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PGDM 2013-15

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5
History and Future of FDI in India
Dr. Palak Jain

Economic Policy and Regulatory Environment

in India
Sunamika Vig
9953593416
ft13sunamikavig@imt.ac.in
Javier Odriz Ezcurra

14FRN-382

Sandeep Kumar

1302-135

Shobhit Sumit Malhotra

1302-150

Sivasankaran S

1302-163

Sunamika Vig

1302-170

Vaibhav Vikram

1302-181

Shine Justin

1302-198

Table of Contents
Introduction.................................................................................................................................................3
Types of FDI............................................................................................................................................3
Methods of FDI.......................................................................................................................................3
History of FDI in India................................................................................................................................5
Need for FDI...............................................................................................................................................6
Issues and challenges faced by FDI in India................................................................................................7
FDI in the Retail sector................................................................................................................................8
FDI in the Insurance Sector.......................................................................................................................10
FDI in the Defence sector..........................................................................................................................12
FDI in the Pharmaceutical sector...............................................................................................................13
FDI in the Banking sector..........................................................................................................................15
Trends in FDI............................................................................................................................................16
Latest Changes in FDI...............................................................................................................................17
Latest Investment Plans by FDIs...............................................................................................................18

Introduction
FDI encompasses any long term investments by an entity that does not reside in the host
country. Usually, the investment is over a long period of time, the idea is to first make an
initial investment and then keep on investing subsequently to leverage the host countrys
advantage. This benefits both the investor and the host country.
Many multinational corporations have come to realize the benefits of investing in India. India
being the worlds second largest economy, fourth largest in terms of GDP. It is a very fast
growing market.

Types of FDI
Outward FDI:
An outward FDI is backed by the government against all types of risks associated with it. It is
subject to tax incentives and disincentives as well. Risk coverage provided to domestic
industries and subsidies granted to local firms stand in the way of outward FDIs.
Inward FDI:
These include interest loans, tax breaks, subsidies and removal of limitations.
Horizontal FDI:
Investment in the same industry abroad provides inputs for a firms domestic production
process.
Vertical FDI:
Backward- An industry abroad gives inputs for a firms domestic production process.
Forward- An industry abroad sells the output of a firms domestic production.
Greenfield investment:
Investment in new facilities or for the expansion of existing facilities. These investments are
the primary target for promotion, as these help in creating jobs and improving production
capacities. Although. It could lead to loss of market share.

Methods of FDI
The investor might acquire 10% or more of the voting power of an enterprise through:

Incorporating a company or a wholly owned subsidiary

Acquiring shares in the enterprise it is associated with

Through a merger or acquisition of an unrelated enterprise

Participating in an equity joint venture with another enterprise

An FDI can be in the following forms:

Preferential tariffs
Soft loan
R and D support
Infrastructure subsidies
Tax holidays
SEZs
Free land
Land subsidies
Job training and employee subsidies
Investment financial subsidies
Income tax rates
Low corporate tax

Fig: Changing trends of FDI in India

History of FDI in India

Foreign investments add to a huge extent to the Indian economy. In the year 1991 India was
under a great and to overcome this financial crisis India opened the gates to FDI. There was a
gradual change in policies on investments in certain sub-sections of the economy in India.
The economic liberalization in India refers to the ongoing economic reforms that started back
in 24th July 1994. After India gained independence in 1947 it adhered to its socialist policies.
In 1966 and 1985 attempts were made to liberalize the economy. This attempt was futile, and
a stronger socialist policy was adopted. The second major attempt was made by Prime
Minister Rajiv Gandhi in 1985. This process came to a halt. In 1991 India faced a balance of
payment crisis. It had to pledge 20 tons of gold to the Union bank of Switzerland and 47 tons
to the bank of England as a part of the bailout deal with IMF.
The IMF also wanted India to undergo a series of structural economic reforms. The new neo
liberal policies included opening for international trade and investment, initiation of
privatization, tax reforms, and deregulation and inflation control measures. Since then,
irrespective of the ruling party the overall direction of liberalization has been the same.
In 1997, India allowed FDI in cash and carry wholesale. The approval of the government was
received in 2006. India retail attracted around $1.8 billion in FDI. Single brand retailing
attracted 94 proposals of which 57 were approved. Although India required the single brand
retailers to limit their ownership in retail outlets to 51%. This inhibited participation.
The laws of India already allow foreign direct investment in the cold chain infrastructure to
100%. Until 2010, middle men have dominated the value chain. This has caused flouting of
norms and lack of transparency. Indian farmers realize only 1/3 rd of the total price paid by the
consumer due to this.
After 2011; for many years India has prevented innovation and competition in its consumer
retail industry. The key cause being lack of infrastructure and competitive retail industry. One
report estimates the 2011 Indian retail market as generating sales of about $470 billion a year,
of which only $27 billion comes from organized retail such as supermarkets, chain stores
with centralized operations and shops in malls. The opening of retail industry to free market
competition, some claim will enable rapid growth in retail sector of Indian economy.
Until 2011, the Indian government denied FDI in the multi brand retail sector. But today,
foreign groups can own up to 51% in multi brand retailers. Single brand retailing has gone up
to 100%. Opening the retail industry to global competition has led to a spur in the sector. This
will help tame high inflation.
Hence, over the years Indian has realized the potential impact FDI can have on its economy
and the further development of the Indian industrial landscape.

