In this article we will discuss about:- 1. Introduction to Foreign Direct Investment 2. Meaning of Foreign Direct Investment 3. Types 4. Importance in India 5. Policy 6. Economic Development 7. Disadvantages 8. A Result Report of Finances of FDI Companies- 2011-2012 9. Conclusion.
Contents:
- Introduction to Foreign Direct Investment
- Meaning of Foreign Direct Investment
- Types of FDI
- Importance of FDI in India
- Foreign Direct Investment Policy
- Foreign Direct Investment and Economic Development
- Disadvantages of FDI
- A Result Report of Finances of FDI Companies- 2011-2012
- Conclusion to Foreign Direct Investment
1. Introduction to Foreign Direct Investment:
After independence there was serious efforts in India to strengthen the economy, the first reform was the nationalization of commercial banks (1969) even though there were lacks in the money market in reshaping and revamping the economy. The sea change could be seen after the economic reforms 1991 well-known as LPG (liberalization, privatization and globalization). The Indian economy has now reached in the orbit of high rate of economic growth.
It is passing through the second economic reforms; primarily this phase of reforms was concerned with increasing transparency and accountability of the country’s financial sector. The main purpose of the reforms was to bring better integration of banking, insurance and other financial agencies so that capital market in India can function smoothly. FDI refers to capital inflows from abroad that is invested in or to enhance the production capacity of the economy. It involves in direct production activities and is also a medium to long- term nature.
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India is a preferred destination for foreign direct investments (FDI). India’s recently liberalized FDI policy permits up to a 100% FDI stake real-estate as last year 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.
The financial crisis in global markets has made the outlook of Indian economy grim. While the consistently volatile markets and the rupee plunging to an all-time low against the USD are some major concern at this moment, natural calamities and economic scandals seem to be the icing on the cake. Two decades ago, in the early 90’s, India faced a similar crisis. At that time India’s major concerns were the problem in balance of payments and poor foreign exchange reserves.
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During the crisis, Dr. Manmohan Singh, the Finance Minister of India at that time, came up with a solution to reform the Indian economy. He liberalized the economy and gave rise to the phenomena of foreign investments in India. Thus, opening the gates for foreign players to come and invest in India. According to the World Bank Investment Report (1997) foreign capital flows during the period 1991 to 1996 have marked by a sharp expansion in net and gross capital flows and an appreciable increase in the participation of foreign investors in developing countries.
In this respect the Finance Minister Manmohan Singh took number of encouraging steps for attracting FDI. After the start of economic reforms in India in July 1991, the large number of investment proposals was received into different industrial sectors both from the domestic investors and foreign industrialists including the Non- Residents Indians (NRI). This shows the confidence of Indian as well as foreign investors in Indian economy.
2. Meaning of Foreign Direct Investment:
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.
Foreign Direct Investments (FDI) is investment of foreign assets into domestic structures, equipment, and organizations. FDI inflows are into the primary market and do not include foreign investments into the stock markets. It is a long-term investment and is used by the developing countries as a source of their economic development, productivity growth, to improve the balance of payments and employment generation.
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Its aim is to increase the productivity by utilizing the resources to their maximum efficiency. According to International Monetary Fund, FDI is defined as Investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of the investor. The investor’s purpose being to have effective voice in the management of the enterprise.
FDI is normally defined as a form of investment made in order to gain unwavering and long-lasting interest in the enterprises that are operated outside of the economy of the shareholder. There is a parent enterprise and a foreign associate to form a Multinational Corporation (MNC). Parent enterprise has power and control over its foreign affiliate on the investment.
3. Types of FDI:
There are two types of FDI:
i. Greenfield Investment:
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It is the direct investment in new facilities or the expansion of existing facilities. It is the principal mode of investing in developing countries like India.
ii. Mergers and Acquisition:
It occurs when a transfer of existing assets from local firms takes place.
4. Importance of FDI in India:
The Indian economy stood at the 11th position in the world with regards to the nominal gross domestic product (GDP) for the fiscal year 2011-12 witnessed a year low growth of the Indian economy (grew at a rate of 6.5%) and reasons traced could be the weak monetary policy, inflation issues, and cut in investments.
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India is one of the most attractive destinations for foreign investment. Since liberalization, when foreign direct investments (FDI) were allowed to enter India, our economy has grown by manifolds. Foreign investments play a very significant role in the Indian economy.
The importance could be attributed to the following reasons:
i. Increased Investment in the country Improvement in Technology and Infrastructure Increased productivity
ii. Enhanced Flow of Equity Capital Improved Corporate Governance Increased Employment Opportunities.
5. Foreign Direct Investment Policy:
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Foreign direct investment (FDI) has become an integral part of national development strategies for almost all the nations globally. Its global popularity and positive output in augmenting of domestic capital, productivity and employment; has made it an indispensable tool for initiating economic growth for countries.
