Foreign direct investment in India As the third-largest economy in the world in PPP terms, India is a preferred destination for

foreign direct investments (FDI); India has strengths in information technology and other important areas such as auto components, apparels, chemicals, pharmaceuticals, jewellery and so on. Although India has always held promise for global investors, but its rigid FDI policies were a significant hindrance in this context. However, as a result of a series of ambitious and positive economic reforms aimed at deregulating the economy and stimulating foreign investment, India has positioned(projected) itself as one of the frontrunners in Asia Pacific Region. India has a large pool of skilled managerial and technical expertise. The size of the middle-class population at 300 million exceeds the population of both the US and the EU, and represents a powerful consumer market. India's recently liberalised FDI policy permits up to a 100% FDI stake in ventures. Industrial policy reforms have substantially reduced industrial licensing requirements, removed restrictions on expansion and facilitated easy access to foreign technology and FDI. The upward moving growth curve of the real-estate sector owes some credit to a booming economy and liberalized FDI regime. A number of changes were approved on the FDI policy to remove the cap in most of the sectors. Restrictions will be relaxed in sectors as diverse as civil aviation, construction development, industrial parks, commodity exchanges, petroleum and natural gas, credit-information services, Mining and so on. But this still leaves an unfinished agenda of permitting greater foreign investment in politically sensitive areas like insurance and retailing. According to the government's Secretariat for Industrial Assistance, FDI inflows into India reached a record US$19.5bn in fiscal year 2006/07 (April-March). This was more than double the total of US$7.8bn in the previous fiscal year. Between April and September 2007, FDI inflows were US$8.2bn.

Definitions
Foreign direct investment has many forms. Broadly, foreign direct investment includes "mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intracompany loans".[1] In a narrow sense, foreign direct investment refers just to building new facilities. The numerical FDI figures based on varied definitions are not easily comparable.As a
part of the national accounts of a country, and in regard to the national income equation Y=C+I+G+(XM), I is investment plus foreign investment, FDI is defined as the net inflows of investment (inflow minus outflow) to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor.[2] FDI is the sum of equity capital, other longterm capital, and short-term capital as shown the balance of payments. FDI usually involves participation in management, joint-venture, transfer of technology and expertise. There are two types of FDI: inward and outward, resulting in a net FDI inflow (positive or negative) and "stock of foreign direct investment", which is the cumulative number for a given period. Direct investment excludes investment through purchase of shares.[3] FDI is one example of international factor movements.

Definition of 'Foreign Direct Investment - FDI'An investment made by a company or entity based in one country, into a company or entity based in another country. Foreign direct investments differ substantially from indirect investments such as portfolio flows, wherein overseas institutions invest in equities listed on a nation's stock exchange. Entities making direct investments typically have a significant degree of influence and control over the company into which the investment is made. Open economies with skilled workforces and good growth

prospects tend to attract larger amounts of foreign direct investment than closed, highly regulated economies.

Advantages of foreign direct investment in India

1) Economic growth 2)Better employment opportunities. 3)Better education 4)Better per capita income. 5)Better products and service at reasonable price.Improves trade.(supply increases) 6)Technology diffusion and knowledge transfer(Industrial development) Disadvantages of foreign direct investment in India 1) It affects small vendors.(Recent walmart issue)(Domestic market suffers) 2)Prices of goods likely to rise.(No guarantee of reasonable price) 3)long-run balance of payment position of the Indian economy is jeopardized when the investor manages to recover its initial outlay. 4)Lot of procedures and products may not be in tune with Indian preferences.(People think this as threat but i don't know much about it) 5)Inflation 6)Risk(because you don't understand the underlying intentions of the country or firm making the investment) Conclusion;-FDI, thus on one hand helps in increasing the output through usage of advanced technology and management techniques and on the other it is a threat to local companies in the country. Government should take steps in the direction of integrating foreign investors with local businesses. This will help in overall economic development as well as preservation of countrys heritage. MNCs should be allowed to set up in such a manner that they help increase the standard of living of our country instead of sole profit making. It is generally said that future is always
uncertain. This saying is correct to some extent. But at the same time it is also said that exceptions are always there. This exception is about India's certain higher rate of growth in the coming future. The future of Indian economy is brighter because of its huge human resources, rapidly upcoming service sector, availability of large number of competent professionals, vast market for every product, increasing impact of consumerism, absence of controls and licenses, interest of foreign entrepreneurs in India and existence of four hundred million middle class people. Even today, India is producing largest number of billionaires in a year, take over by Indian multinationals is amazing, the craze of Indians to go abroad is rapidly diminishing, the Rupee is becoming stronger and stronger in relation to Dollar. India's say in the international diplomacy and political affairs has now become meaningful, thousands of foreigners are working as executives in India, packages are becoming lucrative and competitive and annual rate of growth is highest after China. This present picture gives some reflections of the future. But this is all in the absolute sense and not in the relative terms. A country can only grow if the Govt. policies allow more participation and is able to attract more and more foreign direct investment in India. Today, India provides highest returns on FDI than any other country in the world. India is poised for further growth in manufacturing, infrastructure, automobiles, auto components, food

