Extra Mileage in Foreign Investment in Resurging India


By

Muthu Gopalakrishnan
M.Com., M.Phil., UGC-NET (Ph.D)
Faculty Member - Finance
Xavier Institute of Management and Entrepreneurship
Bangalore
 


Introduction

The impact of globalization on Indian economy is understood to be the support factor for the programmed growth and development taking place today. It will be further improving as and when necessary steps are taken to gain extra mileage as regards the level of foreign investment receipts is concerned. This is multi-dimensional in character and need of the hour in Indian Industry.  The Government Policy, Bankers Attitude, Institutional Arrangement, Market Response, Productivity Rate, Absenteeism, Adaptability of Trade Unions and a host of other factors contribute to the existing conditions in foreign investments in India. This paper is an attempt on such conditions and relevant remedial measures for desired results.

1990s witnessed a tremendous increase in the mobility of international capital. Cross-country trends in capital flows reveal that private capital flows now dominate with official capital flows reduced to a trickle. Until the early 1990s, the main source of external financing across the developing world was official development assistance (ODA) provided by the governments of high-income countries. These assistance stimulated a keen interest in understanding the nature and economic effects of capital flows as well as the appropriate policy responses to safeguard against financial instability While the impact of 'aid' flows was relatively well researched and understood, the impact of private capital flows is still ambiguous and controversial. For e.g., the type of capital inflows, direct or portfolio investment appears to make a critical difference in impact.
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Foreign direct investment is proven to have well-known positive effect through technology spillovers and stable investments tied to plant and equipment, but portfolio capital is associated more closely with volatility and its capacity to be triggered by both domestic as well as exogenous factors, making it extremely difficult to manage and control. Moreover, the impact of private capital flows varies vastly across countries, time, the stage of financial and economic development as well as economic policies, underlining the need for individual country studies to enable comparisons and stylized representations.

Capital flows affect a wide range of economic variables such as exchange rates, interest rates, foreign exchange reserves, domestic monetary conditions and the financial system. Some commonly observed effects of capital inflows that have been documented in recent studies.

* Exchange rate appreciation, stock market and real estate boom, reserve accumulation, monetary expansion as well as effects on production and consumption.

These issues are significant for India, which has witnessed a swing from official aid flows towards private capital flows in the early 1990s. Both the international trend towards private resource transfers and the changing profile of India's capital account merit a close examination of implications of this transition. This context motivates the aim of this paper. It attempts to highlight in the first chapter the impact of lpg in Indian economy in the second chapter liberalization of capital account is dealt .in the third chapter the need and significance is discussed- in the fourth chapter current trend in fii is discussed. And challenges Indian economy-future prospects of fii- role of govt-response by beneficiaries are discussed in the following chapters and finally the concluding discussion takes place.

Impact of LPG on Indian Economy:

The Government approved sweeping reforms in FDI with a first step towards partially opening retail markets to foreign investors. It will now allow 51 per cent FDI in single brand products in the retail sector. Besides retail, other sector are being opened:

*
100 per cent allowed in new sectors such as power trading, processing and warehousing of coffee and rubber.

* FDI limit raised to 100 percent under automatic route in mining of diamonds and precious stones, development of new airports, cash and carry wholesale trading and export trading, laying of natural gas pipelines, petroleum infrastructure, captive mining of coal and lignite.

* Subject to other regulations, 100 percent FDI is allowed in distillation and brewing of potable alcohol, industrial explosives and hazardous chemicals.

* Indian investor allowed transferring shares in an existing company to foreign investors.

* Limit for telecom services firms raised to 74 per cent from 49 per cent

* Insurance (upto 26%); development of integrated townships (upto 100%); defense industry (upto 26%);tea plantation (upto 100% subject to divestment of 26% within five years to FDI); enhancement of FDI limits in private sector banking up to 74%, allowing FDI up to 100% under the automatic route for most manufacturing activities in SEZs; opening up B2B e-commerce; Internet Service Providers (ISPs) without Gateways; electronic mail and voice mail to 100% foreign investment subject to 26% divestment condition; etc. The Department has also strengthened investment facilitation measures through Foreign Investment Implementation Authority (FIIA).

* Non Resident Indian Scheme the general policy and facilities for foreign direct investment as available to foreign investors/ Companies are fully applicable to NRIs as well. In addition, Government has extended some concessions specially for NRIs and overseas corporate bodies having more than 60% stake by NRIs

* Throwing Open Industries Reserved For The Public Sector to Private Participation. Now there are only three industries reserved for the public sector

* Abolition of the (MRTP) Act, which necessitated prior approval for capacity expansion

* The removal of quantitative restrictions on imports.
* The reduction of the peak customs tariff from over 300 per cent prior to the 30 per cent rate that applies now.168 International Research Journal of Finance and Economics - Issue 5 (2006)

* Severe restrictions on short-term debt and allowing external commercial borrowings based on external debt sustainability.

* Wide-ranging financial sector reforms in the banking, capital markets, and insurance sectors, including the deregulation of interest rates, strong regulation and supervisory systems, and the introduction of foreign/private sector competition. Relevant data are given in table and graph in the following pages.

Liberalization of Capital Account Convertibility norms:

The committee on Capital Account Convertibility, with Dr.S.S.Tarapore as Chairman, submitted its Report in May 1997 The committee recommended three crucial preconditions viz., fiscal consolidation, a mandated inflation target and above all, strengthening of the financial system and also a reduction in Gross Fiscal Deficit / Gross Domestic Product ratio from 4.5 per cent to 3.5 per cent in 1999-2000 and a mandated rate of inflation for the period 1997-98 to 1999-2000 at an average of 3 to 5 per cent. The recommendations were to reduce gross NPAs of banks as a percentage of total advances from 13.7 per cent in 1996-97 to 9 per cent by 1998-99 and to 5 per cent by 1999-2000, and the average effective CRR from 9.3 as of April 1997 to 3 per cent by 1999-2000.

                                                                                                                 Source-Reserve Bank Bulletin,April-2006
FOREIGN INVESTMENT FLOWS IN INDIA
                                                                                                                                                        US $ MILLION

ITEMS

95-96

96-97

97-98

98-99

99-00

00-01

01-Feb

02-Mar

03-Apr

04-May

05-06(p)

1

2

3

4

5

6

7

8

9

10

11

12

A.Direct Investment  (I+II+III)

2144

2821

3557

2462

2155

4029

6130

5035

4322

6051

7722

I. Equity (a+b+c+d+e)

2144

2821

3557

2462

2155

2400

4095

2764

2229

3778

5820

a. Government (SIA/FIPB)

1249

1922

2754

1821

1410

1456

2221

919

928

1062

1126

b. RBI

169

135

202

179

171

454

767

739

534

1258

2233

c. NRI

715

639

241

62

84

67

35

-

-

-

-

d. Acquisition of shares *

11

125

360

400

490

362

881

916

735

930

2181

e. Equity capital of unincorporated bodies #

       

6

61

191

190

32

528

280


TREND IN INTERNATIONAL INVESTMENT


 

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Source: E-mail December 4, 2010

          

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