Foreign Direct Investment in India and Political Instability in Business

Foreign Direct Investment In India And Political Instability In Business
Chapter 1: Introduction
Indias FDI Overall ViewThe early nineties was a period when the Indian economy faced a
severe Balance of Payment crisis. Exports began to experience serious difficulties. The crippling
external debts were putting pressure on the economy. In view of all these developments there
was a serious threat of the economy defaulting in respect of external payments liability. It was in
the light of such adverse situations that the policy makers decided to adopt a more liberal and
global approach thereby, opening its door to FDI inflows in order to restore the confidence of
foreign investors.FDI provides a situation wherein both the host and the home nations derive
some benefit. The home countries want to take the advantage of the vast markets opened by
industrial growth. Whereas the host countries get to acquire resources ranging from financial,
capital, entrepreneurship, technological know-how and managerial skills which assist it in
supplementing its domestic savings and foreign exchange.
The contribution or impact of FDI has been well acknowledged in various discussion papers and
studies amongst these in one of the recent study done on Indias FDI inflows trends and
concepts1 it is mentioned that, The Economic Survey 2008-09 reiterated that: FDI is considered
to be the most attractive type of capital flow for emerging economies as it is expected to bring
latest technology and enhance production capabilities of the economy. And the National
Manufacturing Competitiveness Council specified that: Foreign investments mean both foreign
portfolio investments and foreign direct investments (FDI). FDI brings better technology and
management, access to marketing networks and offers competition, the latter helping Indian
companies improve, quite apart from being good for consumers. This efficiency contribution of
FDI is much more important. The evolution of Indian FDI can broadly be divided into three
phases classified on the premises of the initiatives taken to induce foreign investments into the
Indian economy:
(a) The first phase, between 1969 and 1991, was marked by the coming into force of the
Monopolies and Restrictive Trade Practices Commission (MRTP) in 1969, which imposed
restrictions on the size of operations, pricing of products and services of foreign companies. The
Foreign Exchange Regulation Act (FERA), enacted in 1973, limited the extent of foreign equity
to 40%, though this limit could be raised to 74% for technology-intensive, export-intensive, and
core-sector industries. A selective licensing regime was instituted for technology transfer and
royalty payments and applicants were subjected to export obligations.
(b) The second phase, between 1991 and 2000, witnessed the liberalisation of the FDI policy, as
part of the Governments economic reforms program. In 1991 as per the Statement on Industrial
Policy, FDI was allowed on the automatic route, up to 51%, in 35 high priority industries.
Foreign technical collaboration was also placed under the automatic route, subject to specified
limits. In 1996, the automatic approval route for FDI was expanded, from 35 to 111 industries,
under four distinct categories (Part Aup to 50%, Part Bup to 51%, Part Cup to 74%, and Part
D-up to 100%). A Foreign Investment Promotion Board (FIPB) was constituted to consider cases
under the government route.
(c) The third phase, between 2000 till date, has reflected the increasing globalisation of the
Indian economy. In the year 2000, a paradigm shift occurred, wherein, except for a negative list,
all the remaining activities were placed under the automatic route. Caps were gradually raised in
a number of sectors/activities. Some of the initiatives that were taken during this period were that
the insurance and defence sectors were opened up to a cap of 26%, the cap for telecom services
was increased from 49% to 74% , FDI was allowed up to 51% in single brand retail. The year
2010 saw the continuation of the rationalisation process and all existing regulations on FDI were
consolidated into a single document for ease of reference. The evolution of the FDI policy,
towards more rationalisation and liberalisation, has narrowed down the instruments regulating
FDI policy broadly to three2:
(i) Equity caps: restricting foreign ownership of equity capital
(ii) Entry route: requiring prior Government oversight, including screening and approval
(iii) Conditionalities: comprising of operational restrictions/licencing conditions, such as
nationality criteria, minimum-capitalisation and lock-in period etc.
A. FDI Inflows Trends: 1991-2011

The data on FDI inflows into the country shows that foreign investors have shown a keen interest
in the Indian economy ever since it has been liberalized. An increasing trend of flows can be
observed since 1991 with the peak of FDI flows being reached in 2008-09. Therefore the trend
gives support to the fact that as and when the government has taken initiatives to open up and
liberalize the economy further, the investors have welcomed the initiative and reciprocated by
infusing investments into India. There are various reasons which work in favour of India and
increase the level of interest shown in by foreign organizations some of them being its
demographics with a young population there is a huge consumer base that is to be tapped, the
growing middle class, increased urbanization and awareness, rising disposable incomes.
B. FDI Inflow by Components:

