SCHOOL OF ECONOMICS

ITO and WTO Project On Study of FDI in India

Submitted to: Mrs. Sonal Goyal

Submitted by: Knowledge Seekers Batul Kudrati Mansi Nandecha Surbhi Kaushal Madhu Nahar Devangi Yadav MBA (IB) I SEM

CONTENTS

Executive Summary Chapter 1: Introduction Chapter 2: The Historical Perspective Chapter 3: Foreign Direct Investment(Basic Concept) Chapter 4: Policy Initiatives Chapter 5: Indias FDI Current Scenario Chapter 6:Growth Factors of FDI in India Chapter 7: Causes of Low FDI in India Chapter 8: Benefits of FDI in India Conclusion Future recommendations References Annexure

List of Tables

TABLE 1: Sector-wise performance in FDI TABLE 2: FDI Inflows in India (2000 2011) TABLE 3: Sector-wise distribution of FDI equity inflows TABLE 4: Distribution of FDI Equity Inflows in India (Top 5) TABLE 6: Global competitive Index

List of Figures

FIGURE 1: % Share of Sectors FIGURE 2: % Share of States FIGURE 3: % Share of Countries

EXECUTIVE SUMMARY

Foreign direct investment (FDI) has played an important role in the process of globalisation during the past two decades. The rapid expansion in FDI by multinational enterprises since the mid-eighties may be attributed to significant changes in technologies, greater liberalisation of trade and investment regimes, and deregulation and privatisation of markets in many countries including developing countries like India. Capital formation is an important determinant of economic growth. While domestic investments add to the capital stock in an economy, FDI plays a complementary role in overall capital formation and in filling the gap between domestic savings and investment. At the macro-level, FDI is a non-debt-creating source of additional external finances. At the micro-level, FDI is expected to boost output, technology, skill levels, employment and linkages with other sectors and regions of the host economy. The present study aims at providing a detailed understanding of FDI inflow in the country. The study deals with the present FDI policy framework in the country following the various institutions related to FDI in the country. The study largely deals with the current trends of FDI in the country including the major sectors, countries and distribution of FDI in the country. The study also examines the various growth factors of FDI in the country, the benefits as well as the causes for low FDI in the country

CHAPTER 1: INTRODUCTION

Foreign direct investment (FDI) plays a multidimensional role in the overall development of the host economies. It may generate benefits through bringing in non-debt-creating foreign capital resources, technological upgrading, skill enhancement, new employment, spill-overs and allocative efficiency effects. While FDI is expected to create positive outcomes, it may also generate negative effects on the host economy. The costs to the host economy can arise from the market power of large firms and their associated ability to generate high profits.

India is the second largest country in the world. With a population of over I billion people. As a developing country, Indias economy is characterized by wage rates that are significantly lower than those in most developed countries. These two traits combine to make India a natural destination for foreign direct investment (FDI). Until recently. However, India has attracted only a small share of global FDI. Primarily due to government restrictions on foreign involvement in the economy. But beginning in l99l and accelerating rapidly since 2000, India has liberalized its investment regulations and actively encouraged new foreign investment. a sharp reversal front decades of discouraging economic integration with the global economy.

In recognition of the important role of Foreign Direct Investment (FDI) in the accelerated economic growth of the country, Government of India initiated a slew of economic and financial reforms in 1991. India is now ushering in the second generation reforms aimed at further and faster integration of Indian economy with the global economy. As a result of the various policy initiatives taken, India has been rapidly changing from a restrictive regime to a liberal one, and FDI is encouraged in almost all theconomic activities under the automatic route.

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.

CHAPTER 2: THE HISTORICAL PERSPECTIVE

Till 1991, inflows of private capital from overseas were negligible and averaged less than $200 mn a year in the period 1985-90. This was probably a superior situation to the negative net flows caused by factors such as nationalization of foreign oil companies in the 1960s and the closure or sell-out of foreign Companies in the 1970s. It took a very serious Balance of Payments crisis and a possible defalcation in external payments obligations to make the Indian Government decide on radical surgery, a process facilitated to some extent by the pressures to ease up on regulation and liberalise the economy. Foreign investment which had till then been viewed with mistrust and suspicion was overnight being welcomed, indeed wooed. Initially, funds flowed in from Foreign Institutional Investors (FIIs) and Indian Companies using the Global or American Depository Receipt (GDR/ADR ) route to raise funds from overseas. The Indian Corporate sector was wary of Foreign Direct Investment (FDI) and lobbied strongly with the Government to prohibit and if not, to defer the entry of foreign Companies

Commencement of Investment Inflows:

3 years after the 1991 liberalisation, FDI became a significant component of total foreign investment inflow. The initial impetus was with Portfolio Investment. In the main, foreign Companies already operating in India but with a less than 50% equity stake took the opportunity to raise their shareholding levels to the maximum permitted by the Government. Additionally, a number of MNCs had entered into Joint Ventures of convenience with Indian partners, this being the only way they could have established a presence in the Indian market. Such MNCs bought out their local partners, thus contributing to FII inflows. Local Companies were quicker off the mark and there was a spurt in inflows as the Indian Corporate sector used the GDR route to raise funds overseas. It may be recalled that interest rates in India during the early to mid-90s were significantly higher than overseas and were 18% p.a. (Prime Lending Rate) during the time that the new industrial policy was announced.

