MACRO ECONOMIC ENVIRONMENT

A Presentation by:

Aanchal Narang- 241

Anil Bhatia- 244

Monica Mahalwal- 265

Shubhankar Sorkar- 288

Parul Gupta- 297

INTRODUCTION 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.

It usually involves participation in management, joint venture, transfer of technology and expertise.

FDI can be classified:

Inward FDI and Outward FDI

FDI IN INDIA A recent UNCTAD survey projected India as the second most

important FDI destination (after China) for transnational corporations during 2010–2012.

The sectors which attracted higher inflows were services, telecommunication, construction activities and computer software and hardware.

Mauritius, Singapore, the US and the UK were among the leading sources of FDI.

In 2008-09, FDI stood at $27.3 billion.

FDI in 2009-10 was $24.2 billion

In 2010-11, FDI into India declined to $19.43 billion, a significant decrease from both 2008 and 2009

Foreign direct investment (FDI) in India may cross $35 billion in 2011-2012 as against $19.4 billion in the last financial year

FDI BENEFITS

Economic Growth

Trade

Employment and skill levels

Technology diffusion and knowledge

transfer

Linkages and spillover to

domestic firms

OBJECTIVE OF THE STUDY

The objective of this study being conducted is:

To study the trends and patterns of flow of FDI.

To explore the sector wise distribution of FDI inflows in order to point out the dominating sector which has attracted the major share

To assess the determinants of FDI inflows.

To evaluate the impact of FDI on the Indian Economy.

RESEARCH METHODOLOGY The study is based on secondary data.

The required data has been collected from various sources i.e. Asian Development Bank’s Reports, various Bulletins of Reserve Bank of India, publications from Ministry of Commerce, Govt. of India, Economic and Social Survey of Asia and from websites of World Bank, IMF, WTO, RBI, UNCTAD etc.

HYPOTHESIS The study has been taken up with the following hypothesis:

Flow of FDI shows a positive trend over the period 1991-2011.

FDI has had a positive impact on economic growth of the country.

0

5

10

15

20

25

30

2005-06 2006-07 2007-08 2008-09 2009-10

YEARS

AMOUNT (in US $ bn) FDI INFLOWS IN INDIA

TOP INVESTING COUNTRIES

53%11%

9%

7%

5%4% 4% 3%

2% 2% Mauritius

Singapore

USA

UK

Netherlands

Japan

Cyprus

Germany

UAE

France

SECTOR WISE DISTRIBUTION

31%

13%

12%

11%

10%

6%

6%4% 4%

3%

Services Sector

Computer Software & hardware

Telecommunications

Housing & real Estate

Construction Activities

Power

Automobile Industry

Metallurgical Industries

Petroleum & Natural Gas

Chemicals

SECTORAL ANALYSIS

MANUFACTURING SECTOR

India ranks 2nd most favored destination for foreign investments

after China.

India ranks among the top 12 producers of manufacturing value

added (MVA).

In textiles, the country is ranked 4th after China, USA and Italy.

Ranked 5th in electrical machinery and apparatus.

6th position in the basic metals category

7th in chemicals and chemical products

10th in leather, leather products, refined petroleum

products and nuclear fuel

12th in machinery and equipment and motor vehicles.

SERVICE SECTOR India's large service industry accounts for more than 50% of

the country's GDP.

Attracted $3.12 billion FDI in the first seven months of 2009-10

22 per cent of the total FDI inflows of $17.64 billion in the April-October for service sector

In 2008-09, attracted the maximum FDI worth USD 6.11 billion

CURRENT ISSUES WITH FDI IN SERVICES SECTOR

Very weak linkages of service sector with the Indian economy (only few cities).

Requires highly skilled workers.

Employee Welfare in time of crisis.

FDI IN RETAIL- ADVANTAGES

Generates huge employment

Increased investment in technology

The huge tax revenue generated.

The consumer gains from the wide variety of choices and a

more diversified basket.

FDI IN RETAIL-DRAWBACKS Foreign Players would displace the unorganized retailers

because of their superior financial strengths.

The entry of large global retailers such as Wal-Mart would kill local shops and millions of jobs.

Increase in real estate prices and marginalize domestic entrepreneurs

TRADING SECTOR This sector shows an exponential rise in inflows from 2006

onwards.

Total numbers of 20 technical and 1111 financial collaborations have been approved since 2005.

Trading for wholesale received highest percentage (84.25%) of total FDI inflow followed by trading (for exports) with 9.04%, e-commerce with (2.38%) during 2006-08 2008.

CONSULTANCY SECTOR Consultancy Sector received US$ 1.1 bn which is 1.14% of

total inflows received since 2008.

Mumbai (38.76%) and New Delhi (13.01%) received major percentages of inflow .

Out of the 125 technology transfers, 40 technical collaborations are approved with USA, 21 with UK, and 14 with Germany.

EDUCATION SECTOR

100% FDI is allowed in education sector.

India with the added advantage of having large pool of skilled people with secondary and tertiary level of education attracts foreign firms in science, R & D, and high technology products and services.

CONSTRUCTION SECTOR The amount of FDI till Dec. 2008 is US$ 4.9 billion which is

6.15% of the total inflows received .

In India Delhi, Mumbai, and Hyderabad receives maximum amount (viz. US$ 1245.61, 1000.5, and 943.22 billion) of investment.

