Chapter 4

FDI IN INDIA: POLICIES AND TRENDS

This chapter studies the evolution of FDI policies in independent India and the trends of

FDI inflows into India from a historical as well as contemporary perspective. Official

views regarding the role of FDI in India's economic development, and the policies

governing FDI, have changed significantly since the beginning of the decade of the

1990s. Till the 1990s, FDI policies in India were heavily restrictive with majority

foreign equity participation permitted only in select export-oriented, high technology

industries. FDI was viewed essentially as an instrument for fulfilling the technological

requirements in sectors, where indigenous technology was underdeveloped. However, a

radical change in the views regarding FDI's role in the economic progress of the nation

took place during the early 1990s. The new outlook was a part of the overall process of

economic reforms initiated during the time, which entailed transition from a state-

dominated, inward-looking policy regime to a more market-oriented, deregulated policy

framework. Accordingly, FDI policies during the 1990s and thereafter, have also

become progressively more liberal with gradual lifting of external capital controls and

simplification of procedural requirements. '

In view of the sharp differences in policy stances before and after the early 1990s, this

chapter has been divided into two sections. The first examines FDI policies and trends

during the period 1948-1990, i.e. since independence till the beginning of economic

70

reforms. The second focuses on policy developments and FDI inflows from 1991

onward.

4.1 FDI POLICIES AND TRENDS: 1948-1990

The section is divided into two parts. Part I examines the FDI policies and part 2

discusses the trends.

4.1.1 FDI Policies

Foreign investment policies adopted by India during the 1950s and 1960s can be

described as pragmatic, but cautious. There was a clear recognition of the importance of

private capital in supplementing domestic savings. The official position on foreign

investment was articulated in a statement made to the Constituent Assembly on April 6,

1949, by the then Prime Minister of India, Pandit Jawaharlal Nehru. The salient features

of the statement20 were:

1. Foreign capital was an important supplement to domestic savmgs as far as

economic and technological progress of the nation was concerned.

2. Private and foreign investors were not to be discriminated between. Foreign

investors'were to be allowed full freedom in remittance of profit and repatriation

of capital. They were also to be compensated in a just manner in the event of

nationalisation.

Despite following a reasonably liberal foreign investment policy, permission to invest

was allowed only after careful scrutiny of the proposed areas of investment. This was

felt necessary since India had balance of payments difficulties, which the authorities did

20 See IIC ( 1965), p. 7.

71

not wish to aggravate, given the country's unconditional assurance of remittances and

repatriation to foreign investors. FDI, therefore, was attempted to be channelised into

industries, where the requirements of foreign capital were more urgent than others. As a

result of this cautious approach, till the middle of the 1950s, FDI had a largely limited

presence in the Indian economy (except the oil sector). The situation, however, changed

from the mid-fifties with the onset oflndia's 2nd Five-Year Plan.

The 2nd Five-Year Plan awarded topmost priority to rapid industrialisation of the

economy. This objective was attempted to be realised by outlining a new industrial

policy, which was given shape through the Industrial Policy Resolution, 1956. One of

the thrust areas of the new industrial policy was on enhancing the technological

capabilities of the Indian industry for producing high-quality capital, intermediate and

consumer goods. This thrust increased the importance of securing FDI given that FDI

was believed to act as a vehicle of technology transfer from advanced industrialised

nations.

Apart from the desire to achieve technological self-reliance, shortage of foreign

exchange in the Indian economy also increased the importance of securing FDI. During

1955-56 to 1957-58, India's foreign exchange reserves reduced by almost half on

account of an expanding trade deficit. 21 While foreign exchange difficulties had earlier

led to a • selective policy for FDI (on account of repatriation and remittance

considerations), aggravation of the difficulties increased the acceptance of FDI (Kidron

21 Several reasons were responsible for the growing trade deficit. These include: a) Increase in import prices following the Suez War, which also dampened world trade and reduced the prices for Indian exports. b) Heavy foreign exchange outgo on food imports due to bad harvests. c) Step-up in defence expenditure involving large imports on account of growing hostilities in the country's neighbourhood. d)

72

1965), as it was realised that the country had limited foreign exchange resources for

obtaining imported machinery and equipment for domestic industry.

During the late 1950s and early 1960s, different fiscal incentives (e.g. concessional

rates of dividend tax for foreign investors, progressive lowering of taxes on technical

service fees and income from royalties' etc.) were offered to encourage FDI. There are

also instances of FDI being permitted in industries reserved exclusively for the public

sector.22 As a result of the policy encouragement, as well as the stringent import

restrictions imposed due to foreign exchange constraints, FDI emerged as a viable

option for servicing the domestic Indian market. This is evident from the increase in

number of foreign collaboration approvals from 81 in 1957 to 241 in 1965.23

FDI policies, however, became increasingly regulated during the decade of the 1970s.

