FOREIGN DIRECT INVESTMENT

SERVICE SECTOR

in

ver the past two decades, the service sector has expanded rapidly and has come to play an increasingly important role in national economies

The emergence of India as one of the fastest growing economies in the 1990s is due to rapid growth of service sector. India has also become an exporter of services. It today accounts for 1.4 per cent of global exports in services and 0.7 per cent in goods.

and in the international economy. Services account for large shares of production and employment in most economies around the world. The share of services in world trade and investment too has been increasing. The structure of Foreign Direct Investment (FDI) worldwide has also shifted towards services. In the early 1970s, service sector accounted for only one quarter of the world FDI stock. In 1990 this shares was less than one half and by 2003, it has risen to about 67 per cent. Now service sectors like telecommunication, IT enabled

services, electricity insurance, air transport are becoming prominent. As many services are neither tradable nor storable, but must be produced where they are consumed FDI is the dominant means of delivering them to foreign markets, states United Nation Conference on Trade, Aid and Development (UNCTAD). As another sectors, FDI in services can provide capital, technology and managerial knowledge, enhance skills.

There is potential for positive spillovers to the host economy, there by stimulating improvements in competing service firms as well as for customers and suppliers. FDI can improve the provision of basic service such as telecommunications, power, and transport and enhance the welfare of consumers and lower costs to industries using these services as inputs. The rise of services in world trade and investment is due to the growing presence of transnational corporations, the technological progress, especially in telecommunications and information technology and liberalization of many service sectors activities (telecom, transport, finance etc.). Advances in Information and Communication Technologies (ICTs) facilitate trade in service as they make it unnecessary for providers and users to be close to one another. This article examines the trends in FDI inflows in service sector in India. The empirical work is conducted using time series data from 1991 to 2005. Global trend of FDI inflows in Service Sectors The emergence of India as one of the fastest growing economies in the 1990s is due to rapid growth of service sector. India has also become an exporter of services. It today accounts for 1.4 per cent of global exports in services and 0.7 per cent in goods. The FDI in service has also been growing at a rapid rate. According to UNCTAD (2004), the share of service sector in total FDI inflows in India, which was 10.5 per cent during 1990 to 1994, increased to 28.3 per cent during 1995-99. In Australia, it ranged from 52 per cent during 1995-99 to 36.2 per cent during in 20002002. In Mexico, the share of FDI rose from a low of 28 per cent during 1990-94 to 64 per cent during 2000-02. In Norway, Sweden, Switzerland, Netherlands, Hungary, U.K and U.S.A too, the share of services in inward FDI flows considerably. During 1990-94, the share of services in total FDI inflows was higher in Switzerland, followed by France, USA, UK, Australia, Sweden, Mexico, Philippines and India. But during 2000-02, UK came first followed by Switzerland, France and USA. Trends and patterns of FDI Inflows in Indian Service Sector Table I presents year wise FDI Inflows in Service Sectors from 1991 to 2005. Inflow of FDI in India has been uniform across all service sectors. Growths in FDI flows are found to be the heaviest in consultancy services, financial and non-financial services,

Hotel and Tourism and Telecommunications and trading. Consultancy services records a highest growth of 119.0 percent per annum during study period. FDI in Financial and non-financial services, hotel and tourism and telecommunications and trade record a growth rate of 60.5, 46.8, 43,9 and 32.0 percent per annum respectively. Table I FDI Inflows in Service Sectors (Amount in Rs. Million) Financial Non financial 0.3 48.3 1214.9 943.1 11014.9 10106.9 5411.4 7679.8 4023.8 1861.5 8202.2 15431.4 13904.0 11455.83 31445.14 Total FDI Inflows 2656.3 6912.0 18619.6 34196.6 69351.5 103970.0 164258.0 133399.0 168678.0 193417.0 192652.0 212860.0 143011.0

