TABLE OF CONTENTS

INTRODUCTION ................................................................................................. 2

REVIEW OF LITERATURE ................................................................................ 7

INDIAN GOVERNMENT POLICIES ON FDI ................................................... 16

TRENDS AND PATTERNS OF FDI FLOW ...................................................... 38

FDI AND INDIAN ECONOMY ......................................................................... 51

FINDINGS .......................................................................................................... 66

ISSUES AND POLICY RECOMMENDATIONS ............................................... 70

INTRODUCTION
One of the most striking developments during the last two decades is the spectacular growth of FDI in the global economic landscape. Capital formation is an important determinant of economic growth. While domestic investments add to the capital stock in an economy, foreign direct investment (FDI) plays a complementary role in overall capital formation by filling the gap between domestic savings and investment. The unprecedented growth of global FDI in 1990 around the world make FDI an important and vital component of development strategy in both developed and developing nations and policies are designed in order to stimulate inward flows. Infact, FDI provides a win win situation to the host and the home countries. Both countries are directly interested in inviting FDI, because they benefit a lot from such type of investment. The home countries want to take the advantage of the vast markets opened by industrial growth. On the other hand the host countries want to acquire technological and managerial skills and supplement domestic savings and foreign exchange. Moreover, the paucity of all types of resources viz. financial, capital, entrepreneurship, technological know- how, skills and practices, access to markets- abroad- in their economic development, developing nations accepted FDI as a sole visible panacea for all their scarcities. Further, the integration of global financial markets paves ways to this explosive growth of FDI around the globe. An important question that arises is whether FDI merely acts as filler between domestic savings and investment or whether it serves other purposes as well. At the macro level, FDI is a nondebt-creating source of additional external finances. This might boost the overall output, employment and exports of an economy. At the micro-level, the effects of FDI need to be analyzed for changes that might occur at the sector-level output, employment and forward and backward linkages with other sectors of the economy.

OVERVIEW The historical background of FDI in India can be traced back with the establishment of East India Company of Britain. British capital came to India during the colonial era of Britain in India. However, researchers could not portray the complete history of FDI pouring in India due to lack of abundant and authentic data. Before independence major amount of FDI came from the British companies. British companies setup their units in mining sector and in those sectors that suits their own economic and business interest. After Second World War, Japanese companies entered Indian market and enhanced their trade with India, yet U.K. remained the most dominant investor in India.

Further, after Independence issues relating to foreign capital, operations of MNCs, gained attention of the policy makers. Keeping in mind the national interests the policy makers designed the FDI policy which aims FDI as a medium for acquiring advanced technology and to mobilize foreign exchange resources. The first Prime Minister of India considered foreign investment as necessary not only to supplement domestic capital but also to secure scientific, technical, and industrial knowledge and capital equipments. With time and as per economic and political regimes there have been changes in the FDI policy too. The industrial policy of 1965, allowed MNCs to venture through technical collaboration in India. However, the country faced two severe crisis in the form of foreign exchange and financial resource mobilization during the second five year plan (1956 -61). Therefore, the government adopted a liberal attitude by allowing more frequent equity participation to foreign enterprises, and to accept equity capital in technical collaborations. The government also provides many incentives such as tax concessions, simplification of licensing procedures and de - reserving some industries such as drugs, aluminum, heavy electrical equipments, fertilizers, etc in order to further boost the FDI inflows in the country. This liberal attitude of government towards foreign capital lures investors from other advanced countries like USA, Japan, and Germany, etc. But due to significant outflow of foreign reserves in the form of remittances of dividends, profits, royalties etc, the government has to adopt stringent foreign policy in 1970s. During this period the government adopted a selective and highly restrictive foreign policy as far as foreign capital, type of FDI and ownerships of foreign companies was concerned. Government setup Foreign Investment Board and enacted Foreign Exchange Regulation Act in order to regulate flow of foreign capital and FDI flow to India. The soaring oil prices continued low exports and deterioration in Balance of Payment position during 1980s forced the government to make necessary changes in the foreign policy. It is during this period the government encouraged FDI, allowed MNCs to operate in India. Thus, resulting in the partial liberalization of Indian Economy. The government introduced reforms in the industrial sector, aimed at increasing competency, efficiency and growth in industry through a stable, pragmatic and non-discriminatory policy for FDI flow. In fact, in the early nineties, Indian economy faced severe Balance of payment crisis. Exports began to experience serious difficulties. There was a marked increase in petroleum prices because of the gulf war. The crippling external debts were debilitating the economy. India was left with that much amount of foreign exchange reserves which could finance its three weeks of imports. The outflow of foreign currency which was

deposited by the Indian NRIs gave a further jolt to Indian economy. The overall Balance of Payment reached at Rs.( -) 4471 crores. Inflation reached at its highest level of 13%. Foreign reserves of the country stood at Rs.11416 crores. The continued political uncertainty in the country during this period added further to worsen the situation. As a result, Indias credit rating fell in the international market for both short- term and longterm borrowing. All these developments put the economy at that time on the verge of default in respect of external payments liability. In this critical face of Indian economy the then finance Minister of India Dr. Manmohan Singh with the help of World Bank and IMF introduced the macro economic stabilization and structural adjustment program. As a result of these reforms India opened its door to FDI inflows and adopted a more liberal foreign policy in order to restore the confidence of foreign investors. Further, under the new foreign investment policy Government of India constituted FIPB (Foreign Investment Promotion Board) whose main function was to invite and facilitate foreign investment through single window system from the Prime Ministers Office. The foreign equity cap was raised to 51 percent for the existing companies. Government allowed the use of foreign brand names for domestically produced products which was restricted earlier. India also became the member of MIGA (Multilateral Investment Guarantee Agency) for protection of foreign investments. Government lifted restrictions on the operations of MNCs by revising the FERA Act 1973. New sectors such as mining, banking, telecommunications, highway construction and management were open to foreign investors as well as to private sector

FDI INFLOWS IN INDIA IN POST REFORM ERA Indias economic reforms in1991 has generated strong interest in Foreign investors and has turned India into one of the favorite destinations for global FDI flows. According to A.T. Kearney, India ranks second in the World in terms of attractiveness for FDI. A.T. Kearneys 2007 Global Services Locations Index ranks India as the most preferred destination in terms of financial attractiveness, people and skill availability and business environment. Similarly, UNCTADs 76 World Investment Report, 2005 considers India the 2nd most attractive destination among the TNCS.

The positive perceptions among investors as a result of strong economic fundamentals driven by 18 years of reforms have helped FDI inflows grow significantly in India. The FDI inflows have

grown by about 20 times since the opening up of the economy to foreign investment. India received maximum amount of FDI from developing economies (Chart 1.1).

60000 50000 40000 30000 20000 10000 0 Developed Countries Developing Countries NRI's

Figure 1 FDI INFLOWS IN INDIA

It is found that there is a huge gap in FDI approved and FDI realized (Chart- 1.2). It is observed that the realization of approved FDI into actual disbursements has been quite slow. The reason of this slow realization may be the nature and type of investment projects involved. Beside this increased FDI has stimulated both exports and imports, contributing to rising levels of international trade. Indias merchandise trade turnover increased from US$ 95 bn in FY02 to US$391 bn in FY08 (CAGR of 27.8%).

Indias exports increased from US$ 44 bn in FY02 to US$ 163 bn in FY08 (CAGR of 24.5%). Indias imports increased from US$ 51 bn in FY02 to US$ 251 bn in FY08 (CAGR of 30.3%). India ranked at 26th in world merchandise exports in 2007 with a share of 1.04 percent.

Further, the explosive growth of FDI gives opportunities to Indian industry for technological up gradation, gaining access to global managerial skills and practices, optimizing utilization of human and natural resources and competing internationally with higher efficiency. Most importantly FDI is central for Indias integration into global production chains which involves production by MNCs spread across locations all over the world. (Economic Survey 2003-04).

REVIEW OF LITERATURE
INTRODUCTION The comprehensive literature centered on economies pertaining to empirical findings and theoretical rationale tends to demonstrate that FDI is necessary for sustained economic growth and development of any economy in this era of globalization. The reviewed literature is divided under the following heads: Temporal studies Inter Industry studies FDI Studies in Indian Context Conclusions TEMPORAL STUDIES Klaus E Meyer (2008) in his paper Foreign Direct investment in Emerging Economies focuses on the impact of FDI on host economies and on policy and managerial implications arising from this (potential) impact. The study finds out that as emerging economies integrate into the global economies international trade and investment will continue to accelerate. MNEs will continue to act as pivotal interface between domestic and international markets and their relative importance may even increase further. The extensive and variety interaction of MNEs with their host societies may tempt policy makers to micro manage inwards foreign investment and to target their instruments at attracting very specific types of projects. Yet, the potential impact is hard to evaluate ex ante (or even ex post) and it is not clear if policy instruments would be effective in attracting specifically the investors that would generate the desired impact. The study concluded that the first priority should be on enhancing the general institutional framework such as to enhance the efficiency of markets, the effectiveness of the public sector administration and the availability of infrastructure. On that basis, then, carefully designed but flexible schemes of promoting new industries may further enhance the chances of developing internationally competitive business clusters. Dexin Yang (2008) in his study, Foreign Direct Investment from Developing Countries: A case study of Chinas Outward Investment presents an interpretation of FDI by Chinese firms. The research is motivated by the phenomenon that compared with foreign investment in China; direct investment from China has so far attracted relatively little attention from researchers. Given the difficulties in providing a convincing explanation of the patterns of Chinas outward FDI by using mainstream theories, this thesis develops a network model of FDI by formalizing network ideas from business analysis for application to economic analysis, and interprets Chinas outward FDI in terms of network model. This thesis holds that Chinese firms were engaged in FDI for various network benefits. Accordingly, the geographic distribution of Chinas outward FDI

reflected the distribution of network benefits required by Chinese firms and the relevant cost saving effects for containing such benefits. As the functioning of networks relies on elements of market economies, the development of Chinas outward FDI was affected by the progress of marketisation in China. Iyare Sunday O, Bhaumik Pradip K, Banik Arindam (2004), in their work Explaining FDI Inflows to India, China and the Caribbean: An Extended Neighborhood Approach find out that FDI flows are generally believed to be influenced by economic indicators like market size, export intensity, institutions, etc, irrespective of the source and destination countries. This paper looks at FDI inflows in an alternative approach based on the concepts of neighborhood and extended neighborhood. The study shows that the neighborhood concepts are widely applicable in different contexts particularly for China and India, and partly in the case of the Caribbean. There are significant common factors in explaining FDI inflows in select regions. While a substantial fraction of FDI inflows may be explained by select economic variables, country specific factors and the idiosyncratic component account for more of the investment inflows in Europe, China and India. Andersen P.S and Hainaut P. (2004) in their paper Foreign Direct Investment and Employment in the Industrial Countries point out that while looking for evidence regarding a possible relationship between foreign direct investment and employment, in particular between outflows and employment in the source countries n response to outflows. They also find that high labour costs encourage outflows and discourage inflows and that such effect can be reinforced by exchange rate movements. The distribution of FDI towards services also suggests that a large proportion of foreign investment is undertaken with the purpose of expanding sales and improving the distribution of exports produced in the source countries. According to this study the principle determinants of FDI flows are prior trade patterns, IT related investments and the scopes for cross border mergers and acquisitions. Finally, the authors find clear evidence that outflows complement rather than substitute for exports and thus help to protect rather than destroy jobs. John Andreas (2009) in his work The Effects of FDI Inflows on Host Country Economic Growth discusses the potential of FDI inflows to affect host country economic growth. The paper argues that FDI should have a positive effect on economic growth as a result of technology spillovers and physical capital inflows. Performing both cross section and panel data analysis on a dataset covering 90 countries during the period 1980 to 2002, the empirical part of the paper finds indications that FDI inflows enhance economic Growth in developing economies but not in developed economies. This paper has assumed that the direction of causality goes from inflow of FDI to host country economic growth. However, economic growth could itself cause an increase in FDI inflows. Economic growth increases the size of the host country market and strengthens the incentives for market seeking FDI. This could result in a situation where FDI and economic

growth are mutually supporting. However, for the ease of most of the developing economies growth is unlikely to result in market seeking FDI due to the low income levels. Therefore, causality is primarily expected to run from FDI inflows to economic growth for these economies. Dunning John H. (2010) in his study Institutional Reform, FDI and European Transition Economics studied the significance of institutional infrastructure and development as a determinant of FDI inflows into the European Transition Economies. The study examines the critical role of the institutional environment (comprising both institutions and the strategies and policies of organizations relating to these institutions) in reducing the transaction costs of both domestic and cross border business activity. By setting up an analytical framework the study identifies the determinants of FDI, and how these had changed over recent years. John Andreas (2004) in his work The Effects of FDI Inflows on Host Country Economic Growth discusses the potential of FDI inflows to affect host country economic growth. The paper argues that FDI should have a positive effect on economic growth as a result of technology spillovers and physical capital inflows. Performing both cross section and panel data analysis on a dataset covering 90 countries during the period 1980 to 2002, the empirical part of the paper finds indications that FDI inflows enhance economic Growth in developing economies but not in developed economies. This paper has assumed that the direction of causality goes from inflow of FDI to host country economic growth. However, economic growth could itself cause an increase in FDI inflows. Economic growth increases the size of the host country market and strengthens the incentives for market seeking FDI. This could result in a situation where FDI and economic growth are mutually supporting. However, for the ease of most of the developing economies growth is unlikely to result in market seeking FDI due to the low income levels. Therefore, causality is primarily expected to run from FDI inflows to economic growth for these economies. Tomsaz Mickiewicz, Slavo Rasosevic and Urmas Varblane (2005), in their study, The Value of Diversity: Foreign Direct Investment and Employment in Central Europe during Economic Recovery, examine the role of FDI in job creation and job preservation as well as their role in changing the structure of employment. Their analysis refers to Czech Republic, Hungary, Slovakia and Estonia. They present descriptive stage model of FDI progression into Transition economy. They analyzed the employment aspects of the model. The study concluded that the role of FDI in employment creation/preservation has been most successful in Hungary than in Estonia. The paper also find out that the increasing differences in sectoral distribution of FDI employment across countries are closely relates to FDI inflows per capita. The bigger diversity of types of FDI is more favorable for the host economy. There is higher likelihood that it will lead to more diverse types of spillovers and skill transfers. If policy is unable to maximize the scale of FDI inflows then policy makers should focus much more on attracting diverse types of FDI.