Imposition of controls on FDI during this period can be traced to the heavy policy

emphasis on import-substitution. There was a growing feeling among the authorities

that reliance on technology imports had increased the foreign dependence of the Indian

industry (as recorded in the Report of the Industrial Licensing Policy Enquiry

Committee, 1968). It was also felt that domestic companies were resorting to 'over-

import' of technology for expanding market shares (Martinussen, 1988). Thus, in an

effort to reduce the foreign dependence of Indian industry and restrict the flow of

imported technology into 'inessential' areas, FDI was sought to be limited to only a .few

industries, which required sophisticated technology, but were lacking in indigenous

A surge in private imports during the mid-1950s, which had much to do with profligacy in government expenditure on inessential areas involving foreign exchange outgo. See Kidron (1965). 22 Phillips Petroleum of USA had a minority stake in Cochin Refinery Ltd. - a public sector undertaking. The International Telephone and Telegraphs Corporation of the US also collaborated with the Government in a similar manner for manufacturing telephone equipment. See IIC (1965), p.9.

73

technological capabilities. At the same time, there was a deliberate attempt to divert

FDI from consumer goods industries to capital and intermediate goods (Martinussen,

1988).

From a broader perspective, the regulations imposed on FDI were also part of the

ongoing efforts aiming to extend state control in various sectors of the economy. The

late 1960s and early 1970s saw promulgation of restrictive legislations like the

Monopolies and Restrictive Trade Practices (MRTP) Act (1969), the Patent Act (1970)

and nationalisation of banks, insurance companies, coal mines etc. Fears in policy

circles over powerful foreign firms subverting national interests were attempted to be

alleviated by making them divest holdings in favour oflndian entities.

The Industrial Policy Resolution, 1973, restricted foreign participation to industries that

were export-oriented and strategically important for long term growth prospects of the

country, but outside the purview of items reserved for exclusive manufacture by the

public sector and the small-scale sector.Z4 The most restrictive controls on foreign

investment, however, were enforced through the enactment of the Foreign Exchange

Regulation Act (FERA), 1973, which came into force on January 1, 1974. FERA was

particularly noteworthy on account of its conscious effort to discriminate between

Indian and foreign investors. Section 29 of the FERA related to branches of foreign

companies operating in India and Indian joint stock companies having foreign

participation. The main features of the regulatory framework laid down by the FERA

were as follows: 25

23 See RBI (1968), p.l. 24 See Ministry of Commerce and Industry, Government oflndia (2001). 25 See RBI (1985) p. 5-6 and Martinussen (1988) pp.62-63.

74

1. All companies (other than banking companies) incorporated outside India, and

Indian companies with more than 40 per cent equity participation were required to

obtain fresh permission from the RBI for carrying on business.

2. All branches of foreign companies were required to convert themselves into

Indian companies with minimum 60 per cent equity participation.

3. All subsidiaries of foreign companies were to bring down their foreign equity

share to 40 per cent or less.

While foreign equity levels across-the-board were announced to be brought down to 40

per cent, there were some exceptions where the 40 per cent ceiling could be exceeded.

These related to companies engaged in activities that were predominantly export­

oriented, or producing items requiring sophisticated technology, and in tea plantation.

These companies had to satisfy certain conditions, which related to exporting a

minimum proportion of their annual turnovers and productions, for expanding equity

limits beyond 40 per cent.

Like FERA (1973), the Patent Act (1970), which replaced the erstwhile Patent Act

( 1911 ), was also argued to be a deterrent for FDI in Indian industry (Gupta and Mehra,

1995). The Act, aiming to facilitate creation of indigenous technological capability

(Bhaduri, 2001), confined grant of patents only to processes (and not products, as was

the case earlier) and decided to grant patents only to 'new' products manufactured in

India, not to imports. Duration of patents granted was also reduced to seven years.

Promulgation of the Patent Act (1970) sharply reduced the protection available to

intellectual properties of foreign firms, thereby reducing the possibilities of exploiting

their ownership advantages.

75

In the Industrial Policy Resolution, 1977, a list of industries was announced where no

foreign collaboration (financial or technical) was considered necessaD;, since

indigenous technology was fully developed in these areas. Foreign companies, which

had brought down their equity levels to 40 per cent in line with the FERA provisions,

however, were assured treatment on par with their Indian counterparts. Despite

imposition of other sweeping controls, no restrictions, however, were imposed on

remittance of profits, royalties, dividends and repatriation of capital.

4.1.2 FDI Trends

A time-series of annual foreign investment flows into the Indian economy from 1948

onward is available from the BOP statistics compiled by RBI. 26 This data, however, has

some limitations, which constrains extensive statistical analysis. These are:

1. A continuous time series is available only from 1955 onward.

2. Beginning from 1953, till 1962, annual investment figures are available for

calendar years. From 1963-64 onward, the data is available for financial years.

3. Till 1963-64, annual net inflows of foreign investment are not disaggregated

into direct and portfolio inflows. 'Gross inflow' for a particular year provides

data on equity flows, which include portfolio flows as well. Disaggregated

figures are available only from 1964-65 onward.

