Professional Documents
Culture Documents
ON
INVESTMENT IN INDIA“
SUBMITTED BY
AKANKSHA.R.YADAV
(Roll No – 57)
UNIVERSITY OF MUMBAI
New Panvel
ON
INVESTMENT IN INDIA“
SUBMITTED BY
AKANKSHA.R.YADAV
(Roll No – 57)
UNIVERSITY OF MUMBAI
New Panvel
This is to certify that Ms. Akanksha.R.Yadav, student of Pillai’s Institute of Management Studies of
Research, New Panvel, has completed the PROJECT REPORT ON A STUDY OF FOREIGN
DIRECT INVESTMENT IN INDIA in the academic year 2017-18.
Name: AKANKSHA.R.YADAV
The information presented in this project is true and original to the best of my knowledge.
Date:
Place:
First, I would like to thank my college, Pillai’s Institute of Management Studies and Research, for
giving me an opportunity to prepare this project as a part of the MMS program of Mumbai
University.
Secondly, I would like to thank my guide, Prof.Ashish Tripathi, for guiding me throughout the
preparation of this project and for correcting me wherever required.
I would also like to thank my college librarian for giving me access to the library books and materials
as and when I required them.
Last but not the least, a big thank you to my parents and colleagues, without whose support and
encouragement this project would never have been completed.
Akanksha.R.Yadav
EXECUTIVE SUMMARY
Foreign Direct investment plays a very important role in the development of the nation.
Sometimes domestically available capital is inadequate for the purpose of overall development of the
country. Foreign capital is seen as a way of filling in gaps between domestic savings and investment.
India can attract much larger foreign investments than it has done in the past. The present study has
focused on the trends of F.D.I Flow in India during April 2000 to December 2017
The study also highlights country wise approvals of F.D.I inflows to India and the F.D.I inflows
in different sector for the period April 2000 to December 2017. The study based on Secondary data
which have been collected through reports of the Ministry of Commerce and Industry, Department of
Industrial Promotion and Policy, Government of India, Reserve Bank of India, and World Investment
Report.
Foreign direct investment (F.D.I) influences the host country’s economic growth through the transfer
of technologies and know-how, formation of human resources, integration in global markets, increase
of competition, and firms’ development and reorganization. Empirically, a variety of studies
considers that F.D.I generates economic growth in the host country. However, there is also evidence
that F.D.I is a source of negative effects. Given this ambiguity of results, the present paper makes a
review of the existing theoretical and empirical literature on the subject, intending to shed light on the
main explanations for the divergence of results in different studies.
The main idea that stands out in this review is that the effects of F.D.I on economic growth are
dependent on the existing or subsequently developed internal conditions of the host country
(economic, political, social, cultural or other). Thus, the host countries authorities have a key role in
creating the conditions that allow for the leverage of the positive effects or for the reduction of the
negative effects of F.D.I on the host country’s economic growth.
The study concludes that Mauritius emerged as the most dominant source of F.D.I contributing. It is
because the India has Double Taxation Avoidance Agreement (DTAA) with Mauritius and most of
the foreign countries like to invest in service sector.
TABLE CONTENT
INTRODUCTION OF THE PROJECT
F.D.I has been associated with improved economic growth and development in the host countries
which has led to the emergence of global competition to attract F.D.I.
F.D.I offers number of benefits like overture of new technology, innovative products, and
extension of new markets, opportunities of employment and introduction of new skills etc., which
reflect in the growth of income of any nation. Foreign direct investment is one of the measures of
growing economic globalization. Investment has always been an issue for the developing economies
such as India. The world has been globalizing and all the countries are liberalizing their policies for
welcoming investment from countries which are abundant in capital resources. The countries which
are developed are focusing on new markets where there is availability of abundant labors, scope for
products, and high profits are achieved. Therefore Foreign Direct Investment (F.D.I) has become a
battle ground in the emerging markets.
Foreign investment plays a significant role in development of any economy as like India. Many
countries provide many incentives for attracting the foreign direct investment (F.D.I). Need of F.D.I
depends on saving and investment rate in any country. Foreign Direct investment acts as a bridge to
fulfill the gap between investment and saving. In the process of economic development foreign
capital helps to cover the domestic saving constraint and provide access to the superior technology
that promote efficiency and productivity of the existing production capacity and generate new
production opportunity.
India’s recorded GDP growth throughout the last decade has lifted millions out of poverty &
made the country a favored destination for foreign direct investment. A recent UNCTAD survey
projected India as the second most important F.D.I destination after China for transnational
corporations during 2010-2015. Services, telecommunication, construction activities, computer
software & hardware and automobile are major sectors which attracted higher inflows of F.D.I in
India. Countries like Mauritius, Singapore, US & UK were among the leading sources of F.D.I in
India.
