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Foreign Investment India

Foreign Direct Investment in India

India is one of the hottest destinations for foreign investors. It is one of the best emerging market in Asia in terms of growth and GDP. Question here is how India attracted foreign investors and what is the role of government in terms of policies, regulations and control.

To answer this question I will start discussing about the Purpose and scope of the investment and policies and Investment approvals to invest in India in the introduction part.

The significance of the theme comes from why investors are interested in investing in india. Is it just for diversification or any competitive advantage they got in investing in India. FDI inflows are keep on increasing every year that made me to do some research in this.

The second pat deals with the literature review, main problems was the vast sum of articles related to this topic and I tried my best to review the main points related to that. It is an ongoing issue, So I tried my best to get the most relevant data related to this.

The third part deals with the Environment of FDI in India, I will discuss about the Growth, Poverty

Infrastructure, Education, Participation in Private sector these factors played a vital role and attracted foreign investors to invest in India. And also about the FDI inflows to India.

The fourth part deals with the case study

The fifth part deals with the case study

Chapter one

Introduction

On the whole lesser developed countries around the world have set up some kind of agenda to boost their economic growth. But they need resources to achieve that. They do have 2 options a.) Domestic resources and b.) Foreign resources. But the problem for the lesser developed countries is the domestic resources might not be sufficient to achieve the economic growth.

So they need foreign resources to attain economic development and growth. They can get foreign resources by three ways A.) In means of exports of goods B.) Foreign aid and C.) Foreign direct Investment. Exports of goods will not help to attain the growth. They don't have diversified exports, So that would not help to attain growth. And even foreign aid will not help to attain economic take off. But it would be helpful to increase the infrastructure facilities.

So the best option for lesser developed countries is foreign investment. But they need to reframe their policies and regulations to invest in their country. Rules and regulations have to be liberal and it should be understandable easily without any strain. Most of the foreign investment is from companies. Foreign companies will start a subsidiary or they will acquire a domestic company and start their operations in that country. It's a form of direct investment.

India is one of the fastest growing economy in the world. But still World Bank classifies India as a lesser developed country. India got a diversified range of exports but the imports are more than the exports. Below mentioned table will give an overview about India's exports and imports.

Source - DGCI & S

Although India got a diversified range of exports still they are importing more. So they require foreign investment to fill up the gaps and to speed up the operations in some of the sector.

www.diamonds.net/News/NewsItem.aspx?ArticleID=20803 - 143k -

Nature and Scope of Foreign Direct Investment in India

India is the 7^th largest country in the world and 2^nd largest country with manpower of more than 1 billion people. It is the twelfth largest economy in the world. GDP growth rate was 9% during the fiscal year 2007-08. Although India is a developing country the wage rates are comparatively low compare to other industrialised countries. These factors played a major role and attracted foreign investors to invest in India.

There are more government restrictions to invest in India before 1991. After 1991 government stepped in and liberalized its policies and regulations are relatively simple there are not many restrictions. Foreign investors are

Reacted immediately and that attracts investment in India. FDI in India was 19.5bn US $ in 2006-07. There is a significant improvement during 2007-08 and it accounts to 25bn US $.

Despite all these factors India is classified as a Tier III country by A.M.B. It's a well established company in USA

and operating in UK and Hong Kong as well. It's a credit rating company which founded by Alfred M. Best in

1899. So being a Tier III country it is too difficult for them to raise money in International markets. Compare to

Other industrialised countries they have to pay more to raise money. Funds are almost dried up when there is a

need for that.

And the foremost thing is settlement of FDI is not so expens compare to loans. FDI will provide access to improved

Infrastructure because most of the foreign companies are interested to boost up their earnings and that will happen

Only if the business is well established. It may take four to seven years. Advantages in foreign investment are as

follows A.) Wealth B.) Technology C.) Promotional skills D.) Employment opportunities etc. FDI is much more

flexible compare to loans taken from the financial institutions. Reimbursement of loans start from the next year

itself and the interest percentage is very high. Since foreigners are investing more they will import new technology

and they do have tie up with other companies in the world. So it would be very helpful to export the products.

Most of the developing countries around the world have faced problems because of the debt crisis in 1980's. They

Found it too difficult to raise money from financial institutions. So that created a need for foreign investment.

Lesser developed countries around the world have freed up the regulations to attract foreign investment.