4. Data for the decade of 1980s is not available since the RBI conducted no survey

on foreign investment during the period.

26 See RBI (1993)

76

FDI stocks

Table 4.1 gives a time-series profile (the profile becomes continuous only from 1955

onward) ofFDI and portfolio stocks (at the end ofthe year) from the year 1948 onward.

Table 4.1: FDI and Portfolio Stocks (1948-1979-80) (in Rs crore)

Year FDI Portfolio Total Foreign Share of FDI in Share of Portfolio Investment Total Foreign in Total Foreign

Investment(%) Investment(%) 1948 211.1 44.7 255.8 82.5 17.5 1953 326.3 65.7 392 83.2 16.8 1955 386.5 55.9 442.4 87.3 12.7 1956 409.7 68.6 478.3 85.6 14.4 1957 430.6 101.4 532 80.9 19.1 1958 434.1 128.4 562.5 77.2 22.8 1959 443.7 139.1 582.8 76.1 23.9 1960 495.7 138.9 634.6 78.1 21.9 1961 527.2 152.6 679.8 77.6 22.4 1962 567.6 167.9 735.5 77.2 22.8

1963-64 565.5 63.5 629 89.9 10.1 1964-65 611.9 65.6 677.5 903 9.7 1965-66 628.2 67.9 696.1 90.2 9.8 1966-67 692 74.3 766.3 90.3 9.7 1967-68 ! 710.1 86.5 796.6 89.1 10.9 1968-69 737.7 88.7 826.4 89.3 10.7 1969-70 735.4 108.9 844.3 87.1 12.9 1970-71 767.3 111.4 878.7 87.3 12.7 1971-72 816.4 112.3 928.7 87.9 12.1 1972-73 867 129.1 996.1 87.0 13.0 1973-74 916.9 131.3 1048.2 87.4 12.6 1974-75 973.3 130.6 1103.9 88.2 11.8 1975-76 957.1 131.1 1088.2 87.9 12.1 1976-77 920.2 131.8 1052 87.5 12.5 1977-78 876 139.7 1015.7 86.2 13.8 1978-79 875.4 140.4 1015.8 86.2 13.8 1979-80 933.2 141.5 1074.7 86.8 13.2

Source: RBI (1993). Main features:

1. Beginning from 1948, the stock of FDI in the Indian economy increased

continuously ti111974-75. Thereafter, there was a decline in the stock ofFDI for

three years. This decline can be largely attributed to the enforcement of the

FERA from January 1, 1974. The sharp drop in the volume of fresh flows (as

77

can be seen from Table 4.2 later), as well as divestment of foreign equity by

branches and subsidiaries subsequent to promulgation of FERA, explains the

reduction in the volume ofFDI stock after the middle of the 1970s.

2. Except for a brief period during 1958-1962, the share of portfolio stocks in total

stock of foreign investment remained below 15 per cent for· the entire time

series. Thus, longer term FDI flows were clearly the dominant form of foreign

investment for t~e period under consideration, accounting for more than four

fifth of the total stock of foreign investment.

FDI flows

A time-series of annual flows of FDI and portfolio investment (1964-65 to 1979-80) is

given in Table 4.2.

Table 4.2: Annual FDI and Portfolio Flows and Share of the Flows in Total Foreign Investment (1964-65- 1979-80) (in Rs crore)

Share of FDI in Share of Portfolio total foreign in total foreign

Year FDI Portfolio Total investment(%) investment(%) ---

1964-65 44.9 2.1 47 95.5 4.5 ·--

1965-66 15.4 2.3 17.7 87.0 13.0

1966-67 25.4 6.4 31.8 79.9 20.1

1967-68 25.7 12.3 38 67.6 32.4

1968-69 27.3 2.2 29.5 92.5 7.5

1969-70 23.1 2.5 25.6 90.2 9.8

1970-71 34.1 2.5 36.6 93.2 6.8

1971-72 46.3 0.7 47 98.5 1.5

1972-73 29.1 2 31.1 93,6 6.4

1973-74 57.1 3.2 60.3 94.7 5.3

1974-75 80.5 -0.8 79.7 110.0 -10.0

1975-76 2.4 0.5 2.9 82.8 17.2

1976-77 9.2 0.7 9.9 92.9 7.1

1977-78 -5.5 7.9 2.4 -229.0 329.0

1978-79 39.6 0.7 40.3 98.2 1.8

1979-80 76.1 1.1 77.2 98.6 1.4 Source:FUBI(l993)

78

Main features

1. Annual FDI inflows reached a peak ofRs 80.5 crore in 1974-75. Thereafter, the

inflows dropped sharply during the next three years and became net outflows

during 1977-78. The trend clearly points to the effect of the FERA in bringing

down vo1ume of fresh inflows and corroborates our findings in the earlier

analysis of stocks.

2. As proportions of total foreign investment inflows, annual FDI inflows, on an

average, comprised 91 per cent of the total inflows. While this share was

somewhat lower during the middle of the 1960s (1965-66 to 1967-68), it rose

sharply again from the late 1960s.