Consistent economic growth, de-regulation, liberal investment rules, and operational flexibility are
all the factors that help increase the inflow of foreign direct investment or F.D.I.F.D.I or Foreign
Direct Investment is any form of investment that earns interest in enterprises which function outside
of the domestic territory of the investor. F.D.Is requires a business relationship between a parent
company and its foreign subsidiary. Foreign direct business relationships give rise to multinational
corporations. For an investment to be regarded as an F.D.I, the parent firm needs to have at least 10%
of the ordinary shares of its foreign affiliates. The investing firm may also qualify for an F.D.I if it
owns voting power in a business enterprise operating in a foreign country.
India now with consistent growth performance and abundant high-skilled affordable manpower
provides enormous opportunity for investment both domestic and foreign. Foreign direct investment
(F.D.I) causes a flow of money into the economies which stimulates economic activity, increases
employment and induces the long run aggregate supply and brings in best practices. The F.D.I policy
was liberalized progressively through review of the policy on an ongoing basis and allowing F.D.I in
more industries under the automatic route.
OBJECTIVES OF THE STUDY
TYPE OF RESEARCH:
Secondary data
LITERATURE REVIEW
Singh Kr. Arun and Agarwal P.K., (2012) “Foreign direct investment: The big bang in Indian
retail”. In this article they have studied the relation of foreign investment and Indian retail business.
The study is based on different literatures, case studies and analysis of organized retail market. The
author discusses the policy development for FDI in the two retail categories: single brand and multi
brand. The author concludes that FDI in multi brand retail should be considered, better technology
and employment. The paper also concludes that openness of FDI in India would help India to
integrate into worldwide market.
Dr. Mamata Jain and Mrs. Meenal Lodhana Sukhlecha, (2012), “FDI in multi brand retail: Is it
the need of the hour?” The paper studies the need of the retail community to invite FDI in retailing.
The study is under taken through analysis of positive and negative impacts of reforms. The study
shows various advantages of FDI, which suggests for foreign participation in retailing, but the author
also suggests that the ceiling should not exceed 51% even for single brands to ensure check and
control on business operations.
Rajalakshmi K. and Ramachandran F., (2011), “Impact of FDI in India’s automobile sector with
reference to passenger car segment.” The author has studied the foreign investment flows through the
automobile sector with special reference to passenger cars. The research methodology used for
analysis includes the use of ARIMA, coefficient, linear and compound model. The period of study is
from 1991to 2011. This paper is an empirical study of FDI flows after post liberalization period. The
author has also examined the trend ad composition of FDI flow and the effect of FDI on economic
growth. The author has also identified the problems faced by India in FDI growth of automobile
sector through suggestions of policy implications.
Dr. S N Babar and Dr. B V Khandare, (2012), “Structure of FDI in India during globalization
period”. The study is mainly focused on changing structure and direction of India’s FDI during
globalization period. The study is done through analysis of benefits of FDI for economic growth. The
study has been done through sect oral analysis of FDI participation, as well as through study of
country wise flow of foreign inflow in India till 2010. Singh (2009) stated in their study that
foreign direct investment (FDI) policies play a major role in the economic growth of developing
countries around the world. Attracting FDI inflows with conductive policies has therefore become a
key battleground in the emerging markets. The paper highlighted the trend of FDI in India after the
sector-wise economic reforms.
Devajit (2012) conducted the study to find out the impact of foreign direct investments on Indian
economy and concluded that Foreign Direct Investment (FDI) as a strategic component of investment
is needed by India for its sustained economic growth and development through creation of jobs,
expansion of existing manufacturing industries, short and long term project in the field of healthcare,
education, research and development.
Sharma Reetu and Khurana Nikita (2013) in their study on the sector-wise distribution of FDI
inflow to know about which has concerned with the chief share, used a data from 1991-92 to 2011-
2012 (post-liberalization period). This paper also discusses the various problems about the foreign
direct investment and suggests the some recommendations for the same. In this study found that,
Indian economy is mostly based on agriculture. So, there is a most important scope of agriculture
services. Therefore, the foreign direct investment in this sector should be encouraged.
SCOPE OF THE STUDY
At least as a temporary measure, during the period when the capital market is in the process of
development.
Foreign capital usually brings it with other scarce productive factors like technical knowhow,
business expertise and knowledge.
LIMITATION OF THE STUDY
Time is constraint
Accuracy of the data
No.of repondent
Market size
According to Department of Industrial Policy and Promotion (DIPP), the total FDI
investments in India during April-December 2017 stood at US$ 35.94 billion, indicating that
government's effort to improve ease of doing business and relaxation in FDI norms is
yielding results.
Data for April-December 2017 indicates that the telecommunications sector attracted the
highest FDI equity inflow of US$ 6.14 billion, followed by computer software and hardware –
US$ 5.16 billion and services – US$ 4.62 billion. Most recently, the total FDI equity inflows
for the month of December 2017 touched US$ 4.82 billion.
During April-December 2017, India received the maximum FDI equity inflows from Mauritius
(US$ 13.35 billion), followed by Singapore (US$ 9.21 billion), Netherlands (US$ 2.38 billion),
USA (US$ 1.74 billion), and Japan (US$ 1.26 billion).