Need for FDI

There is a strong inter-relationship between FDI and the economy. Higher inflows of investment
are required in order to sustain the economy of a country. Foreign investment in service and
industry is very important. This further contributes to the GDP and foreign exchange earnings of
the country.
The need for FDI can be stated as below:

Creation of jobs which will in turn augment the salary levels of the employees. These
employees then have greater buying power and also will contribute in giving taxes to the
government. These can be used for social welfare like healthcare, education,
infrastructure etc.

Bring in advanced technology and processes. The foreign companies can set an example
for the indigenous companies. Also, there will be more social as well as economic
reforms. As being a part of the global market will help incorporation of modern business
practices.

Financial stability, growth and development. FDI helps increase the capital and flow of
resource within the country. A sustained high level of investment for development is
achieved.

Improvement in quality of products and processes. Transfer of expertise and collaborative

research and development.

Integration into the global economy. Developing nations, such as India have the resources
but lack the expertise to exploit them. FDI helps developing nations realize their potential
and expose them to the global market.

Increase in competition. This motivates companies to improve their processes and offer
higher quality services in order to maintain and enhance their competitive advantage.

Improvement in the standard of living of the host country. By increasing the tax revenue.
Some countries also provide tax benefits in order to attract FDI.

FDI is one of the major sources of external financing for a developing nation. It has
helped many nations beat economic hardships. The resource transfer in terms of capital
and employment is a key motivator.

Also, FDI helps realize economies of scale which helps in reducing costs through
integrated supply chains.

Stimulates demand growth.

Export competitiveness. The advanced technologies brought in by foreign companies,

helps in making products more suitable for export. As the error rates are improved and
quality is improved. Foreign firms have brand equity, strong established distribution and
marketing channels.

Issues and challenges faced by FDI in India

Foreign Investments add a great value to the Indian Economy. The faith in the economy has been
restored and this can be seen by the increasing value of foreign inflows into India. A UN Report
stated that FDI inflows have increased by 17% in 2013 to reach US$28 bn. With huge
expectations from the Modi government, foreign investments are set to rise over the years. The
only barrier to the growth of these investments may be certain challenges that FDI faces in India
which are;
1. Resource Challenge: India is said to be the land of abundant resources. Land, Labour,
Capital all of these are available both in the rural and urban areas. The bigger challenge
facing investment houses is the underexploited and unexploited resources. The focus is
to increase the investments in infrastructure. This is the first step to overcome the
challenge.
2. Equity Challenge: The fast pace of development in India is marred by one of the biggest
problems that the country is plagued with Social Inequity. The developments
throughout have taken place unevenly with 70% of the countrys population which stays
in Rural areas getting meager benefit off it. To get the complete picture of growth, it
become necessary to assure that both the urban and rural areas have been tapped, thus
fostering balanced growth.
3. Political Challenge: A stable government at the Center looking to boost the investment
climate in the country is what India needed. But, time consuming systems, bureaucratic
layers, and multiple clearance bodies makes it difficult for investments to sustain their
transaction costs. There needs to be a common ground between the government and the
investors so as to push the FDI reforms on the right track and make the most for the
country.

