1

PREFACE

While searching for a suitable topic for the Mba Dissertation, I happened to
meet a person from the Retail Sector, who suggested to me the topic on the Retail
Sector of India. During the course of the discussion, it transpired that the
problems that this sector faces is with respect to Foreign Direct Investment, and
the intense competitive scenario in future say 2010 tr 2015.

The topics having aroused my curiosity, discussions were held with several
people in the retail sector to understand the veracity of the above thought
process and also understand the real issues plaguing the industry.

All these aspects then resulted in the development of the project report titled
Foreign Direct Investment, and the Competitive Scenario of the Retail Sector in
India An Analysis of Problems, Implications and Perspectives with a case
study of.

It is strongly hoped that this project covers not only the various requirements of
the Project Study but also of the Industry.

Signature of the Student

TABLE OF CONTENTS
Chapter No

Title

Page No

EXECUTIVE SUMMARY

9-10

OBJECTIVES OF THE STUDY

11-12

RESEARCH METHODOLOGY

13-17

3.1

Primary data

3.2

Secondary data

LITERATURE REVIEW

18-19

INTRODUCTION OF FDI

20-83

5.1

Overall view

5.2

Inter country /industry studies

5.3

Trends and patterns of fdi

5.4

Sorces of fdi

5.5

Distribution of fdi

FDI IN INDIAN RETAIL SECTOR

6.1

Indian scenario
INDIAS POLICY ON FDI

7.1

96-115

evolution
CASES OF FDI IN INDIAN RETAIL SECTOR

84-95

8.1

Foreign retail regroup in india

8.2

India to ease rules for foreign companies

116-125

CONT..

Chapter No
8.3

Title

Page No

India suspends plan to let in foreign retail

India opens retail sector to foreign

8.4

companies
FDI INDIAN RETAIL BIDS FOR
BRIGHT FUTURE

9
9.1

Evolution of Indian retail

9.2

Policy framework

9.3

Impact on retail sector

9.4

Road ahead

126-130

10

ANALYSIS OF QUESTIONNAIRE

131-136

11

CONCLUSION

137-138

12

SUGGESTION

139-141

13

BIBLIOGRAPHY

142-143

14

ANNEXURE

144-146

LIST OF ABBREVIATIONS
FDI

FOREIGN DIRECT INVESTMENT

FPI

FOREIGN PORTFOLIO INVESTMENT

FTZS

FREE TRADE ZONES

IP

INVESTMENT PROMOTION

MNCS

MULTINATIONAL CORPORATIONS

FEMA

FOREIGN EXCHANGE MANAGEMENT ACT

RBI

RESERVE BANK OF INDIA

FIPB

FOREIGN INVESTMENT PROMOTION BOARD

DIPP

DEPARTMENT OF INDUSTRIAL POLICY AND

PROMOTION

BITS

BILATERAL INVESTMENT TREATIES

SEBI

SECURITIES AND EXCHANGE BOARD OF INDIA

FII

FOREIGN INSTITUTIONAL INVESTORS

IPR

INDUSTRIAL POLICY RESOLUTION

LIST OF CHARTS
1

AMOUNT OF FDI INFLOW

FDI INFLOWS IN THE WORLD

SHARE OF INDIA IN WORLD FDI

DISTRIBUTION OF RETAIL SECTORS SHARE

CHAPTER 1
EXECUTIVE SUMMARY

Definition of Retail
In 2004, The High Court of Delhi defined the term retail as a sale for final
consumption in contrast to a sale for further sale or processing (i.e.
wholesale). A sale to the ultimate consumer.Thus, retailing can be said to
be the interface between the producer and the individual consumer buying
for personal consumption. This excludes direct interface between the
manufacturer and institutional buyers such as the government and other
bulk customers retailing is the last link that connects the individual
consumer with the manufacturing and distribution chain. A retailer is
involved in the act of selling goods to the individual consumer at a margin
of profit.
FDI Policy in India
FDI is defined as investment in a foreign country through the acquisition of
a local company or the establishment there of an operation on a new site.
To put in simple words, FDI refers to capital inflows from abroad that is
invested in or to enhance the production capacity of the economy.Foreign
Investment in India is governed by the FDI policy announced by the
Government of India and the provision of the Foreign Exchange
Management Act (FEMA) 1999. The Reserve Bank of India (RBI) in this
regard had issued a notification,[4] which contains the Foreign Exchange
Management (Transfer or issue of security by a person resident outside
India) Regulations, 2000. This notification has been amended from time to
time.The Ministry of Commerce and Industry, Government of India is the
nodal agency for motoring and reviewing the FDI policy on continued basis
and changes in sectoral policy/ sectoral equity cap. The FDI policy is
notified through Press Notes by the Secretariat for Industrial Assistance
(SIA), Department of Industrial Policy and Promotion (DIPP).The foreign
investors are free to invest in India, except few sectors/activities, where
prior approval from the RBI or Foreign Investment Promotion Board
(FIPB) would be required.

FDI Policy with Regard to Retailing in India

It will be prudent to look into Press Note 4 of 2006 issued by DIPP and
consolidated FDI Policy issued in October 2010 which provide the sector
specific guidelines for FDI with regard to the conduct of trading activities.
a) Up to 100% for cash and carry wholesale trading and export trading
allowed under the automatic route.
b) FDI up to 51 % with prior Government approval (i.e. FIPB) for retail trade
of Single Brand products, subject to Press Note 3 (2006 Series).
c) FDI is not permitted in Multi Brand Retailing in India.

CHAPTER 2
OBJECTIVE OF THE STUDY

1.TO STUDY THE TRENDS AND PATTERNS OF FLOW OF FDI IN

INDIAN RETAIL SECTOR .

2. TO ASSESS THE DETERMINANTS OF FDI INFLOWS IN INDIAN RETAIL

SECTOR .

3. TO EVALUATE THE IMPACT OF FDI ON THE INDIAN ECONOMY AND

RETAIL SECTOR.

CHAPTER 3
RESEARCH METHODOLOGY

3.1PRIMARY DATA
The primary data is collected through personalized interview and
the questionnaire from the respondents who is the common public.

3.2SECONDARY DATA
The research done on the desktop research by visiting various web sites
and referring some of the books for understanding various concepts in fdi
which is very important for this project. The consideration on some annual
fdi inflow in India .As mentioned in bibliography.

CHAPTER 4
LITERATURE REVIEW

1) Foreign Direct Investment in India

by Lata M Chakravarthy
summary: Foreign Direct Investment in India
Foreign direct investment is the catalyst to economic growth in developing
countries. Countries should attract FDI for those areas in which they have a
competitive edge. This book is a lively compilation of articles, dealing with
this concept, trends and strategies in this area. Read about FDI in the print
media, power sector, banks, retail and real estate in India.

2) Foreign Direct Investment

in India 1947 to 2007 :
Policies,

Trends

and

Outlook
BookDetails
Author: Gakhar, Kamlesh

Contents : Preface / Foreign Direct Investment (FDI): nature and Scope /

Motives and determinants of FDI: A Theoretical Survey / FDI in India:
Policies and trends since Independence / Determinants and Deterrents of
FDI Inflow in India / FDI Inflow in India: Sectoral and Firm Level
determinants and Motives / FDI Policy Implications and Future Outlook /
Sector-wise FDI Policy and Business Opportunities in India / Concluding
Observations /

3) Foreign Direct Investment : Contemporary Issues

Usha Bhati, Deep
Contents: Preface. 1. Foreign Direct Investment: a theoretical and policy
framework. 2. Studies on Foreign Direct Investment. 3. Problem and
research. 4. Emerging trends in FDI: Indian evidence. 5. Emerging trends
in FDI: global evidence. 6. Determinants of Foreign Direct Investment. 7.

An appraisal for Foreign Investment climate in India. Conclusions.

Bibliography. Index."This book provides a comprehensive description and
in-depth analysis of various contemporary issues in Foreign Direct
Investment (FDI) in India. Divided into eight parts, the book discusses the
following issues:Prevailing FDI policy framework in India since
independence and how it is placed in terms of openness, competitiveness
and other important aspects; Emerging dimensions of FDI inflows in India;
Emerging scenario of FDI at the global level; Performance of India in
comparison to developed ,developing ,Asian and SAARC countries with
respect
to
FDI
in
India;
Factors
having
bearing
on
FDI
flows;
Legal, procedural, socio-economic and other important aspects influencing
FDI in India; Foreign business investors' perceptions about India as an
investment destiny. The book proves to be invaluable to the students of
International business. Further it will be beneficial to the multiple group of
people like the economic policy-makers related to institutions economy and
regulatory bodies and the corporates willing to take advantage of foreign
financial inflows." (jacket)

CHAPTER 5
INTRODUCTION OF FDI

INTRODUCTION
One of the most striking developments during the last two decades is the
spectacular growth of FDI in the global economic landscape. This
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.
5.1 AN OVERALL VIEW
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 encourages FDI, allow
MNCs to operate in India. Thus, resulting in the partial liberalization of
Indian Economy. The government introduces 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.
Infact, 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 can finance its three
weeks of imports. The outflowing 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
adds further to worsen the situation. As a result, Indias credit rating fell in
the international market for both short- term and long term 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 programme. As a result of these reforms India open
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 had 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.
CHART 1)
Amount Mid
of FDI
1948
In
256
crores

March
1964
565.5

March
1974
916

March
1980
933.2

March
1990
2705

March
2000
18486

March
2010
1,23,378

Source: Kumar39 1995, various issues of SIA Publication.

There is a considerable decrease in the tariff rates on various importable
goods. shows FDI inflows in India from 1948 2010.FDI inflows during
1991-92 to March 2010 in India increased manifold as compared to during
mid 1948 to march 1990 (Chart-1). The measures introduced by the
government to liberalize provisions relating to FDI in 1991 lure investors
from every corner of the world. There were just few (U.K, USA, Japan,
Germany, etc.) major countries investing in India during the period mid
1948 to march 1990 and this number has increased to fifteen in 1991. India
emerged as a strong economic player on the global front after its first
generation of economic reforms. As a result of this, the list of investing
countries to India reached to maximum number of 120 in 2008. Although,
India is receiving FDI inflows from a number of sources but large
percentage of FDI inflows is vested with few major countries. Mauritius,
USA, UK, Japan, Singapore, Netherlands constitute 66 percent of the

entire FDI inflows to India.FDI inflows are welcomed in 63 sectors in 2008

as compared to 16 sectors in 1991.
FDI INFLOWS IN INDIA IN POST REFORM ERA
Indias economic reforms way back in 1991 has generated strong interest
in foreign investors and turning India into one of the favorite destinations for
global FDI flows. According to A.T. Kearney1, 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 skills availability and business
environment. Similarly, UNCTADs76 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 grow at about 20 times since the
opening up of the economy to foreign investment. India received maximum
amount of FDI from developing economies (Chart 1.2). Net FDI flow in
India was valued at US$ 33029.32 million in 2008. It is found that there is a
huge gap in FDI approved and FDI realized (Chart- 1.3). 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$391 bn in FY08 (CAGR of 27.8%). US$ Millions amount of FDI
realised amount of FDI approved No. of FDI approved realised to approved
ratio.
Source: compiled and computed from the various issues SIA Bulletin,
Ministry of Commerce, GOI 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 upgradation, 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).16

IMPORTANCE OF THE STUDY

It is apparent from the above discussion that FDI is a predominant and vital
factor in influencing the contemporary process of global economic
development. The study attempts to analyze the important dimensions of
FDI in India. The study works out the trends and patterns, main
determinants and investment flows to India. The study also examines the
role of FDI on economic growth in India for the period 1991-2008. The
period under study is important for a variety of reasons. First of all, it was
during July 1991 India opened its doors to private sector and liberalized its
economy. Secondly, the experiences of South-East Asian countries by
liberalizing their economies in 1980s became stars of economic growth and
development in early 1990s. Thirdly, Indias experience with its first
generation economic reforms and the countrys economic growth
performance were considered safe havens for FDI which led to second
generation of economic reforms in India in first decade of this century.
Fourthly, there is a considerable change in the attitude of both the
developing and developed countries towards FDI. They both consider FDI
as the most suitable form of external finance. Fifthly, increase in
competition for FDI inflows particularly among the developing nations.The
shift of the power center from the western countries to the Asia sub
continent is yet another reason to take up this study. FDI incentives,
removal of restrictions, bilateral and regional investment agreements
among the Asian countries and emergence of Asia as an economic
powerhouse (with China and India emerging as the two most promising
economies of the world) develops new economics in the world of
industralised nations. The study is important from the view point of the
macroeconomic variables included in the study as no other study has
included the explanatory variables which are included in this study. The
study is appropriate in understanding inflows during 1991- 2008.
LIMITATIONS OF THE STUDY
All the economic / scientific studies are faced with various limitations and
this study is no exception to the phenomena. The various limitations of the
study are:
1. At various stages, the basic objective of the study is suffered due to
inadequacy of time series data from related agencies. There has also been
a problem of sufficient homogenous data from different sources. For
example, the time series used for different variables, the averages are used
at certain occasions. Therefore, the trends, growth rates and estimated
regression coefficients may deviate from the true ones.

2. The assumption that FDI was the only cause for development of Indian
economy in the post liberalised period is debatable. No proper methods
were available to segregate the effect of FDI to support the validity of this
assumption.
3. Above all, since it is a Ph.D. project and the research was faced with
the problem of various resources like time and money.
Dunning John H.14 (2004) 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.Tomsaz Mickiewicz,
Slavo Rasosevic and Urmas Varblane73 (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. Iyare Sunday O, Bhaumik Pradip K, Banik Arindam28 (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.3 (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 in 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 Andreas32 (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. Klaus E Meyer34

(2003) 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.Klaus E Meyer, Saul Estrin, Sumon Bhaumik, Stephen
Gelb, Heba Handoussa, Maryse Louis, Subir Gokarn, Laveesh Bhandari,
Nguyen, Than Ha Nguyen, Vo Hung35 (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
Marani78 (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.
5.2 INTER COUNTRY STUDIES
Bhagwati J.N.7 (1978), in his study Anatomy and Consequences of
Exchange Control Regimes analyzed the impact of FDI on international
trade. He concluded that countries actively pursuing export led growth
strategy can reap enormous benefits from FDI.Crespo Nuno and Fontoura
Paula Maria11 (2007) in their paper Determinant Factors of FDI Spillovers
What Do We Rally Know? analyze the factors determining the
existence, dimensions and sign of FDI spillovers. They identify that FDI
spillovers depend on many factors like absorptive capacities of domestic
firms and regions, the technological gap, or the export capacity. Gazioglou
S. and
McCausland W.D.21 (2000), in their study An International Economic
Analysis of FDI and International Indebtedness developed a micro
foundations framework of analysis of FDI and integrated it into a macro
level analysis. They highlighted the importance of profit repatriation in
generating different effects of FDI on net international debt, trade and real
exchange rate in developed economies compared to less developed
economies.Chen Kun- Ming, Rau Hsiu Hua and Lin Chia Ching10

(2005) in their paper The impact of exchange rate movements on Foreign

Direct Investment: Market Oriented versus Cost Oriented , examine the
impact of exchange rate movements on Foreign Direct Investment. Their
empirical findings indicate that the exchange rate level and its volatility in
addition to the relative wage rate have had a significant impact on
Taiwanese firms outward FDI into China. They concluded that the
relationship between exchange rates and FDI is crucially dependent on the
motives of the investing firms. Salisu A. Afees56 (2004) in his study The
Determinants and Impact of Foreign Direct Investment on economic
Growth in Developing Countries: A study of Nigeria examines the
determinants and impact of Foreign Direct Investment on economic Growth
in Developing Countries using Nigeria as a case study. The study observed
that inflation, debt burden, and exchange rate significantly influence FDI
flows into Nigeria. The study suggests the government to pursue prudent
fiscal and monetary policies that will begeared towards attracting more FDI
and enhancing overall domestic productivity, ensure improvements in
infrastructural facilities and to put a stop to the incessant social unrest in
the country. The study concluded that the contribution of FDI to economic
growth in Nigeria was very low even though it was perceived to be a
significant factor influencing the level of economic growth in Nigeria. Lisa
De Propis and Nigel Driffield40 (2006) in their study The Importance of
Cluster for Spillovers from Foreign Direct Investment and Technology
Sourcing, examine the link between cluster development and inward
foreign direct investment. They concluded that firms in clusters gain
significantly from FDI in their region, both within the industry of the
domestic firm and across other industries in the region.Miguel D.
Ramirez42 (2006) in his study Is Foreign Direct Investment Beneficial for
Mexico? An Empirical Analysis examines the impact of Foreign Direct
Investment on labour productivity function for the 1960- 2001 period is
estimated that includes the impact of changes in the stock of private and
foreign capital per worker. The error correction model estimates suggest
that increase in both private and foreign investment per worker have a
positive and economically significant effect on the rate of labour productivity
growth. However, after taking into account the growing remittances of
profits and dividends, there is a marked decrease in the economic effect of
foreign capital per worker on the rate of labour productivity growth. The
study assesses the short term interactions of the relevant variables via
impulse response functions and variance decompositions based on a
decomposition process that does not depend on the ordering of the
variables. Okuda Satoru48 (1994) in his study Taiwans Trade and FDI

policies and their effect on Productivity Growth reviewed the course of

Taiwans trade and FDI policies.The purpose of the study was to examine
how these policies affected productivity of Taiwans manufacturing sector.
As an indicator of productivity, TEP indices of the Taiwan manufacturing
were calculated at the subsector level. It is find out that the TEP growth for
manufacturing as a whole was 2.6 per cent per annum the electronics and
machinery maintained high productivity performance while examining the
relationship between TEP and trade and FDI liberalization policies was
examined. The study concludes that the policies of the Taiwan government
have generally been relevant.Rhys Jenkins53 (2006) in his study
Globalization, FDI and Employment in Vietnam, examines the impact of
FDI on employment in Vietnam, a country that received considerable inflow
of foreign capital in the 1990s as part of its increased integration with the
global economy. The study shows that the indirect employment effects
have been minimal and possibly even negative because of the limited
linkages which foreign investors create and the possibility of crowding
out of domestic investment. Thus, the study finds out that despite the
significant share of foreign firms in industrial output and exports, the direct
employment generated has been limited because of the high labour
productivity and low ratio of value added to output of much of this
investment. Emrah Bilgic18 (2006) in her study Causal Relationship
between Foreign Direct Investment and Economic Growth in turkey ,
examines the possible causal relationship between FDI and Economic
Growth in Turkey. The study finds out that there is neither a long run nor a
short run effect of FDI on economic growth of Turkey. Thus the study could
not find any patterns for each hypothesis of FDI led Growth and
Growth drivenFDI in Turkey. The main reason of this result is that the
country had unstable growth performances and very low FDI inflows for the
period under analysis. The study suggests that in order to have a sustained
economic development the government should improve the investment
environment with the ensured political and economic stability in the country.
Korhonen Kristina36 (2005) in her study Foreign Direct Investment in a
changing Political Environment compares Finnish Investment during the
restrictive period in 1984- 1997, with the liberal period in 1998-2002. The
study reveals that the political environment of the firm in the host country
may have a special role among the other parts of the firms environment
because of the supremacy of the host government to use its political power
in order to intervene in FDI. The study states that TNC may not need to
bargain alone but may lobby from its home government. Therefore, the
study adds the concept of authority services to the list of TNCs bargaining

techniques. The empirical results of the study suggest that the change in the
political environment in Korea in 1998 had a clear impact on Finnish
investment in Korea. The findings indicate that repeat investments had been
engaged regardless of the investment policy liberalization, but the acquisitions
had not taken place without the change in Koreas investment policy. The
results also suggest that the modified strategy performance model can be
successfully used to assess the impact of change in the firms external
environment. The results indicate that firms scan their political environment
continuously in order to anticipate and respond to possible changes. Rydqvist
Johan55 (2005), in his work FDI and Currency Crisis: Currency Crisis and
the inflow of Foreign Direct Investment analyse if there are any changes in
the flow of FDI before, during and after a currency crisis. The study found that
no similarities in regions or year of occurrence of the currency crisis. The
depth, length and structure of each currency crisis together with using the
right definition of a currency crisis are two important factors relating to the
outcomes in this study. Charlotta
Unden9 (2007) in his study Multinational Corporations and Spillovers in
Vietnam- Adding Corporate Social Responsibility focuses the presence of
MNCs and how they have influenced the Vietnamese economy is
examined. Specifically, MNCs spillover effects on domestic enterprises are
discussed. The paper also discussed the challenges and obstacles to
implementation and development of corporate social responsibility policies.
It shows that there is potential for positive spillover effects, such as
production methods and information spread from MNCs to domestic
suppliers. However, the company must be large enough to be contracted
and there is a risk that the gap will widen between the few large strong
suppliers and the huge number of small and medium sized companies
that operate in Vietnam. The paper also shows that MNCs can work as
catalysts by transferring CSR guidelines and a long term way of thinking
to domestic companies. Thai Tri Do72 (2005) in his study, The impact of
Foreign Direct Investment and openness on Vietnamese economy
examines the impact of FDI on Vietnamese economy by using Partial
Adjustment Model and time series data from 1976 to 2004. FDI is shown to
have not only short run but also long run effect on GDP of Vietnam. The
study also examines the impact of trade openness on GDP and it is found
that trade is stronger than that of FDI. Alhijazi, Tahya Z.D2 (1999) in his
work, Developing Countries and Foreign Direct Investment analysed the
pros and cons of FDI for developing countries and other interested parties.
This thesis scrutinizes the regulation of FDI as a means to balance the
interests of the concerned parties, giving an assessment of the balance of

interests in some existing and potential FDI regulations. The study also
highlights the case against the deregulation of FDI and its consequences
for developing countries. The study concludes by formulating regulatory
FDI guidelines for developing countries.Johannes Cornelius Jordaan31
(2005) in his study, Foreign Direct investment and neighbouring
influences evaluates the influences of a number of economic and socio
political influences of neighbouring countries on the host countrys FDI
attractiveness.Three groups, consisting of developed, emerging and African
countries are evaluated, with the main emphasis on African countries.
Results of the study indicate that an improvement in civil liberties and
political rights, improved infrastructure, higher growth rate and a higher
degree of openness of the host country, higher levels of human capital
attract FDI to the developed countries but deter FDI in emerging and
African countriesindicating cheap labour as a determinant of FDI inflows to
these countries. Further, Oil Owned countries in Africas attract more FDI
than non oil endowed countries emphasing the importance of natural
resources in Africa. Pawin Talerngsri50 (2001) in his study, The
Determinants of FDI Distribution across Manufacturing Activities in an Asian
Industrializing Country: A Case of Japanese FDI in Thailand identifies and
investigates the industry level Determinants of FDI in the context of
Asian industrializing countries by using the data on Japanese FDI in
Thailand. The study examines the influences of location specific
characteristics of host industries such as factor endowments, trade costs,
and policy factors. More distinctively, it examines the effect of vertical
(input-output) linkages among Japanese firms. The study finds out that
Japanese FDI in Thailand was not evenly distributed across manufacturing
activities. Some capital / technological intensive industries like rail
equipments and air crafts did not receive any FDI during a specified period.
On the other hand, other relatively labour intensive industries like TV
Radio, and communications equipment industry and motor vehicle industry
received disproportionately large values of FDI.Jainta Chomtoranin29
(2004) in her study, A Comparative Analysis of Japanese and American
Foreign Direct Investment in Thailand assesses the determinants of
Japanese and American FDI in Thailand during 1970-2000. In this analysis,
the short and long-term determinants of both FDI are estimated. This study
concludes that, in the short and the long run, Japanese FDI is found to be
driven by trade factors and the yen appreciation. While the American FDI is
driven by market factor, specifically the income level of Thai people.
Japanese FDI is trade oriented, whereas the American FDI is market
seeking oriented. Khor Chia Boon33 (2001) in his study, Foreign Direct

Investment and EconomicGrowth investigates the casual relationship

between FDI and economic growth. The findings of this thesis are that
bidirectional causality exist, between FDI and economic growth in Malaysia
i.e. while growth in GDP attracts FDI, FDI also contributes to an increase in
output. FDI has played a key role in the diversification of the Malaysian
economy, as a result of which the economy is no longer precariously
dependent on a few primarily commodities, with the manufacturing sector
as the main engine of growth.Tatonga Gardner Rusike71 (2007) in his
study, Trends and determinants of inward Foreign Direct Investment to
South Africa analyses Trends and determinants of inward Foreign Direct
Investment to South Africa for the period 1975-2005. The analysis indicated
that openness, exchange rate and financial development are important in
long run determinants of FDI. Increased openness and financial
development attract FDI. While an increase (depreciation) in the exchange
rate deters FDI to South Africa. Market size emerges as a short run
determinant of FDI although it is declining in importance. The analysis also
showed that FDI itself, imports and exchange rate explain a significant
amount of the forecast error variance. The influence of market size variable
is small and declining over time.Belem Iliana Vasquez Galan6 (2006) in his
study, The effect of Trade Liberalization and Foreign Direct Investment in
Mexico analyses the importance of liberalization and FDI on Mexicos
economy. The major findings of the study demonstrated that the main
determinants of GDP are capital accumulation, labour productivity and FDI.
Further, findings confirm that exports, differences in relative wages and
currency depreciation are explicative of FDI. Exports are highly dependent
on the world economy and exchange rate fluctuations. Labour productivity
and FDI improve human capital. Similarly GDP and human capital induce
productivity gains and capital accumulations improve due to technology
transfers, infrastructure, personal income and peso appreciation. The study
showed that an expansionary monetary policy has the capacity to
decelerate the interest rate and thereby to enhance FDI and its spillovers.
Jing Zhang30 (2008) in his work, Foreign Direct Investment, Governance,
and the Environment in China: Regional Dimensions includes four empirical
studies related to FDI, Governance, economic growth and the environment.
The results of the thesis are, first, an intra-country pollution haven effect does
exist in China. Second, FDI is attracted to regions that have made more effort
on fighting against corruption and that have more efficient government. Third,
government variables do not have a significant impact on environmental
regulation. Fourth, economic growth has a negative effect on environmental
quality at current income level in China.