Indian impact investments may grow 25 per cent annually to US$ 40 billion from US$ 4
billion by 2025, as per Mr Anil Sinha, Global Impact Investing Network's (GIIN’s) advisor for
South Asia.
Investments/ developments
India has become the fastest growing investment region for foreign investors in 2016, led by
an increase in investments in real estate and infrastructure sectors from Canada, according
to a report by KPMG.
Some of the recent significant FDI announcements are as follows:
In February 2018, Ikea announced its plans to invest up to Rs 4,000 crore (US$ 612 million) in the state of
Maharashtra to set up multi-format stores and experience centres.
In November 2017, 39 MoUs were signed for investment of Rs 4,000-5,000 crore (US$ 612-765 million) in the
state of North-East region of India.
In December 2017, the Department of Industrial Policy and Promotion (DIPP) approved FDI proposals of Damro
Furniture and Supr Infotech Solutions in retail sector, while Department of Economic Affairs, Ministry of Finance
approved two FDI proposals worth Rs 532 crore (US$ 81.4 million).
The Department of Economic Affairs, Government of India, closed three foreign direct investment (FDI) proposals
leading to a total foreign investment worth Rs 24.56 crore (US$ 3.80 million) in October 2017.
Singapore's Temasek will acquire a 16 per cent stake worth Rs 1,000 crore (US$ 156.16 million) in Bengaluru
based private healthcare network Manipal Hospitals which runs a hospital chain of around 5,000 beds.
France-based energy firm, Engie SA and Dubai-based private equity (PE) firm Abraaj Group have entered into a
partnership for setting up a wind power platform in India.
US-based footwear company, Skechers, is planning to add 400-500 more exclusive outlets in India over the next
five years and also to launch its apparel and accessories collection in India.
The government has approved five Foreign Direct Investment (FDI) proposals from Oppo Mobiles India, Louis
Vuitton Malletier, Chumbak Design, Daniel Wellington AB and Actoserba Active Wholesale Pvt Ltd, according to
Department of Industrial Policy and Promotion (DIPP).
Cumulative equity foreign direct investment (FDI) inflows in India increased 40 per cent to reach US$ 114.4 billion
between FY 2015-16 and FY 2016-17, as against US$ 81.8 billion between FY 2011-12 and FY 2013-14.
Walmart India Pvt Ltd, the Indian arm of the largest global retailer, is planning to set up 30 new stores in India
over the coming three years.
US-based ecommerce giant, Amazon, has invested about US$ 1 billion in its Indian arm so far in 2017, taking its
total investment in its business in India to US$ 2.7 billion.
Kathmandu based conglomerate, CG Group is looking to invest Rs 1,000 crore (US$ 155.97 million) in India by
2020 in its food and beverage business, stated Mr Varun Choudhary, Executive Director, CG Corp Global.
International Finance Corporation (IFC), the investment arm of the World Bank Group, is planning to invest about
US$ 6 billion through 2022 in several sustainable and renewable energy programmes in India.
SAIC Motor Corporation is planning to enter India’s automobile market and begin operations in 2019 by setting up
a fully-owned car manufacturing facility in India.
SoftBank is planning to invest its new US$ 100 billion technology fund in market leaders in each market segment
in India as it is seeks to begin its third round of investments.
Government Initiatives
In September 2017, the Government of India asked the states to focus on strengthening
single window clearance system for fast-tracking approval processes, in order to increase
Japanese investments in India.
The Ministry of Commerce and Industry, Government of India has eased the approval
mechanism for foreign direct investment (FDI) proposals by doing away with the approval of
Department of Revenue and mandating clearance of all proposals requiring approval within
10 weeks after the receipt of application.
India and Japan have joined hands for infrastructure development in India's north-eastern
states and are also setting up an India-Japan Coordination Forum for Development of North
East to undertake strategic infrastructure projects in the northeast.
The Government of India is in talks with stakeholders to further ease foreign direct
investment (FDI) in defence under the automatic route to 51 per cent from the current 49 per
cent, in order to give a boost to the Make in India initiative and to generate employment. In
January 2018, 100 per cent FDI was allowed in single brand retail through automatic route
along with relaxations in rules in other areas.
The Central Board of Direct Taxes (CBDT) has exempted employee stock options (ESOPs),
foreign direct investment (FDI) and court-approved transactions from the long term capital
gains (LTCG) tax, under the Finance Act 2017.
The Government of India is likely to allow 100 per cent foreign direct investment (FDI) in
cash and ATM management companies, since they are not required to comply with the
Private Securities Agencies Regulations Act (PSARA).
Road ahead
India has become the most attractive emerging market for global partners (GP) investment
for the coming 12 months, as per a recent market attractiveness survey conducted by
Emerging Market Private Equity Association (EMPEA).