The Fits and Starts Approach:

The original policy declaration in 1991 which laid the foundation for foreign investment in India clearly laid down the Governments expectations, which were: Technology transfer Marketing expertise Introduction of modern management techniques Export promotion In order to invite investment in high priority industries, requiring large investments and advanced technology it has been decided to provide approval for direct investment up to 51% in such industries (Statement on Industrial Policy, 1991, pg 4). [Emphasis added]. With the passage of time, it was becoming clear that the objectives were not being achieved. Relaxations, further concessions and additional inducements were offered mostly as reactive rather than proactive measures. Most important amongst these are:

1992: Foreign firms obtained automatic rights over international brand names. 1993: Requirement for industrial licensing in specified industries (white goods, entertainment electronics) abolished FIIs allowed to invest in new Mutual Fund schemes 1994: Banks allowed to set their own rates for lending Companies allowed to issue preferential equity to FIIs 1996: Overseas pension funds, charities, foundations qualify as FIIs FIIs allowed to invest in un-listed firms FIIs allowed to invest 100% of funds (previous 30%) in debt Instruments 1998: Further concessions to FIIs now allowed to invest in Government securities, Treasury Bills, listed and un-listed debt securities. 1999: FIIs allowed conditional forward foreign exchange cover FIIs could participate in open offers in accordance with take-over codes 2000: 100% foreign equity allowed in infrastructure projects ports, roads, highways. 2002: Limited FDI in print media permitted

CHAPTER 3: FOREIGN DIRECT INVESTMENT (FDI) BASIC CONCEPTS

DEFINITION
Foreign Direct Investment, or FDI, is a type of investment that involves the injection of foreign funds into an enterprise that operates in a different country of origin from the investor. Investors are granted management and voting rights if the level of ownership is greater than or equal to 10% of ordinary shares. Shares ownership amounting to less that the stated amount is termed portfolio investment and is not categorized as FDI. This does not include foreign investments in stock markets. Instead, FDI refers more specifically to the investment of foreign assets into domestic goods and services. FDIs are generally favoured over equity investments which tend to flow out of an economy at the first sign of trouble which leaves countries more susceptible to shocks in their money markets.

Classifications of Foreign Direct Investment

INWARD FDI

Inward FDI occurs when foreign capital is invested in local resources. The factors propelling the growth of inward FDI include tax breaks, low interest rates and grants. OUTWARD FDI

Outward FDI, also referred to as "direct investment abroad", is backed by the government against all associated risk.

Various Entry Modes of FDI

The foreign direct investor may acquire voting power of an enterprise in an economy through any of the following methods:

by incorporating a wholly owned subsidiary or company by acquiring shares in an associated enterprise through a merger or an acquisition of an unrelated enterprise participating in an equity joint venture with another investor or enterprise

Routes for receiving FDI in India

An Indian company may receive Foreign Direct Investment under the two routes as given under: i. Automatic Route FDI up to 100 per cent is allowed under the automatic route in all activities/sectors except where the provisions of the consolidated FDI Policy, paragraph on 'Entry Routes for Investment' issued by the Government of India from time to time, are attracted. FDI in sectors /activities to the extent permitted under the automatic route does not require any prior approval either of the Government or the Reserve Bank of India. ii. Government Route FDI in activities not covered under the automatic route requires prior approval of the Government which is considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance. Application can be made in Form FCIL, which can be downloaded from http://www.dipp.gov.in. Plain paper applications carrying all relevant details are also accepted. No fee is payable. 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.

The sectors where FDI is not allowed in India, both under the Automatic Route as well as under the Government Route
FDI is prohibited under the Government Route as well as the Automatic Route in the following sectors: i) Retail Trading (except single brand product retailing)

ii) Atomic Energy

iii) Lottery Business

iv) Gambling and Betting

v) Business of Chit Fund

vi) Nidhi Company

vii) Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled conditions and services related to agro and allied sectors) and Plantations activities (other than Tea Plantations) (cf. Notification No. FEMA 94/2003-RB dated June 18, 2003).

viii) Housing and Real Estate business (except development of townships, construction of residential/commercial premises, roads or bridges to the extent specified in Notification No. FEMA 136/2005-RB dated July 19, 2005).

ix) Trading in Transferable Development Rights (TDRs).

x) Manufacture of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes.

Sector-wise performance in FDI

TABLE 1: Sector-wise performance in FDI

SECTORS
1. Hotel & Tourism

FDI ALLOWED
100% FDI

DETAILS
The term hotels include restaurants, beach resorts, and other tourist complexes providing accommodation and/or catering and food facilities to tourists. Tourism related industry include travel agencies, tour operating agencies and tourist transport operating agencies etc.

2.Private Sector Banking: nonBanking Financial Companies (NBFC)

49% FDI

FDI/NRI/OCB investments allowed in the following 19 NBFC activities shall be as per levels indicated below: i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. xii. xiii. xiv. xv. xvi. xvii. xviii. Merchant banking Underwriting Portfolio Management Services Investment Advisory Services Financial Consultancy Stock Broking Asset Management Venture Capital Custodial Services Factoring Credit Reference Agencies Credit rating Agencies Leasing & Finance Housing Finance Foreign Exchange Brokering Credit card business Money changing Business Micro Credit

xix.