processing sectors, real estate development etc. In this context it is also worth mentioning that savings rate has also increased from 23% to 31% over the last year to this year. India's continuing ambivalence on FDI, as a result, exacts a heavy toll on the economy. Undoubtedly, India is ceding billions of dollars of FDI to its neighbours each year. While China achieved actual FDI inflows of around $45.3 billion in 1997, India settled for a mere $3.2 billion. India therefore stands to win in the next few years.

Basis of Comparison Total population Savings rate Labour force Annual GDP Share of agriculture in GDP Share of industry in GDP Share of service sector in GDP Rail routes Motor vehicles per 1000 people R& D expenditure Internet host Education expenditure Female adult literacy Undernourished people

China 1272 billion 50 per cent 757 billion US $ 1159 billion 15 per cent 52 per cent 33 per cent 56.7 thousand sq kms 8 0.1 % of GNP 0.6 per 10000 people 2.3 per cent of GNP 85 per cent 9 per cent of the total population

India 1033 billion 26 per cent 451 billion 478 US $ billion 27 per cent 27 per cent 48 per cent 62.5 thousand sq kms 7 0.6 % of GNP 0.8 per 10000 people 3.2 per cent of GNP 45 per cent 23 per cent of the total population

Section 1: Trends in FDI Inflows Widening growth differential across economies and gradual opening up of capital accounts in the emerging world resulted in a steep rise in cross border investment flows during the past two decades. This section briefly presents the recent trends in global capital flows particularly to emerging economies including India. 1.1 Global Trends in FDI Inflows During the period subsequent to dotcom burst, there has been an unprecedented rise in the cross-border flows and this exuberance was sustained until the occurrence of global financial crisis in the year 200809. Between 2003 and 2007, global FDI flows grew nearly four -fold and flows to EMEs during this period, grew by about three-fold. After reaching a peak of US$ 2.1 trillion in 2007, global FDI flows witnessed significant moderation over the next two years to touch US$ 1.1 trillion in 2009, following the global financial crisis. On the other hand, FDI flows to developing countries increased from US$ 565 billion in 2007 to US$ 630 billion in 2008 before moderating to US$ 478 billion in 2009. The decline in global FDI during 2009 was mainly attributed to subdued cross border merger and acquisition (M&A) activities and weaker return prospects for foreign affiliates,which adversely impacted equity investments as well as reinvested earnings. According to UNCTAD, decline in M&A activities occurred as the turmoil in stock markets obscured the price signals upon which M&As rely. There was a decline in the number of green field investment cases as well, particularly those related to business and financial services. From an institutional perspective, FDI by private equity funds declined as their fund raising dropped on the back of investors risk aversion and the collapse of the leveraged buyout market in tune with the

deterioration in credit market conditions. On the other hand, FDI from sovereign wealth funds (SWFs) rose by 15 per cent in 2009. This was apparently due to the revised investment strategy of SWFs - who have been moving away from banking and financial sector towards primary and manufacturing sector, which are less vulnerable to financial market developments as well as focusing more on Asia. As the world economic recovery continued to be uncertain and fragile, global FDI flows remained stagnant at US $ 1.1 trillion in 2010. According to UNCTADs Global Investment Trends Monitor (released on January 17, 2011), although global FDI flows at aggregate level remained stagnant, they showed an uneven pattern across regions while it contracted further in advanced economies by about 7 per cent, FDI flows recovered by almost 10 per cent in case of developing economies as a group driven by strong rebound in FDI flows in many countries of Latin America and Asia. Rebound in FDI flows to developing countries has been on the back of improved corporate profitability and some improvement in M&A activities with improved valuations of assets in the stock markets and increased financial capability of potential buyers. Improved macroeconomic conditions, particularly in the emerging economies, which boosted corporate profits coupled with better stock market valuations and rising business confidence augured well for global FDI prospects. According to UNCTAD, these favourable developments may help translate MNCs record level of cash holdings (estimated to be in the range of US$ 4-5 trillion among developed countries firms alone) into new investments during 2011. The share of developing countries, which now constitutes over 50 per cent in total FDI inflows, may increase further on the back of strong growth prospects. However, currency volatility, sovereign debt problems and potential protectionist policies may pose some risks to this positive outlook. Nonetheless, according to the Institute of International Finance (January 2011), net FDI flows to EMEs was projected to increase by over 11 per cent in 2011. FDI flows into select countries are given in Table 1.

