Emerging Issues of FDI in India

Discussion in 'CAT / MBA INDIA Forum' started by krishna, May 9, 2013.

  1. krishna

    krishna Banned

    INTRODUCTION:

    Foreign direct investment (FDI) has been one of the defining characteristics of the world economy during the last two decades. The purpose of this paper is to provide an overview of foreign direct investment in India and explore the sector wise distribution of FDI inflows in order to point out the dominating sector which has attracted the major share. Since 1991, the flow of foreign direct investment (FDI) rapidly expanded across India; this growth was caused by an increase in mergers and acquisitions activities. As this trend gained force, Indian Government started to ask a question: "What implications would these FDIs have on our country's long-term economic growth?" Whereas the traditional theory had it that "FDI could become the engine of growth for India through the transfer and diffusion of knowledge", there is now an increasing need to assess this claim by finding out the growth trend of FDI in India from two decades

    FOREIGN DIRECT INVESTMENT:

    Foreign direct investment (FDI) is direct investment into production in a country by a company located in another country, either by buying a company in the target country or by expanding operations of an existing business in that country. Foreign direct investment is done for many reasons including to take advantage of cheaper wages in the country, special investment privileges such as tax exemptions offered by the country as an incentive to gain tariff-free access to the markets of the country or the region. Foreign direct investment is in contrast to portfolio investment which is a passive investment in the securities of another country such as stocks and bonds.

    OBJECTIVE OF THE STUDY:

    1. To study the trends and patterns of flows of FDI to India.
    2. To explore the sector wise distribution of FDI inflows in order to point out the dominating sector which has attracted the major share?
    3. To assess the determinants of FDI inflows.
    4. To evaluate the impact of FDI on service sectors like Insurance, Retail and Civil Aviation.

    REVIEW OF LITERATURE:

    This study takes a fresh look at key development issues related to foreign direct investment (FDI) in developing and emerging economy of India in the light of country experience and policy-oriented work available in this area. This Research Paper makes a modest attempt of developing an insight as to what are the trends in the Indian Retail Industry and to the benefits and drawbacks of FDI in this sector. It has also focused on effect of FDI on Civil Aviation and Insurance Sectors.

    EVOLUTION:

    As part of the capital account liberalisation, FDI was gradually allowed in almost all sectors, except a few on grounds of strategic importance, subject to compliance of sector specific rules and regulations. The large and stable FDI flows also increasingly financed the current account deficit over the period. During the recent global crisis, when there was a significant deceleration in global FDI flows during 2009-10, the decline in FDI flows to India was relatively moderate reflecting robust equity flows on the back of strong rebound in domestic growth ahead.




    An analysis of trends in FDI flows reveal that India registered decreasing trend of nearly 49% in the financial year 2009-10 i.e., from US$ 35.6 billion in 2008-09 to US$ 24.1 billion since the eruption of global financial crisis in 2008-09. Above graph witnessed that strong rebound during 2010-11 flowed US$ 34.84 billion and 2011-12 it is US$ 46.8 billion on the back of improved corporate profitability and some improvement in M&A activities at India.

    Equity FDI Inflows to India - Sector Wise

    Equity FDI Inflows to India (Per cent)

    Sectors

    2006-07

    2007-08

    2008-09

    2009-10

    2010-11

    Sectoral shares (Per cent)

    Manufactures

    17.6

    19.2

    21.0

    22.9

    32.1

    Services

    56.9

    41.2

    45.1

    32.8

    30.1

    Construction, Real estate and mining

    15.5

    22.4

    18.6

    26.6

    17.6

    Others

    9.9

    17.2

    15.2

    17.7

    20.1

    Total

    100.0

    100.0

    100.0

    100.0

    100.0

    Equity Inflows (US$ billion)

