IMPACT AND INFLUENCE OF FOREIGN INVESTMENT IN INDIA

MASTER OF COMMERCE BANKING & FINANCE SEMESTER I (2012 13)

SUBMITTED In partial fulfillment of the requirement for the award of Degree of Master of Commerce Banking and Finance

Under the guidance of

Dr. Anuja Desai

Maharshi Dayanand College Of Arts, Science and Commerce Parel, Mumbai- 12

Maharshi Dayanand College Of Arts, Science and Commerce Parel, Mumbai- 12

CERTIFICATE
This is to certify that Mr. / Mrs. ANANDNARAYAN SINGH Of M. Com Banking and Finance, Semester II (2012-13) has successfully completed a project on IMPACT AND INFLUENCE OF FOREIGN INVESTMENT IN INDIA Under the guidance of Mrs. Anuja Desai

Course Coordinator Principal

Project Guide/ Internal Examiner

External Examiner

DATE:

PLACE:

DECLARATION
I ANANDNARAYAN SINGH, student of M. Com Banking and

Finance, Semester I (2012-13), hereby declare that I have completed the project on IMPACT AND INFLUENCE OF FOREIGN INVESTMENT IN INDIA The information submitted through this project is true and original to the best of my knowledge.

DATE: PLACE:

SIGNATURE ANANDNARAYAN SINGH Roll number 2053

INDEX

SR.NO

TOPIC

PG.NO

1. 2. 3. 4.

INTRODUCTION FDI- AN OVERVIEW WHAT IS FDI? RECENT GLOBAL & REGIONAL FDI TRENDS

1 7 11 21

5. 6. 7. 8.

FDI APPROVAL ROUTE FDI INVESTMENT IN LAST 10 YEARS RECCOMENDATIONS CONCLUSION

26 30 33 35

9.

BIBLIOGRAPHY

36

EXECUTIVE SUMMARY

Foreign Direct Investment (FDI) flows are usually preferred over other forms of external finance because they are non-debt creating, non-volatile and their returns depend on the performance of the projects financed by the investors. FDI also facilitates international trade and transfer of knowledge, skills and technology. In a world of increased competition and rapid technological change, their complimentary and catalytic role can be very valuable. Over the years, FDI inflow in the country is increasing. However, India has tremendous potential for absorbing greater flow of FDI in the coming years. Serious efforts are being made to attract greater inflow of FDI in the country by taking several actions both on policy and implementation front. An essential requirement of the foreign investing community in making their investment decision is availability of timely and reliable information about the policies and procedures governing FDI in India. Foreign direct investment (FDI) in India has played an important role in the development of the Indian economy. FDI in India has - in a lot of ways - enabled India to achieve a certain degree of financial stability, growth and development. This money has allowed India to focus on the areas that may have needed economic Attention, and address the various problems that continue to challenge the country. India has continually sought to attract FDI from the worlds major investors. In 1998 and 1999, the Indian national government announced a number of reforms designed to encourage FDI and present a favorable scenario for investors. FDI investments are permitted through financial collaborations, through private equity or preferential allotments, by way of capital markets through Euro issues, and in joint venture.

1. INTRODUCTION
The Government of India has recognized the key role of the foreign direct investment (FDI) and foreign institutional investment (FII) in its process of economic development, not only as an addition to its own domestic capital but also as an important source of technology and other global trade practices. In order to attract the required amount of FDI and FII, it has bought about a number of changes in its economic policies and has put in its practice a liberal and more transparent FDI and FII policy with a view to attract more foreign direct institutional investment inflows into its economy. These changes have heralded the liberalization era of the foreign investment policy regime into India and have brought about a structural breakthrough in the volume of FDI and FII inflows in the economy. Growth of Indian economy is playing hide and seek with the double digit growth (Gross Domestic Product) mark. The latter is a key index, which the foreign investors check before committing large sums of money for investment. Of its own, the Indian economy will find it difficult to reach this target, except for an occasional burst of activity; like the one in 2003. To sustain it, outside help is needed and domestic house is to be placed under strict discipline. Democracy is a great buzzword, if it translates into order and political stability. Labor unrest, political opportunism and corporate irregularities are a few issues, which tarnish democracy and discourage outside investors. But the current government in both its terms has opened up the economy to welcome foreign investment to keep up with the strong domestic demand for quality goods and services. This has attracted