Klaus E Meyer, Saul Estrin, Sumon Bhaumik, Stephen Gelb, Heba Handoussa, Maryse Louis, Subir Gokarn, Laveesh Bhandari, Nguyen, Than Ha Nguyen, Vo Hung (2005) in their paper Foreign Direct Investment in Emerging Markets: A Comparative Study in Egypt, India, South Africa and Vietnam show considerable variations of the characteristics of FDI across the four countries, all have had restrictive policy regimes, and have gone through liberalization in the early 1990. Yet the effects of this liberalization policy on characteristics of inward investment vary across countries. Hence, the causality between the institutional framework, including informal institutions, and entry strategies merits further investigation. This analysis has to find appropriate ways to control for the determinants of mode choice, when analyzing its consequences. The study concludes that the policy makers need to understand how institutional arrangements may generate favourable outcomes for both the home company and the host economy. Hence, we need to better understand how the mode choice and the subsequent dynamics affect corporate performance and how it influences externalities generated in favour of the local economy. Vittorio Daniele and Ugo Marani (2007) in their study, Do institutions matter for FDI? - A Comparative analysis for the MENA countries analyse the underpinning factors of foreign Direct Investments towards the MENA countries. The main interpretative hypothesis of the study is based on the significant role of the quality of institutions to attract FDI. In MENA experience the growth of FDI flows proved to be notably inferior to that recorded in the EU or in Asian economies, such as China and India. The study suggests as institutional and legal reform are fundamental steps to improve the attractiveness of MENA in terms of FDI. It is concluded from the above studies that market size, fiscal incentives, lower tariff rates, export intensity, availability of infrastructure, institutional environment, IT related investments and cross border mergers and acquisitions are the main determinants of FDI flows at temporal level. FDI helps in creation/preservation of employment. It also facilitates exports. Diverse types of FDI lead to diverse types of spillovers, skill transfers and physical capital flows. It enhances the chances of developing internationally competitive business clusters (e.g. ASEAN, SAPTA, NAPTA etc.). The increasing numbers of BITs (Bilateral Investment Treaties among nations, which emphasizes non discriminatory treatment of FDI) between nations are found to have a significant impact on attracting aggregate FDI flow as the concepts of neighbourhood and extended neighbourhood are widely applicable in different contexts for different countries. It is concluded that FDI plays a positive role in enhancing the economic growth of the host country. Sasidharan Subash and Ramanathan A. (2010), study on Foreign Direct Investment and Spillovers: Evidence from Indian Manufacturing. It is an attempt to empirically examine the spillover effects from the entry of foreign firms using a firm level data of Indian manufacturing industries. Firm level data of Indian manufacturing industries are used for the period 19942002. They consider both horizontal and vertical spillover effects of FDI. Consistent with the

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results of the previous studies, the study finds no evidence of horizontal spillover effects. However, the study finds negative vertical spillover effects. Rudi Beijnen (2007) in his study, FDI in China: Effects on Regional Exports investigates the existence of a significant FDI Export linkage in China, using panel data at the provincial level over the 1995 to 2003. The theory of FDI proposes the possibility of an export creating effect. However, the results show that if the model is correctly specified, there is no evidence for the existence of a significant FDI-export linkage. The study concluded that the claims of the reference studies concerning the presence of a FDI export linkage are not valid. The paper titled Capital Flows and Development: Lessons from South Asian Experiences by Nagesh Kumar (2010), has reviewed the performance of South Asia in terms of its attractiveness for FDI and FPI inflows. These inflows to South Asia have grown in the recent years in response to policy liberalization and their robust economic performance. Although starting from a low base, South Asian countries have also been able to increase their share in Capital flows and development: Lessons from South Asian experiences FDI inflows received by developing countries especially in the past few years and are catching up with Southeast Asian countries in terms of share of these inflows in capital formation. The region is yet to realize the potential of intra-regional FDI inflows even with their emergence as sources of outward FDI. South Asia especially India is also attracting large magnitudes of portfolio equity flows from foreign institutional investors (FIIs) which are highly volatile. The discussion in this paper also shows that even though South Asian countries may be attracting increasing magnitudes of FDI inflows, they are yet to harness their development potential fully. The empirical studies suggest that the region has received FDI inflows of mixed quality and the developmental impact has been uneven. They can learn a great deal from the experiences of China and other Southeast Asian countries in this regard. China has had a much greater success in harnessing the potential of FDI for building high technology export oriented industrial base using a variety of policy instruments and performance requirements. On the other hand, the region especially India is getting exposed in a significant manner to the FPI flows that are not only highly volatile and are expensive in terms of servicing burden. It is concluded from the analysis of the above studies that political environment, debt burden, exchange rate, FDUI spillovers significantly influence FDI flow to the developing countries. It is also observed that countries pursuing export led growth strategy and firms in clusters gain more benefits from FDI. It is also found that improve infrastructure, higher growth rate, higher degree of openness of the host economy and higher levels of human capital attract FDI to the developed as well as developing nations. It augments domestic savings and enhances efficiency of human capital (through transfer of new technology, marketing and managerial skills, innovation and best practices)

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INTER INDUSTRY STUDIES Park Jongsoo (2004) conducted a study on Korean Perspective on FDI in India: Hyundai Motors Industrial Cluster indicates that industrial clusters are playing an important role in economic activity. The key to promoting FDI inflows into India may lie in industries and products that are technology intensive and have economies of scale and significant domestic content. Sarma EAS (2005) in his paper Need for Caution in Retail FDI examines the constraints faced by traditional retailers in the supply chain and give an emphasis on establishment of a package of safety nets as Thailand has done. India should also draw lessons from restrictions placed on the expansion of organized retailing, in terms of sourcing, capital requirement, zoning etc, in other Asian countries. The article comments on the retail FDI report that as commissioned by the Department of Consumer Affairs and suggests the need for a more comprehensive study. Guruswamy Mohan, Sharma Kamal, Mohanty Jeevan Prakash, Korah Thomas J.(2005) in their paper, FDI in Indias Retail Sector: More Bad than Good, find that retail in India is severely constrained by limited availability of bank finance, dislocation of labor. The study suggests suitable measures like need for setting up of national commission to study the problems of the retail sector and to evolve policies that will enable it to cope with FDI. The study concludes that the entry of FDI in Indias retailing sector is inevitable. However, with the instruments of public policy in its hands, the government can slow down the process. The government can try to ensure that the domestic and foreign players are more or less on an equal footing and that the domestic traders are not at a special disadvantage. The small retailers must be given the opportunity to provide more personalized service, so that their higher costs are taken advantage of by large supermarkets and hypermarkets. Sharma Rajesh Kumar (2006) in his article FDI in Higher Education: Official Vision Needs Corrections, examines the issues and financial compulsions presented in the consultation paper prepared by the Commerce Ministry, which is marked by Shoddy arguments, perverse logic and forced conclusions. This article raises four issues which need critical attention: the objectives of higher education, its contextual relevance, the prevailing financial situation and the viability of alternatives to FDI. The conclusion of the article is that higher education needs long term objectives and a broad vision in tune with the projected future of the country and the world. Higher education will require an investment of Rs. 20,000 to 25,000 crore over the next five or more years to expand capacity and improve access. For such a huge amount the paper argues, we can look to FDI.

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To sum up, it can be said that industrial clusters are playing a significant role in attracting FDI at Inter industry level. It is argued that industries and products that are technology intensive and have economies of scale and significant domestic content attract FDI at industrial level. FDI STUDIES IN INDIAN CONTEXT Naga Raj R (2003) in his article Foreign Direct Investment in India in the 1990s: Trends and Issues discusses the trends in FDI in India in the 1990s and compare them with China. The study raises some issues on the effects of the recent investments on the domestic economy. Based on the analytical discussion and comparative experience, the study concludes by suggesting a realistic foreign investment policy. Nayak D.N (2004) in his paper Canadian Foreign Direct Investment in India: Some Observations, analyse the patterns and trends of Canadian FDI in India. He finds out that India does not figure very much in the investment plans of Canadian firms. The reasons for the same is the indifferent attitude of Canadians towards India and lack of information of investment opportunities in India are the important contributing factor for such an unhealthy trends in economic relation between India and Canada. He suggested some measures such as publishing of regular documents like newsletter that would highlight opportunities in India and a detailed focus on Indias area of strength so that Canadian firms could come forward and discuss their areas of expertise would got long way in enhancing Canadian FDI in India. Chandan Chakraborty, Peter Nunnenkamp (2004) in their study Economic Reforms, FDI and its Economic Effects in India assess the growth implications of FDI in India by subjecting industr y specific FDI and output data to Granger causality tests within a panel co -integration framework. It turns out that the growth effects of FDI vary widely across sectors. FDI stocks and output are mutually reinforcing in the manufacturing sector. In sharp contrast, any causal relationship is absent in the primary sector. Most strikingly, the study finds only transitory effects of FDI on output in the service sector, which attracted the bulk of FDI in the post reform era. These differences in the FDI Growth relationship suggest that FDI is unlikely to work wonders in India if only remaining regulations were relaxed and still more industries opened up o FDI. Kulwinder Singh (2005) in his study Foreign Direct Investment in India: A Critical analysis of FDI from 1991-2005 explores the uneven beginnings of FDI, in India and examines the developments (economic and political) relating to the trends in two sectors: industry and infrastructure.The study concludes that the impact of the reforms in India on the policy environment for FDI presents a mixed picture. The industrial reforms have gone far, though they need to be supplemented by more infrastructure reforms, which are a critical missing link.

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Nirupam Bajpai and Jeffrey D. Sachs (2006) in their paper Foreign Direct Investment in India: Issues and Problems, attempted to identify the issues and problems associated with Indias current FDI regimes, and more importantly the other associated factors responsible for Indias unattractiveness as an investment location. Despite India offering a large domestic market, rule of law, low labour costs, and a well working democracy, her performance in attracting FDI flows have been far from satisfactory. The conclusion of the study is that a restricted FDI regime, high import tariffs, exit barriers for firms, stringent labor laws, poor quality infrastructure, centralized decision making processes, and a very limited scale of export processing zones make India an unattractive investment location.

Balasubramanyam V.N Sapsford David (2007) in their article Does India need a lot more FDI compares the levels of FDI inflows in India and China, and found that FDI in India is one tenth of that of china. The paper also finds that India may not require increased FDI because of the structure and composition of Indias manufacturing, service sectors and her endowments of human capital. The requirements of managerial and organizational skills of these industries are much lower than that of labour intensive industries such as those in China. Also, India has a large pool of well Trained engineers and scientists capable of adapting and restructuring imported know how to suit local factor and product market condition all of these factors promote effective spillovers of technology and know- how from foreign firms to locally own firms. The optimum level of FDI, which generates substantial spillovers, enhances learning on the job, and contributes to the growth of productivity, is likely to be much lower in India than in other developing countries including China. The country may need much larger volumes of FDI than it currently attracts if it were to attain growth rates in excess of 10 per cent per annum. Finally, they conclude that the country is now in a position to unbundle the FDI package effectively and rely on sources other than FDI for its requirements of capital. Basu P., Nayak N.C, Vani Archana (2007) in their paper Foreign Direct Investment in India: Emerging Horizon, intends to study the qualitative shift in the FDI inflows in India in depth in the last fourteen odd years as the bold new policy on economic front makes the country progress in both quantity and the way country attracted FDI. It reveals that the country is not only cost effective but also hot destination for R&D activities. The study also finds out that R&D as a significant determining factor for FDI inflows for most of the industries in India. The software industry is showing intensive R&D activity, which has to be channelized in the form of export promotion for penetration in the new markets. The study also reveals strong negative influence of corporate tax on FDI inflows. To sum up, it can be said that large domestic market, cheap labour, human capital, are the main determinants of FDI inflows to India, however, its stringent labour laws, poor quality

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infrastructure, centralize decision making processes, and a vary limited numbers of SEZs make India an unattractive investment location. CONCLUSIONS The above review of literature helps in identifying the research issues and gaps for the present study. The foregoing review of empirical literature confirms/highlights the following facts: It is found that bigger diversity of types of FDI lead to more diverse types of spillovers and skill transfers which proves more favourable for the host economy. It is also found that apart from market size, exports, infrastructure facilities, institutions, source and destination countries, the concept of neighborhood and extended neighborhood is also gaining importance especially in Europe, China and India. In industrial countries high labour costs encourage outflows and discourage inflows of FDI. The principle determinants of FDI in these countries are IT related investments, trade and cross border mergers and acquisitions. Studies which underlie the effects of FDI on the host countries economic growth shows that FDI enhance economic growth in developing economies but not in developed economies. It is found that in developing economies FDI and economic growth are mutually supporting. In other words economic growth increases the size of the host country market and strengthens the incentives for market seeking FDI. It is also observed that bidirectional causality exist between FDI and economic growth i.e. growth in GDP attracts FDI and FDI also contributes to an increase in output. Studies on developing countries of South, East and South East Asia shows that fiscal incentives, low tariffs, BITs (Bilateral Investment Treaties) with developed countries have a profound impact on the inflows of aggregate FDI to developing countries. Studies on role of FDI in emerging economies shows that general institutional framework, effectiveness of public sector administration and the availability of infrastructural facilities enhance FDI inflows to these nations. FDI also enhance the chances of developing internationally competitive business clusters It is observed that countries pursuing export led growth strategies reaps enormous benefits from FDI. The main determinants of FDI in developing countries are inflation, infrastructural facilities, debts, burden, exchange rate, FDI spillovers, stable political environment etc. It is found that firms in cluster gain significantly from FDI in their region, within industry and across other industries in the region. It is also observed that FDI have both short run and long run effect on the economy. So, regulatory FDI guidelines must be formulated in order to protect developing economies from the consequences of FDI flows.

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INDIAN GOVERNMENT POLICIES ON FDI

CONSOLIDATED FDI POLICY OF INDIA 2012 BY DIPP: GENERAL PROVISIONS The Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry, Government of India (GOI) has released the Consolidated FDI Policy of India 2012. The FDI policy 2012 has become effective from April 10, 2012. The FDI policy 2012 has provided certain crucial definitions that must be well known to all concerned. (1) Who Can Invest In India: A non-resident entity (other than a citizen of Pakistan or an entity incorporated in Pakistan) can invest in India, subject to the FDI Policy. A citizen of Bangladesh or an entity incorporated in Bangladesh can invest only under the Government route. NRIs resident in Nepal and Bhutan as well as citizens of Nepal and Bhutan are permitted to invest in the capital of Indian companies on repatriation basis, subject to the condition that the amount of consideration for such investment shall be paid only by way of inward remittance in free foreign exchange through normal banking channels. OCBs have been derecognized as a class of investors in India with effect from September 16, 2003. Erstwhile OCBs which are incorporated outside India and are not under the adverse notice of RBI can make fresh investments under FDI Policy as incorporated non-resident entities, with the prior approval of Government of India if the investment is through Government route; and with the prior approval of RBI if the investment is through Automatic route. An FII may invest in the capital of an Indian Company under the Portfolio Investment Scheme which limits the individual holding of an FII to 10% of the capital of the company and the aggregate limit for FII investment to 24% of the capital of the company. This aggregate limit of 24% can be increased to the sectoral cap/statutory ceiling, as applicable, by the Indian Company concerned through a resolution by its Board of Directors followed by a special resolution to that effect by its General Body and subject to prior intimation to RBI. The aggregate FII investment, in the FDI and Portfolio Investment Scheme, should be within the above caps. The Indian company which has issued shares to FIIs under the FDI Policy for which the payment has been received directly into companys account should report these figures separately under item no. 5 of Form FC-GPR. A daily statement in respect of all transactions (except derivative trade) has to be submitted by the custodian bank in floppy / soft copy in the prescribed format directly to RBI. Only SEBI registered FII and NRIs as per Schedules 2 and 3 respectively of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations

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2000, can invest/trade through a registered broker in the capital of Indian Companies on recognised Indian Stock Exchanges. A SEBI registered Foreign Venture Capital Investor (FVCI) may contribute up to 100% of the capital of an Indian Venture Capital Undertaking (IVCU) and may also set up a domestic asset management company to manage the fund. All such investments can be made under the automatic route in terms of Schedule 6 to Notification No. FEMA 20. A SEBI registered FVCI can invest in a domestic venture capital fund registered under the SEBI (Venture Capital Fund) Regulations, 1996. Such investments would also be subject to the extant FEMA regulations and extant FDI policy including sectoral caps, etc. SEBI registered FVCIs are also allowed to invest under the FDI Scheme, as non-resident entities, in other companies, subject to FDI Policy and FEMA regulations. Further, FVCIs are allowed to invest in the eligible securities (equity, equity linked instruments, debt, debt instruments, debentures of an IVCU or VCF, units of schemes / funds set up by a VCF) by way of private arrangement / purchase from a third party also, subject to terms and conditions as stipulated in Schedule 6 of Notification No. FEMA 20 / 2000 -RB dated May 3, 2000 as amended from time to time. It is also being clarified that SEBI registered FVCIs would also be allowed to invest in securities on a recognized stock exchange subject to the provisions of the SEBI (FVCI) Regulations, 2000, as amended from time to time, as well as the terms and conditions stipulated therein. (2) Qualified Foreign Investors (QFls) investment in equity shares: QFls are permitted to invest through SEBI registered Depository Participants (DPs) only in equity shares of listed Indian companies through recognized brokers on recognized stock exchanges in India as well as in equity shares of Indian companies which are offered to public in India in terms of the relevant and applicable SEBI guidelines/regulations. QFls are also permitted to acquire equity shares by way of right shares, bonus shares or equity shares on account of stock split / consolidation or equity shares on account of amalgamation, demerger or such corporate actions subject to the prescribed investment limits. QFIs are allowed to sell the equity shares so acquired subject to the relevant SEBI guidelines. The individual and aggregate investment limits for the QFls shall be 5% and 10% respectively of the paid up capital of an Indian company. These limits shall be over and above the FII and NRI investment ceilings prescribed under the Portfolio Investment Scheme for foreign investment in India. Further, wherever there are composite sectoral caps under the extant FDI policy, these limits for QFI investment in equity shares shall also be within such overall FDI sectoral caps. Dividend payments on equity shares held by QFls can either be directly remitted to the designated overseas bank accounts of the QFIs or credited to the single rupee pool bank account.

