DISSERTATION REPORT

ON

FOREIGN DIRECT INVESTMENT

&
ITS IMPACT ON INDIAN ECONOMY

SUBMITTED TO UTTRAKHAND TECHNICAL UNIVERSITY

IN PARTIAL FULFILMENT OF
MASTER OF BUSINESS ADMINISTRATION

(TWO YEARS FULL TIME DEGREE PROGRAMME)

SUBMITTED TO : SUBMITTED BY:

DR. KAWAL KUMAR SAURABH AGARWAL
M.B.A (IV SEMESTER)

1
 CERTIFICATE

This Is to certify that the project work titled FOREIGN

DIRECT INVESTMENT & ITS IMPACT ON INDIAN
ECONOMY Is an independent work of SAURABH
AGARWAL student MBA full time 2009-2011. The project has
been prepared under my guidance and supervision. This project is
in original and not submitted previously.

DATE:- PLACE:-kashipur
Dr. KAWAL KUMAR

2
 ACKNOWLEDGEMENT

Consideration, dedication & hard work are essential but not the
only factor to achieve the desired goals. Corporation & guidance
of the people to make a success must supplement these. It is
my pleasure to acknowledge the assistance of a number of
people without whose help this project would not have been
possible.

First and foremost I would like to express our gratitude to Dr.

KAWAL KUMAR my research guide, SGRRITS, kashipur for
providing invaluable encouragement, guidance, assistance and
supervision in completion my dissertation report.

After doing this training I can confidently say that this experience
has not only enriched my management knowledge but also has
unparsed the maturity of thought and vision, the basic attributes
required for being a successful professional.

Date: saurabh
agarwal
M.B.A.IV(FINANCE)

3
Contents

Chapter 1: Introduction.
Foreign Institutional Investment.
Foreign Direct Investment.
Investment highlights of FIIs.
Role of govt. to attract the FDI.

Chapter 2: Research methodology

Objectives of the study.
Limitations of the study.

Chapter 3: Pattern of FDI in INDIA.

Introduction, Determinants & Types of
FDI.
Capital Flows & Growth in India.
Recent Trends of Foreign Investment in
india.
Investment in indian market.

Chapter 4: FDI & its impact on indian economy.

Indian Economy.
Selected Economic indicators.
Sectoral overview.
Disinvestment.
Policy initiatives.
Opportunities.
Import & Export trend.

Chapter 5: FDI Last updates march 2010.

Chapter 6: Conclusion & suggestion.

Chapter 7: Bibliography.
.

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5
 CHAPTER I

Introduction to Foreign Institutional Investment

Post liberalization period of India has witnessed a rapid

expansion and enrichment of various industrial activities. After the
independence India followed a socialist-inspired approach for most
of its independent history, with strict government control over
private sector participation, foreign trade, and foreign direct
investment. However, since the early 1990s, India has gradually
opened up its markets through economic reforms by reducing
government controls on foreign trade and investment. The
privatization of publicly owned industries and the opening up of
certain sectors to private and foreign interests has proceeded slowly
amid political debate.

Foreign Investment refers to investments made by residents of a

country in financial assets and production process of another country.
After the opening up of the borders for capital movement these
investments have grown in leaps and bounds. But it had varied effects
across the countries. In developing countries there was a great need of
foreign capital, not only to increase their productivity of labor but also
helps to build the foreign exchange reserves to meet the trade deficit.
Foreign investment provides a channel through which these countries
can have access to foreign capital. It can come in two forms: foreign
direct investment (FDI) and foreign portfolio investment (FPI).

6
Foreign direct investment involves in the direct production activity and
also of medium to long-term nature. But the foreign portfolio
investment is a short-term investment mostly in the financial markets
and it consists of Foreign Institutional Investment (FII). The present
study examines the determinants of foreign portfolio investment in the
Indian context as the country after experiencing the foreign exchange
crisis opened up the economy for foreign capital. India, being a capital
scarce country, has taken lot of measures to attract foreign investment
since the beginning of reforms in 1991. Till the end of January 2003 it
could attract a total foreign investment of around US$ 48 billions out
of which US$ 23 billions is in the form of FPI. FII consists of around
US$ 12 billions in the total foreign investments. This shows the
importance of FII in the overall foreign investment programme. As
India is in the process of liberalizing the capital account, it would have
significant impact on the foreign investments and particularly on the
FII, as this would affect short-term stability in the financial markets.
Hence, there is a need to determine the push and pull factors behind
any change in the FII, so that we can frame our policies to influence
the variables which drive-in foreign investment. Also FII has been
subject of intense discussion, as it is held responsible for intensifying
currency crisis in 1990s elsewhere. The present study would
examine the determinants of FII in Indian context. Here we make an
attempt to analyze the effect of return, risk and inflation, which are
treated to be major determinants in the literature, on FII. The proposed
relation (discussed in detail later) is that inflation and risk in domestic
country and return in foreign country would adversely affect the FII

7
flowing to domestic country, whereas inflation and risk in foreign
country and return in domestic country would have favorable affect on
the same. In the next section we would briefly discuss the existing
studies. In section 3, we discuss the theoretical model.
There was a strong growth in Foreign Direct Investment (FDI)
flows with three quarters of such flows in the form of equity. As per
the economic survey, the growth rate was 27.4 per cent in 2008-09,
which was followed by 98.4 per cent in April-September 2006. At US$
4.2 billion during the first six months of this fiscal, FDI was almost
twice its level in April-September, 2005. Capital flows into India
remained strong on an overall basis even after gross outflows under
FDI with domestic corporate entities seeking a global presence to
harness scale, technology and market access advantages through
acquisitions overseas.

Total FDI inflows for April-December 2006 stood at US$ 9.3

billion, as compared to US$ 3.5 billion in the corresponding period last
fiscal. According to certain estimates, India is likely to receive US$ 12
billion of FDI during the current financial year as compared to US$ 5.5
billion in the previous fiscal.

In the past two years, FDI has jumped 100 per cent, from US$
3.75 billion in 2004-05 to US$ 7.231 billion till November 2006.
However, these figures may be an underestimation, say Finance
Ministry officials, since these numbers do not include the amount that
is reinvested by foreign companies operating in the country. The figure

8
for 2009-2010 is likely to be close to US$ 10 billion if one takes into
account profits reinvested by foreign players in Indian operations.

The number of foreign institutional investors (FIIs) registered with the

Securities and Exchange Board of India (Sebi) has now increased to
1,030. In the beginning of calendar year 2006, the figure was 813. As
many as 217 new FIIs opened their offices in India during 2006. This
is the highest number of registrations by FIIs in a year till date. The
previous highest was 209 in 2005. The net investments made by the
institutions during 2006 was US$ 9,185.90 million against US$
9,521.80 million in 2005.

Some investment highlights of FII

Billionaire investor George Soros-owned fund Dacecroft and New

York-based investment firm Blue Ridge are picking 21 per cent equity
stake in Anil Dhirubhai Ambani Group's Reliance Asset
Reconstruction Company (Reliance ARC).

Role of Government initiatives

The Government is looking at reviewing regulation involving foreign

investments into the country. Aimed at simplifying the investment
process, the revised policy will treat foreign direct investment (FDI)
and investment from foreign institutional investors (FII) in the same
light.

At present, investments by GE Capital, for instance, are termed as FII,

while funds from GE are bracketed as FDI. This, despite the fact that
9
GE Capital could be a subsidiary of GE. And in sectors which have a
cap on investments, matters are even more complicated. In such a
situation, treating all foreign investments, irrespective of FDI or FII, as
the same in terms of investment limits and conditions, can be a more
workable solution. Once the changes are in place, the policy will be
more in tune with investments in developed countries where the
distinctions between FDI and FII are fast disappearing.

The sectors that will be affected by the revision include asset

reconstruction companies, direct-to-home distribution of broadcast
signals and real estate, where separate sub-ceilings or conditions apply
at present for FDI, leaving FII investments outside their ambit.

In a move to bolster investments in the aviation sector, the Reserve

Bank of India has said that FIIs can pick up stake in domestic airlines
beyond the sectoral FDI cap of 49 per cent through secondary market
purchases.

Meanwhile, FDI into India is on the verge of surpassing FII for the
first time, the Prime Minister's Economic Advisory Council (EAC) has
said. According to the EAC, net FDI for 2009-2010 would be around
US$ 9 billion, up from US$ 4.7 billion last year while FII or portfolio
inflows are likely to be US$ 7 billion.

10
Advantages of FII

The advantages of having FII investments can be broadly classified

under the following categories.
A. Enhanced flows of equity capital
FIIs are well known for a greater appetite for equity than debt in their
asset structure. For example, pension funds in the United Kingdom
and United States had 68 per cent and 64 per cent, respectively, of
their portfolios in equity in 1998. Thus, opening up the economy to
FIIs is in line with the accepted preference for non-debt creating
foreign inflows over foreign debt. Furthermore, because of this
preference for equities over bonds, FIIs can help in compressing the
yield-differential between equity and bonds and improve corporate
capital structures..
B. Managing uncertainty and controlling risks
Institutional investors promote financial innovation and development
of hedging instruments. Institutions, for example, because of their
interest in hedging risks, are known to have contributed to the
development of zero-coupon bonds and index futures. FIIs, as
professional bodies of asset managers and financial analysts, not only
enhance competition in financial markets, but also improve the
alignment of asset prices to fundamentals. 39. Institutions in general
and FIIs in particular are known to have good information and low
transaction costs. By aligning asset prices closer to fundamentals, they
stabilize markets. Fundamentals are known to be sluggish in their

11
movements. Thus, if prices are aligned to fundamentals, they should
be as stable as the fundamentals themselves. Furthermore, a variety
of FIIs with a variety of risk-return preferences also help in dampening
volatility.
C. Improving capital markets
. FIIs as professional bodies of asset managers and financial analysts
enhance competition and efficiency of financial markets. Equity
market development aids economic development. By increasing the
availability of riskier long term capital for projects, and increasing
firms incentives to supply more information about themselves, the
FIIs can help in the process of economic development.

D. Improved corporate governance Good corporate governance is

essential to overcome the principal-agent problem between share-
holders and management. Information asymmetries and incomplete
contracts between share-holders and management are at the root of the
agency costs. Dividend payment, for example, is discretionary. Bad
corporate governance makes equity finance a costly option. With
boards often captured by managers or passive, ensuring the rights of
shareholders is a problem that needs to be addressed efficiently in any
economy.

Management Control and Risk of Hot Money Flows

The two common apprehensions about FII inflows are the fear of
management takeovers and potential capital outflows.
A. Management control

12
FII sactas agents on behalf of their principals as financial investors
maximizing returns. There are domestic laws that effectively prohibit
institutional investors from taking management control. For
example, US law prevents mutual funds from owning more than 5 per
cent of a companys stock. According to the International Monetary
Funds Balance of Payments Manual 5, FDI is that category of
international investment that reflects the objective of obtaining a
lasting interest by a resident entity in one economy in an enterprise
resident in another economy. The lasting interest implies the existence
of a long-term relationship between the direct investor and the
enterprise and a significant degree of influence by the investor in the
management of the enterprise. According to EU law, foreign
investment is labeled direct investment when the investor buys more
than 10 per cent of the investment target, and portfolio investment
when the acquired stake is less than 10 percent. Institutional investors
on the other hand are specialized financial intermediaries managing
savings collectively on behalf of investors, especially small investors,
towards specific objectives in terms of risk, returns, and maturity of
claims. All take-overs are governed by SEBI (Substantial Acquisition
of Shares and Takeovers) Regulations, 1997, and sub-accounts of FIIs
are deemed to be persons acting in concert with other persons in
the same category unless the contrary is established.
B. Potential capital outflows FII inflows are popularly described
as hot money, because of the herding behaviour and potential for
large capital outflows. Herding behaviour, with all the FIIs trying to
either only buy or only sell at the same time, particularly at times of

13
market stress, can be rational. With performance-related fees for
fund managers, and performance judged on the basis of how other
funds are doing, there is great incentive to suffer the consequences of
being wrong when everyone is wrong, rather than taking the risk of
being wrong when some others are right. The incentive structure
highlights the danger of a contrarian bet going wrong and makes it
much more severe than performing badly along with most others in
the market. It not only leads to reliance on the same information as
others but also reduces the planning horizon to a relatively short one.
Value at Risk models followed by FIIs may destabilize markets by
leading to See Bikhchandani, S and S. Sharma (2000): Herd
Behaviour in Financial Markets, Working Paper No. WP/00/48,
International Monetary Fund, Washington DC, 2000. 15
simultaneous sale by various FIIs, as observed in Russia and Long
Term Capital Management 1998 (LTCM) crisis. Extrapolative
expectations or trend chasing rather than focusing on fundamentals
can lead to destabilization. Movements in the weightage attached to a
country by indices such as Morgan Stanley Country Index (MSCI) or
International Finance Corporation (W) ( IFC) also leads to en masse
shift in FII portfolios.
. Another source of concern are hedge funds, who, unlike pension
funds, life insurance companies and mutual funds, engage in short-
term trading, take short positions and borrow more aggressively, and
numbered about 6,000 with $500 billion of assets under control in
1998. 50. Some of these issues have been relevant right from 1992,
when FII investments were allowed in. The issues, which continue to

14
be relevant even today, are: (i) benchmarking with the best practices
in other developing countries that compete with India for similar
investments; (ii) if management control is what is to be protected, is
there a reason to put a restriction on the maximum amount of shares
that can be held by a foreign investor rather than the maximum that
can be held by all foreigners put together; and (iii) whether the limit
of 24 per cent on FII investment will be over and above the 51 per
cent limit on FDI. There are some other issues such as whether the
existing ceiling on the ratio between equities and debentures in an FII
portfolio of 70:30 should continue or not, but this is beyond the terms
of reference of the Committee
To conclude Foreign Institutional Investment refers to
investments made by residents of a country in financial assets and
production process of another country. After the opening up of the
borders for capital movement these investments have grown in leaps
and bounds. But it had varied effects across the countries. It can affect
the factor productivity of the recipient country and can also affect the
balance of payments. In developing countries there is a great need of
foreign capital, not only to increase their productivity of labor but also
helps to build the foreign exchange reserves to meet the trade deficit.
Foreign investment provides a channel through which these countries
can have access to foreign capital. It can come in two forms: foreign
direct investment (FDI) and foreign portfolio investment (FPI).
Foreign direct investment involves in the direct production activity
and also of medium to long-term nature. But the foreign portfolio
investment is a short-term investment mostly in the financial markets

15
and it consists of Foreign Institutional Investment (FII). The FII,
given its short-term nature, might have bi-directional causation with
the returns of other domestic financial markets like money market,
stock market, foreign exchange market, etc. Hence, understanding the
determinants of FII is very important for any emerging economy as it
would have larger impact on the domestic financial markets in the
short run and real impact in the long run. The some basic objective of
the research and methodology used to achieve the project work is
presented in the preceding chapter no II.