There has been a change in the method of estimation of FDI inflows since 2000-01, prior to this
only equity inflows was taken as the FDI inflow figure however post 2000-01 the RBI has started
following the international practice and taken into account other components of FDI inflows
namely re-invested earnings and other capital. A look at the contribution of various components
of FDI reveals that the share of re-invested earnings was rising from 2000 onwards uptil 2005-06
after which it has constantly been declining. The share of equity inflows has risen sharply since
2000-01 when it stood at 59.6 per cent to 74.3 per cent in 2010-11.
C. Ways of receiving Foreign Direct Investment by an Indian company
i. Automatic Route FDI up to 100 per cent is allowed under the automatic route in all
activities/sectors except where the provisions of the consolidated FDI Policy, paragraph on
Entry Routes for Investment issued by the Government of India from time to time, are attracted.
FDI in sectors /activities to the extent permitted under the automatic route does not require any
prior approval either of the Government or the Reserve Bank of India.
ii. Government Route
FDI in activities not covered under the automatic route requires prior approval of the
Government which are considered by the Foreign Investment Promotion Board (FIPB),
Department of Economic Affairs, Ministry of Finance. Indian companies having foreign
investment approval through FIPB route do not require any further clearance from the Reserve
Bank of India for receiving inward remittance and for the issue of shares to the non-resident
investors. As can be seen that since 2005-06 there has been a significant difference in the amount
of FDI inflows through the two routes a possible explanation for which could be that with the
investment climate in India improving and healthy competition among states to attract FDI, the
government eased foreign investment regulations leading to a spurt in FDI coming through the
RBI route, which is a positive sign. As per the data available there is an increase in share of
inflows through the RBIs automatic route, a decrease in the shares of inflows through the
SIA/FIPB.
D. Sectoral FDI Flow:
Changing Dynamics of Investment:
Overall FDI into almost all the sectors had declined in the year 2010-11, a reason for which
could be the global situation that prevailed during that time frame.
Although services sector remain the sector attracting the highest FDI inflows since 2006-07 its
share has been constantly declining.
The FDI flows into computer hardware and software has been downward ever since 2005-06. It
has drastically gone down from 24.8 per cent in 2005-06 to 4.0% in 2010-11.
Housing & Real Estate have shown an upward trend in terms of their share in FDI inflows.
Investments in chemicals and metallurgical industries have been erratic as no clear trend could
be observed for the time period 2005-06 to 2010-11.
Chapter 2: Relevance Of FDI In India
The 12th Plans draft approach paper of the Planning Commission mentions that Thus the
average investment rate needed during the Twelfth Plan period is estimated to be 38.5 per cent of
GDP for the 9.0 per cent growth scenario with 4.55.0 average inflation. It would have to rise as
much as 41.4 per cent of GDP for the 9.5 per cent growth scenario with 5.05.5 rate of inflation
and in terms of investment in infrastructure the same document suggests that The total
investment in infrastructure would have to be over Rs.45 lakh crore or $ 1 trillion during the 12th
Plan period. Financing this level of investment will require larger outlays from the public sector,
but this has to be coupled with a more than proportional rise in private investment.
It is seen that every nation world over is the race of attracting more FDI inflows to accelerate the
pace of economic progress Indias case is no different as in order to achieve and sustain a healthy
rate of growth India would require huge investments which cannot be financed locally therefore
the government needs to look at alternate avenues of building up investments, FDI in this context
is a very useful mechanism. Recent reports have also suggested that greater FDI inflows must be
encouraged to meet capital requirements. Aside from using FDIs as investment channel and a
method to reduce operating costs, many companies and organizations are now looking at FDI as
a way to internationalize. FDI should be looked upon as a means of industrialisation and
development. The Benefits of FDI Inflows can be broadly identified as:
Bridging the financial gap between the quantum of funds needed to sustain a level of growth
and the domestic availability of funds
Technology transfer coupled with knowledge diffusion that leads to improvement in

productivity. It can, thus, fasten the rate of technological progress through a contagion effect
that permeates domestic firms
The transfer of better organisational and management practices through the linkages between
the investing foreign company and local companies.
Some of these benefits have been seen in the cases of automobile and the telecom industry as
discussed in the study earlier. Moreover it can be seen that a promotion and growth in one
industry simultaneously fuels the growth in its interconnected sectors as well.
It is well accepted that Indias rising growth would require a simultaneous expansion of its
infrastructure facilities to support it. The Government of India has been frequently taking
initiatives to liberalize and incentivize its foreign direct investment policies to attract investments
however the recent decision to suspend FDI in retail as well as hold all other FDI decisions could
dampen the international investors confidence, as the initial announcement and then the rollback
of the initiative might be interpreted as a sign of political instability in taking key policy
decisions. In todays global scenario when investors might be looking at alternate avenues, to
invest their money there are only a few nations across the world that provide opportunities to
foreign companies, with a highly potential market and a low cost manufacturing opportunity and
India is one of them. FDI in retail would have been an opportunity to attract inflow of funds
which would have resulted in major benefits for the Indian economy:
1. Agriculture: Organized retailing would have led to a complete overhauling of the existing
agricultural supply chain. It would have led to bypassing of various intermediaries thereby
reducing costs. Investments made by them would have helped in creating back end infrastructure
like warehousing and distribution centres, transport and cold storage facilities. It would have
created both direct as well as indirect employment at various levels. All these would have
resulted in enhanced farmers realizations, improved quality of products and reduction in
consumer price.
2. Growth in allied industries: The inflow of funds into retailing would have simultaneously led
to the growth of allied industries as happened in the case of automobiles, which led to the growth
of auto components sector. Likewise FDI in retail would assist growth in supplier industries such
as food-processing and textiles moreover, growing demand for retail space, construction of real
estate would have also taken place.
3. Increase in Employment: As mentioned in the previous point the growth in a number of allied
industries would also result in the growth of employment opportunities across sectors. Both
direct and indirect labour would be required to support the industrial and operational machinery
that would have been formed as a result of opening up of the sector.
4.Improvement of Government Revenues: Another significant advantage of organized retailing is
its contribution to government revenues. Organized retailers, by virtue of their being corporate
entities need to file tax returns periodically whereas in the unorganized sectors there have been
leakages in the collection of central and state taxes.
Outcomes of the FDI policy:
Some of the benefits
Industry
Has increased the competitiveness of
Consumers
Consumer choices have increased by
domestic players.
many folds both in terms of product
The growth in the sector assisted the
range within a price range as well as
development of the auto component
across price range.
industry which not only produces
The Indian consumer today has access
products of global standards but has
to global brands
also resulted in increased employment.
The quality of products in terms of
The productivity levels within the
customer experience as well as other
sector have improved as a result of
parameters such as safety, accessories
following globally recognized models of
have improved tremendously.
manufacturing.
Over the years there have been new
The technological capability of Indian
product categories that have been
firms has also seen improvements over
created keeping in mind the change
the years.
in customer preferences. The recent
FDI bought the required capital into the
surge in demand for luxury and high
sector which assisted players in scaling
end automobiles has been noticed by
up their supply thereby assisting their
various international brands which have
overall efficiency and growth
now started looking at India as a future

