FOREIGN DIRECT INVESTMENT

ABSTRACT The Indian economy has reached in the orbit of high rate of economic growth. It is being widely acclaimed and considered as an emerging global economic power. The rate of growth recorded during the period 1950-51 to 2006-07 clearly indicated a tendency of steady upward trend. However, the decade of 80's emerged as a beginning of the high rate of economic growth or at least a dramatic departure from the past growth performance. This tendency had continued in the nineties and further growth stimulus has occurred in the early 21st century. Foreign direct investment is an investment made by a foreign individual or company in productive capacity of another country. It is the movement of capital across national frontiers in a way that grants the investor control over the acquired asset. As the third-largest economy in the world in PPP terms, India is a preferred destination for foreign direct investments (FDI). India's recently liberalised FDI policy permits up to a 100% FDI stake in ventures. Industrial policy reforms have substantially reduced industrial licensing requirements, removed restrictions on expansion and facilitated easy access to foreign technology and FDI. The upward moving growth curve of the real-estate sector owes some credit to a booming economy and liberalized FDI regime. A number of changes were approved on the FDI policy to remove the cap in most of the sectors. Restrictions will be relaxed in sectors as diverse as civil aviation, construction development, industrial parks, commodity exchanges, petroleum and natural gas, credit-information services, Mining etc. The future of Indian economy is brighter because of its huge human resources, rapidly upcoming service sector, availability of large number of competent professionals, vast market for every product, increasing impact of consumerism, absence of controls and licenses, interest of foreign entrepreneurs in India and existence of four hundred million middle class people. Today, India provides highest returns on FDI than any other country in the world. INTODUCTION The Indian economy is the third largest in the world as measured by Purchasing Power Parity, with a gross domestic product of US $3.611 trillion. When measured in USD exchange-rate terms, it is the 10th largest in the world, with a GDP of US $800.8 billion (2006). India is the second fastest growing major economy in the world, with a GDP growth rate of 8.9% at the end of the first quarter of 2006-2007.

However, India's huge population results in a per capita income of $3,300 at PPP and $714 at nominal.

The Indian economy is diverse and encompasses agriculture, handicrafts, manufacturing, textile, and a multitude of services. Although two-thirds of the Indian workforce still earn their livelihood directly or indirectly through agriculture, service sector is a growing one and are play an increasingly important role of India's economy. The advent of the digital age, and the large number of young and educated populace fluent in English, is gradually transforming India as an important 'back office' destination for global (multinational) companies for the outsourcing of their customer services and technical support. India is a major exporter of highly talented workforce in software and financial services, and software engineering. FDI up to 100% is allowed under the automatic route in all activities/sectors except the sectors, which will require approval of the Government. The question that begs for an elaboration is that is high growth and inflows of FDI solve structural imbalance of Indian economy and will it succeed in improving the lot of bottom section of the Indian economy, which are living in abysmally poor socio-economic conditions in the countryside. The employment elasticity in the agriculture and industrial sector has gone down in the post-reform period, therefore, the creation of employment opportunities will be a gigantic task for the policy makers. FDI has come in the most capital-intensive sectors; therefore, the required employment opportunities could not be created especially for the manual and the semi skilled labor. High skilled workforce gained substantially. That is why high growth is called urban centric and thus has developed a wedge between the urban and rural economy. There is urgent need to fill this void. The process of Policymaking has matured in the democratic Indian polity since the independence. It is thus predicted that the growing problems will receive mature response and policy will be articulated in such a way to use FDI the way China has used to enhance economic growth while taking more and more investment to industrialize the rural sector of the Indian economy. FOREIGN DIRECT INVESTMENT
As the third-largest economy in the world in PPP terms, India is a preferred destination for foreign direct investments (FDI); India has strengths in information technology and other important areas such as auto components, apparels, chemicals, pharmaceuticals, jewellery and so on. Although India has always held promise for global investors, but its rigid FDI policies were a significant hindrance in this context. However, as a result of a series of ambitious and positive economic reforms aimed at deregulating the economy and stimulating foreign investment, India has positioned(projected) itself as one of the frontrunners in Asia Pacific Region. India has a large pool of skilled managerial and technical