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unprecedented amount of foreign investment in the last decade, but of the two forms of foreign investment foreign portfolio investment (FPI) and foreign direct investment (FDI), the former has reached our shores much more than the latter. As FPI essentially interacts with the real economy via the stock market, the effect of stock market on the countrys economic development will also be examined. Research shows that the perceived benefits of foreign portfolio investment have not been realized in India. It can be seen that the mainstream argument that the entry of foreign portfolio investors will boost a country's stock market and consequently the economy, does not seem be working in India. The influx of FIIs has indeed influenced the secondary market segment of the Indian stock market. But the supposed linkage effects with the real economy have not worked in the way the mainstream model predicts. Instead there has been an increased uncertainty and skepticism about the stock market in this country. On the other hand, the surge in foreign portfolio investment in the Indian economy has introduced some serious problems of macroeconomic management for the policymakers like inflation, currency appreciation etc. On the other hand FDI is what the government really needs to attract in various sectors like infrastructure, education etc. it is much more stable than the foreign institutional investment which comes via the stock market route, and has more accountability and brings fundamental and tangible benefits to the economy.

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The dependence on FPI is pushing many developing countries, including India, towards a more stock market oriented financial system. This makes it imperative to evaluate the relative merits and demerits of a stock market based financial system in a developing country as compared to the Chinese model where conditions are conducive to foreign investment in the real sector. The global recession in 2008 proved how volatile the money pumped in by the FIIs into the secondary segment of the financial market is, leading to huge losses for the domestic investors who had to bear the brunt even though the economy as such was insulated from the adverse effects of the recession. Whereas the sectors where there was FDI didnt experience such knee-jerk reactions. In this context, this report is going to analyze the trends and patterns of foreign direct investment (FDI) and foreign institutional investment (FII) flows into India during the post liberalization period.

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RESEARCH PROBLEM The opening up of the Indian economy served as a great boon for our country as the foreign investors saw vast opportunities in it and started investing through the various routes allowed by the government of India. It is important to keep record of all such inflows to form strict regulatory procedures, search for areas or sectors that needs more investment etc, which is what this research proposes to do i.e. collect data regarding inflow of foreign direct investment and foreign institutional investment from credible sources for a specified timeline and tabulate such data to perform trend analysis of these investments to understand whether these investments fluctuate rapidly or move in a fixed pattern and also what provides impetus to these investments or what are the parameters that trigger a massive pull-out of them. As it is seen that FII is a volatile investment as compared to FDI the factors affecting the inflow of both types of investment are explored and their investment annually is compared on the basis of certain common parameters.

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RESEARCH METHODOLOGY The research has been carried out by collection of secondary data with the use of primarily the internet, books on banking and finance, various business magazines, journals, newspapers. No primary data has been used here like face to face interviews or telephonic interviews, questionnaires etc. For FDI The study takes into account a sample of top 10 investing countries e.g. Mauritius, Singapore, USA etc. and top 10 sectors e.g. service sector, computer hardware and software, telecommunications etc. which had attracted larger inflow of FDI from different countries.

For FII Correlation tool has been used to determine whether two ranges of data move together that is, how the Sensex, Foreign exchange reserves and exchange rates are related to the FII which may be positive relation, negative relation or no relation. For the purpose of comparison between FDI and FII the raw data has been arranged into a table for better observation and then this numerical data has been incorporated into bar charts and line charts. These are statistical tools used to read their pattern and conduct trend analysis.