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In case dividend payments are credited to the single rupee pool bank account they shall be remitted to the designated overseas bank accounts of the QFIs within five working days (including the day of credit of such funds to the single rupee pool bank account). Within these five working days, the dividend payments can be also utilized for fresh purchases of equity shares under this scheme, if so instructed by the QFI. (3) Entities Into Which FDI Can Be Made: (a) FDI in an Indian Company: Indian companies can issue capital against FDI. (b) FDI in Partnership Firm / Proprietary Concern: A Non-Resident Indian (NRI) or a Person of Indian Origin (PIO) resident outside India can invest in the capital of a firm or a proprietary concern in India on non-repatriation basis provided; (i) Amount is invested by inward remittance or out of NRE/FCNR(B)/NRO account maintained with Authorized Dealers / Authorized banks. (ii) The firm or proprietary concern is not engaged in any agricultural/plantation or real estate business or print media sector. (iii) Amount invested shall not be eligible for repatriation outside India. (c) Investments with repatriation option: NRIs/PIO may seek prior permission of Reserve Bank for investment in sole proprietorship concerns/partnership firms with repatriation option. The application will be decided in consultation with the Government of India. (d) Investment by non-residents other than NRIs/PIO: A person resident outside India other than NRIs/PIO may make an application and seek prior approval of Reserve Bank for making investment in the capital of a firm or a proprietorship concern or any association of persons in India. The application will be decided in consultation with the Government of India. (e) Restrictions: An NRI or PIO is not allowed to invest in a firm or proprietorship concern engaged in any agricultural/plantation activity or real estate business or print media. (f) FDI in Venture Capital Fund (VCF): FVCIs are allowed to invest in Indian Venture Capital Undertakings (IVCUs) /Venture Capital Funds (VCFs) /other companies, as stated in paragraph 3.1.6 of this Circular. If a domestic VCF is set up as a trust, a person resident outside India (nonresident entity/individual including an NRI) can invest in such domestic VCF subject to approval of the FIPB. However, if a domestic VCF is set-up as an incorporated company under the Companies Act, 1956, then a person resident outside India (non-resident entity/individual including an NRI) can invest in such domestic VCF under the automatic route of FDI Scheme,

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subject to the pricing guidelines, reporting requirements, mode of payment, minimum capitalization norms, etc. (g) FDI in Trusts: FDI in Trusts other than VCF is not permitted. (h) FDI in Limited Liability Partnerships (LLPs): FDI in LLPs is permitted, subject to the following conditions: (i) FDI will be allowed, through the Government approval route, only in LLPs operating in sectors/activities where 100% FDI is allowed, through the automatic route and there are no FDIlinked performance conditions (such as 'Non Banking Finance Companies' or 'Development of Townships, Housing, Built-up infrastructure and Construction-development projects' etc.). (ii) LLPs with FDI will not be allowed to operate in agricultural/plantation activity, print media or real estate business. (iii) An Indian company, having FDI, will be permitted to make downstream investment in an LLP only if both-the company, as well as the LLP- are operating in sectors where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance conditions. (iv) LLPs with FDI will not be eligible to make any downstream investments. (v) Foreign Capital participation in LLPs will be allowed only by way of cash consideration, received by inward remittance, through normal banking channels or by debit to NRE/FCNR account of the person concerned, maintained with an authorized dealer/authorized bank. (vi) Investment in LLPs by Foreign Institutional Investors (FIls) and Foreign Venture Capital Investors (FVCIs) will not be permitted. LLPs will also not be permitted to avail External Commercial Borrowings (ECBs). (vii) In case the LLP with FDI has a body corporate that is a designated partner or nominates an individual to act as a designated partner in accordance with the provisions of Section 7 of the LLP Act, 2008, such a body corporate should only be a company registered in India under the Companies Act, 1956 and not any other body, such as an LLP or a trust. (viii) For such LLPs, the designated partner "resident in India", as defined under the 'Explanation' to Section 7(1) of the LLP Act, 2008, would also have to satisfy the definition of "person resident in India", as prescribed under Section 2(v)(i) of the Foreign Exchange Management Act, 1999.

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(ix) The designated partners will be responsible for compliance with all the above conditions and also liable for all penalties imposed on the LLP for their contravention, if any. (x) Conversion of a company with FDI, into an LLP, will be allowed only if the above stipulations are met and with the prior approval of FIPB/Government. (i) FDI in other Entities: FDI in resident entities other than those mentioned above is not permitted. (4) Types Of Instruments: Indian companies can issue equity shares, fully, compulsorily and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares subject to pricing guidelines/valuation norms prescribed under FEMA Regulations. The price/ conversion formula of convertible capital instruments should be determined upfront at the time of issue of the instruments. The price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with the extant FEMA regulations [the DCF method of valuation for the unlisted companies and valuation in terms of SEBI (ICDR) Regulations, for the listed companies. Other types of Preference shares/Debentures i.e. non-convertible, optionally convertible or partially convertible for issue of which funds have been received on or after May 1, 2007 are considered as debt. Accordingly all norms applicable for ECBs relating to eligible borrowers, recognized lenders, amount and maturity, end-use stipulations, etc. shall apply. Since these instruments would be denominated in rupees, the rupee interest rate will be based on the swap equivalent of London Interbank Offered Rate (LIBOR) plus the spread as permissible for ECBs of corresponding maturity. The inward remittance received by the Indian company vide issuance of DRs and FCCBs are treated as FDI and counted towards FDI. (a) Issue of Shares by Indian Companies under FCCB/ADR/GDR: (i) Indian companies can raise foreign currency resources abroad through the issue of FCCB/DR (ADRs/GDRs), in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Government of India there under from time to time. (ii) A company can issue ADRs / GDRs if it is eligible to issue shares to persons resident outside India under the FDI Policy. However, an Indian listed company, which is not eligible to raise funds from the Indian Capital Market including a company which has been restrained from

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accessing the securities market by the Securities and Exchange Board of India (SEBI) will not be eligible to issue ADRs/GDRs. (iii) Unlisted companies, which have not yet accessed the ADR/GDR route for raising capital in the international market, would require prior or simultaneous listing in the domestic market, while seeking to issue such overseas instruments. Unlisted companies, which have already issued ADRs/GDRs in the international market, have to list in the domestic market on making profit or within three years of such issue of ADRs/GDRs, whichever is earlier. ADRs / GDRs are issued on the basis of the ratio worked out by the Indian company in consultation with the Lead Manager to the issue. The proceeds so raised have to be kept abroad till actually required in India. Pending repatriation or utilization of the proceeds, the Indian company can invest the funds in:(a) Deposits, Certificate of Deposits or other instruments offered by banks rated by Standard and Poor, Fitch, IBCA ,Moody's, etc. with rating not below the rating stipulated by Reserve Bank from time to time for the purpose; (b) Deposits with branch/es of Indian Authorized Dealers outside India; and (c) Treasury bills and other monetary instruments with a maturity or unexpired maturity of one year or less. (iv) There are no end-use restrictions except for a ban on deployment / investment of such funds in real estate or the stock market. There is no monetary limit up to which an Indian company can raise ADRs / GDRs. (v) The ADR / GDR proceeds can be utilized for first stage acquisition of shares in the disinvestment process of Public Sector Undertakings / Enterprises and also in the mandatory second stage offer to the public in view of their strategic importance. (vi) Voting rights on shares issued under the Scheme shall be as per the provisions of Companies Act, 1956 and in a manner in which restrictions on voting rights imposed on ADR/GDR issues shall be consistent with the Company Law provisions. Voting rights in the case of banking companies will continue to be in terms of the provisions of the Banking Regulation Act, 1949 and the instructions issued by the Reserve Bank from time to time, as applicable to all shareholders exercising voting rights. (vii) Erstwhile OCBs who are not eligible to invest in India and entities prohibited from buying, selling or dealing in securities by SEBI will not be eligible to subscribe to ADRs/ GDRs issued by Indian companies.

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(viii) The pricing of ADR / GDR issues should be made at a price determined under the provisions of the Scheme of issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Government of India and directions issued by the Reserve Bank, from time to time. (ix) The pricing of sponsored ADRs/GDRs would be determined under the provisions of the Scheme of issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Government of India and directions issued by the Reserve Bank, from time to time. (b) Two-way Fungibility Scheme: A limited two-way Fungibility scheme has been put in place by the Government of India for ADRs / GDRs. Under this Scheme, a stock broker in India, registered with SEBI, can purchase shares of an Indian company from the market for conversion into ADRs/GDRs based on instructions received from overseas investors. Re-issuance of ADRs / GDRs would be permitted to the extent of ADRs / GDRs which have been redeemed into underlying shares and sold in the Indian market. (c) Sponsored ADR/GDR issue: An Indian company can also sponsor an issue of ADR / GDR. Under this mechanism, the company offers its resident shareholders a choice to submit their shares back to the company so that on the basis of such shares, ADRs / GDRs can be issued abroad. The proceeds of the ADR / GDR issue are remitted back to India and distributed among the resident investors who had offered their Rupee denominated shares for conversion. These proceeds can be kept in Resident Foreign Currency (Domestic) accounts in India by the resident shareholders who have tendered such shares for conversion into ADRs / GDRs. (5) Issue/Transfer Of Shares: (a) Capital Instrument: The capital instruments should be issued within 180 days from the date of receipt of the inward remittance received through normal banking channels including escrow account opened and maintained for the purpose or by debit to the NRE/FCNR (B) account of the non-resident investor. In case, the capital instruments are not issued within 180 days from the date of receipt of the inward remittance or date of debit to the NRE/FCNR (B) account, the amount of consideration so received should be refunded immediately to the non-resident investor by outward remittance through normal banking channels or by credit to the NRE/FCNR (B) account, as the case may be. Non-compliance with the above provision would be reckoned as a contravention under FEMA and would attract penal provisions. In exceptional cases, refund of the amount of consideration outstanding beyond a period of 180 days from the date of receipt may be considered by the RBI, on the merits of the case.

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(b) Issue Price of Shares: Price of shares issued to persons resident outside India under the FDI Policy, shall not be less than (i) the price worked out in accordance with the SEBI guidelines, as applicable, where the shares of the company is listed on any recognised stock exchange in India; (ii) the fair valuation of shares done by a SEBI registered Category - I Merchant Banker or a Chartered Accountant as per the discounted free cash flow method, where the shares of the company is not listed on any recognised stock exchange in India ; and (iii) the price as applicable to transfer of shares from resident to non-resident as per the pricing guidelines laid down by the Reserve Bank from time to time, where the issue of shares is on preferential allotment. (c) Foreign Currency Account: Indian companies which are eligible to issue shares to persons resident outside India under the FDI Policy may be allowed to retain the share subscription amount in a Foreign Currency Account, with the prior approval of RBI. (d) Transfer of Shares and Convertible Debentures: (i) Subject to FDI sectoral policy (relating to sectoral caps and entry routes), applicable laws and other conditionalities including security conditions, non-resident investors can also invest in Indian companies by purchasing/acquiring existing shares from Indian shareholders or from other non-resident shareholders. General permission has been granted to non-residents/NRIs for acquisition of shares by way of transfer subject to the following: (a) A person resident outside India (other than NRI and erstwhile OCB) may transfer by way of sale or gift, the shares or convertible debentures to any person resident outside India (including NRIs). (b) NRIs may transfer by way of sale or gift the shares or convertible debentures held by them to another NRI. (c) A person resident outside India can transfer any security to a person resident in India by way of gift. (d) A person resident outside India can sell the shares and convertible debentures of an Indian company on a recognized Stock Exchange in India through a stock broker registered with stock exchange or a merchant banker registered with SEBI. (e) A person resident in India can transfer by way of sale, shares/convertible debentures (including transfer of subscribers shares), of an Indian company under private arrangement to a person resident outside India, subject to these guidelines.