India is evolving as one of the ‘most favored destination’ for FDI in Asia and the Pacific. It has displaced US as the second- most favored destination for FDI in the world after China according to an AT Kearney’s FDI Confidence Index. India attracted more than three times foreign investment at US$ 7.96 billion during the first half of 2005-06 fiscal, as against US$ 2.38 billion during the subsequent period of 2004-05.
FDI in India has contributed effectively to the overall growth of the economy in the recent times. FDI inflow has an impact on India’s transfer of new technology and innovative ideas; improving infrastructure, thus makes a competitive business environment.
FDI policy is reviewed on an ongoing basis and measures for its further liberalization are taken. Change in sectoral policy/sectoral equity cap is notified from time to time through Press Notes by the Secretariat for Industrial Assistance (SIA) in the Department of Industrial Policy announcement by SIA are subsequently notified by RBI under FEMA. All Press Notes are available at the website of Department of Industrial Policy & Promotion.
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FDI Policy permits FDI up to 100 % from foreign/NRI investor without prior approval in most of the sectors including the services sector under automatic route. FDI in sectors/activities under automatic route does not require any prior approval either by the Government or the RBI. The investors are required to notify the Regional office concerned of RBI of receipt of inward remittances within 30 days of such receipt and will have to file the required documents with that office within 30 days after issue of shares to foreign investors.
Automatic Route:
All activities which are not covered under the automatic route prior Government approval for FDI/NRI shall be necessary. Areas/ sectors/activities hitherto not open to FDI/NRI investment shall continue to be so unless otherwise decided and notified by Government. An investor can make an application for prior Government approval even when the proposed activity is under the automatic route.
Procedure for Obtaining Government Approval- FIPB:
The Foreign Investment Promotion Board (FIPB) considers approving all proposals for foreign investment, which requires Government approval. The FIPB also grants composite approvals involving foreign investment/foreign technical collaboration. For seeking the approval for FDI other than NRI Investments and 100% EOU, applications in form FC-IL should be submitted to the Department of Economic Affairs (DEA), Ministry of Finance.
FDI from NRI & for 100% EOU:
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FDI applications with NRI Investments and 100% EOU should be submitted to the Public Relation & Complaint (PR&C) Section of Secretariat of Industrial Assistance (SIA), Department of Industrial Policy & Promotion.
Proposals Requiring Government’s Approval:
Application for proposals requiring prior Government’s approval should be submitted to FIPB in FC-IL form. Plain paper applications carrying all relevant details are also accepted. No fee is payable.
The following information should form part of the proposals submitted to FIPB:
Whether the applicant has had or has any previous/existing financial/technical collaboration or trade mark agreement in India in the same or allied field for which approval has been sought; and If so, details thereof and the justification for proposing the new venture/technical collaboration (including trademarks).
Applications can also be submitted with Indian Missions abroad who will forward them to the Department of Economic Affairs for further processing. Foreign investment proposals received in the DEA are placed before the Foreign Investment Promotion Board (FIPB) within 15 days of receipt. The decision of the Government in all cases is usually conveyed by the DEA within 30 days.
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FDI Prohibited:
FDI is not permissible in Gambling and Betting, or Lottery Business, Business of chit fund, Nidhi Company, Housing and Real Estate business, Trading in Transferable Development Rights (TDRs), Retail Trading, Atomic Energy Agricultural or plantation activities or Agriculture (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 (other than Tea plantations).
6. Foreign Direct Investment and Economic Development:
Government of India accepts the key role of Foreign Direct Investment (FDI) in economic development not only as an addition to domestic capital but also as an important source of technology and global best practices. The Government of India has put in place a liberal and Transparent FDI policy. FDI up to 100% is allowed under the automatic route in most sectors/activities.
FDI policy in India is reckoned to be among the most liberal in emerging economies. FDI Policy permits FDI up to 100 % from foreign/NRI investor without prior approval in most of the sectors including the services sector under automatic route. FDI in sectors/activities under automatic route does not require any prior approval either by the Government or the RBI.
The foreign-direct investments were seen sliding about 21% last fiscal. This is despite, the government passing a law in September 2012, allowing big retailers to open stores directly, yet none of the foreign dream-merchants have really taken the bet. Reasons being too many prerequisites, constraints on whom goods can be purchased from, a raft of regulations limiting franchise models and factory construction, and the infuriating need to negotiate separately with each of the states.
However the recent announcements by the government of India on 100% FDI in telecom & defense sector, 100% FDI in single brand retail & 51% FDI in multi brand retail and 49% FDI in Insurance give us some ray of hope for the economic development.
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Moreover though this could be temporary slowdown or reversals in FDI inflows based on interest rate cycles, flow of funds, global contagion etc., over the long term, given the nascence of many Indian businesses, the growth potential and 1.2 billion people pining for a taste of globalization, one could expect a kick- start of inflows in near future.