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LIMITATIONS Limitations are conditions that restrict the scope of the study period or may affect the results of the research. It cannot be controlled by the researchers and can even affect the analysis of research adversely. One of the limiting factors of my project was that I have taken only three variables for a time period of about seven to ten years for analysis due to time constraints. Since the sample size is small so the results can be different from actual facts and may not give an appropriate judgements. Also all the data have been collected from secondary sources. Information collected first hand from professionals and scholars through interviews would have given the report a larger perspective.

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2. FOREIGN DIRECT INVESTMENT AN OVERVIEW

INTRODUCTION Foreign direct investment (FDI) plays an extraordinary and growing role in global business. It can provide a firm with new markets and marketing channels, cheaper production facilities, access to new technology, products, skills and financing. For a host country or the foreign firm which receives the investment, it can provide a source of new technologies, capital, processes, products, organizational technologies and management skills, and as such can provide a strong impetus to economic development. Foreign direct investment, in its classic definition, is defined as a company from one country making a physical investment into building a factory in another country. The direct investment in buildings, machinery and equipment is in contrast with making a portfolio investment, which is considered an indirect investment. In recent years, given rapid growth and change in global investment patterns, the definition has been broadened to include the acquisition of a lasting management interest in a company or enterprise outside the investing firms home country. As such, it may take many forms, such as a direct acquisition of a foreign firm, construction of a facility, or investment in a joint venture or strategic alliance with a local firm with attendant input of technology, licensing of intellectual property, In the past decade, FDI has come to play a major role in the internationalization of business.

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Reacting to changes in technology, growing liberalization of the national regulatory framework governing investment in enterprises, and changes in capital markets profound changes have occurred in the size, scope and methods of FDI. New information technology systems, decline in global communication costs have made management of foreign investments far easier than in the past. The sea change in trade and investment policies and the regulatory environment globally in the past decade, including trade policy and tariff liberalization, easing of restrictions on foreign investment and acquisition in many nations, and the deregulation and privatization of many industries, has probably been the most significant catalyst for FDIs expanded role. One of the most striking developments during the last two decades is the spectacular growth of FDI in the global economic landscape. This unprecedented growth of global FDI in 1990 around the world make FDI an important and vital component of development strategy in both developed and developing nations and policies are designed in order to stimulate inward flows. Infact, FDI provides a win win situation to the host and the home countries. Both countries are directly interested in inviting FDI, because they benefit a lot from such type of investment. The home countries want to take the advantage of the vast markets opened by industrial growth. On the other hand the host countries want to acquire technological and managerial skills and supplement domestic savings and foreign exchange. Moreover, the paucity of all types of resources viz. financial, capital, entrepreneurship, technological know- how, skills and practices, access to markets- abroad- in their economic development, developing nations accepted FDI as a sole

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visible panacea for all their scarcities. Further, the integration of global financial markets paves ways to this explosive growth of FDI around the globe. THE BOP CRISIS Gulf war broke out in 1990 and the resulting oil shock was enough to trigger a serious balance of payment (BoP) crisis for India in 1991. The cost of oil imports went up to 10,820 crores from the estimated 6,400 crores. Traditionally, India received lot of remittances from the expatriates working in the Gulf countries and this source also dried up as the migrant Indian workers were forced to return home due to the war. The problem was compounded due to an extremely high inflation of about 16% and a fiscal deficit of about 8.5%. The situation was so severe that India had foreign reserves of only around $1 Billion - barely enough to cover two weeks of its payment obligations. Indias credit rating was downgraded as its debt servicing capability was critically impaired and the government had to pledge its gold reserves to soothe creditors. Ostensibly, the trigger for the BoP crisis was the oil shock but the deeper issue was that the governments heavy hand in trying to regulate businesses and to move the country towards economic progress had failed to produce results and drastic measures were now called for. Faced with these insurmountable problems, the Indian government turned to the IMF and thus began a series of far reaching reforms in the India economy which envisioned transforming the countrys economy from an interventionist and overly-regulated economy to a more market oriented one.

