India's Economic Growth and the Role of Foreign Direct Investment


By

Dr. Vemuri Lakshmi Narayana
Principal
Mr. S. Dhinesh Babu
Asst. Professor
Mohamed Sathak Engg. College
Kilakarai-623 806
 


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.

Introduction

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.

India adopted a socialist-inspired approach for most of its independent history, with strict government control over private sector participation, foreign trade, and foreign direct investment. However, since the early nineties, India has gradually opened up its markets through economic reforms by reducing government controls on foreign investment. The privatization of publicly owned industries and the opening up of some sectors to private and foreign investors has proceeded slowly amid political debate.

India faces a burgeoning population and the challenge of reducing social and economic inequality. Even though Poverty remains a serious problem, it has declined considerably since independence, mainly due to the green revolution and economic reforms.

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 in India

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 front-runners 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 (April-March). 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. Govt. has removed 10% voting limit in banks.
2. Higher ceiling in FDI in airport revamp ventures and real estate investment.
3. Revisit foreign shareholding norms in telecom is welcome change.
4. 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.

Foreign Direct Investment - Concept & Policy

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.

Types of FDI

There are two types of FDI:

* Greenfield investment: 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.
* Mergers and Acquisition: It occurs when a transfer of existing assets from local firms takes place.

Forbidden Territories:

FDI is not permitted in the following industrial sectors:

* Arms and ammunition.
* Atomic Energy.
* Railway Transport.
* Coal and lignite.
* Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.

Investment in India

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.

Foreign Direct Investment Policy

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.

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

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 Govt'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.

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)

General permission of RBI under FEMA

RBI has granted general permission under Foreign Exchange Management Act (FEMA) in respect of proposals approved by the Government. Indian companies getting foreign investment approval through FIPB route do not require any further clearance from RBI for the purpose of receiving inward remittance and issue of shares to the foreign investors.

The companies are, however, required to notify the Regional office concerned of the RBI of receipt of inward remittances within 30 days of such receipt and to file the required documents with the concerned Regional offices of the RBI within 30 days after issue of shares to the foreign investors or NRIs.

Besides new companies, automatic route for FDI/NRI investment is also available to the existing companies proposing to induct foreign equity. For existing companies with an expansion programme, the additional requirements include:

The increase in equity level resulting from the expansion of the equity base of the existing company without the acquisition of existing shares by NRI/foreign investors, the money to be remitted should be in foreign currency and proposed expansion programme should be in the sector(s) under automatic route. Otherwise, the proposal would need Government approval through the FIPB. For this a Board Resolution of the existing Indian company must support the proposal.

For existing companies without an expansion programme, the additional requirements for eligibility for automatic approval are: that they are engaged in the industries under automatic route; the increase in equity level must be from expansion of the equity base and the foreign equity must be in foreign currency.

The earlier SEBI requirement, applicable to public limited companies, that shares allotted on preferential basis shall not be transferable in any manner for a period of 5 years from the date of their allotment has now been modified to the extent that not more than 20 per cent of the entire contribution brought in by promoter cumulatively in public or preferential issue shall be locked-in.

Equity participation by international financial institutions such as ADB, IFC, CDC, DEG, etc. in domestic companies is permitted through automatic route subject to SEBI/RBI regulations and sector specific cap on FDI

ADR/GDR

An Indian corporate can raise foreign currency resources abroad through the issue of American Depository Receipts (ADRs) or Global Depository Receipts (GDRs). Regulation 4 of Schedule I of FEMA Notification no. 20 allows an Indian company to issue its Rupee denominated shares to a person resident outside India being a depository for the purpose of issuing Global Depository Receipts (GDRs) and/ or American Depository Receipts (ADRs), subject to the conditions that:
the ADRs/GDRs are issued in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Central Government there under from time to time The Indian company issuing such shares has an approval from the Ministry of Finance, Government of India to issue such ADRs and/or GDRs or is eligible to issue ADRs/ GDRs in terms of the relevant scheme in force or notification issued by the Ministry of Finance, and

There are no end-use restrictions on GDR/ADR issue proceeds, except for an express ban on investment in real estate and stock markets. The FCCB issue proceeds need to conform to external commercial borrowing end use requirements; in addition, 25 per cent of the FCCB proceeds can be used for general corporate restructuring.