4. Federal Challenge: A country with a 29 States with different rules in each of them
makes it challenging for an investor to think on his investments regionally. The vital part
then is to generalize the policies which may happen through the implementation of GST.
It is equally important to speed up the implementation as the final benefit would be
reaped only post implementation.
5. India must also focus on areas of poverty reduction, trade liberalization, and banking
and insurance liberalization. Challenges facing larger FDI are not just restricted to the
ones mentioned above, because trade relations with foreign investors will always bring
in new challenges in investments.
The World Bank President told journalists this April at a round table of the Annual Spring
meeting of the IMF and the World Bank in Washington that there is a direct impression that
many private sector players have that India is a difficult place to do business. There is a lot India
can do to improve its business environment. India needs to prove a point as an investing
destination and project the country to be one of the best investing destinations.

FDI in the Retail sector

Retailing in India is one of the major pillars of growth with a contribution of around 15% in the
GDP. The Indian Retail market is estimated to grow at a CAGR of 10% and is currently
estimated at around US $500bn. This makes India one of the top retail hub s in the world and
with an ever-growing customer base and increasing purchasing power, a retailers dream
destination. It therefore becomes necessary to direct investments in this sector to boost and
benefit the economy to the most.
FDI in retail can be divide into 2 major parts;
1) Single Brand Retail: This is allowing international companies to sell goods that are sold
internationally under a single brand e.g. Reebok, Nike etc. An example may be taken of
Reebok wanting to open a flagship store in India. This can be done through retail outlets

but these outlets will be permitted to sell only Reebok and separate permission will have
to be taken for selling Adidas.
2) Multi Brand Retail: This implies a retail store with foreign investments can sell multiple
brands in a single store. Opening up this segment would mean global retailers like
Carrefour, Tesco can open up their stores in India that offer a variety of products ranging
from Grocery to Household items.
The opening up of the retail landscape is set to not only spur a rush of retail in India but also
transform the nations ailing infrastructure. The reforms on hold will help the retailing industry
on the whole but have been facing a lot of criticism off late. The government is set to bring in a
set of new reforms that boost the investments into this sector and in turn spur the growth
momentum in the countrys favor. The regulations have gone through various stages of harsh
criticism to vast applaud and the same can be seen from the following snapshot of the timeline;

TIMELINE

1997
100% FDI being
permitted in cash &
carry wholesale
trading under approval
route

2006
- FDI in cash & carry
through automatic
route
-FDI in single brand
retail at 51%

2011
-FDI in single brand
raise to 100%
-Approval for 51%
FDI in multi-brand
retail. However
implementation was
delayed

Looking at the way things are progressing, it becomes necessary to analyze these policies from
all angles and provide a full-fledged view on what these may lead to.

WEAKNESSES
-High capital investment required as real
estate costs are high
-Higher prices as compared to local
outlets
-Workforce training
-Reach

STRENGHTS
-Ever-growing retail lanscape
-Young and dynamic workforce
-Highest shop density in the world
-Big Industrial houses

SWOT

THREATS
-Effect on local retailers and kirana stores
-Long gestation period
-Time to adapt to indian scenario is high
-Disagreement of states in this matter

OPPORTUNITIES
-Revenue generation for farmers
-High employment generation
Improved logistics & supply-chain
-Higher foreign capital inflows

FDI in the Insurance Sector

Insurance has been one of the fastest growing sectors since 2000 as government allowed private
players and FDI in this sector. FDI was allowed up to 26% in insurance sector at that time.
Recently it was allowed up to 49% in 2014. However, the largest life insurance company in
India, LIC is still owned by the government. Insurance in India covers both public and private
sector organizations.
IRDA (Insurance Regulations and Development Authority) is the main government agency
which looks into the supervision and development of insurance sector in India.
IRDA granted the following insurance companies the right to operate in India
1.
2.
3.
4.
5.
6.
7.
8.
9.