Overseas FDI by Indian Corporations

Increasing Competitiveness of Indian industry due to globalization of

Indian Economy has led to emergence and growth of Indian
multinationals. This is evident from the FDI overseas from India,
which increased by 13.5 times during the last 7 years. The year 2009-
2010 witnessed large overseas acquisition deals by Indian corporate to
gain market shares and reap economies of scale, supported by
progressive liberalization of the external payments regime. Overseas
investment that started off initially with the acquisition of foreign
companies in the IT and related services sector has now spread to other
areas such as manufacturing including auto components and drugs and
pharmaceuticals.

16
17
CHAPTER-II

Research methodology and data source

Introduction to research:-

Research refers to a search for knowledge. Research is scientific

investigation.

ACCORDING TO REDMAN AND MORY:

A market research cant draw decision, but it helps in the task of

decision making. Research is a systematic effort to gain new
knowledge. ACCORDING TO LERNERS DICTIONARY OF
CURRENT ENGLISH, Research is careful investigation or inquiry
especially through search for new facts in any branch of knowledge.

OBJECTIVE OF RESEARCH:

a. To study the present status of FDI in India.

b. To assess the sector wise FDI in pre &post reform period.

c. OPTo study the role of government in boosting FDI in the

country

d. To study the impact of FDI on Balance of Payment.

18
 Research design:

Descriptive research will be used as it is a study of project to

describe the present status of fdi in india and the role of
government to boosting the fdi in india.

Sample size:

Last six years fdi census report is used.

Sample area:

Data is collected from the census report of fdi India.

Collection of data:
Collection of data is one of the important aspects of research
methodology. This consists of gathering the data from various sources.

Types of data:
Data is important to collect the necessary information. Data may be of
two types: primary and secondary data.
Secondary data is one of the parts of research methodology through
which information about the project can be collected. For this research
data is collected through Websites of RBI, ministery of commerce and
various books.

19
1 The study will be based on the secondary data.

2 Review of literature, books and other papers relevant to the

topic for obtaining secondary data and for preparing
theoretical parts.

3 The collected data will be systematically arranged , tabulated

and appropriate analysis will be drawn.

Limitations of the study:

1. The data is collected on secondary basis.

2. The time was short to cover the whole information.
3. Fdi is not only source that impact on Indian economy.

20
CHAPTER-III
PATTERN OF FDI IN INDIA

INTRODUCTION:
India's post-independence economic policy combined a vigorous
private sector with state planning and control, treating foreign
investment as a necessary evil. Prior to 1991, foreign firms were
allowed to enter the Indian market only if they possessed technology
unavailable in India. Almost every aspect of production and marketing
was tightly controlled, and many of the foreign companies that came to
India eventually abandoned their projects. The industrial policy
announced in July 1991 was vastly simpler, more liberal and more
transparent than its predecessors, and it actively promoted foreign
investment as indispensable to India's international competitiveness.
The new policy permits automatic approval for foreign equity
investments of up to 51 percent, so long as these investments are made
in any of "high priority" industries that account for the lion's share of
industrial activity.
Identifying the growth-augmenting role of foreign capital flows
has assumed critical importance in India in recent years. The overall
shift in the policy stance in India from export pessimism and foreign
exchange conservation to one that assigns an important role to export
of goods and services in the growth process has primarily been guided
by the perception that an open trade regime could offer a dynamic
vehicle for attaining higher economic growth. The absence of any
strong and unanimous empirical evidence justifying the universal
relevance of an export led growth strategy as also the continued
21
reliance and targets for sustainable current accounts has motivated
grater focus on the growth augmenting capacity of foreign capital in
the 1990s.

Structural reforms and external financial liberalization measures

introduced in the 1990s in India brought in their wake surges un
capital flows as well as episodes of volatility associated with the
capital account dictating the balance of payment outcome. Large
capital inflows enables an easing of resource constraints and an
acceleration of growth in the mid-1990s. in the second half, the foreign
exchange market development as well as the rapid transmission of
international sell offs facilitated by cross border integration of equity
markets via capital flows have as a level provoked a reassessment of
the benefits and costs of employing capital flows as a level of growth.
Throughout the 1990s, the role assigned to foreign capital in India has
been guided by the consistent with the absorptive capacity of the
economy. In the aftermath of South-East-Asia crisis, however, the need
for further strengthening the capacity to withstand vulnerabilities has
necessitated a shift in policy that assigns greater weight age to stability
in view of the growing importance of capital flows in relation to trade
flows in influencing the course of the exchange rate and the
potentially large volatility and self fulfilling expectations that often
characterize capital flows, reserve adequacy has also emerged as an
additional requirement for ensuring stable growth in the context of
capital flows. Given the trade off between growth and instability
associated with capital flows, the emphasis of the debate relating to

22
capital flows in India has centered around sustainability a country
specific approach to liberalization of the capital account a desirable
composition and maturity profit of capital flows, and appropriate
reserve management and exchange rate policies in the context of
capital flows, with only occasional reference to the growth enhancing
role of foreign capital in India.

Determinants of FDI:

Is India capable of attracting much larger volumes of FDI than she

does at present? Should India throw all doors wide open to FDI as
advocated by the Harvard economists? Is China's experience a role
model for India? The literature on FDI sheds some light on these
issues.

Why do firms go abroad? Why do they choose to invest in specific

locations? The origins of the theoretical literature on determinants of
FDI are to be found in Stephen Hymers doctoral dissertation (1978).
His thesis briefly put is that firms go abroad to exploit the rents
inherent in the monopoly over advantages they possess and FDI is
their preferred mode of operations. The advantages firms possess
include patented technology, team specific managerial skills,
marketing skills and brand names. All other methods of exploiting
these advantages in external markets such as licensing agreements and
exports are inferior to FDI because the market for knowledge or
advantages possessed by firms tends to be imperfect. In other words,
they do not permit firms to exercise control over operations essential
for retaining and fully exploiting the advantages they own. Hymer's
23
insights form the basis for other explanations such as the transactions
costs and internalisation theories ( Buckley and Casson, 1991), most of
which in essence argue that firms internalise operations, forge
backward and forward linkages in order to by-pass the market with all
its imperfections. Dunning (1973) neatly synthesises these and other
explanations in the well-known eclectic paradigm or the OLI
explanation of FDI. For a firm to successfully invest abroad it must
possess advantages which no other firm possess (O), the country it
wishes to invest in should offer location advantages (L), and it must be
capable of internalising operations (I). Internalisation is synonymous
with the ability of firms to exercise control over operations . And such
control is essential for the exploitation of the advantages which firms
possess and the location advantages which host countries offer.

It is the location advantages emphasised by Dunning, which forms

the core of much of the discussion on the determinants of FDI in
developing countries. The two other attributes necessary for FDI are
taken as given from the perspective of developing countries. Dunning
(1973) set the ball rolling on econometric studies with a statistical
analysis of survey evidence on the determinants of FDI. His study
identified three main determinants of FDI in a particular location;
market forces (including market size and growth, as determined by the
national income of the recipient country), cost factors (such as labour
cost and availability and the domestic inflation situation) and the
investment climate (as determined by such considerations as the extent
of foreign indebtedness and the state of the balance of payments).

24
 During (1973, 1981) analysis proved influential and were pursued
further by others (Agarwal 1980, Root and Ahmed (1979), Levis,
1979, Balasubramanyam and Salisu, 1991) Although the empirical
literature continues to grow unabated both in size and econometric
sophistication, its overall message can be briefly summarised in the
form of the following propositions.

1. Host countries with sizeable domestic markets, measured by

GDP per capita and sustained growth of these markets, measured
by growth rates of GDP, attract relatively large volumes of FDI
2. Resource endowments of host countries including natural
resources and human resources are a factor of importance in the
investment decision process of foreign firms.
3. Infrastructure facilities including transportation and
communication net works are an important determinant of FDI.
4. Macro economic stability, signified by stable exchange rates and
low rates of inflation is a significant factor in attracting foreign
investors.
5. Political stability in the host countries is an important factor in
the investment decision process of foreign firms.
6. A stable and transparent policy framework towards FDI is
attractive to potential investors.
7. Foreign firms place a premium on a distortion free economic and
business environment. An allied proposition here is that a
distortion free foreign trade regime, which is neutral in terms of
the incentives it provides for import substituting (IS) and export

25
 industries (EP), attracts relatively large volumes of FDI than
either an IS or an EP regime.
8. Fiscal and monetary incentives in the form of tax concessions do
play a role in attracting FDI, but these are of little significance in
the absence of a stable economic environment.

How does India fare on these attributes? She does possess a large
domestic market, she has achieved growth rates of around 8.5 to 9
percent per annum in recent years, her overall record on
macroeconomic stability, save for the crisis years of the late eighties, is
superior to that of most other developing countries. And judged by he
criterion of the stability of policies she has displayed a relatively high
degree of political stability. It is, however, Indias trade and FDI
regimes which are seen as major impediments to increased inflows of
FDI. The product and factor market distortions generated by the
inward looking import substitution industrial policies India pursued
until recently have been widely discussed. So too her complex and
cumbersome FDI regime in place until the nineties.

26
 Types of FDI:

Greenfield Investment: Direct investment in new facilities or the

expansion of existing facilities. Greenfield investments are the
primary target of a host nations promotional efforts because they
create new production capacity and jobs, transfer technology and
know-how, and can lead to linkages to the global marketplace.
However, it often does this by crowding out local industry;
multinationals are able to produce goods more cheaply (because of
advanced technology and efficient processes) and uses up resources
(labor, intermediate goods, etc). Another downside of greenfield
investment is that profits from production do not feed back into the
local economy, but instead to the multinational's home economy.
This is in contrast to local industries whose profits flow back into
the domestic economy to promote growth.

Mergers and Acquisitions: Mergers and acquisitions occur when a

transfer of existing assets from local firms to foreign firms takes
place, this is the primary type of FDI. Cross-border mergers occur
when the assets and operation of firms from different countries are
combined to establish a new legal entity. Cross-border acquisitions
occur when the control of assets and operations is transferred from a
local to a foreign company, with the local company becoming an
affiliate of the foreign company. Unlike greenfield investment,
acquisitions provide no long term benefits to the local economy--

27
 even in most deals the owners of the local firm are paid in stock
from the acquiring firm, meaning that the money from the sale
could never reach the local economy. Nevertheless, mergers and
acquisitions are a significant form of FDI and until around 1997,
accounted for nearly 90% of the FDI flow into the United States.

Horizontal Foreign Direct Investment: Horizontal foreign direct

investment is investment in the same industry abroad as a firm
operates in at home. Horizontal FDI help to create economies of
scale because the size of the firm become large to reap the
advantage and gains.

Vertical Foreign Direct Investment: the vertical integration

occurs among the firm involved in different stage of the production
of a single final product. for example if oil exploration firm and
refinery firm merges together. It will be called vertical direct
investment. Vertical investment reduces transportation cost, and of
communication and coordinating production. Vertical direct
investment takes in two forms:

1) Backward vertical FDI: where an industry abroad provides inputs

for a firm's domestic production process
2) Forward vertical FDI: in which an industry abroad sells the
outputs of a firm's domestic production processes.

28
Capital flows and growth in India:
Capital flows into India have been predominantly influenced by
the policy environment, recognizing the availability constraint and
reflecting the emphasis of self reliance, planned levels of dependence
on foreign capital in successive Plans were achieved through import
substitution industrialization in the initial years of planned
development. The possibility of export replacing foreign capital was
generally not explored until the 1980s. it is only in the 1990s that
elements of an export led growth strategy became clearly evident
alongside compositional shifts in the capital flows in favour of
commercial debt capital in the 1980s and in favour of non debt flows
in the 1990s. The approach to liberalization of restriction on specific
capital account transaction however, has all along been against any
big-bang.

A large part of the net capital flows to India in the capital account
is being offset by the debit servicing burden. As a consequence, net
resource transfer have fluctuated quite significantly in the 1990s
turning negative in 1995-96. Till the early 1980s, the capital account of
the balance of payment had essentially a financing function. Nearly 80
percent of the financing requirement was met through external
assistance. Aid financed import were both largely.
Ineffectual in increasing the rate of growth and were responsible
for bloating the inefficient public sector. Due to the tied nature of
bilateral aid, India has to pay 20 to 30 percent higher prices in
selection to what it could have got through international. The real

29
resource transfer associated with aid to India, therefore, was mush
lower. There were occasions when India accepted bilateral aid almost
reluctantly and without enthusiasm because of the combination of low
priority of the project and the inflated process of goofs The
environment for enhancing aid effectiveness has been highlighted as
one of the key factor in the assessments of aid by donors, i.e. :open
trade secured private property rights, the absence of corruption, respect
for the rile of law social safety nets, aid sound macroeconomic and
financial policy the report pf the High Level committee on Balance of
Payments 1993 identified a number of factors constraining effective
aid utilization on India and underscored the need to initial urgent
action on both redacting the overhang of unutilized aid and according
priority to externally sided projects in terms pf plan allocations and
budgetary previsions. Net resource transfer under aid to India, however
turned negative in the second half of the 1990s.

In the 1980s, India increased its reliance on commercial loans as

external assistance increasingly fell short of the growing financing
needs. The significant pressures on the balance of payments as the
international oil prices more than doubled in 1979-80 and the world
trade volume growth decelerated sharply during 19980-82, triggered
an expansion in Indias portfolio of capital inflows to include IMF
facilities, grater reliance on the two deposit schemes for non resident
Indian the Non- Resident External Rupee Accounts (NRERA) (that
started in 1970) and foreign currency Non Resident Account (FCNR)
(that started in 1975) and commercial borrowings on a modest scale. A

30
few select banks all Indian financial institutions leading public sector
undertakings and certain private corporate were allowed to raise
commercial capital from, the international market in the form of loan,
bonds and euro notes. Indian borrowed received final terms in the
1980s Spreads over LIBOR for loan to India improved gradually from
about 100 basis points in the early 1980s to about 25 basis points for
PSUs (50 basis points for private entitles) towards end of 1980s.
Maturities were elongated from seven year to ten year during this
period. Debt sustainability indicators, particularly debt/GDP ration and
debt service ratio, however, deteriorated significantly during this
period.

The policy approach to ECB has undergone fundamental shift

sine then with the institution of reformer and external sector
consolidation in the 1990s. Ceilings are operated on commitment of
ECB with sub ceilings for short term debt. The ceiling on annual
approvals has been raised gradually. The force of ECB policy
continuous to place emphases on low borrowing cost (by specifying
the spread on LIBOR or US TB rates), lengthened maturity profited
(liberal norms for above 8 years of maturity) and end use restrictions.

Given the projected need for financing infrastructure project, 15

percent of the total infrastructure financing may have to come from
foreign sources. Since the ratio of infrastructure investment to GDP is
projected to increase from 5.5 percent in 1995-96 to about 8 percent by
2006, with a foreign financing of about 15 percent foreign capital of

31
about 1.2 percent of GDP has to be earmarked only for he
infrastructure sector to achieve a GDP growth rate of bout 8 percent.