Lastly, foreign investment has positive effects on water pollutants and a

neutral effect on air pollutants Swapna S. Sinha69 (2007) in his thesis,
Comparative Analysis of FDI in China and India: Can Laggards Learn from
Leaders? focuses on what lessons emerging markets that are laggards in
attracting FDI, such as India, can learn from leader countries in attracting
FDI, such as China in global economy. The study compares FDI inflows in
China and India. It is found that India has grown due to its human capital,
size of market, rate of growth of the market and political stability. For china,
congenial business climatefactors comprising of making structural changes,
creating strategic infrastructure at SEZs and taking strategic policy
initiatives of providing economic freedom, opening up its economy,
attracting diasporas and creating flexible labour law were identified as
drivers for attracting FDI.Samuel Adams57 (2009) in his paper, Can
Foreign Direct Investment help topromote growth in Africa provides a
review of Foreign Direct Investment and economic growth literature in the
context of developing countries and particularly Sub- Saharan Africa. The
main findings of the study are as follows, first, FDI contribution to economic
development of the host country in two main ways, augmentation of
domestic capital and enhancement of efficiency through the transfer of new
technology, marketing and managerial skills, innovation and best practices.
Secondly, FDI has both benefits and costs and its impact is determined by
the country specific conditions in general and the policy environment in
particular in terms of the ability to diversify, the level of absorption capacity,
targeting of FDI and opportunities for linkages between FDI and domestic
investment.Yew Siew Youg85 (2007) in his study, Economic Integration,
Foreign Direct Investment and Growth in ASEAN five members examines
the effects of economic integration on FDI flows and the effects of FDI flows
on economic growth in ASEAN 5 countries. The study found that market
size, economic integration, human capital, infrastructure and existing FDI
stock are the important determinants of FDI for ASIAN countries. The study
also found that FDI, economic integration and human capital are robustly
significant to economic growth, manufacturing sector growth and high
technology sector growth for ASEAN countries. The FDI flow into ASEAN
countries was found to be inversely proportional to the per capita income of
the five countries.It is concluded that the effect of FDI on economic growth
of ASEANS countries was found to be higher for countries with higher per
capita income. Coupled with strong intra industry trade in the
manufacturing sector of ASEAN countries an integrated approach to draw
in FDI and promote manufacturing and high technology growth should be
accelerated. The machinery and electrical

appliances industry contributes the highest trade in the region and is highly
integrated in intra industry trade within the region. The key hubs of the
industry within the region are Malaysia and Singapore. Sasidharan Subash
and Ramanathan A.59 (2007), 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 1994-2002. They
consider both horizontal and vertical spillover effects of FDI. Consistent
with the results of the previous studies, the study finds no evidence of
horizontal spillover effects. However, the study finds negative vertical
spillover effects.Diana Viorela Matei13 (2007) in her study, Foreign Direct
Investment location determinants in Central and Eastern European
Countries focuses on central and Eastern European former state
planned economies and investigates why multinationals chose to locate
their investments in these countries. The main findings of the study are that
market potential, privatization and agglomeration factors have significant
effects upon FDI location choice, helping to explain the attractiveness for
FDI of these host countries. Kostevc Crt, Tjasa Redek, Andrej Susjan37
(2007) in their study Foreign Direct Investment and institutional
Environment in Transition Economies analysed the relation between FDI
and the quality of the institutional environment in transition economies. The
analysis confirmed a significant impact of various institutional aspects on
the inflow of foreign capital. To isolate the importance of the institutional
environment from the impact of other factors, a panel data analysis was
performed using the data of 24 transition economies in the period 19952002. The findings showed that in the observed period the quality of the
institutional environment significantly influenced the level of FDI in
transition economies. Other variables that proved to have a statistically
significant influence were budget deficit, insider privatization and labour
cost per hour.Rudi Beijnen54 (2007) in his study, FDI in China: Effects on
Regional Exportsinvestigates 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. Taewon Suh, Omar J.
Khan70 (2003) in their study, The effects of FDI inflows and ICT
infrastructure on exporting in ASEAN/ATTA countries: A comparison with

other regional blocs in emerging markets, explores the impact of both the
increase in FDI inflows and the increase in information and communication
technology infrastructure investments on exporting in ASEAN nations (the
trade bloc of which is known as AFTA) compared with two other major trade
blocs: CEFTA and LAIA. The analysis is based on data from cross section
of countries (26 emerging markets from three trade blocs) over time (from
1995 to 2000). The results show that the increase of investment in ICT
infrastructure yields positive and significant returns in the national exporting
level only for the ASEAN / AFTA and CEFTA sample. The impact of the
increase of FDI inflows on export is significant only in the CEFTA and LAIA
samples. Garrick Blalock20 (2006) in his work, Technology adoption from
Foreign Direct Investment and Exploring: Evidence from Indonesian
Manufacturing contains three essays on technology adoption from foreign
direct investment and exploring. The first essay investigates how
technology that accompanies FDI diffuses in the host economy and finds
that multinationals wish to limit technology leakage to domestic rivals, they
benefits from deliberate technology transfer to suppliers that may lower
input prices or raise input quality. The second essay examines how firm
attributes affect innovation by investing the adoption of technology brought
with FDI. The findings suggest that the more competent firms have already
adopted technologies with high returns and low costs,whereas less
competent firms have room to catch up and can still benefit from the
adoption of low hanging fruit technology the third essay asks whether
firms acquire technology though exporting and find strong evidence that
firms benefits from a one time jump in productivity upon entering export
markets.Dexin Yang12 (2003) 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.

Minquan liu, Luodan Xu, Liu Liu43 (2004) in their study, Wage related
Labour standards and FDI in China: Some survey findings from Guangdong
Province presents findings from a Survey of Foreign Invested Enterprises
(FIEs) in Guangdong China, on the relationship between Foreign Direct
Investment and wage related labour standards (regular wages, and
compliance with official overtime and minimum wage) which show that wage
related standards are statistically high in FIEs whose home countries
standards are higher, after controlling for other influences. However, a cost
reduction FIE is more likely to be associated with inferior standards.D.N
Ghosh22 (2005) in his paper FDI and Reform: Significance and Relevance of
Chinese Experience finds that if India shed its inhibitions about FDI and
follow in the footsteps of China, than India would be in a position to realize its
full potential. Chinas FDI saga has been a textbook replay of what institutional
economics would call adaptive efficiency on the part of its political regime.
The country made courageous but careful choices in difficult circumstances,
signaling radical departure from the belief system it has been accustomed to
for decades. The study concluded that both china and India have
demonstrated that for a late industrializing country the Washington consensus
is not necessarily a good model to follow. It might be appropriate for countries
with a good institutional infrastructure and efficient private sector, but for
others it can be a recipe for disaster. China seems to have discovered its own
reform model with
Chinese Characteristics. A western observer calls it the Beijing
Consensus. India is currently fumbling to validate a different kind of model
call it the India Consensus- for democrating country in a globally
interdependent world. 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)

INTER INDUSTRY STUDIES

Guruswamy Mohan, Sharma Kamal, Mohanty Jeevan Prakash, Korah
Thomas J.26 (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. Park Jongsoo49 (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 EAS58 (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. Gonzalez J.G25 (1988) in
his study
Effect of Foreign Direct Investment in the presence of sector specific
unemployment
extends
the
work
done
by
Srinivasan68
(1983)International factor movements, commodity trade and commercial
policy in a specific factor model, by making an analysis of the welfare
effects of foreign investment. The study shows that if there are no
distortions, foreign investment enhances the social uplift of the people. The
study strongly favours import substitution policies since such a strategy
provides greater job opportunities to the people and consequently improves
their standards of living. But the study finds that welfare effects of foreign
Investment do not explain the pattern of trade in the economy. Thus, both
Srinivasan (1983) and Gonzalez (1998) concluded that foreign direct
investment and distortions of the labour market results in social uplift of the
people.Sharma Rajesh Kumar67 (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.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.
STUDIES IN INDIAN CONTEXT
Nayak D.N46 (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.Balasubramanyam V.N Sapsford David4
(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. Naga Raj R45 (2003) in his article Foreign Direct Investment in
India in the1990s: 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. Morris
Sebastian44 (1999) in his study Foreign Direct Investment from
India:1964-83 studied the features of Indian FDI and the nature and mode
of control exercised by Indians and firms abroad, the causal factors that
underlie Indian FDI and their specific strengths and weaknesses using data
from government files. To this effect, 14 case studies of firms in the textiles,
paper, light machinery, consumer durables and oil industry in Kenya and
South East Asia are presented. This study concludes that the indigenous
private corporate sector is the major source of investments. The current
regime of tariff and narrow export policy are other reasons that have
motivated market seeking FDI.Resources seeking FDI has started to
constitute a substantial portion of FDI from India.Neither the advantage
concept of Kindlebrger, nor the concept of large oligopolies trying to retain
their technological and monopoly power internationally of Hymer and
Vaitsos are relevant in understanding Indian FDI, and hence are not truly
general forces that underlie FDI. The only truly general force is the
inexorable push of capital to seek markets, whether through exports or
when conditions at home put a brake on accumulation and condition
abroad permit its continuation.Nirupam Bajpai and Jeffrey D. Sachs47
(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
4
0

labor laws, poor quality infrastructure, centralized decision making

processes, and a very limited scale of export processing zones make India
an unattractive investment location.Kulwinder Singh38 (2005) in his study
Foreign Direct Investment in India: A Critical analysis of FDI from 19912005 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. Chandan
Chakraborty, Peter Nunnenkamp8 (2004) in their study Economic
Reforms, FDI and its Economic Effects in India assess the growth
implications of FDI in India by subjecting industry 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.Basu P., Nayak N.C, Vani
Archana5 (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
infrastructure, centralize decision making processes, and a vary limited
numbers of SEZs make India an unattractive investment location.

CONCLUSIONS

1)

2)

6)

7)

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
Institutional infrastructure and development are the main determinants of
FDI inflows in the European transition economies. Institutional environment
(comprising both institutional strategies and policies of organizations
relating to these institutions) plays critical role in reducing the transaction
costs of both domestic and cross border business activity.
FDI plays a crucial role in employment generation/ preservation in Central
Europe. It is found that bigger diversity of types of FDI lead to more diverse
types spillovers and skill transfers which proves more favourable for the
host economy.
3)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.
4)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.
5)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

8)It is observed that countries pursuing export led growth strategies reaps
enormous benefits from FDI.
9)The main determinants of FDI in developing countries are inflation,
infrastructural facilities, debts, burden, exchange rate, FDI spillovers, stable
political environment etc.
10) It is found that firms in cluster gain significantly from FDI in their region,
within industry and across other industries in the region.
11)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.
RESEARCH ISSUES AND RESEARCH GAPS
The above review of literature proves beneficial in identifying the research
issues and the research gaps, which are mainly the edifices on which the
objectives of the present study are based on. There is hardly any study in
India which has taken macroeconomic variables like foreign exchange
reserves, total trade, financial position, research and development
expenditure while assessing the determinants and impact of FDI on Indian
economy. The present study tries to include these above said variables in
assessing the determinants and impact of FDI in India at the macro level.
Further, there is hardly any study in India, which documents the trends and
patterns of FDI at world level, Asian level and Indian level. Thus, the
present study is an endeavor to discuss the trends and patterns of FDI, its
determinants and its impact on Indian economy. The present study differs
from the early studies in many ways and enriches the existing literature in
the following ways: Firstly, it has included variables other than the variables
included by other scholars. Secondly, the present study documents the
trends and patterns of FDI at World, Asian and Indian level. Thirdly, the
present study tries to highlight the changing attitude of developing countries
towards FDI and attitude change of developed countries towards
developing countries in understanding their contribution in contemporary
international relations and development process. Fourthly, the study
presents the experiences of first and second generation of economic
reforms on Indian economy.

5.3TRENDS AND PATTERENS OF FDI INFLOWS

One of the most prominent and striking feature of todays globalised world
is the exponential growth of FDI in both developed and developing
countries. In the last two decades the pace of FDI flows are rising faster
than almost all other indicators of economic activity worldwide. Developing
countries, in particular, considered FDI as the safest type of external
finance as it not only supplement domestic savings, foreign reserves but
promotes growth even more through spillovers of technology, skills,
increased innovative capacity, and domestic competition. Now a days, FDI
has become an instrument of international economic integration.Located in
South Asia, India is the 7th largest, and the 2nd most populated country in
the world. India has long been known for the diversity of its culture, for the
inclusiveness of its people and for the convergence of geography. Today,
the worlds largest democracy has come to the forefront as a global
resource for industry in manufacturing and services. Its pool of technical
skills, its base of an English speaking Populace with an increasing
disposable income and its burgeoning market has all combined to enable
India emerge as a viable partner to global industry. Recently, investment
opportunities in India are at a peak.This chapter covers the trends and
patterns of FDI inflows at World, Asian and Indian level during 1991-2008.
TRENDS AND PATTERNS OF FDI FLOW IN THE WORLD
The liberalization of trade, capital markets, breaking of business barriers,
technological advancements, and the growing internationalization of goods,
services, or ideas over the past two decades makes the world economies
the globalised one. Consequently, with large domestic market, low labour
costs, cheap and skilled labour, high returns to investment, developing
countries now have a significant impact on the global economy, particularly
in the economics of the industrialized states. Trends in World FDI flows
depict that developing countries makes their presence felt by receiving a
considerable chunk of FDI inflows. Developing economies share in total
FDI inflows rose from 26% in 1980 to 40% in 1997.

CHART 2)
FDI INFLOWS IN THE WORLD
Years/ 19 96 97 98 99
20 20 20 20 20 20 20 200
Countr 9000 01 02 03 04 05 06 7
ies
95
World 22 38 47 69 108 14 73 71 63 64 95 14 183
FDI
5.3 6.1 8.1 4.5 8.3 92 5.1 6.1 2.6 8.1 8.7 11 3.3
Devel 64. 57. 56 69. 77. 82 68. 76. 69. 58. 63. 66 68
oped
4
1
7
1
.2 4
5
9
6
8
.7
Econo
mies
share
in
world
FDI
Devel 33 39. 39. 27 20. 15 27. 21. 26. 36 33 29 27.
oping
5
9
7
.9 9
7
3
.3 3
Econo
mies
share
in
world
FDI
Source: compiled from the various issues of WIR, UNCTAD, World Bank
However, the share during 1998 to 2003 fell considerably but rose in 2004,
again in 2006 and 2007 it reduces to 29% to 27% due to global economic
meltdown. Specifically, developing Asia received 16 %, Latin America and
the Caribbean 8.7 %, and Africa 2 %.On the other hand, developed
economies show an increasing upward trend of FDI inflows, while
developing economies show a downward trend of FDI inflows after
1995.Developed Economies's share in world FDI Developing Economies's
share in world FDI
Source: compiled from the various issues of WIR, UNCTAD, World Bank
However, India shows a steady pattern of FDI inflows during 1991-2007
(Chart- 2).The annual growth rate of developed economies was 33%,
developing economies was 21% and India was 17% in 2007 over 2006.
During 1991-2007 the compound annual growth rate registered by
developed economies was 16%, developing economies was merely 2%,
and that of India was 41%.

MOST ATTRACTIVE LOCATION OF GLOBAL FDI

It is a well-known fact that due to infrastructural facilities, less bureaucratic
structure and conducive business environment China tops the chart of
major emerging destination of global FDI inflows. The other most preferred
destinations of global FDI flows apart from China are Brazil, Mexico,
Russia, and India. The annual growth rate registered by China was 15%,
Brazil was 84%, Mexico was 28%, Russia was 62%, and India was 17% in
2007 over 2006. During 1991-2007 the compound annual growth rate
registered by China was 20%, Brazil was 24%, Mexico was 11%, Russia
was 41% (from 1994), and India was 41%. Indias FDI need is stood at US$
15 bn per year in order to make the country on a 9% growth trajectory (as
projected by the Finance Minister of India in the current Budget74). Such
massive FDI is needed by India in order to achieve the objectives of its
second generation economic reforms and to maintain the present growth
rate of the economy. Although, Indias share in world FDI inflows has
increased from 0.3% to 1.3% from 1990-95 to 2007. Though, this is not an
attractive share when it is compared with China and other major emerging
destinations of global FDI inflows.
CHART 3)
SHARE OF INDIA IN WORLD FDI
Years
/
Count
ries
World
FDI
India
s
share
in
world
FDI

19 96
9095

97

22
5.3
0.3

47 69 10 14 73 71 63
8.1 4.5 88 92 5
6.1 2.6
0.8 0.4 0.2 0.2 0.5 0.5 0.7

38
6.1
0.7

98

99

20
00

20
01

20
02

20
03

20
04

20
05

64 95
8.1 8.7
0.8 0.8

20
06

200
7

14 183
11 3.3
1.4 1.3

india's share in world FDI

Source: compiled from the various issues of WIR, UNCTAD, World Bank
(Table-3.3) reveals that during the period under review FDI inflow in India
has increased from 11% to 69%. But when it is compared with China,

Indias FDI inflows stand no where. And when it is compared with rest of
the major emerging destinations of global FDI India is found at the bottom
of the ladder.
Source: compiled from the various issues of WIR, UNCTAD, World Bank
The reason could be bureaucratic hurdles, infrastructural problems,
business environment, or government stability. India has to consider the
five point strategy as put forward by the World Bank for India, if India wants
to be an attractive location of global FDI in the coming years.
TRENDS AND PATTERNS OF FDI FLOW IN ASIA
In the South, East, and South East Asia block India is at 3rd place after
China and Singapore South, East, South East Asia block registered an
annual growth rate of 19% in 2007 over 2006 and compound annual growth
rate of 17% on an annualized basis during 1991-2007. Indias share has
increased from 1.5% in 1990- 95 to 9.2% in 2007 while Chinas share was
decreased to 33 per cent in 2007 from 43.4 per cent in 1990-95. It is found
that there is an increment of 5.8% in case of India while there is a
decrement of 9.8% in case of China. It is evident from that Indias share
among developing countries in FDI inflow was 1.4% in the last decade and
2.8% in
Source: Doing business in India: 2009, World Bank.
The doing business84 conducted by World Bank put forward certain
indicators (Table - 3.5) where China beats India in attracting high FDI
inflows. High trade and transaction costs are mainly due to the countrys
lack of quality infrastructure. This lack of infrastructure discourages
resource seeking and export oriented investment. The reason for the
low level of FDI in India as compared to China could be any but the fact is
that China opened its door to foreign investment in 1978 while India in
1991.There is an appreciable increase in the level of FDI inflows in the
South Asian Region. Asia registered an annual growth rate of 17% in 2007
over 2006 and compound annual growth rate of 18% on an annualized
basis during 1991-2007. India, Pakistan,Bangladesh are receiving higher
volume of inflows since 1990. According to World Investment Report77
2007 (WIR), India has emerged as major recipient of FDI in South Asia. Its
share is nearly 75% of total FDI flow to South Asia. Infact, the
Comprehensive Economic Cooperation Agreement (CECA) with Singapore,
Free Trade Agreements (FTAs) with Singapore and Thailand

and by becoming the member of ASEAN Regional Forum India has made
its presence felt in East Asia region. India, is trying hard so that the largest
free Trade Area, even larger than the existing EU-NAFTA combined area,
could come up in the East Asia region. This suggested largest FTA would
make the bilateral trade to the new heights in the coming years.Due to
CECA and FTAs with Singapore, it emerged as the third biggest investing
country in India. Its ranking improved by 4th place. And if this pace of
investment continued from Singapore it is hoped that it will become the
largest investing country in India in the coming years and Singapore may
prove to be a Hong Kong or Taiwan to India.
TRENDS AND PATTERNS OF FDI FLOW IN INDIA
Economic reforms taken by Indian government in 1991 makes the country
as one of the prominent performer of 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.Source: compiled & computed
from the various issues of Economic Survey, RBI Bulletin, Ministry of
Commerce The actual FDI inflows in India is welcomed under five broad
heads: ( i ) Foreign Investment Promotion Boards (FIPB) discretionary
approval route for larger projects,(ii) Reserve Bank of Indias (RBI)
automatic approval route, (iii) acquisition of shares route (since 1996), (iv)
RBIs non resident Indian (NRIs) scheme, and (v) external commercial
borrowings (ADR/GDR) route. An analysis of the last eighteen years of
trends in FDI inflows (Chart-3.5 and Chart-3.6) 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.
Source: compiled & computed from the various issues of Economic Survey,
RBI Bulletin, Ministry of Commerce Further, the actual inflows of FDI
through various routes in India are described in Chart- 3.6. 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. 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 in1991 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 comparative
analysis of FDI approvals and inflows 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 cent 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 non- cooperation from the state
government etc.
Source: compiled & computed from the various issues of Economic Survey,
RBI Bulletin, Ministry of Commerce Infact, 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.
Source: compiled & computed from the various issues of Economic Survey,
RBI Bulletin, Ministry of Commerce Although, total number of foreign
collaborations has increased since 1991. It is evident from 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.
Source: compiled & computed from the various issues of Economic Survey,
RBI Bulletin, Ministry of CommerceThe 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 reveal that the top 5 sectors in
aggregate for FDI inflows constitute US$ 50,479 millions 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.