Is not otherwise ineligible to issue shares to persons resident outside India in terms of these Regulations. There is no limit upto which an Indian company can raise ADRs/GDRs. However, the Indian company has to be otherwise eligible to raise foreign equity under the extant FDI policy.

A company engaged in the manufacture of items covered under Automatic route, whose direct foreign investment after a proposed GDRs/ADRs/FCCBs issue is likely to exceed the percentage limits under the automatic route, or which is implementing a project falling under Government approval route, would need to obtain prior Government clearance through FIPB before seeking final approval from the Ministry of Finance.

Foreign currency convertible Bonds

FCCBs are issued in accordance with the scheme [the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993] and subscribed by a non-resident in foreign currency and convertible into ordinary shares of the issuing company in any manner, either in whole, or in part, on the basis of any equity related warrants attached to debt instruments;

The eligibility for issue of Convertible Bonds or Ordinary Shares of Issuing Company is given as under:
An issuing company desirous of raising foreign funds by issuing Foreign Currency Convertible Bonds or ordinary shares for equity issues through Global Depositary Receipt Can issue FCCBs, upto USD 50 Million under the Automatic route, From  USD 50 -100 Million, the companies have to take RBI approval, From USD 100 Million and above, prior permission of the Department of Economic Affairs is required.

Preference Shares

Foreign investment through preference shares is treated as foreign direct investment. Proposals are processed either through the automatic route or FIPB as the case may be, as per the following guidelines:

Foreign investment in preference share is considered as part of share capital and fall outside the External Commercial Borrowing (ECB) guidelines/cap. Preference shares to be treated as foreign direct equity for purpose of sectoral caps on foreign equity, where such caps are prescribed, provided they carry a conversion option. Preference shares structured without such conversion option fall outside the foreign direct equity cap.

Duration for conversion shall be as per the maximum limit prescribed under the Companies Act or what has been agreed to in the shareholders agreement whichever is less. The dividend rate would not exceed the limit prescribed by the Ministry of Finance. Issue of preference shares should conform to guidelines prescribed by the SEBI and RBI and other statutory requirements.

FDI in EOUs/SEZs/Industrial Park/EHTP/STP

Special Economic Zones

100% FDI is permitted under automatic route for setting up of Special Economic Zone. Units in SEZ qualify for approval through automatic route subject to sectoral norms. Details about the type of activities permitted are available in the Foreign Trade Policy issued by Department of Commerce. Proposals not covered under the automatic route require approval by FIPB.

Export Oriented Units (EOUs)

100% FDI is permitted under automatic route for setting up 100% EOU, subject to sectoral norms. Proposals not covered under the automatic route would be considered and approved by FIPB.

Industrial Park

100% FDI is permitted under automatic route for setting up of Industrial Park.

Electronic Hardware Technology Park (EHTP) Units All proposals for FDI/NRI investment in EHTP Units are eligible for approval under automatic route. For proposals not covered under automatic route, the applicant should seek separate approval of the FIPB.

Software Technology Park Units

All proposals for FDI/NRI investment in STP Units are eligible for approval under automatic route. For proposals not covered under automatic route, the applicant should seek separate approval of the FIPB.

Capitalization of Import Payables

FDI inflows are required to be under the following modes:
By inward remittances through normal banking channels or by debit to the specified account of person concerned maintained in an authorized dealer/authorized bank. Issue of equity to non-residents against other modes of FDI inflows or in kind is not permissible.

However, Issue of equity shares against lump sum fee, royalty payable and external commercial borrowings (ECBs) in convertible foreign currency are permitted, subject to meeting all applicable tax liabilities and sector specific guidelines.