The World Bank has stated that private investments in India is expected to grow by 8.8 per
cent in FY 2018-19 to overtake private consumption growth of 7.4 per cent, and thereby
drive the growth in India's gross domestic product (GDP) in FY 2018-19.
Exchange Rate Used: INR 1 = US$ 0.0153 as on March 01, 2018.
THEORETICAL BACKGROUND
MEANING & DEFINITIONS
Definitions –
Broadly, foreign direct investment includes "mergers and acquisitions, building new facilities,
reinvesting profits earned from overseas operations and intra company loans". In a narrow
sense, foreign direct investment refers just to building new facilities. The numerical FDI
figures based on varied definitions are not easily comparable. As a part of the national
accounts of a country, and in regard to the GDP equation Y=C+I+G+ (XM) [Consumption +
gross Investment + Government spending + (exports - imports)], where I is domestic
investment plus foreign investment, FDI is defined as the net inflows of investment (inflow
minus outflow) to acquire a lasting management interest (10 percent or more of voting stock)
in an enterprise operating in an economy other than that of the investor. FDI is the sum of
equity capital, other long-term capital, and short-term capital as shown the balance of
payments. FDI usually involves participation in management, joint-venture, transfer of
technology and expertise. Stock of FDI is the net (i.e., inward FDI minus outward FDI)
cumulative FDI for any given period. Direct investment excludes investment through
purchase of shares. FDI is one example of international factor movements.
Types:-
Horizontal: where the company carries out the same activities abroad as at home (for
example, Toyota assembling cars in both Japan and the UK.
Vertical: when different stages of activities are added abroad. Forward vertical FDI is where
the FDI takes the firm nearer to the market (for example, Toyota acquiring a car
distributorship in America) and Backward Vertical FDI is where international integration
moves back towards raw materials (for example, Toyota acquiring a tyre manufacturer or a
rubber plantation).
-Conglomerate: where an unrelated business is added abroad. This is the most unusual form
of FDI as it involves attempting to overcome two barriers simultaneously - entering a foreign
country and a new industry. This leads to the analytical solution that internationalization and
diversification are often alternative strategies, not complements.
Greenfield entry implies assembling all the elements from scratch as Honda did in the UK,
whereas foreign takeover means the acquisition of an existing foreign company - as
Tata’s acquisition of Jaguar Land Rover illustrates.
Foreign takeover is often covered by the term 'mergers and acquisitions’ (M&As) but
internationally, mergers are vanishingly small, accounting for less than 1 per cent of all
foreign acquisitions.
This choice of entry mode interacts with ownership strategy – the choice of wholly owned
subsidiaries versus joint ventures to give a 2x2 matrix of choices – Greenfield wholly owned
ventures, Greenfield joint ventures, wholly owned takeovers and joint foreign acquisitions -
giving foreign investors choices that they can match to their own capabilities and foreign
conditions
Methods
The foreign direct investor may acquire voting power of an enterprise in an economy through
any of the following methods:
1. by incorporating a wholly owned subsidiary or company anywhere
2. by acquiring shares in an associated enterprise
3. through a merger or an acquisition of an unrelated enterprise
4. participating in an equity joint venture with another investor or enterprise[
Government of India facilitates Foreign Direct Investment (FDI) and investment from Non-
Resident Indians (NRIs) including Overseas Corporate Bodies (OCBs), predominantly
owned by them, to complement and supplement domestic investment. Foreign technology
induction is encouraged both through FDI and through foreign technology collaboration
agreements. Foreign Direct Investment and Foreign technology collaboration agreements
can be approved either through the automatic route under powers delegated to the Reserve
Bank of India (RBI) or otherwise by the Government.
Automatic Approval
RBI also gives automatic permission for foreign technology agreement in all areas of
electronics provided:
Lump sum payment of the price of the technology does not exceed USD 2 million and
Royalty payments do not exceed 5% of domestic sales and 8% of exports. (The royalty
rates are net of taxes).
The payments are subject to an overall ceiling of 8 percent of total sales over a period of
10 years from the date of agreement or over 7 years period from the date of commencement of
commercial production, whichever is earlier?
Application for investment under the automatic process is to be made to the RBI and approval
is generally granted within three weeks.
Investment Proposals under Hardware and software Technology Parks, Export Oriented Units
and Export Processing Zones
Foreign investment up to 100 percent is welcome in electronics and software industries set up
exclusively for exports. The units set up under these programs are bonded factories eligible to
import, free of duty
o Government approval
The FDI/ Foreign technology collaboration agreement proposals which do not conform to the
guidelines for automatic approval require Government approval through the Foreign
Investment Promotion Board (FIPB). The Government has set up a special 'Foreign
Investment Promotion Board' (FIPB) as a fast track mechanism to invite and facilitate foreign
investments in large projects in India, which are considered beneficial to the Indian economy
but are not covered by the automatic approval process and norms under which SIA is
authorized to grant investment approvals.