NRI deposits represent an importance avenue to access foreign

capital. The policy framework for NRI deposit during 1990s has
offered increased options to the NRIs through different deposit
schemes and by modulation rate of return maturities and the
application of cash reserve ratio (CRR) in the 190s FCNR (B) deposit
rates have been linked to LIBOR and short term deposits are
discouraged. For NRERA, the interest rate are determined by banks
themselves. The non resident Rupee deposit (NR (NR) RD) introduced
in June 1992 is non reparable although interest earned is fully
reparable under the obligation of current account convertibility
subscribed to in 1994. in the 1990s NRI deposit remained an important
sources of foreign capital with outstanding balances under various
schemes taken together rising from about US $10 billion at the close of
1980s to US $ 23 billion at the close of 2001. capital flows from NRIs
have occasionally taken the form of large investment in specific bonds,
i.e. the Indian Development Bond (IDB) in 1991, the Resurgent Indian
Bond RIB) in 1998 and Indian Millennium Deposit (IMD) in 2000.

The need for supplementing data capital with non debt capital
with a clear prioritization in favor of the latter has characters the
government policy framework from capital flows in the 1990s. the
high level committee on balance of payments recommended the need
for achievement this composition shift. A major shift in the policy

32
stance occurred in 1991-92 with the liberalization of norms for foreign
direct a portfolio investment in India.

The liberalization process started with automatic approval up to

51 percent for investment in select areas. Subsequently the areas
covered under the automatic route and the limits of investment were
raised gradually culminating in permission for 100 percent
participation in certain areas (particularly oil refining
telecommunications, and manufacturing activities in special economic
zone). The requirement of balancing the dividend payments with
export earnings which was earlier limited to a short list of 22 consumer
goods items was completely withdrawn. Limit for FDI in projects
relating to electricity generation, transmission and distribution has
been removed. FDI in non bank financial activities and insurance is
also permitted. Restriction on portfolio investment through purchased
of both traded primary and secondary market Indian securities are also
liberalized. As opposed to the earlier restriction permitting non-
resident Indian (MRIs) overseas corporate bodies (OCBs) to acquire
up to 1 percent for foreign institutional investor (FIIs)/NRIs/OCBs
while allowing investment by FIIs in September 1992. Subsequently
the aggregate limit was raised gradually and presently for FDI
investment in different sector provided the general body of the
respective firms takes a decision to that effect. Portfolio investment in
Global Depository Receipts (GDRs) /American Depository Reseats
(ADRs) /Foreign currency convertible bonds (FCCBs) floated by
Indian companies in international markets is also permitted.

33
 It is difficult to asses the direct contribution of these flows
particularly FDI to the growth process. Anecdotal evidence suggests
that foreign controlled firms often use third party export to meet their
export obligations. Another factor that contributes to widening the
technology gap in FDI in India is the inappropriate intellectual
property (IP) regime of India. Survey results for 100US multinationals
indicate that about 44 percent of the firms highlighted the weak IP
protection in India as a constraining factor for transfer of new
technology to Indian subsidiaries. For investment in sector like
chemicals and pharmaceuticals almost 80 percent of the firms review
Indian IP regime as the key constraining factor for technology transfer.
Information collected from annual surveys of select foreign controlled
rupee companies (FCRCs)/FDI companies on the export intensity of
FCRC/FDI firms during the 1980 and 1990 shows that these firms
export only about 10 percent of their domestic sales and the export
intensity has increased only modestly in the 1990. it appears that the
lure of the large size of the domestic market continues to be on of the
primary factor causing FDI flows into India.

Spillover of positive externalities associate with FDI in the form

of transfer of technology is also highlighted as another factor that
could contribute to growth. The relationship between technology
imports comprising impost of capital goods and payment for royalty
and technical know how fees) and domestic technology efforts in
terms of R & D expenditure does not exhibit any complementarily

34
foreign exchange spent on technology import as percentage of
domestic expenses on R & D rather increased significantly in the 1990
in relation to 1980 suggesting the use of transfer patterns of resource
transfer. The share of imported raw materials in total raw materials
used by FDI firms however, outperformed the overall growth in
industrial production in the 1990.
Foreign direct investment

Foreign direct investment (FDI) is defined as a long term

investment by a foreign direct investor in an enterprise resident in an
economy other than that in which the foreign direct investor is based.
The FDI relationship, consists of a parent enterprise and a foreign
affiliate which together form a transnational corporation (TNC). In
order to qualify as FDI the investment must afford the parent
enterprise control over its foreign affiliate. The UN defines control in
this case as owning 10% or more of the ordinary shares or voting
power of an incorporated firm or its equivalent for an unincorporated
firm.

In the years after the Second World War global FDI was
dominated by the United States, as much of the world recovered from
the destruction wrought by the conflict. The U.S. accounted for around
three-quarters of new FDI (including reinvested profits) between 1945
and 1960. Since that time FDI has spread to become a truly global
phenomenon, no longer the exclusive preserve of OECD countries.
FDI has grown in importance in the global economy with FDI stocks
now constituting over 20% of global GDP. In the last few years, the

35
emerging market countries such as China and India have become the
most favoured destinations for FDI and investor confidence in these
countries has soared. As per the FDI Confidence Index compiled by
A.T. Kearney for 2005, China and India hold the first and second
position respectively, whereas United States has slipped to the third
position.

Foreign Investment in India recent tends:

After a sharp set back in 1998-99 foreign investment inflows made a

smart recovery in 2004-05 and the position was broadly maintained in
2004-05. total foreign investment comprising direct and portfolio
which average about US$. 39 billion during the four year ended 1997-
98 fell sharply to US $ 2.40 billion in 1998-99 as a fall out of the
Asian Crisis in 2004-05, with the total inflow of US$ .10 billion.
During the first eight months of 2004-05 total foreign investment
inflows have risen by about 47 percent of US $ 3.68 billion form US $
2.51 billion in the corresponding period in 2004-05 due mainly to
about 61 percent increase in foreign direct investment (FDI). The
trends in foreign investment flows in 2004-05 and 2004-05 augur well
when seen against the background of private capital flows (net) to
emerging market economics being only marginal in 2000 and negative
in2001.

36
(i) Foreign Direct Investment :

Foreign direct investment (FDI) flows after reaching a peek of

US $ 3.56 billion in 1997-98 receded gradually to US 2.16 billon in
2004-05. FDI inflows rose only marginally to US $ 2.34 billion in
2004-05. FDI inflows during the current financial year (2004-05) o far
have been encouraging. During April-November 2001 they show an
increase of 61 percent to US $ 2.37 billion for US $ 1.47 billion during
April-November 2000,. The source and direction of FDI remained by
and large unchanged during the 1990s. companies registered in
Mauritius and the US were the principal source of FDI was channeled
into computer hardware and software, engineering industries, service,
electronic and electrical equipment chemical and allied products and
food and dairy products.

FDI is seen as means to supplement domestic investment for

achieving a higher level of economic growth and development. FDI
benefits domestic industry as well as the Indian consumer by providing
opportunities for technological up-gradation access to global
managerial skills and practice optimal utilization of human and nature
resources making Indian industry internationally competitive opening
up export markets providing backward and forward linkages and
access to international quality goods and services. Towards this end,
the FDI policy has been constantly received and necessary steps have
been taken to make Indian a most favorable destination for FDI.
ii) Portfolio Investment:

37
 Fresh inflows for portfolio investment by foreign institution
investors (FIIs) during 2004-05 were US$ 1.85 billion slightly lower
than the inflows of US $ 2.14 billion in the previous year. During the
first eight months of 2004-05 such inflows amounted to US $ 799
million and increase of US $532 million over the inflows amounted to
US $ 799 million and increase of US $ 532 million over the inflows
during the corresponding period in 2004-05. the policy in regard to
portfolio investment by FIIs in reviewed constantly and major
initiative are taken when necessary. In the Budge for 2004-05 it was
proposed to rises the limit for portfolio investment by FIIs from the
normal level of 24 percent of the paid up capital of the Company have
been permitted to raise the aggregate ceiling for portfolio investment
by FIIs through secondary market form the normal level of 24 percent
up to the applicable sector cap level of the issued and paid up capital
of the company subject to compliance company to the enhances limit
beyond 24 percent and (b) a special resolution pass by the general
body of the company approving the enhanced limit beyond 24 percent.

Funds raised through issue of ADRs/GDRs amounted in US $831

million in 2004-05 compared with US $ 768 million in 2000-01.
During the current financial year up to November 2001 US $ 477
million has been raised through this route. The government has been
liberalizing the guidelines for issue of GDRs/ADRs in a phased
manner. The initiative taken in 2004-05 include
(a) As a follows up of the announcement in the budget for
2004-05 Indian companies have been permitted to list in

38
 foreign stock exchange by sponsoring ADR/GDR issues
with overseas depositor against share held by its
shareholders subject to prescribed conditions
(b) All companies that have made an ADR/GDR issue earlier
and list abroad have been permitted the facility of overseas
business acquisition through ADR/GDR stock swap under
the automatic route subject to conditions that include
adherence to FDI policy and the value limit for the
transaction not toe exceed US $100 million of 10 times the
export earning during the processing financial year Indian
ADRs/GDRs announced by the Financial Minister in the
Union Budge 2004-05 are under finalization in
consultation with they RBI and the SEBI.

39
 Foreign investment in billions

iii) Non Resident Indian Deposit:

Fresh accrual to non resident deposit including accrued interest rose by

over 50 percent to US $2.30 billion in 2004-05, on top of an increase
of over 60 percent in 2004-05. during the first eight months of the
current financial year 2004-05, accrual to NRI deposit were about US
$1.98 billion higher than the US $1.52 billion in the same period last
year. The outstanding balances under non resident deposit schemes
continued their increasing trend, reflecting the overall confidence of
non-resident Indian in the strength of the economy. Outstanding
balance under all the non-0resident deposit schemes amounted to US$
24.64 billion at the end of November 2001, up from US $ 23.07
billion at the end March 2001 and Dus$.68 billion at end March 2000
raised through IMD amounted to US $3.81 billion in 2004-05,
compared with the gross disbursement of US $ 3.19 billion in 2004-05.
40
The increase in disbursements in 2004-05 was mainly on account of
the refinancing of prepayment of more expensive loans with relatively
softer terms. The prepayment of loans was also reflects in significant
increase in amortization payments form US $ 1.50 billion in 2004-05
to US $5.31 billion in 2004-05. as a result disbursements, net of
amortization payments in 2004-05 turned negative at US$ 1.50 billion
compared with the net inflow of US $0.31 billion in the previous year.
The negative flows in 2004-05 were more made up by the funds raised
through Indian Millennium Deposits of US $5.51 billion resulting in
net overall inflows of US $4.01 billion under external commercial
borrowing.

The external commercial borrowing policy continues to provide

flexibility in borrowing by Indian corporate and public sector
undertaking (PSUs) while at the same time maintaining safe limits for
total external borrowings consistent with prudent debt management.
The guiding principles for ECB policy are to keep maturities long,
costs low, and encourage infrastructure and export sector financing
which are crucial for overall growth of the economy. The status of
approvals given to the corporate under normal windows during the last
three financial years.
The idea of India is changing. This is best proved by the
increasing number of countries showing interest to invest in India.
Another encouraging factor is that India is considered a stable country
for investing in by corporate overseas. This is evident from the fact
that not a single corporate has approached the World Bank Group's

41
Multilateral Investment Guarantee Agency (Mega) for non-commercial
risk cover for making investments into the country.

India has displaced US as the second-most favored destination

for foreign direct investment (FDI) in the world after China according
to an AT Kearney's FDI Confidence Index that tracked investor
confidence among global executives to determine their order of
preferences. The United Nations Conference on Trade and
Development (Unclad) has said that India is among the "dominant host
countries" for FDI in Asia and the Pacific (APAC). It is evident. The
investment scenario in India has changed. And the figures say that it is
for the better.

India attracted more than three times foreign investment at US$

7.96 billion during the first half of 2008-09 fiscal, as against US$ 2.38
billion during the corresponding period of 2004-05. For the first six
months of this fiscal, the country drew US$ 2.86 billion of FDI and
US$ 5.10 billion of portfolio investment through GDRs, ADRs, FIIs,
offshore funds and others. In a bid to stimulate the sector further, the
government is working on a series of ambitious economic reforms.

The Centre has divested some of its own powers of approving

foreign investments that it exercised through the Foreign Investment
Promotion Board (FIPB) and has handed them over to the general
permission route under the RBI.

The FDI cap for aviation has been hiked from 40 to 49 per cent
through the automatic route. It has set up an Investment Commission

42
that will garner investments in the infrastructure sector among others,
and plans to increase the limit for investment in the infrastructure
sector. The Government approved sweeping reforms in FDI with a first
step towards partially opening retail markets to foreign investors. It
will now allow 51 per cent FDI in single brand products in the retail
sector. Besides retail, other sector are being opened:

100 per cent allowed in new sectors such as power trading,

processing and warehousing of coffee and rubber.
FDI limit raised to 100 percent under automatic route in mining
of diamonds and precious stones, development of new airports,
cash and carry wholesale trading and export trading, laying of
natural gas pipelines, petroleum infrastructure, captive mining of
coal and lignite.
Subject to other regulations, 100 percent FDI is allowed in
distillation and brewing of potable alcohol, industrial explosives
and hazardous chemicals.
Indian investor allowed to transfer shares in an existing company
to foreign investors.
Limit for telecoms services firms raised to 74 per cent from 49
per cent.

Investment in Indian market:

India, among the European investors, is believed to be a good
investment despite political uncertainty, bureaucratic hassles, shortages
of power and infrastructural deficiencies. India presents a vast
potential for overseas investment and is actively encouraging the

43
entrance of foreign players into the market. No company, of any size,
aspiring to be a global player can, for long ignore this country which is
expected to become one of the top three emerging economies.

Market potential:

India is the fifth largest economy in the world (ranking above France,
Italy, the United Kingdom, and Russia) and has the third largest GDP
in the entire continent of Asia. It is also the second largest among
emerging nations. (These indicators are based on purchasing power
parity.) India is also one of the few markets in the world which offers
high prospects for growth and earning potential in practically all areas
of business.Yet, despite the practically unlimited possibilities in India
for overseas businesses, the world's most populous democracy has,
until fairly recently, failed to get the kind of enthusiastic attention
generated by other emerging economies such as China.