Annual FDI inflows reflected in. Table 4.2 have been aggregated after taking into

account gross inflows for foreign controlled rupee companies27 and branches of foreign

companies in India. It is possible to obtain clearer insights into the trend behaviour of

overall FDI inflows by examining the inflows through foreign controlled Rupee

companies and branches separately (Table 4.3). It is, however, mentionable that while

gross inflows data is available for foreign controlled Rupee companies, the data f~3r

branches pertains to net annual investment and therefore has negative values in certain

years.

27 Foreign controlled Rupee companies are Indian joint stock companies, including subsidiaries of foreign companies, and companies in which 40 per cent of equity share capital are held by foreign companies or their nominees. See RBI (1993) p.450.

79

Table 4.3: Annual FDI materialising through Foreign Controlled Rupee Companies and Branches (1964-65 -1979-80) (in Rs crore)

Years Foreign controlled

Branches Total FDI Rupee companies

1964-65 42.8 2.1 44.9

1965-66 33.5 -18.1 15.4

1966-67 25.6 -0.2 25.4

1967-68 30.8 -5.1 25.7

1968-69 30.8 -3.5 27.3

1969-70 35.6 -12.5 23.1

1970-71 38.1 -4 34.1

1971-72 37.6 8.7 46.3

1972-73 35.5 -6.4 29.1

1973-74 40.1 17 57.1

1974-75 95.5 -15 80.5

1975-76 48 -45.6 2.4

1976-77 42.1 -32.9 9.2

1977-78 60.1 -65.6 -5.5

1978-79 65 -25.4 39.6

1979-80 72.8 3.3 76.1 Source:FUBI(l993)

The pattern of inflows through foreign controlled rupee companies and branches

is depicted in Figure 4.1.

80

120 -

100 --

80-;-

60--

40 .'-­lnfl ow s 20 --(in Rs era re)

·80 --

Main features

Figure 4.1

Annual FDIInflows for Foreign Controlled Rupee Companies and Branches of Foreign Companies (1964-65 • 1979-80)

----

,~,

I I I I

I 1 I I

I 1 I I J \ //

I ' ' I I /

I ' ' / .... ____ ,..,"" -------- _..., ______ - _,..;,.,.

--------

Years - - - - For.cntld. Re cmpns. ~Branches

Foreign controlled Rupee companies

From 1966-67 onward, gross inflows of foreign controlled Rupee companies exhibit a

flat, almost horizontal trend, till 1973-74. Thereafter, the trend reaches a peak in 1974-

75 (Rs 95.5 crore) and declines during the following two years (1975-76 and1976-77).

The inflows are s'e.en to recover during the last two years of the period. The overall

decline in FDI inflows after 1974-75, therefore, can be traced to the reduction in FDI

from foreign controlled Rupe:e companies, since these enterprises were the main sources

ofFDI in India, as can be seen from Table 4.3.

81

Branches

Net investments by branches were almost consistently negative during the period except

for the years 1964-65, 1971-72, and 1973-74. What is, however, noticeable is that after

1973-74 net investment by branches declined to a trough ofRs -65.6 crore in 1978-79.

In the earlier years of the period, despite being negative, the amounts were not as high

as those during the later years of the period, underlying the effect of FERA guidelines

on branches of foreign companies.

4.2 FDI POLICIES AND TRENDS: 1991-2002

4.2.1 FDI Policies

During the 1990s and thereafter, FDI policies and procedures in India have undergone

radical transformations. From the selective, tightly controlled regulatory framework of

the 1970s and 1980s, FDI policies during the 1990s became progressively more liberhl,

bringing almost all sectors of the economy under their coverage. The policy I

transformation was on account of the government's increasing reliance on stable non-

debt creating long-term capital flows as a major source of funds for supplementing

domestic savings. The positive outlook towards FDI was a part of the paradigmatic shift

in the policy perspective towards future socio-economic development of the country

that occurred during the early 1990s. The new perspective led to introduction of

economic reforms for moving away from a rigidly controlled, inward-looking, state-

dominated economic framework to a more decontrolled, open and market-oriented

system. Strengthening of economic reforms through the 1990s and thereafter, has

82

resulted in progressive relaxation of FDI policies, accompanied by far-reaching reforms

in other sectors of the economy.

On July 24, 1991, the Government of India announced a new industrial poli£y. The

policy was significantly different from earlier industrial policies in terms of its emphasis

on encouragement of private entrepreneurship and initiative in industrial development.

Entry barriers to private participation in various industries were sought to be removed

by reducing the scope of industrial licensing, redefining the role of the public sector by

restricting its presence to only core areas of vital national importance, and withdrawing

several existing prohibitions under the MRTP Act (1969) relating to expansion of

industrial investment. The new policy also underlined the government's intention of

welcoming foreign investment in the country's industrial development by removing

several procedural controls on inflow ofFDI in domestic industries.