expertise. The size of the middle-class population at 300 million exceeds the population of both the US and the EU, and represents a powerful consumer market. India's recently liberalised FDI policy permits up to a 100% FDI stake in ventures. Industrial policy reforms have substantially reduced industrial licensing requirements, removed restrictions on expansion and facilitated easy access to foreign technology and FDI. The upward moving growth curve of the real-estate sector owes some credit to a booming economy and liberalized FDI regime. A number of changes were approved on the FDI policy to remove the cap in most of the sectors. Restrictions will be relaxed in sectors as diverse as civil aviation, construction development, industrial parks, commodity exchanges, petroleum and natural gas, credit-information services, Mining and so on. But this still leaves an unfinished agenda of permitting greater foreign investment in politically sensitive areas like insurance and retailing. According to the government's Secretariat for Industrial Assistance, FDI inflows into India reached a record US$19.5bn in fiscal year 2006/07 (AprilMarch). This was more than double the total of US$7.8bn in the previous fiscal year. Between April and September 2007, FDI inflows were US$8.2bn. There is no doubt about the fact that there has been a worldwide stir about foreign direct investment in India. India's growth rate of 8% certainly owes a lot to foreign equity capital and foreign direct investment. Here are the highlights of the latest trend figures concerned with FDI in India: * * * * * Increase in total FDI: 46.8% Rise in foreign equity: 36% Reinvested foreign earnings and other capital: $3.2 billion Total FDI earnings (inward) in Apr-Jan 2005-06: $5.7 billion Total FDI earnings (outward) increase: 2000-01: $757 million 2004-05: $2.4 billion

In the backdrop of this flourishing Indian economy The Associated Chambers of Commerce and Industry of India (ASSOCHAM) has projected India to double its GDP reaching a phenomenal USD 1100 billion from present USD 550 billion by 2010. Why do you think so? Well statistics also say that an average Indian will be growing richer as per capita income rises from USD 600 per annum to USD 1200 per annum by 2010. The GDP investments will likewise increase from current 5% to 35% by 2010. No wonder India has tremendous potential to attract USD 50 billion FDI in the next 5 years. With so much of visibility of MNCs, JVs, foreign investors etc it is little contradictory to say that the current flow of foreign direct investment India has been only 0.8% of GDP, compared to other nations of south-east Asia like Malaysia and Thailand with a FDI flow of 3% of GDP. Hence with more liberalization and opening of other sectors of the economy like the latest relaxation in FDI policies in real estate or direct foreign investment in real estate India etc, FDI will increase by at least 1.6% of GDP in the next 5 years. Indian Government has a key role to play as far as investment laws are concerned. In this regard it is noteworthy to highlight some of the positive reforms that have brought a positive growth in the Indian economy in terms of GDP growth. 1. 2. 3. 4. Govt. has removed 10% voting limit in banks. Higher ceiling in FDI in airport revamp ventures and real estate investment. Revisit foreign shareholding norms in telecom is welcome change. Removal of unwarranted restrictions on hindrances to foreign investments has

exceptionally increased FDI in India. 5. Govt. of India has already allowed FDI up to 51% with prior government approval in the retail trade of "single brand" products. THE ECONOMIC SCENARIO

India has been ranked at the second place in global foreign direct investments (FDI) in 2010 and is expected to remain among the top five attractive destinations for international investors during 2010-12, according to a report on world investment prospects titled, 'World Investment Prospects Survey 2009-2012' by the United Nations Conference on Trade and Development (UNCTAD). India's FDI gathered momentum with the inflows growing by 310 per cent in June 2011 to touch US$ 5.65 billion. It is the highest monthly inflow during the last 11 years. The total FDI stood at US$ 16.83 billion during January-June 2011, nearly 57 per cent higher than the US$ 10.74 billion received during the same period last year. Non-resident Indian (NRI) inflows in the first quarter of 2011-12 has witnessed a rise of 38 per cent as compared to the same period in 2010-11. NRIs invested US$ 1.54 billion in various NRI deposit schemes during April-June 2011. Private equity (PE) investments in India stood at US$ 6.14 billion in value terms, while the number of deals increased by 33 per cent to 195, during January-June 2011, according to data compiled by Chennai-based Venture Intelligence. The rise in the value of the deals so far (June 2011) recorded a growth of 52 per cent, as compared to US$ 4.04 billion raised during 2010. India's foreign exchange (Forex) reserves have increased by US$ 1.6 billion to register US$ 318 billion during the week ended August 19, 2011, according to data released by the Reserve Bank of India (RBI). The increase in Forex is largely attributed due to valuation changes. The Government has approved fund raising worth Rs 60,950 crore (US$ 13.24 billion) by companies through external commercial borrowings (ECB) or foreign currency convertible bonds (FCCB) for infrastructure projects in the financial years 2009-2011. India's merchandise exports have registered an increase of nearly 82 per cent during July 2011 from a year ago to touch US$ 29.3 billion, according to a release by the Ministry of Commerce and Industry. Exports during April-July 2011 reached US$ 108.3 billion, up 54 per cent over the same period a year ago, according to Mr Rahul Khullar, Commerce Secretary. Exports in the referred period increased on back of demand for engineering and petroleum products, gems and jewellery and readymade garments. FDI BOOM IN INDIA

The FDI boom in India * India is now the third most favoured destination for Foreign Direct Investment (FDI), behind China and the USA, according to an AT Kearney survey that tracked investor confidence among global executives to decide their order of preferences.