Capital Flows:

Capital flows to India remained strong during , led by foreign

investment flows. Foreign direct investment (FDI) inflows into India at
US $ 5.8 billion during 2008-09 (April-January) were 31 per cent
higher than in the corresponding period of the previous year, on the
back of sustained growth in activity and positive investment climate.
FDI was channeled mainly into manufacturing, business and computer
services. Mauritius, the US and the UK continued to remain the
dominant sources of FDI to India. Foreign institutional investors (FIIs)
after remaining subdued during April-May 2005 made large purchases
in the Indian stock markets in the subsequent months. Cumulative FII

44
 inflows during April-February 2008-09 amounted to US $ 8.2 billion,
19 per cent higher than a year ago. The number of FIIs registered with
the SEBI increased from 685 at end-March 2005 to 882 by end-March
2006. Capital inflows through the issuances of American depository
receipts (ADRs)/global depository receipts (GDRs) were also
substantially higher as booming stock markets offered corporate

(US $ million)

Table 3.1 capital flows

Item Period 2007-08 2008-09

1 2 3 4

Foreign Direct Investment into April- 4,478 5,843

India January
FIIs (net) April- 6,858 8,176
February
ADRs/GDRs April- 442 2,141
January
External Assistance (net) April- 673 914
December
External Commercial Borrowings April- 2,857 -1,555
(Medium and long-term) (net) December
(3,945*
)
Short-term Trade Credits (net) April- 2,963 1,697
45
 December
NRI Deposits (net) April- -771 1,666
January

* : Excluding the IMD redemption.

the opportunity to issue equities abroad. Reflecting the increased

domestic investment activity, demand for external commercial
borrowings (ECBs), including foreign currency convertible bonds
(FCCBs), remained high. Non-Resident Indian deposit accounts
recorded inflows during April-January 2008-09 in contrast to net
outflows in the previous year (Table 53).

Lack of enthusiasm among investors:

The reason being, after independence from Britain 50 years ago,

India developed a highly protected, semi-socialist autarkic economy.
Structural and bureaucratic impediments were vigorously fostered,
along with a distrust of foreign business. Even as today the climate in
India has seen a sea change, smashing barriers and actively seeking
foreign investment, many companies still see it as a difficult market.
India is rightfully quoted to be an incomparable country and is both
frustrating and challenging at the same time. Foreign investors should
be prepared to take India as it is with all of its difficulties,
contradictions and challenges.

Developing a basic understanding or potential of the Indian

market
The Indian middle class is large and growing; wages are low; many
workers are well educated and speak English; investors are optimistic

46
and local stocks are up; despite political turmoil, the country presses
on with economic reforms. But there is still cause for worries-

Infrastructural hassles:

The rapid economic growth of the last few years has put heavy
stress on India's infrastructural facilities. The projections of further
expansion in key areas could snap the already strained lines of
transportation unless massive programs of expansion and
modernization are put in place. Problems include power demand
shortfall, port traffic capacity mismatch, poor road conditions (only
half of the country's roads are surfaced), low telephone penetration
(1.4% of population).

Indian Bureaucracy:

Although the Indian government is well aware of the need for

reform and is pushing ahead in this area, business still has to deal with
an inefficient and sometimes still slow-moving bureaucracy.

Diverse Market:

The Indian market is widely diverse. The country has 17 official

languages, 6 major religions, and ethnic diversity as wide as all of
Europe. Thus, tastes and preferences differ greatly among sections of
consumers.

Therefore, it is advisable to develop a good understanding of the

Indian market and overall economy before taking the plunge. Research
firms in India can provide the information to determine how, when and
where to enter the market. There are also companies which can guide
the foreign firm through the entry process from beginning to end
47
--performing the requisite research, assisting with configuration of the
project, helping develop Indian partners and financing, finding the land
or ready premises, and pushing through the paperwork required.

Developing up-front takes:

Market Study-

Is there a need for the products/services/technology? What is the

probable market for the product/service? Where is the market located?
Which mix of products and services will find the most acceptability
and be the most likely to generate sales? What distribution and sales
channels are available? What costs will be involved? Who is the
competitor.

Check on Economic Policies:

The general economic direction in India is toward liberalization and

globalization. But the process is slow. Before jumping into the market,
it is necessary to discover whether government policies exist relating
to the particular area of business and if there are political concerns
which should be taken into account.

Foreign Direct Investment (FDI) is permitted as under the following

forms of investments.

Through financial collaborations.

Through joint ventures and technical collaborations.

48
 Through capital markets via Euro issues.

Through private placements or preferential allotments.

Forbidden Territories:

FDI is not permitted in the following industrial sectors:

Arms and ammunition.

Atomic Energy.

Railway Transport.

Coal and lignite.

Mining of iron, manganese, chrome, gypsum, sulphur, gold,

diamonds, copper, zinc.

Foreign Investment through GDRs (Euro Issues)

Foreign Investment through GDRs is treated as Foreign Direct
Investment :

Indian companies are allowed to raise equity capital in the

international market through the issue of Global Depository Receipt
(GDRs). GDRs are designated in dollars and are not subject to any
ceilings on investment. An applicant company seeking Government's
approval in this regard should have consistent track record for good
performance (financial or otherwise) for a minimum period of 3 years.
This condition would be relaxed for infrastructure projects such as
power generation, telecommunication, petroleum exploration and
refining, ports, airports and roads.

49
Clearance from FIPB:

There is no restriction on the number of Euro-issue to be floated by a

company or a group of companies in the financial year . A company
engaged in the manufacture of items covered under Annex-III of the
New Industrial Policy whose direct foreign investment after a
proposed Euro issue is likely to exceed 51% or which is implementing
a project not contained in Annex-III, would need to obtain prior FIPB
clearance before seeking final approval from Ministry of Finance.

Use of GDRs:

The proceeds of the GDRs can be used for financing capital goods
imports, capital expenditure including domestic purchase/installation
of plant, equipment and building and investment in software
development, prepayment or scheduled repayment of earlier external
borrowings, and equity investment in JV/WOSs in India.

Restrictions:
However, investment in stock markets and real estate will not be
permitted. Companies may retain the proceeds abroad or may remit
funds into India in anticipation of the use of funds for approved end
uses. Any investment from a foreign firm into India requires the prior
approval of the Government of India.

Investment in India - Foreign Direct Investment - Approval

Foreign direct investments in India are approved through two
routes:

Automatic approval by RBI:

50
The Reserve Bank of India accords automatic approval within a period
of two weeks (provided certain parameters are met) to all proposals
involving:

foreign equity up to 50% in 3 categories relating to mining

activities (List 2).

Foreign equity up to 51% in 48 specified industries (List 3).

Foreign equity up to 74% in 9 categories (List 4).

Where List 4 includes items also listed in List 3, 74%

participation shall apply.

The lists are comprehensive and cover most industries of interest to

foreign companies. Investments in high-priority industries or for
trading companies primarily engaged in exporting are given almost
automatic approval by the RBI.

Opening an office in India:

Opening an office in India for the aforesaid incorporates assessing the

commercial opportunity for self, planning business, obtaining legal,
financial, official, environmental, and tax advice as needed, choosing
legal and capital structure, selecting a location, obtaining personnel,
developing a product marketing strategy and more.

The FIPB Route:

FIPB stands for Foreign Investment Promotion Board which approves

all other cases where the parameters of automatic approval are not met.
Normal processing time is 4 to 6 weeks. Its approach is liberal for all
sectors and all types of proposals, and rejections are few. It is not

51
necessary for foreign investors to have a local partner, even when the
foreign investor wishes to hold less than the entire equity of the
company. The portion of the equity not proposed to be held by the
foreign investor can be offered to the public.

Foreign Direct Investment Recent Trend:

India. India replaces the United States as the 2nd most attractive FDI
location, up from 3rd place in 2004 and reaching its highest ranking
ever. While India's IT and software industry has made it the darling in
the global business community over the past few years, global investor
interest in other areas is just now catching up.

Indian government has been trying to attract foreign direct investment

(FDI) and it seems be paying off. India is still way behind in terms of
attracting FDI but India is improving. Forbes reported:
The economy drew in a record 2.9 bin used in foreign direct
investment (FDI) in the first four months of the fiscal year ending next
March, nearly double last year's amount, the Press Trust of India news
agency reported.
'FDI inflows in April-July 2009-2010 increased by 92 pct to 2.9 bin
used from 1.5 bin used in the same period of the last fiscal year,' the
news agency quoted Commerce Minister Kamal Nath as telling
reporters.
The Indian government is reforming the Foreign Investment
Promotion Board, and has established the Indian Investment
Commission to act as a one-stop shop between the investor and the
bureaucracy. Also, India has raised FDI caps in the telecom, aviation,
52
banking, petroleum and media sectors. 'India is set to receive 12 bln
usd this year as against 8.3 bln USD in 2008-09,' Nath was quoted as
saying. $12 billion is an impressive figure. There is no doubt that
India is attracting more FDI and India will perhaps continue to do for
the foreseeable future. However, the bad part is that the growth in
Indian economy and FDI are not creating enough jobs in India. This is
what India needs at this moment. So, I hope that Indian government
will try to focus on this area more.
Indian government is trying very aggressively to attract foreign
direct investment (FDI) and FDI is coming into India these days in a
satisfactory way. The interesting thing is that Indian companies have
become matured and strong enough to expand their business outside of
India. In other words, Indian companies have started to invest in
foreign countries in large scale. "No wonder, foreign direct investment
(FDI) outflows from India now exceed inflows. June alone saw the
closure of 10 cross-border big time deals with a combined transaction
value of $1.5 billion. Around 76 deals worth $5.2 billion were cut in
six months between January and June this year. In comparison, the
whole of 2005 saw 136 deals at a value of $4.7 billion. This could well
be the beginning of a global presence for Indian companies. In
Unctads outward FDI performance index rankings covering 132
economies, India improved its rank from 80 in 1990 to 54 in
2004."Indian companies may have started to go abroad on a large scale
but the reality is that they have still some catching up to do compared
to companies of China, Korea, Japan and even Malaysia. So, the next

53
challenge is to catch up the big companies of Asia in terms of global
presence

India requires $150 billion worth of investments to upgrade the

country's weak infrastructure over the next 10 years. The government
is considering sweeping liberalization to expedite the FDI project
review process and eliminate FDI restrictions across a broad range of
sectors, including airports, oil, gas and natural resources.

Although more investors view India as an attractive destination,

bureaucracy, perceived corruption and a poor infrastructure may cloud
efforts to attract FDI. Among the most recent troubles: Telecom
Malaysia and Singapore Technologies' bid to buy Idea Cellular was
abandoned when it ran into regulatory problems. Singapore's Changi
airport withdrew its bid for the Delhi and Mumbai airports because of
constraints on foreign investors.

Financial services investors upgrade India from 4th to 2nd most

attractive FDI location. The emergence of local players, ICICI Bank
and HDFC Bank, along with foreign investors, has helped restructure
India's underdeveloped financial sector and spur competition.
Deutsche Bank (Germany) is launching a range of savings, investment
and loan products as well as investment and financial planning
services in seven major Indian cities.

Telecom and utilities investors rank India their 3rd most attractive
destination. One reason for the interest is the relaxation of ownership
restrictions. In October 2005, the Indian government raised foreign

54
ownership levels to 74 percent (from 49 percent), a move that will add
fuel to India's booming IT and software industry. According to
NASSCOM, the Indian IT software and services exports have grown
from $5.3 billion in 2000 to $16.5 billion in 2005.

Also, estimates suggest that India has the world's fastest-growing

mobile phone market, growing at 35 percent per year until 2006.
Immediately following the relaxation of restrictions, Vodafone Group
(U.K.) acquired a 10 percent stake in Bharti Tele-Ventures, India's
largest mobile phone operator.

Investors in the heavy and light manufacturing sectors are optimistic

about India. The country's largest FDI commitment was won when
Pohang Iron & Steel (South Korea) confirmed a $12 billion deal to
build a steel plant and develop iron ore in Orissa. The success of this
deal will be a test case for future large-scale, long-term foreign
investment in India. The government has established special economic
zones to encourage a competitive, export-oriented manufacturing
sector. In 2004, India had the fastest growing large-passenger-car
market in the world, which will likely continue to expand given the
country's low loan rates, rising incomes and flourishing middle class.

MNCs are happy operating in India, India received record foreign

direct investment (FDI) in 2006, with equity inflows expected to top
11 billion dollars, more than double the 5.5 billion dollars of inflows
last year.

55
"A survey on FDI conducted by FICCI shows that the performance
of 385 foreign investors operating in India was satisfactory, with 69
per cent reporting profits or break-even. And around 83% of the
respondents have expansion plans on the cards. Despite the overall
conditions of slowdown, over 71 per cent respondents reported a
capacity utilization of 50-75 per cent. As many as 74 per cent of the
respondents find the handling of approvals and applications at the
Centre to be good to average.

Around 62 percent find the overall policy framework to be good to

average. "The apparent increase in the FDI inflow shows that the
improved policy environment is having a positive impact," says a
senior official at FICCI. FDI this year(2006) has reached to US$
20243 Mn as compared to US$ 133 Mn corresponding period 1991-
1992.Largest investors in India as per the data provided by Business
Today Dec 2009. is as follow:

56
Table no 3.2
Largest investors in India

Country 2008-09 2009-2010 Total % of Total

Apr Apr- July Aug91- Inflow
March Jul206
Mauritius 11,411 6,789 57,192 38.49
USA 2,210 1187 21862 14.71
Japan 925 133 9063 6.1
Netherlands 340 349 8845 5.95
UK 1164 358 8629 5.81
Germany 1345 126 6647 4.47
Singapore 1218 1946 6334 4.26
France 82 164 3440 2.31
South 269 89 3001 2.02
Korea
Switzerland 426 86 2780 1.82
Total FDI 24613 13055 174466
Inflow

57
All figures are in crore Source: Business Today December
31,2009
Above table indicates that Mauritius was the largest investor in India
contributing 38.49% of total FDI inflow. This was followed by USA
with 14.71 and Japan by 6.1% of total FDI. Other countries like
Netherland and UK contributed 5.95% and 5.81% respectively.
Germany and Singapore account for 4.47and 4.26% only . France
South Korea and Switzerland contribution of FDI accounts for 2.31%
2.02% ad 1.82% respectively.
Table no 3.3
Statement of country wise FDI inflow

Sl No Country Amount of FDI % age with

Inflow FDI inflow
1 Netherlands 84851.88 6.51
2 Germany 64780.32 4.97
3 France 32567.79 2.50
4 Italy 20408.55 1.57
5 Belgium 5851.64 0.45
6 Finland 1726.78 0.13
7 Luxembourg 1720.31 0.13
8 Austria 1592.66 0.12
9 Spain 1422.03 0.11
10 Ireland 804.91 0.06
11 Greece 98.06 0.01
12 Portugal 51.32 0.00

58
The data presented in the above table indicates that Netherland was the
largest investor in India contributing 6.51% of total FDI inflow. This
was followed by Germany with 4.97% France by 2.50 and Italy by
1.57% of total FDI in India. Other countries likeBelgium Finland
Luxemberg Austria Spain and Ireland Netherland account for 0.45
0.13%, 0.12% , 0.11% 0.06% and 0.01% respectively
Foreign investment is encouraged with performance
requirements, employment generation, transfer of technology, export
performance requirements, manufacturing requirements, training and
R&D. The role of FDI is as a means to support domestic investment
for achieving a higher level of economic development, providing
opportunities for technological upgradation, access to global
managerial skills and practices, optimal utilisation of human and
natural resources, making Indian industry internationally competitive,

59
opening up export markets, providing backward and forward linkages
and access to international quality goods and services.
FDI basically complements and supplement domestic investment
and to some extent fills up savings investment gap. India has always
emphasised that developing countries need to retain the ability to
screen and channel foreign investment in accordance with their
domestic interest and priorities the year wise FDI in the country from
the financial year 1991-1992 to 2009-2010 is presented in the table
below.