Other proposal including in services sector which do not conform to the guidelines for
automatic approval or seeking higher foreign equity investment are approved by the
Secretariat for Industrial Assistance (SIA) in the Ministry of Industry.
Their entire requirement of capital goods, raw materials and components, spares and
consumables, office equipments etc. Deemed export benefits are available to suppliers of
these goods from the Domestic Tariff Area (DTA). A part of the production from such units
is permitted to be sold in the DTA depending upon the level of the value addition achieved.
FDI IS NOT PERMITTED IN THE FOLLOWING INDUSTRIAL SECTORS:
o Atomic Energy,
o Railway Transport.
o Mining of iron, manganese, chrome, gypsum, sculpture, gold, diamonds, copper, zinc.
o Lottery Business
Policy regime is one of the key factors driving investment flows to a country. Apart from
underlying overall fundamentals, ability of a nation to attract foreign investment essentially depends
upon its policy regime -
of India’s FDI policy framework. There has been a sea change in India’s approach to foreign
investment from the early 1990s when it began structural economic reforms about almost all the
sectors of the economy whether it promotes or restrains the foreign investment flows.
This section undertakes a review.
a) Pre-Liberalization Period:
Historically, India had followed an extremely careful and selective approach while formulating
FDI policy in view of the governance of „import-substitution strategy‟ of industrialization. The
regulatory framework was consolidated through the enactment of Foreign Exchange Regulation Act
(FERA), 1973 wherein foreign equity holding in a joint venture was allowed only up to 40 per cent.
Subsequently, various exemptions were extended to foreign companies engaged in export oriented
businesses and high technology and high priority areas including allowing equity holdings of over 40
per cent. Moreover, drawing from successes of other country experiences in Asia, Government not
only established special economic zones (SEZs) but also designed liberal policy and provided
incentives for promoting FDI in these zones with a view to promote exports. The announcements of
Industrial Policy (1980 and 1982) and Technology Policy (1983) provided for a liberal attitude
towards foreign investments in terms of changes in policy directions. The policy was characterized by
de-licensing of some of the industrial rules and promotion of Indian manufacturing exports as well as
emphasizing on modernization of industries through liberalized imports of capital goods and
technology. This was supported by trade liberalization measures in the form of tariff reduction and
shifting of large number of items from import licensing to Open General Licensing (OGL).
b) Post-Liberalization Period:
A major shift occurred when India embarked upon economic liberalization and reforms program
in 1991 aiming to raise its growth potential and integrating with the world economy. Industrial
policy reforms slowly but surely removed restrictions on investment projects and business
expansion on the one hand and allowed increased access to foreign technology and funding on
the other. A series of measures that were directed towards liberalizing foreign investment
included:
2. Automatic permission for technology agreements in high priority industries and removal of
restriction of FDI in low technology areas as well as liberalization of technology imports.
3. Permission to Non-resident Indians (NRIs) and Overseas Corporate Bodies (OCBs) to invest
up to 100 per cent in high priorities sectors.
4. Hike in the foreign equity participation limits to 51 per cent for existing companies and
liberalization of the use of foreign “brands name”.
5. Signing the Convention of Multilateral Investment Guarantee Agency (MIGA) for protection
of foreign
6. Investments.
These efforts were boosted by the enactment of Foreign Exchange Management Act (FEMA),
1999 [that replaced the Foreign Exchange Regulation Act (FERA), 1973] which was less stringent. In
1997, Indian Government allowed 100% FDI in cash and carry wholesale and FDI in single brand
retailing was allowed 51% in June, 2006. After a long debate, further amendment was made in
December, 2012 which led FDI to 100% in single brand retailing and 51% in multiple brand retailing.
SECTOR SPECIFIC FOREIGN DIRECT INVESTMENT IN INDIA
FDI plays a major role in the dynamic growth of the service sector. The service sector in India has
tremendous growth potential and as a result it attracts huge FDI.
The Computer Software and Hardware enjoy the permission of 100% FDI under
automatic route.
The limit of FDI in Telecom sector was increased from 49% to 74%. FDI up to 49%
is permissible under automatic route but FDI in the licensee company/Indian promoters
including their holding companies shall require approval of FIPB.
Yet, India seems to be suffering from a host of self-imposed restrictions and problems regarding
opening its markets completely too global investors by implementing full scale economic reforms.
Some of the major impediments for India’s poor performance in the area of FDI are: political
instability, poor infrastructure, confusing tax and tariff policies, Draconian labor laws, well
entrenched corruption and governmental regulations.
3. Corruption:
Corruption is found in nearly every public service, from defense to distribution of subsidized food
to the poor people, to the generation and transmission of electric power. The combination of legal
hurdles, lack of institutional reforms, bureaucratic decision-making and the allegations of corruption
at the top have turned foreign investors away from India.
