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TABLE OF CONTENTS
1. FDI in India .................................................................................................................................. ................................. 3 1.1. What is foreign investment? ...................................................................................................................... 3 1.2. Entry Options for Foreign Investors...................................................................................................... 3 1.3. What is the difference between FDI and FII? .................................................................................... 3 1.4. Different TYPES of FDI in India: ............................................................................................................... 4 1.5. Current inflows for FDI in India ............................................................................................................... 4 1.6. Country contribution List of FDI in India............................................................................................ 4 2. Relationship of Foreign Investment with Macro Economic Factors............................................. 5 2.1. Foreign investment and GDP of india ................................................................................................... 5 2.2. FDI and Indian Currency .............................................................................................................................. 5 2.3. Foreign investment and employment growth ................................................................................. 5 2.4. FDI and INFLATION (WPI)..................................................................................................................... ...... 5 2.5. Foreign Investment And IIP ....................................................................................................................... 5 3. Time Series Analysis of Foreign investment and FDI in India ......................................................... 6 4. Political footprints on FDI in India .................................................................................................................. 6 5. How does government attracts and monitors FDI? ............................................................................... 7 6. What determines the FDI in the economy? ................................................................................................ 8 7. Annexure ..................................................................................................................................
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1. FDI IN INDIA
1 . 1 . W H A T I S F O R E I G N I N VE S T M E N T ? Any investment flowing from one country to another country is foreign investment. The management of a business enterprise in a foreign country is foreign investment. Indian Government classifies foreign investment in the following form: Foreign direct investment (FDI) Foreign institutional investment (FII) Non-resident Indian (NRI) investment 1.2. ENTRY OPTIONS FOR FOREIGN INVESTORS A foreign company planning to set up business operations in India has the following options: Incorporate a company under the Companies Act, 1956 through: Joint Venture or Wholly owned Subsidiary Foreign equity in such Indian companies can be up to 100% depending on the requirements of the investor, subject to equity caps in respect of the sector/area of activities under the FDI policy. Enter as a Foreign Company through: o Liaison Office/Representative Office o Project Office o Branch Office Such offices can undertake activities permitted under the Foreign Exchange Management Regulations, 2000 (Establishment in India of branch or office of other place of business).
1.3. WHAT IS THE DIFFERENCE BET WEEN FDI AND FII? Foreign direct investment (FDI) is defined as "investment made to acquire lasting interest in enterprises operating outside of the economy of the investor."The FDI relationship consists of a parent enterprise and a foreign affiliate which together form a Multinational corporation (MNC). 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; lower ownership shares are known as
portfolio investment. The definition of FDI originally meant that the investing corporation gained a significant number of shares (10 percent or more) of the new venture. In recent years, however, companies have been able to make a foreign direct investment that is actually longterm management control as opposed to direct investment in buildings and equipment. FDI growth has been a key factor in the international nature of business that many are familiar with in the 21st century. This growth has been facilitated by changes in regulations both in the originating country and in the country where the new installation is to be built. FII generally means portfolio investment by foreign institutions in a market which is not their home country. These institutions are generally Mutual Funds, Investment Companies, Pension Funds, and Insurance Houses. Their investments are in the stock market whereas FDI is generally a long term commitment to a particular company in a sector in terms of equity investment by some foreign entity. FII funding is a paramount maker of stock markets and there selling or buying moves the stock in a day. FDI have long term commitment and hence we see flight of capital in terms of FII outflows but not generally in FDIs. 1. 4 . DI F F E R E N T T Y P E S O F F DI I N I N D I A : Foreign direct investment (FDI) is permitted in India as under the following form: Financial collaborations Joint ventures and technical collaborations Capital markets via Euro issues Private placements or preferential allotments 1. 5 . C U R R E N T I N F L O W S F O R F DI I N I N DI A CUMULATIVE FDI EQUITY INFLOWS Cumulative FDI inflows (From April 2000 to March 2009) FDI inflows during 2009-10 (From April 74378 15312 to Sep 2009) Cumulative amount of FDI Inflows (Up 467,504 105152 to Sep 2009) SOURCE: DIPP, Federal Ministry of Commerce & Industry, Government of India 1.6 . C O U N T R Y C O N T R I B U T I O N L I S T O F F D I I N I N DI A The major countries contributing to the FDI inflow in India are Mauritius, USA, UK, Singapore etc. Mauritius is the largest contributor in the cumulative FDI flow during the period of 2000-2009. For detailed break up please refer to section C of the Annexure. Rs Crores 393,126 US$ Million 89,840
2. 5 . F O R E I G N I N V E S T M ENT AND IIP The correlation derived between Foreign Investment and Index for Industrial Production (IIP) shows strong relationship with R^2 value of 0.91 for a linear correlation. The R^2 value is 0.95 for a 2degree polynomial correlation of FDI with IIP which again shows a very
strong relationship. Please refer to section A.6 of the Annexure for further reference.