Bajaj Allianz Life Insurance Company Limited

Birla Sun Life Insurance Co. Ltd
HDFC Standard Life Insurance Co. Ltd
ICICI Prudential Life Insurance Co. Ltd.
ING Vysya Life Insurance Company Ltd.
Life Insurance Corporation of India
Max New York Life Insurance Co. Ltd
Met Life India Insurance Company Ltd.
Kotak Mahindra Old Mutual Life Insurance Limited

10. SBI Life Insurance Co. Ltd

11. Tata AIG Life Insurance Company Limited
12. Reliance Life Insurance Company Limited.
13. Aviva Life Insurance Co. India Pvt. Ltd.
14. Sahara India Life Insurance Co, Ltd.
15. Shriram Life Insurance Co, Ltd.
16. Bharti AXA Life Insurance Company Ltd.
17. Future General Life Insurance Company Ltd.
18. IDBI Fortis Life Insurance Company Ltd.
19. Canara HSBC Oriental Bank of Commerce Life Insurance Co.Ltd
20. AEGON Religare Life Insurance Company Limited.
21. DLF Pramerica Life Insurance Co. Ltd.
22. Star Union Dai-ichi Life Insurance Comp. Ltd.
Arguments in favour of FDI in insurance sector in India
1. It will bring additional funds into the insurance sector which will provide strength for
insurance companies.
2. It will also promote into the development of insurance sector by bringing in more features
and products in this sector.
3. It will help in sharing of knowledge from foreign investors about risks.
4. Better modeling processes will come which will help to reduce the premium for most of
the companies.
5. FDI will introduce competition into the market which will improve efficiency of the
markets.
Arguments against FDI in insurance sector in India
1. Higher stake holding by foreign companies will result in higher control which could have
adverse impact for domestic consumers.
2. FDI is done by foreign institutions or individuals which would mean that at some point of
time in future capital would eventually go out form the country.
3. Domestic insurance companies may suffer due to higher cost of capital and may not be
able to compete with lower premium offered by FDI funded insurance companies.
4. Laws and regulations are not so strong and it may create a problem for the government.
5. Competition already exists in insurance sector with LIC providing good services and so
not much competition is desired in the sector
There are both positive and negative of each decision. FDI in insurance is one such decision. It
will increase the competition which will increase supply as in basic economics and reduce prices
which would benefit the customers. As a developing country insurance sector in India has small
payers and FDI would increase the number of insurance companies but it will also increase the
risks associated. Regulations need to be revisited in order that FDI could benefit the country.

FDI in the Defence sector

The Defence sector in India comprises of the Defence industry consisting of government and
commercial industry who are mostly involved in research, development, production and service
of equipments and materials for military.
Recently, cabinet headed by Prime Minister Mr. Narendra Modi, decided to increase FDI in
Defence sector from 26% to 49% with the condition that control will be in Indian hands for joint
ventures for manufacturing of Defence equipments.
FDI in Defence aims to reduce the imports which India currently does for its Defence equipment.
Routes for FDI in India
1. Automated routes
2. Government route
Some of the advantages of FDI in Defence sector are:
1. FDI in Defence will reduce the imports of Defence equipment, thus reducing fiscal
deficit.
2. Inflow of high end equipment and new technologies.
3. Competition and innovation in the Defence sector
4. FDI will allow India to develop its own indigenous equipment and thus help in executing
its aspiring programs.
Some disadvantages of FDI in Defence sector are:
1. Cap of 49% means that private players will not be able to take control of the company
which makes FDI in Defence an unattractive offer.
2. Threat to national security may develop from FDI in Defence sector. Programs which are
meant to be kept secret can be leaked to other countries

Looking at the overall picture of FDI in Defence sector in India doesnt look so attractive for
private players which make the whole idea of FDI absolute. The whole idea is to fund the
Defence sector so that imports could be reduced. So in order to attract FDI certain incentives
need to be provided so that funds will be available for Defence sector to grow. But there is a need
to regulate and monitor closely as Defence sector is of national importance and any lack will
cause a threat to the national security.