Rural Credit

3.Insurance Sector

26% FDI

It is subject to obtaining licence from Insurance Regulatory & Development Authority (IRDA)

4.Telecommunication 49% FDI

i.ISPs with gateways, radio-paging and endto-end bandwidth, FDI is permitted up to 74%. ii. FDI up to 100% is allowed for the following activities in the telecom sector : a. ISPs not providing gateways (both for satellite and submarine cables); b. Infrastructure Providers providing dark fibre (IP Category 1); c. Electronic Mail; and d. Voice Mail

5.Trading

Under automatic route 100% FDI is permitted in case of trading with FDI up to 51% is allowed provided it is primarily export activities and the undertaking is an export house/trading house/super trading house/star trading

companies for the following activities under FIPB route: exports; bulk imports with ex-port/ex-bonded warehouse sales; cash and carry wholesale trading; other import of goods or services

house.

provided at least 75% is for procurement and sale of goods and services among the companies of the same group and not for third party use or onward transfer/distribution/sales

6.Power

100% FDI

FDI is allowed in respect of projects relating to electricity generation, transmission and distribution, other than atomic reactor power plants

7.Drugs & Pharmaceuticals

100% FDI

FDI proposals for the manufacture of licensable drugs and pharmaceuticals and bulk drugs produced by recombinant DNA technology, and specific cell / tissue targeted formulations will require prior Government approval.

8.Roads, Highways, Ports and Harbours

100% FDI

FDI under automatic route is permitted in projects for construction and maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels, ports and harbours

9.Pollution Control and Management

100% FDI

FDI in both manufacture of pollution control equipment and consultancy for integration of pollution control systems is permitted on the automatic route.

10.Call Centres in India

FDI up to 100% is allowed subject to certain conditions

11.BPO

100% FDI

12.Small scale industries 13. Public Sector Units (PSU) refineries 14. Civil aviation 15.Aircraft maintenance and repair operations 16.Commodity exchanges 17. Mining of titanium

FDI up to 100% 49% FDI

74% FDI 100% FDI

26% FDI

100% FDI

Source: madaan article

CHAPTER 4: POLICY INITIATIVES

FDI POLICY FRAMEWWORK

It is the intent and objective of the Government to promote FDI through a policy framework which is transparent, predictable, simple and clear and reduces regulatory burden. The system of periodic consolidation and updation is introduced as an investor friendly measure. Prior to 1991, the FDI policy framework in India was highly regulated. The government aimed at exercising control over foreign exchange transactions. All dealings in foreign exchange were regulated under the Foreign Exchange Regulation Act (FERA), 1973, the violation of which was a criminal offence. Through this Act, the government tried to conserve foreign exchange resources for the economic development of the nation. Consequently the investment process was plagued with many hurdles including unethical practices that became part of bureaucratic procedures. Under the deregulated regime, FERA was consolidated and amended to introduce the Foreign Exchange Management Act (FEMA), 1999. The new Act was less stringent and aimed at improving the capital account management of foreign exchange in India. The Act sought to facilitate external trade and payments and to promote orderly development and maintenance of the foreign exchange market in India. It resulted in improved access to foreign exchange.

POLICY INITIATIVES
The Circular 1 of 2010 and Circular 2 of 2010 issued by this Department on March 31, 2010 and September 30, 2010 respectively, consolidated into one document all the prior policies/ regulations on FDI which are contained in FEMA, 1999, RBI Regulations under FEMA, 1999 and Press Notes/Press Releases/Clarifications issued by DIPP and reflected the current policy framework on FDI. The present consolidation subsumes and supersedes all Press Notes/Press Releases/Clarifications/ Circulars issued by DIPP, which were in force as on March 31, 2011, and reflects the FDI Policy as on April 1, 2011.It includes the following:

According to the modified policy, foreign investors can inject their funds though the automatic route in the Indian economy. Such investments do not mandate any prior

government permission. However, the Indian company receiving such investment would be required to intimate the RBI of any such investment.

In a landmark decision, the Government has eased norms for investments by foreign companies that are present in India through a JV or a technical collaboration. Now, the foreign company will not have to seek a no-objection certificate from the Indian partner for investing in the sector where the joint venture operates.

The Government has also relaxed norms for downstream investments and convertible instruments, giving foreign companies more powers. The aim is to check a decline in FDI inflows. The changes are part of the third revision of the Consolidated FDI Policy. The new norms came into effect from April 2011.

The FDI policy unveiled by the DIPP brought out a clear picture on convertible instrument prices. DIPP announced companies would now have the option of prescribing a conversion formula, instead of specifying the price of convertible instruments. The instruments include compulsory convertible preference shares (CCPS) and compulsory convertible debentures (CCDs). The parties are free to either agree on a numerical price or a conversion formula, as long as the price at which the conversion takes place is not less than the floor price prescribed by RBIs pricing guidelines, as per DIPP.

The Securities and Exchange Board of India (SEBI) has permitted both existing mutual funds and non-banking finance companies (NBFCs) to launch infrastructure debt funds (IDFs). The minimum investment into the fund would be US$ 2, 26,526 (Rs1crore). In addition, Sebi has announced that the limited liability partnership (LLP) firms should be considered as a body corporate and would be eligible to become members of stock exchanges.

