1. GLS UNIVERSITY
FACULTY OF COMMERCE
PROJECT
B-COM(SEM-4)
INTERNATIONAL TRADE
TOPIC
ROLE OF FDI IN INDIA.
2. Foreign direct investment refers to , ‘ investment in a foreign country where the foreign investor
control over the investment. It typically takes the form of starting a subsidiary, acquiring a stake in
the existing firm or start a joint venture in the foreign country. Direct investment and management
of the firm concerned normally go together.
Foreign direct investment can play a very important role in rapid economic development of
developing countries like India.
What is FDI ?
3. Equity Capital
It is the value of the multinational corporations(MNCs) invested in shares of an enterprise in a
foreign country. An equity capital stake of 10% or more of the ordinary shares or voting power in a
incorporated enterprise or its equivalent in an unincorporated enterprise is normally considered a
threshold for the control of assets. This category includes both mergers & acquisitions, and green
field investment.
Reinvested Earnings
These are the MNCs share of affiliate earnings not disturbed as dividends or remitted to the MNCs.
Such retained profits by affiliates are assumed to be reinvested in the affiliate.
Other Capital
It refers to short-term or long-term borrowings and lending's of funds between MNCs & affiliate.
Categories of FDI
4. Market Seeking
These are attracted by the size of the local market which depends on the income of the country and
its growth rate.
Efficiency Seeking
In developing countries where capital is relatively scarce the marginal efficiency of capital tends to be
higher than in the developed world where it is abundant. Assuming that interest rates broadly reflect
marginal efficiency of capital(MEC), it follows that lending rates in western financial centers are below
MECs in developing countries. Hence economic efficiency & commercial logic dictate that capital
should flow from relatively less profitable developed worlds to relatively more profitable developing
countries.
Other location Advantages
These include the technological status of a country, brand name and goodwill enjoyed by local firms
, openness of the economy , trade and macro policies pursued by the govt. and the intellectual
property protection granted by the govt. MNCs have become a major carriers of foreign capital and
technical know-how.
Types of
5. There are two ways by which India gets FDI :-
1) Automatic Route :- By this route FDI is allowed without prior approval by
government and RBI.
2) Government Route :- By this route prior approval of government is
necessary.
GOVT. INITATIVEs
Government of India has amended its FDI policy and made it more investment
friendly.
In 2014 govt. increased FDI upper limit from 26 % to 49% in insurance
sector.
FDI inflow in India increased by 48% since the launch of “Make in India ”
Initiative.
In 2015 India became top destination for FDI.
6. India has replaced China as top destination for FDI by attracting $ 63
billion.
India was the highest ranked country by capital investment in 2015.
Also there where 8 % increase in project numbers to 697.
India’s greenfield investment tripled.
In 2015, India was for the first time the leading country in the world for FDI,
overtaking the US (which had $59.6 billion of greenfield FDI ) and china
($56.6 billion).
According to DIPP (Department of industrial policy and promotion) FDI in
INDIA during April-September 2016 raise 30% an year to us $ 21.6 billion.
INDIA has moved up to 16 position to rank 55 on global index of the
worlds most competitive economy.
Indicating governments efforts towards opening vast sectors , it is also a
success of India's policy initiative.
7. on top 10 destination state for FDI in 2015, India claim five places ,with the top place
going to Gujarat , which attracted $12.4 billion . Maharashtra has been one of the
strong performer across the years attracting $8.4 billion , respectively in 2015.
The Make in India campaign and the resultant boost in FDI has resulted in a
whopping increase in FDI job creation from 1.16 lakh new job in 2013 to 2.25 lakh in
2015 – the highest number in the world.
Investment in the sectors which are not under the automatic route requires FIPB
(Foreign investment promotion board) approval. Currently 98% FDI into India comes
through automatic route.
India is emerging as a key destination for renewable energy projects, helped by a wider
government policy of incentives , infrastructure and programmes designed to attract
investment.
Success breeds success and to attract high volume of FDI, location need to create the
condition for strong economic growth and development to take place.
Report is based on a survey of more then 1700 executives in 45 top countries that was
conducted by EY’s economists intelligence unit (EIU) in Aug. & sept. Along with the facts
on official govt. website.
10. Impact investments in India is expected to grow at a compound annual growth rate (CAGR) of 20-24
per cent to touch US$ 6-8 billion by 2025, from US$ 1 billion in 2015.
Source :- IBEF –(Indian brand equity foundation.)
39%
32%
19%
10%
Top 4 Investing Countries in India (2016)
Mauritius
Singapore
Japan
USA
11. Sectors FDI Limit Route
Agriculture & Animal Husbandry. 100% Automatic
Plantation Sector 100% Automatic
Mining 100% Automatic
Mining (coal & Lignite) 100% Automatic
Mining
(Mining & minerals separation of titanium bearing minerals & ores , its
value addition & integrated activities)
100%
Government
Petroleum & Natural Gas 100% Automatic
Petroleum & Natural Gas
(Petroleum refining by the public sector undertaking (PSU), without
any disinvestment or dilution of domestic equity in the existing PSUs.