The main features of the new industrial policy with respect to foreign investment

were:28

1. Automatic approval for FDI upto 51 per cent in high-priority industries (the

list of such industries was given in Annexure III of the industrial policy

statement). In this regard, necessary changes were to be made in the FERA

(1973).29 However, automatic approval was subject to the amount of foreign

equity covering the foreign exchange requirement for imported capital goods.

2. For all companies receiving automatic approval for FDI upto 51 per cent in

line with the provisions of ( 1) above, payments of dividends were to be

28 See Ministry of Commerce and Industry, Government of India (2001); pp.15-16. 29 FERA (1973) has been subsequently withdrawn and replaced by the Foreign Exchange Management Act (FEMA), 1999.

83

balanced by export earnings over a period of seven years from the date of

commencement of production. 30

3. FDI in industries other than those mentioned in Annexure III of the policy

statement (including proposals upto 51 per cent FDI in high-priority

industries failing to meet the foreign exchange requirement in (1) above)

continued to be subject to existing procedures and required prior clearance.

4. Majority foreign equity holding upto 51 per cent was allowed for trading

enterprisesprimarily engaged in exports.

5. Foreign equity holding upto 51 per cent was also permitted in hotels and

tourism related industry. 31

6. It was not necessary for foreign equity proposals to be accompanied by

foreign technology agreements.

7. A special empowered Board was to be set up for nbgotiating with large

multinationals and approving FDI proposals in select areas.

Subsequent to the new industrial policy of 1991, several relaxations in FDI policies and

procedures have been announced at later dates. Details of these measures are provided

chronologically in Appendix 1. At present, FDI is permitted in almost all sectors

including the services sector, subject to the existing sectoral limits on FDI. For most

items/activities, FDI can be brought in through the automatic route administered by the

RBI. For the remaining items/activities, FDI proposals require government approval.

The details of sector-specific FDI ceilings and amount of FDI permitted under

automatic and government routes are given in Appendix 2.

30 See Ministry of Commerce and Industry, Government oflndia (2001); pp.15-16.

84

The highlights of the current FDI policy regime in India are given below:

Automatic approval

The bulk of incoming FDI proposals in different sectors qualify under the automatic

approval route. Under this route, FDI proposals do not require prior approval. However,

investors (including NRis and OCBs) are required to submit the necessary documents to

the RBI within 30 days after issue of shares to foreign investors. Certain categories of

FDI proposals, however, do not qualify for the automatic route. Such proposals require

prior approval from the government and are considered by the Foreign Investment

Promotion Board (FIPB).

Government approval

The FIPB is commonly referred to as the government route for FDI proposals. The

FIPB considers proposals, which belong to the following categories:

a. Proposals requiring industrial licences, which include:

~ Items requiring licences under the Industries (Development and

Regulation) Act, 1951.

~ FDI proposals involving more than 24 per cent share in equity capitals of

enterprises manufacturing items reserved for small-scale industries.

~ All items requiring licences in terms of the locational policy notified by

Government under the New Industrial Policy of 1991.

b. Proposals in which the foreign collaborator has a previous venture/tie-up in

India (the restriction does_ not apply to investments by multilateral financial

institutions (e.g. ADB, IFC, etc) as also for investment in IT sector).

31 See Ministry of Commerce and Industry, Government of India (2001); pp.15-16.

85

c. Proposals relating to acquisition of shares in an existing Indian company in

favour of a foreign/NRI/OCB investor.

d. Proposals falling outside notified sectoral policy/caps on FDI, or under sectors

in which FDI is not permitted.

NRls and OCBs

The existing FDI policies are more liberal for NRls (which also includes PIOs, i.e.

Persons of Indian Origin) and OCBs (overseas corporate bodies, which are companies

or other entities owned directly or indirectly to the extent of at least 60 per cent by

NRis). The liberal facilities comprise higher investment ceilings in different activities

vis-a-vis non-expatriate FDI and greater number of sectors permitted for investment.

Though over time the discrimination between NRI and non-NRI investors have reduced,

NRls continue to enjoy specific advantages in some-key sectors. For example, NRls and

OCBs can invest in several activities pertaining to housing and real estate, where FDI is

otherwise not permitted (except for development of integrated townships where I 00 per

cent FDI is permitted with government approval; see Appendix 2). Moreover, NRls can

also invest upto 100 per cent in domestic airlines (where non-NRI FDI is permitted only

up to 40 p'er cent). In general, NRls are permitted to invest through the automatic route

in all sectors excluding those falling under government approval.

Small scale industries

FDI in small scale industries is permitted upto 24 per cent of total equity capital. There

is, however, no bar on higher levels of FDI if the concerned unit agrees to surrender its

small scale status. As mentioned earlier, FDI proposals involving more than 24 per cent

share in equity capitals of enterprises manufacturing items reserved for small-scale

86

industries require prior government approval. However, even if such proposals get

approved, they are subject to a mandatory export obligation of 50 per cent of output.