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THE BEGINING OF A NEW ERA The year 1991 marks a new growth phase of FDI in India with an all time high flow of FDI. Following the Industrial Policy (1991) , a large number of foreign companies from different parts of the world rushed into India. In this period, in addition to thousands of foreign collaborations in India, as many as 145 foreign companies registered in India within a span of 10 years from 1991-2000. Companies like General Motors, Ford Motors, and IBM that divested from India in the 1950s and 1970s reentered India during this period. A large number of Asian companies like Daewoo Motors, Hyundai Motors and LG Electronics from S. Korea, Matsushita Television and Honda Motors from Japan invested in India during this period. With the legislation of the Industrial Licensing Policy, 1991, industrial licensing was abolished except for 18 industries. FDI up to 51% equity was allowed in 34 formerly high priority industries and the concept of phased manufacturing requirement on foreign companies was removed. Further, the tariffs on imports have been steadily reduced in every budget since 1991. Subsequently, GOI replaced FERA, 1973 that regulated all foreign exchange transactions with Foreign Exchange Management Act (FEMA), 1999. The objectives of FEMA have been to facilitate external trade and payments and to promote orderly development and maintenance of foreign exchange market. The total number of foreign collaborations increased from 976 in the year 1991 to 2144 in the year 2000.

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3. WHAT IS FOREIGN DIRECT INVESTMENT?

Is the process whereby residents of one country (the source country) acquire ownership of assets for the purpose of controlling the production, distribution, and other activities of a firm in another country (the host country). The international monetary funds balance of payment manual defines FDI as an investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of the investor. The investors purpose being to have an effective voice in the management of the enterprise. The united nations 1999 world investment report defines FDI as an investment involving a long term relationship and reflecting a lasting interest and control of a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor ( FDI enterprise, affiliate enterprise or foreign affiliate).

TYPES OF FDI

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A)BY DIRECTION Inward FDIs: Inward FDI for an economy can be defined as the capital provided from a foreign direct investor (i.e. the coca cola company) residing in a country, to that economy, which is residing in another country. EXAMPLE: General Motors decides to open a factory in India. They are going to need some capital. That capital is inward FDI for India. Different economic factors encourage inward FDIs. These include interest loans, tax breaks, grants, subsidies, and the removal of restrictions and limitations. Outward FDIs: A business strategy where a domestic firm expands its operations to a foreign country either via a Green field investment, merger/acquisition and/or expansion of an existing foreign facility. Employing outward direct investment is a natural progression for firms as better business

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opportunities will be available in foreign countries when domestic markets become too saturated. In recent years, emerging market economies (EMEs) are increasingly becoming a source of foreign investment for rest of the world. It is not only a sign of their increasing participation in the global economy but also of their increasing competence. More importantly, a growing impetus for change today is coming from developing countries and economies in transition, where a number of private as well as stateowned enterprises are increasingly undertaking outward expansion through foreign direct investments (FDI). Companies are expanding their business operations by investing overseas with a view to acquiring a regional and global reach. B) BY TARGET Greenfield investment: A form of foreign direct investment where a parent company starts a new venture in a foreign country by constructing new operational facilities from the ground up. In addition to building new facilities, most parent companies also create new long-term jobs in the foreign country by hiring new employees. Green field investments occur when multinational corporations enter into developing countries to build new factories and/or stores. Developing countries often offer prospective companies tax-breaks, subsidies and other types of incentives to set up green field investments. Governments often see that losing corporate tax revenue is a small price to pay if jobs are created and knowledge and technology is gained to boost the country's human capital.

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Horizontal FDI: Horizontal FDI arises when a firm duplicates its home country-based activities at the same value chain stage in a host country through FDI. For example, Ford assembles cars in the United States. Through horizontal FDI, it does the same thing in different host countries such as the United Kingdom (UK), France, Taiwan, Saudi Arabia, and India. Horizontal FDI therefore refers to producing the same products or offering the same services in a host country as firms do at home.