growth driver.
10
Chapter 3: Lost Opportunity
As the largest democracy with the second largest population in the world and with rule of law
and a highly educated, English speaking work force, India must have been considered as a safe
haven for foreign investors. Yet, India seems to be suffering from a host of self-imposed
restrictions and problems regarding opening its markets completely to global investors by
implementing full scale economic reforms. India seems to have lost a golden opportunity for
attracting a sizable amount of FDI at least commensurate with that of China. Some of the major
impediments for Indias 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.
1. Political instability: Indian politics is cacophonous and fractious, playing itself out in one of
the most socially heterogeneous societies in the world with sharp social inequities, a corrupt and
11
inefficient bureaucracy, and poor accountability of politicians (Kapur and Ramamurti, 2001).
Adding to these problems is the political instability at the central government arising out of
the multiplicity of regional political parties and the need to form shaky coalition governments.
Consequently, there were four general elections and six prime ministers during the last decade. In
such an environment, the much needed economic reforms have been slow and inadequate. Even
though the present Vajapayees government is more stable than the three previous ones, it is still
a shaky coalition of 24 disparate parties with divergent agendas. There is a general consensus
across party lines to push for sustained economic reforms and growth but, in reality, governments
are repeatedly obliged to dilute the reforms in order to keep their coalition partners on board
(Kripalani, 1999).
2. Infrastructure: It is generally recognized that the state-controlled physical infrastructure is the
weakest link in the economy (Sheel, 2001). : Lack of adequate infrastructure is cited as a major
hurdle for FDI inflows into India. Badale (1998) states that regional differences in infrastructure
have become critical determinants for outside investors. The Indian government has
vowed to bring its infrastructure up to date, but power cuts remain daily events, and transporting
goods from place to place takes weeks (Lane, 1998). This bottleneck in the form of poor
infrastructure may discourage foreign investors from putting their money in India. However, this
in itself can be an opportunity for investment with the governments willingness to open the
infrastructure sector to foreign investors. Even state governments are welcoming projects like
roads, rural electrification, and power generation and transmission (Pathak, Venugopal and
Chandra, 2000). Indias age old and biggest infrastructure problem is the supply of electricity.
Power cuts are so common that most businesses stopped depending on state electricity
supply and started having their own power generators. Even the little power supplied by stateowned electricity boards, the power is so uncertain and uneven that it leads to burnt out motors
and lost output. It is no surprise that India is the worlds biggest market for items such as voltage
regulators and power stabilizers. Enron Corporation came with the largest FDI project so far in
India and started the $2.9 billion Dhaboli power project six years ago. But continuous litigation
with its sole customer, the State of Maharashtra, resulted in Enron stopping work and finally
12
pulling out of India. Enron accused the state government of slowing the project for political
reasons. Enron decided to pull out of India and the companys decision to flee is
having a chilling effect on other foreign power companies (Kripalani, 2001) If the dispute is not
resolved soon, India could harm its already blighted image as destination of FDI.
3. Commercial Law and Government regulations: Indian company law has undergone a number
of significant changes in 1999, supposedly paving for smoother inflow of FDI. The Companies
(Amendment) Act of 1999 allowed Indian companies for the first time to buy back their shares
and substantially relaxed the restrictions on inter-corporate loans and investments. However,
an indirect amendment of the law by the new guidelines of the Ministry of Industry has
effectively rendered investments by international investors subject to veto by their local partners
(Viswanathan, 2000). Several joint ventures between foreign and Indian companies have
unraveled, forcing the investors to waste a lot of time negotiating with their Indian partners over
the premium demanded for a buy-out. Under the new law, written approvals have to be obtained
from both past and present joint venture partners and technology and trade mark licenses in order
for a foreign company to do anything in India. Restricting foreign investment is a recurring
theme throughout the 1999 amendments to the Companies Act. Additionally, the new Guidelines
of the Ministry of Industry effectively put the Indian companies in a position to dictate terms to
their joint venture partners and licensors of technology and trademarks (Viswanathan, 2000).
4. Tax and Tariff: India has been sending mixed signals to investors by changing it tax and tariff
policies without notice. When India opened its economy to FDI initially in the early 1990s,
several foreign investors decided to base their business operations in Mauritius (a beautiful
island state in the Indian Ocean), because Mauritius does not tax dividends or capital gains, as
India does. However, India has a long-standing tax treaty with Mauritius under which residents
of Mauritius are to be taxed under Mauritius law rather than Indian law (Rao, 2000). But, on
March 31, 2000, Indian tax authorities sent notices to five foreign institutional investors (FII)
based in Maritius, demanding income taxes worth about $2 million. The tax notices caused
havoc and several of these FIIs pulled out of the Indian market (Dasgupta, 2000). Sales taxes are
13
levied by individual states and so these taxes vary from state to state. This complex sales tax
structure can sometimes be a deterrent to foreign investors. Coca Cola Company found that
carbonated soft drinks face an excise tax of 40 per cent. These are also subjected to 17
different sales tax rates ranging from 12 to 25 per cent. Such complex tax structure can make it
difficult for potential investors to project their returns accurately. Some of the new tax laws can
be retroactive and collection from unrelated parties may be mandatory. In some cases, Indian
government can tax companies not physically present in India but doing business there (Klein
and Hirji, 2001).
5. Labor Laws: India is ranked very highly in the Global Competitive report for abundant and
skilled labor, but very low on flexibility. This inflexibility is embedded mainly in the laws and
regulation relating to disputes in change of service conditions. One of the biggest impediments to
privatization in India is the lack of an exit policy, that is, a policy to govern the dismissal of
redundant workers (Ramamurthi, 2000). The present Indian labor laws forbid layoffs of workers
for any reason (Kripalani, 1998). These laws protect the workers and thwart legitimate attempts
to restructure business. To retrench unnecessary workers, firms require approval from both
employees and state governments-approval that is rarely given (Kripalani, 2000). Militant unions
extort huge sums from companies through over-generous voluntary retirement schemes.
Treadgold (1998) observes that "attempt to tap the cheap and often highly skilled labor of India
can in itself be a trap and anyone thinking of investing directly into the Indian market must take
care when dealing with these labor laws. Once workers are employed, it is virtually impossible to
dismiss them". The pharmaceutical company Parke- Davis, India was recently reported to have
paid $6.6 million to retire just 300 workers, about four times the usual rate (Treadgold, 1998).
6. Corruption: The word corruption does not surprise the Indians because they are expected to
bribe everyone, from the traffic cop to the top officer in the civil service. It is common
knowledge in India that corruption is the norm, not an exception. India is afflicted with what
some refer to as a crisis in governance, with corruption in nearly every public service, from
defense to distribution of subsidized food to the poor people, to the generation and
14
transmission of electric power. Politicians in their honest moments admit that the system is
thoroughly corrupt. The complex approval procedures confronting the foreign investors are
also very often intimidating. As Treadgold (1998) states, foreign investors find it difficult to cut a
path through the paper work of overlapping government agencies. The humongous bureaucratic
structure has created a fertile ground for corruption. Transparency International (2000) recently
ranked India close to the bottom of its list corrupt countries. Kumar (2000)
observes that a combination of legal hurdles, lack of institutional reforms, bureaucratic decisionmaking and the allegations of corruption at the top have turned foreign investors away from
India. Most foreign investors have become leery of the country's history of discrimination
against foreign companies and its reputation as a slow, difficult, bureaucracy ridden
environment to do business (Teisch and Stoever, 1999). According to Lane (1998), the most
telling evidence of the cost of delaying the reforms is the sheer effort foreign investors have to
put in to cope with the labyrinthine bureaucratic tangle. Vittal (2001) states that corruption, the
misuse of public office for private gain, is capable of paralyzing a countrys development and
diverting its precious resources from public needs of the entire nation. Corruption is
anti-poor because it snatches away food from the mouths of the poor. Corruption is antidevelopment. According to the United Nations Development Project report for South Asia in
1999, if corruption levels in
India come down to those of Scandinavian countries, Indias GDP growth would increase by 1.5
per cent and FDI will grow by 12 per cent (Vittal, 2001).
15
Chapter 4: India's Long, Uncomfortable