Year 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Tele Communication 0.0 0.0 16.6 140.2 1274.5 7529.8 11850.0 17410.2 2155.6 6855.4 42671.0 9090.7 7272.6 6087.84 9639.13

Consultancy Services 0.0 0.0 0.0 0.0 0.0 0.0 0.0 5.8 214.2 209.0 2922.9 1003.0 2480.3 11843.5 1627.16

Hotel& Tourism 0.0 7.4 2.9 533.0 219.1 444.3 1031.9 399.5 405.4 524.0 471.5 2237.9 2594.2 1527.23 2799.59

Trading 0.0 1.9 55.0 240.9 3320.1 650.7 945.1 520.0 980.6 1239.8 2204.4 1824.2 831.5 682.16 1257.67

Total service 0.3 57.7 1289.4 1857.1 15828.5 18731.7 19238.4 26015.3 7779.5 10689.7 56472.1 29587.2 27082.6

31596.56 172657.5 46768.69 192990.9

Telecommunication sector has been massive FDI inflows during 1991 to 2005, accounting for 7 percent share out of total FDI inflows. FDI is limited to 49% subject to licensing and security requirement. Internet service providers (ISPs) with gateways, radio-paging and end-to-end bandwidth, FDI is permitted up to 74% with FDI, beyond 49% requiring Government approval. FDI up to 100% is allowed in Internet service providers not providing gateways; Infrastructure providing dark fiber;

Electronic Mail; and Voice Mail. Tele density in India has increased from low of 4 per 1000 persons in 1986 to 45 per 1000 persons in 2002. The Ministry of Finance and Reserve Bank of India have agreed to allow foreign banks to open 20 branches a year as against 12 now. At present, 40 odd foreign banks have over 225 branches in India. At the end of 2004-05, total assets of foreign banks aggregated US$ 30 billion or 6.9 percent of the assets of all scheduled commercial banks. India has also opened up the insurance sector which is allowed on the automatic route subject to obtaining licence from Insurance Regulatory and Development Authority (IRDA). Foreign companies have been able to grab a 22 per cent market share in the life insurance segment and about 20 per cent in the general insurance segment. Economic liberalization has given a new impetus to the hospitality industry. 100% FDI is permissible in this sector on the automatic route. Many foreign companies have already tied up with prominent Indian companies for setting up new hotels, and holiday resorts. Trading is permitted under automatic route with FDI up to 51% provided it is primarily export activities. Economic liberalization has given a new impetus to the hospitality industry. 100% FDI is permissible in this sector on the automatic route. Many foreign companies have already tied up with prominent Indian companies for setting up new hotels, and holiday resorts. Trading is permitted under automatic route with FDI up to 51% provided it is primarily export activities. FDI up to 100 % is permitted in the trading sector for specified activities, like exports bulk imports with export / ex-bonded warehouse sales; cash and carry wholesales trading; other import of goods or services provided at least 75% is for procurement and sale of goods and services among the companies of the same group and not for third party use or onward transfer/ distribution /sales. FDI up to 100% permitted for E-commerce activities subject to the condition that such companies would

divest 26% of their equity in favour of the Indian public in five years, if these companies are listed in other part of the world. The share of trading in total FDI inflows is a meager 0.82 percent out of the total FDI inflows.

Conclusion The empirical results discussed in this article points out that FDI in services responds well to openness. Further liberalization of services involves potential advantages for Indian economy. Benefits can arise from increased competition, lower prices, and better quality of services. FDI in services provide key inputs to other productive activities that lead to further investment and competitiveness of an economy. Efforts should be made towards attracting efficiency seeking FDI through a right policy that expand operation, improve local skills, establish linkages and upgrade technology.

M. Selvakumar, Lecturer, & T. Ambika, Research Scholar, & S. Muthulakshmi, Research Scholar, PG and Research Deptt. of Commerce, Sri. S.R.N.M College, Sattur 626 203. Tamil Nadu