SOURCES OF FDI IN INDIA

India has broadened the sources of FDI in the period of reforms. There
were 120 countries investing in India in 2008 as compared to 15 countries
in 1991. Thus the number of countries investing in India increased after
reforms. After liberalization of economy Mauritius, South Korea, Malaysia,
Cayman Islands and many more countries predominantly appears on the
list of major investors apart from U.S., U.K., Germany, Japan, Italy, and
France which are not only the major investor now but during
MAJOR SOURCES OF FDI IN INDIA
Mauritius,USA, Singapore ,UK ,Netherlands, Japan ,Germany ,Cyprus,
France ,Switzerland
Source: compiled & computed from the various issues of Economic Survey,
RBI Bulletin, Ministry of Commerce pre- liberalizations era also. The
analysis in (Table-3.6) presents the major investing countries in India during
1991-2008. Mauritius (Chart- 3.11) is the largest investor in India during
1991-2008. FDI inflows from Mauritius constitute about 39.9% of the total
FDI in India and enjoying the top position on Indias FDI map from
1995. This dominance of Mauritius is because of the Double Taxation
Treaty i.e. DTAA- Double Taxation Avoidance Agreement between the two
countries, which favours routing of investment through this country. This
(DTAA) type of taxation treaty has been made out with Singapore also.
Source: compiled & computed from the various issues of Economic Survey,
RBI Bulletin, Ministry of Commerce The US is the second largest investing
country in India. While comparing the investment made by both (Mauritius
and US) countries one interesting fact comes up which shows that there is
a huge difference (between FDI inflows to India from Mauritius and the US)
in the volume of FDI received from Mauritius and the US. FDI inflow from
Mauritius is more than double then that from the US. The other major
countries are Singapore with a relative share of 7.2% followed by UK,
Netherlands, Japan, Germany, Cyprus, France, and Switzerland.Thus, an
analysis of last eighteen years of FDI inflows shows that only five countries
accounted for nearly 66% of the total FDI inflows in India. India needs
enormous amount of financial resources to carry forward the agenda of
transformation (i.e. from a plannedeconomy to an open market), to tackle
imbalance in BOP, to accelerate the rate of economic growth and have a
sustained economic growth.

5.5 DISTRIBUTION OF FDI WITHIN INDIA

FDI inflows in India are heavily concentrated around two cities, Mumbai
(US$ 26899.57million) and Delhi (US$ 12683.24 million). Bangalore,
Ahmedabad and Chennai are also receiving significant amount of FDI
inflows. These five cities together account for 69 per cent of total FDI
inflows to India. Mumbai and Delhi together received 50 per cent of total
FDI inflows to India during 2000 to 2008.
Source: compiled and computed from the various issues SIA Bulletin,
Ministry of Commerce, GOI Mumbai received heavy investment from
Mauritius (29%), apart from U.K. (17%), USA(10%), Singapore (9%) and
Germany (4%).The key sectors attracting FDI inflows to Mumbai are
services (30%), computer software and hardware (12%), power
(7%),metallurgical industry (5%) and automobile industry (4%). Mumbai
received 1371numbers of technical collaborations during 1991-2008. Delhi
received maximum investment from Mauritius (58%), apart from Japan
(10%), Netherlands (9%), and UK (3%).While the key industries attracting
FDI inflows to Delhi region are telecommunications (19%), services (18%),
housing and real estate (11%), automobile industry (8%) and computer
software and hardware (6%). As far as technical collaborations are
concerned Delhi received 315 numbers of technical collaborations during
1991- 2008. Heavy investment in Bangalore came from Mauritius (40%)
alone. The other major investing countries in Bangalore are USA (15%),
Netherlands (10%), Germany (6%), and UK (5%). Top sectors reported the
FDI inflows are computer software and hardware (22%), services (11%),
housing and real estate (10%), telecommunications (5%), and fermentation
industries (4%). Bangalore received 516 numbers of technical
collaborations during 1991-2008. Chennai received FDI inflows from
Mauritius (37%), Bermuda (14%), USA (13%), Singapore (9%) and
Germany (4%). The key sectors attracting FDI inflows are construction
activities (21%), telecommunications (10%),services (10%), computer
software and hardware (7%), automobile industry (7%), As far as technical
collaborations are concerned, Chennai received 660 numbers of technical
collaborations during 1991-2008.
TRENDS AND PATTERNS OF FDI FLOW AT SECTORAL LEVEL
Infrastructure Sector
FDI up to 49% is allowed for investing companies in infrastructure/ services
sector (except telecom sector) through FIPB route. The infrastructure
sector constitutes Power, Non-conventional energy, Petroleum and natural

gas, Telecommunication, Air Transport, Ports, Construction activities and

(including roads and highways), real estate. The infrastructure sector
accounted for 28.62% of total FDI inflows from 2000 to 2008.Initially the
inflows were low but there is a sharp rise in investment flow from 2005
onwards Telecommunication received the highest percentage (8.05%)
followed by construction activities (6.15%), real estate (5.78%), and power
(3.16%). The major investment comes from Mauritius (56.30%) and
Singapore (8.54%). In order to attract the investment, New Delhi (23.2%)
and Mumbai (20.47%) enjoy the top two positions in India. Infrastructure
sector received 2528 numbers of foreign collaborations with an equity
participation of US$ 111.0 bn; 41.15% of the total investment. Out of 2528
foreign collaborations 633 were technical and 2795 are financial
collaborations during 1991- 2008. The top Indian companies which
received FDI inflows in Infrastructure sector during 2000 to 2008 are IDEA,
Cellule Ltd, Bhaik Infotel P.Ltd, Dabhol Power Company Ltd, Aircel Ltd,
Relogistics Infrastructure P.Ltd.
Actual values Trend line
Source: compiled and computed from the various issues SIA Bulletin,
Ministry of Commerce, GOI India has encouraged FDI in infrastructure
sector from the very initiation of its economic reforms, but the demand for it
is still not being fulfilled. In fact, investment is heavily concentrated in
consumer durables sector rather than in long term investment projects
such as power generation, maintaining roads, water management and on
modernizing the basic infrastructure. Maitra41 (2003) reveals that the
shortage of power is estimated at about 10% of the total electrical energy
and approximately 20% of peak capacity requirement. However, insufficient
and poor conditions of Indias infrastructure are the major factors to the
slowdown in growth which reduces the trust and enthusiasm for FDI from
investors and economic growth of the country. Further, insufficient power
supply, inadequate and unmaintained roads, an over- burdened railway
system, severely congested urban areas, may continue to plague the
Indian economy in the coming years.
Services Sector
Services sector puts the economy on a proper glide path. It is among the
main drivers of sustained economic growth and development by
contributing 55% to GDP. There is a continuously increasing trend of FDI
inflows in services sector with a steep rise in the inflows from 2005
onwards Service sector received an investment of US$ 19.2 bn which is

19.34% of the total FDI inflows from 1991-2008 from FIPB/SIA,acquisition

of existing shares and RBIs automatic routes only. However, this amount
does not include FDI inflows received through acquisition route prior to Jan.
2000.
Among the subsectors of services sectors, financial services attract 10.25%
of total FDI inflows followed by banking services (2.22%), insurance
(1.60%) and non- financial services (1.62%) respectively. Outsourcing,
banking, financial, information technology oriented services make intensive
use of human capital. FDI would be much more efficient and result oriented
in these services vis- a-vis services which make intensive use of
semiskilled and unskilled labour.
Actual Values Trend Line
Source: compiled and computed from the various issues SIA Bulletin,
Ministry of Commerce, GOI In India, FDI inflows in services sector are
heavily concentrated around two major cities- Mumbai (33.77%) and Delhi
(16.14%). Mauritius top the chart by investing 42.52% in services sector
followed by UK (14.66%), Singapore (11.18%). The total number of
approvals for services sector (financial non-financial) have been of the
order of 1626 (5.78% of the total approvals) with an equity participation of
US$ 8.7 bn, 10.28% of the total investment. Services sector ranks 3rd in
the list of sectors in terms of cumulative FDI approved from August 1991 to
Dec 2008. Out of 1626 numbers of foreign collaborations, 77 are technical
and 1549 are financial in nature. Majority of collaborations in technology
transfers are from USA (30) and UK (8).the leading Indian companies
which received FDI inflows in services sector are: Cairn (I) Ltd, DSP Merrill
Lynch Ltd, AAA Global Ventures Pvt. Ltd., Kappa Industries Ltd, Citi
Financial Consumer Finance (I) Ltd, Blue Dart Express Ltd, Vyasa Bank
Ltd, CRISIL Ltd, Associates India Holding Co. Pvt. Ltd, Housing
Development Finance Corp. Ltd.
Trading Sector
Trading sector received 1.67% of the total FDI inflows from 1991-2008.
Trading(wholesale cash and carry) received highest percentage (84.25%)
of total FDI inflow to this sector from 2000-2008 followed by trading (for
exports) with 9.04%, e-commerce with (2.38%). Trading sector shows a
trailing investment pattern upto 2005 but there is an exponential rise in
inflows from 2006 onwards Further, major investment inflows came from
Mauritius (24.69%), Japan (14.81%), and Cayman Island (14.60%)
respectively from 2000-2008. Investment in India is heavily concentrated in

three cities viz. Mumbai (40.76%), Bangalore (15.97%), and New Delhi
(12.05%). As far as Actual Values Trend Line
Source: compiled and computed from the various issues SIA Bulletin,
Ministry of Commerce, GOI technology transfers are concerned, total
numbers of 20 technical and 1111 financial collaborations have been
approved for Trading sector from 1991-2008. Maximum numbers of
technology transfers are approved from USA (5), Japan (3) and
Netherlands.The top five Indian companies which received FDI inflows are
Multi Commodity Exchanges of India Ltd, Anchor Electricals, Multi
Commodity Exchanges of India Ltd, Metro Cash and Carry India Pvt. Ltd,
Essilor India Pvt. Ltd.
Consultancy Sector
Consultancy Sector received US$ 1.1 bn which is 1.14% of total inflows
received from 2000-2008 through FIPB/SIA route, acquisition of existing
shares and RBIs automatic route. Management services received an
investment of US$ 737.6 million, marketing US$138.65 million and Design
and Engineering services constitute an investment of US$
110.43.
Source: compiled and computed from the various issues SIA Bulletin,
Ministry of Commerce, GOI Major share of investment in consultancy
services comes from Mauritius with 37.2%, USA (25.47%) and Netherlands
6.63% respectively. FDI inflows in consultancy sector registered a
continuous increasing trend of FDI inflows from 2005 onwards Further, in
India Mumbai (38.76%) and New Delhi (13.01%) received major
percentages of FDI inflow for consultancy sector from 2000-2008. Total
numbers of technology transfers in consultancy services are 125, out of
which 40 technical collaborations are approved with USA, 21 with UK, and
14 with Germany from 1991-2008.
Education Sector
FDI up to 100% is allowed in education sector under the automatic route.
Education sector received US$ 308.28 million of FDI inflow from 20042008. Education sector shows a steep rise in FDI inflows from 2005
onwards Heavy investment in education sector came from Mauritius with
87.95%, followed by Netherlands (3.76%), USA (2.93%) respectively.
Source: compiled and computed from the various issues SIA Bulletin,
Ministry of Commerce, GOI In India, Bangalore received 80.14% of total

FDI inflow followed by Delhi (6.45%),Mumbai (5.58%) respectively. As far

as technology transfer and financial collaborations are concerned, total
number of 2 technical and 112 financial collaboration are approved for
education sector. Out of 2 technical collaborations, USA and Japan begged
one each during 1991-2008. Further, India is endowed with a large pool of
skilled people with secondary and tertiary level of education. India with this
level of education attracts foreign firms in science, R & D, and high
technology products and services. The endowment of science, engineering,
and technology oriented people facilitate the spillovers of technology and
know how. Moreover, the medium of instruction at these education levels
is English the lingua franca of business. India with this added advantage
benefits in attracting foreign firms in education sector.
Housing and Real Estate sector
Housing and Real Estate sector accounts US$ 4.7 bn of FDI inflows which
is 5.78% of the total inflows received through FIPB/SIA route, acquisition of
existing shares and RBIs automatic route during 2000 2008. There is an
exponential rise in the amount of FDI inflows to this sector after 2005.
Source: compiled and computed from the various issues SIA Bulletin,
Ministry of Commerce, GOI Heavy investment i.e. 61.96% came from
Mauritius. In terms of most attractive locations in India New Delhi and
Mumbai with 34.7% and 29.8% shares are on the first and second
positions. The total numbers of foreign collaborations in Housing and Real
Estate sector is 18 with an equity participation of US$1.0 bn during 19912008. Maximum numbers of foreign collaborations in Housing and Real
Estate sector is with Mauritius (7), Singapore (2), and U.K (2). The top five
Indian companies which received maximum FDI inflows in this sector are:
Emaar MGF Land P. Ltd, Emaar MGF Land P. Ltd, Shivaji Marg Properities,
Shyamaraju & Company (India) Pvt. Ltd, and India Bulls Infrastructure
Development.
Construction activities sector
Construction activities Sector includes construction development projects
viz. housing,commercial premises, resorts, educational institutions,
recreational facilities, city and regional level infrastructure, township. The
amount of FDI in construction activities during Jan 2000 to Dec. 2008 is
US$ 4.9 bn which is 6.15% of the total inflows received through FIPB/SIA
route, acquisition of existing shares and RBIs automatic route. The

construction activities sector shows a steep rise in FDI inflows from 2005
onwards Major investment in construction activities is received from
Mauritius which is accounted nearly 58.61% of total FDI inflows during
2000-2008. In India Delhi,Mumbai, and Hyderabad receives maximum
amount (viz. US$ 1245.61, 1000.5, and 943.22 bn) of investment. As far as
technology transfers are concerned, total numbers of 9 technical and 223
numbers of financial collaborations have been approved for construction
activities, which accounts for 0.11% of the total collaborations approved
during August 1991 to December 2008.
Source: compiled and computed from the various issues SIA Bulletin,
Ministry of Commerce, GOI Maximum numbers of technical collaborations
are approved with France (3) and USA(2). The top five Indian companies
which received FDI inflows in this sector are: W.S Electric Ltd, Carmen
Builders & Construction Pvt. Ltd, Caitlin Builders & Developers Pvt. Ltd,
W.S. Electric Ltd, and PVP Ventures Pvt. Ltd.
Automobile Industry
Automobile Industry Sector comprises Passenger cars, auto ancillaries etc.
FDI inflows in the automobile Industry sector, during Jan 2000 to Dec. 2008
is US$ 3.2 bn which is 4.09% of the total inflows received through FIPB/SIA
route, acquisition of existing shares and RBI automatic route. The trends in
automobile sector show that there is acontinuous increase of investment in
this sector after 2005 onwards Major investment came from Japan
(27.59%), Italy (14.66%), USA (13.88%) followed by Mauritius(7.77%) and
Netherlands (6.91%). in India Mumbai, New Delhi and Ahmedabad
received major chunks of investment i.e. 36.98%, 26.63% and 9.47%). The
total numbers of approvals for automobile industry have been of the order
of 1611 with an equity participation of US$ 6.1 bn, which is 7.01% of the
total investment. Automobile industry sector ranks 5th in the list of sectors
in terms of cumulative FDI approved from August 1991 to Dec 2008. Out of
1611 numbers of foreign collaborations approved 734 are technical and
877 are financial in nature.
Source: compiled and computed from the various issues SIA Bulletin,
Ministry of Commerce, GOI Highest numbers of technical collaborations
with Japan in automobile Industry.Major Indian companies which received
highest percentage of FDI inflows in automobile industry are Escorts
Yamaha Motor Ltd, Yamaha Motors India Pvt. Ltd, Punjab Tractors Ltd.,
Yamaha Motor Escorts Ltd, Endurance Technologies P. Ltd, General
Motors India Ltd, and Fiat India Automobile P. Ltd.

Computer Software and Hardware Sector

Computer Software and Hardware sector received US$ 8.9 bn which
constitute 11.43% of the total FDI inflows during the period Jan 2000 to Dec
2007. Computer Software and Hardware sector shows a continuous
increasing trend of FDI inflows Mauritius with an investment of US$ 4789
bn remained at the top among the investing countries in India in this Sector.
Other major investing countries in this sector are USA(12.88%), Singapore
(10.07%) etc. Among Indian locations Mumbai received 22.44% of
investment followed by Bangalore (10.8%), and Chennai (9.90%). actual
data trend line
Source: compiled and computed from the various issues SIA Bulletin,
Ministry of Commerce, GOI Computer Software and Hardware industry
fetched 3636 numbers of foreign collaborations. Out of 3636, 125 are
technical and 3511 are financial in nature with an equity participation of
US$ 3.0bn. Major technological transfers come from USA (43.2%) and
Japan (10.4%). The top Indian companies which received FDI inflows in
this sector are: I Fliex Solutions Ltd, I Flex Solutions ltd, Tata Consultancy
Services Ltd,Infrasoft Technologies Ltd, Mphasis BFL Ltd, I- Flex Solutions
Ltd, Digital Global Soft Ltd, India Bulls Financials Services P. Ltd, IFLEX
Solutions Ltd, Unitech Reality Projects Ltd.
Telecommunications Sector
Telecommunications Sector comprises Telecommunications, Radio Paging,
Cellular Mobile/ Basic Telephone Services etc. India received cumulative
FDI inflows of US$ 100.4 bn during 1991-2008. Out of this,
Telecommunications Sector received an inflow of US$ 8.2 bn, which is
8.4% of the total FDI inflows during August 1991 to December 2008. There
has been a steady flow of FDI in telecommunications from 1991 to 2005,
but there is an exponential rise in FDI inflows after 2005 Mauritius with
82.22% of investment remains on the top among the investing countries in
this sector. Other investing countries in the telecom sector are Russia
(5.41%) and USA (2%). New Delhi attracts highest percentage (32.58%) of
FDI inflows during Jan 2000 to Dec 2008. The total numbers of approvals
for telecommunications Industry have been of the order of 1099 with an
equity participation of US$ 13.3 bn, 14.34% of the total
investment.Telecommunication sector ranks 2nd in the list of sectors in
terms of cumulative FDI approved from August 1991 to Dec 2008.
Source: compiled and computed from the various issues SIA Bulletin,
Ministry of Commerce, GOI Out of 1099 foreign collaborations, 139 are
technical and 960 are financial in nature. Highest numbers (32) of technical

collaborations are approved with USA followed by Japan (19), U.K. (12),
Canada (12) and Germany (12). The leading Indian companies which
received FDI inflows in this sector are: Bhaik Infotel p. Ltd, Aircel Ltd, Bharti
Tele Ventures Ltd, Bharti Telecom ltd, Flextronics Software Systems Ltd,
Hathway Cable & Data Com. Pvt. Ltd, Unitech Developers & Projects Ltd,
Hutchison Essar South Ltd. Etc.
INTERNATIONAL INVESTMENT AGREEMENTS
India is the founding member of GATT (General Agreement on Trade and
Tariffs). India is also a signatory member of South Asian Free Trade
Agreement (SAFTA). India has signed BITs (Bilateral Investment Treaties)
with both developed and developing nations. India has concluded 57
numbers (upto 2006) of BITs, out of which 27 are with developed nations
and majority of them, are with developing countries of Asia (16), the Middle
East (9), Africa (4), and Latin America (1). India also maintains double tax
avoidance agreements (tax treaties) with 70 countries (upto 2006). Apart
from BITs and tax treaties India is the member of many FTAs (Free Trade
Area, nearly 17 in numbers, upto 2006)).

1)
2)

4)
5)
6)

CONCLUSIONS
The above analysis of Trends and Patterns of FDI inflows reveals the
following facts:FDI has gained momentum in the economic landscape of world economies
in the last three decades. It had outpaced almost all other economic
indicators of economic transactions worldwide.
FDI is considered as the safest type of external finance both by the
developed and developing nations. So, there is growing competition among
the countries in receiving maximum inward FDI.
3)Trends in world FDI inflows shows that maximum percentage of global
FDI is vested with the developed nation. But in the last two decades,
developing countries by receiving 40% of global FDI in 1997 as against
26% in 1980 make waves in the economics of developed nations.
Among developing nations of the world, the emerging economies of the
Asian continent are receiving maximum share (16%) of FDI inflows as
against other emerging countries of Latin America (8.7%) and Africa (2%).
In the last two decades, India has significantly increased its share of world
FDI from 0.7% in 1996 to 1.3% in 2007.
China is the major recipient of global FDI flows among the emerging
economies of the world. It is also the most preferred destination of global

FDI flow. India is at 5th position in the category of most attractive location of
global FDI.
7) It is found that FDI flows to India have increased from 11% in 1991-99 to
69% in2000-2007.
8)In the South, East and South-East Asia block India is at 3rd place after
China and Singapore in receiving FDI inflows.
9)India is the major recipient of FDI inflows in South-Asia region. It
constitutes 75% of total FDI inflows to this region.
10)In order to have a generous flow of FDI, India has maintained Double
Tax Avoidance Agreements (DTAA) with nearly 70 countries of the world.
11)
India is the signatory member of south Asian Free Trade Agreement
(SAFTA). Apart from SAFTA, India is also the member of many (of nearly
17) Free Trade Agreements (FTAs).
12) It is found that Chinas share is 21.7% and Indias share is miniscule
(i.e. 2.8%) among the emerging economies of the world in the present
decade.
13)India has considerably decreased its fiscal deficit from 4.5 percent in
2003-04 to 2.7 percent in 2007-08 and revenue deficit from 3.6 percent to
1.1 percent in 2007-08.
14)
India has received increased NRIs deposits and commercial
borrowings largely because of its rate of economic growth and stability in
the political environment of the country.
15)
Economic reform process since 1991 have paves way for increasing
foreign exchange reserves to US$ 251985 millions as against US$ 9220
millions in 1991- 92.
16)
During the period under study it is found that Indias GDP crossed one
trillion dollar mark in 2007. Its domestic saving ratio to GDP also increases
from 29.8 percent in 2004-05 to 37 percent in 2007-08.
17)
FDI in India has increased manifold since 1991. FDI inflows in India
have increased from US$ 144.45 millions in 1991to US$ 33029.32 millions
in 2008.
18)
An analysis of last eighteen 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.
19)
Although there has been a generous flow of FDI in India but the pace of
FDI inflows has been slower in India when it is compared with China,
Russian federation, Brazil and Singapore.
20)
The study reveals that there is a huge gap (almost 40%) between the
amount of FDI approved & its realization into actual disbursement in India.