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(f) General permission is also available for transfer of shares/convertible debentures, by way of sale under private arrangement by a person resident outside India to a person resident in India, subject to these guidelines. (g) The above General Permission also covers transfer by a resident to a non-resident of shares/convertible debentures of an Indian company, engaged in an activity earlier covered under the Government Route but now falling under Automatic Route, as well as transfer of shares by a non-resident to an Indian company under buyback and/or capital reduction scheme of the company. (h) The Form FC-TRS should be submitted to the AD Category-I Bank, within 60 days from the date of receipt of the amount of consideration. The onus of submission of the Form FC-TRS within the given timeframe would be on the transferor/transferee, resident in India. (ii) The sale consideration in respect of equity instruments purchased by a person resident outside India, remitted into India through normal banking channels, shall be subjected to a Know Your Customer (KYC) check by the remittance receiving AD Category-I bank at the time of receipt of funds. In case, the remittance receiving AD Category-I bank is different from the AD Category-I bank handling the transfer transaction, the KYC check should be carried out by the remittance receiving bank and the KYC report be submitted by the customer to the AD Category-I bank carrying out the transaction along with the Form FC-TRS. (iii) Escrow: AD Category-I banks have been given general permission to open Escrow account and Special account of non-resident corporate for open offers / exit offers and delisting of shares. The relevant SEBI (SAST) Regulations or any other applicable SEBI Regulations/ provisions of the Companies Act, 1956 will be applicable. AD Category-I banks have also been permitted to open and maintain, without prior approval of RBI, non-interest bearing Escrow accounts in Indian Rupees in India on behalf of residents and/or non-residents, towards payment of share purchase consideration and/or provide Escrow facilities for keeping securities to facilitate FDI transactions subject to the terms and conditions specified by RBI. SEBI authorised Depository Participants have also been permitted to open and maintain, without prior approval of RBI, Escrow accounts for securities subject to the terms and conditions as specified by RBI. In both cases, the Escrow agent shall necessarily be an AD Category- I bank or SEBI authorised Depository Participant (in case of securities accounts). These facilities will be applicable for both issue of fresh shares to the non- residents as well as transfer of shares from / to the nonresidents. (5) Prior Permission of RBI in certain cases for Transfer of Capital Instruments Except cases mentioned in subsequent paragraph below, the following cases require prior approval of RBI

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FDI in Broadcasting Sector The salient points outlined in the given literature for this sector were found to be: 1. FDI in terrestrial broadcasting FM (FM Radio) - subject to such terms and conditions as specified from time to time by Ministry of Information and Broadcasting for grant of permission for setting up of FM Radio Stations would be allowed up to 26% (FDI, NRI & PIO investments and portfolio investment) through government approval route. 2. FDI in Cable Network- subject to Cable Television Network Rules, 1994 and other conditions as specified from time to time by Ministry of Information and Broadcasting would be allowed up to 49% (FDI, NRI & PIO investments and portfolio investment) through government approval route. 3. FDI in Directto-Home -subject to such guidelines/terms and conditions as specified from time to time by Ministry of Information and Broadcasting would be allowed up to 49% (FDI, NRI & PIO investments and portfolio investment) (Within this limit, FDI component not to exceed 20%) with government approval route. 4. Head-end-In-The-Sky (HITS) Broadcasting Service- refers to the multichannel down linking and distribution of television programme in C-Band or Ku Band wherein all the pay channels are down linked at a central facility (Hub/teleport) and again uplinked to a satellite after encryption of channel. FDI limit in (HITS) Broadcasting Service is subject to such guidelines/terms and conditions as specified from time to time by Ministry of Information and Broadcasting. FDI is allowed up to 74% (total direct and indirect foreign investment including portfolio and FDI) where FDI up to 49% would be through automatic route and beyond 49% but up to 74% it would be allowed through government approval route. Given the mass reach of broadcasting services, the immense popularity of entertainment avenues through all these means and the up- gradation of quality on the entry of multiple players in the market, we feel that the opening up of this sector to FDI is a step in the right direction. In this vein, the 74% FDI allowance in the HITS sector allows users the benefits of worldwide channels and shows via the satellite provisions, given that they pay for such use. The DTH and Cable networks set-ups are those that are currently tightly-controlled by various groups of interests, often at loggerheads with each other and highly fragmented and disorganized at grass roots level. Thus it is likely and expected that they shall offer much resistance to FDI relaxations in the near future. Similar is the case with Radio feeds, which is abysmally low on competitors in most places apart from the metros. Things are changing with greater demand from consumers for global content, and FDI to these sectors might just to the trick

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FDI in Civil Aviation Sector This sector includes Airports, Scheduled and Non-Scheduled domestic passenger airlines, Helicopter services / Seaplane services, Ground Handling Services, Maintenance and Repair organizations; Flying training institutes; and Technical training institutions. According to review of literature on guidelines for this sector as of 2012, we infer that 1. FDI in Airports- allowed in the following categories: (a) Greenfield projects: FDI is allowed up to 100% through automatic route. (b) Existing projects: FDI is allowed up to 100% where FDI up to 74% is allowed through automatic route and beyond 74% FDI is allowed through government approval route. 2. Regarding Air Transport Services: Air Transport Services would include Domestic Scheduled Passenger Airlines; Non-Scheduled Air Transport Services, helicopter and seaplane services. (a) No foreign airlines are currently allowed to participate directly or indirectly in the equity of an Air Transport Undertaking engaged in operating Scheduled and Non-Scheduled Air Transport Services except Cargo airlines. (b) Foreign airlines are allowed to participate in the equity of companies operating Cargo airlines, helicopter and seaplane services. (c) FDI in Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline is allowed upto 49% (100% for NRIs) through automatic route. (d) FDI in Non-Scheduled Air Transport Service is allowed upto 74% (100% for NRIs) where upto 49% is allowed through automatic route and beyond 49% and upto 74% through government approval route. (e) FDI in Helicopter services/seaplane services requiring DGCA approval is allowed upto 100% through automatic route. 3.FDI in Ground Handling Services - subject to sectoral regulations and security clearance is allowed upto 74% (100% for NRIs) where upto 46% can be through automatic route and beyond 49% but upto 74% can be made through government approval route. 4. FDI in Maintenance and Repair- organizations; flying training institutes; and technical training institutions is allowed upto 100% through automatic approval route. Thus, the area of civil aviation rightly has a lot of scope to utilise foreign funds for the construction, maintenance, upkeep and expansion of civil aviation facilities. Given the current scenario in India, where low-cost carriers are the buzzword for so many frequent fliers, yet airlines like Kingfisher, Jet Airways, Deccan etc. have gone bust or have taken a huge hit to their margins, FDI seems to be a savior. Recently, the Union Budget 2012 also allowed ECB (External Commercial Borrowings) for the good of airlines. Though a step thought to be in reaction to mounting losses of the abovementioned firms, this step is indirectly the only way out for cash-

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strapped airlines. Also, with superior technology of aircrafts being build in the West, technology transfers shall help improve the quality of flying in India. FDI in Defence Sector FDI in defence industry subject to Industrial license under the Industries (Development and Regulation) Act 1951 is to be allowed up to 26% through government approval route. However as we found out through the papers pertaining to this sector, the following conditions must be satisfied in this regard. 1.License applications will be considered and licenses given by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, in consultation with Ministry of Defence. 2. The applicant should be an Indian company / partnership firm and management of the Applicant Company / partnership should be in Indian hands with majority representation on the Board as well as the Chief Executives of the company / partnership firm being resident Indians. Full particulars of the Directors and the Chief Executives should be furnished along with the applications. 3. The Government reserves the right to verify the antecedents of the foreign collaborators and domestic promoters including their financial standing and credentials in the world market. Preference would be given to original equipment manufacturers or design establishments, and companies having a good track record of past supplies to Armed Forces, Space and Atomic energy sections and having an established R & D base. 4. There would be no minimum capitalization for the FDI. A proper assessment, however, needs to be done by the management of the applicant company depending upon the product and the technology. The licensing authority would satisfy itself about the adequacy of the net worth of the non-resident investor taking into account the category of weapons and equipment that are proposed to be manufactured. 5. There would be a three-year lock-in period for transfer of equity from one non-resident investor to another non-resident investor (including NRIs & erstwhile OCBs with 60% or more NRI stake) and such transfer would be subject to prior approval of the Government. 6. Adequate safety and security procedures would need to be put in place by the licensee once the license is granted and production commences. These would be subject to verification by authorized Government agencies. The standards and testing procedures for equipment to be produced under license from foreign collaborators or from indigenous R & D will have to be provided by the licensee to the Government nominated quality assurance agency under appropriate confidentiality clause. The nominated quality assurance agency would inspect the finished product and would conduct surveillance and audit of the Quality Assurance Procedures of the licensee. 7. Arms and ammunition produced by the private manufacturers will be primarily sold to the Ministry of Defence. These items may also be sold to other Government entities under the

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control of the Ministry of Home Affairs and State Governments with the prior approval of the Ministry of Defence. No such item should be sold within the country to any other person or entity 8. Government decision on applications to FIPB for FDI in defence industry sector will be normally communicated within a time frame of 10 weeks from the date of acknowledgement. Thus, as we can clearly see, the process for FDI infusion is a highly controlled one, and the mandatory requirement of the FDI agency being largely held by Indians, automatically rules out a majority of the foreign sources. Perhaps it is only fitting to do so- for we feel that Defence, being a sector of national security must keep in mind that whatever be the merits of foreignfund inflows, the security factor remains of paramount importance, The country cannot have a too liberal pattern to it, given that doing so might open some legal and procedural loopholes that might allow nations inimical to Indias interest to jeopardize projects that affect national safety. Thus the control, verification etc. are necessary checks to the FDI allowances in this sector.

FDI in Telecom Services, ISPs And Telecom Infrastructure Providing Sectors Of India Telecom service providers, ISPs and telecom infrastructure providers must comply with licensing and security requirements notified by the Department of Telecommunications for all service in order to make FDI in India. FDI in telecom services is allowed upto 74% where upto 49% FDI can be made through automatic route and beyond 49% but upto 74%, FDI can be made through government approval route. The following conditions must also be fulfilled in this regard:

1) General Conditions
(i)This is applicable in case of Basic, Cellular, Unified Access Services, National/ International Long Distance, V-Sat, Public Mobile Radio Trunked Services (PMRTS), Global Mobile Personal Communications Services (GMPCS) and other value added Services. (ii) Both direct and indirect foreign investment in the licensee company shall be counted for the purpose of FDI ceiling. Foreign Investment shall include investment by Foreign Institutional Investors (FIIs), Non-resident Indians (NRIs), Foreign Currency Convertible Bonds (FCCBs), American Depository Receipts (ADRs), Global Depository Receipts (GDRs) and convertible preference shares held by foreign entity. In any case, the Indian shareholding will not be less than 26%. (iii) FDI in the licensee company/Indian promoters/investment companies including their holding companies shall require approval of the Foreign Investment Promotion Board (FIPB) if it has a bearing on the overall ceiling of 74 percent. While approving the investment

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proposals, FIPB shall take note that investment is not coming from countries of concern and/or unfriendly entities. (iv)The investment approval by FIPB shall envisage the conditionality that Company would adhere to licence Agreement. (v) FDI shall be subject to laws of India and not the laws of the foreign country/countries. 2) Security Conditions: (i) The Chief Officer In-charge of technical network operations and the Chief Security Officer should be a resident Indian citizen. (ii) Details of infrastructure/network diagram (technical details of the network) could be provided on a need basis only to telecom equipment suppliers/manufacturers and the affiliate/parents of the licensee company. Clearance from the licensor (Department of Telecommunications) would be required if such information is to be provided to anybody else. (iii) For security reasons, domestic traffic of such entities as may be identified /specified by the licensor shall not be hauled/routed to any place outside India. (iv)The licensee company shall take adequate and timely measures to ensure that the information transacted through a network by the subscribers is secure and protected. (v) The officers/officials of the licensee companies dealing with the lawful interception of messages will be resident Indian citizens. (vi) The majority Directors on the Board of the company shall be Indian citizens. Recently, the Home Ministry of India blocked Telenors FIPB application on certain grounds, including absence of resident directors, and this condition has made the license conditions even more stringent. (vii) The positions of the Chairman, Managing Director, Chief Executive Officer (CEO) and/or Chief Financial Officer (CFO), if held by foreign nationals, would require to be security vetted by Ministry of Home Affairs (MHA). Security vetting shall be required periodically on yearly basis. In case something adverse is found during the security vetting, the direction of MHA shall be binding on the licensee. (viii) The Company shall not transfer the following to any person/place outside India:-

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(a) Any accounting information relating to subscriber (except for international roaming/billing) (Note: it does not restrict a statutorily required disclosure of financial nature); and (b) User information (except pertaining to foreign subscribers using Indian Operators network while roaming). (ix) The Company must provide traceable identity of their subscribers. However, in case of providing service to roaming subscriber of foreign Companies, the Indian Company shall endeavour to obtain traceable identity of roaming subscribers from the foreign company as a part of its roaming agreement. (x) On request of the licensor or any other agency authorised by the licensor, the telecom service provider should be able to provide the geographical location of any subscriber (BTS location) at a given point of time. (xi) The Remote Access (RA) to Network would be provided only to approved location(s) abroad through approved location(s) in India. The approval for location(s) would be given by the Licensor (DOT) in consultation with the Ministry of Home Affairs.

(xii) Under no circumstances, should any RA to the suppliers/manufacturers and affiliate(s) be enabled to access Lawful Interception System(LIS), Lawful Interception Monitoring(LIM), Call contents of the traffic and any such sensitive sector/data, which the licensor may notify from time to time. (xiii) The licensee company is not allowed to use remote access facility for monitoring of content. (xiv) Suitable technical device should be made available at Indian end to the designated security agency /licensor in which a mirror image of the remote access information is available on line for monitoring purposes. (xv) Complete audit trail of the remote access activities pertaining to the network operated in India should be maintained for a period of six months and provided on request to the licensor or any other agency authorized by the licensor. (xvi) The telecom service providers should ensure that necessary provision

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(hardware/software) is available in their equipment for doing the Lawful interception and monitoring from a centralized location. (xvii) The telecom service providers should familiarize/train Vigilance Technical Monitoring (VTM)/security agency officers/officials in respect of relevant operations/features of their systems. (xviii) It shall be open to the licensor to restrict the Licensee Company from operating in any sensitive area from the National Security angle. (xix) In order to maintain the privacy of voice and data, monitoring shall only be upon authorization by the Union Home Secretary or Home Secretaries of the States/Union Territories. (xx) For monitoring traffic, the licensee company shall provide access of their network and other facilities as well as to books of accounts to the security agencies. (xxi) The aforesaid Security Conditions shall be applicable to all the licensee companies operating telecom services covered under this circular irrespective of the level of FDI. (xxii) Other Service Providers (OSPs), providing services like Call Centres, Business Process Outsourcing (BPO), tele-marketing, tele-education, etc, and are registered with DoT as OSP. Such OSPs operate the service using the telecom infrastructure provided by licensed telecom service providers and 100% FDI is permitted for OSPs. As the security conditions are applicable to all licensed telecom service providers, the security conditions mentioned above shall not be separately enforced on OSPs. 3) The above General Conditions and Security Conditions shall also be applicable to the companies operating telecom service(s) with the FDI cap of 49%. 4) All the telecom service providers shall submit a compliance report on the aforesaid conditions to the licensor on 1st day of July and January on six monthly basis.

(a)FDI in ISP with gateways is allowed upto 74% where FDI upto 49% would be through automatic route and FDI beyond 49% but upto 74% would be through government approval route. (b) FDI in ISPs not providing gateways i.e. without gate-ways (both for satellite and marine cables) would be allowed upto 74% where FDI upto 49% would be through automatic route and FDI beyond 49% but upto 74% would be through government approval route.

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The new guidelines of August 24, 2007 Department of Telecommunications provide for new ISP licenses with FDI up to 74%. (c) Radio paging (d) End-to-End bandwidth (e) FDI for infrastructure providers providing dark fiber, right of way, duct space, tower (IP Category I) is allowed upto 100% where FDI upto 49% would be through automatic route and FDI beyond 49% shall be through government approval route. (f) Electronic Mail (g) Voice Mail Investment in all the above activities is subject to the conditions that such companies will divest 26% of their equity in favour of Indian public in 5 years, if these companies are listed in other parts of the world.

FDI in Wholesale Trading And E-Commerce Sectors Of India FDI in cash and carry wholesale trading/ wholesale trading (including sourcing from MSEs), would be allowed upto 100% through automatic route. Cash and Carry wholesale trading/Wholesale trading would mean sale of goods/merchandise to retailers, industrial, commercial, institutional or other professional business users or to other wholesalers and related subordinated service providers. Wholesale trading would, accordingly, be sales for the purpose of trade, business and profession, as opposed to sales for the purpose of personal consumption. The yardstick to determine whether the sale is wholesale or not would be the type of customers to whom the sale is made and not the size and volume of sales. Wholesale trading would include resale, processing and thereafter sale, bulk imports with ex-port/ex-bonded warehouse business sales and B2B e-Commerce. The following Guidelines for Cash and Carry Wholesale Trading/Wholesale Trading (WT) would apply: (a) For undertaking WT, requisite licenses/registration/ permits, as specified under the relevant Acts/Regulations/Rules/Orders of the State Government/Government Body/Government Authority/Local Self-Government Body under that State Government should be obtained.