Vertical FDI: Vertical Foreign Direct Investment takes two forms: 1. Backward vertical FDI: where an industry abroad provides inputs for a firm's domestic production process like exploiting the available raw materials in the host country. 2. Forward vertical FDI: in which an industry abroad sells the outputs of a firm's domestic production i.e to be nearer to the consumers through the aquisition of distribution outlets. C) BY MOTIVE Resource seeking: Investments which seek to acquire factors of production that is more efficient than those obtainable in the home economy of the firm. In some

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cases, these resources may not be available in the home economy at all (e.g. natural resources,naturally occurring materials such as coal, fertile land, etc., that can be used by man, and cheap labor). This characterizes Foreign Direct Investment into developing countries, for example seeking cheap labor in India and China, or natural resources in the Middle East and Africa. Market seeking: Market seeking FDI is driven by access to local or regional markets. Investing locally can be driven by regulations or to save on operational costs such as transportation. General Motors investment in China is market seeking because the cars built in China are sold in China, the size and growth of host country markets are among the most important FDI determinants. Efficiency seeking: Investments which firms hope will increase their efficiency by exploiting the benefits of economies of scale and scope, and also those of common ownership. It is suggested that this kind of Foreign Direct Investment comes after either resource or market seeking investments have been realized, with the expectation that it further increases the profitability of the firm. Efficiency seeking FDI is commonly described as off shoring, or investing in foreign markets to take advantage of a lower cost structure. A credit card company opening a call center in India to serve U.S. customers is a form of efficiency seeking FDI.

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ADVANTAGES OF FDI 1. Raising the Level of Investment: Foreign investment can fill the gap between desired investment and locally mobilized savings. Local capital markets are often not well developed. Thus, they cannot meet the capital requirements for large investment projects. Besides, access to the hard currency needed to purchase investment goods not available locally can be difficult. FDI solves both these problems at once as it is a direct source of external capital. It can fill the gap between desired foreign exchange requirements and those derived from net export earnings.

2. Up gradation of Technology: Foreign investment brings with it technological knowledge while transferring machinery and equipment
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to developing countries. Production units in developing countries use out-dated equipment and techniques that can reduce the productivity of workers and lead to the production of goods of a lower standard. 3. Improvement in Export Competitiveness: FDI can help the host country improve its export performance. By raising the level of efficiency and the standards of product quality, FDI makes a positive impact on the host countrys export competitiveness. Further, because of the international linkages of MNCs, FDI provides to the host country better access to foreign markets. Enhanced export possibility contributes to the growth of the host economies by relaxing demand side constraints on growth. This is important for those countries which have a small domestic market and must increase exports vigorously to maintain their tempo of economic growth. 4. Employment Generation/Development: Foreign investment can create employment in the modern sectors of developing countries. Recipients of FDI gain training of employees in the course of operating new enterprises, which contributes to human capital formation in the host country.

5. Benefits to Consumers: Consumers in developing countries stand to gain from FDI through new products, and improved quality of goods at competitive prices.

6. Revenue to Government: Profits generated by FDI contribute to corporate tax revenues in the host country. DISADVANTAGES OF FDI
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FDI is not an unmixed blessing. Governments in developing countries have to be very careful while deciding the magnitude, pattern and conditions of private foreign investment. Possible adverse implications of foreign investment are the following: 1. When foreign investment is competitive with home investment, profits in domestic industries fall, leading to fall in domestic savings.

2. Contribution of foreign firms to public revenue through corporate taxes is comparatively less because of liberal tax concessions, investment allowances, disguised public subsidies and tariff protection provided by the host government.

3. Foreign firms reinforce dualistic socio-economic structure and increase income inequalities. They create a small number of highly paid modern sector executives. They divert resources away from priority sectors to the manufacture of sophisticated products for the consumption of the local elite. As they are located in urban areas, they create imbalances between rural and urban opportunities, accelerating flow of rural population to urban areas.

4. Foreign firms stimulate inappropriate consumption patterns through excessive advertising and monopolistic market power. The products made by multinationals for the domestic market are not necessarily low in price and high in quality. Their technology is generally capitalintensive which does not suit the needs of a labour-surplus economy.