* India's share of global FDI flows rose from 1.8 per cent in 1996 to 2.2 percent in 1997. * FDI in India in 1997-98 was lower at U.S.$ 5,025 million compared to U.S.$ 6,008 million in 1996-97 because of a decline in portfolio investment. Although foreign direct investment (FDI) increased by 18.6 per cent from U.S.$ 2,696 million in 1996-97 to U.S.$ 3,197 million in 1997- 98 * International developments continue to attract capital flows into India in 1998-99 as well. * Mauritius, as in the previous two years, was the dominant source of FDI inflows in 199798. U.S.A. and S. Korea were, respectively, the second and third largest sources of FDI. * S. Korea increased its flow of investment in India from a meager U.S.$ 6.3 million in 1996-97 (0.2 per cent of total FDI) to U.S.$ 333.1 million in 1997-98 (10.4 per cent share). * There has been a sharp rise in the number of FDIs approved in 2004. * During the first seven months of 2004, between January and July, Rs. 5,220 crore worth of FDI was approved. * Almost a third share of the investment in India is by NRI. * According to the latest Reserve Bank of India figures, outflows through various NRI deposits schemes amounted to $903 million since May 2004, as against net inflows of $1.2 billion in the corresponding period last year.

A recent international agency report has explained that the Indian economy will become one of the world's largest by 2050 A.D. With a GDP growth rate of 8 per cent since 2003 starting with a rebound in the Indian agriculture initially but now followed with a boom in production and service sectors similar to that of China. In the last couple of months there has been a series of announcements of huge investments by giant foreign and NRI companies. Bill Gates in recent visit to India announced that the Microsoft will invest around $ 1.7 billion over the next few years in India. Intel, the world's largest computer chips company has planned to invest over $ 1 billion in India. CISCO has announced plans to spend $ 1.1 billion over the next few years in India. And for Microsoft, India is emerging as a big market to exploit as Microsoft doesn't have much in stake in China. Purchasing of shares to the tune of $ 1.5 Billion in Bharti Tele ventures by Vodaphone is another big FDI inflow into the country. To be a genuine competitor of China in FDI, India should attain an annual growth rate of 10 %. So far India has not attracted more then $ 3-4 Billion annually when compared to FDI inflows of $ 55- 60 Billion for China. The number of foreign and NRI equities which have invested in India between Aug' 1991 Nov' 2002 is 15761 with a total foreign investment of Rs. 283447 Crores. However things are changing and improving in India too. FDI investment in India has nearly doubled to $2.9 billion during April July 2006 from $ 1.5 billion for the same period last year (2007) representing a growth rate of 259 %. According to the RBI, it is inferred that India has received $50.1 billion since 1991 of which $16 billion or 32% of it came since April 2004. The negative side of this bouncing FDI and NRI inflow is the constraints of Indian economic growth which are internal and not external .Ups and downs in Indian agriculture plays a major role in constraining Indian growth rate coupled with unhealthy infrastructure like pot holed roads, incomplete flyovers, undeveloped airport facilities etc are the main constraints in the growth of the Indian economy. Again lopsided regional variation in the economic growth of the country is another major impediment in the economic growth. Truant Left Parties whose support is important for the survival of the UPA government at the center is another major bottleneck in the inflow to FDI investment. However a very reassuring development has been the tremendous boost up which the recent budget has given to industrial infrastructure and FDI investment in India. Positive