History With FDI
"The ever increasing state controls were carried on to such a point where, after nearly four
decades of governmental intervention, the nation had become virtually bankrupt in almost every
sphere - economic, political and commercial."
By the early 1990s it was clear that a change of course was the only way forward and under
Prime Minister Narasimha Rao the government began to liberalize the Indian economy little by
little. FDI started trickling in. By way of comparison, China, under Deng Xiaoping had begun
introducing something akin to modest amounts of free market reform in the 1980s as a way out
16
of a similarly ruinous and failed socialist economy. However, comparisons of FDI flows
between India and China do not flatter India. In 1990, at the dawn of Rao's reforms, FDI into
India stood at an extremely modest US$162 million and it took until 1998 for FDI flows to pass
the $3 billion mark. China hit $3.4 billion in 1990 and by 1998 was seeing FDI of $45 billion.
Over that same period, the authors point out, China received $208 billion in FDI to India's $11
billion, yet the Indian market has as much to offer. As India's rapid and highly successful ramp
up over the last decade of its capabilities as a site for offshoring IT and financial processes
demonstrates, the country has tremendous potential to compete in global markets. Unfortunately,
the country's socialist history has left it with a legacy that allows almost any market liberalising
move to be branded as "anti-people", to the advantage of this or that political grouping, creating
road blocks to economic progress at every turn.
The comparative FDI picture presents a paradox in global investment. India and China started
liberalizing their economies about the same time. India is the world's largest democracy, with its
administration operating under rule of law, and with a very stable and long established judiciary
system. Contrarily, China has been and still is an authoritarian communist country, a far cry from
the democratic society that India is... Most of the developed countries are democracies with
capitalist market economics... global FDI is rushing to China... bypassing India, which by all
standards should have been a natural choice for foreign investors. Obviously, something is
seriously wrong in India's approach to attracting FDI."
"Some of the major impediments for Indias 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."
That is a frightening handful of failings to lay before any potential investor, and the biggest
whammy in the list is probably the first one, which goes to political risk. As the authors note:
"Indian politics is cacophonous and fractious, playing itself out in one of the most socially
heterogeneous societies in the world with sharp social inequities, a corrupt and inefficient
bureaucracy, and poor accountability of politicians (Kapur and Ramamurti, 2001). Adding to
17
these problems is the political instability at the central government arising out of the multiplicity
of regional political parties and the need to form shaky coalition governments."
It is hard to imagine any potential investor reading that and thinking, "So what?". If there is one
thing business hates above all else, it is political risk. Politics is a realm where anything can
happen and probably will, as far as business is concerned. The problems with the eurozone are,
in essence, purely political, as are the solutions, which is why the Eurozone crisis looks set to run
for a decade or so yet. India's "cacophonous" politics look set to run for a good deal longer than a
mere decade - which looks like inhibiting what should be strong FDI flows into the dim and
distant future.
18
Chapter 5: Foreign Direct Investment (FDI)

A Necessity In India !!
19
There are arguments and counter-arguments on FDI or Foreign Direct Investment in India in the
Parliament, in election rallies, in TV-debates, in newspaper articles, in general strikes in the
country or Bharat Bandhs There are obvious fears by the farmers, retailers, small-scale
manufacturers, and the common man on the effect of FDI in India. Some say that FDI in India
will bring major Multi National Companies (MNCs) in India which will abolish small-scale
retailers and businessman. There are arguments saying that the MNCs will have a monopoly in
the market resulting in a sharp rise in price of items in India. Further, there is also a fear that the
countrys security both internal and external, will be at stake due to the involvement of MNCs
in Telecom, Internet, Aviation, Infrastructure, Retail, Healthcare, Insurance, etc.
Not that all the above arguments against FDI are invalid. However, with a positive mindset, we
can certainly overcome such apprehensions. This can certainly be done by bringing reforms in
our Judicial system, and by resetting a stronger regulator like the Competition Commission in the
line of Election Commission of India or Auditor General of India. Moreover, Vigilance
Commission has to be more responsive and aggressive in its activities. Along with these, the
concept of Lokpal needs to be operational in India and the nature of functioning of the Central
Bureau of Investigation (CBI) needs to be completely autonomous in this regard. And of course,
the public (consumers) must be aware, prompt and pursuant with regard to issues and their
20
solutions ! With a proper check-and-balance policy implemented, we can certainly reap benefits
from FDI in India. In the current economic scenario stiff rise in corruption, lack of
accountability and transparency FDI seems to be the right answer and is a dire necessity in
India.
Here are some reasons favouring FDI in India