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5. Foreign firms able to extract sizeable economic and political concessions from competing governments of developing countries. Consequently, private profits of these companies may exceed social benefits.

6. Profit distribution, investment ratios are not fixed: Continual outflow of profits is too large in many cases, putting pressure on foreign exchange reserves. Foreign investors are very particular about profit repatriation facilities. 7. Political Lobbying: Foreign firms may influence political decisions in developing countries. In view of their large size and power, national sovereignty and control over economic policies may be jeopardized. In extreme cases, foreign firms may bribe public officials at the highest levels to secure undue favours. Similarly, they may contribute to friendly political parties and subvert the political process of the host country. Determinants of FDI: 1. Size of the Market: Large developing countries provide substantial markets where the consumers demand for certain goods far exceed the available supplies. This demand potential is a big draw for many foreign-owned enterprises. In many cases, the establishment of a low cost marketing operation represents the first step by a multinational into the market of the country. This establishes a presence in the market and provides important insights into the ways of doing business and possible opportunities in the country.
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2. Political stability: In many countries, the institutions of government are still evolving and there are unsettled political questions. Companies are unwilling to contribute large amounts of capital into an environment where some of the basics political questions have not yet been resolved. 3. Macro-economic Environment: Instability in the level of prices and exchange rate enhance the level of uncertainty, making business planning difficult. This increases the perceived risk of making investments and therefore adversely affects the inflow of FDI. 4. Legal and Regulatory Framework: The transition to a market economy entails the establishment of a legal and regulatory framework that is compatible with private sector activities and the operation of foreign owned companies. The relevant areas in this field include protection of property rights, ability to repatriate profits, and a free market for currency exchange. It is important that these rules and their administrative procedures are transparent and easily comprehensive. 5. Access to Basic Inputs: Many developing countries have large reserves of skilled and semi-skilled workers that available for employment at wages significantly lower than in developed countries. This provides an opportunity for foreign firms to make investments in these countries to cater to the export market. Availability of natural resources such as oil and gas, minerals and forestry products also determine the extent of FDI.

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The determinants of FDI differ among countries and across economic sectors. These factors include the policy framework, economic determinants and the extent of business facilitation such as macroeconomic fundamentals and availability of infrastructure.

4.Recent global and regional FDI trends

The rise of FDI flows in 2011 was widespread in all three major groups developed, developing and transition economies. Developing economies

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continued to absorb nearly half of global FDI and transition economies another 6 per cent. This graph gives a pretty good indicator of how relative FDI inflows have changed since 2002 we can see that right from the year 2002 there has been an increase in FDI investments in the developing economies. The increase in the GDP growth or the bull phase which most of the developing economies experienced from 2003-2008 could be attributed to the increased FDI.

FDI flows, by region, 20092011

Amount in billions of dollars Source: UNCTAD In 2011, FDI inflows increased in all major economic groups developed, developing and transition economies. Developing countries accounted for 45 per cent of global FDI inflows in 2011. The increase
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was driven by East and South-East Asia and Latin America. East and South-East Asia still accounted for almost half of FDI in developing economies. Inflows to the transition economies of South-East Europe, the Commonwealth of Independent States (CIS) and Georgia accounted for another 6 per cent of the global total.

FII ACCORDING TO TYPE OF INVESTMENT

Source:UNCTAD Cross-border mergers and acquisitions are rising, but Greenfield investment still dominates, as the following graph shows. Greenfield investment and M&A differ in their impacts on host economies, especially in the initial stages of investment. In the short run, M&As clearly do not bring the same development benefits as Greenfield investment projects, in terms of the creation of new productive capacity, additional value added, employment and so forth. The effect of M&As on, for example, host-country employment can even be negative, in cases of restructuring to achieve synergies.

