What does India Need - FDI or FII FDI usually is associated with export growth.

It comes only when all the criteria to set up an export industry are met. That includes, reduced taxes, favorable labor law, freedom to move money in and out of country, government assistance to acquire land, full grown infrastructure, reduced bureaucratic involvement etc. IT, BPO, Auto Parts, Pharmaceuticals, unexplored service sectors including accounting; drug testing, medical care etc are key sectors for foreign investment. Manufacturing is a brick and mortar investment. It is permanent and stays in the country for a very long time. Huge investments are needed to set this industry. It provides employment potential to semi skilled and skilled labor. On the other hand the service sector requires fewer but highly skilled workers. Both are needed in India. Conventional wisdom is that China will have an upper hand in manufacturing for a long time. If India plays its cards right India may be the hub for the service sector. Still high end manufacturing in auto parts and pharmaceuticals should be Indias target. The FII (Foreign Institutional Investor) is monies, which chases the stocks in the market place. It is not exactly brick and mortar money, but in the long run it may translate into brick and mortar. Sudden influx of this drives the stock market up as too much money chases too little stock. In last four months an influx of about $1.5 Billion has driven the Indian stock market 20% higher. Where FDI is a bit of a permanent nature, the FII flies away at the shortest political or economical disturbance. The late nineties economic disaster of Asian Tigers is a key example of the latter. Once this money leaves, it leaves ruined economy and ruined lives behind. Hence FII is to be welcomed with strict political and economical discipline. China receives mainly the FDI. They do not have instruments to receive the FII i.e. laws, institutions and political and judicial framework. On the contrary, India should welcome both and work hard to retain both. Hence How much FDI and FII India Needs Economists believe that additional $20 Billion a year for next ten years will drive up GDP growth additional 2 3% from the current level of 6.5 8%. If these monies arrive in form of FDI, it is good for the country. If it arrives in form of FII, it is still good, but it has to be controlled. Internal resources and withdrawal from foreign reserves, trade loans, long term financing from World Bank etc. will add additional luster to the investment plans. All the above will happen, if the planned structural changes to the Indian economy are concurrently made and countrys bureaucratic structure is made investor friendly. Other legislative changes needed to ensure the safety of investors money are made concurrently. The recent changes in Indias patent rules and regulation are steps in the right direction. All in all India has to become investor friendly. It is need of the hour. Left leaning politics will not help. Opportunism in politics, which endangers the welfare of the people, is to be thoroughly discouraged.

FII refers to the Foreign Institutional Investors that are allowed to invest in the Indian financial sector. Since the opening up of Indias capital markets, the FII activity has been on a constant rise. FII are extremely keen to invest in the BRIC countries or Brazil, Russia, India and China.

In the past year, 2010 India received US$30 billion net foreign inflows From April 2000 April 2011, cumulative inflow of FDI is US$ 197,935 million. The FDI inflow has increased in 2011 by as much as 43% as compared to 2010 according to the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry From January July 2011, about US$3.82 billion has been invested in the Indian Stock market in shares and bonds According to SEBI, the FIIs have also invested in equities and debt securities for about US$5.84 billion As of July, the number of FIIs that has been registered is 1730 according to SEBI. This figure continues to grow each year.

FDI investments and the hurdles in India As the statistics show, the FII investment in India is extremely bullish and shows a positive trend. In 2007, India receivedUS$34 billion as FDI, but this was nothing as compared to the FDI that was received by China and stood at US$134. Even though India has the largest pool of highly educated people, China scores due to the fact that it has huge infrastructure that is missing from India. Another problem that plagues the setting up is bureaucratic hurdles. The paperwork system is still bounded by the red tape system of the earlier years. Even though infrastructure work is being carried, its slow development is a matter of concern. Caveat for FII investment in India and how it affects the Indian markets However, the FII activities come with a caveat. When the FII find that the markets are performing badly, they will quickly cash out to save their positions. In August as the stock markets fell on the news of the problems with Greece financial situation and the down rating of US credit rating, the FIIs have been selling heavily. This means that the investment will be sent out of the country. FII and FDI connection The relationship between FII and FDI (Foreign Direct Investment) is intertwined. In 1998 1999 a number of reforms were initiated, that were designed specifically for attracting FDI. In India FDI is allowed through FIIs. This is done through private equity, preferential allotment, joint ventures and capital market operations. The only industries in which FDI isnt allowed are arms, railways, coal, nuclear and mining. 100% financing by FDI is allowed in infrastructural projects such as construction of the bridges and the tunnels. In the financial sector, insurance and banking operations can have foreign investors. Even though the current financial crisis is affecting the markets, it will be some time before the markets will rise again.