Table 1 : Countries with Higher Estimated Level of FDI Inflows than India in 2010 Amount (US$ billion) Variation (Percent) 2010 2010 2007 2008 2009 2008 2009 (Estimates) (Estimates) World 2100.0 1770.9 1114.2 1122.0 -15.7 -37.1 0.7 Developed 1444.1 1018.3 565.9 526.6 -29.5 -44.4 -6.9 Economies United States 266.0 324.6 129.9 186.1 22.0 -60.0 43.3 France 96.2 62.3 59.6 57.4 -35.2 -4.3 -3.7 Belgium 118.4 110.0 33.8 50.5 -7.1 -69.3 49.4 United Kingdom 186.4 91.5 45.7 46.2 -50.9 -50.1 1.1 Germany 76.5 24.4 35.6 34.4 -68.1 45.9 -3.4 Developing 564.9 630.0 478.3 524.8 11.5 -24.1 9.7 Economies China 83.5 108.3 95.0 101.0 29.7 -12.3 6.3 Hong Kong 54.3 59.6 48.4 62.6 9.8 -18.8 29.3 Russian Federation 55.1 75.5 38.7 39.7 37.0 -48.7 2.6 Singapore 35.8 10.9 16.8 37.4 -69.6 54.1 122.6 Saudi Arabia 22.8 38.2 35.5 - 67.5 -7.1 Brazil 34.6 45.1 25.9 30.2 30.3 -42.6 16.6 India 25.0 40.4 34.6 23.7 61.6 -14.4 -31.5 Source:World Investment Report, 2010 and Global Investment Trends Monitor,

UNCTAD.
Section 1.2: Trends in FDI Inflows to India With the tripling of the FDI flows to EMEs during the pre-crisis period of the 2000s, India also received large FDI inflows in line with its robust domestic economic performance. The attractiveness of India as a preferred investment destination could be ascertained from the large increase in FDI inflows to India, which rose from around US$ 6 billion in 2001-02 to almost US$ 38 billion in 2008-09. The significant increase in FDI inflows to India reflected the impact of liberalisation of the economy since the early 1990s as well as gradual opening up of the capital account. As part of the capital account liberalisation, FDI was gradually allowed in almost all sectors, except a few on grounds of strategic importance, subject to compliance of sector specific rules and regulations. The large and stable FDI flows also increasingly financed the current account deficit over the period. During the recent global crisis, when there was a significant deceleration in global FDI flows during 2009-10, the decline in FDI flows to India was relatively moderate reflecting robust equity flows on the back of strong rebound in domestic growth ahead of global recovery and steady reinvested earnings (with a share of almost 25 per cent) reflecting better profitability of foreign companies in India. However, when there had been some recovery in global FDI flows, especially driven by flows to Asian EMEs, during 2010-11, gross FDI equity inflows to India witnessed significant moderation. Gross equity FDI flows to India moderated to US$ 20.3 billion during 2010-11 from US$ 27.1 billion in the preceding year.