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TNCs top prospective host economies for 20122014

The importance of developing regions to TNCs as locations for international production is also evident in the economies they selected as the most likely destinations for their FDI in the medium term. Among the top five, four are developing economies .Indonesia rose into the top five in this years survey, displacing Brazil in fourth place. South Africa entered the list of top prospective economies, ranking 14th with the Netherlands and Poland. Among developed countries, Australia and the United Kingdom moved up from their positions in last years survey, while Germany maintained its position.

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Source: UNCTAD survey 2011 If we analyze the above survey it can be said that the global capital which is not providing good returns in the developed economies is moving rapidly towards developing economies. Major developing economies like India,China,Brazil etc have emerged as the top destinations for FDI worldwide because the potential impact of the economic crisis enforce the shifting of geographical focus to developing and transition economies because of their much better economic performance than the developed countries .Factors such as weaker economic growth in developed countries and abnormal functioning of the world credit are putting pressures on the pace of recovery of FDI flows towards developed economies.

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5.FDI Approval Route

Foreign direct investments in India are approved through two routes

1. Automatic approval by RBI The Reserve Bank of India accords automatic approval within a period of two weeks (subject to compliance of norms) to all proposals and permits foreign equity up to 24%; 50%; 51%; 74% and 100% is allowed depending on the category of industries and the sectoral caps applicable. 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.
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2. The FIPB Route Processing of non-automatic approval cases FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance. Indian companies having foreign investment approval through FIPB route do not require any further clearance from the Reserve Bank of India for receiving inward remittance and for the issue of shares to the non-resident investors.

SECTOR SPECIFIC CONDITIONS ON FDI PROHIBITED SECTORS. Retail Trading (except single brand product retailing) Lottery Business including Government /private lottery, online lotteries, etc. Gambling and Betting including casinos etc. Chit funds Nidhi company Trading in Transferable Development Rights (TDRs) Real Estate Business or Construction of Farm Houses Manufacturing of Cigars, cheroots, cigarillos and cigarettes substitutes

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 Activities / sectors not open to private sector investment e.g. Atomic Energy Railway Transport (other than Mass Rapid Transport System

PERMITTED SECTORS In the following sectors/activities, FDI up to the limit indicated against each sector/activity is allowed, subject to applicable laws/ regulations; security and other conditionality. In sectors/activities not listed below, FDI is permitted upto 100% on the automatic route, subject to applicable laws/ regulations; security and other conditions. Sr. No. 1. 2. 3. 4. Hotel & Tourism NBFC Insurance Telecommunication: cellular, value added services ISPs paging Electronic Mail & Voice Mail 5. Trading companies: with gateways, radio74% 100% 49% Above 49% need Govt. licence Sector/Activity FDI cap/Equity 100% 49% 26% Automatic Automatic Automatic Automatic Entry/Route

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primarily export activities bulk imports, cash and carry wholesale trading 6. Power(other than atomic reactor power plants) 7. 8. 9. 10 11. 13. Drugs & Pharmaceuticals

51%

Automatic

100%

Automatic

100% 100%

Automatic Automatic Automatic Automatic Automatic Automatic

Roads, Highways, Ports and 100% Harbors Pollution Management Call Centers BPO Airports: Greenfield projects Existing projects 100% 100% 49% 100% 100% in 49% than Control and 100% 100% 100%

Automatic Beyond 74% FIPB FIPB FIPB FIPB FIPB

14 15. 16. 17.

Assets reconstruction company Cigars and cigarettes Courier services Investing infrastructure telecom sector) companies (other

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6.Foreign Direct Investment in India in the last 10 Years

It can be seen that the flow of FDI has consistent and gradually increasing over the years. There has been an increase of 129% i.e. Rs. 13851 Crores from the year 2000-01 to 2005-06 while the increase from 2005-06 to 2011-12 has been a phenomenal 607% i.e. from Rs. 24584 Cr to Rs. 173947 Cr which can be attributed to relaxation of foreign investment rules. Despite the global financial credit squeeze brought by the recession India continues to be an attractive destination for investment as there is tremendous potential for growth in the vast and diverse markets of our country. The bars from 2000-01 to 2004-05 have been almost hovering the same levels but importantly havent gone down which is because the foreign investors saw immense potential but were not getting enough incentives to enter with huge business propositions. The breakout came from the year 2005-06 when the investment nearly doubled as compared to 2000-