21)It is also found that investors in India are inclined toward having more
financial collaborations rather than technical ones.
22)Among sectors, Services sector tops the chart of FDI inflows in India in
2008. Nearly, 41% of FDI inflows are in high priority areas like services,
electrical equipments, telecommunication etc.
23) The sources of FDI inflows are also increased to 120 countries in 2008
as compared to 15 countries in 1991 and a few countries (UK, USA,
Germany, Japan, Italy, and France etc.) before 1991. Mauritius, South
Korea, Malaysia, Cayman Islands and many more countries appears for
the first time in the source list of FDI inflows after 1991.
24)Mauritius is the major investing country in India during 1991-2008.
Nearly 40% of FDI inflows came from Mauritius alone.
25)The other major investing countries are USA, Singapore, UK,
Netherlands, Japan, Germany, Cypress, France and Switzerland.
26)
An analysis of last eighteen years of FDI inflows in the country shows
that nearly66% of FDI inflows came from only five countries viz. Mauritius,
USA, Singapore, UK, and Netherlands.
27)
Mauritius and United states are the two major countries holding first
and the second position in the investors list of FDI in India. While
comparing the investment made by both countries, one interesting fact
comes up which shows that there is huge difference in the volume of FDI
received from Mauritius and the U.S. It is found that FDI inflows from
Mauritius are more than double from that of U.S.
28)
FDI inflows in India are concentrated around two cities i.e. Mumbai and
New Delhi. Nearly 50 percent of total FDI inflows to India are concentrated
in these two cities. Apart from Mumbai and Delhi Bangalore, Ahemdabad,
and Chennai also received significant amount of FDI inflows in the country.
29)
It is observed that among Indian cities maximum (1371) foreign
collaborations were received Mumbai.
30)The Infrastructure sector received 28.62% of total FDI inflows in the
present decade. This sector received maximum member (2528) of foreign
collaboration among sectors. Although this sector received the maximum
amount of FDI Inflows, but the demand of this sector are still unfulfilled. So,
investment opportunities in this sector are at its peak. Trend in
infrastructure shows that FDI inflows were low initially but there is a sharp
rise in investment flow from 2005 onwards.
31)
Services sector received 19.34% of total FDI inflows from 1991-2008.
This sector is the main driver of economic growth by contributing 55% to
GDP. Services sector shows a continuously increasing trend of FDI inflows
with a steep rise in the inflows from 2005 onwards.

32)Trading sector received 1.67% of total FDI inflows from 1991-2008.

Major investment (25%) in this sector came from Mauritius. Trading sector
shows a trailing investment pattern up to 2005 but there is an exponential
rise in FDI inflows from 2006 onwards.
33)
Consultancy Sector received 1.14% of total inflows from 2000-2008.
FDI inflows in consultancy sector registered a continuous increasing trend
of FDI inflows from 2005 onwards.
34)
Education sector received US $308.28 million of FDI inflows from 20042008. The sector shows a steep rise in FDI inflows from 2005 onwards.
35)
Housing and Real Estate Sector accounts for 5.78% of total FDI inflows
during 2000-2008. There is an exponential rise in the amount of FDI inflows
to this sector after 2005.
36)
Construction Activities Sector received 6.15% of the total inflows during
2000 to Dec. 2008. The Construction Activities Sector shows a steep rise in
FDI inflows from 2005 onwards.
37)Automobile Industry received US $3.2 billion of total FDI inflows to the
country during 2000 to 2008. The trends in automobile sector show that
there is a continuous increase of investment in this sector after 2005
onwards.
38)
Computer Software and Hardware sector received US $8.9 billion of
total FDI inflows during 2000 to Dec. 2007. This sector shows a continuous
increasing trend of FDI inflows.
39)
Telecommunications Sector received an inflow of US $8.2 billion during
1991 to 2008. There has been a steady flow of FDI in the
telecommunication from 1991 to 2005, but there is an exponential rise in
FDI inflows after 2005.
40)It is observed that major investment in the above sectors came from
Mauritius and investments in these sectors in India are primarily
concentrated in Mumbai and New Delhi.
41)
Maximum numbers (3636) of foreign collaborations during 1991-2008
are concluded in the computer software and hardware sector.
42)
It is found that maximum (i.e. 734) technical collaborations are
concluded in automobile sector while computer software and hardware
sector fetched maximum (3511) financial collaborations during 1991-2008.
43)
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.
44)
It is found that India has signed 57 members of Bilateral Investment
Treaties up to 2006. 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).
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 prerequisite 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 WTO83, 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

FOREIGN DIRECT INVESTMENT (FDI): It refers to foreign direct

investment.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 200708 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 200203.FDI Flow
Source: various issues of SIA Bulletin.
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
Young19 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 Report76 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.
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 an historical high of 10.10 percent in2006.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. Infact, 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 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.

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.
Source: various issues of RBI Bulletin 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.
FOREIGN EXCHANGE RSERVES (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)17. Stock of
foreign exchange reserves shows a countrys financial strength. 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. The
reserves stood at Rs. 1283865 crores as on March 2008 .
Source: various issues of RBI Bulletin 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. 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 entire reform period from 1991 onwards
reveals that increase in net FDI from Rs. 409 crores in 1991-92 to Rs.
1,23,378 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 crore during
1991-92 increased to Rs. 766935 crores in 2007-08. Indias imports which
were Rs. 47851 crore in 1991-92 increased to Rs. 1305503 crores in 200809. 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 200304. 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) Infact, 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.
RESEARCH & DEVELOPMENT EXPENDIYURE (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. 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 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.
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 any economy. It shows that external
debts are covered from the exports earning of a country.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 was 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. 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.However,
the share of concessional debt in total external debt declined to 18.2% in
2008-2009 from 19.7 % in 2007-2008.Concessional Debt as % of Total
Debt Short - Term Debt as % of Total Debt
Source: various issues of RBI Bulletin 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 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.
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. There are a number of factor 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 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
which has swept away huge chunk of profits of the companies.
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.
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
In order to assess the role of FDI on economic growth, two models were
used. The estimation results of the two models are supported and further
analysed by using the relevant econometric techniques viz. Coefficient of
determination, standard error, f- ratio,t- statistics, D-W Statistics etc. In the
foreign direct investment model, the main determinants of FDI inflows to
India are assessed. 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 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.trade GDP 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.
4.4 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 is a significant
factor influencing the level of economic growth in India. The results of
Economic Growth Model and Foreign Direct Investment Model show 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
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.
Trends and Patterns of FDI flows at World level:
1) It is seen from the analysis that large amount of FDI flows are confined to
the developed economies. But there is a marked increase in the FDI
inflows to developing economies from 1997 onwards. Developing
economies fetch a good share of 40 percent of the world FDI inflows in
1997 as compared to 26 percent in 1980s.
2) Among developing nations, Asian countries received maximum share
(16%) of FDI inflows as compared to other emerging developing countries
of Latin America (8.7 %) and Africa (2%).

3) Indias share in World FDI rose to 1.3% in 2007 as compared to 0.7% in

1996.This can be attributed to the economic reform process of the country
for the last eighteen years.
4) China is the most attractive destination and the major recipient of global
FDI inflows among emerging nations. India is at 5th position among the
major emerging destinations of global FDI inflows. The other preferred
destinations apart from China and above to India are Brazil, Mexico and
Russia. It is found that FDI inflows to India have increased from 11% in
1990-99 to 69% in 2000-2007.
Trends and patterns of FDI flows at Asian level:
1) India, with a share of nearly 75% emerged as a major recipient of global
FDI inflows in South Asia region in 2007.
2) As far as South, East and South East block is concerned India is at 3rd
place with a share of 9.2% while China is at number one position with a
share of 33% in 2007. Other major economies of this block are Singapore,
South Korea, Malaysia,Thailand and Philippines.
3)While comparing the share of FDI inflows of China and India during this
decade(i.e. 2000-2007) it is found that Indias share is barely 2.8 percent
while chinas share is 21.7 percent.
Trends and patterns of FDI flows at Indian level:
1) Although Indias share in global FDI has increased considerably, but the
pace of FDI inflows has been slower than China, Singapore, Brazil, and
Russia.
2) Due to the continued economic liberalization since 1991, India has seen a
decade of 7 plus percent of economic growth. Infact, Indias economy has
been growing more than 9 percent for three consecutive years since 2006
which makes the country a prominent performer among global economies.
At present India is the 4th largest and 2nd fastest growing economy in the
world. It is the 11th largest economy in terms of industrial output and has
the 3rd largest pool of scientific and technical manpower.
3)India has considerably decreased its fiscal deficit from 4.5 percent in
2003-04 to 2.7 percent in 2007-08 and revenue deficit from 3.6 percent to
1.1 percent in 2007-08.
4) There has been a generous flow of FDI in India since 1991 and its overall
direction also remained the same over the years irrespective of the ruling
party.

5) India has received increased NRIs deposits and commercial borrowings

largely because of its rate of economic growth and stability in the political
environment of the country.
6) Economic reform process since 1991 have paves way for increasing
foreign exchange reserves to US$ 251985 millions as against US$ 9220
millions in 1991-92.
7) During the period under study it is found that Indias GDP crossed one
trillion dollar mark in 2007. Its domestic saving ratio to GDP also increases
from 29.8 percent in 2004-05 to 37 percent in 2007-08.
8) An analysis of last eighteen 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.
9) 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.
10)
A comparative analysis of FDI approvals and inflows reveals that there
is a huge gap between the amount of FDI approved and its realization into
actual disbursements. A difference of almost 40 percent is observed
between investment committed and actual inflows during the year 2005-06.
11)
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.
12)
In order to have a generous flow of FDI, India has maintained Double
Tax Avoidance Agreements (DTAA) with nearly 70 countries of the world.
13)
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).
14)
Among the sectors, services sector received the highest percentage of
FDI inflows in 2008. Other major sectors receiving the large inflows of FDI
apart
from
services
sector
are
electrical
and
electronics,
telecommunications, transportations and construction activities etc. It is
found that nearly 41 percent of FDI inflows are in high priority areas like
services, electrical equipments, telecommunications etc.
15)
India has received maximum number of financial collaborations as
compared to technical collaborations.

16)
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).
17)
It is found that India has increased its list of sources of FDI since 1991.
There were just few countries (U.K, Japan) before Independence. After
Independence from the British Colonial era India received FDI from U.K.,
U.S.A., Japan, Germany, etc. There were 120 countries investing in India in
2008 as compared to 15 countries in 1991. Mauritius, South Korea,
Malaysia, Cayman Islands and many more countries predominantly
appears on the list of major investors in India after 1991. This broaden list
of sources of FDI inflows shows that India is successful in restoring the
confidence of foreign investors through its economic reforms process.
18)It is also found that although the list of sources of FDI flows has reached
to 120 countries but the lions share (66 percent) of FDI flow is vested with
just five countries (viz. Mauritius, USA, UK, Netherlands and Singapore).
19)
Mauritius and United states are the two major countries holding first
and the second position in the investors list of FDI in India. While
comparing the investment made by both countries, one interesting fact
comes up which shows that there is huge difference in the volume of FDI
received from Mauritius and the U.S. It is found that FDI inflows from
Mauritius are more than double from that of the U.S.
20)
State- wise FDI inflows show that Maharashtra, New Delhi, Karnataka,
Gujarat and Tamil Nadu received major investment from investors because
of the infrastructural facilities and favourable business environment
provided by these states. All these states together accounted for nearly
69.38 percent of inflows during 2000-2008.
21)
It is observed that among Indian cities Mumbai received maximum
numbers (1371) of foreign collaborations during 1991-2008.
Trends and patterns of FDI flows at Sectoral level of Indian Economy:
Infrastructure Sector: Infrastructure sector received 28.6 percent of total
FDI inflows from 2000 to 2008. Initially, the inflows were low but there is a
sharp rise in FDI inflows from 2005 onwards. Among the subsectors of
Infrastructure sector, telecommunications received the highest percentage
(8 percent) of FDI inflows. Other major subsectors of infrastructure sectors
are construction activities (6.15 percent), real estate (5.78 percent) and
power (3.16 percent). Mauritius (with 56.3 percent) and Singapore (with
8.54 percent) are the two major investors in this sector. In India highest
percentage of FDI inflows for infrastructure sector is with New Delhi (23.2
percent) and Mumbai (20.47 percent). Infrastructure sector received a total

of. 2528 numbers of foreign collaborations in India. Out of 2528 numbers of

foreign collaborations 633 were technical and 2795 were financial
collaborations, which involves an equity participation of US$ 111.0 bn. The
top five Indian companies which received FDI inflows in Infrastructure
sector during 2000 to 2008 are IDEA, Cellule Ltd.,Bhaik Infotel P. Ltd.,
Dabhol power Company Ltd., and Aircel Ltd.
Services sector: In recent years Services sector puts the economy on a
proper gliding path by contributing 55 percent to GDP. There is a
continuously increasing trend of FDI inflows in services sector with a steep
rise in the inflows from 2005 onwards. Services sector received an
investment of 19.2 bn from 1991 to 2008. Among the subsectors of
services sector, financial services attract 10.2 percent of total FDI inflows
followed by banking services (2.22 percent), insurance (1.6 percent) and
non- financial services (1.62 percent). In India, Mumbai (with 33.77
percent) and Delhi (with 16 percent) are the two most attractive locations
which receives heavy investment in services sector. It is found that among
the major investing countries in India Mauritius tops the chart by investing
42.5 percent in services sector followed by U.K (14.66 percent) and
Singapore (11.18 percent). During 1991 to Dec 2008 services sector
received 1626 numbers of foreign collaborations, out of which 77 are
technical and 1549 are financial in nature.
Trading sector: Trading sector received 1.67 percent of the total FDI
inflows from 1991-2008. The sector shows a trailing pattern upto 2005 but
there is an exponential rise in inflows from 2006 onwards. Trading sector
received 1130 (1111 numbers of financial collaborations and 20 numbers of
technical collaborations) numbers of foreign collaborations during 19912008. Major investment in this sector came from Mauritius (24.69 percent),
Japan (14.81 percent) and Cayman Island (14.6 percent) respectively
during 2000-2008. In India, Mumbai (40.76 percent), Bangalore (15.97
percent) and New Delhi (12.05 percent) are the top three cities which have
received highest investment in trading sector upto Dec. 2008. Trading of
wholesale cash and carry constitute highest percentage (84 percent of total
FDI inflows to trading sector) among the subsectors of trading sector
.
Consultancy Sector: Consultancy sector received 1.14% of total FDI
inflows during 2000 to 2008. Among the subsectors of consultancy sector
management services received highest amount of FDI inflows apart from
marketing and design and engineering services. Mauritius invest heavily

(37%) in the consultancy sector. In India Mumbai received heavy

investment in the consultancy sector. Consultancy sector shows a
continuous increasing trend of FDI inflows from 2005 onwards.
Education sector: Education sector attracts foreign investors in the
present decade and received a whopping 308.28 million of FDI inflows
during 2004-2008. It registered a steep rise in FDI inflows from 2005.
Mauritius remains top on the chart of investing countries investing in
education sector. Bangalore received highest percentage of 80.14% of FDI
inflows in India.
Housing and Real Estate Sector: Housing and Real Estate sector
received 5.78% of total FDI inflows in India upto 2008. Major investment
(61.96%) in this sector came from Mauritius. New Delhi and Mumbai are
the two top cities which received highest percentage of (34.7% and 29.8%)
FDI inflows. Housing sector shows an exponentially increasing trend after
2005.
Construction Activities Sector: Construction Activities sector received
US$ 4.9 bn of the total FDI inflows. Mauritius is the major investment
country in India. New Delhi and Mumbai are the most preferred locations
for construction activities in India.
Automobile Sector: Earlier Automobile Industry was the part of
transportation sector but it became an independent sector in 2000. During
Jan 2000 to dec. 2008 this industry received an investment of US$ 3.2 bn
which is 4.09 % of the total FDI inflows in the country. Japan (27.59%), Italy
(14.66%) and USA (13.88%) are the prominent investors in this sector. In
India Mumbai and New Delhi with 36.98 % and 26.63 percent of investment
becomes favourites destination for this sector. Maximum numbers of
technical collaborations in this sector are with Japan.
Computer Hardware and Software Sector: Computer Software and
Hardware sector received an investment of US$ 8.9 bn during Jan 2000 to
Dec. 2008. From 1991 to Dec. 1999 computer software and hardware was
the part of electrical and electronics sector. However, it was segregated
from electrical and electronics sector in 2000. This sector received heavy
investment from Mauritius apart from USA and Singapore.
It is observed that major investment in the above sectors came from
Mauritius and investments in these sectors in India are primarily
concentrated in Mumbai and New Delhi.
Maximum numbers (3636) of foreign collaborations during 1991-2008
are concluded in the computer software and hardware sector.

It is found that maximum (i.e. 734) technical collaborations are concluded

in automobile sector while computer software and hardware sector fetched
maximum (3511) financial collaborations during 1991-2008.
FDI and Indian Economy
The results of Foreign Direct Investment Model shows that all variables
included in the study are statistically significant. Except the two variables
i.e. Exchange Rate and Research and Development expenditure
(R&DGDP) which deviates from their predicted signs. All other variables
show the predicted signs.
Exchange rate shows positive sign instead of expected negative sign.
This could be attributed to the appreciation of Indian Rupee in international
market which helped the foreign firms to acquire the firm specific assets at
cheap rates and gain higher profits.
Research and Development expenditure shows unexpected negative
sign as of expected positive sign. This could be attributed to the fact that
R&D sector is not receiving enough FDI as per its requirement. but this
sector is gaining more attention in recent years.
Another important factor which influenced FDI inflows is the TradeGDP. It
shows the expected positive sign. In other words, the elasticity coefficient
between TradeGDP and FDI inflows is 11.79 percent which shows that one
percent increase in TradeGDP causes 11.79 percent increase in FDI
inflows to India.
The next important factor which shows the predicted positive sign is
ReservesGDP. The elasticity coefficient between ReservesGDP and FDI
inflows is 1.44 percent which means one percent increase in ReservesGDP
causes an increase of 1.44 percent in the level of FDI inflows to the
country.
Another important factor which shows the predicted positive sign is FIN.
Position i.e. financial position. The elasticity coefficient between financial
position and FDI inflows is 15.2 percent i.e. one percent increase in
financial position causes15.2 percent increase in the level of FDI inflows to
the country.
In the Economic Growth Model, the variable GDPG (Gross Domestic
Product Growth i.e. level of economic growth) which shows the market size
of the host economy revealed that FDI is a vital and significant factor
influencing the level of economic growth in India. In a nutshell, despite
troubles in the world economy, India continued to attract substantial amount
of FDI inflows. India due to its flexible investment regimes and policies
prove to be the horde for the foreign investors in finding the investment
opportunities in the country.

SUGGESTIONS
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 long term
financial projects. So, the study recommends the following suggestions:
The study urges the policy makers to focus more on attracting diverse
types of FDI.
The policy makers should design policies where foreign investment can
be utilised as means of enhancing domestic production, savings, and
exports; as medium of technological learning and technology diffusion and
also in providing access to the external market.
It is suggested that the government should push for the speedy
improvement of infrastructure sectors requirements which are important for
diversification of business activities.
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.
Government 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.
Government must target at attracting specific types of FDI that are able
to generate spillovers effects in the overall economy. This could be
achieved by investing in human capital, R&D activities, environmental
issues, dynamic products, productive capacity, infrastructure and sectors
with high income elasticity of demand.
The government must promote policies which allow development
process starts from within (i.e. through productive capacity and by
absorptive capacity).
It is suggested that the government endeavour should be on the type
and volume of FDI that will significantly boost domestic competitiveness,
enhance skills, technological learning and invariably leading to both social
and economic gains.

It is also suggested that the government must promote sustainable

development through FDI by further strengthening of education, health and
R&D system,political involvement of people and by ensuring personal
security of the citizens.
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
concludes FTAs with the emerging economic Asian giants.
FDI should be guided so as to establish deeper linkages with the
economy, which would stabilize the economy (e.g. improves the financial
position, facilitates exports, stabilize the exchange rates, supplement
domestic savings and foreign reserves, stimulates R&D activities and
decrease interest rates and inflation etc.) and providing to investors a
sound and reliable macroeconomic environment.
As the appreciation of Indian rupee in the international market is
providing golden opportunity to the policy makers to attract more FDI in
Greenfield projects as compared to Brownfield investment. So the
government must invite Greenfield investments.
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. As foreign investors doesnt look for fiscal concessions or special
incentives but they are more of a mind in having access to a consolidated
document that 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 favourable FDI destination in the world but also set an example to
the rest of the world by achieving what is predicted by Goldman
Sachs23,24 (in 2003, 2007) that from 2007 to 2020, Indias GDP per capita
in US$ terms will quadruple and the Indian economy will overtake France
and Italy by 2020, Germany, UK and Russia by 2025,Japan by 2035 and
US by 2043.

CHAPTER 6
FDI IN INDIAN RETAIL SECTOR

Retailing is the interface between the producer and the individual consumer
buying for personal consumption. This excludes direct interface between
the manufacturer and institutional buyers such as the government and
other bulk customers. A retailer is one who stocks the producers goods
and is involved in the act of selling it to the individual consumer, at a margin
of profit. Assuch, retailing is the last link that connects the individual
consumer with the manufacturing and distribution chain.
The retail industry in India is of late often being hailed as one of the sunrise
sectors in the economy. AT Kearney, the well-known international
management consultancy, recently identified India as the second most
attractive retail destination globally from among thirty emergent markets. It
has made India the cause of a good deal of excitement and the cynosure of
many foreign eyes. With a contribution of 14% to the national GDP and
employing 7% of the total workforce (only agriculture employs more) in the
country, the retail industry is definitely one of the pillars of the Indian
economy.
6.1The Indian Scenario:
Trade or retailing is the single largest component of the services sector in
terms of contribution to GDP. Its massive share of 14% is double the figure
of the next largest broad economic activity in the sector.
1 Singhal, Arvind, Indian Retail: The road ahead, Retail biz, The retail
industry is divided into organised and unorganised sectors.Organised
retailing refers to trading activities undertaken by licensed retailers, that is,
those who are registered for sales tax, income tax, etc.These include the
corporate-backed hypermarkets and retail chains, and also the privately
owned large retail businesses. Unorganised retailing, on the other hand,
refers to the traditional formats of low-cost retailing, for example, the local
kirana shops, owner manned general stores, paan/beedi shops,
convenience stores, hand cart and pavement vendors, etc. Unorganized
retailing is by far the prevalent form of trade in India constituting 98% of
total trade, while organised trade accounts only for the remaining 2%.
Estimates vary widely about the true size of the retail business in India. AT
Kearney estimated it to be Rs. 4,00,000 crores and poised to double in
2005.2 On the other hand, if one used the Governments figures the retail
trade in 2002-03 amounted to Rs. 3,82,000 crores. One thing all
consultants are agreed upon is that the total size of the corporate owned
retail business was Rs. 15,000 crores in 1999 and poised to grow to
Rs.35,000 crores by 2005 and keep growing at a rate of 40% per annum.3
In a recent presentation, FICCI has estimated the total retail business to be

Rs.11,00,000 crores or 44% of GDP4. According to this report dated Nov.