1997
1998 1998-99
BJP: We will make our economy truly Swadeshi by promoting native initiatives". The government realized the importance of FDI. The FDI Mindset sets into the Government but opposition were critical of Government's acceptance to IMF conditionality. FDI and the United Front Government: Increase in understanding towards Foreign Investment. Foreign Investment Promotion Council Setup. The first ever guidelines were announced for consideration of foreign direct investment proposals by the FIPB, which were not covered under the route. automatic The list of industries eligible for automatic approval of up to 51 per cent foreign equity was expanded. When there was a decline in FDI the government had to take greater technical measures in terms of liberalizing investment norms in BJP admitted in its manifesto that the country cannot do without FDI, because besides capital stocks it brings with it technology, new market most importantly employment. practices and However BJP clarified that FDI will be encouraged in core areas so that itsupplements the national efforts and it discouraged usefully FDI in non
priority areas. 1999 When a second year of decline continued a Foreign Investment Implementation Authority (FIIA) was set up for providing a single point interface between foreign investors and the government machinery. 2004 FDI had become a non-electable issue as there was widespread acceptance of the topic among all the party lines 2006 "FDI will continue to be encouraged and actively sought, particularly in areas of infrastructure, high technology and exports and where local assets are created on a significant scale. The country needs and can easily absorb at least two to three times the present level of FDI inflows basis of CMP
Investment Commission: The Investment commission of India is a three-member commission set up in the Ministry of Finance in December 2004 by the Government of India. Mr. Ratan Tata is Chairman and Mr. Deepak Parekh and Dr. Ashok Ganguly are members. The Investment Commission has been set up to enhance and facilitate investment in India. The Commission makes recommendations to the Government of India on policies and
procedures to facilitate investment, recommends projects and investment proposals that should be fast tracked/mentored and promotes India as an investment destination
6 . W H A T D E T E R M I N E S T H E FDI I N T H E E C O NOMY?
Growth of the economy: o The growth rate of the home economy is an important determinant of FDI into the country. Size of the economy: o The FDI flows also depend on the size of the home economy. Real exchange rate: o Any depreciation in the currency of India will make our country more favorable for foreign investments. Degree of openness of the economy: o Any FDI investment into a country depends upon how open the economy is towards foreign trade (both imports and exports). We have captured the openness of the economy through the proxy variable, DO (Degree of Openness) where it is given by DO = (Imports+Exports)/GDP
An open-market operation where the RBI decides to buy government bonds from the public will result in the expansion of the money supply. From the above graph, we can see that the increase in the money supply decreases the interest rate from i1 to i2. The decrease in the interest rate increases the exchange rate (as the demand for foreign currency > supply of foreign currency). As a result, the FDI increases in the host country. Also, the decrease in the interest rate means the cost of capital decreases since national income identity suggests that an increase in domestic investment will positively impact on domestic output.(Y = C + I + G + X M). Open-market operations are likely to do a better job in attracting more flows of FDI than other type of monetary policy. The reason is because they impact on two determinants of FDI inflows exchange rate and GDP.
Incorporating all these factors as determinants of FDI, we get the following model: FDIt = a +b GDPt + c GDPt + d DOt+ e REERt+ ut Where, FDIt = Foreign Direct Investment in Period t GDPt = Gross Domestic Product in Period t GDPt = GDPt -GDPt-1 DOt = Degree of Openness in Period t and is equal to ratio of Sum of Exports and Imports to GDPt REERt = Real Effective Exchange Rate in Period t ut = Error Term
Using the time series data, we ran a multi-variate regression of the above equation to estimate the values of the coefficients and to check their significance levels. We obtained an adjusted R square value of .783 which shows that the model explains more than 70% of the data. FDIt = -83110 + .011 GDPt + .02 GDPt + 66970 DOt+ 633.5 REERt Also, we note that all the coefficients are positive which is as expected and the t statistic values indicate that all coefficients are significant.