he article looks like having a good discussion on FDI and FII , even though old article( 2006 April). India doesn't need FDI

It won't be an exaggeration to say Nimesh Kampani, Chairman, JM Morgan Stanley, knows the Bombay Stock Exchange like the back of his hand. Kampani was one of those who propelled the stock exchange boom in the early 1980s when Reliance Industries founder Dhirubhai Ambani entered the world of equities. Nimeshbhai, as he is popularly known, is media-shy and a man of few words. For a change, he agreed to a rare and exclusive interview with Managing Editor (National Affairs) Sheela Bhatt in New Delhi and discussed what can bring about changes in India. The world is saying <st1:country-region w:st="on">India</st1:country-region> will grow, <st1:country-region w:st="on">India</st1:country-region> will become a big power. What are the hidden risk factors in this hype? There is too much liquidity across the globe. Rich people all around have so much cash in hand that they are looking for markets that are growing. How many places in the world are registering growth? Europe doesn't have much of it. Only Asia is attractive. The <st1:country-region w:st="on">US</st1:country-region> is showing one to three per cent growth in most sectors. The <st1:country-region w:st="on">US</st1:country-region> economy is developed. People there have cash in hand to spend. People in the <st1:country-region w:st="on">US</st1:country-region> want to consume using credit cards. Our risk factor lies in liquidity. Too much liquidity of those consumer economies is chasing Indian stocks. Because there is an absence of growth in their domestic markets. Their money is welcomed in <st1:country-region w:st="on">India</st1:country-region> but the risk of withdrawal comes along with that. If withdrawal of money happens it can very well bust Indian stocks. In the last five years, $45 billion investment has come to the Indian markets from foreign institutional investors. Today, the market value of their money should be around $120 billion. Who will buy when they will rush in to sell? Right now, one lot is selling and the other lot is buying. Those who bought shares at much lower price of say, Rs 80 are selling at Rs 800 and booking profit. The newcomers, on the other hand, are buying at Rs 800 with confidence in market. The new buyers will like to wait for the next five years for the stock prices to go further up. We know <st1:country-region w:st="on">Japan</st1:country-region> has invested $5 billion in the Indian market. Much of it is retail money. These days, as soon as new public issue opens, it gets filled up within the first few hours. Why is it so? Because <st1:country-region w:st="on">Japan</st1:country-region> has saved money for years. Investors there get zero or negligible interest. At some places, bank charges them for keeping deposits. In our banks, on the contrary, we get four per cent, at least. The Japanese are tired of dead investment. So they are looking out. In the last one year, the Japanese have got return of 48 per cent in the Indian stock exchange. They had started with $1 billion. Now it has reached $5 billion. Nomura Securities and others invested in it. They take index stocks. When an investor does not know the country well, he tends to buy index shares only.

The Japanese and the Koreans have invested. Recently I met 30 parliamentarians from <st1:country-region w:st="on">Denmark</st1:country-region>. I made a presentation to them on <st1:country-region w:st="on">India</st1:country-region>'s future. Thereafter, two of them came and talked about investing in Indian stocks. What can go wrong in realising your dreams of <st1:country-region w:st="on">India</st1:country-region>? Politics. If something happens to this government and there is instability at the Centre, it can affect our growth. In 2004, between May 13 and 18, the stock index plunged when Sonia Gandhi delayed her decision to announce (Dr Manmohan) Singh's name as the prime minister. The market picked up only when the announcement was made. The investor does not like political uncertainty. They are afraid of power in the hands of Left parties or the so-called Third Front because all they want is a stable government. These days people say Dr Singh is the weakest prime minister but the stock market does not think so. Dr Singh may be weak politically but he is the best prime minister as far as the country's economy is concerned. The prime minister along with Finance Minister P Chidambaram, Commerce and Industry Minister Kamal Nath and Deputy Chairman of Planning Commission Montek Singh Ahluwalia are too good for Indian markets.