Table no 3.4
Yearwise FDI Inflows
Sl.NO Year(Apr- Amount of FDI Inflow
March)
In Rupees In US$ Million
Crore
1 1991-1992 409 167
2 1992-1993 1094 393
3 1993-1994 2018 654
4 1994-1995 4312 1374
5 1995-1996 6916 2141
6 1996-1997 9654 2770
7 1997-1998 13548 3682
8 1998-1999 12343 3083
9 1999-2000 10311 2439
10 2000-2001 12645 2908
11 2001-2002 19361 4222
12 2002-2003 14932 3134
13 2003-2004 12117 2634

60
 14 2004-2005 17138 3755
15 2005-2006 24613 4343

16 2006-2007 13055 2896

17 2007-2008 14536 3645
18 2008-2009 13452 3241
19 2009-2010 13764 3524
TOTAL 216218 52208

To achieve the objectives of the economic reforms, one of our

significant policy responses has been to focus on enhancing
competitiveness of industry by providing the most conducive
investment climate. FDI benefits domestic industry as well as the
Indian consumer by providing opportunities for technological

61
 upgradation, access to global managerial skills and practices, optimal
utilisation of human and natural resources, making Indian industry
internationally competitive. Today every sector of Indian economy is
trying its best to attract more amount of FDI in order to meet their
future needs and make the sector competitive. The different sector
attracting highest FDI since last four year is presented in the table
below:

Table no 3.5
Sector Attracting Highest FDI Inflows
Amount rupees in crores
Sector 2004- 2005- 2006- 2007- Cumulative % age
05 06 07 08 Inflows with
Rank (April- (April- (April- (April- (from FDI
March) March) March) Jan) August inflows
1991 to jan
2006)
1 Electrical 2,075 2,449 3,821 3893 21,103 16.20
Equipments
(Including
62
 Computer software
& electronics)
2 Transportations 2,173 1,417 815 948 13,280 10.19
Industry
3 Service Sector 1,551 1,235 2,106 2,169 12,408 9.52
(financial &non
financial)
4 Telecommunications 1,058 532 588 905 12,218 9.38
(radio paging,
cellular mobile,
basic telephone
services)
5 Fuels ( Power + Oil 551 521 759 923 11,484 8.81
refinery)
6 Chemicals (other 611 94 909 1,941 8,542 6.56
than fertilizers)
7 Food Processing 177 511 174 175 4,694 3.60
Industries
8 Drugs & 192 502 1,343 67 4,221 3.24
Pharmaceuticals
9 Cement and 101 44 1 1,970 3,231 2.48
Gypsum Products
10 Metallurgical 222 146 881 621 2,757 2.12
Industries
Data indicates that electrical equipment sector attracted highest
amount of FDI since last four year. It was flowed by transportation
industry services sector industry and telecommunication other sector
of the economy like Fuels attracted 8.81% of total FDI in last four
year.
To conclude, it can be said that FDI is the most import tool to
attract investment and boost the industrial development. Indian
government has been trying to attract foreign direct investment (FDI)
and it seems be paying off. India is still way behind in terms of
attracting FDI but India is improving. The economy drew in a record
63
2.9 bln usd in foreign direct investment (FDI) in the first four months
of the fiscal year ending March., nearly double last year's amount, the
Press Trust of India news agency reported.

Shares of major sectors in FDI inflows

(Aug 1991 to may 2009)

Foreign Direct Investment:

With continued liberalisation of the foreign direct investment (FDI)

policy, procedural relaxations, the sustained growth in the economy,
and a favourable investment regime, a horde of global corporations are

64
keen on investing in India. India continues to be regarded as one of the
fastest expanding economies and the growth outlook for 200809 has
been projected at a high sub-eight per cent by different rating agencies.

Further, according to a report by the Centre for Monitoring Indian

Economy (CMIE), "Our close monitoring of projects through the
CMIE CapEx service shows acceleration in the announcement of fresh
investment." The CaPex service, with new projects worth US$ 44.89
billion in July, said that on an average, the monthly capturing of fresh
investments was US$ 15.32 billion in 200506, which increased to
US$ 25.18 billion in 200607, and to US$ 32.97 billion in 200708. In
the first quarter of 200809, CMIE CapEx service received projects
worth US$ 117.70 billion, averaging at US$ 39.14 billion, the report
informed.

In spite of the global meltdown, in fiscal year 200708, about US$

32.4 billion as foreign investment had poured into India. The country
posted a 45 per cent growth in foreign direct investment (FDI) with
US$ 23.3 billion between April-December 2008, over the same period
last year. The FDI inflows between April-November 2008 stood at
US$ 19.79 billion.

FDI inflows between April-October 2008 were US$ 18.70 billion, as

against the US$ 9.27 billion received during same period last year.
Inflow of FDI equity for the month of September 2008 alone was US$
2.56 billion, a growth of 259 per cent over the same month in last year.
Further, October 2008 has witnessed FDI inflows of US$ 1.49 billion,
thereby increasing the FDI inflows for the period April-October 2008
to US$ 18.7 billion, according to Commerce Minister, Mr Kamal Nath.

According to the Reserve Bank of India's (RBI) monthly bulletin,

NRIs have pumped in US$ 513 million (on net basis) in NRI deposits
in September 2008, which is the highest since December 2006.

The government has in February 2009 approved 29 foreign direct

investment (FDI) proposals worth US$ 118.95 million including an
US$ 70.49 million hotel project of AAPC Singapore Pte Ltd, a hotel
management company this month.

65
The Foreign Investment Promotion Board (FIPB) has cleared around
30 proposals accounting for more than US$ 1.21 billion in the last few
months. The approvals for such proposals went up about 50 per cent in
2008 as against 2007.

India: A much favoured destination :

India has been rated as the fourth most attractive investment

destination in the world, according to a global survey conducted by
Ernst and Young in June 2008. India was after China, Central Europe
and Western Europe in terms of prospects of alternative business
locations. With 30 per cent votes, India emerged ahead of the US and
Russia, which received 21 per cent votes each.

As per the global survey of corporate investment plans carried out by

KPMG International, released in June 2008, (a global network of
professional firms providing audit, tax, and advisory services), India
will see the largest overall growth in its share of foreign investment,
and it is likely to become the world leader for investment in
manufacturing. Its share of international corporate investment is likely
to increase by 8 per cent to 18 per cent over the next five years,
helping it rise to the fourth, from the seventh position, in the
investment league table, pushing Germany, France and the UK behind.

According to the AT Kearney FDI Confidence Index 2007, India

continues to be the second most preferred destination for attracting
global FDI inflows, a position it has held since 2005. India topped the
AT Kearney's 2007 Global Services Location Index, emerging as the
most preferred destination in terms of financial attractiveness, people
and skills availability and business environment.

India is emerging as the most favoured investment destination for

many countries.

The US Consul General, Aileen Crowe Nandi has said, "India is

emerging as the most favoured destination for overseas investment and
an important trading partner for the US."

66
A recent survey conducted by the Japan Bank for International
Cooperation (JBIC) shows that India has become the most-favoured
destination for long-term Japanese investment.

In recent times, Japanese corporations have bought varying amounts of

equity stakes in Indian firms, particularly, in the automobile sector and
also machine tools, electronics and IT. In terms of cumulative FDI
inflow, Japan is the fifth largest investor and Japan's FDI in India is
estimated to be around US$ 5.5 billion over five years from 2006 to
2010.

Further, according to Tourism Minister Anil Sarkar, Australia and

many South-Asian countries such as Cambodia, Vietnam and Thailand
have plans for investing in the tourism sector in the Indian state of
Tripura.

In terms of FDI equity inflows during April to October, the largest

investments came from Mauritius (US$ 7.69 billion), Singapore (US$
1.90 billion), U.S.A (US$ 1.25 billion), Cyprus (US$ 827 million),
Netherlands (US$ 740 million), U.K ( US$ 701 million), Germany
(US$ 538 million), France US$ 295 million), Japan (US$ 223 million),
and UAE (US$ 186 million).

Sector-wise FDI:

The sectors bagging the maximum amount of FDI equity during April
to October, 2008 are the Services Sector (US$ 3.35 billion), Computer
Hardware and Software (US$ 1.52 billion), Telecommunications (US$
1.99 billion), Construction Activities (US$ 1.74 billion), & Housing
and Real Estate (US$ 1.82 billion) .

Now, global investors are also evincing interest in other sectors like
telecommunication, energy, construction, automobiles, electrical
equipment apart from others.

Investment in the Indian realty market is set to increase to US$

20 billion by 2010.
Many big names in international retail are also entering Indian
cities. Global players such as Wal Mart, Marks & Spencers,

67
 Rosebys etc., have lined up investments to the tune of US$ 10
billion for the retail industry.
According to Mines Minister, Mr Sis Ram Ola, "FDI of about
US$ 2.5 billion per annum is expected in the mining sector from
the fifth year of implementation of the new National Mineral
Policy (NMP)."
The surge in mobile services market is likely to see cumulative
FDI inflows worth about US$ 24 billion into the Indian
telecommunications sector by 2010, from US$ 3.84 billion till
March 2008.

Aggressive Investment Plans :

The surging economy has resulted in India emerging as the fastest

growing market for many global majors. This has resulted in many
companies lining up aggressive investment plans for the Indian
market.

Footwear retail company, Pavers England Footprint, has plans to

invest US$ 10 million for setting up 1,000 stores in India by
2013. Moreover, the company also plans to invest US$ 3 million
on an R&D facility in Chennai.
General Motors India plans to invest US$ 500 million, in
addition to US$ 1 billion it has already committed to invest in
India. General Motors will also invest US$ 200 million in its
Talegaon plant near Pune for its powertrain project.
American Tower Corporation (ATC) plans an investment of
about US$ 500 million to buy a stake in an Indian telecom tower
company.
Norway-based Telenor has acquired Unitech Wireless with a US$
1.23 billion investment for a 60 per cent stake.
Leading global multiplex player Cinepolis plans to start its India
operations with an investment of US$ 350 million.
Finnish engineering and technology group, Metso started the
development of its 49-acre multi-functional industrial facility, in
Rajasthan, with an investment of around US$ 33.28 million over
two years.

68
 Swiss processing and packaging major, Tetra Pak International
SA, plans to invest US$ 100.85 million in its second plant in
Maharashtra.
Japanese telecom major, NTT DoCoMo, will be buying 27.31
per cent equity capital of Tata Teleservices for around US$ 2.48
billion.
The Goldman Sachs Group will be making an overall investment
of almost US$ 100 million in its wholly owned non-banking
financial company, Pratham Investments and Trading Private
Ltd.
Ford Indias plans to expand its capacity in India will continue as
per schedule. The expansion programme entails doubling its car
manufacturing capacity to 200,000 units per year and an engine
manufacturing facility with a capacity of producing 250,000
engines annually. The project will be completed by early 2010.
All Green Energy India, a subsidiary of Singapore-based All
Green Energy Pvt Ltd, will be investing around US$ 96.30
million for the development of 10 biomass-based renewable
energy projects over the next three years.
StarragHeckert, a global company in the field of milling machine
centres for the aerospace, transport (automotive), energy and
precision machinery markets, is planning to invest US$ 31
million in two phases.
Socomec UPS India, part of Socemec, France, will be investing
US$ 5.02 million over the next three years. Targetting a 10 per
cent share of the US$ 600 million - UPS market in India,
Socomec has inked alliances with 24 new business partners.
A joint venture by Punj Llyod and US-based Thorium Power will
see an investment of around US$ 1 billion for exploring
commercial nuclear power opportunities.
Singapore-based Universal Success Enterprises Ltd (USEL) has
signed three pacts with the Gujarat government for infrastructure
projects and will be investing about US$ 17.5 billion for the
same.

Government Initiatives:

69
The government has taken significant steps to make foreign direct
investment simpler, and render caps on FDI redundant.

In a recent move, the government has announced that equity

investments coming through companies with Indians having majority
ownership and control would be taken as fully domestic equity.

With the changes in the FDI policy, sectors like retail, telecom and
media amongst others would benefit greatly.

The change in FDI norms will bring much respite to retailers who can
now raise funds through stake sale in subsidiaries, and also build
closer alliances with their foreign partners.

Furthermore, with the revised FDI norms, extensive re-organisation of

company finances across many sectors would be seen and companies
would now be subject to further dividend distribution tax of 15 per
cent, including surcharges.

Additionally, the government has made new amendments to these

revised norms.

Even indirect foreign investment would not be allowed in sectors

where foreign investment is barred, like multi-brand retail, agriculture,
lottery and atomic energy.

The Department of Industrial Policy and Promotion (DIPP) and

the Finance Ministry are planning to remove the cap on FDI in
single-brand retail and permit up to 100 per cent foreign
investments as against the 51 per cent currently.
The government is also considering the removal of the incentive
cap in wind energy which is restricted to projects up to 49 MW,
presently.
The Reserve Bank of India (RBI) will now permit FDI up to 49
per cent in credit information companies with voting rights up to
10 per cent.

The government is now planning to permit FDI in investment

companies as well.

70
The government has also proposed wide-ranging modifications in the
guidelines FDI over various sectors.

Investment by Indian companies in which foreign firms have

beneficial investment will account as direct FDI.
Direct investments made by NRIs to account as FDI.

Looking ahead :

With the government planning more liberalisation measures across a

broad range of sectors and continued investor interest, the inflow of
FDI into India is likely to further accelerate.

The Union Commerce and Industry Minister in India, Mr Kamal Nath,

has assured that India will not be greatly affected by the current global
meltdown and has expressed confidence about achieving the FDI
target set for this year.

CHAPTER-IV

FDI AND ITS IMPACT ON INDIAN ECONOMY

India is emerging as fast growing nation, contributing in world

trade by bringing reforms in its trade practices. The world's largest
democracy, India, has emerged as a new player on the international
arena. From 3.5% growth at the time independence till average growth
of 9% in 2008, long closed to foreign competition, India has now
71
opened up its market to foreign companies. The major changes brought
in by the Indian government in International trade sweep away many
archaic and burdensome regulations and create a business-friendly
environment for domestic and international business.

The Indian economy

India: The promise of growth:

India is today one of the six fastest growing economies of the world.
The country ranked fourth in terms of Purchasing Power Parity (PPP)
in 2001. The business and regulatory environment is evolving and
moving towards constant improvement. A highly talented, skilled and
English-speaking human resource base forms its backbone.