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(b) Except in case of sales to Government, sales made by the wholesaler would be considered as cash and carry wholesale trading/wholesale trading with valid business customers, only when WT are made to the following entities: (i) Entities holding sales tax/ VAT registration/service tax/excise duty registration; or (ii) Entities holding trade licenses i.e. a license/registration certificate/membership certificate/registration under Shops and Establishment Act, issued by a Government Authority/ Government Body/ Local Self-Government Authority, reflecting that the entity/person holding the license/ registration certificate/ membership certificate, as the case may be, is itself/ himself/herself engaged in a business involving commercial activity; or (iii) Entities holding permits/license etc. for undertaking retail trade (like tehbazari and similar license for hawkers) from Government Authorities/Local Self Government Bodies; or (iv) Institutions having certificate of incorporation or registration as a society or registration as public trust for their self consumption. An Entity, to whom WT is made, may fulfill any one of the 4 conditions. (c) Full records indicating all the details of such sales like name of entity, kind of entity, registration/license/permit etc. number, amount of sale etc. should be maintained on a day to day basis. (d) WT of goods would be permitted among companies of the same group. However, such WT to group companies taken together should not exceed 25% of the total turnover of the wholesale venture (e) WT can be undertaken as per normal business practice, including extending credit facilities subject to applicable regulations. (f) A Wholesale/Cash and carry trader cannot open retail shops to sell to the consumer directly. FDI in E-commerce activities is allowed upto 100% through Automatic route. E-commerce activities refer to the activity of buying and selling by a company through the e-commerce platform. Such companies would engage only in Business to Business (B2B) e-commerce and not in retail trading, inter-alia implying that existing restrictions on FDI in domestic trading would be applicable to e-commerce as well.

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FDI in test marketing of such items for which a company has approval for manufacture is allowed upto 100% through government approval route, provided such test marketing facility will be for a period of two years, and investment in setting up manufacturing facility commences simultaneously with test marketing. FDI in Single Brand product retail trading is allowed upto 100% through government approval route. For this purpose: 1) Foreign Investment in Single Brand product retail trading is aimed at attracting investments in production and marketing, improving the availability of such goods for the consumer, encouraging increased sourcing of goods from India, and enhancing competitiveness of Indian enterprises through access to global designs, technologies and management practices. 2) FDI in Single Brand product retail trading would be subject to the following conditions: (a) Products to be sold should be of a Single Brand only. (b) Products should be sold under the same brand internationally i.e. products should be sold under the same brand in one or more countries other than India. (c) Single Brand product-retail trading would cover only products which are branded during manufacturing. (d) The foreign investor should be the owner of the brand. (e) In respect of proposals involving FDI beyond 51%, mandatory sourcing of at least 30% of the value of products sold would have to be done from Indian small industries/ village and cottage industries, artisans and craftsmen. 'Small industries' would be defined as industries which have a total investment in plant and machinery not exceeding US $ 1.00 million. This valuation refers to the value at the time of installation, without providing for depreciation. Further, if at any point in time, this valuation is exceeded, the industry shall not qualify as a 'small industry' for this purpose. The compliance of this condition will be ensured through self-certification by the company, to be subsequently checked, by statutory auditors, from the duly certified accounts, which the company will be required to maintain. 3) Application seeking permission of the Government for FDI in retail trade of Single Brand products would be made to the Secretariat for Industrial Assistance (SIA) in the Department

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of Industrial Policy and Promotion. The application would specifically indicate the product/ product categories which are proposed to be sold under a Single Brand. Any addition to the product/ product categories to be sold under Single Brand would require a fresh approval of the Government. 4) Applications would be processed in the Department of Industrial Policy and Promotion, to determine whether the products proposed to be sold satisfy the notified guidelines, before being considered by the FIPB for Government approval.

FDI in Banking Sector in India FDI in private banking sector of India is allowed up to 74% where FDI up to 49% is allowed through automatic route and FDI beyond 49% but up to 74% is allowed through government approval route. These conditions must also be satisfied in this regard: 1) This 74% limit will include investment under the Portfolio Investment Scheme (PIS) by FIIs, NRIs and shares acquired prior to September 16, 2003 by erstwhile OCBs, and continue to include IPOs, Private placements, GDR/ADRs and acquisition of shares from existing shareholders. 2) The aggregate foreign investment in a private bank from all sources will be allowed up to a maximum of 74 per cent of the paid up capital of the Bank. At all times, at least 26 per cent of the paid up capital will have to be held by residents, except in regard to a wholly-owned subsidiary of a foreign bank. 3) The stipulations as above will be applicable to all investments in existing private sector banks also. 4) The permissible limits under portfolio investment schemes through stock exchanges for FIIs and NRIs will be as follows: (i) In the case of FIIs, as hitherto, individual FII holding is restricted to 10 per cent of the total paid-up capital, aggregate limit for all FIIs cannot exceed 24 per cent of the total paid-up capital, which can be raised to 49 per cent of the total paid-up capital by the bank concerned through a resolution by its Board of Directors followed by a special resolution to that effect by its General Body.

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(a) Thus, the FII investment limit will continue to be within 49 per cent of the total paid-up capital. (b) In the case of NRIs, as hitherto, individual holding is restricted to 5 per cent of the total paidup capital both on repatriation and non-repatriation basis and aggregate limit cannot exceed 10 per cent of the total paid-up capital both on repatriation and non-repatriation basis. However, NRI holding can be allowed up to 24 per cent of the total paid-up capital both on repatriation and non-repatriation basis provided the banking company passes a special resolution to that effect in the General Body. (c) Applications for foreign direct investment in private banks having joint venture/subsidiary in insurance sector may be addressed to the Reserve Bank of India (RBI) for consideration in consultation with the Insurance Regulatory and Development Authority (IRDA) in order to ensure that the 26 per cent limit of foreign shareholding applicable for the insurance sector is not being breached. (d) Transfer of shares under FDI from residents to non-residents will continue to require approval of RBI and Government as per para 3.6.2 above as applicable. (e) The policies and procedures prescribed from time to time by RBI and other institutions such as SEBI, D/o Company Affairs and IRDA on these matters will continue to apply. (f) RBI guidelines relating to acquisition by purchase or otherwise of shares of a private bank, if such acquisition results in any person owning or controlling 5 per cent or more of the paid up capital of the private bank will apply to non-resident investors as well. (ii) Setting up of a subsidiary by foreign banks (a) Foreign banks will be permitted to either have branches or subsidiaries but not both. (b) Foreign banks regulated by banking supervisory authority in the home country and meeting Reserve Banks licensing criteria will be allowed to hold 100 per cent paid up capital to enable them to set up a wholly-owned subsidiary in India. (c) A foreign bank may operate in India through only one of the three channels viz., (i) branches (ii) a wholly-owned subsidiary and (iii) a subsidiary with aggregate foreign investment up to a maximum of 74 per cent in a private bank. (d) A foreign bank will be permitted to establish a wholly-owned subsidiary either through conversion of existing branches into a subsidiary or through a fresh banking license. A foreign

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bank will be permitted to establish a subsidiary through acquisition of shares of an existing private sector bank provided at least 26 per cent of the paid capital of the private sector bank is held by residents at all times consistent with para (i) (b) above. (e) A subsidiary of a foreign bank will be subject to the licensing requirements and conditions broadly consistent with those for new private sector banks. (f) Guidelines for setting up a wholly-owned subsidiary of a foreign bank will be issued separately by RBI. (g) All applications by a foreign bank for setting up a subsidiary or for conversion of their existing branches to subsidiary in India will have to be made to the RBI. (iii) At present there is a limit of ten per cent on voting rights in respect of banking companies, and this should be noted by potential investor. Any change in the ceiling can be brought about only after final policy decisions and appropriate Parliamentary approvals. FDI in public banking sector of India is allowed up to 20% (FDI and Portfolio Investment) through government approval route subject to Banking Companies (Acquisition and Transfer of Undertakings) Acts 1970/80. This ceiling (20%) is also applicable to the State Bank of India and its associate Banks.

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TRENDS AND PATTERNS OF FDI FLOW

Economic reforms taken by Indian government in 1991 have made the country one of the prominent performers in global economies by placing the country as the 4th largest and the 2nd fastest growing economy in the world. India also ranks as the 11th largest economy in terms of industrial output and has the 3rd largest pool of scientific and technical manpower. Continued economic liberalization since 1991 and its overall direction remained the same over the years irrespective of the ruling party moved the economy towards a market based system from a closed economy characterized by extensive regulation, protectionism, public ownership which leads to pervasive corruption and slow growth from 1950s until 1990s. In fact, Indias economy has been growing at a rate of more than 9% for three running years and has seen a decade of 7 plus per cent growth. The exports in 2008 were $175.7 bn and imports were $287.5 bn. Indias export has been consistently rising, covering 81.3% of its imports in 2008, up from 66.2% in 1990-91. Since independence, Indias BOP on its current account has been negative. Since 1996 -97, its overall BOP has been positive, largely on account of increased FDI and deposits from Non Resident Indians (NRIs), and commercial borrowings. The fiscal deficit has come down from 4.5 per cent in 2003-04 to 2.7 per cent in 2007-08 and revenue deficit from 3.6 per cent to 1.1 per cent in 2007-08. As a result, Indias foreign exchange reserves shot up 55 per cent in 2007-08 to close at US $309.16 billion an increase of nearly US $110 billion from US $199.18 billion at the end of 2006-07. Domestic saving ratio to GDP shot up from 29.8% in 2004-05 to 37.7% in 2007-08. For the first time Indias GDP crossed one trillion dollars mark in 2007. As a consequence of policy measures (taken way back in 1991) FDI in India has increased manifold since 1991 irrespective of the ruling party over the years, as there is a growing consensus and commitments among political parties to follow liberal foreign investment policy that invite steady flow of FDI in India so that sustained economic growth can be achieved. Further, in order to study the impact of economic reforms and FDI policy on the magnitude of FDI inflows, quantitative information is needed on broad dimensions of FDI and its distribution across sectors and regions. An analysis of the last eighteen years of trends in FDI inflows (Chart below) shows that there has been a steady flow of FDI in the country upto 2004, but there is an exponential rise in the FDI inflows from 2005 onwards.

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The actual FDI inflows in India is welcomed under five broad heads (Chart below) 1. Foreign Investment Promotion Boards (FIPB) discretionary approval route for larger projects, 2. Reserve Bank of Indias (RBI) automatic approval route, 3. Acquisition of shares route (since 1996), 4. RBIs non resident Indian (NRIs) scheme, and 5. External commercial borrowings (ADR/GDR) route.

The FIPB route represents larger projects which require bulk of inflows and account for governments discretionary approval. Although, the share of FIPB route is declining somewhat as compared to RBIs automatic route and acquisition of existing shares route.

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Automatic approval route via RBI shows an upward trend of FDI inflows since 1995. This route is meant for smaller sized investment projects. Acquisition of existing shares route and external commercial borrowing route gained prominence (in 1999 and 2003) and shows an upward increasing trend. However, FDI inflows through NRIs route show a sharp declining trend. It is found that India was not able to attract substantial amount of FDI inflow from 1991-99. FDI inflows were US$ 144.45 million in 1991 after that the inflows reached to its peak to US$ 3621.34 million in 1997. Subsequently, these inflows touched a low of US $2205.64 million in 1999 but then shot up in 2001. Except in 2003, which shows a slight decline in FDI inflows, FDI has been picking up since 2004 and rose to an appreciable level of US$ 33029.32 million in 2008.

The annual growth rate was 107% in 2008 over 2007, and compound annual growth rate registered was 40% on an annualized basis during 1991-2008. The increase in FDI inflows during 2008 is due to increased economic growth and sustained developmental process of the country which restore foreign investors confidence in Indian economy despite global economic crisis. However, the pace of FDI inflows in India has definitely been slower than China, Singapore, Russian Federation, and Brazil.

A GAPING HOLE: APPROVED VS. INFLOW A comparative analysis of FDI approvals and inflows (Charts below) reveals that there is a huge gap between the amount of FDI approved and its realization into actual disbursements. A difference of almost 40 per is observed between investment committed and actual inflows during the year 2005-06. All this depends on various factors, namely regulatory, procedural, government clearances, lack of sufficient infrastructural facilities, delay in implementation of projects, and noncooperation from the state government etc. In fact, many long term projects under foreign collaborations get delayed considerably, or in some cases, they may even be denied in the absence of proper and sufficient infrastructural support and facilities. These are perhaps some reasons that could be attributed to this low ratio of approvals vs. actual inflows.

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TYPES OF FDI INFLOWS Although the total number of foreign collaborations has increased since 1991, it is evident (Chart below) that financial collaborations have gradually outnumbered the technical collaborations which indicate that investors are more interested in financial collaborations rather than technical ones. The increase in financial collaboration could be because of the relaxation given by government in the investment norms for financial collaborations.

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SECTORAL TRENDS The major sectors attracting FDI inflows in India have been Services and Electrical & electronics amounting US$ 30,421millions or 32 % of total FDI. Service sector tops the chart of FDI inflows in 2008 with India emerged as a top destination for FDI in services sector. Services exports are the major driving force in promoting exports. Keeping in mind the rising service sector India should open doors to foreign companies in the export oriented services which could increase the demand of unskilled workers and low skilled services and also increases the wage level in these services. Data in (Chart3.10) reveal that the top 5 sectors in aggregate for FDI inflows constitute US$ 50,479 million during August 1991 to Dec. 2008 which accounts for 53.2% of total FDI inflow. Out of this, nearly 40.8% of FDI inflows are in high priority areas like Services, Electrical Equipments, Telecommunication, etc.

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FDI Outflows From India Indian companies are reaching overseas destinations to tap new markets and acquire technologies. While some of the investment has gone into Greenfield projects, a major portion of Indian overseas investment went into acquiring companies abroad. Acquisitions bring with them major benefits such as existing customers, a foothold in the destination market and the niche technologies they require. Due to the rapid growth in Indian companies M&A activity, Indian companies are acquiring international firms in an effort to acquire new markets and maintain their growth momentum, buy cutting-edge technology, develop new product mixes, improve operating margins and efficiencies, and take worldwide competition head-on. It has emerged as the most acquisitive nation in emerging nations, according to global consultancy KPMG (2008) in their Emerging Markets International Acquisitions Tracker. Country-wise FDI Inflows Among the countries heading the list of FDI inflows into India is Mauritius (chart below). This could be attributed to the double taxation treaty that India has signed with Mauritius and also to the fact that most US investment into India is being routed through Mauritius. However, Singapore is the second largest investor in India followed by the US and other developed countries like the UK and the Netherlands, which are Indias major trading partners.