It is really surprising to know that only 2-3% Indians pay Income tax. Does this figure say that
the income of 97-98% Indians are less than the taxable limit (INR 2 Lakh/year) ?? A serious
doubt. There are many reasons to it. The first and foremost is the lack of transparency and lack of
accountability in our financial transactions be it in income or expenditure. People prefer cash
transaction over card or cheque while buying any item in India. Starting from a kirana shop
(local general store) to a jewellery shop, everybody prefers cash transaction and giving and
taking a bill /receipt is mostly discouraged. Some feel it is a taboo to ask for a bill, and some
think why to pay tax and take a bill ? But have you ever wondered that in not asking for a bill
/receipt, who is getting benefited the customers or the aamjunta ?!? No they are the losers
only !!!
With direct and organized marketing which will mainly result out of FDI, the financial
transactions will be mostly transparent and will be accounted for. Payments will be mostly in
online mode. This will not only improve the tax scenario in India but also curtail huge corruption
in India. Poor customers will not be cheated and even if they are cheated, with a valid bill
/receipt, necessary complaints can be conveniently filed in the Consumer Court. The
investigation process will also become easy and quick as everything would be duly accounted.
In India, we have the wide concept of Middle-Man or Agent or Broker, who always
demands his/her share in every deal; sometimes even more than the actual cost of the product or
21
service, without actually doing any thing or adding any value to it. The concept of direct
marketing is hardly available in India, especially in Agriculture, Medicine, Grocery and
Household items, etc. Surprisingly, there are many middle-men involved in the process from
the farmer to the consumer, from the factory-worker to the customer, from the laboratorytechnician to the patient, and from the poor manufacturer (workmen) to the average consumers.
This not only increases the price of the items but also encourages hoarding, corruption, unethical
practices in business, unfair trade dealings, and above all the big bug i.e. inflation.
As per a study commissioned by the World Bank, farmers in India hardly get anything more than
12-15% of the price consumers pay at the retail outlet for Agricultural products. The reasons
being - (i) lack of education or awareness (ii) poor infrastructure (machinery) (iii) poor storage
system (more than 25% food-grains are wasted in India today due to poor storage system) (iv)
poor transport (e.g. non-urbanized roads leading from the agricultural fields to the towns) (v)
middle-man (market-domination). With direct marketing as expected because of FDI in
agriculture, the involvement of middle-man will be minimized in the process. Both the farmer
and the consumer will be benefited largely quantitatively and qualitatively. Direct sell by the
farmers to organized retailers can render them a profit about 60% higher than that via mandi (a
big un-organized wholesale /retail market in India) or the middle-man ! This will also check
inflation of food items. Moreover, FDI will also ensure adequate storage facilities for food items,
improve infrastructure scientifically and transportation facilities.
Like Agriculture, Retailing in India also requires FDI and organized marketing. The quality of
the products will be improved and at the same time the price of the retail items will reduce
severely. Moreover, it will also generate employment in India. With Indias traditional family
system, culture, population and needs, the small retailers will also remain fully functional but
with enhanced accountability in services and products. It will create a healthy atmosphere for a
sustained competitive market.
22
Other than Agriculture and Retail, FDI will also benefit India to improve its Telecom penetration,
Internet affordability, etc. At present, Broadband Services are mainly available in cities only.
With better infrastructure and technology, it can be expanded to villages or rural areas at a lesser
cost. Growth of Telecom and Internet in India will lead to better Governance, Healthcare,
Insurance, Education, etc. This will ensure more and more participation of the common man in
day-to-day services or the Public Services of the government. All services can be improved and a
better lifestyle can be provided to the common man.
With FDI in Healthcare and Insurance, better care facilities can be provided at a lesser cost in the
villages and expert advices can also be effectively delivered through e-health programs. Cost of
Medicines will also come down drastically, if the system of generic medicines is adopted in
India. In any case, with no middle-man involved, the prices of medicines can be brought down at
least by 15-20%. Awareness for insurance schemes be it life insurance or crop insurance or
health insurance will also greatly benefit the people in general.
What we need is very simple accountable and transparent services at a better price with
growth-oriented policies; create more jobs and provide better services. Political parties ruling
or opposition must explore maturity levels in understanding the various issues by discussing
and debating these in the Parliament, and not on the streets and election rallies ! Nation-wide or
state-level strikes must be discouraged outrightly as these activities often spread the wrong
message to the unaware folks. Parliament can introduce or change Laws and Institutions such
that things can be improved to a larger extent in the interest of the common man.
Many may differ regarding the implementation, policy and the limits of FDI in various sectors.
But if FDI brings organized market, with accountability and transparency, then it should be
definitely welcomed in India, without any politics.
23
24
Chapter 6: Walmart In India- Case Study
Hours after the Indian Government approved FDI in multi-brand retail; there was an outcry from
various sections of the society, media and political parties about the vial ability of the decision.
25
The most discussed part of this decision has been whether opening of store like Wal-Mart in
India is going to improve or disturb the retail environment. Before we can analytically answer
this question, let us have a look at the profile; the pros and cons of Wal-Mart in general. WalMart is one of the largest employers in the world; it employs more than 1.5 million people
worldwide. Its annual revenue is more than $ 40 billion. It is so huge that their revenue topples
the combined revenue of the next 5 largest retailers in the US. Wal-Mart imports about 20% of its
goods from low cost china. Its imports are so huge that if Wal-Mart were a country it would be
the 8th largest importer from china. Studies have shown that the prices of goods in Wal-Mart can
be as low 8-39% than what their pears. Average saving from Wal-Mart stands around 15% and
grocery (largest seller) at around 25-35%. The low price at Wal-Mart forces its competitors to
lower their price as well. Studies have found that overall cost is pushed down by about 3-8%.
The low income group, single moms are the one to have benefited the most by Wal-Mart. 40% of
customers of Wal-Mart in US have an income less than $20,000 and the next 30% having income
less than $ 40,000 (Average income in US being at about $50,000).
Let us consider the impact of Wal-Mart selling only groceries in India. Total grocery market in
India stands at about $ 150 billion. Lets says Wal-Marts market share is 2/3. Average saving that
Wal-Mart can offer in grocery in India can be taken as 20%. So that means $20 billion of saving
by shopping with Wal-Mart. However, Wal-Mart also forces its competitors to drop the prices so
the addition market of $50 Billion carries a discount of 10%. So the total savings stands at about
$25 billion, and lets double it too cater for all those things that it will sell. SO in total we have a
saving of $50 billion and that is no coins. It is a huge sum of money that will be available for the
consumers to spend in other spears of life which may include education, healthcare and other
social service scheme. Thus, consumers are the real winner, even those who dont even enter it
make merry as other outlets are forced to reduce their cost due to competition. However,
consumers are not only the one to make profit out of Wal-Mart, It also helps some markets, when
people save bucks from shopping in Wal-Mart they tend to spend it in other sector which may
include fashion or their field of interest.
So, now the question arises how Wal-Mart tags its goods so cheap? Wal-Mart uses its technology
pioneer and its huge size as a weapon to pull down the operation costs. Wal-Mart has always
26
been adopting state of art technology and always stays a step ahead of its competitors. It
connected its entire store with computer network as early as in 1970, Wal-Mart also owns the
largest private satellite network; it also introduced the revolutionary bar codes and advanced ERP
for inventory management. Its sheer size and volume allows it to order in bulk and bargain for a
very low cost. Above all Wal-Marts operation cost and labour productivity are known to be one
of the lowest.
There is also a mixed feeling whether Wal-Mart will reduce or increase the number of jobs, will
the kirana shops and the general retail outlet lose its charm. Well, the general retail shops and
grocery have already started to lose foot, with mega malls sprawling the length and breadth of
the country. There already has been reduction of sales and profits for the general stores. WalMart will do the same to these malls, well this is the rule of the game and its all fair. Its all about
catering and satisfying the needs of the customers and no one in the world knows the retail
customer better than Wal-Mart. Wal-Mart has often been accused of using predatory pricing,ie..
Selling goods at an exceptional cheap price, to capture the market share and force other outlet to
shut. Finally monopolising the market and drive the price at a more comfortable level for
themselves. The introduction of Wal-Mart in the Indian market will definitely see other
competitors losing market share, dipping profit and even be forced to close. A Wal-Mart store on
an average employs 500 employees, but that does not necessarily mean creation of 500 more
jobs. As mentioned before that Wal-Mart forces other retailer to close, thus it absorbs these work
force. Their state of art inventory also means that they can sell the same stuffs with a lower
number of employees. Thus it is a very debatable topic if there is a net increase in employment
due to Wal-Mart at a micro level. However at a macro level there will be huge amount of
unemployment due to closure of independent stores but a huge amount of employment
opportunity will also be created by Wal-Mart indirectly, an estimated 1.5 million jobs will be
created in India due to logistics alone. Wal-Mart is often in the news for paying its employs very
low, but on the upside employees at Wal-Mart dont need a very high level educational
qualification. Wal-Mart heart lies in the core of western and southern US were the people are not
very well off. Thus its operation in low wage area legitimates its low payment it makes to its
employees. But with not a very demanding wage work force available in India that should not be
27
a problem. Analyst however have showed that overall average wages in the retail sector does go
down by 2-3%, but that is generally due to the low demand of employees that Wal-Mart
artificially creates for the market due to close down of some retailers.
Wal-Mart promoted small local manufactures who can manufacture goods at a low cost, WalMart acts as a brand for these locally produced goods and if a good is available on a Wal-Mart
shelf it has a huge market base for sure and that too, without advertisement. Thus if mandated
well we will see a boom in the small and medium manufacturing sector, creating a very healthy
economic environment and creating employment. Wal-Mart will also drive away the middle man
and deal directly with producers, this will sharply drop the price of grocery and bring the food
inflation lower (momentarily), the people will get what they wanted- cheaper goods, but it will
cost jobs of the middle man contractors.
A tiny little thing to worry about is the inadequate infrastructure, think of a Wal-Mart store even
at the outskirts the city the volume of traffic it will be bring in, will cause a lot of traffic jams in
already very congested Indian streets.
Wal-Mart will change the face of the Indian retail sector, it will move from a local concentrated
activity to global phenomenon. It will kill the local economic activity like contracting, but
subsequently create new economic opportunity. There is an obvious fear that farmers and the
suppliers are not going to benefit from Wal-Mart in the long term. Wal-Mart all together will
bring in foreign investment and strengthen Indias economic position globally and also help get
good grades from the rating agencies. But it will definitely be a tricky task for Wal-Mart to
explore the already price obsessed nation.
Let us go head to head.
1)
With the size of the Indian population and the demand in the retail sector, Wal-Mart will
produce about 8 million job opportunity in retail and logistics combined. On the down side India
will see many jobs cut which may be as large as 4 million.
2)
There will be a change in the economic environment of the country, it will have to adapt
to a more global condition and change and change quick.
28
3)
Bring in FDI was very important for the economic stability of the country and also
restore the faith of the investor; there was a looming fear of the rating agencies degrading the
financial outlook.
4)
With 51% opening in multi-brand retail, 49% of the profits generated will still remain in
the country.
5)
Many question the poor working condition of Wal-Mart, hello India, the workers in
individual retail are made to toil hours for an exchange of nothing, there have been a lot cases of
violence and child labour. Wal-Mart guarantees a lot superior conditions to work in.
Wal-Mart has always generated a mixed feelings, some sectors just love it, while some not that
much. But if a Wal-Mart is opening in your city, we say you have a reason to smile.
29
Chapter 7: Conclusions And