The Indian economy has transformed into a vibrant, rapidly growing

consumer market, comprising over 300 million strong middle class
with increasing purchasing power. India provides a large market for
consumer goods on the one hand and imports capital goods and
technology to modernize its manufacturing base on the other.

An abundant and diversified natural resource base, sound economic,

industrial and market fundamentals and highly skilled and talented
human resources, make India a destination for business and investment
opportunities with an assured potential for attractive returns.

Far-reaching measures introduced by the government over the past few

years to liberalise the Indian market and integrate it with the global
economy are widely acknowledged.

The tenth five year plan document targets a healthy growth rate of 8%
for the Indian economy during the plan period 2002 07.

Selected Economic Indicators :

India remained relatively unscathed from the 1997-98 Asian financial

sector crisis and has maintained a healthy growth rate of over 5 per
72
cent despite recession in major world economies over the past two
years. This demonstrates the size, strength and resilience of the Indian
economy.

Indias GDP for the year 2004-05 was US$ 422 billion. The real GDP
growth varied between 6 to 8 per cent per annum (average 6.5 per cent
per annum), during the 1990s.

Were it not for the resilience of China and India, the world economy
would have been in deep recession in 2002.

Source: Morgan Stanley Dean Witter report.

The sectoral composition of GDP reflects a transition. While the

agricultural and industrial sectors have continued to grow, the services
sector has grown at a significantly higher pace - it currently contributes
nearly half of Indias GDP.

On the external front, cumulative foreign investment inflows have

been US$ 50 billion since 1991. This includes over US$ 28 billion of
Foreign Direct Investment (FDI) and about US$ 22.6 billion in
portfolio investment.

Licensing has been removed from all but six sectors. The Indian
government is determined to remove any remaining road blocks, real
or perceived. India has one of the most transparent and liberal FDI
regimes among the emerging developing economies. The Union
government has been continuously opening up new sectors to foreign
investment, while enhancing FDI limits in others. The year 2002 saw
the opening up of the defence, print media, housing and real estate and
urban mass transportation sectors. Some of the key aspects of FDI in
the country include:

100 per cent FDI is allowed in most sectors except

telecommunications (49 per cent), insurance (26 per cent),
banking (49 per cent), aviation (40 per cent) and small scale
industries (24 per cent). FDI in excess of 24% is permitted in SSI
sector on 50% export obligation.

73
 FDI inflows grew by 65 per cent over the previous year to reach
US$ 3.91 billion during 2004-05. The growth of 65 per cent is
encouraging at a time when global FDI inflows have declined by
40 per cent.

The upward trend in FDI inflows has been sustained with FDI
inflows during April-June 2002 being double that of the
corresponding period in 2001.

An Economist Intelligence Unit (EIU) report on World

investment prospects 2002 projects an annual average FDI
inflow of US$ 5.3 billion into India during 2002-2006.

74
External sector :

Indias external sector posted significant gains during 2004-05, despite

the deepening of the global slowdown and uncertainties owing to
September 11, 2001 terrorist attacks. The current account registered a
surplus after a period of more than two decades. The buoyancy in
capital flows bolstered the foreign exchange. Indicators of liquidity
and sustainability of external debt improved further. The exchange rate
of the rupee remained broadly stable during the year.

FDI flows to India will go up: UNCTAD

Worldwide FDI flows will decline this year - 25 per cent in

developing and 31 per cent in developed countries - but India is one of
the few countries where it will go up, Karl Sauvant, Director,
UNCTAD told UNI.

Source: News reports, 25 November 2002.

According to a recent report on global foreign direct investment

inflows, India has been rated the seventh most attractive destination in
the world for FDI for 2001.

Weak external demand adversely affected Indias export performance

during 2004-05. This was counterbalanced by the listless domestic
demand for imports and the softness in international oil prices for a
greater part of the year. As a result, the trade deficit, on balance of
payments basis, declined from US$ 14.4 billion during 2004-05 to
US$ 12.7 billion during 2004-05. The invisible account continued to
provide support to the balance of payments with the surplus increasing
from US$ 11.8 billion during 2004-05 to US$ 14.1 billion during
2004-05. The current account recorded a surplus of US$ 1.4 billion.
Net capital flows were higher at US$ 9.5 billion during 2004-05.

MNCs happy operating in India, 61% in black :

"A survey on FDI conducted by FICCI shows that the performance

of 385 foreign investors operating in India was satisfactory, with 61
per cent reporting profits or break-even. And around 51 percent of the
respondents have expansion plans on the cards. Despite the overall
75
conditions of slowdown, over 71 per cent respondents reported a
capacity utilization of 50-75 per cent.

As many as 93 per cent of the respondents find the handling of

approvals and applications at the Centre to be good to average. The
simplification of the approval procedure at the Centre can be gauged
by the fact that the number of applications going through the automatic
route has risen from 16 per cent in 2000 to 29 per cent in 2001. Also
the ratio of FDI inflows to approvals had gone up to 52.8 per cent in
2000 compared to 29 per cent in 1996.

Around 63 percent find the overall policy framework to be good to

average. "The apparent increase in the FDI inflow shows that the
improved policy environment is having a positive impact," says a
senior official at FICCI. FDI this year has risen by 61 per cent to US$
2.37 billion in April- November 2001 compared to US$ 1.47 billion in
the corresponding period last year. Besides 70 per cent feel that
bringing funds into the country is relatively easy and 69 per cent say
that funds repatriation can be carried out fairly easily"

Source: India Business World, April 2002.

Indias foreign exchange reserves have risen significantly to over US$

68 billion by the end of December 2002. This has provided the much
needed stability to the exchange rate and strengthening of the rupee.

The external debt to GDP ratio of the country has improved

significantly from 38.7 per cent in 1992 to around 22.3 percent in
2001. Among developing countries, India has one of the lowest
external debt to GDP ratios.

The value of foreign trade has increased substantially. Both exports

from and imports into India are increasing. The total volume of foreign
trade in 2004-05 was over US$ 95 billion. In order to boost exports
and attract foreign investments, the government had announced in
April 2000 the establishment of Special Economic Zones (SEZs)
policy. The SEZs would offer world class infrastructure, attractive
financial and tax incentives and procedural ease of a duty-free trading
area. For all practical purposes, units located in the SEZs are given
deemed foreign territory treatment.
76
A unique feature of the transition of the Indian economy has been an
element of high growth with stability. Both at the central and state
levels and across political affiliations of the Indian federal and state
polity, there is consensus on further economic liberalisation. The
reforms programme and the market oriented policies of the
government are irreversible.

Sectoral overview

Agriculture :

Two thirds of Indias population lives in rural areas. Agriculture and

related activities are the main source of livelihood for them. The
performance of the agricultural sector has continuously been
improving (over many decades), helping the country achieve a surplus
in food grains production. This has been facilitated through new
agricultural techniques and tools acquired by Indian farmers,
mechanisation, use of high yielding varieties of seeds, increasing use
of fertilizers and irrigation facilities, on-going operational research in
the countrys numerous agricultural universities and colleges, etc. With
liberalisation of trade in agricultural commodities, India enjoys a
competitive advantage in a number of agricultural and processed food
products exports.

While the share of agriculture in GDP (26.6 per cent in 2004-05) is

declining because of faster growth of the services sector, production in
absolute terms has been steadily rising. Agriculture accounts for 62 per
cent of total employment. Some other key highlights include:

India had a buffer stock of foodgrains (wheat and rice) of nearly

50 million tonnes (Dec. 02) as against the target of 20 million
tonnes at any given point in time. This has helped India enter the
foodgrains export market in a significant way.

India is the largest producer and consumer of tea in the world

and accounts for 28 per cent of world production and 15 per cent
of world trade.

77
 Agri-exports account for 13-18 per cent of total annual exports
of the country. Agri-exports amounted to over US$ 6 billion in
2004-05.

The value of agricultural imports of inputs like fertilizers, etc.

are approximately one-fourth the value of exports.

Manufacturing :

India has moved from an agrarian to a manufacturing and services led

economy. The manufacturing sector contributes around one-fourth of
the total GDP. The country has built a diversified industrial base
comprising traditional handicrafts, small, medium and large
manufacturing companies and high technology-oriented products. The
industrial output has grown to approx US$ 65 billion.

The country has emerged as an important global manufacturing hub -

many multinational corporations (MNCs) like Pepsi, General Electric
(GE), General Motors (GM), Ford, Suzuki, Hyundai, Gillette, LG, etc.
have followed Indias economic liberalisation process from close
quarters and set up successful operations in the country in recent years.
They have been able to leverage cost advantages while adhering to
global manufacturing facilities.

Companies in the manufacturing sector have consolidated around their

area of core competence by tying up with foreign companies to acquire
new technologies, management expertise and access to foreign
markets. The cost benefits associated with manufacturing in India,
have positioned India as a preferred destination for manufacturing and
sourcing for global markets.

Services :

The services sector currently accounts for almost half of the countrys
GDP. Expanding at a rate of 8-10 per cent per annum, services is the
fastest growing sector in the Indian economy. In fact, the growth in
Indias GDP, despite the global slowdown, is attributed largely to its
strong performance.

78
Availability of highly skilled workers has encouraged many
international companies to carry out their research and development
activities in India. IT, biotech, tourism, health, financial services and
education hold the promise of sustainable high growth. To give a
perspective:

The Indian IT industry has grown from US$ 0.8 billion in 1994-
95 to US$ 10.1 billion in 2004-05. Domestic software has grown
at 46 per cent while software exports have grown at 62 per cent
over the last 5 years.

The last decade has seen the Indian entertainment industry grow
exponentially. The key drivers for this have been technology and
the governments recognition of the importance of the sector. The
industry is expected to grow at a compound annual growth rate
(CAGR) of 27 per cent. Revenues are projected to increase from
US$ 3 billion in 2002 to US$ 10 billion in 2005.

Information Technology enabled Services (ITeS) with elements

like call centres, back office processing, content development
and medical transcription are key to rapid growth. The sector has
an employment potential of 1.1 million by 2008.

Infrastructure :

The infrastructure sector in India, traditionally reserved for the

government, is progressively being opened up for private sector
participation.

Ports :

The country has a 7500 km long coastline dotted with numerous major
and minor ports. The areas that have been identified for participation
and investment by the private sector include leasing out existing assets
of the ports, construction of additional assets such as container
terminals, cargo berths, handling equipment, repair facility, captive
power plants and captive facilities for port based industries. Foreign
investment up to 100 per cent equity participation is permitted in ports
through the automatic route for construction and maintenance of ports
and harbours.

79
A number of private companies have already set up port facilities in
the country. Two greenfield ports i.e. Pipavav and Mundra in Gujarat
have been set up through private participation and these have been able
to compete with existing major ports. Many multinational and
domestic players have taken over existing port facilities and are
operating them. Recently the container terminal at Chennai port has
been taken over by an Australian port major.

Roads :

India has the second largest road network in the world, spanning 3.3
million kilometres. Most of the private investment in this sector has
traditionally been through the build-operate-transfer schemes.
However, now many new projects are being bid out on toll collection
mechanism.

Currently, the National Highways Authority of India (NHAI) is

implementing the National Highways Development Project (NHDP).
NHDP is the largest ever highway development project to be
undertaken in the country. The project involves widening of over
13,000 km of highways in the country. The investment for this project
is estimated at US$ 13.2 billion at 1999 prices. The project has been
broken up into a large number of smaller segments, many of which
have been commissioned. Currently work has been completed on 1976
kilometers and another 5222 kilometers of length is under
construction.

Airports :

India has 122 airports, controlled by the Airports Authority of India

(AAI). The total passenger traffic handled by these airports in 2004-05
was over 40 million, while the cargo traffic handled was around
854,000 tonnes. The government is in the process of leasing out the
four major international airports at Delhi, Mumbai, Chennai and
Kolkata to private operators.

Power :

Power Sector, hitherto, had been funded mainly through budgetary

support and external borrowings. But given the budgetary support

80
limitation due to growing demands from other sectors, particularly
social sector and the severe borrowing constraints, a new financing
strategy was enunciated in 1991 allowing private enterprise a larger
role in the power sector.

The all India installed capacity of electric power generating stations

under utilities was 104917 MW as on March 2002 consisting of 26261
MW hydro, 74428 MW thermal, 2720 MW nuclear and 1507 MW
wind. A capacity addition target of 4764 MW consisting of 1536 MW
of Hydro and 3228 MW of thermal was envisaged for the year 2004-
05 of which 3115 MW consisting of 1106 MW of hydro and 2009 MW
of thermal was achieved.

Presently, restructuring and regulatory reforms include bringing about

reforms in the State Electricity Boards (SEBs) through establishment
of the State Electricity Regulatory Commissions. Reforms are
progressing steadily in the sector and privatisation of SEBs have
already begun. The government is also planning a massive
restructuring of the finances of SEBs and is looking at a one-time
settlement of dues of SEBs. In effect, a large amount of liquidity will
be injected in the sector.

The Ministry of Power has also formulated a Blue Print to provide

reliable, affordable and quality power to all users in the country i.e.
power on demand by 2012. This requires huge increase in generation
capacity, upgradation of existing generation facilities and also the
transmission and distribution network.

Telecommunications :

Indias telecommunications network ranks among the top ten countries

in the world. One of the worlds largest and fastest growing telecom
markets, the country has an investment potential estimated at US$ 39
billion by 2005 and US$ 69 billion by 2010.

Despite a strong base of a billion people, the country has a low

telephone density of approximately 5 per cent, estimated to grow to 7
per cent by 2005 and 15 per cent by 2010. The government had
allowed private participation in cellular services in 1992. The sector
witnessed partial de-regulation between 1994 and 1999. The
81
government announced the New Telecom Policy (NTP) in 1999 to
further de-regulate the sector with respect to services like basic,
international long distance (ILD), national long distance (NLD) and
Wireless in Local Loop (WLL) among others.

Financial sector :

The Indian financial sector reforms aim at improving the productivity

and efficiency of the economy. It remained stable, even when other
markets in the Asian region were facing a crisis. The opening of the
Indian financial market to foreign and private Indian players, has
resulted in increased competition and better product offerings to
consumers.

The financial sector has kept pace with the growing needs of
corporates and other borrowers. Banks, capital market participants and
insurers have developed a wide range of products and services to suit
varied customer requirements. A trend towards mergers and
acquisitions is expected in the near future due to the compulsions of
size and limitations of growth of business on its own vis--vis growth
through acquisitions. The recent favourable government policies for
enhancing limits of foreign investments in the banking sector have
generated interest from global banking majors.

The Reserve Bank of India (RBI) has ushered in a regime where

interest rates are more in line with market forces. This has increased
the credit disbursements in the economy which, in turn, will boost
industry. Banks and trade financiers have also played an important role
in promoting foreign trade of the country.