7. ANNEXURE
FDI, FI, GDP, WPI, Unemployment and Currency statistics are taken from RBIs Indian Statistics Handbook 2009 mentioned below http://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Handbook %20of%20Sta tistics%20on%20Indian%20Economy A.1) Foreign investment in India and Indias GDP:
Year 1998-99 1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-2008 Foreign Investment ('000 US $ millions) 2.401 5.181 6.789 8.151 6.014 15.699 15.366 21.453 29.082 34.36 GDP ('00000 In Rs Crore) 17.86525 19.25017 20.97726 22.61415 25.38171 28.77706 23.82068 27.46928 43.03654 50.234
Durables 146.2 152.9 164.9 174.1 198.7 227.6 253.7 237.8 265.4 303.5 349.9 382.0 378.0
Year 1995-96 1996-97 1997-98 1998-99 19992000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
FDI in US $ millions 2144 2821 3557 2462 2155 4029 6130 5035 4322 6051 8961 22826 34362
Foreign Investment US $ millions 4892 6133 5385 2401 5181 6789 8151 6014 15699 15366 21453 29082 34360
FDI and FI figures are taken from RBI website mentioned below http://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Handbook %20of%20Sta tistics%20on%20Indian%20Economy
3.
CATIONS (radio paging, cellular mobile, basic telephone services) 4. HOUSING & REAL ESTATE
(478)
(1,261)
(2,558)
(2,010)
(8,386)
2,121 (467)
8,749 (2,179) 6,989 (1,743) 3,875 (967) 2,697 (675) 4,686 (1,177) 5,729 (1,427) 920 (229)
12,621 (2,801) 8,792 (2,028) 4,382 (985) 5,212 (1,152) 4,157 (961) 1,931 (412) 3,427 (749)
9,193 (1,894) 4,814 (991) 5,805 (1,197) 4,029 (833) 1,273 (263) 1,019 (205) 617 (127)
32,975 (7,407) 26,991 (6,182) 19,816 (4,387) 19,096 (4,222) 12,778 (2,987) 11,196 (2,598) 10,185 (2,261)
7%
5.
4,424 (985) 713 (157) 1,254 (276) 7,866 (173) 401 (89) 930 (205)
6%
6. 7. 8.
POWER AUTOMOBILE INDUSTRY METALLURGIC AL INDUSTRIES PETROLEUM & NATURAL GAS CEHMICALS (other than fertilizers)
4% 4% 3%
9.
3%
10.
2%
Ran k s
Country
200607
2007-08
200809
2009-10
1. 2. 3. 4. 5.
(April (April(April (April Sept. 09) (April 00 (in Marc terms of to Marc h) Sept. 09) rupees) h) Marc 28,75 44,48 50,79 31,76 193,03 44 % 9 3 4 1 4 (6,36 2,66 2 (578 3,86 1 (856 8,38 9 (1,87 2,90 5 (644 (11,09 (11,20 12,31 15,72 9 7 (3,07 4,37 7 (1,08 4,69 0 (1,17 2,78 0 (695 (3,45 8,00 2 (1,80 3,84 0 (864 3,92 2 (883 (6,52 5,76 3 (1,18 5,99 1 (1,24 1,36 4 (282 2,76 1 (571 (43,38 39,61 5 (8,99 33,95 1 (7,57 24,26 8 (5,50 18,61 4 (4,16 9% 8% 5% 4%
6. 7. 8. 9. 10.
382 3,336 (85 ) 266 (58 ) 540 (120 ) 528 (117 ) 1,17 4 (260 70,63 0 (15,72 (815 ) 3,38 5 (834 2,07 5 (514 583 (145 ) 1,03 9
3,85 7 (793 3,87 1 (794 1,81 5 (375 891 (185) 2,34 4 (484 74,37 8 (15,31
15,08 2 (3,32 13,92 0 (3,06 11,30 4 (2,54 6,37 3 (1,41 6,35 0 (1,40 467,5 04 (105,15 3)
3% 3% 3% 1% 1% -
FDI Inflows for 2009-2010 (In Rs. Crore) (In US$ mn)
1. 2. 3. 4. 5. 6.
April 2009 May 2009 June 2009 July 2009 August 2009 September 2009
2009-10 (Up to September 2009) 2008-09 (Up to September 2008) %age growth over last year