    Manufactures

    1.6

    3.7

    4.8

    5.1

    4.8

    Services

    5.3

    8.0

    10.2

    7.4

    4.5

    Construction, Real estate and mining

    1.4

    4.3

    4.2

    6.0

    2.6

    Others

    0.9

    3.3

    3.4

    4.0

    3.0

    Total Equity FDI

    9.3

    19.4

    22.7

    22.5

    14.9


    From a sectoral perspective, FDI in India mainly flowed into services sector (with an average share of 41 per cent from the 2006-07 to 2010-11) followed by manufacturing (around 23 per cent). However, the share of services declined over the years from almost 57 per cent in 2006-07 to about 30 per cent in 2010-11, while the shares of manufacturing and others largely comprising electricity and other power generation increased over the same period. Sectoral information on the recent trends in FDI flows to India show that the moderation in gross equity FDI flows during 2010-11 has been mainly driven by sectors such as "construction, real estate and mining" and services such as "business and financial services". Manufacturing, which has been the largest recipient of FDI in India, has also witnessed some moderation

    PROHIBITION ON FDI IN INDIA:

    FDI is prohibited in the following activities/sectors:

    * Retail Trading (except single brand product retailing)
    * Lottery Business including Government /private lottery, online lotteries etc,
    * Gambling and Betting including casinos etc.
    * Business of chit fund
    * Nidhi company
    * Trading in Transferable Development Rights (TDRs)
    * Real Estate Business or Construction of Farm Houses
    * Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
    * Activities / sectors not opened to private sector investment including Atomic Energy and Railway Transport (other than Mass Rapid Transport Systems)

    DETERMINANTS OF FDI:

    The determinant varies from one country to another due to their unique characteristics and opportunities for the potential investors. In specific the determinants of FDI in India are:

    * STABLE POLICIES: India stable economic and socio policies have attracted investors across border. Investors prefer countries which stable economic policies. If the government makes changes in policies which will have effect on the business. The business requires a lot of funds to be deployed and any change in policy against the investor will have a negative effect.

    * ECONOMIC FACTORS: Different economic factors encourage inward FDI. These include interest loans, tax breaks, grants, subsidies and the removal of restrictions and limitation. The government of India has given many tax exemption and subsidies to the foreign investors who would help in developing the economy.

    * CHEAP AND SKILLED LABOUR: There is abundant labour available in India in terms of skilled and unskilled human resources. Foreign investors will take advantage of the difference in the cost of labour as we have cheap and skilled labourers. Example: Foreign firms have invested in BPO's in India which require skilled labour and we have been providing the same.
  2. krishna

    krishna Banned

    * BASIC INFRASTRUCTURE: India though is a developing country, it has infrastructure such as roads, effective transportation and registered carrier departure worldwide, Information and communication network/technology, powers, financial institutions, and legal system and other basic amenities which are must for the success of the business. A sound legal system and modern infrastructure supporting an efficient distribution of goods and services in the host country.

    * UNEXPLORED MARKETS: In India there is large scope for the investors because there is a large section of markets have not explored or unutilized. In India there is enormous potential customer market with large middle class income group who would be target group for new markets. Example: BPO was one sector where the investors had large scope exploring the markets where the service was provided with just a call, with almost customer satisfaction.

    * AVAILABILITY OF NATURAL RESOURCES: As we that India has large volume of natural resources such as coal, iron ore, Natural gas etc. If natural resources are available they can be used in production process or for extraction of mines.

    2012 FDI REFORMS:

    On 14 September 2012, Government of India allowed FDI in aviation up to 49%, in the broadcast sector up to 74%, in multi-brand retail up to 51% and in single-brand retail up to 100%. The choice of allowing FDI in multi-brand retail up to 51% has been left to each state.

    In its supply chain sector, the government of India had already approved 100% FDI for developing cold chain. This allows non-Indians to now invest with full ownership in India's growing demand for efficient food supply systems. The need to reduce waste in fresh food and to feed the hopeful demand of India's fast developing population has made the cold supply chain a very exciting investment proposition.

    Foreign investment is announced by the government of India as FEMA (Foreign Exchange Management Act). It was introduced by Prime Minister Manmohan Singh when he was finance minister (1991)

    Sl No.