In a move to enhance India's retail trade, 51 per cent FDI in multi-brand retail has been allowed by the Committee of Secretaries (CoS), headed by Mr. Ajit Kumar Seth, the Cabinet Secretary. This is awaiting approval from the Union Cabinet. Currently, these companies are only permitted to operate cash-and-carry format stores catering to wholesalers and business consumers.

All the above initiatives by the Government of India outline the Governments focus on enhancing the FDI inflows, besides creating a conducive investor-friendly environment for the foreign players.

GOVERNMENT ORGANISATIONS DIPP

The Department of Industrial Policy & Promotion was established in 1995 and has been reconstituted in the year 2000 with the merger of the Department of Industrial Development. Earlier separate Ministries for Small Scale Industries & Agro and Rural Industries (SSI&A&RI) and Heavy Industries and Public Enterprises (HI&PE) were created in October, 1999.The role and functions of the Department of Industrial Policy and Promotion primarily include:

Formulation and implementation of industrial policy and strategies for industrial development in conformity with the development needs and national objectives;

Monitoring the industrial growth, in general, and performance of industries specifically assigned to it, in particular, including advice on all industrial and technical matters;

Formulation of Foreign Direct Investment (FDI) Policy and promotion, approval and facilitation of FDI;

Encouragement to foreign technology collaborations at enterprise level and formulating policy parameters for the same;

Formulation of policies relating to Intellectual Property Rights in the fields of Patents, Trademarks, Industrial Designs and Geographical Indications of Goods and administration of regulations, rules made there under ;

Administration of Industries (Development & Regulation) Act, 1951 Promoting industrial development of industrially backward areas and the North Eastern Region including International Co-operation for industrial partnerships and

Promotion of productivity, quality and technical cooperation.

Foreign Investment Promotion Board (FIPB)

The Foreign Investment Promotion Board (FIPB), Department of Economic Affairs (DEA), Ministry of Finance is the nodal single-window agency for all matters relating to FDI as well

as promoting investment in the country. It is chaired by the Secretary, Industry (Department of Industrial Promotion and Policy). Its objective is to promote FDI in India: by undertaking investment promotion activities in India and abroad; by facilitating investment in the country by international companies, non-resident Indians and other foreign investors; through purposeful negotiations/discussions with potential investors; through early clearance of proposals submitted to it; and by reviewing policies and putting in place appropriate institutional arrangements, transparent rules and procedures and guidelines for investment promotion and approvals.

Secretariat for Industrial Assistance (SIA)

The Secretariat for Industrial Assistance (SIA) has been set up by the Government of India in the Department of Industrial Policy and Promotion, Ministry of Commerce & Industry to provide a single-window service for entrepreneurial assistance, investor facilitation, receiving and processing all applications which require government approval, conveying government decisions on applications filed, assisting entrepreneurs and investors in setting up projects (including liaison with other organisations and state governments) and monitoring the implementation of projects. It also notifies all government policy decisions relating to investment and technology, and collects and publishes monthly production data for select industry groups. The SIA website2 provides chat time during fixed hours when all questions are answered. During other times, investors are encouraged to write e-mails and the Secretariat assures a reply within 24 hours.

Foreign Investment Implementation Authority (FIIA)

The Government of India has set up the Foreign Investment Implementation Authority (FIIA) to facilitate quick translation of Foreign Direct Investment (FDI) approvals into implementation, and to provide a pro-active one-stop after-care service to foreign investors by helping them obtain necessary approvals, sort out operational problems and meet with various government agencies to find solutions to their problems. The proforma for making a reference to the Foreign Investment Implementation Authority (FIIA) can be downloaded

from the website.3 The Secretariat for Industrial Assistance (SIA) in the Department of Industrial Policy & Promotion (DIPP) functions as the Secretariat of the FIIA.

FDI PROMOTION INITIATIVES

Several steps have been initiated to facilitate increased FDI inflows. These include, inter-alia, the following: On the policy front, the FDI policy is already very liberal & it is being further progressively rationalized, on the basis of an exercise initiated for integration of all prior regulations on FDI, contained in FEMA, RBI circulars, various Press Notes etc., into one consolidated document, so as to reflect the current regulatory framework. The latest consolidated FDI policy document has been launched by Department of Industrial Policy & Promotion on 30.09.2010, which is available at DIPPs website (www.dipp.nic.in) for public domain.

On the investment promotion front, the Department organizes Destination India and Invest India events in association with CII and FICCI.

DIPP has been undertaking concerted efforts for improving the business environment in the country. The business reforms aimed at improving the business environment include setting up of single windows, online registrations, computerization of information, simplification of taxes and payments, reduction of documents through developing single forms for various licences/permissions and reduction of inspections etc.

As a step towards promoting an online single window at the national level for business users, the Department has undertaking e-Biz project, which is one of Mission Mode Projects (MMPs) under the National eGovernance Plan (NeGP). The objectives of setting up of the e-Biz Portal are to provide a number of services to competitiveness through a service oriented, event-driven G2B interaction.

The National Manufacturing Competitiveness Council (NMCC) has been set up to provide a continuing forum for policy dialogue to energise and sustain the growth of manufacturing industries.

The Department has regular interaction with foreign investors. Such interactions have been held in bilateral/regional/international meets such as Indo-ASEAN, Indo-EU, Indo-Japan, etc. Meetings with individual investors were also held on a regular basis.