Exchange Control Management

FEMA

The Reserve Bank of India's Exchange Control Department, administers Foreign Exchange Management Act, 1999, (FEMA) which has replaced the earlier act, FERA, with effect from June 1, 2000. The new legislation is for "facilitating external trade" and "promoting the orderly development and maintenance of foreign exchange market in India". FEMA extends to the whole of India. Under FEMA an Indian company with foreign equity participation is treated at par with other locally incorporated companies. Accordingly, the exchange control laws and regulations for residents apply to foreign-invested companies as well.

FDI in Indian Company

In terms of Section 6(3) (b) of Foreign Exchange Management Act. 1999 Reserve Bank regulates transfer or issue of any security by a person resident outside India read with Notification No. FEMA 20/2000-RB dated May 3, 2000

Issue of Rights/ Bonus Shares

General permission is available to Indian companies to issue Right/Bonus shares subject to certain conditions. Entitlement of rights shares is not automatically available to investors who have been allotted such shares as OCBs. Such issuing companies would have to seek specific permission from RBI, Foreign Exchange Department, Foreign Investment Division, Central Office, Mumbai for issue of shares on right basis to erstwhile OCBs. However, bonus shares can be issued to OCBs.

Issue of shares under ESOS scheme

A company may issue shares under this Scheme, to its employees or employees of its joint venture or wholly owned subsidiary abroad who are resident outside India, directly or through a Trust subject to the condition that the scheme has been drawn in terms of relevant regulations issued by the SEBI; and face value of the shares to be allotted under the scheme to the non-resident employees does not exceed 5% of the paid-up capital of the issuing company.

Issue of shares under merger/amalgamation

An Indian corporate can raise foreign currency resources abroad through the issue of ADRs or GDRs. Regulation 4 of Schedule I of FEMA Notification no. 20 allows an Indian company to issue its Rupee denominated shares to a person resident outside India being a depository for the purpose of issuing GDRs and/ or ADRs, subject to the conditions that:
the ADRs/GDRs are issued in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Central Government there under from time to time.

The Indian company issuing such shares has an approval from the Ministry of Finance, Government of India to issue such ADRs and/or GDRs or is eligible to issue ADRs/ GDRs in terms of the relevant scheme in force or notification issued by the Ministry of Finance, and Is not otherwise ineligible to issue shares to persons resident outside India in terms of these Regulations.

Repatriation of investment Capital and profits Earned in India

All foreign investments are freely repatriable except for the cases where NRIs choose to invest specifically under non-repatriable schemes. Dividends declared on foreign investments can be remitted freely through an Authorised Dealer.

Non-residents can sell shares on stock exchange without prior approval of RBI and repatriate through a bank the sale proceeds if they hold the shares on repatriation basis and if they have necessary NOC/tax clearance certificate issued by Income Tax authorities. For sale of shares through private arrangements, Regional offices of RBI grant permission for recognized units of foreign equity in Indian company in terms of guidelines indicated in Regulation 10.B of Notification No. FEMA.20/2000 RB dated 3rd May 2000. The sale price of shares on recognised units is to be determined in accordance with the guidelines prescribed under Regulation 10B (2) of the above Notification.

Profits, dividends, etc. (which are remittances classified as current account transactions) can be freely repatriated.

Transfer of shares/debentures

A person resident outside India (Other than NRI and OCB) may transfer by way of sale or gift the shares or convertible debentures to any person resident outside India (including NRIs); provided transferee has obtained prior permission of SIA/FIPB to acquire the shares if he has previous venture or tie-up in India in same field or allied field
NRI or OCB may transfer by way of sale or gift the shares or convertible debentures held by him or it to another non-resident Indian; provided transferee has obtained prior permission of Central Government to acquire the shares if he has previous venture or tie-up in India in the same field or allied field
The person resident outside India may transfer any security to a person resident in India by way of gift. A person resident outside India may sell the shares and convertible debentures of an Indian company on a recognized Stock Exchange in India through a registered broker.