    Sector

    FDI %

    1

    Aviation

    49

    2

    Broadcasting

    74

    3

    Multi brand Retail

    51

    4

    Single Brand Retail

    100

    5

    Supply Chain

    100





    ROLE OF FDI IN RETAIL SECTOR:

    The government recently announced 51% in Foreign Direct Investment (FDI) in multi-brand retail and 100% FDI in single-brand retail. Indian retail industry is the biggest industry in comparison to other industries. It occupied 14% of India's Gross Development Product and near about 8% of the employment. It has two sector viz. organized sectors, unorganized sectors. Organized sector refers to that part which is well regulated i.e. registered stores. Unorganized sector included the traditional stores such as Pan tapri, corner store etc.

    Retail sector is fastest growing sector in India. 90% retail business is run by the unorganized retailers. The organized retail sector is still at emerging stage.

    SWOT Analysis of FDI in Retail

    A) Strengths
    * Fast growing economy.
    * Young and dynamic manpower.
    * Highest shop density in the world.
    * High growth rate in retail & wholesale trade.
    * Presence of big industry houses which can absorb losses.

    B) Weaknesses
    * Low capital investment in retail sector.
    * Lack of trained & educated force.
    * Lack of competition.
    * More prices as compared to specialized shops.

    C) Opportunities
    * Major employment generation in the future.
    * It will enhance the financial condition of farmers.
    * Increase in lifecycle changes and status consciousness.
    * Improve the competition.
    * Big market along with better technology & branding with latest managerial skills.

    D) Threats
    * Threat to the survival of small retailers like 'pantapri', 'local kirana'.
    * Jobs in the manufacturing sector will be lost.
    * Started roadside bargains.
    * Work will be done by Indians and profits will go to foreigners.

    In view of some of short coming observed in the SWOT analysis, FDI in retailing is going to attract retail players by Indian Government, but India should welcome them with a talented pool of human resources by promoting institution imparting knowledge in retailing. Protection must be given to Indian small and medium retailers as retailing is their source of live hood. The Government must properly discuss the pros and cons of allowing 51% FDI and have a law in place to control unfair competition. Then the FDI Bill will be given definitely a positive impact on the retail industry and the country by attracting more foreign investment.
  3. krishna

    krishna Banned

    ROLE OF FDI IN INSURANCE SECTOR:

    The insurance sector in India has been thrown open for some 12 years now. Until the passage of the Insurance Regulatory and Development Authority Act in 1999, it was a public sector monopoly. The act eased some controls, but foreign direct investment (FDI) was restricted to 26%. In a capital-hungry business, this has proved a constraint to growth.

    The past two-to-three years haven't been the happiest of times for the insurance industry. In the life insurance sector, for instance, there has been a slowdown because of the country's economic travails. The saving rate has come down and insurance has been impacted. (In India, insurance is looked upon as a form of savings.) And IRDA's consumer-centric orientation has been adding to the troubles, critics note.

    The government decided on 4th October 2012 to move ahead with its proposal to hike foreign investment ceiling in the insurance sector to 49 per cent from the present 26 per cent. A decision in this regard was taken by the Union Cabinet headed by Prime Minister Manmohan Singh. The benefit of this amendment will go to the private sector insurance companies which require huge amount of capital and that capital will be facilitated with increase in FDI to 49 per cent," finance minister P Chidambaram told reporters. The minister also clarified that state-run insurance companies will remain in the public sector.

    With the Cabinet approving the proposal, the Insurance Laws (Amendment) Bill is likely to be taken up by Parliament for passage in the forthcoming Winter Session. The bill introduced in RajyaSabha in December 2008 proposes to increase the foreign direct investment (FDI) limit in the insurance sector to 49 per cent. During the last decade (2001-02 to 2011-12), the market share of the public sector insurers has decreased due to new entrants in the private sector. A Zee Research Group (ZRG) analysis reveals that Life insurance Corporation (LIC) has been struggling to maintain the market share in segments, life and non life, since 1999, when 26 percent FDI was allowed in the insurance sector.