Figure 2 Country-wise FDI Inflows (Jan. 2000-March 2009): SIA Newsletter

Double Taxation Treaty: FDI Through Mauritius The India-Mauritius Double Taxation Avoidance Agreement (DTAA) was signed in 1982 and has played an important role in facilitating foreign investment in India via Mauritius. It has emerged as

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the largest source of foreign direct investment (FDI) in India, accounting for 50 per cent of inflows between August 1991 and 2008. A large number of foreign institutional investors (FIIs) who trade on the Indian stock markets operate from Mauritius. According to the DTAA between India and Mauritius, capital gains arising from the sale of shares are taxable in the country of residence of the shareholder and not in the country of residence of the company whose shares have been sold. Therefore, a Company resident in Mauritius selling shares of an Indian company will not pay tax in India. Since there is no capital gains tax in Mauritius, the gain will escape tax altogether. The DTAA has, however, recently been in the news, with Indian left-wing parties demanding a review of the treaty. They argue that businessmen are misusing the provisions of the treaty to evade taxes. The Mauritius stock market was opened to foreign investors following the lifting of foreign exchange controls in 1994.No approval is required for the trading of shares by foreign investors, unless investment is for the purpose of legal and management control of a Mauritian company or for the holding of more than 15 per cent in a sugar company. Incentives to foreign investors include free repatriation of revenue from the sale of shares and exemption from tax on dividends and capital gains. Mauritius has an active offshore financial sector, which is a major route for foreign investments into the Asian sub-continent. Foreign direct investment transiting through the Mauritian offshore sector to India amounted to US$1.19 billion during the Indian financial year April 2007March 2008, according to figures released by the Indian Ministry of Commerce and Industry. Major US corporations use the Mauritius offshore sector to channel their investment to India. India Mauritius DTAA: Issues The Foreign Investment Promotion Board (FIPB) seems to have laid to rest the controversy surrounding FDI investments routed via Mauritius. FIPB, recently, has given the nod to several FDI proposals, and rejected the Revenue Departments argument about treaty shopping and roundtripping. The board unanimously agreed that FDI proposals should not be held up unless there is concrete evidence to prove loss of revenue. Since the 1990s there has been an on-going debate on the India-Mauritius treaty because it provides two benefits: it exempts capital gains tax in India on sale of shares in Indian companies, and the 1992 offshore tax regime in Mauritius exempts offshore Mauritius resident companies from tax in Mauritius. Further, the treaty does not include a limitation of benefit (LOB) clause, which is like a look through provision in tax treaties to ensure that only residents of treaty countries who are beneficiaries avail such benefits. The Apex court held that a Mauritius resident holding a valid tax residency certificate (issued by the regulators in Mauritius) would be eligible for benefits under the India-Mauritius treaty in the absence of an LOB clause. The debate on this topic continues. The key change to the treaty being pushed by India is to move from a residence-based system of taxation to a source-based system, which means that investors from Mauritius would need more than a Performa and a registered office in the island to qualify for tax breaks. Concerted negotiations were conducted at Port Louis,

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the islands capital city, between government representatives of both countries on February 29, 2008, which was three weeks before the Union Budget 2008-09 was presented in Parliament. The attempt to plug the misuse of the Mauritius double-taxation avoidance agreement was made in response to a specific promise set out in the National Common Minimum Programme drawn up by the United Progressive Alliance when it came to power in May 2004. While some progress has since been made to tighten similar agreements with other countries, the Mauritius treaty is important because from April 2000 to December 2007, FDI equity inflows from the tax haven stood at US$20.1 billion, almost 40 per cent of total inflows of nearly US$51 billion during the period.7 To date, India has signed comprehensive double taxation avoidance agreements with 72 countries. Indian tax authorities have managed to tighten the clauses in many of these treaties. Only 12 treaties have the residence-based taxation, of which seven have been revised and the remaining are in the process of being revised. The only ones left are the treaties with Mauritius and Singapore, but the latter has safeguards. Foreign Technology Transfers Along with the increase in FDI inflows, there has also been an increase in Foreign Technology Transfer approvals into India This could be attributed to Indias increasing quest for advanced technology to modernize its industrial sectors. The majority of the foreign technology transfers have been from the US, followed by Germany and other European countries .FDI trends in India show that the FDI environment has undergone a major change since the inception of economic reforms in 1991. The positive changes can be attributed to the government, which has been instrumental in encouraging FDI in the country. The government now acts as a facilitator of private investment by creating an enabling environment, it is a provider of gaps in critical infrastructure to encourage investment, it acts as a partner to the private sector in public-private partnerships, and it acts as an investor in social sectors such as health and education to serve the needs of society.

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Figure 3 Some Analyzed Trends regarding FDI in recent times

Location determinants of foreign direct investment Location-specific rewards are further classified by three types of FDI motives. 1. Market-seeking investment is undertaken to uphold existing markets or to exploit new markets. For example, due to tariffs and other forms of barriers, the firm has to relocate production to the host country where it had previously served by exporting 2. When firms invest abroad to obtain resources not available in the home country, the investment is called resource- or asset-seeking. Resources may be natural resources, raw materials, or low-cost inputs such as labor 3. The investment is streamlined or efficiency-seeking when the firm can gain from the general governance of organically dispersed activities in the presence of economies of scale and scope The host country factors or fundamentals can be grouped in two categories: the first group comprises of natural resources, most kinds of labor, and proximity to markets. The second group include of a range of environmental variables that act as a function of political, economic, legal, and infra-structural factors of a host country.

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Indias inward investment rule went through a series of changes since economic reforms were escorted in two decades back. The expectation of the policy-makers was that an investor friendly command will help India establish itself as a preferred destination of foreign investors. These expectations remained largely unfulfilled despite the consistent attempts by the policy makers to increase the attractiveness of India by further changes in policies that included opening up of individual sectors, raising the hitherto existing caps on foreign holding and improving investment procedures. But after 200506, official statistics started reporting steep increases in FDI inflows. Portfolio investors and round-tripping investments have been important contributors to Indias reported FDI inflows thus blurring the distinction between direct and portfolio investors on one hand and foreign and domestic investors on the other. These investors were also the ones which have exploited the tax haven route most. Inward investments have been constantly rising since the sharp drop witnessed in 2009, following the global financial crisis. Hiccups apart, foreign investors see huge long-term growth potential in the country. As much as 75 percent of global businesses already present in the country are looking to considerably expand their operations going forward according to the Indian attractive survey by Ernst & Young. This also confirms that India is undergoing a changeover, both in terms of investor perception of its market potential, and in reality. With GDP growth anticipated to surpass 8 percent yearly and the number of people in the Indian middle class set to triple over the next 15 years, with an equivalent impact on disposable income, domestic demand is expected to grow exponentially. Indias young demographic profile also helps it in providing an increasingly well-educated and cost-competitive labor force. These factors put India in a good position to attract an increasing proportion of global FDI. As project numbers and jobs created are still some way off highs reached in 2008, which saw 971 projects, the trend over the last decade has shown a steady, if not dramatic, upward movement. Generally project numbers in 2010 were up 60 percent over 2003 and the number of jobs created up 30 percent. The strong domestic market enabled India to deliver a flexible performance during the global economic slowdown. India today is rising as a manufacturing destination, both for the domestic and global markets. As business leaders battle for growth in the new economy, there is a sense of urgency among leading players to grab the prospects offered by the Indian market. With the liberty of the simplified compendium on foreign direct investment, numerous processes on FDI and associated routes of investment too are being ratified with a view to speed up the process of inflows into India. The out of the country Indian investors too would find it simpler to entry nodal bodies and invest in India. Though, a note of caution the Reserve Bank of India too is attempting to legalize certain sections in Foreign Exchange Management Act (FEMA) which also allow NRIs, routes to invest in India. Its argument is that NRIs tend to invest much more than the cap allowed in the sectors through these other routes, thereby exceeding allowed limits for FDI. The government may also remove the liberties provided to NRIs in sectors such as aviation, real estate etc.

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More reforms to make investing in India a simpler process, such as FDI in multi-brand retail, defense production, and agriculture, are in the discussion stage and the government intends to bring out tangible policies in this direction. Proposals can also be sent to DIPP online. This facility will allow all abroad investors to speed up their investment proposals. Tax incentives to SEZ developers Income tax Deduction from profits and gains from export of goods/services as follows (Section 10AA) 100 percent income tax exemption for first five years 50 percent income tax exemption for next five years Income tax exemption for next five years to the extent of profits Reinvested (maximum 50 percent) Capital gains tax exemption on relocation to SEZ (Section 54GA): This is a controversial issue as to be eligible for income tax exemption; the unit should be a new unit. Further, a press statement from Hon. Minister for Commerce and Industry, Mr. Kamal Nath, mentions that SEZs are basically for fresh investments No TDS by overseas banking units on interest on deposits/borrowings from non-resident or person not ordinarily resident No minimum alternate tax Transferee developer enjoys 100 percent income tax exemption for balance period of 10 assessment years Indirect tax SEZ units may import or procure from domestic sources duty free, all their requirements of capital goods, raw materials, consumables, spares, packaging materials, office equipment, DG sets for implementation of their project in the zone without any license or specific approval No import duty on these goods imported No excise duty on these goods procured from domestic tariff area No service tax on services availed from domestic tariff area No value added tax and central sales tax on goods procured from domestic tariff area On goods procured from DTA, drawback under section 75 allowed to SEZ unit Goods imported/procured locally duty free could be utilized over the approval period of five years Other incentives A foreign institutional investor investing in shares and securities in India would be accountable to tax at 10 percent on its long-term capital gains and 30 percent on short-term capital gains. The least amount period of investment in the case of equity shares would be more than one year to be considered long term, and three years in the case of other securities. Dividends, interest or longterm capital gains of an infrastructure capital fund or infrastructure Capital Company that earns from investments made on or after June 1, 1998 in any venture engaged in the business of developing, maintaining and working any infrastructure facility, and which has been permitted

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by the central Government, is not liable from tax. Dividends paid by local players to their shareholders are excused from tax. Though, the domestic corporation would have to pay an extra tax termed as tax on circulated profits which is computed at the rate of 10 percent of the amounts spread as dividends by the local company. Current statistics Indian has been attracting foreign direct investment for a long period. The sectors like telecommunication, construction activities and computer software and hardware have been the major sectors for FDI inflows in India. As per the fact sheet on FDI, there was Rs. 6,30,336 crore FDI equity inflows between the period of August 1991 to January 2011. Top 10 investing FDI investing countries in India are Mauritius, Singapore, United States, UK, Netherlands, Japan, Cyprus, Germany, France and UAE. According to media reports, the decline in the FDI inflows would be a major concern for the economy, as the Indian economy is heading to reach the 9 percent growth rate. For developing countries like India, the most important reason to attract FDI is the availability of better technology. This does not mean that overseas companies transfer technology. All studies stated that the presence of foreign companies which positively impacts productivity of domestic firms through learning the use of new technologies. This is really important than obtaining technology through purchases of drawings and designs. If we accept this, then a better indicator of FDI interest is the long term trends of FDI in India. Real FDI is increasing in India An annual FDI inflow indicates that FDI went up from around negligible amounts in 1991-92 to around US$9 billion in 2006-07. It then hiked to around US$22 billion in 2007-08, rising to around US$37 billion by 2009-10. It is now clear that FDI was related to the recessionary conditions in the western economies. In other words, the stock of FDI has jumped by almost US$100 billion since 2006-07. The recent flattening of monthly FDI flows is a sign more of recovery in the western economies than any loss of long term interest in the Indian economy. The monthly figure only shows that the incremental FDI is going back to the prerecession years rather than indicating decline of FDI into India. In fact, a monthly inflow of US$1.1 billion is about 30 percent higher than pre-recession years. Also, FDI is all about long term investment. Companies have already invested in to India and are unlikely to move elsewhere. Unless any dramatic negative changes in policy, FDI will continue to inch upwards. The crucial test for India is how to move from US$10-12 billion FDI economy to one where investment levels are US$30-40 billion. Concluding Remarks India has been receiving increasing amounts of FDI since 1991-92. The government has facilitated inflows of FDI by making its policies relatively liberal since 1991-92. FDI inflows have complemented domestic investment and hence contributed to capital formation as well as to bringing in new technologies and global linkages. Despite the global financial crisis and economic

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slowdown, it is expected that FDI inflows would bounce back to pre-crisis levels soon enough with more market stability and clarity over legal matters.

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FDI AND INDIAN ECONOMY

INTRODUCTION Nations progress and prosperity is reflected by the pace of its sustained economic growth and development. Investment provides the base and pre-requisite for economic growth and development. Apart from a nations foreign exchange reserves, exports, governments revenue, financial position, available supply of domestic savings, magnitude and quality of foreign investment is necessary for the well being of a country. Developing nations, in particular, consider FDI as the safest type of international capital flows out of all the available sources of external finance available to them. It is during 1990s that FDI inflows rose faster than almost all other indicators of economic activity worldwide. According to WTO, the total world FDI outflows have increased nine fold during 1982 to 1993, world trade of merchandise and services has only doubled in the same. Since 1990 virtually every country- developed or developing, large or small alike- have sought FDI to facilitate their development process. Thus, a nation can improve its economic fortunes by adopting liberal policies vis--vis by creating conditions conducive to investment as these things positively influence the inputs and determinants of the investment process. This chapter highlights the role of FDI on economic growth of the country. FDI AND INDIAN ECONOMY Developed economies consider FDI as an engine of market access in developing and less developed countries vis--vis for their own technological progress and in maintaining their own economic growth and development. Developing nations looks at FDI as a source of filling the savings, foreign exchange reserves, revenue, trade deficit, management and technological gaps. FDI is considered as an instrument of international economic integration as it brings a package of assets including capital, technology, managerial skills and capacity and access to foreign markets. The impact of FDI depends on the countrys domestic policy and foreign policy. As a result FDI has a wide range of impact on the countrys economic policy. In order to study the impact of foreign direct investment on economic growth, two models were framed and fitted. The foreign direct investment model shows the factors influencing the foreign direct investment in India. The economic growth model depicts the contribution of foreign direct investment to economic growth.

SELECTION OF VARIABLES Macroeconomic indicators of an economy are considered as the major pull factors of FDI inflows to a country. The analysis of above theoretical rationale and existing literature also provides a base in choosing the right combination of explanatory variables that explains the

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variations in the flows of FDI in the country. In order to have the best combination of explanatory variables for the determinants of FDI inflows into India, different alternatives combination of variables were identified and then estimated. The alternative combinations of variables included in the study are in tune with the famous specifications given by United Nations Conference on Trade and Development, (UNCTAD 2007). The study applies the simple and multiple regression method to find out the explanatory variables of the FDI inflows in the country. The regression analysis has been carried out in two steps. In the first step, all variables are taken into consideration in the estimable model. In the second stage, the insignificant variables are dropped to avoid the problem of multi-co-linearity and thus the variables are selected. However, after thorough analysis of the different combination of the explanatory variables, the present study includes the following macroeconomic indicators: total trade (TRADEGDP), research and development expenditure (R&DGDP), financial position (FIN. Position), exchange rate (EXR), foreign exchange reserves (RESERVESGDP), and foreign direct investment (FDI), foreign direct investment growth rate (FDIG) and level of economic growth (GDPG). These macroeconomic indicators are considered as the pull factors of FDI inflows in the country. In other words, it is said that FDI inflows in India at aggregate level can be considered as the function of these said macroeconomic indicators. 1. Foreign Direct Investment (FDI): Economic growth has a profound effect on the domestic market as countries with expanding domestic markets should attract higher levels of FDI inflows. The generous flow of FDI is playing a significant and contributory role in the economic growth of the country. In 2008-09, Indias FDI touched Rs. 123025 crores up 56% against Rs. 98664 crores in 2007-08 and the countrys foreign exchange reserves touched a new high of Rs.1283865 crores in 2009-10. As a result of Indias economic reforms, the countrys annual growth rate has averaged 5.9% during 1992-93 to 2002-03.