Special Economic Zones (SEZs) and Industrial Parks

FDI upto 100 per cent is permitted under the automatic route for setting up Industrial

Park/Industrial Model Town/Special Economic Zones in the country, and for all

manufacturing activities in Special Economic Zones (SEZs), except for the following

activities:

o Arms and ammunition, explosives and allied items of defence equipments,

defence aircraft and warships;

o Atomic substances;

o Narcotics and psychotropic substances and hazardous chemicals;

o Distillation and brewing, of alcoholic drinks; and cigarettes/cigars and

manufactured tobacco substitutes.

FDI Policies post-1991: A Critical Analysis

FDI policies underwent comprehensive changes during the 1990s. The strict

regulations, prevailing earlier, gave way to a more decontrolled framework 'facilitating

automatic entry ofFDI in practically all sectors of the economy. Sector-specific ceilings

on FDI, however, still exist, indicating the extents by which FDI can flow into the

concerned sectors through the automatic route. Apart from a few sectors like banking,

insurance; basic_ and cellular telecom services, and defence, majority foreign equity

participation is allowed in all other sectors. Besides, incoming FDI is no longer

87

contingent upon technology transfer, foreign exchange requirements or export

obligations.

The Industrial Policy Statement of 1991 marked the onset of the new policies. The new .

industrial policy was drafted against the backdrop of probably the most serious balance

of payments difficulties experienced by independent India. The external sector crisis

highlighted some major structural problems of the Indian economy. Foremost among

these was the country's heavy reliance on high-cost external debt for financing balance

of payments deficits. While large inflows of concessional assistance helped in covering

the balance of payments deficits during the decades of the fifties, sixties, and seventies,

non-concessional loans on market terms were the main sources of finance during the

eighties (Jalan, 1992), leading to rapid increase in debt-service obligations. It was,

therefore, imperative for the country to reduce reliance on debt flows in favour of

stable, non-debt creating flows like FDI.

Liberalisation of FDI policies also requires to be viewed in the light of the widespread

economic restructuring initiated in the Indian economy during the 1990s. Right from the

beginning of the nineties, the country made efforts for moving away from the inward­

looking development strategy of import substitution that it had followed so far, to a

more liberal import regime, by gradually reducing import restrictions. Removal of

import restrictions was accompanied by other significant measur.es like moving to a

market-based exchange rate management system, convertibility of the Rupee in the

current account of the balance of payments and phased withdrawal of restrictions on

88

capital account transactions. The highly restrictive FERA ( 1973) has smce been

replaced by the Foreign Exchange Management Act (FEMA), 1999.32

Prior to the 1990s, ·given the heavy protection offered to domestic industries through

tariff and other trade barriers, FDI in India was largely of the 'tariff-jumping' variety.

The welfare effects of FDI induced by high levels of effective protection have been

found to be weak for host countries (Lall and Streeten, 1977). This policy distortion,

however, has been corrected in the 1990s by progressively reducing tariff rates on

imports.

A review of the FDI policies during the nineties and thereafter, indicates that though the

system of automatic approval was introduced as early as in 1991, its scope remained

restricted till February 2000. Since February 2000, the coverage of the automatic route

has been significantly expanded. In some areas, however, which are mostly of a

strategic nature, FDI continues to require prior government approval (e.g.

telecommunications, atomic minerals, defence and strategic industries, tea plantations,

broadcasting, petroleum (other than refining), postal services, satellite operations etc.).

It is clear, therefore, that despite providing significant relaxation's, the government

wishes to retain some policy control over FDI in select industries and services

32FEMA (1999) has replaced FERA (1973) from June 1, 2000. Under FEMA (1999), there are no restrictions on current account transactions involving foreign exchange. Capital account transactions (e.g. investment by non-resident entities in India and investment by Indian entities abroad) continue to be regulated by the RBI. FEMA indicates a move from a regulatory arrangement in the Indian foreign exchange market to a management mechanism.

89

4.2.2 FDI Trends

This section attempts to study the pattern of FDI inflows into India after the

liberalisation of the FDI policies from the early 1990s. The analysis is based upon data

on foreign investment inflows provided by the RBI. It is mentionable in this regard that

the RBI revised the annual data on FDI inflows from the year 2000-01 onward after

adopting an expanded definition for FDI flows. While for the earlier years, FDI inflows ·

comprise of only equity capital, data from 2000-01 onward include reinvested earnings

and other capital (inter-corporate debt transactions of FDI entities), in addition to equity

capital, as components of FDI. Data on FDI inflows from 2000-01 therefore, is not

strictly comparable with the data for the earlier years.33

FDI and Portfolio flows: A Comparison

The Table below indicates the volume of annual FDI and portfolio investment inflows

into India from 1990-91 to 2002-03.