    Public sector insurer, Life Insurance Corporation of India (LIC), in its bread and butter segment (Life segment) has lost a significant market share from 98.65 percent in 2001-02 to 71.40 percent in 2011-12. On the other hand, during the corresponding period, the market share of private sector life insurers has increased from 1.35 percent to 28.6 percent. With regards to the market share of LIC in the non-life segment has decreased to 58.46 percent in 2011-12 from 95.91 percent in 2001-02. The massive potential in the Indian life and non-life insurance sector has encouraged large private financial services companies to form joint ventures with global insurers. Some of the prominent private players of this sector include the names of Bajaj Allianz, Birla Sunlife, ICICI Prudential, Tata AIG, HDFC Standard Life, Reliance Life and Max Life and so on.

    FDI IN CIVIL AVIATION SECTOR:

    Foreign airlines can now pick up 49 percent stake in India's domestic carriers, a step that is expected to give a boost to cash-strapped aviation industry. The Cabinet Committee on Economic Affairs on Friday approved the proposal which would pave way for much-needed equity infusion into India's airlines passing through acute turbulence as most of them are in terrible need of funds for operations.

    "The cabinet approved the proposal of allowing foreign airlines to pick upto 49 per cent stakes in Indian carrier. Though FDI of upto 49 percent, 75 percent and 100 per cent was there in aviation sector, foreign airlines were not allowed. Current FDI norms allow foreign investors, not related to airline business, to directly or indirectly own an equity stake of up to 49 percent in Indian carrier. Allowing foreign airlines to pick up stakes in Indian carriers has been a long-pending demand of the aviation sector. Most of the Indian carriers are suffering losses because of high taxes on jet fuel, rising airport fees, costlier loans, poor infrastructure and cut-throat competition. Except IndiGo, all airlines have posted losses in the financial year ending on March 31 2012.

    Kingfisher Airlines, which is burdened with a debt of over Rs 7,000 crore, has been in the forefront of pushing for permission to allow foreign airlines to invest in domestic carriers.
    Though Kingfisher has been pushing for FDI to boost the sector, Jet Airways and IndiGo have expressed reservations saying allowing global players in would lead to cartelisation and takeovers of Indian carriers.

    The opening of the sector to foreign airlines may, however, bring good news for passengers who would benefit from more competitive fares, better product and services and better international connectivity.

    CONCLUSIONS:

    Foreign direct investment plays an important role in India's dynamic growth. The examples are software or services industry, two-wheeler, automobile and auto-component industries, electronics and telecommunications. FDI in these industries expanded home and export markets, benefitted consumers, generated employment, increased productivity and wages and generated externalities to local firms.

    FDI in the retail sector, supported by effective local institutions, can play similar role. The most important dimension of the possible benefits is generation of world class supply chain in India which will decrease transaction, information and production costs of business and expand markets significantly. As long as the foreign players such as Wal-Mart do pricing based on long run average costs, the benefits will accrue to consumers and farmers.

    The main role of government is to establish and implement effective and autonomous regulatory institutions- restraining anti-competitive conduct by firms, labour and environmental regulation. The government has to make credible commitments of its policies. Agents react differently if they believe that the reform is only political window-dressing and most of it will be retracted in the face of opposition. This behavior has a significant effect on the success of the reforms and the time it takes for the reform process. If the government acts opportunistically in changing its policies, it sends signal of non-credible commitments which discourages investments especially in durable assets (with high fixed and sunk costs).

    The study concludes by government must target at attracting specific types of FDI that will be able to generate spill over's effects in the overall economy like investing in human capital, R&D activities, environmental issues, productive capacity, sectors with high income elasticity of demand. The policy makers should focus more on attracting diverse types of FDI and should design policies where foreign investment can be utilized as means of enhancing domestic production, savings and exports and also as medium of technological learning and diffusion and also in providing access to the external market.

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