2003,sales now account for 44% of the total GDP and food sales account
for 63%of the total retail sales, increasing to Rs.100 billion from just Rs.
38.1 billion in 1996. Food retail trade is a very large segment of the total
economic activity of our country and due to its vast employment potential, it
deserves very special focused attention. Efficiency enhancements and
increase in the food retail sales activity would have a cascading effect on
employment and economic activity in the rural areas for the marginalized
workers. Thus even without FDI driving it, the corporate owned sector is
expanding at a furious rate. The question then that arises is that since there
is obviously no dearth of indigenous capital, what is the need for FDI? It is
not that retailing in Indiais in the need of any technology special to foreign
chains.
2 Ganguly, Saby, Retailing Industry in India, www.indiaonestop.com
3 Singhal, Arvind, Technopak Projections, 1999, Changing Retail
Landscape, www.ksa-technopak.com.
4 Chengappa, P.G, Achoth, Lalith, Mukherjee, Arpita, Ramachandra Reddy
B.M. & Ravi, P.C, Evolution of Food Retail Chains: The Indian Context, 56th Nov. 2003, www.ficci.com
Employment in Retailing:
A simple glance at the employment numbers is enough to paint a good
picture of the relative sizes of these two forms of trade in India organised
trade employs roughly 5 lakh people whereas the unorganized retail trade
employs nearly 3.95 crores5! According to a GoI study the number of
workers in retail trade in 1998 was almost 175 lakhs. Given the recent
numbers indicated by other studies, this is only indicative of the magnitude
of expansion the retail trade is experiencing, both due to economic
expansion as well as the jobless growth that we have seen in the past
decade. It must be noted that even within the organised sector, the number
of individually-owned retail outlets far out number the corporatebacked
institutions. Though these numbers translate to approximately 8% of the
workforce in the country (half the normal share in developed countries)
there are far more retailers in India than other countries in absolute
numbers, because of the demographic profile and the preponderance of
youth, Indias workforce is proportionately much larger. That about 4% of

Indias population is in the retail trade says a lot about how vital this
business is to the socio-economic equilibrium in India. Organised retail is
still in the stages of finding its feet in India even now. Though organised
trade makes up over 70-80% of total trade in developed economies, Indias
figure is low even in comparison with other Asian developing economies
like China, Thailand, South Korea and Philippines, all of whom have figures
hovering around the 20-25% mark. These figures quite accurately reveal
the relative underdevelopment of the retail industry in India. (Here
development is used in the narrowest sense of the term, implying lean
employment and high automation)
Retail as a Forced Employment Sector:
It is important to understand how retailing works in our economy, and what
role it plays in the lives of its citizens, from a social as well as an economic
perspective. India still predominantly houses the traditional formats of
retailing, that is, the local kirana shop, paan/beedi shop, hardware stores,
weekly haats, convenience stores, and bazaars, which together form the
bulk. Most importantly, Indian retail is highly fragmented, with about 11
million outlets operating in the country and only 4% of them being larger
than 500 square feet in size. Compare this with the figure of just 0.9 million
in the US, yet catering to more than 13 times of the Indian retail market
size. Figures quoted from Anil Sasis article Indian Retail Most
Fragmented(Aug. 18, 2004) The Hindu Business Line.The Indian retail
industry was, and continues to be, highly fragmented. According to the
global consultancy firms AC Neilsen and KSA Technopak, India has the
highest shop density in the world. In 2001 they estimated there were 11
outlets for every 1,000 people.7 Further, a report prepared by McKinsey &
Company and the Confederation of Indian Industry (CII) predicted that
global retail giants such as Tesco, Kingfisher, Carrefour and Ahold were
waiting in the wings to enter the retail arena. This report also states that the
Indian retail market holds the potential of becoming a $300 billion per year
market by 2010, provided the sector is opened up significantly.8 It does not
talk about creating additional jobs however, which should be the prime
concern of the policy maker. One of the principal reasons behind the
explosion of retail and its fragmented nature in the country is the fact that
retailing is probably the primary form of disguised
unemployment/underemployment in the country. Given the already overcrowded agriculture sector, and the stagnating manufacturing sector, and
the hard nature and relatively low wages of jobs in both, many million

Indians are virtually forced into the services sector. Here, given the lack of
opportunities, it is almost a natural decision for an individual to set up a
small shop or store, depending on his or her means and capital. And thus,
a retailer is born, seemingly out of circumstance rather than choice. This
phenomenon quite aptly explains the millions of kirana shops and small
stores. The explosion of retail outlets in the more busy streets of Indian
villages and towns is a visible testimony of this.
Singhal, Arvind, A Strong Pillar of Indian Economy,
www.ksa- technopak.com
Iyengar, Jayanthi China, India Confront the Wal-Marts, Online Asia Times,
www.atimes.com, January,
31,2004.
The presence of more than one retailer for every hundred persons is
indicative of the lack of economic opportunities that is forcing people into this
form of self-employment, even though much of it is marginal. Because of this
fragmentation, the Indian retail sector typically suffers from limited access to
capital, labour and real estate options. The typical traditional retailer follows
the low-cost-and-size format, functioning at a small-scale level, rarely eligible
for tax and following a cheap model of operations. As on January 1st of this
year, there were 413.88 lakhs job seekers registered at the Employment
Exchange9. They register at the exchange, to enjoy the benefits and security
that a job in the organised sector provides lifetime employment, pension,
and union membership etc. But over the period 1992- 93 to 2001-02, only a
total of 30,000 jobs have been added in the organized sector in the whole
country10 A vast majority is aware of what these figures signify that they are
most unlikely to get such jobs. Therefore, they find jobs in the informal sector,
mostly in retail. Retailing is by far the easiest business to enter, with low
capital and infrastructure needs, and as such, performs a vital function in the
economy as a social security net for the unemployed. India, being a free and
democratic country, provides its people with this cushion of being able to
make a living for oneself through self-employment, as opposed to an economy
like China, where employment is regulated. Yet, even this does not annul the
fact that a multitude of these so-called self-employed retailers are simply
trying to scrape together a living, in the face of limited opportunities for
employment. In this light, one could brand this sector as one of forced As
per figures given in www.tn.gov.in 10 Monthly abstract of Statistics, Volume

57, No.7, July 2004, Central Statistical Organisation, GOI employment ,

where the retailer is pushed into it, purely because of the paucity of
opportunities in other sectors.
The Waiting Foreign Juggernaut:
The largest retailer in the world Wal-Mart has a turnover of $ 256 bn. and
is growing annually at an average of 12-13%. In 2004 its net profit was $
9,000 mn. It had 4806 stores employing 1.4 mn persons. Of these 1355
were outside the USA. The average size of a Wal-mart is 85,000 sq.ft and
the average turnover of a store was about $ 51 mn. The turnover per
employee averaged $ 175,000. In 2004 Wal-Mart had a 9% return on
assets and 21% return on equity.By contrast the average Indian retailer had
a turnover of Rs. 186,075. Only 4% of the 12 million retail outlets were
larger than 500 sq.ft in size. The total turnover of the unorganized retail
sector was Rs. 735,000 crores employing 39.5 mn persons. Let alone the
average Indian retailer in the unorganized sector, no Indian retailer in the
organised sector will be able to meet the onslaught from a firm such as
Wal-Mart when it comes. With its incredibly deep pockets Wal-Mart will
be able to sustain losses for many years till its immediate competition is
wiped out. This is a normal predatory strategy used by large players to
drive out small and dispersed competition. This entails job losses by the
millions.India has 35 towns each with a population over 1 million. If WalMart were to open an average Wal-Mart store in each of these cities and
they reached the average Wal-Mart performance per store we are looking
at a turnover of over Rs. 80,330 mn with only 10195 employees.
Extrapolating this with the average trend in India, it would mean displacing
about 4,32,000 persons.If large FDI driven retailers were to take 20% of the
retail trade, as the now somewhat hard-pressed Hindustan Lever Limited
anxiously anticipates, this would mean a turnover of Rs.800 billion on
todays basis. This would mean an employment of just 43,540 persons
displacing nearly eight million persons employed in the unorganized retail
sector. With possible implications of this magnitude, a great deal of
prudence should go into policymaking. Rather we seem to moving towards
a policy steamrolled obviously by vested interests acting in concert with the
CII &FICCI. We need to take a deep hard look at FDI in the retail sector. In
thi context we must be concerned about the statement the Finance
Minister, Mr.P. Chidambaram, made while making the mid year review for
2004-05. On retail, the review notes that creating an effective supply
chain from the producer to the consumer is critical for development of many

sectors, particularly processed and semi-processed agro-products. In this

context, it says, the role that could be played by organised retail chains,
including international ones merits careful attention.
The Question of Foreign Direct Investment (FDI) in Retail:
Given this backdrop, the recent clamour about opening up the retail sector
to Foreign Direct Investment (FDI) becomes a very sensitive issue, with
arguments to support both sides of the debate. It is widely acknowledged
12 Review hints at FDI in retail, pp 1-15, Times of India, 14 Dec.2004 that
FDI can have some positive results on the economy, triggering a series of
reactions that in the long run can lead to greater efficiency and
improvement of living standards, apart from greater integration into the
global economy. Supporters of FDI in retail trade talk of how ultimately the
consumer is benefited by both price reductions and improved selection,
brought about by the technology and know-how of foreign players in the
market. This in turn can lead to greater output and domestic consumption.
But the most important factor against FDI driven modern retailing is that
it is labour displacing to the extent that it can only expand by destroying the
traditional retail sector. Till such time we are in a position to create jobs on
a large scale in manufacturing, it would make eminent sense that any
policy that results in the elimination of jobs in the unorganised retail sector
should be kept on hold.Though most of the high decibel arguments in
favour of FDI in the retail sector are not without some merit, it is not fully
applicable to the retailing sector in India, or at least, not yet. This is
because the primary task of government in India is still to provide
livelihoods and not create so called efficiencies of scale by creating
redundancies. As per present regulations, noFDI is permitted in retail trade
in India. Allowing 49% or 26% FDI (which have been the proposed figures
till date) will have immediate and dire consequences. Entry of foreign
players now will most definitely disrupt the current balance of the economy,
will render millions of small retailers jobless by closing the small slit of
opportunity available to them. Imagine if Wal-Mart, the worlds biggest
retailer sets up operations in India at prime locations in the 35 large cities
and towns that house more than 1 million people13. The supermarket will
typically sell everything, from vegetables to the latest electronic gadgets, at
extremely low prices that will most likely undercut those in nearby local
stores selling similar goods. Wal-Mart would be more likely to source its
raw materials from abroad, and procure goods like vegetables and fruits
directly from farmers at preordained quantities and specifications. This

means a foreign company will buy big from India and abroad and be able to
sell low severely undercutting the small retailers. Once a monopoly
situation is created this will then turn into buying low and selling high. Such
re-orientation of sourcing of materials will completely disintegrate the
already established supply chain. In time, the neighbouring traditional
outlets are also likely to fold and perish, given the predatory pricing power
that a foreign player is able to exert. As Nick Robbins wrote in the context
of the East India Company, By controlling both ends of the chain, the
company could buy cheap and sell dear 14. The producers and traders at
the lowest level of operations will never find place in this sector, which
would now have demand mostly only for fluent English-speaking helpers.
Having been uprooted from their traditional form of business, these persons
are unlikely to be suitable for other areas of work either. It is easy to
visualise from the discussion above, how the entry of just one big retailer is
capable of destroying a whole local economy and send it hurtling down a
spiral. One must also not forget how countries like China, Malaysia and
Thailand, who opened their retail sector to FDI in the recent 13 Census
2001, Registrar of Census, GOI 14 Robbins, Nick, The Worlds First
Multinational. The New Statesman, (Dec. 13, 2004) past, have been
forced to enact new laws to check the prolific expansion of the new foreign
malls and hypermarkets15. Given their economies of scale and huge
resources, a big domestic retailer or any new foreign player will be able to
provide their merchandise at cheaper rates than a smaller retailer. But
stopping an Indian retailer from growing bigger is something current public
policy cannot do, whereas the State does have the prerogative in whether
foreign entry in the retail sector should be stalled or not. It is true that it is in
the consumers best interest to obtain his goods and services at the lowest
possible price. But this is a privilege for the individual consumer and it
cannot, in any circumstance, override the responsibility of any society to
provide economic security for its population. Clearly collective well-being
must take precedence over individual benefits.
Disturbing the Hornets Nest:
If you assume 40 mn adults in the retail sector, it would translate into
around 160 million dependents using a 1:4 dependency ratio. Opening the
retailing sector to FDI means dislocating millions from their occupation, and
pushing a lot of families under the poverty line. Plus, one must not forget
that the western concept of efficiency is maximizing output while minimizing
the number of workers involved which will only increase social tensions in
a poor and yet developing country like India, where tens of millions are still

seeking gainful employment. Vijay, Tarun, Debate: Should FDI Be

Allowed In Retail Branding?, The Financial Express, (Dec. 6, 2004) This
dislocated and unemployed horde has to be accommodated somewhere
else. But if you look at the growth rates of labour in manufacturing and
industry, you wonder where this new accommodation can be found?
Agriculture already employs nearly 60% of our total workforce, and is in
dire need of shedding excess baggage. That leaves us with manufacturing
as the only other alternative. With only 17% of our total workforce already
employed in industry, which contributes altogether only 21.7% of our GDP,
this sector can hardly absorb more without a major expansion. So far
Indian economy has been heavily geared towards the service sector that
contributes 56% of our GDP. The service sectors contribution to the
increase in GDP over the last 5 years has been 63.9%. Having a high
contribution from services is an attribute that is characteristic of developed
economies. What is anomalous in the Indian case is the fact that in other
fast developing economies, say China, manufacturing accounts for a
significant share of GDP, whereas in India, manufacturing contributes a
mere 23.1% of the GDP. It is evident that the manufacturing sector has
been the engine for economic growth in China, which has been growing at
10.1% since 199116. In India,the credit for its 5.9% growth over the
corresponding period goes mostly to the service sector. Ironically it would
seem that the Indian economy is getting a post-industrial profile without
having been industrialised! Retailing is not an activity that can boost GDP
by itself. It is only an intermediate value-adding process. If there arent any
goods being manufactured, then there will not be many goods to be
retailed! This underlines the importance of manufacturing in a developing
economy. One could argue that the alarmingly low contribution of industry
is attributable to the structural adjustments going on the sector, getting rid
of the flab and getting ready to compete, but that still cannot undermine the
seriousness of 16 Calculated from World Development Indicators 2003.the
issue at hand, in that only 6.215 million out of productive cohort of 600
million is employed in organised manufacturing.Only until the tardy growth
of the manufacturing sector is addressed properly and its productivity chart
starts to look prettier, could one begin thinking of dislocating some of the
retailing workforce into this space. Until that day, disturbing the hornets
nest would be one very painful experience for the economy.

1.

2.
3.

4.

5.

6.

7.

Recommendations:
The retail sector in India is severely constrained by limited availability of
bank finance. The Government and RBI need to evolve suitable lending
policies that will enable retailers in the organised and unorganised sectors
to expand and improve efficiencies. Policies that encourage unorganised
sector retailers to migrate to the organised sector by investing in space and
equipment should be encouraged.
A National Commission must be established to study the problems of the
retail sector and to evolve policies that will enable it to cope with FDI as
and when it comes.
The proposed National Commission should evolve a clear set of
conditionalities on giant foreign retailers on the procurement of farm
produce, domestically manufactured merchandise and imported goods.
These conditionalities must be aimed at encouraging the purchase of
goods in the domestic market, state the minimum space, size and specify
details like, construction and storage standards, the ratio of floor space to
parking space etc. Giant shopping centres must not add to our existing
urban snarl.
Entry of foreign players must be gradual and with social safeguards so
that the effects of the labour dislocation can be analysed & policy
finetuned.Initially allow them to set up supermarkets only in metros. Make
the costs of entry high and according to specific norms and regulations so
that the retailer cannot immediately indulge in predatory pricing.
In order to address the dislocation issue, it becomes imperative to develop
and improve the manufacturing sector in India. There has been a
substantial fall in employment by the manufacturing sector, to the extent of
4.06 lakhs over the period 1998 to 2001, while its contribution to the GDP
has grown at an average rate of only 3.7%17. If this sector is given due
attention, and allowed to take wings, then it could be a source of great
compensation to the displaced workforce from the retail industry.
The government must actively encourage setting up of co-operative
stores to procure and stock their consumer goods and commodities from
small producers. This will address the dual problem of limited promotion
and marketing ability, as well as market penetration for the retailer. The
government can also facilitate the setting up of warehousing units and cold
chains, thereby lowering the capital costs for the small retailers.
According to IndiaInfoline.com, agro products and food processing
sector in India is responsible for $69.4 billion out of the total $180
billion retail sector (these are 2001 figures). This is more than just a
sizeable portion of the pie and what makes it even more significant is the

1.
2.

3.
4.

5.

fact that in this segment, returns are likely to be much higher for any
retailer. Prices for perishable goods like vegetables, fruits, etc. are not fixed
(as opposed to, say, branded textiles) and therefore, this is where
economies of scale are likely to kick in and benefit the consumer in the 17
Calculated from Monthly abstract of Statistics, Volume 57, No.7, July 2004,
Central Statistical Organisation, GOI, GDP figures from India Observer
Statistical Handbook (2004). form of lower prices. But due attention must
be given to the producer too.Often the producer loses out, for example,
when the goods are procured at Rs.2 and ultimately sold to the consumer
at about Rs.15 as in the case of tomatoes now. The Government
themselves can tap into the opportunities of this segment, rather than
letting it be lost to foreign players. And by doing so, they can more directly
ensure the welfare of producers and the interest of the consumers.
8. Set up an Agricultural Perishable Produce Commission (APPC), to
ensure that procurement prices for perishable commodities are fair to
farmers and that they are not distorted with relation to market prices.
Recommendations for the Food Retail Sector: With 3.6 million shops
retailing food and employing 4% of total workforce and contributing 10.9%
to GDP18, the food-retailing segment presents a focused opportunity to the
Government to catalyze growth & employment.
Provision of training in handling, storing, transporting, grading, sorting,
maintaining hygiene standards, upkeep of refrigeration equipment, packing,
etc. is an area where ITIs and SISIs can play a proactive role.
Creation of infrastructure for retailing at mandis, community welfare
centers, government and private colonies with a thrust on easier logistics
and hygiene will enable greater employment and higher hygiene
consciousness, and faster turnaround of transport and higher rollover of
produce.18 Chengappa, P.G., Achoth, Lalith, Mukherjee, Arpita, Reddy,
B.M. Ramachandra, Ravi, P.C. Evolution of Food Retail Chains: The
Indian Context (Nov. 2003)
Quality regulation, certification & price administration bodies can be
created at district and lower levels for upgrading the technical and human
interface in the rural to urban supply chain.
Credit availability for retail traders must be encouraged with a view to
enhancing employment and higher utilization of fixed assets. This would
lead to less wastage (India has currently the highest wastage in the world)
of perishables, enhance nutritional status of producers and increase caloric
availability.
Several successful models of integrating very long food supply chains
in dairy, vegetable, fish and fruit have been evolved in India. These

one off interventions can be replicated in all states, segments and areas.
Cross integrations of these unique food supply chains will provide new
products in new markets increasing consumer choice, economic activity
and employment.
6. Government intervention in food retail segment is necessitated by:
a) The lack of any other body at remote/grassroots level.
b) Need to provide market for casual and distant selfemployed growers and gatherers.
c) Maintain regulatory standards in hygiene.
d) Seek markets in India and abroad (provide charter aircrafts, freeze frying,
vacuuming, dehydrating, packing facilities for small producers at nodal
points).
e) Provide scope and opportunity for productive self-employment (since
Govt. cant provide employment). At a subsequent stage, these
interventions can be integrated into the supply chains of the foreign
retailers in India and abroad, creating 20 synergy between national
priorities, market realities, globalization, and private-public cooperation. In
this fashion, the Government can try to ensure that the domestic and
foreign players are approximately on an equal footing and that the domestic
traders are not at an especial disadvantage. The small retailers must be
given ample opportunity to be able to provide more personalized service,
so that their higher costs are not duly nullified by the presence of big
supermarkets and hypermarkets.

CHAPTER 7
INDIAS POLICY ON FDI

Indias conscious shift in the early 1990s from an inward-looking

development strategy to a globalized market-based approach resulted in
significant changes in its foreign investment policy. Till the 1990s, the policy
was heavily restrictive with majority foreign equity permitted only in a
handful export-oriented, high technology industries. Outward-oriented
reforms radically changed such perceptions with foreign investment policy
becoming progressively liberal following steady withdrawal of external
capital controls and simplification of procedures. Enabling policies have
resulted in aggregate foreign investment into India increasing from US$103
million in 1990-91 to US$61.8 billion in 2007-2008.1 India is variously
identified as one of the most attractive long-term investment locations.2 It
can attract much larger foreign investments given its distinct virtues of large
domestic market, rising disposable incomes, developed financial
architecture and skilled human resources. But transforming the potential to
actual will depend significantly upon further liberalization of its foreign
investment policy. This paper outlines salient aspects of Indias foreign
investment policy and traces the evolution of the same. It follows up with a
critical evaluation of the policy from a political economy perspective.
Structurally the paper is divided into three sections with the first and second
dealing with features of the investment policy and its evolution and the third
attempting to outline the unfinished policy agenda and the constraints on
further liberalization from a political economy perspective. Amitendu Palit is
a visiting research fellow at the Institute of South Asian Studies (ISAS) at
the National University of Singapore (NUS). Comments and feedback on
the paper may kindly be sent to isasap@nus.edu.sg or
amitendu@gmail.com. The views expressed in the paper are entirely
personal to the author. Usual disclaimers apply.
1 Total of foreign direct investment and foreign portfolio investment.
Estimates obtained from the Handbook of Statistics on Indian Economy,
Reserve Bank of India (RBI), Table 159, p. 264. Available at:
http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/87541.pdf [Accessed on
June 5, 2009].
2 Observations from UNCTADs World Investment Report (2007) and
Foreign Direct Investment Confidence Index of A.T. Kearney. See Foreign
Direct Investment in
India: Policies and Procedures, Government of India, p. 6; available at:
A.Palit/Indias Foreign Investment Policy
Operational Features