Table 4 4· Annual FDI and Portfolio Inflows (1990-91- 2003-04) (in US$ million)

Total Foreign FDI as% of Portfolio Investment

Year FDI Portfolio Total Foreign as % of Total Foreign Investment

Investment Investment 1990-91 97 6 103 94.2 5.8 1991-92 129 4 133 97.0 3.0 1992-93 315 244 559 56.4 43.6 1993-94 586 3567 4153 14.1 85.9 1994-95 1314 3824 5138 25.6 74.4 1995-96 2144 2748 4892 43.8 56.2 1996-97 2821 3312 6133 46.0 54.0 1997-98 3557 1828 5385 66.1 33.9 1998-99 2462 -61 2401 102.5 -2.5 1999-00 2155 3026 5181 41.6 58.4 2000-01 4029 2760 6789 59.3 40.7 2001-02 6131 2021 8152 75.2 24.8

·--2002-03 4660 979 5639 82.6 17.4

Source: RBI (2004); Note: Figures from 2000-01 onward are estimates subsequently revised by RBI.

33 See RBI (May, 2004)

90

The trends of FDI and portfolio investment inflows are depicted pictorially in Figure

4.2.·

Figure 4.2

FDI and Portfolio inflows : 1990-91 - 2002-03

7000.---------------------------------~--------------------~

6000.

c .2 5000-

.E 4ooo-~

~ 3000-

..:. 2000 -

~ 0 1000-

;;::: c

0 -

-1000 - 1990- 1991- 1992- 1993- 1994- 1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002: 91 92 93 94 95 96 97 98 99 00 01 02 03

I -- -- -· FDI Portfolio : Years

Main features:

The following are the highlights of Table 4.4 and Figure 4.2.

1. In the early years of the 1990s, FDI inflows were the dominant contributors to

total foreign investment flows. Thus, the trend was similar to that in the pre-reform

period. From 1993-94 onward, portfolio inflows replaced FDI as the more dominant

contributor. This was probably on account of the upbeat trends in the Indian stock

market during the time, which is likely to have encouraged large portfolio inflows.

Portfolio inflows are seen to have declined sharply during1997-98 and 1998-99, which

can be attributed to the depressed state of Indian stock markets during the period, as

well as the overall reduction in portfolio flows to South East Asia, following the

outbreak of the East Asian crisis in middle of 1997.

91

2. FDI inflows on the other hand, despite being generally lower than portfolio

inflows in volume maintained an increasing trend till 1997-98. Thereafter, there was a

decline for two years (1998-99 and 1999-00), till a revival again from 2000-01 onward.

The decline in FDI inflows during 1998-99 and 1999-00 can probably be traced to

exogenous factors like an unstable political climate (two general elections to the Indian

Parliament were held during the period), imposition of economic sanctions after the

nuclear explosion at Pokhran (May, 1998), investor apprehensions arising from political

uncertainties in India's neighbourhood (e.g. the Kargil War in June 1999), and

disturbing developments like the Gujarat earthquake (January 2000). The recovery of

FDI inflows in the later years can be explained by non-occurrence of exogenous shocks,

and implementation of significantly liberal policy measures, particularly expansion of

/ the scope of the automatic route in early 200034 (see Appendix 1).

Route-wise FDI inflows

As mentioned earlier, FDI inflows in India materialise either through the automatic

route, or through the government route administered by the FIPB. The table below

indicates the volume of incoming FDI through the two routes over the period 1991-92

to 2002-03 and also their respective shares to total FDI.

34 It should be noted that FDI figures from 2000-01 onward relate to an expanded definition ofFDI, and therefore, are not strictly comparable with figures for earlier years.

92

:rable 4.5: FDI inflows through FIPB and Automatic Routes (1991-92 to 2002-03) (In US$ million)

Year Total FDI FIPB Automatic Share of FIPB Share of route in Total FDI Automatic route

in Total FDI 1991-92 129 66 0 51.16 0.00 1992-93 315 222 42 70.48 13.33 1993-94 586 280 89 47.78 15.19 1994-95 1314 701 171 53.35 13.01 1995-96 2144 1249 169 58.26 7.88 1996-97 2821 1922 135 68.13 4.79 1997-98 3557 2754 202 77.42 5.68 1998-99 2462 1821 179 73.96 7.27 1999-00 2155 1410 171 65.43 7.94 2000-01 4029 1456 454 36.14 11.27 2001-02 6131 2221 767 36.23 12.51 2002-03 4660 919 739 19.72 15.86 Source: RBI (2004)

A pictorial depiction of the share of FDI inflows through the two routes is given in

Figure 4.3 below.

Figure 4.3

----------------------~~----------

Share of FDI inflows through Government route and automatic route (1991-92 to 2002-03)

90.------------------------------------------------------.

80-

70 '2 60-0

50 E 40 ih

·= 30-- 20-

10 0 -t-, .L......I..---,....1..-

- 1991- 1992- 1993- 1994- 1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002-92 93 94 95 96 97 98 99 00 01 02 03

!oFIPB •Automaticr~e l 1

L__ __ ------------ ____________ __j

93

Main features:

1. Inflows through the FIPB route are seen to have formed the bulk of total FDI

inflows. However, from 2000-01, the share of the government route has reduced in

total FDI inflows, while that ofthe automatic route has increased. This change in the

pattern of contribution of the two routes reflects the impact of the expansion in the

scope of the automatic route from early 2000.