The Department website (www.dipp.nic.in) has been made both comprehensive and informative, with an online chat facility. Business users covering the entire life cycle on their operations. The project aims at enhancing Indias business

CHAPTER 5: INDIAS FDI SCENARIO

OVERVIEW
The constant efforts of the Government of India in making the country an investor friendly destination are reaping dividends. Alongside the United Nations Conference on Trade and Development (UNCTAD) ranking India at second place in global foreign direct investments (FDI) in 2010, in its report titled, 'World Investment Prospects Survey 2009-2012' has added to the initiative to a great extent . The report further forecasts, India to be among the top five attractive destinations for international investors during 2010-12. FDI inflow rose by more than 100 per cent to US$ 4.66 billion in May 2011, which is the highest monthly inflow in 39 months, while the cumulative amount of FDI equity inflows from April 2000 to August 2011 stood at US$ 219,143 billion, according to the latest data released by the Department of Industrial Policy and Promotion (DIPP). The service (including financial and non-financial) sectors attracted highest FDI equity inflows during April-May 2011-12 at US$ 910 million. India received maximum FDI from countries like Mauritius, Singapore, and the US at US$ 56.31 billion, US$ 13.25 billion and US$ 9.71 billion, respectively, during April 2000-May 2011. India's foreign exchange (Forex) reserves have increased by US$ 2.29 billion for the week ended July 22, 2011, according to the weekly statistical bulletin released by the Reserve Bank of India (RBI). In the week under consideration, foreign currency assets went up by US$ 2.23 billion to US$ 284.53 billion. Furthermore, India may emerge as US Export Import Bank's (Ex-Im) largest market in next 12-18 months. During the last nine months, we have approved 173 transactions involving 100 companies and US$ 1.4 billion in financing of US exports to India, as per Fred P Hochberg, the bank's Chairman and President.

FDI INFLOWS IN INDIA (2000 2011)

TABLE 2: FDI INFLOWS IN INDIA (2000 2011) YEAR

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011(January June) TOTAL

FDI INFLOW(in crores)

104,411 160,711 161,344 95,639 147,814 192,707 503,573 654,950 1,397,255 1,309,799 960,149 755,064 6,443,506(US$ 143,959)

Source: SIA newsletter, June 2011

FDI inflow rose by more than 100 per cent to US$ 4.66 billion in May 2011, which is the highest monthly inflow in 39 months, while the cumulative amount of FDI equity inflows from April 2000 to August 2011 stood at US$ 219,143 billion, according to the latest data released by the Department of Industrial Policy and Promotion (DIPP).

Sector-wise distribution of FDI equity inflows:

TABLE 3:Sector-wise distribution of FDI equity inflows

RANK SECTOR 2011-12(in Crores) (April-August) 1 2 3 Service Sector Telecommunication Computer Software and Hardware 4 5 6 7 8 9 10 Housing and Real Estate Construction activities Power Automobile Industry Metallurgical Industries Drugs and pharmaceuticals Petroleum and Natural gas 1764 3491 4999 2113 5202 13437 690 48083 42072 30535 28550 23790 21896 14300 7% 6% 5% 4% 4% 3% 2% 12892 8405 1696 134000 56471 48010 20% 8% 7% Cumulative Inflows (April00August11) % Share

Source: India FACT SHEET ON FOREIGN DIRECT INVESTMENT (FDI)

From APRIL 2000 to AUGUST 2011, DIPP

FIGURE 1: % SHARE OF SECTORS

Metallurgic Drugs and al pharmaceutical Industries, s, 3% 4% Automobile Industry, 4% Power, 5% Construction activities, 6% Telecommunic ation, 8% Computer Software and Hardware, 7% Petroleum and Natural gas, 2%

Service Sector, 20%

Housing and Real Estate, 7%

The sectors receiving the largest shares of total FDI inflows between August 199l and December 2011 was services sector accounting for20%, These were followed by the telecommunications, computer and hardware, housing and power. The top sectors attracting FDI into India M&A activity were manufacturing; information: and professional, scientific and technical services. These sectors correspond closely with the sectors identified by the Indian government as attracting the largest shares of FDI inflows overall.

Distribution of FDI Equity Inflows in India

TABLE 4: Distribution of FDI Equity Inflows in India (Top 5) in crores Rank RBI Regional offices 1 2 Mumbai New Delhi Maharashtra Delhi, Haryana & U.P 3 4 5 Bangalore Ahmedabad Chennai Karnataka Gujarat Tamil Nadu 3844 1908 3177 40502 33,601 34024 6 5 5 States covered 201112(AprilAugust) 28124 22272 Cumulative Inflows(April00August11) 229,595 135,961 35 20 % Share

Source: India FACT SHEET ON FOREIGN DIRECT INVESTMENT (FDI)

From APRIL 2000 to AUGUST 2011, DIPP

FDI inflows within India are heavily concentrated around two major cities. Mumbai and New Delhi, with Chennai, Bangalore. Hyderabad and Ahmedabad also drawing significant shares of FDl inflows. For statistical purposes, Indian Department of Industrial Policy and Promotion (DlPP) divides the country into I6 regional offices. The main highlights are as follows:

The key industries attracting FDI to the Maharashtra region are energy, transportation, services, telecommunications, and electrical equipment

The key sectors attracting FDI inflows to Delhi are similar: telecommunications. transportation, electrical equipment (including software), and services The status of Uttar Pradesh and Haryana are also contained in the New Delhi region. The geographic proximity of both status to New Delhi helps them to attract FD]. Due to its abundance of natural resources, Uttar Pradesh attracts FDI in chemicals, pharmaceuticals, and mining and minerals. Haryana attracts FDI in the electrical equipment, transportation, and food processing sectors.