Table 1 RBI Bulletins

Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

FDI Inflow in India (Rs. Crore) 10,368 18,486 13,711 11,789 14,653 24,613 70,630 98,664 123,025 135,542 148,059

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Figure 4 RBI Bulletins

Notwithstanding some concerns about the large fiscal deficit, India represents a promising macroeconomic story, with potential to sustain high economic growth rates. According to a survey conducted by Ernst and Young in June 2008 India has been rated as the fourth most attractive investment destination in the world after China, Central Europe and Western Europe. Similarly, UNCTADs World Investment Report 2005 considers India the 2nd most attractive investment destination among the Transnational Corporations (TNCs). All this could be attributed to the rapid growth of the economy and favourable investment process, liberal policy changes and procedural relaxation made by the government from time to time. 2. Gross Domestic Product (GDP): Gross Domestic Product is used as one of the independent variable. The tremendous growth in GDP since 1991 put the economy in the elite group of 12 countries with trillion dollar economy. India makes its presence felt by making remarkable progress in information technology, high end services and knowledge process services. By achieving a growth rate of 9% in three consecutive years opens new avenues to foreign investors from 2004 until 2010, Indias GDP growth was 8.37 percent reaching a historical high of 10.10 percent in 2006.

Figure 5 RBI Bulletins

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Table 2 RBI Bulletins

Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

GDP at Factor Cost (Rs. Crore) 18,64,301 19,72,606 20,48,286 22,22,758 23,88,768 26,16,101 28,71,120 31,29,717 33,39,375 35,03,272 36,67,169

Indias diverse economy attracts high FDI inflows due to its huge market size, low wage rate, large human capital (which has benefited immensely from outsourcing of work from developed countries). In the present decade India has witnessed unprecedented levels of economic expansion and also seen healthy growth of trade. GDP reflects the potential market size of Indian economy. Potential market size of an economy can be measured with two variables i.e. GDP (the gross domestic product) and GNP (the gross national product).GNP refers to the final value of all the goods and services produced plus the net factor income earned from abroad. The word gross is used to indicate the valuation of the national product including depreciation. GDP is an unduplicated total of monetary values of product generated in various kinds of economic activities during a given period, i.e. one year. It is called as domestic product because it is the value of final goods and services produced domestically within the country during a given period i.e. one year. Hence in functional form GDP= GNP-Net factor income from abroad. In India GDP is calculated at market price and at factor cost. GDP at market price is the sum of market values of all the final goods and services produced in the domestic territory of a country in a given year. Similarly, GDP at factor cost is equal to the GDP at market prices minus indirect taxes plus subsidies. It is called GDP at factor cost because it is the summation of the income of the factors of production Further, GDP can be estimated with the help of either (a) Current prices or (b) constant prices. If domestic product is estimated on the basis of market prices, it is known as GDP at current prices. On the other hand, if it is calculated on the basis of base year prices prevailing at some point of time, it is known as GDP at constant prices. In fact, in a dynamic economy, prices are quite sensitive due to the fluctuations in the domestic as well as international market. In order to isolate the fluctuations, the estimates of domestic product at current prices need to be converted into the domestic product at constant prices. Any increase in domestic product that takes place on account of increase in prices cannot be called as the real increase in GDP. Real GDP is estimated by converting

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the GDP at current prices into GDP at constant prices, with a fixed base year. In this context, a GDP deflator is used to convert the GDP at current prices to GDP at constant prices. The present study uses GDP at factor cost (GDPFC) with constant prices as one of the explanatory variable to the FDI inflows into India for the aggregate analysis. Gross Domestic Product at Factor cost (GDPFC) as the macroeconomic variable of the Indian economy is one of the pull factors of FDI inflows into India at national level. It is conventionally accepted as realistic indicator of the market size and the level of output. There is direct relationship between the market size and FDI inflows. If market size of an economy is large than it will attract higher FDI inflows and vice versa i.e. an economy with higher GDPFC will attract more FDI inflows. The relevant data on GDPFC have been collected from the various issues of Reserve bank of India (RBI) bulletin and Economic Survey of India. 3. Total Trade (TradeGDP): It refers to the total trade as percentage of GDP. Total trade implies sum of total exports and total imports. Trade, another explanatory variable in the study also affects the economic growth of the country. The values of exports and imports are taken at constant prices. The relationship between trade, FDI and growth is well known. FDI and trade are engines of growth as technological diffusion through international trade and inward FDI stimulates economic growth. Knowledge and technological spillovers (between firms, within industries and between industries etc.) contributes to growth via increasing productivity level. Economic growth, whether in the form of export promoting or import substituting strategy, can significantly affect trade flows. Export led growth leads to expansion of exports which in turn promote economic growth by expanding the market size for developing countries.
Table 3 SIA Newsletter

Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Total Trade (Rs. Crore) 434444 454218 552343 652475 876405 1116827 1412285 1668176 2072438

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Figure 6 RBI Bulletins

India prefers export stimulating FDI inflows, that is, FDI inflows which boost the demand of export in the international market are preferred by the country as it nullifies the gap between exports and imports. Since liberalization, the value of Indias international trade has risen to Rs. 2072438 crores in 2008-09 from Rs. 91892 crores in 1991-92. As exports from the country have increased manifolds after the initiation of economic reforms since 1991. Indias major trading partners are China, United States of America, United Arab Emirates, United Kingdom, Japan, and European Union. Since 1991, Indias exports have been consistently rising although India is still a net importer. In 2008-09 imports were Rs. 1305503 crores and exports were Rs. 766935 crores. India accounted for 1.45 per cent of global merchandise trade and 2.8 per cent of global commercial services export. Economic growth and FDI are closely linked with international trade. Countries that are more open are more likely to attract FDI inflows in many ways: Foreign investor brings machines and equipment from outside the host country in order to reduce their cost of production. This can increase exports of the host country. Growth and trade are mutually dependent on one another. Trade is a complement to FDI, such that countries tending to be more open to trade attract higher levels of FDI. 4. Foreign Exchange Reserves (RESGDP): RESGDP represents Foreign Exchange Reserves as percentage of GDP. Indias foreign exchange reserves comprise foreign currency assets (FCA), gold, special drawing rights (SDR) and Reserve Tranche Position (RTP) in the International Monetary Fund. The emerging economic giants, the BRIC (Brazil, Russian Federation, India, and China) countries, hold the largest foreign exchange reserves globally and India is among the top 10 nations in the world in terms of foreign exchange reserves. India is also the worlds 10th largest gold holding country (Economic Survey 2009-10). Stock of foreign exchange reserves shows a countrys financial strength.

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Indias foreign exchange reserves have grown significantly since 1991.The reserves, which stood at Rs. 23850 crores at end march 1991, increased gradually to Rs. 361470 crores by the end of March 2002, after which rose steadily reaching a level of Rs. 1237985 crores in March 2007 and have been on the rise ever since. The reserves stood at Rs. 1,529,600 crores as on April 2012.

Figure 7 RBI Bulletins

Further, an adequate FDI inflow adds foreign reserves by exchange reserves which put the economy in better position in international market. It not only allows the Indian government to manipulate exchange rates, commodity prices, credit risks, market risks, liquidity risks and operational risks but it also helps the country to defend itself from speculative attacks on the domestic currency.
Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 Foreign Exchange Reserves (Rs. Crores) 197204 264036 361470 490129 619116 676387 868222 1237985 1283865 1304605 1415345 1529600

Adequate foreign reserves of India indicates its ability to repay foreign debt which in turn increases the credit rating of India in international market and this helps in attracting more FDI inflows in the country. An analysis of the sources of reserves accretion during the

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entire reform period from 1991 onwards reveals that increase in net FDI from Rs. 409 crores in 1991-92 to Rs. 123,378 crores by March 2010. NRI deposits increased from Rs.27400 crores in 1991-92 to Rs.174623 by the end of March 2008. As at the end of March 2009, the outstanding NRI deposits stood at Rs. 210118 crores. On the current account, Indias exports, which were Rs. 44041 crores during 1991-92 increased to Rs. 766935 crores in 2007-08. Indias imports which were Rs. 47851 crores in 1991-92 increased to Rs. 1305503 crores in 2008-09. Indias current account balance which was in deficit at 3.0 percent of GDP in 1990-91 turned into a surplus during the period 2001-02 to 2003-04. However, this could not be sustained in the subsequent years. In the aftermath of the global financial crisis, the current account deficit increased from 1.3 percent of GDP in 2007-08 to 2.4 percent of GDP in 2008-09 and further to 2.9 percent in 2009-10. Invisibles, such as private remittances have also contributed significantly to the current account. Enough stocks of foreign reserves enabled India in prepayment of certain high cost foreign currency loans of Government of India from Asian Development Bank (ADB) and World Bank (IBRD). In fact, adequate foreign reserves are an important parameter of Indian economy in gauging its ability to absorb external shocks. The import cover of reserves, which fell to a low of three weeks of imports at the end of Dec 1990, reached a peak of 16.9 months of imports at the end of March 2004. At the end of March 2010, the import cover stands at 11.2 months. The ratio of short term debt to the foreign exchange reserves declined from 146.5 percent at the end of March 1991 to 12.5 percent as at the end of March 2005, but increased slightly to 12.9 percent as at the end of March 2006. It further increased from 14.8 percent at the end of March 2008 to 17.2 percent at the end of March 2009 and 18.8 percent by the end of March 2010. FDI helps in filling the gap between targeted foreign exchange requirements and those derived from net export earnings plus net public foreign aid. The basic argument behind this gap is that most developing countries face either a shortage of domestic savings to match investment opportunities or a shortage of foreign exchange reserves to finance needed imports of capital and intermediate goods. 5. R&D Expenditure (R&DGDP): It refers to the research and development expenditure as percentage of GDP. India has large pool of human resources and human capital is known as the prime mover of economic activity.

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Figure 8 RBI Bulletins

Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

National Expenditure on Research & Development (Rs. Crores) 15683.37 16007.14 16353.72 17575.41 19991.64 22963.91 24821.63 27213.54 28654.81

India has the third largest higher education system in the world and a tradition of over 5000 year old of science and technology. India can strengthen the quality and affordability of its health care, education system, agriculture, trade, industry and services by investing in R&D activities. India has emerged as a global R&D hub since the last two decades. There has been a significant rise in the expenditure of R&D activities as FDI flows in this sector and in services sector is increasing in the present decade. R&D activities (in combination with other high end services) generally known as Knowledge Process Outsourcing or KPO are gaining much attention with services sector leading among all sectors of Indian economy in receiving / attracting higher percentage of FDI flows. It is clear from the chart that the expenditure on R&D activities is rising significantly in the present decade. India has been a centre for many research and development activities by many TNCs. Today, companies like General Electric, Microsoft, Oracle, SAP and IBM to name a few are all pursuing R&D in India. R&D activities in India demands huge funds thus providing greater opportunities for foreign investors. 6. Financial Position (FIN. Position): FIN. Position stands for Financial Position. Financial Position is the ratio of external debts to exports. It is a strong indicator of the soundness of

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any economy. It shows that external debts are covered from the exports earning of a country.
Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Exports (Rs. crore) 203571 209018 255137 293367 375340 456418 571779 655864 766935 Debt (Rs crore) 472625 482328 498804 491078 581802 616144 746918 897955 1169575

Figure 9 RBI Bulletins

External debt of India refers to the total amount of external debts taken by India in a particular year, its repayments as well as the outstanding debts amounts, if any. Indias external debts, as of march 2008 were Rs. 897955, recording an increase of Rs.1169575 crores in March 2009 mainly due to the increase in trade credits. Among the composition of external debt, the share of commercial borrowings was the highest at 27.3% on March 2009, followed by short term debt (21.5%), NRI deposits (18%) and multilateral debt (17%). Due to arise in short term trade credits, the share of short term debt in the total debt increased to 21.5% in march 2009, from 20.9% in march 2008. As a result the short term debt accounted for 40.6% of the total external debt on March 2009. In 2007 India was rated the 5th most indebted country according to an international comparison of external debt of the twenty most indebted countries.

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The ratio of short term debt to foreign exchange reserves stood at 19.6% in March 2009, higher than the 15.2% in the previous year. Indias foreign exchange reserves provided a cover of 109.6% of the external debt stock at the end of March 2009, as compared to 137.9% at the end of March 2008. An assessment of sustainability of external debt is generally undertaken based on the trends in certain key ratios such as debt to GDP ratio, debt service ratio, short term debt to total debt and total debt to foreign exchange reserves. The ratio of external debt to GDP increased to 22% as at end march 2009 from 19.0% as at end March 2008. The debt service ratio has declined steadily over the year, and stood at 4.8 % as at the end of March 2009.
Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Debt Service Ratio (%) 17.1 16.6 13.7 16.0 16.1 5.9 10.1 4.7 4.8 Ratio of Foreign Exchange to Debt 0.46 0.56 0.75 0.98 1.26 1.16 1.41 1.66 1.43

However, the share of concessional debt in total external debt declined to 18.2% in 20082009 from 19.7 % in 2007-2008.

Figure 10 RBI Bulletins

Large fiscal deficit has variety of adverse effects: reducing growth, lowering real incomes, increasing the risks of financial and economic crises and in some circumstances it can also leads to high inflation. Recently the finance minister of India had promised to cut its budget deficit to 5.5% of the GDP in 2010 from 6.9% of GDP in 2009. As a result the credit rating outlook was raised

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to stable from negative by standard and poors based on the optimism that faster growth in Asias third largest and world second fastest growing economy will help the government cut its budget deficit. The government also plans to cut its debt to 68% of the GDP by 2015, from its current levels of 80%. In order to reduce the ratio of debt to GDP there must be either a primary surplus (i.e. revenue must exceed non interest outlays) or the economy must grow faster than the rate of interest, or both, so that one must outweigh the adverse effect of the other. 7. Exchange Rates (EXR): It refers to the exchange rate variable. Exchange rate is a key determinant of international finance as the world economies are globalised ones.
Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 Exchange Rate (1$ = X rs.) 45.7 47.7 48.4 45.9 44.9 44.3 42.3 40.2 45.9 45.9 45.2 51.4

There are a number of factors which affect the exchange rate viz. government policy, competitive advantages, market size, international trade, domestic financial market, rate of inflation, interest rate etc. Exchange rate touched a high of Rs. 48.4 in 2002-03.