Current Account transactions

Prior approval of the RBI is required for acquiring foreign currency above certain limits for the following purposes:

Holiday travel over US$ 10,000 p.a.
Gift / donation over US$ 5,000 / US$ 10,000 per beneficiary p.a.
Business travel over US$ 25,000 per person
Foreign studies as per estimate of institution or US$ 100,000 per academic year
Architectural / consultancy services procured from abroad over US$ 1,000,000 per project
Remittance for purchase of Trade Mark / Franchise
Reimbursement of pre incorporation expenses over US$ 100,000
Remittances exceeding US$ 25,000 p.a. (over and above ceilings prescribed for other remittances mentioned above) by a resident individual for any current account or capital account transaction.
In certain specified cases, prior approval of the ministry concerned is needed for withdrawal of foreign exchange, such as: -
Remittance of freight of vessel chartered by a PSU,
Payment of import through ocean transport by a Govt. Department or a PSU on C.I.F basis,
Multi-modal transport operators making remittance to their agents abroad.

Acquisition of Immovable property by Non-resident

A person resident outside India, who has been permitted by Reserve Bank to establish a branch, or office, or place of business in India (excluding a Liaison Office), has general permission of Reserve Bank to acquire immovable property in India, which is necessary for, or incidental to, the activity. However, in such cases a declaration, in prescribed form (IPI), is required to be filed with the Reserve Bank, within 90 days of the acquisition of immovable property.

Foreign nationals of non-Indian origin who have acquired immovable property in India with the specific approval of the Reserve Bank cannot transfer such property without prior permission from the Reserve Bank of India.

Acquisition of Immovable property by NRI

An Indian citizen resident outside India (NRI) can acquire by way of purchase any immovable property in India other than agricultural/ plantation /farm house. He may transfer any immovable property other than agricultural or plantation property or farm house to a person resident outside India who is a citizen of India or to a person of Indian origin resident outside India or a person resident in India.

Liberalization of FDI

Beside 100 percent relaxation of FDI in real estate, the government policies on FDI also offer opportunities for foreign investors to invest in different sectors. This includes 100 percent in power trading, processing, development of new airports, laying of natural gas pipelines, petroleum infrastructure and warehousing of coffee and rubber. Limit for telecom services firms have been raised from 49 per cent to 74 per cent.

Another cap to the retailing industry in India is allowing 51% FDI in single brand outlet. The government is now set to initiate a second wave of reforms in the segment by liberalizing investment norms further. And this has also brought about a conspicuous interest by towards investments in the Indian hospitality sector. Industry reports suggest the inflow of about US$ 500 million into the real estate sector over the past six months and is expected to rise to a massive $ seven to eight billion over the next 18-30 months.

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 1997- 98. 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

China

India

Total population

1272 billion

1033 billion

Savings rate

50 per cent

26 per cent

Labour force

757 billion

451 billion

Annual GDP

US $ 1159 billion

478 US $ billion

Share of agriculture in GDP

15 per cent

27 per cent

Share of industry in GDP

52 per cent

27 per cent

Share of service sector in GDP

33 per cent

48 per cent

Rail routes

56.7 thousand sq kms

62.5 thousand sq kms

Motor vehicles per 1000 people

8

7

R& D expenditure

0.1 % of GNP

0.6 % of GNP

Internet host

0.6 per 10000 people

0.8 per 10000 people

Education expenditure

2.3 per cent of GNP

3.2 per cent of GNP

Female adult literacy

85 per cent

45 per cent

Undernourished people

9 per cent of the total population

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.

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.

Online References

http://en.wikipedia.org

http://www.indianindustry.com

http://www.indianground.com

http://dipp.nic.in

http://www.rediff.com

http://ideas.repec.org

http://business.mapsofindia.com

http://www.hinduonet.com

http://www.merinews.com

http://commerce.nic.in

http://www.igidr.ac.in

http://www.economywatch.com
 


Dr. Vemuri Lakshmi Narayana
Principal
Mr. S. Dhinesh Babu
Asst. Professor
Mohamed Sathak Engg. College
Kilakarai-623 806
 

Source: E-mail May 16, 2008

          

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