Automotive and auto components are the largest sectors attracting FDl into Tamil Nadu. Ford, Hyundai, and Mitsubishi all have muItimiIlion dollar investments in Tamil Nadu. The state capital, Chennai, is sometimes called the Detroit of India. Other sectors attractingFDI include port infrastructure, ICT, and electronics.

The same is true for of projects in Karnataka. where Bangalore is located: Karnataka also has a large number of projects in the automotive sector

FIGURE 2: % Share of States

Tamil Nadu, 0 Gujarat, 1.2 Karnataka, 1.4

Delhi, Haryana & U.P, 3.2

Maharashtra, 8.2

Country-wise Distribution of FDI Equity Inflows

TABLE 5: Country-wise Distribution of FDI Equity Inflows

RANK COUNTRY 2011-12(in Crores) (April-August) 1 2 3 4 5 6 7 8 9 10 Mauritius Singapore USA UK Japan Netherlands Cyprus Germany France UAE 26634 13350 2066 11311 7855 3207 1830 5737 1668 376 Cumulative Inflows (April00August11) In crores 269,395 66,407 44,609 40,744 31,813 28,834 23,778 19,113 11,936 8,968 41% 10% 7% 6% 5% 4% 4% 3% 2% 1% % Share

Source: India FACT SHEET ON FOREIGN DIRECT INVESTMENT (FDI)

From APRIL 2000 to AUGUST 2011,DIPP

FIGURE 3: % SHARE OF COUNTRIES

Germany, 3% Cyprus, 4% Netherlands, 4% Japan, 5% Mauritius, 41% UK, 6% USA, 7% Singapore, 10% France, 2% UAE, 1%

Some highlights:

Mauritius has been the single largest source of FDI into the country in the first 10 years of the new millennium. As much as $55 billion worth of money has been invested in India after being routed through Mauritius. This is 42 per cent of the total FDI in the country in the past decade. This is due to the Double Taxation Avoidance Agreement.

The United States is the third largest source of FDI in the country. The major sectors attracting FDI from US are fuel, telecommunication, electrical equipment, food processing and services.

Within the European Union, the largest country investors were UK, Netherlands and Germany.FDI from EU to India are primarily concentrated into power/fuel, telecommunications and transportation sectors.

Japan is the fifth largest investor in the country. India is one of the largest recipients of Japan Official Development Assistance through which Japan has assisted India in building infrastructure. However there has been a decreasing trend in the inflows from Japan to India.

FDI Performance and Potential Index

UNCTAD ranks countries by their Inward FDI Performance3 and Inward FDI Potential Indices. While India is the second most attractive country in terms of the foreign investors confidence index, it does not rank high on either the performance or potential indices. Indias FDI Performance Index in 2010 ranked at 97 out of 141 countries. However, it has a relatively high FDI Potential Index at 79.

Global Competitiveness of Indias FDI

Another method of assessing the investment potential of an economy is its rank on global competitiveness. The Global Competitiveness Index (GCI) is a comprehensive index developed by the World Economic Forum (WEF) to measure national competitiveness and is published in the Global Competitiveness Report (GCR). It takes into account the micro- and macro-economic foundations of national competitiveness, in which competitiveness is defined as the set of institutions, policies and factors that determine the level of productivity6 of a country and involves static and dynamic components. The overall GCI is the weighted average of three major components: a) basic requirements (BR); b) efficiency enhancers (EE); and c) innovations and sophistication factors (ISF).

Within the information available for 142 countries, the GCI of some of the countries including India is: TABLE 6: Global competitive Index Country Rank GCI Index Switzerland 1 5-74 Singapore 2 5.70 U.S.A 5 5.43 U.K 10 5.39 China 13 5.26 India 56 4.30 Pakistan 118 3.58 Chad 142 2.87 Source: Global Competitiveness Report,2011 World Economic Forum

PROSPECTS
The positive efforts of the Government to improve the investment climate, including sustained improvement on infrastructure front, have led to renewed optimism about India as an emerging investment destination. Some of the independent assessments in this regard include:

The UNCTAD World Investment Report (WIR) 2009, in its analysis of the global trends and sustained growth of Foreign Direct Investment (FDI) inflows, has reported India as the third most attractive location for FDI for 2009-2011. According to the WIR 2009 report, the top five most attractive locations for FDI for 2009-11 are China, United States, India, Brazil, and the Russian Federation.

India has retained the second place in A.T. Kearneys 2007 Foreign Direct Investment Confidence Index, a position it has held since displacing the US in 2005. India continues to attract investors in the high value-added services industries like financial services and information technology. The top position is occupied by China, while the US is the fourth in the list. The report predicts India to be on the cusp of FDI take off, in view of the Government maintaining focus on reforms, overcoming narrow business interests, de-bottlenecking infrastructure, logistics and regulatory barriers.