Recommendations
30
Even though India is a democracy, it has gone through a series of shaky coalition governments
without much stability and with no steady policies toward foreign investors. Even though China
is a communist country, the governments firm and unquestioned control over the policies acted
as a great advantage in providing stability of policies, which made the foreign investors feel
secure in investing in China. Contrary to the pathetic situation in India, there is no labor union
problem in China. As with India, China also has a bloated bureaucracy, which is ridden with
corruption. But, the Chinese government has been working hard to root out the corruption with
severe punishment, including the death penalty. It seems it is irrelevant to global investors as to
whether the host countries are democracies with rule of law or communist countries with rigid
controls. These investors main interest is access to emerging markets of the developing
countries, a safe and secure return on their investment and the stability of the host countrys
political environment. India is a country with enormous potential for development. India needs to
wake up to the realities of the global investment markets, and start to notice the preferences of
the foreign investors. India has to bring in sweeping reforms to completely liberalize its
economy, abandon the inefficient protectionist policies regarding its inefficient domestic
industry, curb the cancer of corruption and offer the appropriate tax incentives to the foreign
investors. If the Indian government hesitates to bring in the much-needed economic reforms
soon, India may face a tale of lost opportunity.
Recommendation
31
FDI since 1991 has proved to be game changer for wide segments of Indian industry. FDI has
change quality, productivity, and production in areas where it has been allowed. FDI has led to
the creation of new activities such as IT-BPO, which was initiated by select foreign companies.
India needs huge investment in the 12th Plan period, it is calling for investments to the tune of $1
trillion in the infrastructure sector alone. We need among many other infrastructure facilities
infrastructure in retail as well as those for food & perishable products. Opening of FDI in retail
would have led to the creation of such farm infrastructure. This apart mining and manufacturing
sectors also require huge investments and FDI can supplement domestic efforts significantly.
There is also an urgent need for India to augment the investment absorption capacity. Moreover
it has to be understood that India is competing for foreign investments with other emerging
economies and so far a comparative analysis suggest that India has not been a large recipient of
FDI. Therefore we would like to propose a few suggestions to the policymakers for their
consideration:
Bureaucratic delays and various governmental approvals and clearances involving different
ministries need to be fastened so as to increase the absorption rate of FDI into the country.
Restrictions on sector caps and entry route to sectors other than those of national importance
need to be liberalized further and constant reviewing of policies must be done.
Government must ensure consistency of policy so as to improve the business and investor
confidence. It is in the interest of the industry at large if a mechanism could be developed which
facilitates a consultation between Centre and State governments before a policy rollout so that
once the decision is taken its implementation does not get affected.
Government must recognise that good regulations and efficient processes are key catalysts for
FDI. Accessible and reliable information and efficient and predictable actions by public
institutions help create a business environment conducive to investment.
Time bound, non-discretionary, simplified and less number of procedures and approvals would
also help in uplifting the international investors confidence and help foster more investment into
India.
32
Chapter 8: Facts And Figures
33
What is the full form of FDI :