Out of the total technology transfers ,9 technical and 223 financial collaborations have been approved till December 2008

AUTOMOBILE INDUSTRY

FDI inflows during Jan 2005 to Dec. 2009 is US$ 3.2 billion which is 4.09% of the total inflows received.

It ranks 5th in the list of sectors in terms of cumulative FDI approved from August 1991 to Dec 2008.

In India Mumbai, New Delhi and Ahmedabad received major chunks of investment i.e. 36.98%, 26.63% and 9.47%).

COMPUTER HARDWARE AND SOFTWARE

This industry fetched 3636 numbers of foreign collaborations out of which, 125 are technical and 3511 are financial in nature.

Also it received US$ 8.9 billion which constitute 11.43% of the total FDI inflows during the period during 2005-2007.

Among Indian locations Mumbai received 22.44% of investment followed by Bangalore (10.8%), and Chennai (9.90%).

TELECOMMUNICATION SECTOR

Telecommunication sector ranks 2nd in the list of sectors in terms of cumulative FDI.

Out of cumulative FDI inflows , this Sector received an inflow of US$ 8.2 billion, which is 8.4% of the total FDI inflows during last few years.

New Delhi attracts highest percentage (32.58%) of FDI inflows after 2005.

FINDINGS

FDI AND ECONOMIC DEVELOPMENT FDI has an important impact on country’s trade balance,

increasing labour standards and skills, transfer of technology, skills and the general business climate.

FDI also provides an opportunity for technological transfer and up gradation, access to global managerial skills and practices ,optimal utilization of human capabilities and natural resources, making industry internationally competitive,opening up export markets,access to international quality goods and services and augmenting employment opportunities.

India’s share in global FDI has increased considerably, but the pace of FDI inflows has been slower than China, Singapore, Brazil, and Russia.

Indian economy is largely agriculture based andt here is plenty of scope in food processing, agriculture services and agriculture machinery. FDI in this sector should be encouraged.

Research and Development expenditure shows unexpected negative sign. This could be attributed to the fact that R&D sector is not receiving enough FDI as per its requirement. but this sector is gaining more attention in recent years.

FINDINGS AT SECTORAL LEVEL

INFRASTRUCTURE SECTOR Infrastructure sector received 28.6 percent of total FDI

inflows from 2008 to 2010

Initially, the inflows were low but there is a sharp rise in FDI inflows from 2006 onwards

Mauritius (with 56.3 percent) and Singapore (with 8.54 percent) are the two major investors in this sector.

Infrastructure sector received a total of. 2528 numbers of foreign collaborations in India.

SERVICE SECTOR

Service sector in India attracts the maximum FDI inflows amounting to Rs. 106992 crores,

Service sector has been able to put the economy on a proper gliding path by contributing 55 percent to GDP

There is a continuously increasing trend of FDI inflows in services sector with a steep rise in the inflows from 2006 onwards.

AUTOMOBILE SECTOR The FDI in Automobile Industry has experienced huge growth in

the past few years that contributes for 6% of total FDI inflows from 2006-2011.

The increase in the demand for cars and other vehicles is powered by the increase in the levels of disposable income in India.

The introduction of tailor made finance schemes, easy repayment schemes has also helped the growth of the automobile sector.

EDUCATION SECTOR Education sector attracted foreign investors in the present

decade and received a whopping 308.28 million of FDI inflows during 2010.

Mauritius remains top on the chart of investing countries investing in education sector

Bangalore received highest percentage of 80.14% of FDI inflows in India.

HOUSING AND REAL ESTATE SECTOR Housing and Real Estate sector received cumulative FDI inflows

in India for Rs 37,615crore upto 2010.

New Delhi and Mumbai are the two top cities which received highest percentage of FDI inflows (34.7% and 29.8%).

Housing sector shows an exponentially increasing trend after 2006 as major investment (61.96%) in this sector came from Mauritius.

CONSULTANCY SECTOR Consultancy sector received 1.14% of total FDI inflows during

2000 to 2008.

Consultancy is one sector which is still in its development phase.

Among the subsectors of consultancy sector management services received highest amount of FDI inflows apart from marketing and design and engineering services.

In India, Mumbai received heavy investment in the consultancy sector. Consultancy sector shows a continuous increasing trend of FDI inflows from 2006 onwards.

SECTOR WISE RANKING OF FDI INFLOWS

RECOMMENDATIONS The government should provide additional incentives to foreign

investors to invest in states where the level of FDI inflows is quite low.

Government should ensure the equitable distribution of inflows among states and must give more freedom to states, so that they can attract inflows at their own level.

Government must target at attracting specific types of FDI that will be able to generate spillovers 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.

Government must exercise strict control over inefficient bureaucracy, red - tapism, and the rampant corruption, so that investor’s confidence can be maintained for attracting more FDI inflows to India.

CONCLUSION

The increased flow of FDI in a country has given a major boost to the country's economy.

FDI has provided better access to technologies for the local economy.

FDI has lead to indirect productivity gains through spillovers.

Multinational firms have increased the degree of competition in host-country markets which will force existing inefficient firms to invest more in physical or human capital.

• Service sector has been the most sought after sector in India for Foreign Direct Investments.

• India, with its skilled labor and manpower has the potential to overtake China as the most preferred destination for Foreign Investments.

• Hence measures must be taken in order to ensure that the flow of FDI in our country continues to grow.

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