The 2009 survey of the Japan Bank for International Cooperation, conducted among Japanese investors, continues to rank India as the second most promising country for overseas business operations.

CHAPTER 6: GROWTH FACTORS FOR FDI IN INDIA

Strong Economic Growth Few countries have experienced the economic dynamism that India has enjoyed during the past decade. This positive economic environment has attracted FDI by firms anxious to take advantage of higher Indian living standards and increased demand for goods. The Indian economy has grown, on average, more than 7 % annually since l994, and is forecast to grow at comparable rate in 211. By 2004, India had become the tenth largest economy in the world and the fourth largest in purchasing-power parity terms. With percapita income having more than doubled since the mid80s. The Indian middle class has expanded and Its purchasing power has increased significantly. Economic growth has not been accompanied by high inflation-annual inflation in India has remained close to 4 % since 2000. Increased FDI has stimulated both imports and exports contributing to rising levels of international trade.

Low Wages Foreign investors have been drawn to India not only by economic growth but also by low labour costs. Indian salaries are considerably lower than those in the United States and other industrialized countries. The average annual salary for all Indian employees in the Manufacturing sector was approximately $l.080 in 20000l; by 2003-04 (latest data available), the average annual salary had risen to approximately $l .270.' Annual salaries for skilled workers in India arc much higher than these averages, but still substantially below salaries in the United States and other developed countries.

Increased Opportunities for Private Sector Participation in Infrastructure Projects To help alleviate the strains on the infrastructure, large government projects have been Initiated including

(1)a National Highway Development Program to modernize roads connecting Indias four largest cities. Delhi. Mumbai, Chennai. and Kolkata ( the Golden Quadrilateral) (2) a rural roads program to better integrate rural areas into Indias transportation network

(3) a National Railway Development Program to expand rail capacity between major cities and provide better connectivity to Indian seaports (4) a National Maritime Development Program to expand freight handling capacity in India`s large seaports ( 5) a program to increase capacity at the New Delhi and Mumbai airports, which handle about 50 %of the country's air traffic.

Educated Work Force India`s educational system is vast, educates millions, and tums out thousands of well-trained and skilled workers. India has an extensive system of schools, including primary and upper primary schools, high schools, colleges for general education, colleges for professional education (engineering. technology, medical. and teacher education), and Universities/institutes.Many foreign investors have established R&D centres in India and have made it an important location for software development. Indeed. 20 % of the Fortune 500 companies have R&D facilities in India, drawn in large part by this vast pool of scientific and technical

Access to Capital The Indian financial sector has experienced significant reforms in recent years. Government control and regulation have been reduced; interest rates have been allowed to fluctuate with the market, restrictions on capital inflows have been loosened, and private firms have been encouraged to participate." Although the Indian government is still the dominant actor itt the financial sector, foreign firms in India can access capital through bank loans, equity markets. And international financial institutions.

CHAPTER 7: CAUSES OF LOW FDI IN INDIA

Infrastructure bottlenecks: Globalization and economic liberalization have stepped up many economic activities in the Indian economy, putting heavy stress on the available infrastructure. The government has taken certain steps to increase facilities like transport, power. and telecommunications. But these efforts haven't yielded the desired results. The growth in infrastructure has not matched the demand. Thus the inadequate infrastructure has become a major hurdle for inward FDI flows. The poor infrastructure facilities in the country have discouraged foreign investors from investing their money in India. Bureaucratic hurdles: The government has initiated several measures for smooth flow of Dl into the country The Companies Act has been amended to ease restrictions on corporate investments. There are provisions in the relevant act for automatic approvals in many cases and for easy establishment of business units. Nevertheless, investors have to deal with inefficient and slow-moving bureaucracy for several things. Although the economy is progressing towards liberalization and globalization. The process of economic reforms is very slow. The complex approval procedures confronting foreign investors also discourage FDl. Tax and Tariff: India follows a complex tax and tariff structure, which makes it difficult for potential investors to project their returns. The individual state governments in the country have their own tax and tariff structures. Besides confusion, this adds to uncertainty of returns for investors. Labour laws: The labour laws in India are highly complex and inflexible. Existing Indian labour laws forbid layoff of workers and. therefore; even legitimate attempts to restructure business are thwarted. The lack of an exit policy is also responsible for India`s poor performance in the area of FDl. Political instability and Corruption: In recent years, the government at the Centre has become shaky with a multiplicity of political parties having formed ruling coalitions. In reality, regional political parties hold sway over the ruling coalition at the Centre. As the political parties in the coalition government have divergent political agenda. It has become highly difficult to push for sustained economic reforms and growth in India. Moreover, the political system in general is highly corrupt.

CHAPTER 8: BENEFITS OF FDI IN INDIA

Attracting foreign direct investment has become an integral part of the economic development strategies for India. FDI ensures a huge amount of domestic capital, production level, and employment opportunities in the developing countries, which is a major step towards the economic growth of the country. FDI has been a booming factor that has bolstered the economic life of India, but on the other hand it is also being blamed for ousting domestic inflows. FDI is also claimed to have lowered few regulatory standards in terms of investment patterns. The effects of FDI are by and large transformative. The incorporation of a range of well-composed and relevant policies will boost up the profit ratio from Foreign Direct Investment higher. Some of the biggest advantages of FDI enjoyed by India have been listed as under:

Economic growth- This is one of the major sectors, which is enormously benefited from foreign direct investment. A remarkable inflow of FDI in various industrial units in India has boosted the economic life of country.