The service sector has the highest contribution to the Indian economy. It has been 55.2 per cent in gross domestic product and has been growing by 10 per cent annually. An international comparison of the services sector shows that India compares well even with the developed countries in the top 12 countries with highest overall GDP. At the same time computer hardware and software and telecommunications sector is also growing at a tremendous rate.
The important factors for FDI Inflows in the former were mainly development of software technology parks, regulatory reforms by the Indian government, the growing Indian market and availability of skilled workforce. At the same time, liberal policies of the government provide easy market access for telecom equipment and a fair regulatory frame work for offering telecom services to the Indian consumers at affordable prices. This is the main reason for growth in the telecom sector.
Thus, as can be seen from the graph, the highest recorded amount of FDI Inflow in India is in the RBI Regional office in Mumbai (about INR 2,41,228 crores, 34%), closely followed by New Delhi Regional office (20%).
Forbidden Sectors:
There are a few sectors where FDI is not permitted according to the FDI theory of Government of India:
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i. Arms & Ammunition
ii. Atomic Energy
iii. Railway transport
iv. Coal & Lignite
v. Mining of Iron, Manganese, Chrome, Gypsum, Sulphur, Gold, Diamond, Copper and Zinc.
Foreign investment up to 49% of their paid-up capital:
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i. Hindustan Unilever Ltd.
ii. HDFC Bank Ltd.
iii. Reliance Industries Ltd.
iv. Reliance Petroleum Ltd.
v. Zee Telefilms
Foreign investment up to 40% of their paid-up capital:
i. Balaji
ii. Hero Honda
Foreign investment up to 30% of their paid-up capital:
i. Asian Paints India Ltd.
ii. Ranbaxy Laboratories Ltd.
iii. Gujarat Ambuja Cements Ltd.
iv. Infotech Enterprises
7. Disadvantages of FDI:
The disadvantages of foreign direct investment occur mostly in case of matters related to operation, distribution of the profits made on the investment and the personnel. One of the most indirect disadvantages is that the economically backward section of the host country is always inconvenienced when the stream of FDI is negatively affected.
The situations in countries like Ireland, Singapore, Chile and China corroborate such an opinion. It is normally the responsibility of the host country to limit the extent of impact that may be made by the FDI. They should be making sure that the entities that are making the FDI in their country adhere to the environmental, governance and social regulations that have been laid down in the country.
FDI may entail high travel and communication expenses. The differences of language and culture that exist between the country of the investor and the host country could also pose problems in case of FDI.
Yet another major drawback of FDI is that there is a chance that a company may lose out on its ownership to an overseas company. This has often caused many companies to approach FDI with a certain amount of caution.
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.
8. A Result Report of Finances of FDI Companies- 2011-2012:
This article presents the financial performance of select 766 non-government non-financial foreign direct investment companies during the F.Y. 2011-2012, based on their audited annual accounts. It also draws a comparative picture over the five year period studies on FDI companies.
The sales growth of select FDI companies improved in 2011- 12. However, higher growth in operating expenses relative to that in value of production led to decline in net profits (PAT).
Earnings before interest, tax, depreciation and amortization (EBITDA) margin (EBITDA to sales Ratio) of select FDI companies declined in 2011-12 after successive recovery in previous two years; however, the EBITDA margin of the companies in service sector improved.
The external sources of funds continued to play a major role in business expansion of the select FDI companies.
As compared to select FDI companies recorded similar growth in sales in 2011-12 but their operating expenses grew at a slightly lower rate. As a result, EBITDA of non-FDI companies contracted at a lower rate.
The construction sector witnessed steadily rising FDI from 2006-07 to 2009-10 after which the level of inflows have been much lower. Between April 2000 and Aug 2014 construction development townships, housing, and built-up infrastructure received FDI $23.75 billion or 10% of the total FDI attracted by India during this period.
Recent Announcements Regarding FDI:
i. 100% FDI under automatic route will be permitted in the construction development sector.
ii. The minimum floor area reduced to 20,000 sq. m. from the earlier 50,000 sq. m.
iii. The minimum capital requirement cut to $5 million from $10 million.
iv. Investment to be made within six months of the commencement of the project.
v. Foreign investors allowed to exit on project completion or 3 years from the date of final investment.
FDI not allowed in entity that is engaged or plans to engage in real estate business, construction of farmhouse and trading in Transferable Development Rights (TDRs).
9. Conclusion to Foreign Direct 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.
FDI inflow into an economy benefits the economy in terms of investment capital, technology transfer, management skills, and job creation. At present, many developing and least developed countries rely on FDI inflows as the engine of growth due to shortage of domestic investment and resources. As a result, these countries are continuously trying to attract more FDI for their own benefits, which facilitates global economic integration. All such countries can take advantage of this global economic integration.
FDI is not only an alternative to domestic investment, but also can improve the host country’s balance of payments. It is one of the major stimuli to economic development of the developing countries. In such a way FDI plays an important role in economic growth and generating employment in a globalized world.