FDI in the Pharmaceutical sector

The Indian Pharmaceutical sector is a highly fragmented market with about 24,000 players (330
are in organized sector). While the top 10 companies occupies more than a third of the market,
the industry is dominated by branded generics (70% to 80%).
Despite the growth rate depreciation of 6% from 12% last year due to DPCO regulations, the
Indian pharmaceutical market remains one of the fastest growing pharmaceutical markets in the
world. Currently, IPM is valued at 750 making it 13 nth largest in terms of value and third largest
in terms of volume. The recent consolidations like Strides selling its injectable arm, Sun
pharmaceutical acquiring Ranbaxy, Wyeth and Pfizer merger, Mergers and acquisitions has
increasingly become a vitality for the survival of pharmaceuticals.
Even though there are concerns over a series of takeovers of Indian pharmaceutical companies
by foreign MNCs, Indian government on 2014 have kept the existing policy for FDI in
pharmaceuticals, allowing up to 100 per cent foreign equity in the sector.
FDI in the pharmaceutical sector grew 86.5 per cent to reach $1.08 billion (approx. Rs. 6,750
crore) during April-October 2014 over the same period in 2013.
The major reason behind this decision is that in order to survive the competition with its
American and European counterparts, the Indian pharmaceutical industry desperately needs
foreign aid to match up to their R&D and other innovations. . They believe there is more benefit
with 100% FDIs as they will help in creating a healthier nation, for the development of R&D,
exports, drug development and its latest technological applications
From investor perspective, they like to start new ventures in pharmaceutical industry in India the
country is less expensive- from the finances required to invest to kick start a project to skilled
manpower, cheap and efficient labour, renowned scientists & research personnel. To sum up,

India is a perfect place for contract research, clinical trials, clinical data management& biotech
research
But there is are apprehensions from the domestic Pharmaceuticals about the arrival of MNCs to
monopolize the Indian pharma sector, particularly because of the various acquisitions.
So after through the recommendations made by the Maira Commission, the government
categorized the FDIs as investment in Brownfield (existing) and Greenfield (new) areas. In this,
Mergers & Acquisitions that will take place in Brownfield sector will be scanned by the
Competition Commission of India while 100 percent FDIs will take place in the Greenfield
sector.
Thus, based on the recommendation by the Cabinet Committee on Economic Affairs (CCEA),
the department of industrial policy and promotion (DIPP) under the ministry of commerce and
industry stated 100 per cent foreign direct investment (FDI) would be allowed in both Greenfield
and brownfield segments.
However, on the other side there is one section in the society that feels that FDI in pharma might
not be beneficial by this policy.
The commerce and industry ministry proposed to lower the FDI cap to 49 per cent in the
brownfield segment, to make the medicines more affordable and prevent the takeovers of
domestic drug making companies by multinational giants. Commerce and Industry Minister
Anand Sharma says, The investments in new areas had not displayed value addition in terms of
additional infrastructure or the research and development segment. At the same time, FDI in
brownfield investment resulted in acquisition of domestic manufacturers by multinationals.
Even though both the health and commerce & industry ministries had proposed more restrictions
to foreign players into the sector, the finance ministry felt this might reduce the flow of foreign
exchange
But considering the fact that there are bodies to govern the proper functioning of the impact and
effect of FDI on indigenous producers, one may welcome it as a boon that will enable future
advancement.

FDI in the Banking sector

The Indian banking has shown remarkable progress in financial growth and improved
employment since the last few years. The banking sector still continues to remain a highly
prominent sector in India despite the global financial crisis. Because of opened up markets, most
of the Indian banks are competing at international level with their innovative products and solid
financial status.
FDI has contributed a lot for India in enhancing efficiency of the Indian banking sector, creating
innovative financial products and improving capitalization of banks which became inevitable for
them to survive the changing market conditions.
Indian banking sector underwent many changes since 1990. Initially, large number of banks was
supported by Indian government to ensure adequate capital level. Later the Government tried to
create self-sufficiency to banks by offering licenses to the latest generation of private sector
banks. This step actually compelled most of the banks to introduced modern technology so as to
survive the competition and stimulated opening up of branches and ATMs across the India in
order to sustain customers from going to their competitors. And very recently, the Indian
government has taken a very important step by allowing foreign banks to invest in Indian private
sector banks.
Here are the guidelines of allowing FDI in Banking:

Foreign Direct Investment of up to 49% from different sources shall be allowed in private
sectors banks of India on the automatic route.

An approval from Foreign Investment Promotion Board (FIPB) is required for the issual
of fresh shares under automatic route, to foreign investors with financial or technical
collaboration in the allied or similar field.