5. Limited scale of export processing zones: India’s export processing zones have
lacked dynamism because of several reasons, such as their relatively limited scale; the
Government’s general ambivalence about attracting FDI; the unclear and changing incentive
packages attached to the zones; and the power of the central government in the regulation of the
zones. India which established its first Export Processing Zone (EPZ) in 1965 has failed to
develop the zones when compared to China which took initiative for establishment only in 1980.
Indecisive government and political instability: There were too many anomalies on the
government side during past two decades and they are still affecting the direct inflow of FDI in India
such as mismanagement and oppression by the different company, which affect the image of the
country and also deject the prospective investor, who is very much conscious about safety and
constant return on their investment
DETERMINANTS OF FDI:-
The determinant varies from one country to another due their unique characteristics and
opportunities for the potential investors. In specific the determinants of FDI in India are:
1) Stable policies:
India stable economic and socio policies have attracted investors across border. Investors prefer
countries which stable economic policies. If the government makes changes in policies which will
have effect on the business. The business requires a lot of funds to be deployed and any change in
policy against the investor will have a negative effect.
2) Economic factors:
Different economic factors encourage inward FDI. These include interest loans, tax breaks,
grants, subsidies and the removal of restrictions and limitation. The government of India has given
many tax exemption and subsidies to the foreign investors who would help in developing the
economy.
4) Basic infrastructure:
India though is a developing country, it has developed special economic zone where there have
focused to build required infrastructure such as roads, effective transportation and registered carrier
departure worldwide, Information and communication network/technology, powers, financial
institutions, and legal system and other basic amenities which are must for the success of the
business.
A sound legal system and modern infrastructure supporting an efficient distribution of goods and
services in the host country.
5) Unexplored markets:
In India there is large scope for the investors because there is a large section of markets have not
explored or unutilized. In India there is enormous potential customer market with large middle class
income group who would be target group for new markets.
Example: BPO was one sector where the investors had large scope exploring the markets where
the service was provided with just a call, with almost customer satisfaction.
6) Availability of natural resources:
As we that India has large volume of natural resources such as coal, iron ore, Natural gas etc. If
natural resources are available they can be used in production process or for extraction of mines by
the foreign investors.
In the recent years foreign financial institutions and government of advanced countries have made
substantial capital available to the under developed countries. FDI will help in developing the
infrastructure by establishing firm’s different parts of the country.
There are special economic zones which have been developed by government for improvising the
industrial growth.
6) Improvement in the balance of payments position: The inflow FDI will help in
improving the balance of payment. Firms which feel that the goods produced in India will have a
low cost, will produce the goods and export the same to other country. This helps in increasing the
exports.
7) Foreign firm’s helps in increasing the competition: Foreign firms have always
come up with better technology, process, and innovations comparing with the domestic firms.
They develop a completion in which the domestic firms will perform better it survive in the
market.
1) Sovereign Risk
India is a vibrant parliamentary democracy and has been one since its political independence
from British rule more than 50 years ago. There is no serious revolutionary movement in
India; hence there is no conceivable possibility of the state collapsing. Sovereign Risk in
India is therefore zero for both "foreign direct investment" and "foreign portfolio
investment." It is however advisable to avoid investing in the extreme north-eastern parts of
India because of terrorist threats. Kashmir in the northern tip is also a troubled area, but
investment opportunities in Kashmir are anyway restricted by law.
2) Political Risk
India suffered political instability for a few years due to the failure of any party to win an
absolute majority in Parliament. However, political stability has returned since the previous
general elections in 1999. However, political instability did not change India's economic
course though it delayed certain decisions relating to the economy.
The political divide in India is not one of policy, but essentially of personalities. Economic
liberalization (which is what foreign investors are interested in) has been accepted as a
necessity by all parties including the Communist Party of India (Marxist).
Thus, political instability in India, in practical terms, posed no risk to foreign direct investors
because no policy framed by a past government has been reversed by any successive
government so far. You can find a comparison in Italy which has had some 45 governments
in 50 years, yet overall economic policy remains unchanged. Even if
Political instability is to return in the future, chances of a reversal in economic policy are next
to nil.
As for terrorism, no terrorist outfit is strong enough to disturb the state. Except for Kashmir
in the north and parts of the north-east, terrorist activity is either non-existent or too weak to
be of any significance. It would take an extreme stretching of the imagination to visualize a
Bangladesh-type state-disrupting revolution in India or a Kuwait-type annexation of India by
a foreign power.
3) Commercial Risk
Commercial risk exists in business in any country. Not each and every product or service can
be readily sold; hence it is necessary to study the demand/supply situation for a particular
product or service before making any major investment. There is a large number of market
research firms in India (including our own) which will study demand/supply situation for any
product/service and advise the potential investor accordingly in exchange of a professional
fee. The India One Stop website provides some accurate statistics and insights into the most
viable sectors for foreign direct investments.
Market size
According to Department of Industrial Policy and Promotion (DIPP), the total FDI investments in
India during April-December 2017 stood at US$ 35.94 billion, indicating that government's effort to
improve ease of doing business and relaxation in FDI norms is yielding results.