49% Automatic
Defense Manufacturing 100% Automatic up to 49% & Above 49% under govt. route in cases resulting
in access to modern technology in the country.
Broadcasting 100% Automatic
White label ATM operations 100% Automatic
Non-Banking Financial companies(NBFC) 100% Automatic
Pharmaceuticals (Green Field) 100% Automatic
Pharmaceuticals (Brown Field) 100% Automatic up to 74% Above 74% under Govt. route.
Food products manufactured or produced in India 100% Government
Civil Aviation 100% Automatic
Construction Development(Township, housing build-up
infrastructure)
100% Automatic
Satellite (ISRO) 100% Government
Telecom services 100% Automatic up to 49% Above 49% under Govt. route.
Duty free shops 100% Automatic
Railway Infrastructure 100% Automatic
Assets Reconstruction 100% Automatic
CIC-(credit information companies) 100% Automatic
Insurance
-Insurance company
-Insurance Brokers
-Third Party Admin.
-surveyors &Loss Assessors
-other Insurance Intermediaries
49% Automatic
Indian Sectors / FDI Limit & Route
Note:- Data is taken from the official govt. website (DIPP) / It does not include all sectors.
12. Prohibited Sectors
• Lottery business including government/private lottery ,online lotteries , etc.
• Gambling and betting including casinos etc.
• Chit funds.
• Nidhi company.
• Trading in transferable development rights(TDRs)
• Real Estate business or construction of farm houses (It does not include development of
townships, construction of residential/commercial premises , roads or bridges)
• Manufacturing of cigars, cheroots ,cigarillos , of tobacco or of tobacco substitutes.
• Activities / sectors not open to private sector investment e.g. :- Atomic energy & railway
operations (other than permitted activities)
13. Benefits of FDI
with the retreat of socialism ,MNCs have become a powerful force in the world economy. Potential
benefits that a developing country can hope to get from MNCs operations.
Impact Area Potential Benefits
1. Capital Provision of scare capital resources
Internally generated
Externally generated
(privileged access to global capital
markets).
2. Technology Provision for sophisticated technology and other
technology not available in the host country.
3. Exports and balance of payments Access to superior global distribution of
marketing systems.
MNCs may increase exports and create
positive balance of payment effects.
4. Diversification MNCs command technology and skills required
for diversification of the industrial base and for
creation of backward and forward linkages.
14. • Foreign direct investment helps in raising the level of investment in the country and acts as a supplement to
domestic savings.
• It helps in generating new avenues of employment and income , thereby increase the country’s exports
through new line of production.
• FDI brings with it technical , managerial , & administrative skills and thereby helps in modernizing the
industrial sector.
• FDI removes the lack of entrepreneurship and helps in utilizing the untapped resources.
• FDI brings new techniques of production , new ideas , new thinking , and various types of innovation.
• FDI possesses vast experience of the global standards and through an appropriate and aggressive marketing
strategy.
• Helps in accelerating the rate of capital formation in the recipient country.
• FDI facilitates transfer of technology to the recipient country and brings ‘Marginal Revolution’ through
professional management and the use of highly sophisticated management techniques.
• FDI leads to increase competition and brakes the hold of domestic monopolies.
• FDI shifts the burden of risk of an investment from domestic to foreign investor.
• FDI increase the GDP growth.
15. Points of Criticism
Impact Area Potential Benefits
1. Capital Insignificant net flow,
Large dividend remittances.
Large technical payments.
Progressive fall of foreign participation in
corporate capital formation.
2. Technology Costly ‘over-import’.
Problem with advance technology and updating
problems.
Problem with technical support.
3. Export and balance of
payments
Export performance at par with domestic
companies.
Higher import propensity than domestic
companies.
Some import substitution but negative BDP
effects.
4. Diversification Preemption of growth opportunities &
substitution of domestic capital in several
promisive areas,
Increased foreign influence in key sectors.
Experience with MNCs have been a unmixed blessing.
16. • FDI tends to flow towards high profit areas rather then towards the priority sector.
• Imported technology may not be suitable or adjust the local conditions , which will result in wastage of
resources and time along it will also hamper the development of indigenous technology.
• It will increase the dependence on the foreign technology.
• FDI will reduce the competition.
• Large scale drain of wealth by the way of royalty, dividend , profit, repartition etc. And it will have a
deleterious effect in the balance of payment of the country.
• Sometimes the investors indulge in unfair & unethical trade practices beside interfering in the national
politics of the country.
• Through their manpower , the MNCs try to evade and undermine the economic autonomy and control
of the concerned authorities. It will be prejudicial to the national interest of the country.
18. Bibliography
Microsoft powerpoint 2013.
Source :- Official Govt. website.
Internet for pictures and extra information.
Magazines & Newspapers.
Survey from EIU & IBEF.
Make In India
Note :- Best viewed in Power point 2013 version.