Table 2: Equity FDI Inflows to India (Percent) 2006- 2007- 2008- 2009- 2010Sectors 07 08 09 10 11 Sectoral shares (Percent) Manufactures 17.6 19.2 21.0 22.9 32.1 Services 56.9 41.2 45.1 32.8 30.1 Construction, Real estate and mining 15.5 22.4 18.6 26.6 17.6 Others 9.9 17.2 15.2 17.7 20.1 Total 100.0 100.0 100.0 100.0 100.0 Equity Inflows (US$ billion) Manufactures 1.6 3.7 4.8 5.1 4.8 Services 5.3 8.0 10.2 7.4 4.5 Construction, Real estate and mining 1.4 4.3 4.2 6.0 2.6 Others 0.9 3.3 3.4 4.0 3.0 Total Equity FDI 9.3 19.4 22.7 22.5 14.9
From a sectoral perspective, FDI in India mainly flowed into services sector (with an average share of 41 per cent in the past five years) followed by manufacturing (around 23 per cent) and mainly routed through Mauritius (with an average share of 43 per cent in the past five years) followed by Singapore (around 11 per cent). However, the share of services declined over the years from almost 57 per cent in 2006-07 to about 30 per cent in 2010-11, while the shares of manufacturing, and others largely comprising electricity and other power generation increased over the same period (Table 2). Sectoral information on the recent trends in FDI flows to India show that the moderation in gross equity FDI flows during 2010-11 has been mainly driven by sectors such as construction, real estate and mining and services such as business and financial services. Manufacturing, which has been the largest recipient of FDI in India, has also witnessed some moderation (Table 2).

IMPACT FDI =INTRODUCTION:-FDIs being the leading source of external finance , have
become very important factor in national development strategies in our country . FDIs provide impetus for economic development , enhance competitive efficiency , open up new opportunities , help to optimize allocation of resources . It can contribute to GDP , Gross fixed capital formation and balance of payments. Objective :1. To find the relationship between FDIs flow with export and foreign currency reserves over the last decade . 2. The viability of FDIs inflow in Indian Economy . 3. The effectiveness of FDIs inflow in Indian Economy. SOCIAL ASPECT :FDI can stimulate employment , raise wages and replace declining market sectors , provided it generates and expands business . But, the benefits may only be felt by small portion of the population i.e. where there is an urban emphasis or wage differentials between income groups will be exacerbated . More over it can encourage a culture of consumerism. Green field investments can stimulate new infrastructure development and technologies which will result in social and environmental benefits provided they spill over into host communities and business i.e. in - house investment . NATURE OF FDI IN INDIA(1991-2010):- Its volume and composition of FDI are determined by assignment theory . FDI flows can be characterized in two ways either through Greenfield investment i.e. building productive capacity in the foreign country to develop corporate assets abroad or through cross border acquisition i.e. purchasing foreign corporate assets. Green field FDI must be one-way , where as , cross-border acquisitions are two ways . Green field FDI occurs because firms want to exploit cost differences by reallocation . But cross-border acquisitions exist not only because of cost differences but also for the distribution of entrepreneurial abilities . FDI is motivated by differences in production cost provided entrepreneurial abilities are same in concerned countries . Green field FDIs are more efficient if entrepreneurial abilities differ . Crossborder acquisitions are more productive incase of high cost country . Cross-border acquisitions prohibit a firm to produce other goods but Green field FDIs do not prohibit a firm to produce the said goods which was initially endowed Green field FDI and cross border acquisitions co-exist but FDIs take the form of cross-border acquisitions only when difference in cost of production vanishes . Green field FDIs are more productive since cross-border acquisitions provide less to the host country's economy and deploy less efficient foreign firms . Analysis depending on (1990-91 to 1998-99) MNCs which are coming mainly from European countries (49%) , entering mainly on Green field activity (46%) . They are comparatively less interested in acquisition i.e. in partial acquisition, 12 % and full acquisition 5 % respectively . PATTERNS AND COMPOSITIONS OF FDI :MNC's investment in India until 1994 was not encouraging i.e. only 25% . But investment in India got momentum after 1994 . The majority of MNC's investment , i.e., 53% is focused on product and 35% is in related business sectors .