Foreign investment comprises foreign direct investment (FDI) and foreign

portfolio investment (FPI). The two categories are conceptually distinct in
several respects. FDI represents a long-term vision and strategic
commitment of the investors to the recipient economy. In contrast, FPI is
intrinsically short-term aiming to maximize risk-return payoffs from capital
markets. While both FDI and FPI are reflected in capital structures of
resident enterprises as equity held by non-resident entities, FDI is
distinguished by the investors desire to hold a controlling stake in the
enterprise.3 In this respect, foreign investment policies of host economies
usually refer to FDI policies with operational procedures for portfolio
investment being functionally inclusive aspects of such policies. Indias
present policy framework for inward FDI was introduced by the Industrial
Policy Statement of July 24, 1991. The framework has subsequently
evolved and enlarged in line with reforms and structural developments in
the economy. The present policy allows foreign investors to invest in
resident entities through either the automatic route or the governmentadministered route. Most sectors and activities qualify for the automatic
route. This route allows investors to bring in funds without obtaining prior
permission from the Government, RBI, or any other regulatory agency.
However, invested enterprises are required to inform RBI within 30 days of
receipt of funds and also comply with documentation requirements within
30 days of issue of shares to foreign investors.4 Certain investment
intentions do not qualify under automatic route and require prior permission
from the government. There are also sectors/activities where despite being
eligible for automatic route, foreign investment is subject to other caveats.
A detailed http://www.dipp.nic.in/manual/FDI_Manual_Latset.pdf [Accessed
on June 2, 2009]. 3 Both IMF and OECD define FDI as investment for
obtaining a lasting interest by resident entity of one economy in an
enterprise that is resident in another economy.The lasting interest
symbolizes a desire to exert significant influence in managerial control of
the invested enterprise. The IMFs Balance of Payment Manual (1993, 5th
edition) defines a direct investor as one owning 10% or more of an
enterprises capital.' See Duce, M. and Espana, B. (2003), Definitions of
Foreign Direct Investment: A Methodological Note, July 31; See also
http://www.bis.org/ publ/cgfs22bde3.pdf [Accessed on June 19, 2009] 4
These apply to non-resident Indians (NRIs), Persons of Indian Origin
(PIOs) and Overseas Corporate Bodies (OCBs) as well.
A.Palit/Indias Foreign Investment Policy
illustration of these sectors and associated conditions is at Appendix 1.
Appendix 1 also indicates extant restrictions on degree of foreign

investment permitted in various sectors. Though almost all of

manufacturing is fully open to foreign investment, limitations on extent of
foreign ownership (measured by proportion of equity capital belonging to
non-resident entities) prevail in several services. Most of Indias agriculture
is closed to foreign investment, while it is prohibited in atomic energy,
lottery business, gambling & betting and retail trading (except single-brand
retailing). The present policy permits foreign investors to collaborate with
local partners as well as establish wholly owned subsidiaries (WOSs). Both
joint ventures and WOSs can be incorporated as resident enterprises under
the Indian Companies Act (1956). Foreign-owned enterprises can also be
unincorporated entities such as liaison/project/branch offices. Commercial
scopes of unincorporated entities, however, are narrower compared to their
incorporated counterparts.5 India does not restrict repatriation of
investments, dividends and profits. Non-resident investors can dispose
equity shares without prior government permission. They are also allowed
to purchase immovable property in India after acquiring permission for
doing business as incorporated/unincorporated entities.6 Such acquisition,
however, needs to be brought to the notice of the RBI within 90 days.
Furthermore, according to the Foreign Exchange Management Act (FEMA)
of 2000, acquired property cannot be transferred without permission of
RBI.7 Other than funding new ventures, foreign investors can acquire
stakes in existing resident companies. Equity transfer from residents to
non-residents in such instances of mergers and acquisitions (M&A) is
usually permitted under the automatic route. However, if the M&As are in
sectors and activities requiring prior government permission (Appendix 1)
then transfer can proceed only after such permission. The foreign
investment policy offers some additional benefits to expatriate Indian
investors (NRIs, PIOs and OCBs)8 including permission to invest more
than the prescribed foreign equity ceilings in specific sectors such as
domestic scheduled passenger airlines, ground handling and cargo
services where expatriates can invest up to 100 percent under the
automatic route as opposed to non-5 Liaison and project offices cannot
carry out exclusive commercial activities except for facilitating export-import
business, technical/financial collaborations and activities incidental to
projects. Branch offices, besides acting as buying/selling agents of parent
companies, can render consultancy services and research work. Source is
as cited in 3 above, p. 24-25. 6 Liaison offices cannot acquire immovable
property. 7 Refer Notification No. FEMA 21/2000-RB dated May 3, 2000. 8
Companies or other entities owned directly or indirectly to the extent of at
least 60 percent by NRIs. expatriate investment ceiling of 49 percent.9

Expatriate investors also enjoy more liberal facilities with respect to transfer
of immovable property acquired in India.Short-term portfolio investors,
primarily foreign institutional investors (FIIs)10, can invest in equity shares
and convertible debentures of resident enterprises. They, however, need to
register with the Securities and Exchange Board of India (SEBI) - Indias
capital market regulator. FIIs can split capital portfolios in 70:30 ratios
between equity and debt. Though they can transact on notified stock
exchanges without prior permission of RBI, individually, they cannot own
more than 10 percent equity in paid-up capitals of Indian enterprises, while
aggregate FII holding is capped at 24 percent. In this respect, the foreign
investment policy shows a clear preference for longer-term FDI, which is
allowed up to 100 percent in most areas, rather than short-term portfolio
flows. Small scale enterprises11 can attract FDI up to 24 percent of their
total capital. Higher levels of foreign equity require the enterprises to
surrender their small status. Small enterprises cannot remain small
even if non-small domestic investors pick up more than 24 percent of
their capitals. Foreign investors seeking more than 24 percent equity
holding in enterprises manufacturing items reserved for small industries
require prior government approval. Infusion of such equity also requires the
small enterprise to obtain an industrial license for continuing to produce
items reserved for small industries. Investing in Special Economic Zones
(SEZs) attracts a slew of incentives for foreign investors with such
investments exempt from practically all taxes, including those on export
profit, capital gains, dividend distribution as well as customs duties on
imported goods and local excise. In addition, investments in specific
segments of infrastructure such as roads, airports, seaports, inland
waterways,sanitation and sewage systems, solid waste management,
electricity generation, transmission & distribution and housing and hospital
development are eligible for full income-tax exemptions. India has double
tax avoidance agreement (DTAA) with 69 countries enabling foreign
investors to choose their preferred taxation turfs.
9 Press Note 7 (2008), Department of Industrial Promotion and Policy
(DIPP),Government of India. Available at: http://siadipp.nic.in/policy/
changes.htm [Accessed on June 3, 2009].10 FIIs include asset
management companies (AMCs), pension and mutual funds,investment
trusts, endowment foundations, university funds, charitable trusts and
societies. Further details on portfolio investment scheme are available at
source cited in 3 above, p. 32-33.11 An enterprise whose investment in
plant and machinery does not exceed Rs 10 million.

7.1Gradual Evolution
Indias approach to foreign investment during the 1950s and 1960s was
cautiously pragmatic. It was ensured that ownership and enterprise control
remained primarily with resident investors. Within such limitations, foreign
investment was sought to be utilized in a manner beneficial for the
economy. The official position on foreign investment was articulated in a
statement12 made to the Constituent Assembly on April 6, 1949, by
Jawaharlal Nehru. Foreign capital was recognized as an important
supplement to domestic savings for facilitating national economic and
technological progress. Foreign investors were allowed full freedom of
repatriation with the assurance of compensation in the unforeseen event of
nationalization. Foreign investment proposals, however, were sanctioned
only after careful scrutiny necessitated by Indias fragile balance of
payments (BOP) and scarce foreign exchange reserves. Authorities did not
wish to aggravate BOP difficulties given the unconditional assurance of
repatriation and foreign investment therefore was channelized mostly into
essential industries. The tight monitoring ensured that there was hardly
much FDI in the economy (except in the oil sector) till the middle of the
1950s. The situation changed from Indias 2nd Five-Year Plan (1956- 1961)
that awarded high priority to rapid industrialization. The Industrial Policy
Resolution (IPR) of 1956 emphasized on increasing technological
capabilities of indigenous industry for producing highquality capital,
intermediate and consumer goods. The thrust on technological self-reliance
increased the importance of FDI with the latter expected to be a key
conduit for transfer of advanced technology. At the same time, while foreign
exchange difficulties had earlier forced rationing of FDI, aggravation of the
same difficulties increased its acceptance13, as it was realized that foreign
exchange resources were inadequate for importing large-scale machinery
and equipment for domestic industry. Foreign investment began to be12
See IIC (1965), India Welcomes Foreign Investment by India Investment
Centre 13 Kidron, M. (1965), Foreign Investments in India, Oxford
University Press (OUP),London.encouraged with fiscal incentives14 during
the late 1950s and 1960s with foreign capital also allowed in industries
reserved exclusively for the public sector.15 The 1970s kicked off an
inward-looking phase that led to foreign investment getting heavily
regulated. The scope of foreign investment was not only confined to
industries requiring sophisticated technology, but was accompanied by a
deliberate attempt to divert FDI from consumer goods to capital and

intermediate goods.16 Restricting FDI was a part of efforts aiming to

extend state control in various sectors of the economy and was consistent
with promulgation of restrictive legislations such as Monopolies and
Restrictive Trade Practices (MRTP) Act (1969), the Patent Act (1970) and
allied measures such as nationalization of banks, insurance companies and
coal mines.The Industrial Policy Resolution (IPR) of 1973 limited foreign
participation to export-oriented industries that were strategically important
for long term growth prospects of the country. The most restrictive controls
were enforced through the Foreign Exchange Regulation Act (FERA) of
1973. FERA consciously discriminated between domestic and foreign
investors making it mandatory for branches and subsidiaries of foreign
firms to convert foreign equities to minority holdings.17 There were,
however, some exceptions such as predominantly export-oriented firms, or
those producing items requiring sophisticated technology. But even these
firms had to fulfill export obligations by exporting certain minimum parts of
their annual turnovers. The Industrial Policy Resolution (IPR) of 1977
further indicated industries where no foreign collaboration (financial or
technical) was considered necessary. Foreign companies, which had
already diluted foreign ownership to 40 percent or less in line with the
FERA, were assured treatment on par with their Indian counterparts.
However, despite imposition of such sweeping controls, it is noteworthy that
no restrictions were imposed on remittance of profits, royalties, dividends
and repatriation of capital. The year 1991 marked a key transition in Indias
foreign investment policy. The transformation was induced by the
governments decision to encourage stable non-debt creating long- 14
These included concessional rates of dividend tax for foreign investors and
lowering of taxes on technical service fees and income from royalties. 15
Phillips Petroleum of USA had a minority stake in Cochin Refinery Ltd. a
public sector undertaking. The International Telephone and Telegraphs
Corporation of the US also collaborated with the Government in a similar
manner for manufacturing telephone equipment. See IIC (1965), p. 9. 16
Martinussen, J. (1998), Transnational Corporations in a Developing
Country: The Indian Experience, New Delhi, Sage. 17 Section 29 of FERA
dealt with branches of foreign companies in India and Indian joint stock
companies having foreign participation. The FERA stipulated: 1. Branches
of foreign companies were to convert to Indian companies with minimum
60% equity participation. 2. Subsidiaries of foreign companies were to
reduce foreign equity to 40% or less. term capital flows as a major source
of funds for supplementing domestic savings. This was a significant
departure from the overt reliance on debt-creating flows during the 1970s

and 1980s. Such reliance was instrumental in creating structural

imbalances in the economy that manifested in a serious balance of
payments crisis in 1991. The crisis precipitated a paradigmatic shift in the
policy perspective on future development of the country resulting in reforms
aiming to move away from a rigidly controlled, inward-looking,
statedominated economic framework to a decontrolled, outward-oriented
and market-friendly system. The positive outlook towards FDI was a key
part of this shift. The foreign investment policy for a reforming Indian
economy was articulated in the new industrial policy announced on July 24,
1991. The latter differed significantly different from its predecessors in its
emphasis on private entrepreneurship. Entry barriers to private participation
in different industries were sought to be removed by reducing the scope of
industrial licensing, restricting the public sector to areas of vital national
importance, and withdrawing several prohibitions under the MRTP Act of
1969, which constrained expansion of industrial investment. The industrial
policy allowed foreign investment in thirty five high-priority industries while
removing several procedural controls on inflow of FDI.18 The policy
introduced the automatic route for FDI. Sectors opened to FDI included
almost the entire gamut of machineries (e.g. rubber, printing, electrical,
industrial and agricultural), processed food, oil extraction, cement,
metallurgical industries, chemical, ceramics, paper, fibres, pharmaceuticals,
fertilizers, automobiles & auto components, electrical equipment,hotels &
tourism and software.19 The thrust was clearly on attracting foreign capital
and technology in large segments of manufacturing with FDI in services
remaining restricted to tourism and software.Easy entry of foreign capital in
notified industries was accompanied by some limiting restrictions. Foreign
ownership was capped at a maximum of 51 percent of enterprise capital.
Automatic approval was contingent upon the proposed foreign equity
covering the foreign exchange requirement for imported capital goods. 18
Statement on Industrial Policy', July 24, 1991, paragraph 1.25 as
reproduced in Handbook of Industrial Policy and Statistics (2006-2007),
Office of Economic Adviser, Ministry of Commerce and Industry,
Government
of
India;
p.
6;
available
at:
http://eaindustry.nic.in/2008_handout.htm [Accessed on June 2, 2009].
19 Press Note No. 10 (1992 series), DIPP, Government of India; pp. 60-81;
Available at: http://siadipp.nic.in/policy/changes.htm [Accessed on June 2,
2009]. A.Palit/Indias Foreign Investment Policy
Furthermore, companies receiving automatic approval for FDI up to 51
percent were required to balance their dividend payments by export
earnings over a period of seven years.20 Entry of foreign investment was

streamlined in two distinct channels. Apart from the automatic route, an

empowered Board was set up for negotiating with investors and approving
investments in select areas. This board the Foreign Investment Promotion
Board (FIPB) administers the government channel of foreign
investments.21 Subsequent developments in FDI policy have focused on
altering the scale and scope of foreign investment between these two
routes. Since 1991, FDI policies and procedures have been progressively
relaxed at different points in time. A major policy revamp occurred in
February 2000. The automatic route was significantly expanded to make
FDI in all items/activities eligible for the route except a well-defined
negative list. The latter included industries requiring licenses under the
Industries (Development and Regulation) Act of 1951 and in terms of
locational policy requirements of the Industrial Policy of 1991, proposals
involving FDI higher than 24 percent of equity in small-scale enterprises,
instances where foreign collaborator had previous venture/tie-up in India,
cases relating to acquisition of shares in resident Indian companies in favor
of foreign/NRI/OCB investors and all proposals falling outside notified
sectoral policy/caps relating to the automatic route, or in sectors where FDI
was not permitted. The negative list proposals were to be examined by
FIPB. Liberalization of FDI policies has been a part of reforms aiming to
remove controls on industrial output. A key reform in this regard has been
reduction of the scope of the public sector. Indias industrialization during
the first four decades of its planned development was led by the public
sector. Public enterprises dominated the basic and heavy segments of
manufacturing (e.g. steel, cement and coal). While consumer goods and
intermediates had sizeable presence of small and medium private
enterprises, key services (e.g. electricity, telecommunication, road
transport, aviation,shipping, banking, insurance) were monopolized by state
agencies. Effective entry of foreign investors in the Indian economy was
inconceivable till the scope of the public sector was reduced and private
enterprise allowed to fill up the vacuum. The Industrial Policy of 1991
limited public sector monopoly to only eight activities while 20 Source is as
cited in 18 above; pp. 15-16. 21 The FIPB is located in the Department of
Economic Affairs, Ministry of Finance.The Board includes Secretaries of the
Department of Economic Affairs, Department of Industrial Policy &
Promotion, Department of Commerce, Department of Economic Relations,
Ministry of External Affairs and Ministry of Overseas Affairs. The Board is
chaired by the Secretary, Department of Economic Affairs. Source is as in 3
above; freeing up the rest. 22 Subsequently state monopoly has
beencramped to only sectors of strategic importance such as atomic

energy. Private initiative and foreign investment has been allowed in most
of the erstwhile domain of the public sector including sensitive segments
such as defense, insurance, petroleum & natural gas.Industrial licenses
were widely perceived as critical entry barriers for private enterprise. It was
evident that mere opening up of the economy to foreign investment was
unlikely to see such investment materializing unless entry barriers were
removed. Thus while limiting the public sector increased potential for
competition, withdrawal of licenses facilitated competition. The Industrial
Policy of 1991 confined mandatory licensing to 18 manufacturing
industries. These included minerals and natural resource-based
products,chemicals, alcoholic beverages, tobacco and consumer durables.
23Licensing continued even in some high-priority industries made eligible
for FDI up to 51 percent through automatic route (e.g.pharmaceuticals and
automobiles). These were, however, freed soon after. While automobiles
were de-licensed in April 1993, most bulk drugs and formulations were
freed from licensing in 1994.24 The measures have yielded dividends with
leading global automobile assemblers (e.g. Benz, Honda, Hyundai, Toyota)
setting up production facilities in India and the pharmaceutical &
biotechnology industries witnessing entry of major global players such as
GlaxoSmithKline, Eli Lily, Monsanto and Wockhardt. Progressive delicensing has resulted in licensing now being confined to five activities:
alcoholic beverages, electronic aerospace and defense equipment,
cigarettes & tobacco, industrial explosives and hazardous chemicals.25
FDI is permitted in these industries, though proposals for manufacture of
cigarettes and defense equipment require clearance from the FIPB, while
the remaining is eligible for the automatic route. The industrial policy of
1991 justified entry of foreign investment by citing the intrinsic virtues of
FDI such as advanced technology, proven managerial expertise and
modern marketing 22 These areas were arms & ammunition, atomic
energy, coal and lignite, mineral oils, mining of iron and manganese, mining
of copper, lead, zinc and tin, minerals specified in the Schedule to Atomic
Energy and railway transport.23 Coal & lignite, petroleum, alcoholic drinks,
animal fats & oils, sugar, cigarettes & tobacco, asbestos, plywood and
other wood-based products, raw hides & skins & leather, tanned and
dressed fur skins, motor cars, paper and newsprint, electronic aerospace
and defense equipment, industrial explosives, hazardous chemicals, drugs
& pharmaceuticals, Entertainment electronics (e.g. television, tape
recorders), white goods (refrigerators, washing machines, microwave
ovens, air conditioners etc). See Annex II, Press Note No. 9 (1991 series),

DIPP,
Government
of
India,
available
at:
http://siadipp.nic.in/policy/changes.htm [Accessed on June 3, 2009].
24 Press Note No. 5 (1996) series, DIPP, Government of India; Source as
in 23 above. 25 Source is as cited in 3 above, p. 14. techniques.26 New
export possibilities were also underlined as one of the likely spin-offs from
such investment. It was therefore natural that FDI be initially allowed only in
sectors where advanced technology and other attributes could make a
significant difference to industrial capacities and competitiveness, both in
domestic and overseas markets. More industries have been subsequently
opened to FDI. Almost the entire sweep of manufacturing ranging from
basic and capital goods to intermediates and consumer durables are now
open to foreign investment. But the across-the-board opening up in
manufacturing has not been accompanied by similar moves in services and
agriculture. Over time Indias foreign investment policy has steadily
enlarged the scope of foreign ownership in resident enterprises. The 1991
policy made a rather cautious beginning in this respect, which was fully in
sync with the calibrated approach characterizing Indias economic reforms.
With FDI ceiling frozen at 51 percent, foreign investors, while aspiring to
become majority stakeholders, had to still have local partners and could not
establish WOSs. Foreign equity remained capped at 51 percent for quite a
few years and it was only in January 1997 that nine industries were allowed
to increase FDI to 74 percent27 under the automatic route. The bulk of the
expanded list comprised services including mining, electricity generation
and transmission, non-conventional energy generation and distribution,
construction, land transport, water transport, storage and warehousing.
Only two industries basic metals & alloys and other manufacturing
industries were manufacturing. In a significant move, 100 percent foreign
ownership under automatic route was allowed in electricity generation,
transmission, and distribution in June 1998. However, the projects were
capped at a maximum of Rs 15 billion (approximately US$300 million
@1USD=Rs 50). Within less than a year in January 1999, projects for
construction and maintenance of roads, highways, vehicular bridges, toll
roads, vehicular tunnels, ports and harbours were permitted 100 percent
FDI under automatic route subject to same limitations on size.28
Permission of full foreign ownership underlined the urgency of inviting
funds in Indias infrastructure. Since then, almost all manufacturing
activities and several services have been allowed to access 100 percent
FDI under automatic route. The gradual ease of entry enabled to foreign
investors through the automatic route marks another key reform in Indias
foreign investment policy. The automatic route is a simpler route than the

government-administered (FIPB) process 26 Source is as cited in 18

above, p. 11. 27 Press Note No. 2 (1997 series), DIPP, Government of
India; Source is as cited in 23 above. 28 Press Note No. 1 (1999 series),
DIPP, Government of India. Source is as cited in 23 above. acquiring prior
permission before the investor can bring in funds, there are more
procedures involved entailing greater transaction costs. For almost a
decade, however, the scope of the automatic route remained relatively
restricted. It is interesting to note that though bulk drugs figured in
Annexure III of the industrial policy of 1991, which specified industries
eligible for FDI under automatic route, investment proposals in drugs
continued to be guided by restrictive provisions of the Drug Policy of 1986.
It was only in October 1994 that FDI in bulk drugs, intermediates and
formulations were granted automatic approval.29 The coverage of the
automatic route remained restricted till January 1997, when thirteen new
industries were permitted FDI up to 51 percent under automatic route.30
Ease of entry for foreign investors were greatly expanded in February
200031 with FDI in all industries channelized to the automatic route barring
activities attracting provisions of the Negative List mentioned earlier. The
scopes of the Negative List and intervention by FIPB have narrowed over
time. Much of the contraction has come from increases in FDI limits for
automatic route as well as wider structural facilitations. A key step in this
respect has been simplification of rules relating to foreign investment in
instances where the investor had a previous tie-up with a local partner.
Foreign investors with previous tie-ups were required to justify why the new
venture will not be injurious to the existing collaboration.32 The current
rules specify the onus of justification on both the foreign investor as well as
the local partner. All proposals of this nature now qualify under the
automatic route unless the proposed venture is exactly in the same field.
33 The FIPB is also no longer required to decide on proposals pertaining to
transfer and acquisition of resident shares by nonresidents with the process
now being delegated to the automatic route. 34 Indeed, except for
segments where FDI has equity caps (Appendix 1) and the narrowly
defined premise of new ventures in 29 Press Note No. 4 (1994 series),
DIPP, Government of India. Source is as cited in 23 above. 30 Same as in
27 above. 31 Press Note No. 2 (2000 series), DIPP, Government of India.
Source is as cited in 23 above. 32 Press Note no. 18 (1998 series); DIPP,
Government of India. Source is as cited in 23 above. 33 Press note no. 1
(2005 series); DIPP, Government of India. Source is as mentioned in 19
above.34 Press note No. 4 (2006 series); DIPP, Government of India.
Source is as mentioned in 23 above. However, FIPBs approval is required

for transfer of shares in sectors where FDI is not permitted up to 100%

under automatic route (Appendix 1). For all these industries, FIPB approval
is required in instances where an Indian company is being incorporated
with foreign funds and such a company is either owned/controlled by nonresident entities, or where ownership/control of Indian companies resting
with resident Indian entities is being transferred to non-resident entities on
account of merger, amalgamation or acquisition. Press Note No. 3 (2009
series), DIPP, Government of India. Source again is as in 23 above. fields
where investors have existing collaborations, the FIPBs role is confined to
cases where investment proposals involve more than 24 percent equity in
small enterprises.
The Unfinished Agenda
Indias present foreign investment policy facilitates easy entry of foreign
capital in most areas subject to specific limits on extent of foreign
ownership. Entry options have not only become procedurally simpler, but
prospects for higher yields from investment have also become brighter with
withdrawal of restrictive provisions such as balancing dividend payouts by
exports. In hindsight, the balance of payments crisis in 1991 left little option
for India other than adopting an accommodating policy towards foreign
investment. The crisis was largely a result of the economys heavy reliance
on high-cost external debt for financing balance of payments deficits. While
hefty inflows of concessional assistance covered these deficits during the
1950s, 1960s, and 1970s, non concessional loans on market terms were
the main sources of finance during the 1980s leading to sharp increase in
debt-service obligations.35 The imperative for the economy was to urgently
reduce reliance on debt flows in favour of stable, non-debt capital like FDI.
The importance of foreign investment in revitalizing the economy also fitted
well with the spirit of market-oriented economic restructuring initiated from
early 1990s. A liberal foreign investment policy was consistent with
simultaneous measures aiming for greater integration with the world
economy: removal of import restrictions, introduction of a market-based
exchange rate management system, convertibility of the Indian Rupee in
the current account of the balance of payments, phased withdrawal of
restrictions on capital account transactions and replacement of FERA
(1973) by the Foreign Exchange Management Act (FEMA) of 2000.36
Though FDI inflows have responded positively to policy changes by
increasing from US$ 97 million in 1990-1991 to US$ 32.4 billion in 20072008, they might have been much more had foreign investment not been