Trade- Foreign Direct Investments have opened a wide spectrum of opportunities in the trading of goods and services in India both in terms of import and export production. Products of superior quality are manufactured by various industries in India due to greater amount of FDI inflows in the country.

Employment and skill levels- FDI has also ensured a number of employment opportunities by aiding the setting up of industrial units in various corners of India.

Technology diffusion and knowledge transfer- FDI apparently helps in the outsourcing of knowledge from India especially in the Information Technology sector. It helps in developing the know-how process in India in terms of enhancing the technological advancement in India.

Linkages and spill over to domestic firms- Various foreign firms are now occupying a position in the Indian market through Joint Ventures and collaboration concerns. The maximum amount of the profits gained by the foreign firms through these joint ventures is spent on the Indian market.

Rising Salaries and High Turnover in Some Industries Strong demand for skilled workers in India has led to rising salaries and high turnover. To expand their operations in India. Large multinational computer firms, automotive firms, and electronic firms have offered to double or triple the salaries of workers employed by Indian firms and have aggressively recruited graduates from top Indian universities and technical schools. Scientists and engineers in Indian government research laboratories haw lull to pursue opportunities and higher salaries in the private sector. Indian companies have also inexperienced rapid turnover as their skilled workers leave and go to work for other employers.

CONCLUSION

Indias potential to attract increased FDI inflows is vast, although poor infrastructure, excessive bureaucracy and interdepartmental wrangling will slow the pace of opening in many sectors. The infrastructure, energy, telecoms, IT and insurance sectors are likely to be the main magnets for FDI. Producers and assemblers of cars and automotive components are also re-evaluating Indias potential, as are biotechnology firms. The establishment of special economic zones, in which 100% foreign ownership is allowed, in order to promote exports should attract increased FDI inflows into export-oriented industries. India has been receiving increasing amounts of FDI since 1991-92. It received about $129 million FDI in 1991-92, which went up to $613 million in 2001-02 and further up to $4.6 billion in 20011-12. The government has facilitated inflows of FDI by making its policies relatively liberal since 1991-92. FDI inflows have complemented domestic investment and hence contributed to capital formation as well as to bringing in new technologies and global linkages. Indias skilled, English-speaking workforce has been a significant attraction for FDI, particularly in the information technology (IT) sector. Caps on FDI in protected industries have been steadily lifted: in January 2004 the limits on foreign investment in oil production and oil refining were abolished, and in private banking the limit was raised to 74%. In October 2004 the pectoral caps were raised in insurance (to 26%), civil aviation (to 49%) and telecoms (to 49%). The limit for some telecoms services, for example Internet service providers (ISPs), was subsequently raised to 74% in February 2005, and all basic, mobile, and value-added telecoms services were moved under the 74% limit in November 2005. In February 2006 FDI up to 51% was permitted for retail trading of single brand products. However, fuller liberalisation of the retail sector has been held up by political opposition, and some sectors, such as agriculture, remain off-limits to foreign investment. The approval process is gradually being simplified, and the government is expanding the number of industries that are subject to automatic approval. However, state-level impediments can be severe, and companies have been known to abandon FDI projects mid-way through the implementation stage.

FUTURE RECOMMENDATIONS
India should take steps to ensure an enabling business environment to improve Indias attractiveness as an investment destination and a global manufacturing hub. Some of them are:

India should put more focus in improving its infrastructural facilities. Government should take steps to enhance labor laws flexibility. Particular attention should also be paid to the removal of restrictions on FDI in the services sectors -- including telecoms, banking and insurance, aviation, etc as this will help ease transactions costs for both consumers and business.

Concurrent to the establishment of SEZs in strategic locations, the government should also provide all necessary infrastructural facilities to ensure the success of the SEZ because the fact is that for an SEZ to do well, there must some level of active government intervention.

The effectiveness of the Foreign Investment Implementation Authority (FIIA) needs to be enhanced. There is a need to fast track FDI inflows via the provision of a onestop after-care service to foreign investors should be enhanced and be given wider powers.

Image-building activities promoting the country and its regions and states as favourable locations for investment should be undertaken. Investment-generating activities should be undertaken through direct targeting of firms by promotion of specific sectors and industries, and personal selling and establishing direct contacts with prospective investors

Efforts should be taken to curb corruption and remove bureaucratic hurdles in the country in order to attract more FDI.

REFERENCES

Webliography
http://www.freewebs.com/rrajan1/IFDI.pdf www.ibef.org/india/economy/fdi.aspx http://graphics.eiu.com/upload/WIP_2007_WEB.pdf http://dipp.nic.in/English/Publications/FDI_Statistics/2011/india_FDI_August2011.pdf http://dipp.nic.in/manual/manual_0403.pdf http://www.rbi.org.in/scripts/FAQView.aspx?Id=26 http://www.madaan.com/sectors.html http://planningcommission.nic.in/aboutus/committee/strgrp/stgp_fdi.pdf http://business.mapsofindia.com/fdi-india/advantages.html http://dipp.nic.in/English/Publications/Annual_Reports/AnnualReport_Eng_2010-11.pdf http://dipp.nic.in/English/Publications/SIA_Newsletter/2011/jul2011/index.htm