The potential of the sector is evident from existing and projected

estimates:

Presently the total asset size of the Indian banking sector is US$
270 billion while the total deposits amount to US$ 220 billion in
a banking network of over 66,000 branches across the country.

The size of the insurance market with only 20 per cent of the
insurable population currently insured, presents an immense
opportunity to new players. Foreign insurance majors have

82
 entered the country in a big way and started joint ventures in both
life and non-life areas.

Disinvestment :

The government over the past decade has been increasingly redefining
its role from being a provider of goods and services to that of a policy
maker and facilitator. Towards this objective, the government has been
consistently divesting its stake in various public sector undertakings
(PSUs).

Between 1991 and 2002, the government divestment process

had yielded US$ 6.3 billion to the national exchequer.

Policy Initiatives :

There has been a paradigm shift in the governments approach

to selling its stake since 31 March, 2000. From selling minority
stakes, the government has started divesting majority holdings
and transferring management control to strategic investors in
profitable undertakings.

The government had set up a separate ministry in late 1999 to

facilitate the divestment process. It has also set up a cabinet
committee and an inter-ministerial group to consider and
facilitate specific divestment proposals.

Some of the key highlights of the disinvestment policy are:

The 1991-92 budget considered divestment of 20 per cent

government equity in select PSUs in favour of public sector
institutional investors, mutual funds and workers.

The Disinvestment Commission (1997-99) made specific

recommendations on 58 specific PSUs with respect to
disinvestment feasibility and the methodology to be
adopted.

The second phase of disinvestment started in 1998-99.

Each year since 1999, the government is pushing ahead
with reforms and disinvestments. The government has now
83
 declared its willingness to reduce its stake below 26 per
cent in non-strategic PSUs.

Opportunities :

The successfully privatised projects during 2002-03 include the long-

distance international telecom carrier Videsh Sanchar Nigam Limited
(VSNL); petroleum marketing company IBP; petrochemical
company Indian Petrochemicals Limited (IPCL); metal
manufacturing companies Hindustan Zinc Limited and Bharat
Aluminium Company; hotels belonging to India Tourism Development
Corporation (ITDC) and the countrys largest small and medium car
manufacturing company Maruti.

The government is now considering disinvestments of the Shipping

Corporation of India and two state trading corporations (STC and
MMTC) among others. One of the biggest privatisation projects that
the government has initiated is the leasing of international airports at
the four metropolitan cities of Delhi, Mumbai, Chennai and Kolkata.
The privatisation mandates will provide a good opportunity to both
domestic and foreign investors to pick up stakes in well-performing
assets.

http://www.divest.nic.in

Actual Disinvestment from April 1991 onwards and :

Methodologies Adopted

Year No. of cos. In Actual Methodology which equity sold receipts

(INR bn)
2002-03 6 47.48 # Strategic sale of JESSOP-72%, HZL 26%, MFIL-
26%, IPCL 26% and other modes : HCI, ITDC and Maruti

2004-05 10 56.32 # Strategic sale of CMC 51%, HTL 74%, VSNL

25%, IBP 33.58%, PPL 74%, and other modes: ITDC, HCI,
STC, MMTC

84
2004-05 4 18.70 Strategic sale of BALCO, LJMC; KRL (CRL), CPCL
(MRL)

1999-00 2 18.29 GDRGAIL VSNL-domestic issue, BALCO

restructuring, MFILs strategic sale and others

1998-99 5 53.71 GDR (VSNL) / Domestic offerings with the

participation of FIIs
(CONCOR, GAIL). Cross purchase by 3 Oil sector companies i.e.
GAIL, ONGC & Indian Oil Corporation

1997-98 1 9.02 GDR (MTNL) in international market.

1996-97 1 3.80 GDR (VSNL) in international market.

Year No. of cos. In Actual Methodology which equity sold receipts

(INR bn)
1995-96 5 3.62 Equities of 4 companies auctioned and Government
followed the IDBI fixed price offering for the fifth company.

1994-95 13 48.43 Sale through auction method, in which NRIs and

other persons legally permitted to buy, hold or sell equity, allowed to
participate.

1993-94 Nil Equity of 7 companies sold by open auction but proceeds

received in 94-95.

1992-93 35 (in 3 19.13 Bundling of shares abandoned. tranches)

Shares sold separately for each company by auction method.

1991-92 47 (31 in one 30.38 Minority shares sold by auction tranche

and method in bundles of "very good", 16 in other) "good", and
"average" companies.

Note: - * and # indicate estimated and expected figures

Source: Ministry of Disinvestment
1 US$ = INR 49 approx.
85
Trade Balance :

The trade deficit for April- February, 2007 was estimated at US $

55858.54 million which was higher than the deficit of US $
37575.61(P)million during April- February, 2006.

Table n o4.6
Import and Export Trend

DEPARTMENT OF COMMERCEECONOMIC DIVISION

IMPORTS & EXPORTS: (US $ Million)
(PROVISIONAL)
February April February
Provisional Provisionally Provisional Provisionally
Revised** Revised**
EXPORTS (incl.re-exports)
2007-2008* 7834.49 8993.67 88760.40 91499.99
2008-2009 9701.71 109126.78
%Growth 23.83 7.87 22.95 19.26
2008-
2009/2007-
2008
IMPORTS
2007-2008* 11040.09 11480.03 126336.01 129118.77
2008-2009 14362.69 164985.32
%Growth 30.10 25.11 30.59 27.78
2008-2009/

86
2007-2008
TRADE BALANCE
2007-2008* -3205.60 -2486.35 -37575.61 -37618.78
2008-2009 -4660.98 -55858.54

Table no 4.7
India's Exports of Principal Commodities

India's Exports of Principal Commodities

(US $ million)
Commodity Group April-October Percentage
Variation
2009-
2007-08 2008-09 (3)/(2) (4)/(3)
2010 P
1 2 3 4 5 6
I. Primary Products 6,200.9 8,355.5 9,717.1 34.7 16.3
(14.6) (14.7) (13.7)
A. Agricultural & 4,202.9 5,247.7 6,355.5 24.9 21.1
Allied Products
of which : (9.9) (9.3) (9.0)
1. Tea 237.1 233.6 269.1 1.5 15.2

87
 2. Coffee 125.6 203.8 260.7 62.3 27.9
3. Rice 595.5 799.7 828.6 34.3 3.6
4. Wheat 244.7 120.2 6.8 50.9 94.3
5. Cotton Raw 48.2 151.4 366.6 214.3 142.1
incl. Waste
6. Tobacco 150.7 171.7 196.6 14.0 14.5
7. Cashew incl. 284.9 358.7 319.6 25.9 10.9
CNSL
8. Spices 238.9 272.5 356.2 14.0 30.7
9. Oil Meal 328.6 361.4 441.1 10.0 22.0
10. Marine 680.1 882.1 937.7 29.7 6.3
Products
11. Sugar & 17.3 19.2 525.0 11.0 2637.0
Mollases
B. Ores & 1,998.0 3,107.8 3,361.6 55.5 8.2
Minerals
of which : (4.7) (5.5) (4.7)
1. Iron Ore 1,190.5 1,928.7 1,776.5 62.0 7.9
2. Processed 414.1 591.3 762.2 42.8 28.9
Minerals
II. Manufactured 31,341.3 40,692.6 46,336.1 29.8 13.9
Goods
of which : (74.0) (71.8) (65.3)
A. Leather & 1,320.3 1,559.5 1,625.0 18.1 4.2
Manufactures
B. Chemicals & 6,128.2 7,926.3 9,088.1 29.3 14.7
Related
88
 Products
1. Basic 3,521.2 4,780.8 5,583.2 35.8 16.8
Chemicals,
Pharmaceuticals
& Cosmetics
2. Plastic & 1,481.9 1,620.1 1,766.6 9.3 9.0
Linoleum
3. Rubber, 874.1 1,149.1 1,310.0 31.5 14.0
Glass, Paints &
Enamels etc.,
4. Residual 251.0 376.3 428.4 49.9 13.8
Chemicals &
Allied Products
C. Engineering 8,560.8 11,761.5 16,045.0 37.4 36.4
Goods
of which :
1. Manufactures 1,740.7 2,320.1 2,783.3 33.3 20.0
of metals
2. Machinery & 1,782.7 2,739.2 3,640.0 53.7 32.9
Instruments
3. Transport 1,524.8 2,407.2 2,722.7 57.9 13.1
equipments
4. Iron & steel 1,789.4 1,981.8 2,934.8 10.8 48.1
5. Electronic 985.9 1,153.6 1,537.9 17.0 33.3
goods
D. Textiles and 7,304.5 9,037.6 9,533.8 23.7 5.5

89
Textile
Products
1. Cotton Yarn, 1,885.0 2,197.9 2,366.6 16.6 7.7
Fabrics, Made-
ups, etc.,
2. Natural Silk 224.2 257.4 239.7 14.8 6.9
Yarn, Fabrics,
Madeups etc.
(incl.silk waste)
3. Manmade 1,124.1 1,101.2 1,205.6 2.0 9.5
Yarn, Fabrics,
Made-ups, etc.,
4. Manmade 26.8 43.5 93.8 62.3 115.9
Staple Fibre
5. Woolen Yarn, 38.3 50.8 49.4 32.6 2.8
Fabrics,
Madeups etc.
6. Readymade 3,478.0 4,667.5 4,820.2 34.2 3.3
Garments
7. Jute & Jute 147.9 173.7 169.2 17.4 2.6
Manufactures
8. Coir & Coir 55.9 78.6 80.9 40.7 2.9
Manufactures
9. Carpets 324.4 467.0 508.4 44.0 8.9
(a) Carpet 315.5 456.0 500.3 44.5 9.7
Handmade

90
 (b) Carpet 0.0 0.0 0.0
Millmade
(c) Silk 8.9 11.1 8.1 24.6 26.9
Carpets
E. Gems & 7,366.0 9,547.8 9,132.3 29.6 4.4
Jewellery
F. Handicrafts 226.9 288.9 190.7 27.3 34.0
III. Petroleum 3,664.5 6,119.0 11,308.5 67.0 84.8
Products
(8.7) (10.8) (15.9)
IV. Others 1,127.6 1,502.1 3,633.1 33.2 141.9
(2.7) (2.7) (5.1)
Total Exports 42,334.3 56,669.2 70,994.8 33.9 25.3

Provisional.
Note : Figures in brackets relate to percentage to total exports for the
period.
Source : DGCI&S.

Table no 4.8

Direction of India's Foreign Trade Exports

Direction of India's Foreign Trade - Exports

(US $ million)
Group/Country April-October Percentage
Variation
2007-08 2008-09 2009- (3)/(2) (4)/(3)

91
 2010 P
1 2 3 4 5 6
I. O E C D 19,178.5 25,330.5 29,380.1 32.1 16.0
Countries
A. E U 8,836.2 12,183.5 14,301.3 37.9 17.4
of which:
1. Belgium 1,329.0 1,610.3 1,886.3 21.2 17.1
2. France 857.7 1,170.5 1,199.7 36.5 2.5
3. Germany 1,450.5 1,914.3 2,235.6 32.0 16.8
4. Italy 1,090.3 1,324.1 1,961.7 21.4 48.2
5. 764.4 1,314.5 1,383.7 72.0 5.3
Netherland
6. U K 1,863.6 2,816.8 3,167.9 51.1 12.5
B. North 8,137.5 10,329.6 11,642.3 26.9 12.7
America
1. Canada 458.0 571.0 657.1 24.7 15.1
2. U S A 7,679.6 9,758.6 10,985.2 27.1 12.6
C. Asia and 1,448.6 1,928.8 2,479.1 33.1 28.5
Oceania
of which:
1. Australia 385.3 488.0 523.1 26.7 7.2
2. Japan 1,012.3 1,343.4 1,507.1 32.7 12.2
D. Other O E 756.2 888.6 957.4 17.5 7.7
C D
Countries
of which:
1. 318.6 275.9 239.0 13.4 13.4
92
 Switzerland
II. O P E C 6,496.6 8,024.7 12,025.5 23.5 49.9
of which:
1. Indonesia 638.4 733.8 1,013.5 15.0 38.1
2. Iran 682.9 580.7 977.5 15.0 68.3
3. Iraq 70.2 53.0 111.5 24.6 110.5
4. Kuwait 225.1 294.0 351.5 30.6 19.5
5. Saudi 773.9 1,025.1 1,391.4 32.5 35.7
Arabia
6. U A E 3,562.5 4,513.0 7,141.9 26.7 58.2
III. Eastern 942.8 1,109.0 1,344.5 17.6 21.2
Europe
of which:
1. Romania 41.6 46.6 70.5 11.9 51.4
2. Russia 327.2 417.1 488.5 27.5 17.1
IV. Developing 15,425.2 22,051.9 28,094.6 43.0 27.4
Countries
of which:
A. Asia 12,037.9 17,221.2 20,742.8 43.1 20.4
a) SAARC 2,337.4 3,062.9 3,562.0 31.0 16.3
1. 803.8 901.5 895.9 12.2 0.6
Bangladesh
2. Bhutan 51.7 58.7 27.7 52.7
3. Maldives 25.6 41.8 39.4 63.1 5.6
4. Nepal 445.1 482.7 546.7 8.4 13.3
5. Pakistan 271.3 327.0 789.1 20.6 141.3
6. Sri Lanka 739.9 1,251.3 1,263.1 69.1 0.9

93
 b) Other 9,700.5 14,158.2 17,180.7 46.0 21.3
Asian
Developing
Countries
of which:
1. Peoples 2,012.1 3,382.3 4,015.4 68.1 18.7
Rep of
China
2. Hong 1,957.6 2,722.6 2,633.4 39.1 3.3
Kong
3. South 526.6 899.8 1,265.4 70.9 40.6
Korea
4. Malaysia 614.9 606.7 686.9 1.3 13.2
5. Singapore 1,895.0 3,284.2 3,872.7 73.3 17.9
6. Thailand 442.8 584.5 795.1 32.0 36.0
B. Africa 2,231.8 3,048.2 4,973.7 36.6 63.2
of which:
1. Benin 24.4 56.3 82.7 131.0 46.9
2. Egypt 217.3 341.3 379.5 57.1 11.2
Arab
Republic
3. Kenya 237.8 269.9 876.9 13.5 224.9
4. South 575.4 872.2 1,366.0 51.6 56.6
Africa
5. Sudan 132.5 177.4 234.8 33.9 32.4
6. Tanzania 92.4 138.0 169.3 49.4 22.7

94
 7. Zambia 22.4 38.5 68.0 71.9 76.7
C. Latin 1,155.6 1,782.6 2,378.1 54.3 33.4
American
Countries
V. Others 36.8 57.4 61.0 55.9 6.2
VI. Unspecified 254.3 95.6 89.1 62.4 6.7
Total Exports 42,334.3 56,669.2 70,994.8 33.9 25.3
Source : DGCI&S.