Data for April-December 2017 indicates that the telecommunications sector attracted the highest FDI
equity inflow of US$ 6.14 billion, followed by computer software and hardware – US$ 5.16 billion
and services – US$ 4.62 billion. Most recently, the total FDI equity inflows for the month of
December 2017 touched US$ 4.82 billion.
During April-December 2017, India received the maximum FDI equity inflows from Mauritius (US$
13.35 billion), followed by Singapore (US$ 9.21 billion), Netherlands (US$ 2.38 billion), USA (US$
1.74 billion), and Japan (US$ 1.26 billion).
Indian impact investments may grow 25 per cent annually to US$ 40 billion from US$ 4 billion by
2025, as per Mr Anil Sinha, Global Impact Investing Network's (GIIN’s) advisor for South Asia.
Investments/ developments
India has become the fastest growing investment region for foreign investors in 2016, led by an
increase in investments in real estate and infrastructure sectors from Canada, according to a report by
KPMG.
Some of the recent significant FDI announcements are as follows:
In February 2018, Ikea announced its plans to invest up to Rs 4,000 crore (US$ 612 million)
in the state of Maharashtra to set up multi-format stores and experience centres.
In November 2017, 39 MoUs were signed for investment of Rs 4,000-5,000 crore (US$ 612-
765 million) in the state of North-East region of India.
In December 2017, the Department of Industrial Policy and Promotion (DIPP) approved FDI
proposals of Damro Furniture and Supr Infotech Solutions in retail sector, while Department
of Economic Affairs, Ministry of Finance approved two FDI proposals worth Rs 532 crore
(US$ 81.4 million).
The Department of Economic Affairs, Government of India, closed three foreign direct
investment (FDI) proposals leading to a total foreign investment worth Rs 24.56 crore (US$
3.80 million) in October 2017.
Singapore's Temasek will acquire a 16 per cent stake worth Rs 1,000 crore (US$ 156.16
million) in Bengaluru based private healthcare network Manipal Hospitals which runs a
hospital chain of around 5,000 beds.
France-based energy firm, Engie SA and Dubai-based private equity (PE) firm Abraaj Group
have entered into a partnership for setting up a wind power platform in India.
US-based footwear company, Skechers, is planning to add 400-500 more exclusive outlets in
India over the next five years and also to launch its apparel and accessories collection in India.
The government has approved five Foreign Direct Investment (FDI) proposals from Oppo
Mobiles India, Louis Vuitton Malletier, Chumbak Design, Daniel Wellington AB and
Actoserba Active Wholesale Pvt Ltd, according to Department of Industrial Policy and
Promotion (DIPP).
Cumulative equity foreign direct investment (FDI) inflows in India increased 40 per cent to
reach US$ 114.4 billion between FY 2015-16 and FY 2016-17, as against US$ 81.8 billion
between FY 2011-12 and FY 2013-14.
Walmart India Pvt Ltd, the Indian arm of the largest global retailer, is planning to set up 30
new stores in India over the coming three years.
US-based ecommerce giant, Amazon, has invested about US$ 1 billion in its Indian arm so far
in 2017, taking its total investment in its business in India to US$ 2.7 billion.
Kathmandu based conglomerate, CG Group is looking to invest Rs 1,000 crore (US$ 155.97
million) in India by 2020 in its food and beverage business, stated Mr Varun Choudhary,
Executive Director, CG Corp Global.
International Finance Corporation (IFC), the investment arm of the World Bank Group, is
planning to invest about US$ 6 billion through 2022 in several sustainable and renewable
energy programmes in India.
SAIC Motor Corporation is planning to enter India’s automobile market and begin operations
in 2019 by setting up a fully-owned car manufacturing facility in India.
SoftBank is planning to invest its new US$ 100 billion technology fund in market leaders in
each market segment in India as it is seeks to begin its third round of investments.
Government Initiatives
In September 2017, the Government of India asked the states to focus on strengthening single
window clearance system for fast-tracking approval processes, in order to increase Japanese
investments in India.
The Ministry of Commerce and Industry, Government of India has eased the approval mechanism for
foreign direct investment (FDI) proposals by doing away with the approval of Department of
Revenue and mandating clearance of all proposals requiring approval within 10 weeks after the
receipt of application.
India and Japan have joined hands for infrastructure development in India's north-eastern states and
are also setting up an India-Japan Coordination Forum for Development of North East to undertake
strategic infrastructure projects in the northeast.
The Government of India is in talks with stakeholders to further ease foreign direct investment (FDI)
in defence under the automatic route to 51 per cent from the current 49 per cent, in order to give a
boost to the Make in India initiative and to generate employment. In January 2018, 100 per cent FDI
was allowed in single brand retail through automatic route along with relaxations in rules in other
areas.
The Central Board of Direct Taxes (CBDT) has exempted employee stock options (ESOPs), foreign
direct investment (FDI) and court-approved transactions from the long term capital gains (LTCG) tax,
under the Finance Act 2017.