Amongst MNC's Investment in India almost 78% is from USA and Western Europe ,11 % from Germany and 9% from U.K . Pattern of FDI in India has been significantly changed during two successive decades , starting from 1991.service sectors has got more importance during second decade i.e. (2000-2009) . it has been increased from 7% to 21% . Telecommunication has remained the same i.e. 7% .Investments during 1991-1999 in different sectors are, transportation 9% , electrical equipment 8% , chemical 7% and others 62% respectively . FDIs during 2000-2009 , are computer software and hardware 10% , construction -6% , House and real estate 6% and others 50% respectively . FDI AND WORLD TRADE :Exports and Imports to and from EU , Germany and U.K and USA are almost balanced .Much European investment is directed towards Intermediate goods , Machinery and Equipment sectors ; North American firms invest in IT and financial services sectors ; Japanese and East Asian countries invest in machines and equipment. FDI is generally preferred since portfolio investment is highly volatile and it can be taken back during wakening phase of any economy . FOREIGN EXCHANGE , FOREIGN INVESTMENT IN INDIA :- Foreign exchange reserves which was 1 billion US$ during 1990 , increased to five times during 1991 , 1995 , 2004 respectively . It amounted to almost three times during May 2008 and afterwards falls to US$252 , due to Global crisis and strengthening of US dollar , again it increased to US$192.08 in the year 2010-2011 after a fall in US$182.64 billion . India is now the fourth largest foreign exchange holder in the world , ranks after China , Japan and Russia . A noticeable development in 2009-2010 is the investment of foreign exchange reserves in domestic infrastructure projects , means doing away with the need for external assistance and carrying out without the fear of monetary expansion .

RELATIONSHIP BETWEEN FDI WITH EXPORT AND FOREIGN EXCHANGE RESERVES :- FDIs
can contribute to GDP , Investment and Balance of payments . If we go through the FDIs inflow , starting from 1991 we will be observing a steady increase up to 98-97 , i.e., from US$1.65 billion to US$36.8 billion . Export has been increased steadily during this period and a result Foreign Exchange reserves has been increased from US$1 billion to US$25.2 billion .FDIs inflow have been declined during 1999-2000 and 2000-2001 and come to US$24.39 billion .Again we have observed a declining tendency during 2003-2004 and 2004-2005 respectively i.e. US$ 31.34 to $26.34 billion . Export during 1909-1910 has fallen i.e. from US$ 1852.95 billion to US$ 1787.51 billion .Foreign Exchange reserve has declined during March 2009 to 2009-2010 i.e. from US$ 252 billion to US$ 192.08 billion Growth of FDIs in comparison to last year have declined considerably after 2008-2009 to negative figure i.e., -18% and -22% in the year 2009-2010 and 2010-2011 , respectively . So we can conclude that FDIs flows have persistent relations with export growth and foreign currency reserves in our country . From the on going analysis we can conclude that overall impact of FDIs inflow on current Indian economy is optimistic .In terms of foreign currency reserves, employment generation, social development, competitive framework development- noticeable improvements have been observed. But " Miles to go" to maintain the sustainability in overall development of our

economy.

FOREIGN INVESTMENT & REGULATION

We, at Kanth and Associates, provide assistance to foreign companies for routing entry strategies for investment in India and assisting them through Government regulations and procedures for

setting up their operations in India. We assist our clients in complying with the provisions of Foreign Investment Management Act (FEMA) 1999 on routing Foreign Direct Investment (FDI) in India. Our lawyers have in depth knowledge of international markets and FEMA and have comprehensive experience in cross border transactions. We provide FDI consulting services to our clients. We have assisted clients such as IREO Management Pvt. Ltd, Nelson Planning and Design Pvt. Ltd, Masonite India in obtaining necessary approvals from concerned authorities such as Foreign Investment Promotion Board (FIPB), Director General of Foreign Trade (DGFT), Department of Industrial Policy & Promotion (DIPP), Secretariat for Industrial Assistance (SIA), and Reserve Bank of India (RBI) etc. We also assist clients in Industrial licencing, Government contracts, transfer of technology and licencing and repatriation. We have advised and assisted clients on routing Foreign Direct Investment (FDI) in the fields of telecommunication, construction, single brand retailing, power, hotel and tourism etc. We have significant experience in dealing with mergers & acquisitions, private equity, joint venture agreements, international securities and capital markets transactions. We assist companies in raising capital by way of FCCBs, ADR/GDR etc. We are a capital investment consulting firm. We have advised foreign companies such as Maipu Communication Technology Co Ltd, Nelson Design and Planning Pvt Ltd, ZTE Telecom (India) Pvt Ltd, etc. to determine the most appropriate vehicles for their desired investment in India, ranging from establishing a Liaison Office, Branch Office, Representative Office, Joint Venture, Wholly Owned Subsidiary, Holding Companies and Acquisition of an existing company. We also advise on various provisions and procedures relating to imports and exports. We have conducted due diligence and feasibility analysis of probable collaborators for our clients. We draft various agreements such as joint venture agreement, shareholders agreements, share purchase agreements, memorandum and articles of association of joint venture companies for our clients.