All the decisions for FDI in an Indian bank that has joint venture with insurance sector
will be observed by the RBI in collaboration with the Insurance Regulatory and Development
Authority (IRDA), to make sure it is in compliance with FDI cap in insurance sector.

Foreign bank which has branch in India is eligible for FDI in private sector banks, subject
to the limit of 49% and has to get RBI approval.

The foreign investors can set up new branches in rural India and weak banks with an
investment of up to 74 percent.

74 % is the limit permitted for Foreign Direct Investment in Indian banking sectors of which 49
percent is allowed through automotive route, while FDI beyond 49 percent up to 74 percent is
permitted via government approval route.
Foreign Direct Investment (FDI) limit in public sector banks:
FDI in public sector banks of India is permitted up to 20% and must be in compliance with
Banking Companies Act
Also RBI doesnt support foreign banks which doesnt comply to the general financial inclusion
and those aspiring to enter into a niche market

Trends in FDI
FDI in India has averaged at 1013.94 USD mill since opening it up at 1995. The flow had
fluctuated widely to an extent of 5670 million on February, 2008 to as low as -60 million on
February of 2014. Since the change in the government there has been a general rise in FDI and
FII as well, this was shown by an increase in FDI by 17% in comparison to the past year.

The percentage share of FDI in various sectors can be seem in the below chart.

The recent figures show FDI in Metallurgical Industry at 1 million USD, 5 million USD in
Chemicals, 27 million USD in Computers, 47 million USD in automobile industry, 60 million
USD in Construction, 119 million USD in power sector, 131 million USD in Hospitality (hotels
and tourism), 164 million USD in Service sector and 483 million USD in telecommunication.
The trend of service sector attracting higher percentage of FDI in the past years has changed and
the first place has been taken up by the telecom sectors.

Latest Changes in FDI

Under Modi governments first financial meet the following changes were taken up to the
finance minister Arun Jaitley.

Railway Infrastructure excluding operations, has been approved to 100%. This was
made to allow foreign firm to create train networks and supply trains but not operate

them.
Defence sector increased to 49% from 26%.

Telecom raised from 74% to 100%.

Single brand retail from 51% to 100%
Multi brand retail 49%
Insurance sector increased from 26% to 49%. But the management of the company and

the control should be with the Indians.

Petroleum refining, Power exchange 49% changed from government approval to

through automatic route

Asset reconstruction companies raised from 74% to 100 %, of which 49% will be under
automatic route.

With the increasing confidence in the new Indian Government FDI and FII are expected to
increase by more than two times and even cross the mark of 60 billion USD by end of the
financial year 2015. A recent study shows that the investor sentiments about India are positive
and are banking on the Modi governments plans to improve Indias economy.
India still requires a 1 trillion USD investment for its latest five year plan 2012-17 to fund the
infrastructure and growth. For this huge amount India has to continue opening up and promote
FDI and FIIs in all sectors.

Latest Investment Plans by FDIs

Nike, US based firm, has proposed to Department of Industry Policy and Promotion

(DIPP) for setting up a fully owned stores in India.

Milacron Llc, plastic manufacturer and moulding company, to invest in 30 million USD

over the next three years through its subsidiaries.

InterGlobe Aviation, parent company of IndiGo, has made a move to change the
investment from a major promoter to be classified as NRI investment making it available

for new round of FDI.

ZTE Corporation, a Chinese Telecom equipment maker, has announced plans to establish
a Global Networking Operation Centre (GNCO) in India. GNCO will act as a central

managing centre for multiple telecom carriers in Asia and Africa.

Suzuki Motor Corporation has made announcements on increasing its investment in its
Indian subsidiary Suzuki Motor for establishing a new plant in Gujarat. This plant will

operate under the principle of no-loss and no-profit and the Japanese company will be

holding 100% of its stake.

Since the changes in FDI rules for Telecom industry, Uninors Norway counterpart

Telenor has planned to increase its stake in it to 100% from 74% stake.
Leapfrog Investment, US based firm has brought a minority stake in IFMR Capital
Finance for 29 million USD; making it the third largest FDI investment in Indian

insurance sector.
FIPB, foreign investments board, has approved many pending investment proposals.
These proposals count up to a total of Rs. 3,854 crores.