The Government of India is likely to allow 100 per cent foreign direct investment (FDI) in cash and
ATM management companies, since they are not required to comply with the Private Securities
Agencies Regulations Act (PSARA).
Road ahead
India has become the most attractive emerging market for global partners (GP) investment for the
coming 12 months, as per a recent market attractiveness survey conducted by Emerging Market
Private Equity Association (EMPEA).
The World Bank has stated that private investments in India is expected to grow by 8.8 per cent in FY
2018-19 to overtake private consumption growth of 7.4 per cent, and thereby drive the growth in
India's gross domestic product (GDP) in FY 2018-19.
Foreign direct investment (FDI) inflows declined globally by approximately 10–15 per cent in
2016, owing to the vulnerability of the world economy and the persistent fragility of
aggregate demand. Moreover, stagnant growth in commodity exporting countries, the lack
of effective policies to restrict tax inversion deals and a downtrend in the profits of
Multinational Enterprises (MNEs) also contributed to the slump in FDI inflows. Global FDI
flows regained some growth in 2017 and are expected to post a strong recovery in 2018 at
US$1.8 trillion.
Source: United Nations Conference on Trade and Development (UNCTAD) Business Survey based on
Responses of Top Multi National Executives (MNEs), 2016 & Frost & Sullivan Analysis
Most promising industries for attracting FDI in their own economy, Global, 2016-2018
Source: UNCTAD Business Survey based on Responses of Top MNEs, 2016 & Frost & Sullivan Analysis
Globally, there currently are over 190 national level and over 5000 regional and city
level Investment Promotion Agencies (IPAs) that seek to boost investments.
Confronted by the on-going slump in global FDI, IPAs are struggling to make much
progress due to their traditional approach.
From a business / industry perspective, the IPAs’ limited understanding of the industry domain
is their major drawback, whereas, the IPAs believe that limited budgets and fierce competition
are the biggest factors adversely affecting their effectiveness.
Venture capitalists are continuously seeking opportunities in large markets like India, the
second most populous country in the world. 2016 was a year of great momentum for Indian
e-commerce companies, with Snapdeal and BigBasket leading the show by raising $200
million and $150 million in funding, respectively. Yet there are some signs of a decline
which cannot be ignored, for example, India’s largest app-based cab platform, Ola,
reportedly raised money at a 40% concession to its preceding valuation of $5 billion in
2017.
• DST Global led by Russian entrepreneur Yuri Milner invested around $352
million.
To regain their foothold, IPAs need to be innovative and adopt differentiated strategies to
transform themselves into next-gen IPAs. Some strategies are outlined below:
Customization – Every investor is different. So IPAs should be careful while designing
pitches and incentive structures.
Target Start-ups / Fastest Growing Companies – IPAs should ideally look
beyond the Fortune 500 or Forbes 2000 companies. Start-ups seeking international
expansion or companies with high growth prospects from emerging economies
should ideally be the new target companies.
Leverage Social Media – Social media enables greater outreach and enhanced
access to a target audience. So social media platforms like LinkedIn, Facebook,
Twitter, and YouTube should be fully leveraged.
Utilizing Mobile App Platforms – IPAs must possess a mobile app. Mobile apps
of top executives who conduct
are particularly relevant given the time constraints
a fair amount of work on their smartphones.
Thought Leadership – Companies seek IPAs that have comprehensive
knowledge of disruptive changes happening across industries and that can
effectively guide them on ways to benefit from these emerging trends.
Intra Collaboration - IPAs can collaborate amongst themselves and also with
private sector organizations to showcase a stronger value proposition, by
combining their complementary advantages at a lower cost.
Showcasing Brand Ambassadors – IPAs can also use social media tools to
showcase short videos of CEOs talking about why a particular location was chosen
as a preferred investment destination and their experience so far. In this way, it will
be easier for IPAs to promote a particular location and also earn credibility.
Charge for Value Added Services (VAS) – Everything cannot be free. So charging
fees for VAS such as providing linkages with local suppliers / customers and
manpower related services will be acceptable to the industry. This will also improve
the overall quality of the services offered by the IPAs.
Monitoring and Evaluation with External Communication – Any investment
campaign becomes more robust only when Key Performance Indicator (KPI)
performance dashboards and investment value forecasts are incorporated into it.
Inclusion of these parameters allows IPAs to communicate more effectively with
relevant government departments, NGOs, the media and citizens.
Relationship Building – New investment is also likely to come from existing
investors. So, IPAs should typically be careful in managing their existing client
base and periodically interacting with the top management to discuss growth
strategy and future goals.
Bibliography
https://www.ibef.org/economy/foreign-direct-investment.aspx
Media Reports, Press Releases, Press Information Bureau, Press Trust of India
Source: United Nations Conference on Trade and Development (UNCTAD) Business Survey based
on Responses of Top Multi National Executives (MNEs), 2016 & Frost & Sullivan Analysis