<st1:country-region w:st="on">China</st1:country-region> has not grown with the

help of FII investment. Your comment.

Yes. <st1:country-region w:st="on">China</st1:country-region> has grown with the help of bank money, or people's money. <st1:country-region w:st="on">China</st1:countryregion> has got four prime banks owned by the government. These banks' non-performing assets is approximately above 30 per cent. Can you imagine about Rs 6 lakh crore (Rs 6 trillion) is disappearing from the total deposits of Indian people kept in the Indian banks? Indian banks have deposits worth around Rs 20 lakh crore (Rs 20 trillion). Chinese banks have more than what Indian banks have. Out of that money, 30 per cent has vanished. Its savings rate is around 40 per cent. The question is: Where has people's money gone? It has gone into building infrastructure. They have issued loans to whoever came to the bank. To build infrastructure, they were fast to disburse money. Now, they are writing off those loans. In <st1:country-region w:st="on">India</st1:country-region>, bad debts of banking industry stands at a meagre 1.75 per cent. <st1:country-region w:st="on">China</st1:country-region> went ahead full steam without taking care of
the accounting and financial niceties. <st1:country-region w:st="on">India</st1:country-region> is a democratic country. Here, journalists and Parliament would ask questions about fiscal management. About 30 per cent of bad debts won't be allowed.

A friend of mine was in <st1:country-region w:st="on">China</st1:country-region> recently. He was travelling along a road lined with houses on both sides. After 15 days, when he returned

along the same road, he saw those homes had disappeared and a bigger road was being built. That is <st1:country-region w:st="on">China</st1:country-region>. There the government can evacuate you in no time. Many of us feel the Sensex boom helps only a few people. Indian slums are growing as ever. Slums will not go away in the next two decades. You need wealth to distribute it. We need to create wealth in private hands. In <st1:country-region w:st="on">China</st1:country-region>, government created wealth. In <st1:country-region w:st="on">India</st1:country-region>, we are following a different route. The Indian process will be a slow one. Recently we at Morgan Stanley, handled the issue of China Construction Bank. It is the first government-owned bank in <st1:country-region w:st="on">China</st1:country-region> to go public. It was heavily subscribed. Meaning, <st1:country-region w:st="on">China</st1:countryregion> is now adopting discipline in fiscal management. Recently, <st1:country-region w:st="on">China</st1:country-region> collected around $8 billion from the <st1:country-region w:st="on">US</st1:country-region> and Hong Kong and other places and wrote off old bad debts. Now, it has begun repairing its balancesheet. Therefore, we need huge investment in infrastructure before we can even think of removing slums. We cannot tackle poverty until we raise money to finance infrastructure. I always believe that more roads, more construction and development of tourism are sure-shot ways to create huge employment. Do you find deficit financing a big issue for Indian fiscal management? I don't think it's an issue. <st1:country-region w:st="on">India</st1:country-region>'s deficit is under control. The problem lies with the states and not with the Centre. <st1:country-region w:st="on">India</st1:country-region>'s combined deficit is 10 per cent. States should improve financial management. Gujarat and Tamil Nadu are the best managed states as the governments there are excellent in financial management. They are developing their states' resources impressively. If you are asked to take one creative decision as finance minister, what will that be? I will go to Parliament and ask for permission to create fiscal deficit. I want to spend $50 billion on infrastructure! Here deficit financing is justified because I am not spending on people. Rather, I am creating assets. People will get employment and that should justify deficit planning. You need political guts and courage to do it. Planners would fear that if tax does not rise, inflation will increase and savings would pump in more money. This, in turn, will increase liquidity. But all depends on the management of spending on infrastructure. Spending on infrastructure will increase internal mobility of our people. I feel tourism and infrastructure are the areas where the Indian government should be involved. All other areas can be developed with private money. Does <st1:country-region w:st="on">India</st1:country-region> need more foreign direct investment? <st1:country-region w:st="on">India</st1:country-region> doesn't need FDI. To get FDI, you have to
install infrastructure first. <st1:country-region w:st="on">China</st1:country-region> is getting 10 times more FDI than <st1:country-region w:st="on">India</st1:country-region> because they have invested in roads and bridges and airports.