regulated in some key areas. Activities promising high returns on

investment yet being of a strategic nature
35 Jalan, B. (1992), Introduction, in Jalan, B. (ed.), The Indian Economy:
Problems and Prospects, New Delhi, Viking. 36 FEMA (2000) has replaced
FERA (1973) from June 1, 2000. Under FEMA (2000), there are no restrictions
on current account transactions involving foreign exchange. Capital account
transactions (e.g. investment by non-resident entities in India and investment
by Indian entities abroad) continue to be regulated by the RBI. FEMA
indicates a move away from a regulatory arrangement in the Indian foreign
exchange market to a management mechanism.
A.Palit/Indias Foreign Investment Policy
(e.g. telecommunications, defense production, broadcasting, print media
and satellite operations) have limitations on foreign ownership and require
government sanctions. Such concerns, however, should not apply to
agriculture. Nonetheless foreign investment can only be in a few valueadditive agricultural activities like aquaculture, floriculture, pisciculture,
horticulture, development of seeds, animal husbandry and cultivation of
vegetables and mushrooms. While these are eligible for 100 percent FDI
under automatic route, investment in tea plantations is regulated by the
FIPB and is subject to the restrictive condition of divestment of equity in
favour of local partners (Appendix 1). Closed policies for FDI in agriculture
can partly be explained on account of the latter figuring primarily in
administrative domains of states. Article 246 in the Seventh Schedule of the
Indian Constitution divides responsibilities between the central government
(Union List), state governments (State List) and jointly between centre and
states (Concurrent List). This vests agriculture, water, and land with
states37 enabling state governments to frame their own policies in these
subjects. On the other hand, external trade & commerce and industries rest
with the central government. The Constitutional separation of
responsibilities implies that framing an overarching foreign investment
policy in agriculture requires close coordination between individual states,
as well as between the centre and states.Such coordination is difficult to
achieve in a large and complex federal administrative set-up like Indias. In
addition, foreign investment in key agricultural activities such as
procurement is not possible unless individual states reform their marketing
and procurement policies.The fate of foreign investment in Indias
agriculture will depend upon political management of domestic sensitivities.
Several segments of Indias agriculture remain protected from imports. This
inward-looking attitude seems to have influenced the outlook towards
foreign investment as well. Potential welfare gains (or losses) associated

with greater market access to imports in a sector providing livelihood to

around two-third of the countrys population (despite contributing only 17
percent of national output) is debatable. Nonetheless, resistance to market
access and antipathy to foreign investment has overlooked the positive
difference which such investment can make to agricultural productivity and
infrastructure. But given the political sensitivity associated with impacts of
economic policies on farming livelihoods, a circumspect approach to
foreign goods and capital looks set to prevail in the foreseeable future.
Service reforms have progressed far slowly than those in manufacturing.
Public services in India were state monopolies for decades. Even now, rail
transport, electricity generation, airports . 37 Seventh Schedule (Article
246)
of
the
Constitution
of
India,
available
at:
http://indiacode.nic.in/coiweb/fullact1.asp?tfnm=00%2051
seaports,
banking and insurance have overarching state presence. Opening up most
services to foreign investment had to be preceded by domestic reforms
enabling private entry and competition. Such reforms took considerable
time in sectors like electricity and telecommunication due to efforts
requiring establishment of independent regulators for creating appropriate
incentive structures for private investment. With the exception of
telecommunications, regulatory frameworks for most public services are
still trying to come to terms with the complex challenges arising from
nascent growth of competition in historically controlled territories. Decisions
relating to removal of industrial licenses and entry of foreign investment in
manufacturing could be taken relatively easily since both figured under the
operational purview of the DIPP in the Ministry of Industry. However, foreign
investment decisions in services entailed extensive consultations between
DIPP and individual ministries in charge of specific services adding to
delays in arriving at decisions. Though the DIPP notifies policies on foreign
investment in services, investment guidelines are usually accompanied by
specifications issued by nodal ministries. FDI in power and airports, for
example, despite being allowed up to 100 percent under automatic route is
subject to provisions of the Electricity Act of 2003 and departmental
regulations of the Ministry of Civil Aviation respectively.Slow progress in
domestic reforms in competition and regulation has resulted in FDI
remaining restrictive in several services. These include domestic
passenger airlines, FM radio and cable network services, publishing of
newspapers and retail trading (except single brand)38. However, in
services such as telecommunication and the internet, mining, road
transport, electricity and non-passenger aviation services, FDI policies are
more liberal (Appendix 1). Energy, road transport and mining were among

the earliest to be opened up to foreign investment on account of pressing

investment needs for augmenting capacities. Within financial services, liberal
policies for non-banking services are accompanied by relatively restrictive
regulations in insurance and banking. Indias foreign investment regime has
experienced a gradual pace of liberalization in line with the caution and
calibration characterizing Indias economic reforms. The latter have never
been overly aggressive. Measures to decontrol and introduce competition
have usually been accompanied by conditions aiming to temper the initial
intensity of such competition. The earliest efforts to invite foreign capital in
July 1991 were accompanied by the dividend balancing condition. The
condition of foreign equity covering foreign exchange requirements for import
of capital goods applicable to automatic approvals for 51 percent FDI in
high-priority industries was withdrawn much later. Similar moves in the later
years pertain to 38 NRIs can invest up to 100 percent in scheduled domestic
passenger airlines. limitation on project sizes in electricity and road transport
despite allowing 100 percent FDI and minimum capitalization norms for
nonbanking financial companies (NBFCs). The caveats reflect caution arising
from concerns over maintaining stable levels of foreign exchange reserves as
well as avoiding marginalization of domestic producers in different segments.
Calibrated policy moves have been aimed at assuaging political opposition as
well. Introduction of economic reforms generated intense debates in an
economy accustomed to decades of controls and planned development.
Controls had produced pressure lobbies enjoying political patronage and
influence. Opposition to reforms were spearheaded by these segments, which
included domestic producers benefitting from high import tariffs and entry
barriers like industrial licensing. Indeed, early moves to open up
manufacturing to FDI evoked a chorus of protests from many of Indias
leading industrialists popularly christened the Bombay Club demanding
a level playing field between domestic and foreign investors.39 In the years
that followed, there were attempts to exploit the emotive

imperial aspect of foreign investment by highlighting its allegedly adverse

effects on indigenous producers and industries. Agitations against foreign
investment with pronounced nationalistic hues and arguing for
discrimination between domestic and foreign investors were led by
organisations like the Swadeshi Jagaran Manch (SJM). The SJM was born
in the early 1990s in response to Indias efforts to globalize and is
dedicated to fighting economic imperialism for protecting indigenous
industries. On the other hand, the Left parties (e.g. Communist Party of
India (CPI) and the Communist Party of India (Marxist) (CPI-M) have been

equally hostile to foreign investment. Their opposition stems from antipathy

to private investment per se and is an extension of the infant industry
argument defending import-substitution and protectionist policies. Political
opposition to FDI has had a symbiotic association with interest groups with
each trying to support the other on common grounds. In telecom and
finance, stakeholders earning rents from monopolistic virtues could hardly
be expected to support competition, private entry and foreign investment.
These specifically include employee federations affiliated to mainstream
political parties and representing interests of Indias over-protected
organized sector workers.40 Such groups are still active and resistant
explaining why 39 See a) Boquerat, G. (2003), Swadeshi in the Throes of
Liberalization, in Landy, F.and Chaudhuri, B.(eds.), Examining the Spatial
Dimension: Globalization and Local Development in India, New Delhi,
Manohar Publications and b) Thakore, D (1998), Congress More Likely to
Sustain Liberalization, Business Commentary, February 26, available at:
http://www.rediff.com/money/1998/feb/ 26dilip.htm [Accessed on June 17,
2009].40 Indias labor market is characterized by dualism where stringent
labour laws on exit in the formal organized sector co-exist with minimum
regulations protecting Indias insurance sector which allowed maximum
foreign ownership of 26 percent way back in October 2000 has not
experienced any further increase in scope of such ownership after almost
nine years and two different governments. The role of politically motivated
pressure lobbies in restricting FDI is best understood from the virulent
opposition to foreign entry in retail trade. A modern, efficient and
technologically advanced organized retail industry has never been
welcomed by Indias huge unorganized retail trade. Such opposition has
enjoyed covert political support given the significance of the 13 million
strong small unorganized retailers as a political constituency. In this respect
the run-up to the latest Parliamentary elections held during April- May 2009
witnessed an interesting political consensus. Despite being at opposite
extremes of the ideological spectrum, election manifestos of the right-wing
Bharatiya Janata Party (BJP) and the Left parties were common in resisting
foreign entry in retail.41 The rather paradoxical similarity in agendas was
clearly on account of both viewing unorganized retail as a core
constituency and advocating protectionist policies for safeguarding
economic interests of small retailers.The success of the Congress-led
coalition at the elections is unlikely to change the prospects of foreign
capital in retail since political opposition continues to remain significant
within the legislature. A Parliament Committee has recently opined that
foreign retail firms are likely to inflict significant welfare losses by creating

large-scale unemployment through predatory pricing policies.42 Though

this has not stopped Wal-Mart from commencing India operations,43 any
precipitate move to encourage further foreign entry in retail appears remote
at this juncture. This is in spite of the latest employee interests in the
unorganized sector. See Kumar, Palit and Singh (2007), Sustainability of
Economic Growth in India, Working Paper No. 25, Centre for International
Governance
Innovation
(CIGI),
May,
available
at:http://www.cigionline.org/sites/default/files/Paper%2025
_India.pdf [Accessed on June 21, 2009]. 41 Party manifestos seek to axe
FDI in retail, Business Line, April 21, 2009, available at:
http://www.thehindubusinessline.com/2009/04/21/storie s /
2009042151381500.htm [Accessed on June 16, 2009]. 42 House Panel
Applies Brakes on FDI in retail, The Times of India, June 9, 2009, available
at: http://timesofindia.indiatimes.com/articleshow/ msid-4632751,prtpage1.cms [Accessed on June 16, 2009]. 43 Wal-Mart and Bharti Group opened
their first cash and carry store in the city of Amritsar in Punjab on May 30,
2009. Story available at: http://www.bloomberg.com/apps/news?
pid=20601205&sid=a5IJ nEEOESTo [Accessed on June 21, 2009]. prebudget Economic Survey of the Ministry of Finance making a strong pitch
for FDI in multi-format retail, particularly in distribution of food items.44
Influential groups also continue to block entry of foreign capital in
broadcasting, print media and aviation. In these areas, as well as in
education, legal and accountancy services, which till now have almost
entirely inward-looking foreign investment policies, complexities involved in
multilateral trade negotiations have also, influenced investment policies.
Restrictions on foreign entry in these sectors have been partly due to
Indias unwillingness to offer deeper commitments in services negotiations
on account of lukewarm responses to its own demands for enhanced
market access elsewhere. Reluctance to offer deeper market access
commitments, however, has often been influenced by domestic
protectionist pressures. Fortunately, Indias foreign investment policy has
progressed in spite of political opposition and lobbyist pressures. This is
primarily due to favorable dispositions of key decision-makers towards
foreign investment. In more recent times, however, political resistance is
turning out to be more successful in blocking reforms than in the past. This
could be due to the complex nature of the turfs where foreign capital still
has limited access. Agriculture, education, retail, media etc are sectors
where policy consensus between centres and states a difficult mission to
accomplish in the first place needs to be followed by effective
coordination between central and state

agencies. Reforms in many of these segments entail involvement of state

legislatures as well. Matters are not helped by management compulsions of
coalition politics, where minority partners hold considerable sway and can
stall decisions on reforms and foreign investment. 44 Economic Survey
2008-2009;
Box
2.6;
p.
32,
available
at:
http://www.indiabudget.nic.in/es2008-09/chapt2009/ chap24.pdf [Accessed
on July 2, 2009].
Conclusion
While India has an overall market-friendly and liberal policy towards foreign
investment, foreign capital still does not enjoy equally porous access in all
parts of the economy. Fairly unhindered access to manufacturing is
accompanied by conspicuous lack of access in certain services and
agriculture. Indias future foreign investment policy faces the critical
challenge of increasing access of foreign capital to these segments for
enhancing inward FDI. The existing pattern of inward FDI into India does
point to the possibility of substantive increase in investment following
further liberalization. FDI inflows in India have been concentrating mostly in
services. Financial and non-financial services, computer software,
telecommunications, housing and construction have been the top drawers
of FDI during April 2000 March 2009.45 The servicesorientation of inward
FDI vindicates arguments for greater liberalization of foreign investment
policies in services. Despite being relatively more restricted than
manufacturing, Indias services are drawing significant FDI due to
undisputed virtues of large domestic market and skilled human resources.
Manufacturing is unable to do so in spite of more liberal entry rules
primarily on account of persistence of high transaction costs arising from
poor infrastructure, inflexible labor policies in the formal sector and opaque
land markets. Structural changes within the economy also point to a larger
role of foreign investment in some sectors. Insurance is a key area in this
respect. Rising life expectancy and greater healthcare costs have
increased demand for a variety of life and non-life, equity marketlinked
insurance products. Global insurance majors with a diverse product
portfolio can make a major difference in this regard.46 Indias aviation
industry, particularly the low-cost segment, can benefit from foreign funds
and managerial expertise at a time when it is struggling to recover from
financial difficulties. Indias agriculture, on the other hand, is in dire need of
investments for enhancing productivity and 45 Fact Sheet on Foreign
Investment; May 28, 2009; DIPP, Government of India; p. 2, available at:

http://www.dipp.nic.in/fdi_statistics/india_FDI_ March2009.pdf [Accessed

on June 5, 2009]. 46 The Economic Survey 2008-2009 argues for 100
percent foreign equity in special insurance companies providing all
insurance products to rural residents and in agriculture-related activities.
Otherwise, it favors increasing FDI cap to 49 percent in insurance. Source
is as in 45 earlier. improving infrastructure, particularly in storage,
conservation and transmission of farm produce. Foreign investment again
can play a critically important role in augmenting capacities. India has been
able to provide an enabling environment to foreign investors in several
respects. Deep reforms in capital markets aided by an efficient regulatory
architecture have facilitated portfolio investments. Transfer and acquisition
of shares are taking place according to investor-friendly guidelines. Foreign
exchange regulations have been aligned to global standards courtesy
FEMA. But these facilitations need to be matched by a more open foreign
investment policy for increasing FDI inflows to a level higher than their
current share of only 3 percent of Indias GDP. A more open policy calls for
committed political consensus on foreign investment. Such an accord has
proved elusive so far. However, given that Indias reforms have been
irreversible notwithstanding political discord, hopes of further reforms in
foreign investment are not entirely farfetched

CHAPTER 8
CASES ON FDI IN INDIAN
RETAIL SECTOR

8.1Foreign Retailers Regroup in India

THE WALL STREET JOURNAL
The potential of the booming Indian market is captivating to the worlds
biggest store chains, which long to make it a linchpin of their growth
strategies. Now, with the Indian government backtracking from retail
liberalization, retailers like Wal-Mart Stores Inc. and Tesco PLC are
retooling their plans.The political backlash against foreign retailers was a
major setback for Wal-Mart, which for years lobbied Indian officials to
change the rules, arguing that allowing international retailers to run their
own stores in the country would not only improve shopping options for the
public, but modernize the entire economy.The worlds largest retailer also
has been vocal about Indias potential impact on its bottom line.
Executives of U.S.-based Wal-Mart said during a March investors
conference on its international business that the company expected to
turn a profit more quickly in India than in China, where the process took a
dozen years.The enormity of the Indian retail market has dazzled major
corporations: Consulting firm A.T. Kearney, which has been polling
companies about global-expansion aspirations for more than a dozen
years, said India now ranks only below China on their priority lists, ahead
of markets like Brazil and the U.S.But public opposition to the move in
India remains rife. Radha Krishna Store in Bengali Market in central Delhi
is typical of the mom-and-pop stores the Indian government wants to
protect from big-box retailers like Wal-Mart. The small stores shelves are
stacked with items as diverse as shampoos, cooking oils, diapers and
milk. Kamlesh Gupta and her husband have been operating the store for
25 years.If chains like Wal-Mart and Tesco are permitted to operate in
India, everything will be over, Mrs. Gupta said. If they sell goods
cheaper than us, who will come here? Already, we have lost 20% of our
business since Big Bazaar and Reliance started operating in the last two
years, she said, referring to two Indian retailers.To protect stores like
these, Uma Bharti, a leader of the main opposition party, the right-ofcenter Bharatiya Janata Party, had threatened that she would personally
set fire to any Wal-Mart stores if they were allowed to enter India. She

said she was prepared to go to prison for it. This partys voting
constituency includes small retailers.The political opposition to loosening
the foreign-investment rules ensures that, for now, Wal-Marts only way to
grab a piece of the lucrative market is through a partnership with Bharti
Enterprises Ltd. to operate wholesale-style cash and carry shops
selling bulk items to small-business owners. The joint venture only had
nine stores as of the end of October, a minuscule presence for a retail
giant with more than 9,000 shops in 28 countries.Carrefour SA, the
worlds second-largest retailer behind Wal-Mart, has long pegged India
as a strategic market. For years, the French company has been seeking
a local partner with whom to launch a chain of supercenters. A person
close to Carrefour said the company is unswayed in its quest, regardless
of whether the retail law goes into effect or not, though this person added
that having a majority stake would be important symbolically.Impatient
to get its business started in India, Carrefour has opened two wholesale
cash-and-carry stores in the meantime. The first opened in Delhi a year
ago, and the second opened in Jaipur in November. The opening of the
second store coincided with the passing of the retail law, and protesters
demonstrated outside the store against the new law. Carrefour intends to
open more wholesale stores next year but hasnt detailed its plans.The
Indian governments decision to put the proposal for multibrand retailers
on ice came also as a blow to Tesco, which along with other British
businesses has advocated changing the regulations. Tesco has been
unable to open stand-alone retail stores in India and instead operates
through a franchise deal with Tata Group unit Trent. The decision to
defer [foreign direct investment] is a missed opportunity for Indian
producers, farmers and consumers, Tesco said.Saloni Nangia, senior
vice president and head of retail and consumer goods at Technopak, a
consulting firm based in New Delhi, is hopeful that the decision to allow
foreign retailers to open supermarkets in India might still happen.A
number of brands were already in the country and will continue to believe
and be a part of the India opportunity, Ms. Nangia said. While the
discussion has been put on hold, it will come back in due course of time
and the government will come up with a plan.

The door remains open to single brand retailers in India, like Ikea
Group of Sweden, Nike Inc. of the U.S. and Marks and Spencer Group
PLC of the U.K. Until now, single-brand foreign retailers like Nike could
only hold 51% of an Indian joint venture. Now, the government is allowing
100% foreign investment in single-brand retail, which is attractive to
companies like Ikea that have publicly said that they werent interested in
partnerships.Brands like Levi Strauss & Co., Nike and Reebok
International Ltd. have been in India for several years. Their products
have been popular among a brand-conscious generation and were being
sold in India initially through department stores and more recently through
their stand-alone stores operated via joint ventures or franchisees. Marks
& Spencer entered the market in 2001, initially as a franchise business. In
2008, the company, which has 23 stores in India, signed a joint-venture
agreement with the Indian company Reliance Retail Ltd., a unit of
Reliance Industries Ltd., which has allowed Marks & Spencer to open
larger stores and tap into local sourcing.More recently, brands like
Tommy Hilfiger, Zara, Mango and French Connection have set up stores
in the bigger cities, offering more choice and providing more competition
to increasingly discerning consumers.These brands, under the new
policy, will now have the opportunity to buy out their partners or
franchisees with the condition that they source at least 30% of their future
products from Indian small and midsize enterprises.But this requirement
poses a problem for companies in the luxury-goods sector, many of which
make their products in Europe and export them to markets like India.An
example is Burberry Group PLC, the British trench-coat maker. The
company has seven stores in India, all of which are operated as a joint
venture with the Indian company Genesis Colors Pvt. Ltd. Burberry,
which opened its first store in India in 2008, owns 51% of the
venture.Burberry faces high import duties in India because many of its
products fall under a so-called luxurytax on high-end goods. The
company would face difficulty satisfying the sourcing requirements if it
decided to take full ownership of its Indian operation. Burberrys
traditional raincoats are made in England, and most of its leather
products come from Italy.

