalization policy. On an average, the growth rate
of FDI since globalization was found 37 percent. Opening Indian economy to
the world economy, relaxation of previous rigid norms for foreign trade and
enlarging the limit of FDI in various sectors are the main reasons of ample
growth in FDI inflows in India. Inflow of FDI adversely affected with the
reasons of prohibition of FDI in some sectors and recent economic slowdown.
This flow boosts the exports and national income in positive way which
indications of macroeconomic performance of the nation. These foreign
investment inflows are to be diverted to manufacturing and infrastructure
sectors which will increase the national product at large. With this it is clear
that the India has to attract more and more FDI to make nation self-sufficient by
arranging required facilities and creating trade opportunities. For this it is
required that the government should amend and revise the norms in a way to
expand the foreign trade, attracting joint ventures, minimizing the risk and
providing the opportunities like diversifications of sales, acquiring the
resources to the investors.

References

1. FDI in India Statistics.

2. RBI Reports on RBI site.
3. “FDI inflows to exceed USD 35 billion target in 2008-09”
Economic Times.
4 http://www.ibef.org/economy/fdi.aspx : INDI BRAND EQUITY
FOUNDATION.
5. Reports of Department of Industrial Policy & Promotion, Ministry
of Commerce and Industry.
6. FDI Policy 2009-14.