Figure 11 RBI Bulletins

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Since 1991 Indian economy has gone through a sea change and that changes are reflected on the Indian Industry too. There is high volatility in the value of INR/USD. There is high appreciation in the value of INR from 2001-02 and also in the past year which has swept away huge chunk of profits of the companies. 8. Gross Domestic Product Growth (GDPG): It refers to the growth rate of gross domestic product. Economic growth rate have an effect on the domestic market, such that countries with expanding domestic markets should attract higher levels of FDI. India is the 2nd fastest growing economy among the emerging nations of the world. It has the third largest GDP in the continent of Asia. Since 1991 India has emerged as one of the wealthiest economies in the developing world. During this period, the economy has grown constantly and this has been accompanied by increase in life expectancy, literacy rates, and food security. It is also the world most populous democracy. The Indian middle class is large and growing; wages are low; many workers are well educated and speak English. All these factors lure foreign investors to India. India is also a major exporter of highly skilled workers in software and financial services and provide an important back office destination for global outsourcing of customer services and technical support. The Indian market is widely diverse. The country has 17 official languages, 6 major religion and ethnic diversity. Thus, tastes and preferences differ greatly among sections of consumers. 9. Foreign Direct Investment Growth (FDIG): In the last two decade world has witnessed unprecedented growth of FDI. This growth of FDI provides new avenues of economic expansion especially, to the developing countries. India due to its huge market size, diversity, cheap labour and large human capital received substantial amount of FDI inflows during 1991-2008. India received cumulative FDI inflows of Rs. 577108 crore during 1991 to march 2010. It received FDI inflows of Rs. 492303 crore during 2000 to march 2010 as compared to Rs. 84806 crore during 1991 to march 99. During 1994-95, FDI registered a 110% growth over the previous year and a 184% age growth in 2007-08 over 2006-07. FDI as a percentage of gross total investment increased to 7.4% in 2008 as against 2.6% in 2005. This increased level of FDI contributes towards increased foreign reserves. The steady increase in foreign reserves provides a shield against external debt. The growth in FDI also provides adequate security against any possible currency crisis or monetary instability. It also helps in boosting the exports of the country. It enhances economic growth by increasing the financial position of the country. The growth in FDI contributes toward the sound performance of each sector (especially, services, industry, manufacturing etc.) which ultimately leads to the overall robust performance of the Indian economy. ROLE OF FDI ON ECONOMIC GROWTH The study identified the following macroeconomic variables: TradeGDP, R&DGDP, FIN.Position, EXR, and ReservesGDP as the main determinants of FDI inflows into India. And the relation of these variables with FDI is specified and analysed in equation 4.1. In order to study the role of FDI on Indian economy it is imperative to assess the trend pattern of all the

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variables used in the determinant analysis. It is observed that FDI inflows into India shows a steady trend in early nineties but shows a sharp increase after 2005, though it had fluctuated a bit in early 2000. However, Gross domestic product shows an increasing trend pattern since 1991-92 to 2007-08. Another variable i.e. TradeGDP maintained a steady trend pattern upto 2001-02, after that it shows a continuous increasing pattern upto 2008-09. ReservesGDP, another explanatory variable shows low trend pattern upto 2000-01 but gained momentum after 2001-02 and shows an increasing trend. In addition to these trend patterns of the variables the study also used the multiple regression analysis to further explain the variations in FDI inflows into India due to the variations caused by these explanatory variables. The TradeGDP shows that the predicted positive sign. Hence, Trade GDP positively influences the flow of FDI into India. Further, it is seen from the analysis that another important promotive factor of FDI inflows to the country is ReservesGDP. The positive sign of ReservesGDP is in accordance with the predicted sign. It implies that one percent increase in ReserveGDP causes 1.44 percentage increases in FDI inflows into India. The other factor which shows the predicted positive sign is FIN.Position (financial position). India prefers FDI inflows in export led strategy in boosting its exports. Further, the analysis shows that the trend pattern of external debt to exports (i.e. FIN. Position) has been decreasing continuously since 1991-92, indicating towards a strong economy. This positive indication is a good fortune to the Indian economy as it helps in attracting foreign investors to the country. One remarkable fact observed from the regression results reveal that R&DGDP shows a negative relationship with FDI inflows into India. The results show that the elasticity coefficient between FDI and R&D GDP is -582.14. This implies that a percentage increase in R&DGDP causes nearly 582 percent reductions in the FDI inflows. This may be attributed to the low level of R&D activities in the country. This is also attributed to the high interest rate in the country and also investments in Brownfield projects are more as compared to investments in Greenfield projects. India requires more knowledge cities, Special Economic Zones (SEZs), Economic Processing Zones (EPZs), Industrial clusters, IT Parks, Highways, R&D hubs etc. so government must attract Greenfield investment. Another variable which shows the negative relationship with FDI is exchange rate. The elasticity coefficient between FDI and Exchange rate is 7.06 which show that one percent increase in exchange rate leads to a reduction of 7.06 percentages of FDI inflows to the country. The exchange rate shows a positive sign as expected of negative sign. Conventionally, it is assumed that exchange rate is the negative determinant of FDI inflows. This positive impact of exchange rate on the FDI inflows could be attributed to the appreciation of the Indian rupee against US Dollar. This appreciation in the value of Rupee helped the foreign firms in many ways. Firstly, it helped the foreign firms in acquiring the firm specific assets cheaply. Secondly, it helped the foreign firms in reducing the cost of firm specific assets (this is particularly done in case of Brownfield projects). Thirdly, it ensures the foreign firm higher profit in the long-run (as the value of the assets in appreciated Indian currency also appreciates).

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It is also observable that FDI inflows are more sensitive to R&DGDP than to exchange rate as the elasticity coefficient between FDI and exchange rate is least, whereas the elasticity coefficient between FDI and R&DGDP is more.

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FINDINGS
Although India is not the most preferred destination of global FDI, but there has been a generous flow of FDI in India since 1991. It has become the 2nd fastest growing economy of the world. India has substantially increased its list of source countries in the post liberalisation era. India has signed a number of bilateral and multilateral trade agreements with developed and developing nations. India as the founding member of GATT, WTO, a signatory member of SAFTA and a member of MIGA is making its presence felt in the economic landscape of globalised economies. The economic reform process started in 1991 helps in creating a conducive and healthy atmosphere for foreign investors and thus, resulting in substantial amount of FDI inflows in the country. Trends and patterns of FDI flows at Indian level Although Indias share in global FDI has increased considerably, but the pace of FDI inflows has been slower than China, Singapore, Brazil, and Russia. An analysis of last five years of trends in FDI inflows in India shows that initially the inflows were low but there is a sharp rise in investment flows from 2005 onwards. It is observed that India received FDI inflows of Rs.492302 crore during 2000-2010 as compared to Rs. 84806 crore during 1991-1999. India received a cumulative FDI flow of Rs. 577108 crore during 1991to march 2010. It is observed that major FDI inflows in India are concluded through automatic route and acquisition of existing shares route than through FIPB, SIA route during 1991-2008. In order to have a generous flow of FDI, India has maintained Double Tax Avoidance Agreements (DTAA) with nearly 70 countries of the world. India has signed 57 (upto 2006) numbers of Bilateral Investments Treaties (BITs). Maximum numbers of BITS are signed with developing countries of Asia (16), the Middle East (9), Africa (4) and Latin America (1) apart from the developed nation (i.e. 27 in numbers). India has also become the member of prominent regional groups in Asia and signed numbers of Free Trade Area (nearly 17 in number). India received large amount of FDI from Mauritius (nearly 40 percent of the total FDI inflows) apart from USA (8.8 percent), Singapore (7.2 percent), U.K (6.1 percent), Netherlands (4.4 percent) and Japan (3.4 percent).

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Trends and patterns of FDI flows at Sectoral level of Indian Economy The Sector wise Analysis of FDI Inflow in India reveals that maximum FDI has taken place in the service sector including the telecommunication, information technology, travel and many others. The service sector is followed by the computer hardware and software in terms of FDI. High volumes of FDI take place in telecommunication, real estate, construction, power, automobiles, etc. The rapid development of the telecommunication sector was due to the FDI inflows in form of international players entering the market and transfer of advanced technologies. The telecom industry is one of the fastest growing industries in India. With a growth rate of 45%, Indian telecom industry has the highest growth rate in the world. FDI inflows to real estate sector in India have developed the sector. The increased flow of foreign direct investment in the real estate sector in India has helped in the growth, development, and expansion of the sector. FDI Inflows to Construction Activities has led to a phenomenal growth in the economic life of the country. India has become one of the most prime destinations in terms of construction activities as well as real estate investment. The FDI in Automobile Industry has experienced huge growth in the past few years. The increase in the demand for cars and other vehicles is powered by the increase in the levels of disposable income in India. The options have increased with quality products from foreign car manufacturers. The introduction of tailor made finance schemes, easy repayment schemes has also helped the growth of the automobile sector. The basic advantages provided by India in the automobile sector include, advanced technology, cost-effectiveness, and efficient manpower. Besides, India has a well-developed and competent Auto Ancillary Industry along with automobile testing and R&D centres. The automobile sector in India ranks third in manufacturing three wheelers and second in manufacturing of two wheelers. Opportunities of FDI in the Automobile Sector in India exist in establishing Engineering Centres, Two Wheeler Segment, Exports, Establishing Research and Development Centres, Heavy truck Segment, Passenger Car Segment. The increased FDI Inflows to Metallurgical Industries in India has helped to bring in the latest technology to the industries. Further the increased FDI Inflows to Metallurgical Industries in India has led to the development, expansion, and growth of the industries. All this has helped in improving the quality of the products of the metallurgical industries in India.

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The increased FDI Inflows to Chemicals industry in India has helped in the growth and development of the sector. The increased flow of foreign direct investment in the chemicals industry in India has helped in the development, expansion, and growth of the industry. This in its turn has led to the improvement of the quality of the products from the industry. Based upon the data given by department of Industrial Policy and Promotion, in India there are sixty two (62) sectors in which FDI inflows are seen but it is found that top ten sectors attract almost seventy percent (70%) of FDI inflows. The cumulative FDI inflows from the above results reveals that service sector in India attracts the maximum FDI inflows amounting to Rs. 106992 crores, followed by Computer Software and Hardware amounting to Rs. 44611 crores. These two sectors collectively attract more than thirty percent (30%) of the total FDI inflows in India. The housing and real estate sector and the construction industry are among the new sectors attracting huge FDI inflows that come under top ten sectors attracting maximum FDI inflows. Thus the sector wise inflows of FDI in India shows a varying trend but acts as a catalyst for growth, quality maintenance and development of Indian Industries to a greater and larger extend. The technology transfer is also seen as one of the major change apart from increase in operational efficiency, managerial efficiency, employment opportunities and infrastructure development.

CONCLUSIONS It is observed from the results of above analysis that TradeGDP, ReservesGDP, Exchange rate, FIN. Position, R&DGDP and FDIG are the main determinants of FDI inflows to the country. In other words, these macroeconomic variables have a profound impact on the inflows of FDI in India. The results of foreign Direct Investment Model reveal that TradeGDP, ReservesGDP, and FIN. Position variables exhibit a positive relationship with FDI while R&DGDP and Exchange rate variables exhibit a negative relationship with FDI inflows. Hence, TradeGDP, ReservesGDP, and FIN. Position variables are the pull factors for FDI inflows to the country and R&DGDP and Exchange rate are deterrent forces for FDI inflows into the country. Thus, it is concluded that the above analysis is successful in identifying those variables which are important in attracting FDI inflows to the country. The study also reveals that FDI plays a crucial role in enhancing the level of economic growth in the country. It helps in increasing the trade in the international market. However, it has failed in raising the R&D and in stabilizing the exchange rates of the economy. The positive sign of exchange rate variables depicts the appreciation of Indian Rupee in the international market. This appreciation in the value of Indian Rupee provides an opportunity to the policy makers to attract FDI inflows in Greenfield projects rather than attracting FDI inflows

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in Brownfield projects. Further, the above analysis helps in identifying the major determinants of FDI in the country. FDI plays a significant role in enhancing the level of economic growth of the country. This analysis also helps the future aspirants of research scholars to identify the main determinants of FDI at sectoral level because FDI is also a sector specific activity of foreign firms vis--vis an aggregate activity at national level. Finally, the study observes that FDI is a significant factor influencing the level of economic growth in India. It provides a sound base for economic growth and development by enhancing the financial position of the country. It also contributes to the GDP and foreign exchange reserves of the country.

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ISSUES AND POLICY RECOMMENDATIONS

Thus, it is found that FDI as a strategic component of investment is needed by India for its sustained economic growth and development. FDI is necessary for creation of jobs, expansion of existing manufacturing industries and development of the new one. Indeed, it is also needed in the healthcare, education, R&D, infrastructure, retailing and in longterm financial projects. So, our study recommends the following suggestions: FDI can be instrumental in developing rural economy. There is abundant opportunity in Greenfield Projects. But the issue of land acquisition and steps taken to protect local interests by the various state governments are not encouraging. MOU Arecelor-Mittal controversy is one of the best examples of such disputes. India has a huge pool of working population. However, due to poor quality primary education and higher there is still an acute shortage of talent. This factor has negative repercussion on domestic and foreign business. FDI in Education Sector is less than 1%. Given the status of primary and higher education in the country, FDI in this sector must be encouraged. However, appropriate measure must be taken to ensure quality. The issues of commercialization of education, regional gap and structural gap have to be addressed on priority. Indian economy is largely agriculture based. There is plenty of scope in food processing, agriculture services and agriculture machinery. FDI in this sector should be encouraged. The issue of food security, interest of small farmers and marginal farmers need cannot be ignored for the sake of mobilization of foreign funds for development. Government should ensure the equitable distribution of FDI inflows among states. The central government must give more freedom to states, so that they can attract FDI inflows at their own level. The government should also provide additional incentives to foreign investors to invest in states where the level of FDI inflows is quite low.

In order to improve technological competitiveness of India, FDI into R&D should be promoted. Various issues pending relating to Intellectual Property Rights, Copy Rights and Patents need to be addressed on priority. Special package can be also instrumental in mobilizing FDI in R&D. Though service sector is one of the major sources of mobilizing FDI to India, plenty of scope exists. Still we find the financial inclusion is missing. Large part of population still

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doesnt have bank accounts, insurance of any kind, underinsurance etc. These problems could be addressed by making service sector more competitive. Removal of sectoral cap in insurance is still awaited. India has a well developed equity market but does not have a well developed debt market. Steps should be taken to improve the depth and liquidity of debt market as many companies may prefer leveraged investment rather than investing their own cash. Looking for debt funds in their own country invites exchange rate risk. Government must pay attention to the emerging Asian continent as the new economic power house of business transaction and try to boost the trade within this region through bilateral, multilateral agreements and also conclude FTAs with the emerging economic Asian giants. Finally, it is suggested that the policy makers should ensure optimum utilization of funds and timely implementation of projects. It is also observed that the realisation of approved FDI into actual disbursement is quite low. It is also suggested that the government while pursuing prudent policies must also exercise strict control over inefficient bureaucracy, red - tapism, and the rampant corruption, so that investors confidence can be maintained for attracting more FDI inflows to India. Last but not least, the study suggests that the government ensures FDI quality rather than its magnitude.

Indeed, India needs a business environment which is conducive to the needs of business. India's poor performance in terms of competitiveness, quality of infrastructure, skills and productivity of labor makes India a far less attractive ground for direct investment than the potential she has. Given that India has a huge domestic market and a fast growing one, there is every reason to believe that with continued reforms that improve institutions and economic policies, and thereby create an environment conducive for private investment and economic growth so that substantially large volumes of FDI will flow to India. As foreign investors dont look for fiscal concessions or special incentives but they are more of a mind in having access to a consolidated document t.at specified official procedures, rules and regulations, clearance, and opportunities in India. In fact, this can be achieved only if India implements its second generation reforms in totality and in right direction. Then no doubt the third generation economic reforms make India not only favorable FDI destination in the world but also set an example to the rest of the world by achieving what is predicted by Goldman Sachs (in 2003, 2007) that from 2007 to 2020, Indias GDP per capita in US$ terms will quadruple and the Ind ian economy will overtake France and Italy by 2020, Germany, UK and Russia by 2025, Japan by 2035 and US by 2043.

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