Why do you say <st1:country-region w:st="on">India</st1:country-region> doesn't need FDI? You need infrastructure to manage incoming FDI. You need clear policy. FDI is not needed in <st1:country-region w:st="on">India</st1:country-region> because we are getting more money from the FIIs. We are getting around $12 billion from them. They are buying in secondary markets and that money gets into the Indian economy. While <st1:country-region w:st="on">India</st1:country-region> gets around FDI worth $5 billion, <st1:country-region w:st="on">China</st1:country-region> gets around $50 billion. They don't have our types of stockmarkets. So FIIs are absent there. In <st1:country-region w:st="on">India</st1:country-region>, when FIIs pump in $12 billion, it means a few Indians have sold their shares to them (the FIIs), so that free cash gets invested somewhere within <st1:country-region w:st="on">India</st1:countryregion> by Indians. That money goes into land, buying of new stocks and into banks. The fundamentals of money are that it goes where it gets sound returns. Therefore, if you keep up our policies and make them fair, <st1:country-region w:st="on">India</st1:country-region> should not worry which way it gets money. Mittal Steel, Reliance, Tata, Vedanta and other Indian companies are going to invest more than Rs 2 lakh crore (Rs 2 trillion) in the coming years. FDI is not a big issue because Indians are in now a position to raise big money and invest in <st1:country-region w:st="on">India</st1:country-region>. The government should see that people get returns.

: What explains the greater attraction of the Indian market for portfolio investors as compared to foreign direct investment (FDI)? In his column Bullish FII versus cautious FDI in these pages (FE, February 14), Senthil Chengalvarayan has compared the Indian scenario, characterised by strong portfolio inflows and much weaker foreign direct investment (FDI), with China, where the situation is the reverse. He attributes the difference to the opening of the capital market. Open up the real sector and investments will flow, he argues. While his broad thrust is correct, there is another factor thats just as critical, if not more. Ease of entry and exit. Today, it is relatively effortless for a foreign institutional investor (FII) to enter the capital market. A Sebi registration, preceded by a fairly perfunctory due diligence, is all it takes before an FII can enter the Indian stock market and commence trading. Exit is equally simple. For FDI, however, both entry and exit are far more difficult. Even in sectors opened to FDI on paper, problems remain at the grassroots. There are innumerable clearances that need to be obtained at the state and district levels. There are also a number of practical hurdles, such as infrastructure bottlenecks, all of which make entry difficult. Exit is more complicated. Archaic labour laws, such as the Industrial Disputes Act, prohibit the closure of any company employing more than 100 workers without obtaining prior state government permission. Bankruptcy laws are convoluted and legal processes costly and long-winded. No wonder portfolio inflows into India far exceed direct investment flows. FII flows topped $8.5 billion last year and have already exceeded $1 billion in the current year to date. In contrast, FDI

flows have remained stuck in the $3-4 billion groove for the past many years. Its just the reverse in China. FDI is in the range of $50 billion, while portfolio flows are much lower, in the range of $4-5 billion. Part of the reason is that equity markets are far less open than in India. The market is segregated between resident and non-resident investors and there are strict controls. Given that FDI is far more beneficial to the recipient country than FII, the big question troubling Indian policymakers is how do we replicate the Chinese example. We would say open up and, equally, make exit easier as well.