Foreign investment to developing countries was 11bn US $ during 1980 - 86 and it was increased to 438.4bn US $

In 2007.

http://en.wikipedia.org/wiki/Economy_of_India

http://www3.ambest.com/ratings/cr/crisk.aspx?l=1&Menu=Country+Risk

http://www.unctad.org/Templates/webflyer.asp?docid=9439&intItemID=1528&lang=1

FDI in India

Infact we can notice the rise of south east asia and their economic growth compare to other advanced countries. It's

mainly because of global investment inflows. They are doing a comparative and they are reframing the policies

now and then to attract foreign investment. And we can say that the rise of south east asia its mainly because of

foreign investment.

FDI inflows are keep on increasing to south east asia and latin American countries. South east asian economies are

fastly growing compare to other countries. China is one of the fastest growing economy in the world its growth rate

was 11.4 % in 2007.

Although foreign investors are interested in emerging markets but still they will do a comparative analysis of each

Economies in terms of growth, infrastructure, previous debts, technology etc. Government restrictions are more in

Eastern Europe during 1990's and on the other hand there is a consistent growth on these developing countries. So

that helped south east asian and latin American countries to liberalize their policies and to attract foreign investors.

Below mentioned diagrams will give an over view about global investment flows to india from 1991-2007. It also

Gives an overview about the list of countries those who are invested and the segment in which they are invested.

http://news.xinhuanet.com/english/2008-04/01/content_7897074.htm

http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/80341.pdf

http://greathumancapital.wordpress.com/2007/01/31/swot-matrix-of-india-analysis-of-indian-social-economic-political-technological-conditions/

FDI Guidelines in India

Let's look at the important policies and regulations that Indian government has framed up over the years to

draw foreigners attention. Let's split this into two parts. A.) During 1951- 1980 B.) After 1991.

Polices during 1951-1980

FDI guidelines are mostly related to trade guidelines. So the trade guidelines have to be almost similar to the FDI

guidelines for better results. During April 1949, Trade policy came into effect through that they gave some guarantees to the global investors.

• No unfair practice among domestic and global companies

• Government will provide additional amenities to global firms to transfer their gains to their home country.

• If the firm has been converted into a public company reasonable amount will be paid to the investors.

During the period 1957-1978 Indian government faced a major crisis on forex. In order to overcome this problem

they had liberalised their polices for more investment flows. But still there is a considerable amount of outflow of

forex every year. Finally they planned to set up a separate body to look after this. In 1968 they started Foreign

investment board (FIB).

When the investment exceeds 20mn RS(INR) it has to be approved by the cabinet committee. In order to give a

clear picture to the FIB government has set up a another agency in 1976 called Technical evaluation committee

(TEC). The main purpose of TEC is to assist FIB in terms of evaluating the project and interacts with other

committees in the country for assessing the project.

Main highlight during this period was introduction of Foreign exchange regulation act (FERA) which came into

existence on 1/1/1974. RBI is controlling all the global companies and global companies have to get approval from

RBI to continue their business. Key objective of FERA act was global companies should invest minimum of 40%

of their capital in India. If they failed to do so action will be taken against the company according to the rules laid

down by the government. Companies those who are invested 40% can increase their size, volume and scope of the

business. They guaranteed the investors regarding that and a policy have been come into effect during 1977.

Polices during 1981-1990

The rules and regulations under FERA are in close conformity with the requirements. Government noticed that

the export market has not widened that too especially in the manufacturing sector. Indian manufacturing goods

have not been very popular because of the technological deficiency and products are really worse. It's mainly

because of strict regulations followed in FERA act.

To overcome this problem and to gain a competitive advantage rules and regulations have been liberalized on

import of advance technology. Considerable steps have been taken by the government to reduce tariffs and quotas

on imports. Government have also taken up additional steps and encouraged global companies to export the

products and they have given some subsidies for that. All these things have come into effect during 1980's.

Government had reduced the import duties during 1985. And for importing some technology there is no import

duties. Due to this there is an increase in investment and acquisitions. During 1980 they reframed the policy for

capital outflow. Capital outflow should not exceed 5mn RS(INR) and it has been extended to 10mn RS(INR) during

1987. They have reduced the tax fee to 30% from 40% it was announced in the bu

Reference - FDI in India 1947 to 2007 policies, trends and outlook by Kamalesh Gakhar.

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