8.2) THE NEW YORK TIMES

India to Ease Retail Rules for Foreign Companies
By VIKAS BAJAJ
Published: November 24, 2011
MUMBAI The Indian government decided on Thursday to allow foreign
retailers like Wal-Mart and Tesco to open stores in the country, the first
time that policy makers have moved to open Indias vast and fastgrowing retail market to outsiders.
NIKE Inc
Wal-Mart Stores Inc
The long-awaited decision by the cabinet of Prime Minister Manmohan Singh
will allow retailers who sell multiple brands of products to own 51 percent of
their Indian operations, with the rest held by an Indian partner. Previously,
such retailers were not allowed to conduct retail business in the
country.Companies like Apple and Nike that sell only one brand of product in
their retail operations will now be allowed to own 100 percent of their stores,
up from 51 percent.A spokesman for the governing Congress Party confirmed
the move on Indian television but provided no details about the decision,
which is opposed by small-store owners and many political parties, including
one that supports Mr. Singhs government. A senior minister was expected to
make a statement about the decision in Parliament on Friday.Wal-Mart, Tesco,
Carrefour and Ikea are among the multinational retailers that had expressed
interest in investing in India if the rules were changed.On Thursday, Wal-Mart
welcomed the move as a first, important step, adding that the company
would study the conditions and the finer details of the new policy and the
impact that it will have on our ability to do business in India. Analysts said the
fact that policy makers opened the retail market despite of opposition from
other parties suggested they might be more willing to open up the broader
economy further.In the last seven years, the coalition government led by the
Congress Party has delayed many proposals to open domestic industries like
insurance and

aviation to greater foreign investment and competition.One had almost

given up hope that the government would make a big move, said Arvind
Singhal, chairman of Technopak Advisors, a consulting firm that specializes
in the retailing industry. There is a big sense of relief. Mr. Singhal and
other analysts say India needs significant foreign investment to help
establish a modern retail industry and a more efficient supply system.
Modern stores make up about 5 percent of Indias $500 billion retail
industry, with the rest made up of corner stores and other small
enterprises.Analysts have estimated that up to 35 percent of Indian fruits
and vegetables spoil before they get to market, largely as a result of an
antiquated supply system that includes many wholesale markets and
middlemen.Partly as a result, Indian food prices often rise quickly when
there are minor disruptions in the supply or harvest of staple crops like
onions and potatoes. Food inflation in recent months has been hovering
near 10 percent.While some companies have begun building supply
networks in parts of India, Mr. Singhal said it would take three to five years
of investment to establish a more efficient supply chain. Companies will
need to work from the ground up, setting up warehouses, buying trucks and
establishing relationships with farmers and other suppliers.I dont see
any immediate impact in the next six months, Mr. Singhal said. Supply
chain development takes its own time. It moves from one state to
another.For the last two years, Wal-Mart, the giant American retailer, has
been operating wholesale stores in India that sell only to other businesses;
it now has nine such outlets. It has also established relationships with
farmers in some states like Punjab to supply vegetables and other produce
to the retail supermarkets of its Indian partner Bharti Retail. Metro, a
German retail chain, has also opened wholesale stores in India.The move
will also help Indian companies like the Future Group, the countrys largest
retailer, and FlipKart.com, a fast-growing online store, that would like to
raise money from foreign investors to expand their operations.In many
cases, Indian retailers, especially those that operate online stores, have
been setting up separate retail and wholesale companies to get around the
restrictions on foreign investment. Their American venture capital partners
invest in the wholesale operations, which sell goods and services to the
retail firms.The decision will face stiff opposition from political parties,
including partners of the Congress Party like the Trinamool Congress, an

important party in the eastern part of the country.The lead opposition party
in Parliament, the Bharatiya Janata Party, said before the decision was
announced that foreign retailers would merely displace domestic
stores.Foreign direct investment with deep pockets entering this segment
will have an adverse impact on our domestic retail sector, which is
growing, the party said.
8.3)THE NEW YORK TIMES
India Suspends Plan to Let in Foreign Retail
Kuni Takahashi for The New York Times
Customers shop at Best Price, a store jointly owned by Wal-Mart and
Bharti Enterprise, in India.
By JIM YARDLEY Published:
December 7, 2011
NEW DELHI Facing a harsh political reaction that has paralyzed the
Indian Parliament, the governing Congress Party announced on
Wednesday that it would suspend plans to allow foreign multibrand
retailers like Wal-Mart to open stores in India.
Related
Wal-Mart Debate Rages in India(December 6, 2011)
Wal-Mart Stores Inc
The decision, announced in Parliament, was a setback for Prime Minister
Manmohan Singh and seemed certain to deepen criticism that his
administration had become increasingly adrift and ineffective. Foreign
corporations eager to enter the Indian retail market must now also put
aside any expansion plans.Government will take a decision after a
consensus is developed, Pranab Mukherjee, the Indian finance minister,
said in announcing the suspension.The question is whether thegovernment
will try to resurrect the plan in the weeks or months ahead. The Indian
economy has been slowing in recent months, partly because of the global
economic downturn but also, many analysts say, because of the inability of
the government to pass crucial reforms, including on foreign retail

investment.For months, Mr. Singh has taken a political battering. His

administration has been beset by scandals, and opposition leaders have
succeeded in stalling the Congress Partys agenda in Parliament. When Mr.
Singhs cabinet approved the foreign retail measure on Nov. 24, business
groups and many economists hailed the decision as a bold reform that would
benefit consumers and farmers while providing a much-needed jolt to the
Indian economy.No parliamentary vote was required for the executive decision
to take effect, but loud resistance quickly arose from both political allies and
opponents of the Congress Party. Mamata Banerjee, a powerful ally,
threatened to withdraw her Trinamool Congress Party from the coalition
national government.Opposition parties blocked all debate in Parliament for
days and condemned the proposal as a direct threat to millions of small
businesses across India. Political resistance from Indian traders and shop
owners has blocked previous efforts to push through similar measures.By
Wednesday, with other important pieces of legislation stalled, Mr. Mukherjee
announced the governments retreat on foreign retail as part of a deal with
opposition leaders to restart Parliament.Analysts and newspaper editorials
have excoriated Congress Party leaders, saying they mishandled the issue by
failing to consult in advance with allies like Ms. Banerjee and for making the
announcement while Parliament was in session even though parliamentary
approval was not required.The political handling is extraordinarily inept,
said Pratap

Bhanu Mehta, a political analyst in New Delhi.Mr. Mehta said the decision
by Congress Party leaders to push aside the foreign retail measure had
most likely been linked to an important election early next year in the state
of Uttar Pradesh. Rahul Gandhi, regarded as the partys prime minister in
waiting, has staked his reputation on making sizable gains in that state,
Indias most populous.The political maneuverings of the Congress Party
were secondary on Wednesday for many business leaders who regarded
the retreat on foreign retail investment as a major blow. Deeply
disappointing, said Rajiv Kumar, secretary general of the Federation of
Indian Chambers of Commerce and Industry, a leading business group.The
retail measure, which would have allowed multi-brand stores like Wal-Mart
to open stores with a minority Indian partner, was indefinitely tabled.
however, the measure also opened the door for single-brand retailers like
Ikea and Gap to enter the Indian market. On Thursday morning, Indian

media quoted unnamed government sources saying that type of foreign

retail investment might still be allowed to move forward.Mr. Kumar noted
that Congress Party leaders had not rescinded the executive order on
foreign retail but had merely suspended the plan and thus left open the
possibility that it could be resuscitated. Still, Mr. Kumar was skeptical that
any action would be taken before the Uttar Pradesh elections and possibly
even after that.Its going to take a long time to come back, he said.
This waiting for a consensus I cant see it happening now.
8.4)THE ECONOMIC TIMES
India opens retail sector to foreign brands like Adidas, Ikea and others
NEW DELHI: Government has allowed foreign brands such as Adidas or
home furnishings giant Ikea to open 100-percent owned shops, but will
continue to block the entry of supermarkets. The retail reform allowing
wholly foreign-owned "single brand stores" into the country was announced
late Tuesday by the left-leaning government, which had initially announced
sweeping plans to throw open the sector. In December, it said it planned to
allow in foreign supermarket chains such as Wal-Mart, but it backtracked
two weeks later amid parliamentary opposition and protests from small
shopkeepers. Major Western brands such as Adidas already own shops in
the booming retail centres and shopping malls of major cities, but they are
currently obliged to operate with a local partner. "Foreign direct investment
(FDI) up to 100 per cent, under the government approval route, would be
permitted in single brand product retail trading," the Department of
Industrial Policy and Promotion ( DIPP) said late Tuesday. The condition is
that the foreign companies owning more than 51 percent of their shops in
India source a minimum of 30 percent of their products from small-scale
local "cottage industry" suppliers. "The move will not only mean more FDI
but lead to employment and also lead to more choices for consumers," the
secretary general of business lobby group FICCI, Rajiv Kumar, said in a
statement. "The sourcing clause will lead to a direct benefit for the SME
(small and medium-sized enterprises) sector," he added. But Arvind
Singhal, chairman of Gurgaon-based retail consultancy Technopark, told
AFP he was sceptical that foreign companies would be rushing to open
100-percent owned stories because of the local supplier condition.

"This is an unfeasible demand. If a foreign brand like Ikea comes to India

they want their own suppliers, who are very efficient," he said. The
insistence that the suppliers be small in scale also limits the options of
large companies such as Ikea. "If they come here and do find good local
suppliers, what happens when those suppliers soon become too big to be
included? This means that the reform will not mean very much," he said.
The change to the foreign direct investment rule does not require
parliamentary approval. The government U-turn on allowing in
supermarkets was forced after an ally in the ruling coalition threatened to
quit over the move. "I wonder about the government's real intention to
reform the retail sector," Singhal said. "On this thinking, multi-brand
supermarkets will never be allowed here." Other analysts said brands like
Adidas, Louis Vuitton or Gucci, which are already in India, might look to
expand their presence, while others would be unlikely to jump in with a
100-percent owned store. "Action may not come from new players. Only
those who understand the Indian markets and its challenges and policies
will be interested," Anil Talreja, a partner with consultancy Deloitte India,
said.

CHAPTER 9
FDI INDIAN RETAIL BIDS FOR A BRIGHTER
FUTURE

In a landmark decision for the Indian retail industry, the cabinet finally gave
its nod to allow Foreign Direct Investment (FDI) in multibrand retail
segment and even raised the bar for FDI in single brand retail. Although,
FDI in multibrand retail is still under consideration by the Government,
100% FDI in single brand retail has become a reality allowing foreign
brands to finally have the ownership on their Indian business. This comes
as a strong indication of a futuristic approach from the Indian Government.
The policy, most certainly, will have a long term impact on retail and retail
real estate developments in the country.The policy is expected to enable
the growth of organized retail as it will open up the door for a number of
prominent global retail brands. Hence, the retail sector is poised to see
some significant changes in its current dynamics. In this paper, Cushman &
Wakefield Research presents a snapshot of the impact of the new policy on
Indian retail real estate sector.
INDIA ADVANTAGE
1) India has a relatively younger population in the age bracket of 15-64 with
a median age of 26.2 years, lowest among the BRIC countries.
Moreover, 29.7% of the population is in between the age group of 0-14
which is the highest among the BRIC.
2) India is the ninth largest in the world by nominal GDP and the fourth
largest by Purchasing Power Parity (PPP). (Source: International
Monetary Fund) India's per capita income has tripled from USD 423 in
2002-03 to USD 1,219 in 2010-11, averaging 14.4% growth over these
eight years. (Source: World Bank) Service industry accounts for 54.7 %
of the GDP, although agriculture is the predominant occupation in India.
Dependency on agriculture has reduced and share of services and
industry sector has increased.
9.1)EVOLUTION OF INDIAN RETAIL
The story of Indian retail has been an intriguing one with diverse
opportunities and challenges. Till the 1990's Indian retail market was
primarily dominated by traditional neighborhood retailers or 'kirana' (Mom &
Pop) stores. However with the economic progression, India has accepted
the exposure of organized retail in the last decade. The transition was
gradual, with 100% FDI in cash and carry / wholesale format allowed in
1997 and 51% FDI in single brand retail permitted in 2006. As a result,
cumulative FDI in retail trading (single brand) till April 2011 is estimated at

approximately USD 61 million which represents 0.05% of the total FDI

inflow. The growth of organized retail was further propelled on account of
the demand generated by the rise of Indian middle class, a fast changing
consumer mindset and increasing disposable incomes. Riding on the
favorable demographics and a steady economic growth, Indian retail sector
soon emerged as one of the fastest growing sectors in the domestic
economy. With 100% FDI in Cash & Carry format, India witnessed the entry
of retail giants like Metro AG and Walmart. The growth was also fuelled by
retail real estate and infrastructure developments in the country. A wide
range of retail categories and innovative formats like supermarket,
hypermarket, and Cash & Carry categories evolved across india
9.2)FDI POLICY FRAMEWORK
Although Indian economy demonstrated resilience in recessionary
conditions primarily due to its inherent strength, it must also be noted that
the sustenance of its economic growth calls for the next round of reforms
of which Retail FDI, Land Acquisition Rehabilitation & Resettlement Bill,
Public Private Partnership Bill are the key milestones. Despite the fact that
there are diverse opinions on almost all of these in the society, the only
apparent way for the economic growth down the road is through these
reforms. While analysts continue to observe this vast maze of socioeconomic landscape in India with deep interest, there is no denying that the
country needs to implement second generation reforms for inclusive and
sustainable growth.
Source: Technopak Advisors Pvt Ltd
Manufacturers opening their own outlets Pure play Retailers, realizing the
potential start to test waters, stall most of them in apparel segment Large
Investment Commitments by large Indian corporate Entry in food and
general merchandise category Investments in the Back End Pan India
Expansion but still limited to top 100 cities Repositioning Existing Players
Entry of large global retailers Competition beginning to increase Fringe
Players getting Marginalised Specialty formats based on finer segmentation
of the market Private brands getting established More aggression from
International Players More than 5-6 players with Revenues in excess of
US$ 700mm Movement to smaller cities and rular areas Large scale
consolidation Stiff competition Pre 1995s 1995 to 2005 2005 to 2010 2010
Onwards Size of Industry

1)The Cabinet has approved 100% FDI in single brand retail and 51% FDI
in multi-brand retail.
2)Government stipulates that the minimum capital for investment required
shall be USD 100 million and 50% of the investment should be in the
backend infrastructure.
3)Investments should be restricted to cities with population over 1 million
4)In January 2012, the government notified its earlier decision of permitting
100% FDI in single-brand product retail trading. For investing in singlebrand retail, the government has made it mandatory for the retailer to
source atleast 30% of the products sold from small industries/village and
cottage industries, artisans and craftsman.
The Cabinet approval for FDI in multi-brand retail and raising the cap in
single brand retail came as the next big move for Indian retail. However,
while the proposed FDI in multibrand retail has been temporarily
suspended due to disagreement between political parties, the Congress led
Government has been able to pave the way for 100% FDI in single brand
retail segment. The decision is expected to create a healthy growth
situation for retailers across categories.After much deliberation Department
of Industrial Policy and Promotion has permitted FDI upto 100% under the
Government approved route. There are certain conditions that are
highlighted in the notification which have to be complied for foreign
investments in single brand. Of them, it is mandatory to source of atleast
30% of the value of products sold from domestic small and cottage
industries which have a maximum investment of INR 5 crores in plant and
machinery. This is expected to provide stimulus for the manufacturing
sector that will get exposed to global technologies, design and business
practices.
9.3)IMPACT ON RETAIL SEGMENT
1) 100% FDI in single brand retail would allow many foreign brands to take
full ownership of their Indian business. This would increase foreign
investment along with providing the domestic industries an exposure to
superior technology, research, design and business practices.

2) In the case of Indian corporate retail chains, the policy will hopefully,
make them more efficient due to the increased competition from foreign
brands and companies.
3) The penetration of organized retail will improve and the development of
modern retail will be spread out beyond the traditional cities. As per the
Census 2011, India has 33 cities which have a population of 1 million or
more that are expected to witness increased penetration of organized
retail.
4) With global retail players and practices coming into the market, the retail
industry is expected to witness many innovations in formats and
strategies changing the dynamics of the retail sector.
5) With the advent of international brands in various formats and
categories, the market will experience international retail practices. As a
result Indian retail will get exposure to the world's best retail services
and practices from across the globe.
6) Food and Grocery segment which holds a significant share in the
average consumer's total household spending, will witness significant
impact. Government's recommendation to invest 50% of the total
investment into the back end infrastructure will improve the supply chain
efficiency. Thus with better supply chain mechanism and bigger scale of
operations, retailers in this category will see profitability.
7) Better back-end infrastructure and supply chain efficiency will result in
reducing the involvement of intermediaries which will ultimately benefit
the farmer as well as the end consumers. While the increased profitably
will be passed on to end consumer, the farmer will gain by getting
justified pricing for their product and a direct access to the market. The
Government also expects almost 10 million jobs to be created through
the retail segment.Hence, in all probability, it would be incorrect to
deduce that FDI in retail will sound a deathknell for the traditional 'kirana'
operation in Indian cities and towns.
Chart 4)
Food and Grocery Retail 1)Business Monitor International (BMI) forecast
that sales through Mass
Grocery Retail outlets to reach to
USD 27.67 billion by 2015

Apparel Retail

Furniture and Furnishings

2)According to industry estimates,

lack of supply chain infrastructure
results in 40% loss of farm produce;
investment in back-end
infrastructure should help reducing
this
3)Sourcing of processed food from
SMEs could result in higher margins
4)Political support for FDI in food
and grocery may face challenges
and
many state may not allow FDI or
else allow with more restriction
5)Hypermarkets and supermarkets
are the best suited retail structure for
the segment
1)Readymade and western outfits
are growing at 40-45% annually
2)Opening of multi-brand apparel
retail for FDI is not expected to face
major political deliberations
3)For apparel retail, investment in
back-end infrastructure lies in
creation of
warehouses
4)Manufacturing facilities (for private
label brand) and logistics is most
likely to be outsourced
5)International retailer could have
private label brand sourced from
SME segment
6)Departmental store is the best
suited retail structure for this
segment
FDI: Indian Retail Bids for a Brighter
Future
1) For furniture retail, options for
investment
in
back-end
infrastructure lies in creation of
manufacturing
facilities/

Beauty and Wellness

Gems and Jewelry

warehouses
2)Some of the furniture products
could be sourced from the SME
segment
3)FDI in furniture retail is not
expected to face major political
deliberation
s
4)Specialty retail outlet is best
suited
structure for this
segment
1)Penetration level of modern retail
is just 4% and there is a
huge
untapped potential in this segment
2)Private label brands in some of
the
product categories can be sourced
from the SME segment
3)FDI in multi-brand beauty and
wellness stores is not expected to
face major political deliberations
4)Specialty retail outlet is the best
suited structure for this segment
1)Branded jewelry has rapidly
acquired a niche over the past few
years.Increasin
g
purchasing power
and disposable income of India's
middle class has resulted in growth
of this industry
2)Opening of multi-brand gems
and
jewelry stores is not expected to
face major political deliberations
3)Special design products could be
sourced from the SME segment

Consumer Durables

4)Target segment for retailers

are
largely in the metros and tier-1
cities
1)Traditionally market is largely
dominated by branded
store,
penetration of modern retail is 12%
in consumer electronics segment
2)Consumer
s
are brand conscious
for consumer
durables hence
sourcing

of products from SME the segment

is not favorable
3)Target segment for retailers would
not just be restricted in the metros
and tier-1 cities, it would also include
tier-2 cities
4)FDI in consumer durables sector
too is not expected to face any major
political deliberation

9.4)THE ROAD AHEAD

The Cabinet approval for FDI in multibrand and the government notification
for single brand retail appears to be a natural step in the forward direction
for the Indian economy. It holds significant scope and opportunities for the
Indian retail revolution which started more than a decade ago. In the last
five years, India has witnessed retail sector being redefined and now the
improvised FDI policy definitely has the ability to push India's growth story
to new heights. The policy has been hailed by India Inc. and when rolled
out, the retail history of India will have a new chapter to it.

130

CHAPTER 10
ANALYSIS OF PRIMARY DATA

a) ARE YOU AWARE OF RECENT FDI INFLOW IN INDIA?

Sales
YES
NO

YES

62%

NO

38%

In the above question ,62% of the respondents were aware of the fdi
inflow to india.

b) DO YOU REALLY THINK INDIA NEED FDI

Sales
YES
NO

YES

62%

NO

38%

In the above question 62% of the respondents felt that india seriously need
fdi whereas 38% felt the our country doesnot require fdi

c) WHAT IS YOUR OPINION ON RECENT FDI

Most of the respondents said they are not satisfied with the way the fdi in
india is handled . our country should handle fdi in a more appropriate and
transparent manner.
d) DONT YOU THINK FDI HAS DONE MORE HARM THAN GOOD ,
COMMENT
Most of the respondents felt that fdi have done more harm than good.fdi
has resulted in a stiff competition for local retailers and local retailers are
finding it difficult to compete with huge giants.hence .fdi are a harm for local
retailers.

e) ARE YOU AWARE OF RETAIL SECTOR IN INDIA?

Sales
YES
NO

YES

99%

NO

1%

This question was added to know the retail knowledge of the respondents
.99% of the respondents were well aware of the retail sector.

f) DOES RETAIL SECTOR REALLY NEED FDI?

Sales
YES
NO

YES

46%

NO

54%

In this question 46% of the respondents felt that retail sector needed fdi
where as 54% of the respondents felt that indian retail sector doesnot need
fdi.
g) AS A CITIZEN ARE YOU CONTENT WITH THE WAY FDI ARE MANAGED

Sales
YES
NO

YES

38%

NO

62%

In this qestion 62% of the respondents felt that they are not happy with the
way fdi are handled by the government and it can be handled in a far better
way where as 38% felt that they are satisfied with the way fdi are managed.

h) ANY SUGGESTIONS ON FD
Number of daily responses

CHAPTER 11
CONCLUSION

Finally, it may be concluded that developing countries has make their

presence felt in the economics of developed nations by receiving a descent
amount of FDI in the last three decades. 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. No doubt,
FDI plays a crucial role in enhancing the economic growth and
development of the country. Moreover, FDI as a strategic component of
investment is needed by India for achieving the objectives of its second
generation of economic reforms and maintaining this pace of growth and
development of the economy. This chapter highlights the main findings of
the study and sought valuable suggestions

CHAPTER 12
SUGGESTIONS

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, the study recommends the following suggestions:
The study urges the policy makers to focus more on attracting diverse
types ofFDI.
The policy makers should design policies where foreign investment can
be utilised as means of enhancing domestic production, savings, and
exports; as medium of technological learning and technology diffusion and
also in providing access to the external market.
It is suggested that the government should push for the speedy
improvement of infrastructure sectors requirements which are important for
diversification of business activities.
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.
Government 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.
Government must target at attracting specific types of FDI that are able
to generate spillovers effects in the overall economy. This could be
achieved by investing in human capital, R&D activities, environmental
issues, dynamic products, productive capacity, infrastructure and sectors
with high income elasticity of demand.
The government must promote policies which allow development
process starts from within (i.e. through productive capacity and by
absorptive capacity).
It is suggested that the government endeavour should be on the type
and volume of FDI that will significantly boost domestic competitiveness,
enhance skills, technological learning and invariably leading to both social
and economic gains.
It is also suggested that the government must promote sustainable
development through FDI by further strengthening of education, health and

R&D system, political involvement of people and by ensuring personal

security of the citizens.
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
concludes FTAs with the emerging economic Asian giants.
FDI should be guided so as to establish deeper linkages with the
economy, which would stabilize the economy (e.g. improves the financial
position, facilitates exports, stabilize the exchange rates, supplement
domestic savings and foreign reserves, stimulates R&D activities and
decrease interest rates and inflation etc.) and providing to investors a
sound and reliable macroeconomic environment.
As the appreciation of Indian rupee in the international market is
providing golden
opportunity to the policy makers to attract more FDI in Greenfield projects
as compared to Brownfield investment. So the government must invite
Greenfield investments.
Finally, it is suggested that the policy makers should ensure optimum
utilisation 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. As foreign investors doesnt look for fiscal concessions or special
incentives but they are more of a mind in having access to a consolidated
document that 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 favourable FDI destination in the world but also set an example to
the rest of the world by achieving what is predicted by Goldman
Sachs23,24 (in 2003, 2007) that from 2007 to 2020, Indias GDP per capita
in US$ terms willquadruple and the Indian economy will overtake France
and Italy by 2020, Germany, UK and Russia by 2025,Japan by 2035 and
US by 2043.

CHAPTER 13
BIBLIOGRAPHY

1. A.T.
Kearneys
(2007):
Global
Services
Locations
Index ,
www.atkearney.com
2. Alhijazi, Yahya Z.D (1999): Developing Countries and Foreign
Direct
Investment,
digitool.library.mcgill.ca.8881/dtl_publish/7/21670.htm.
3. Andersen P.S and Hainaut P. (2004): Foreign Direct Investment
and
Employment
in
the
Industrial
Countries,
http:\\www.bis\pub\work61.pdf.
4. Balasubramanyam V.N, Sapsford David (2007): Does India need a lot
more FDI, Economic and Political Weekly, pp.1549-1555.
5. Basu P., Nayak N.C, Archana (2007): Foreign Direct Investment in
India:Emerging Horizon, Indian Economic Review, Vol. XXXXII. No.2, pp.
255-266.
6. Belem Iliana Vasquez Galan (2006): The effect of Trade Liberalization
and
Foreign
Direct
Investment
in
Mexico,
etheses.bham.ac.uk/89/1/vasquezgalan06phd.pdf.
7. Bhagwati J.N. (1978), Anatomy and Consequences of Exchange Control
Regime, Vol 1, Studies in International economies Relations
No.10, New York, ideas-repec.org/b/nbr/nberbk/bhag78-1.html.
Newspapers
1. The economic times
2. Business standard
3. Business lines

Search engines
1) www.google.com
2) www.wikipedia.com

CHAPTER 14
ANNEXURE

a) ARE YOU AWARE OF RECENT FDI INFLOW IN

INDIA? Yes
No

b) DO YOU REALLY THINK INDIA NEED FDI

Yes
No

c) WHAT IS YOUR OPINION ON RECENT

FDI SUGGESTION

d) DONT YOU THINK FDI HAS DONE MORE HARM THAN

GOOD , COMMENT

e) ARE YOU AWARE OF RETAIL SECTOR IN INDIA?

Yes

No

f) DOES RETAIL SECTOR REALLY NEED

FDI? Yes
No

g) AS A CITIZEN ARE YOU CONTENT WITH THE WAY FDI

ARE MANAGED
Yes
No

h) ANY SUGGESTIONS ON FDI