The full form of FDI is Foreign Direct Investment.
What is the meaning of FDI ?
The Foreign Direct Investment means cross border investment made by a resident in one
economy in an enterprise in another economy, with the objective of establishing a lasting
interest in the investee economy. FDI is also described as investment into the business of a
country by a company in another country. Mostly the investment is into production by either
buying a company in the target country or by expanding operations of an existing business in that
country. Such investments can take place for many reasons, including to take advantage of
cheaper wages, special investment privileges (e.g. tax exemptions) offered by the country.
Why Countries Seek FDI ?
(a)
Domestic capital is inadequate for purpose of economic growth;
(b) Foreign capital is usually essential, at least as a temporary measure, during the period when
the capital market is in the process of development;
34
(c)
Foreign capital usually brings it with other scarce productive factors like technical know
how, business expertise and knowledge

What are the major benefits of FDI :
(a)
Improves forex position of the country;
(b) Employment generation and increase in production ;

(c)
Help in capital formation by bringing fresh capital;
(d) Helps in transfer of new technologies, management skills, intellectual property

(e)
Increases competition within the local market and this brings higher efficiencies
(f)
Helps in increasing exports;
(g) Increases tax revenues

Why FDI is Opposed by Local People or Disadvantages of FDI :
(a)
(b)
Domestic companies fear that they may lose their ownership to overseas company
Small enterprises fear that they may not be able to compete with world class large
companies and may ultimately be edged out of business;

(c)
Large giants of the world try to monopolise and take over the highly profitable sectors;
(d) Such foreign companies invest more in machinery and intellectual property than in wages of
the local people;
(e)
Government has less control over the functioning of such companies as they usually work
as wholly owned subsidiary of an overseas company;

Brief Latest Developments on FDI (all sectors including retail):2012 October: In the second round of economic reforms, the government cleared amendments
to raise the FDI cap
(a)
in the insurance sector from 26% to 49%;
(b)
in the pension sector it approved a 26 percent FDI;
Now, Indian Parliament will have to give its approval for the final shape,"
35
2012 - September : The government approved the

(a) Allowed 51% foreign investment in multi-brand retail,
(b)
Relaxed FDI norms for civil aviation and broadcasting sectors. FDI cap in Broadcasting
was raised to 74% from 49%;

(c) Allowed foreign investment in power exchanges
2011 December :
(i) The Indian government removed the 51 percent cap on FDI into single-brand retail outlets
and
thus opened the market fully to foreign investors by permitting 100 percent foreign
investment in this area.