Table no 4.9
India's Imports of Principal Commodities

India's Imports of Principal Commodities

(US $ million)
Commodity Group April-October Percentage
Variation
2009-
2007-08 2008-09 (3)/(2) (4)/(3)
2010 P
1 2 3 4 5 6
I. Bulk Imports 23,856.1 34,700.6 49,389.4 45.5 42.3
(42.1) (47.4)
(41.8)
A. Petroleum, Petroleum 17,249.3 24,392.2 35,120.8 41.4 44.0

95
 Products & Related (29.6) (33.7)
Material (30.2)
B. Bulk Consumption 1,789.7 1,881.5 1,964.7 5.1 4.4
Goods
1. Wheat 0.0 0.0 189.3
2. Cereals & Cereal 14.3 16.3 21.2 13.8 29.9
Preparations
3. Edible Oil 1,463.2 1,374.5 1,359.4 -6.1 -1.1
4. Pulses 228.1 344.1 394.1 50.8 14.5
5. Sugar 84.0 146.6 0.7
C. Other Bulk Items 4,817.1 8,426.9 12,304.0 74.9 46.0
1. Fertilisers 671.5 1,214.5 1,896.9 80.9 56.2
155.1 191.7 212.8 23.6 11.0
a) Crude
70.3 85.7 61.3 21.9 -28.5
b) Sulphur &
Unroasted
Iron Pyrites
446.0 937.1 1,622.8 110.1 73.2
c)
Manufactured
2. Non-Ferrous Metals 687.1 1,024.7 1,473.4 49.1 43.8
3. Paper, Paperboard & 393.4 555.3 750.9 41.2 35.2
Mgfd. incl. Newsprint
4. Crude Rubber, incl. 224.2 265.7 337.8 18.5 27.1
Synthetic & Reclaimed
5. Pulp & Waste Paper 273.0 345.9 362.4 26.7 4.8
6. Metalliferrous Ores & 1,245.0 2,183.0 4,049.2 75.3 85.5

96
 Metal Scrap
7. Iron & Steel 1,323.0 2,837.9 3,433.4 114.5 21.0
II. Non-Bulk Imports 33,204.0 47,670.5 54,730.7 43.6 14.8
(58.2) (57.9) (52.6)
A. Capital Goods 11,395.3 16,928.1 23,162.8 48.6 36.8
1. Manufactures of 474.9 691.6 840.8 45.7 21.6
Metals
2. Machine Tools 280.5 569.6 800.8 103.1 40.6
3. Machinery except 3,204.4 5,380.5 7,466.8 67.9 38.8
Electrical & Electronics
4. Electrical Machinery 639.9 811.1 1,115.2 26.8 37.5
except Electronics
5. Electronic Goods incl. 5,659.7 7,536.2 9,735.6 33.2 29.2
Computer Software
6. Transport Equipments 896.7 1,479.0 2,204.7 64.9 49.1
7. Project Goods 239.3 460.1 998.8 92.3 117.1
B. Mainly Export Related 8,440.7 11,857.5 10,390.8 40.5 -12.4
Items
1. Pearls, Precious & 4,530.4 6,197.0 4,254.5 36.8 -31.3
Semi-Precious Stones
2. Chemicals, Organic & 2,870.6 4,120.0 4,544.7 43.5 10.3
Inorganic
3. Textile Yarn, Fabric, 794.3 1,227.1 1,308.6 54.5 6.6
etc.
4. Cashew Nuts, raw 245.4 313.5 282.9 27.8 -9.8
C. Others 13,368.0 18,885.0 21,177.2 41.3 12.1

97
 of which :
1. Gold & Silver 5,159.4 7,396.2 8,936.2 43.4 20.8
2. Artificial Resins & 767.3 1,374.9 1,522.5 79.2 10.7
Plastic Materials
3. Professional 775.0 1,114.0 1,320.5 43.7 18.5
Instruments etc. except
electrical
4. Coal, Coke & 1,608.6 2,101.0 2,543.4 30.6 21.1
Briquittes etc.
5. Medicinal & 381.1 564.0 662.3 48.0 17.4
Pharmaceutical Products
6. Chemical Materials & 463.3 635.4 798.9 37.1 25.7
Products
7. Non-Metallic Mineral 359.9 444.4 46.6 23.5
Manufactures
245.5
Total Imports 57,060.1 82,371.2 104,120.2 44.4 26.4
Memo items
Non-Oil Imports 39,810.8 57,979.0 68,999.4 45.6 19.0
Non-Oil Imports excl. Gold & 34,651.4 50,582.8 60,063.2 46.0 18.7
Silver
Mainly Industrial Inputs* 31,640.8 46,650.2 55,155.3 47.4 18.2

* Non oil imports net of gold and silver,bulk consumption goods,

manufactured fertilizers and professional instruments.
Note : Figures in brackets relate to percentage to total imports for the
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period.
Source : DGCI & S.

Table no 4.10

Direction of India's Foreign Trade Imports

Direction of India's Foreign Trade Imports

(US $ million)
Group/Country April-October
2007-08 2008-09 2009-2010
P
1 2 3 4
I O E C D Countries 19,245.3 27,569.6 33,616.6
A. E U 9,125.9 12,912.3 14,561.2
Of which:
1. Belgium 2,386.2 2,976.5 2,285.8
2. France 651.4 886.1 1,198.8
3. Germany 1,993.9 3,286.3 4,151.2
4. Italy 681.1 1,020.7 1,460.8
5. Netherland 380.8 620.9 624.5
6. U K 1,705.9 2,387.6 2,292.9
B. North America 3,658.5 5,118.8 6,667.0
1. Canada 314.8 559.2 731.9
2. U S A 3,343.7 4,559.6 5,935.2
C. Asia and Oceania 3,511.3 5,007.4 6,792.3
Of which:

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 1. Australia 1,840.8 2,891.9 4,099.7
2. Japan 1,602.8 2,016.8 2,534.7
D. Other O E C D 2,949.6 4,531.1 5,596.0
Countries
Of which:
1. Switzerland 2,816.8 4,309.5 5,274.2
II. O P E C 4,733.1 6,669.3 33,602.9
Of which:
1. Indonesia 1,419.3 1,733.1 2,092.5
2. Iran 187.8 430.9 4,491.6
3. Iraq 0.5 1.2 3,517.8
4. Kuwait 121.9 231.2 3,472.0
5. Saudi Arabia 656.9 870.8 8,491.6
6. U A E 1,960.1 2,864.7 4,991.6
III. Eastern Europe 1,326.2 2,341.3 2,406.1
Of which:
1. Romania 99.2 192.6 121.3
2. Russia 704.9 1,260.1 1,059.9
IV. Developing Countries 14,414.4 21,225.6 34,189.2
Of which:
A. Asia 11,429.6 16,963.9 27,143.7
a) S A A R C 447.9 748.9 856.8
1. Bangladesh 23.9 59.3 139.5
2. Bhutan 35.8 39.2 67.7
3. Maldives 0.3 1.0 1.9
4. Nepal 177.4 221.5 162.1
5. Pakistan 53.8 100.6 187.9

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 6. Sri Lanka 156.7 327.3 297.7
b) Other Asian 10,981.7 16,215.0 26,286.9
Developing Countries
Of which:
1. Peoples Rep of 3,550.2 5,990.3 9,471.6
China
2. Hong Kong 869.1 1,296.2 1,425.9
3. South Korea 1,707.0 2,483.2 2,816.9
4. Malaysia 1,231.7 1,388.8 3,185.4
5. Singapore 1,353.4 1,789.8 3,206.2
6. Thailand 431.5 711.3 953.6
B. Africa 1,948.7 2,806.1 4,281.3
Of which:
1. Benin 56.8 65.9 64.5
2. Egypt Arab Republic 92.7 163.2 1,106.9
3. Kenya 25.4 29.0 33.3
4. South Africa 985.2 1,501.5 1,639.8
5. Sudan 15.3 19.3 48.9
6. Tanzania 41.2 32.4 24.6
7. Zambia 15.9 21.7 71.4
C. Latin American 1,036.1 1,455.6 2,764.3
Countries
V. Others 7.1 17.8 35.3
VI. Unspecified 17,334.0 24,547.4 270.1
Total Imports 57,060.1 82,371.2 104,120.2

Note : The figures for 2009-2010, which include country-wise

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distribution of petroleum imports, are not strictly comparable with the
data for previous years.
Source : DGCI&S.

CHAPTER-V

CONCLUSIONS AND SUGGESIONS

India, among the European investors, is believed to be a good

investment despite political uncertainty, bureaucratic hassles, shortages
of power and infrastructural deficiencies. India presents a vast
potential for overseas investment and is actively encouraging the
entrance of foreign players into the market. No company, of any size,
aspiring to be a global player can, for long ignore this country which is
expected to become one of the top three emerging economies.

Success in India will depend on the correct estimation of the

country's potential, underestimation of its complexity or
overestimation of its possibilities can lead to failure. While calculating,

102
due consideration should be given to the factor of the inherent
difficulties and uncertainties of functioning in the Indian system.
Entering India's marketplace requires a well-designed plan backed by
serious thought and careful research.

India has emerged as one of the potential Market and is

ranked as the fifth largest economy in the world (ranking above
France, Italy, the United Kingdom, and Russia) and has the third
largest GDP in the entire continent of Asia. It is also the second largest
among emerging nations. (These indicators are based on purchasing
power parity.) India is also one of the few markets in the world which
offers high prospects for growth and earning potential in practically all
areas of business. Yet, despite the practically unlimited possibilities in
India for overseas businesses, the world's most populous democracy
has, until fairly recently, failed to get the kind of enthusiastic attention
generated by other emerging economies such as China. The some of
the important reasons of lack of the higher FDI can be highlighted as:

Lack of enthusiasm among investors:

The reason being, after independence from Britain 50 years ago, India
developed a highly protected, semi-socialist autarkic economy.
Structural and bureaucratic impediments were vigorously fostered,
along with a distrust of foreign business. Even as today the climate in
India has seen a seachange, smashing barriers and actively seeking
foreign investment, many companies still see it as a difficult market.
India is rightfully quoted to be an incomparable country and is both

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frustrating and challenging at the same time. Foreign investors should
be prepared to take India as it is with all of its difficulties,
contradictions and challenges.

The Indian middle class is large and growing; wages are low; many
workers are well educated and speak English; investors are optimistic
and local stocks are up; despite political turmoil, the country presses
on with economic reforms.But there is still cause for worries-

Infrastructural hassles:

The rapid economic growth of the last few years has put heavy stress
on India's infrastructural facilities. The projections of further
expansion in key areas could snap the already strained lines of
transportation unless massive programs of expansion and
modernization are put in place. Problems include power demand
shortfall, port traffic capacity mismatch, poor road conditions (only
half of the country's roads are surfaced), low telephone penetration
(1.4% of population).

Indian Bureaucracy:

Although the Indian government is well aware of the need for reform
and is pushing ahead in this area, business still has to deal with an
inefficient and sometimes still slow-moving bureaucracy.

Diverse Market :

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The Indian market is widely diverse. The country has 17 official
languages, 6 major religions, and ethnic diversity as wide as all of
Europe. Thus, tastes and preferences differ greatly among sections of
consumers.

Therefore, it is advisable to develop a good understanding of the

Indian market and overall economy before taking the plunge. Research
firms in India can provide the information to determine how, when and
where to enter the market. There are also companies which can guide
the foreign firm through the entry process from beginning to end
--performing the requisite research, assisting with configuration of the
project, helping develop Indian partners and financing, finding the land
or ready premises, and pushing through the paperwork required.

Developing up-front takes

Market Study:

Is there a need for the products/services/technology? What is the

probable market for the product/service? Where is the market located?
Which mix of products and services will find the most acceptability
and be the most likely to generate sales? What distribution and sales
channels are available? What costs will be involved? Who is the
competi

Check on Economic Policies:

The general economic direction in India is toward liberalization and

globalization. But the process is slow. Before jumping into the market,
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it is necessary to discover whether government policies exist relating
to the particular area of business and if there are political concerns
which should be taken into account.

In sum, Indian government is trying very aggressively to attract

foreign direct investment (FDI) and FDI is coming into India these
days in a satisfactory way the argument that India should attract large
volumes of FDI if only because other countries has done so may be
misconceived. The structure, stage of development, sources of FDI
and historical factors set India apart from other countries. The
optimum level of FDI a country should harbour is a function of the
structure, stage of development, sources of FDI it has access to and the
volume of co-operant factors it possess. And so too would be the
contractual forms of foreign enterprise participation the country should
opt for. None of these factors underlie the recent exhortations such as
"in terms of foreign investment, it is the direct investment that should
be actively sought for and doors should be thrown wide open for
foreign direct investment. FDI brings huge advantages (new capital,
technology, managerial expertise, and access to foreign markets) with
little or no downside . The open door policies advocated include
relaxation of limits on foreign equity participation, reduction of
corporate tax rates, relaxation of labour laws which at present do not
allow retrenchment of workers or closure of loss making enterprises,
and promotion of export processing zones (EPZs).

The empirical research and finding on the basis of various studies

indicates that there are many economic and non economic factors

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directing the amount of FDI , Export and Import situation and inturn
Balance of Payment of the country. However FDI and Balance of
payment trend of last 15 year shows a healthy sign and need to be
strengthen further to improve the balance of payment situation of the
country.

BIBLIOGRAPHY:

Agarwal, J. (1980) Determinants of Foreign Direct Investment: A

Survey, Weltwirtschaftliches Archiv 116, 739-773.
Athreye S and Kapur S. (2001) Private Foreign Investment In
India: pain or Panacea, World Economy, 24, 399-424.

Bajpai. N. and Sachs.J.D. (2000) Foreign Direct Investment in

India: Issues and Problems, Development Discussion Paper No
759, Harvard Institute For International Development.

, 12, 343-369.

Kidron, M. (1965) Foreign Investments In India, London, Oxford

University Press

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 Kokko, A. (1994), Technology, Market Characteristics, and
Spillovers, Journal of Development Economics, 43, 279-293

Kumar, N. (1990) Multinational Enterprises in India (Routledge:

London)

Kumar, N. (1994) Multinational Enterprises and Industrial

Organization: The Case of India, New Delhi: Sage

Kumar, N. (1995) Industrialization, Liberalization and Two Way

Flows of Foreign Direct Investments: The Case of India, INTECH
discussion Paper Series 9504

Lall, S. (1980) Vertical Inter-firm Linkages In LDCs: An Empirical

Study, Oxford Bulletin of Economics and Statistics, 42, 203-226

Lall, S. and Kumar, R (1981) Firm- Level Export Performance in an

Inward Looking Economy: The Indian Engineering Industry, World
Development, 9, 453-463.

Lall, S. (1983) Technological Change, Employment Generation and

Multinationals: A Case Study of a Foreign Firm and a Local
Multinational In India (International Labour Office, Geneva)

Websites:
1. http://commerce.nic.in/pr_archive.htm
2. https://www.imf.org/external/pubs/ft/bop/2006/06-09.pdf.
3. www.ficci.com
4. www.rbi.com

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