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01, after which there was no looking back as consistent economic growth, de-regulation, liberal investment rules, and operational flexibility helped increase the inflow of Foreign Direct Investment or FDI. So much so that even during the year 2008-09 when the recession had taken its toll on the western countries there was no indication of falling investment via the FDI route as can be seen from the chart. In fact during 2008-09 the chart shows that FDI breached the Rs. 1 lakh crore marks. In percentage terms FDI inflow increased by 28% from 2007-08 to 2008-09.

DIFFERENT SECTORS ATTRACTING HIGHEST FDI EQUITY INFLOWS

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FINDINGS It is an accepted fact now that FIIs have significant influence on the movements of the stock market indexes in India. If one looks at the total FII trade in equity in India and its relationship with the stock market major indexes like Sensex and Nifty, it shows a steadily growing influence of FIIs in the domestic stock market. FIIs and the movements of Sensex are quite closely correlated in India and FIIs wield significant influence on the movement of Sensex. NSE also observes that in the Indian stock markets FIIs have a disproportionately high level of influence on the market sentiments and price trends. This is so because other market participants perceive the FIIs to be infallible in their assessment of the market and tend to follow the decisions taken by FIIs. This herd instinct displayed by other market participants amplifies the importance of FIIs in the domestic stock market in India.

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7.RECOMMENDATIONS:
Some of the steps that can be taken to help influence the choices made by foreign investors include: The Government should cut its fiscal deficits, which would result in strengthening the economy as a whole. Creating infrastructure and other facilities to attract foreign investment. As described earlier, an array of services can help promote foreign institutional investment in India, ranging from basic services such as the provision of electricity and clean water, to fair and effective dispute resolution systems. The ability of governments to prevent or reduce financial crises also has a great impact on the growth of capital flows. Steps to address these crises include strengthening banking supervision, requiring more transparency in international financial transactions and ensuring adequate supervision and regulation of financial markets. An attempt should be made to bring down the inflation level to attract more foreign investments into India. The Banking system needs to be strengthened which could be achieved by reducing the number of Non Performing Assets. The FI investments, though shown an increasing trend over time, are still far below the permissible limits. One such measure in this line could

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be the newly announced INDONEXT, the platform for trading the small and mid-cap companies, which might bring some focus on these companies and hopefully add some liquidity and volume to their trading, which may attract some further investments in them by FIIs The fact is that developing country like India has its own compulsions arising out of the very state of their social, political and economic development. To attract portfolio investments and retain their confidence, the host countries have to follow stable macro-economic policies, The provision for clear procedures must be followed in the event of disputes between investors and host governments, to ensure that rules are adhered to and that arbitration may be established by mutual consent. Countries may impose these kinds of measures like expropriation, domestic content requirements, restrictions on capital outflows of short term investments, etc with the intention of protecting domestic industries from international competition and promoting their economic development, but this usually leads to misallocation of resources away from the natural economic capabilities of nations. There has been a significant shift in the character of global capital flows to the developing countries in recent years in that the predominance of private account capital transfer and especially portfolio investments (FPI) increased considerably. In order to attract portfolio investments which prefer liquidity, it has been advocated to develop stock markets.

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 The general perception about the foreign portfolio investments is that, not only do they expand the demand base of the stock market, but they can also stabilise the market through investor diversification.

8.CONCLUSION
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. 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. Where FDI is a bit of a permanent nature, the FII flies away at the

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shortest political or economical disturbance. The Global Recession of 2008 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.

9.BIBLIOGRAPHY

www.dipp.nic.in

www.sebi.gov.in

www.bseindia.com

www.rbi.org.in

www.unctad.org

www.indiainfoline.com

www.thehindu.com

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