The forms in which business can be conducted by a foreign company in India
A foreign company planning to set up business operations in India may:
Incorporate a company under the Companies Act, 1956, as a Joint Venture or a Wholly
Owned Subsidiary.
Set up a Liaison Office / Representative Office or a Project Office or a Branch Office of
the foreign company
What is Scope of FDI in India? Why World is looking towards India for Foreign Direct
Investments :
India is the 3rd largest economy of the world in terms of purchasing power parity and thus looks
attractive to the world for FDI. Even Government of India, has been trying hard to do away
with the FDI caps for majority of the sectors, but there are still critical areas like retailing and
insurance where there is lot of opposition from local Indians / Indian companies.
Some of the major economic sectors where India can attract investment are as follows:
Telecommunications
Apparels
36
Information Technology
Pharma
Auto parts
Jewelry
Chemicals
In last few years, certainly foreign investments have shown upward trends but the strict FDI
policies have put hurdles in the growth in this sector. India is however set to become one of the
major recipients of FDI in the Asia-Pacific region because of the economic reforms for
increasing foreign investment and the deregulation of this important sector. India has technical
expertise and skilled managers and a growing middle class market of more than 300 million and
this represents an attractive market.
Background and Recent Developments for FDI in Retail Sector which has raised lot of
controversies in political circles :
As part of the economic liberalization process set in place by the Industrial Policy of 1991, the
Indian government has opened the retail sector to FDI slowly through a series of steps:
1995 : World Trade Organisations (WTO) General Agreement on Trade in Services, which
includes both wholesale and retailing services, came into effect
1997 : FDI in cash and carry (wholesale) with 100% rights allowed under the government
approval route;
2006 : FDI in cash and carry (wholesale) was brought under automatic approval route; Upto
51% investment in single brand retail outlet permitted, subject to Press Note 3 (2006 series)
2011 : 100% FDI in Single Brand Retail allowed
37
2012 : On Sept. 13, Government approved the allowance of 51 percent foreign investment in
multi-brand retail, [ It also relaxed FDI norms for civil aviation and broadcasting sectors]
The sectors where FDI is NOT allowed in India, both under the Automatic Route as well as
under the Government Route?
FDI is prohibited under the Government Route as well as the Automatic Route in the following
sectors:
i) Atomic Energy
ii) Lottery Business
iii) Gambling and Betting
iv) Business of Chit Fund
v) Nidhi Company
vi) Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry,
Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled conditions and
services related to agro and allied sectors) and Plantations activities (other than Tea Plantations)
vii) Housing and Real Estate business (except development of townships, construction of
residential/commercial premises, roads or bridges to the extent specified in notification
viii) Trading in Transferable Development Rights (TDRs).
ix) Manufacture of cigars , cheroots, cigarillos and cigarettes , of tobacco or of tobacco
substitutes.
The authorities Dealing With Foreign Investment:
(a)
Foreign Investment Promotion Board (popularly known as FIPB) : The Board is responsible
for expeditious clearance of FDI proposals and review of the implementation of cleared
proposals. It also undertake investment promotion activities and issue and review general and
sectoral policy guidelines;
(b) Secretariat for Industrial Assistance (SIA) : It acts as a gateway to industrial investment in
India and assists the entrepreneurs and investors in setting up projects. SIA also liaison with
other government bodies to ensure necessary clearances;
38
(c)
Foreign Investment Implementation Authority (FIIA) : The authority works for quick
implementation of FDI approvals and resolution of operational difficultieis faced by foreign

investors;
(d) Investment Commission
(e)
Project Approval Board
(f)
Reserve Bank of India
What are the instruments for receiving Foreign Direct Investment in an Indian company?
Foreign investment is reckoned as FDI only if the investment is made in equity shares , fully and
mandatorily convertible preference shares and fully and mandatorily convertible debentures with
the pricing being decided upfront as a figure or based on the formula that is decided upfront. Any
foreign investment into an instrument issued by an Indian company which: gives an option to the
investor to convert or not to convert it into equity or does not involve upfront pricing of the
instruments a date would be reckoned as ECB and would have to comply with the ECB
guidelines.
The FDI policy provides that the price/ conversion formula of convertible capital instruments
should be determined upfront at the time of issue of the instruments. The price at the time of
conversion should not in any case be lower than the fair value worked out, at the time of issuance
of such instruments, in accordance with the extant FEMA regulations [the DCF method of
valuation for the unlisted companies and valuation in terms of SEBI (ICDR) Regulations, for the
listed companies].
What are the Total Inflows of FDI in India :

a.
b.
For the FY 2012-13 (for the month of July, 2012) was US$ 1.47 billion.
Amount of FDI equity inflows for the financial year 2012-13 (from April 2012 to July
2012) stood at US$ 5.90 billion.
39
c.
Cumulative amount of FDI (from April 2000 to July 2012) into India stood at US$ 176.76
billion
Which country tops in inflow of FDI ? Top 5 Countries for FDI :
Country
Iinflow in % age Inflows in absolute Terms (million US

terms
dollars)
Mauritius
42%
50164
Singapore
11275
USA
8914
UK
6158
Netherlands
4968
Majority of the foreign direct investment comes through Mauritius as it enjoys several tax
advantages, which works well for the international investors.
Recent Development
Farmers have reiterated their support for Cabinets decision to allow FDI in Multi-Brand Retail.
In a meeting with the Minister of Commerce, Industry and Textiles Shri Anand Sharma,
Secretary General of Consortium of Indian Farmers Associations (CIFA), Shri P. Chengal Reddy
conveyed the desire of various farmers body to implement the decision as soon as possible.
FDI in retail will free farmers from the middleman and will get the remunerative price for the
produce to the farmer said Shri Reddy after the meeting. Shri Reddy also informed about the
CIFAs efforts to engage state governments on the issue of FDI in retail. Many states are
reconsidering their opinion as we have explained to them various details because of which FDI
will help the small farmers in the long run as it builds competitiveness informed Shri Reddy.
40
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