side of the story is the tremendous resilience of the economy, rapid growth of Indian agriculture, boost up to infrastructural facilities, the tremendous global outsourcing boom in India and a well-regulated and deep capital market. Looking at the current rate of FDI inflow India can attract a record of $ 12 billion FDI inflow this fiscal year. The commerce minister of India feels it is possible though he has a note of caution, "There is competition not only just from China but also from others like Thailand, Malaysia and so on. We cant lose focus on attracting investments since we cant get inflows by giving lectures but work on ways to get investors." If a comparative analysis of the Indian and Chinese economy is done some interesting comparison emerges through India lags behind China in so many areas and a lot needs to be done if India has to catch up with China. The comparative analysis is given as below:
Basis of Comparison Total population Savings rate Labour force Annual GDP Share of agriculture in GDP Share of industry in GDP Share of service sector in GDP Rail routes Motor vehicles per 1000 people R& D expenditure Internet host Education expenditure Female adult literacy Undernourished people China 1272 billion 50 per cent 757 billion US $ 1159 billion 15 per cent 52 per cent 33 per cent 56.7 thousand sq kms 8 0.1 % of GNP 0.6 per 10000 people 2.3 per cent of GNP 85 per cent 9 per cent of the total population India 1033 billion 26 per cent 451 billion 478 US $ billion 27 per cent 27 per cent 48 per cent 62.5 thousand sq kms 7 0.6 % of GNP 0.8 per 10000 people 3.2 per cent of GNP 45 per cent 23 per cent of the total population

Thus it is noticed that the overall scene of Indian economy with a booming stock touching almost the 14000 mark, a buoyant Rupee of Rs 43.44 /Dollar and a healthy growth trend of the major sectors of the Indian economy the environment is very positive for FDI and NRI inflows. However compared to China it is still behind even though it is marching ahead. A lot more needs to be done. The Indian bull is no doubt energetic now however it has to run fast to overtake the Chinese dragon which is possible if friendly ground is created.

FDI Inflows by Sector Cumulative FDI inflows reached just over US$60 billion between August 1991 and July 2007. Since 2002, some sectors such as electrical equipment, services, drugs and pharmaceuticals, cement and gypsum products, metallurgical industries have also

been doing very well in attracting FDI. The electrical equipment sector and the services sector in particular received the largest shares of total FDI inflows between August 1991 and July 2007. These were followed by the telecommunications, transportation, fuels, and chemicals sectors (Figure 3). The Department of Industrial Policy and Promotion has recently modified the classifications of the sectors and data released from August 2007 has been based on the new sectoral classifications. According to that classification, the top performers are the services and computer software & hardware sectors (Figure 4). Clearly, India has attracted significant overseas investment interest in services. It has been the main destination for off-shoring of most services as back-office processes, customer interaction and technical support (UNCTAD, 2007). Indian services have also ventured into other territories such as reading medical X-rays, analyzing equities, and processing insurance claims. According to some reports, however, increasing competition is making it more difficult for Indian firms to attract and keep BPO employees with the

necessary skills, leading to increasing wages and other costs.

Distribution of FDI within India Mumbai and New Delhi have been the top performers, with the majority of FDI inflows within India being heavily concentrated around these two major cities. Chennai, Bangalore, Hyderabad and Ahmedabad are also drawing significant shares of FDI inflows. For statistical purposes, Indias Department of Industrial Policy and Promotion (DIPP) divides the country into 16 regional offices. The top 6 regions account for more than two-thirds of all FDI inflows to India between January 2000 and July 2007

Conclusion

It is generally said that future is always uncertain. This saying is correct to some extent. But at the same time it is also said that exceptions are always there. This exception is about India's certain higher rate of growth in the coming future. The future of Indian economy is brighter because of its huge human resources, rapidly upcoming service sector, availability of large number of competent professionals, vast market for every product, increasing impact of consumerism, absence of controls and licenses, interest of foreign entrepreneurs in India and existence of four hundred million middle class people. Even today, India is producing largest number of billionaires in a year, take over by Indian multinationals is amazing, the craze of Indians to go abroad is rapidly diminishing, the Rupee is becoming stronger and stronger in relation to Dollar. India's say in the international diplomacy and political affairs has now become meaningful, thousands of foreigners are working as executives in India, packages are becoming lucrative and competitive and annual rate of growth is highest after China. This present picture gives some reflections of the future. But this is all in the absolute sense and not in the relative terms. A country can only grow if the Govt. policies allow more participation and is able to attract more and more foreign direct investment in India. Today, India provides highest returns on FDI than any other country in the world. India is poised for further growth in manufacturing, infrastructure, automobiles, auto components, food processing sectors, real estate development etc. In this context it is also worth mentioning that savings rate has also increased from 23% to 31% over the last year to this year. India's continuing ambivalence on FDI, as a result, exacts a heavy toll on the economy. Undoubtedly, India is ceding billions of dollars of FDI to its neighbours each year. While China achieved actual FDI inflows of around $45.3 billion in 1997, India settled for a mere $3.2 billion. India therefore stands to win in the next few years.