2. During the middle of the 1990s, i.e. from 1994-95 onward, inflows through the

automatic route are seen to have declined in volume. There was no such decline for

inflows through the FIPB route. However, it must be remembered in this context

that inflows through the government route can materialise with lags, i.e. with gaps

between their time of approval and actual time of entry (a detailed analysis of the

nature of lags between approved and actual investment flows is presented in chapter

6). A substantial part of the inflows through the government route, therefore, can be

materialisation of investment approved in the past. Such gaps can not take place in

the automatic route. A decline in inflows under the automatic route, therefore, is

possibly indicative of the larger issue of a lack of investment interest on part of the

foreign direct investors as far as the host economy is concerned. The middle and /

later years of the 1990s experienced several ex~genous disturbances mentioned

earlier, whi~h might have affected these investment decisions, as reflected by the

lower volume of inflows under the automatic route.

NRI investment

One of the major features of the foreign investment policy pursued in the post-

reform period has been the conscious attempt to encourage expatriate investment in

94

India. The table below indicates the pattern of non-resident investment in India since

1991-92 and its share in total FDI inflows.

Table 4 6· NRI Investment Inflows (1991-92 to 2002-03) (in US$ million) .. Year Total FDI NRI Share ofNRI

investment in total FDI

1991-92 129 63 48.8% 1992-93 315 51 16.2% 1993-94 586 217 37.0% 1994-95 1314 442 33.6% 1995-96 2144 715 33.3% 1996-97 2821 639 22.7% 1997-98 3557 241 6.8% 1998-99 2462 62 2.5% 1999-00 2155 84 3.9% 2000-01 4029 67 2.9% 2001-02 6131 35 0.9% 2002-03 4660 - -

Source: RBI (2004)

Main features:

1. Non-resident inflows are seen to have contributed quite significantly to total

FDI till the middle of the 1990s. But from 1997-98 onward, there has been a sharp

decline in the share of NRI investment to total FDI flows. While various exogenous

factors discouraging FDI in general may have been at work in dampening NRI

investment inflows, it is also important to consider the intricacies involved in

interpreting the data on NRI investment. The specific category for NRI investment

under overall FDI figures reported by the RBI relates to inflows under specific

investment schemes designed for non-residents, offering higher investment ceilings

in various sectors. In addition, expatriate investment can also materialise through the

other routes i.e. government or automatic routes. Thus, NRI investment inflows are

not completely distinguishable in the disaggregated category-wise break-up for total

95

FDI flows. Moreover, since the introduction of FEMA in 1999, there is no separate

route for NRI investment. This explains the very low volume of NRI investment

during the later points of the series.

4.3 A SUMMARY

In this chapter we tried to study the evolution of FDI policies in independent India,

along with the trends ofFDI flows.

India followed a reasonably liberal policy towards foreign investment during the

decades of the 1950s and 1960s. Foreign capital was viewed as a supplement to

domestic savings. It was also considered as an important vehicle of technology

transfer, since, scarcity of foreign exchange restricted the nation's capability to

secure imported technology and know-how.

From the 1970s, however, FDI policies became tightly regulated. The regulations

were part of the overall change in policy perspective, which emphasised heavily

upon import-substitution, and aimed to achieve technological self-reliance by

reducing dependence on foreign imports. The scope of FDI was restricted to only a

handful of high technology sectors, where domestic capabilities were

underdeveloped. Further, there were conscious efforts to discriminate between

Indian and foreign investors through legislations like the FERA (1973) which forced

majority of foreign incorporated enterprises to bring down the equity holdings to

minority levels. The Patent Act (1970) also restricted the scope of FDI by reducing

the degree of patent protection on imported products.

96

Our study of the trends of FDI and portfolio investment inflows prior to the 1990s

indicates that longer-term FDI inflows were the major source of foreign capital

during the period. We observe a sharp decline in FDI stocks from 1974-75 onward,

subsequent to promulgation of FERA. The decline was on account of a

corresponding reduction in volume of fresh investment inflows, particularly for joint

stock companies. It is clear that the introduction of FERA had a major impact in

curtailing FDI flows. Unfortunately, we could not analyse the trends of FDI during

the decade of 1980s due to unavailability of data.

FDI policies experienced radical changes from the beginning of the decade of 1990s

after the onset of economic reforms. The thrust on FDI arose from the conscious

policy decision to replace debt flows by non-debt creating flows as supplements to

domestic resources. The gradual transition of India from an inward-looking,

controlled economy, to an outward-looking, market-oriented economic system, saw

progressive liberalisation of external sector policies, including those for FDI.

Currently, India has a liberal FDI policy regime, with foreign investment permitted

in almost all sectors through the automatic route. The procedures for FDI have also

been considerably relaxed.

An analysis of the trend of FDI flows after 1991 indicates that FDI responded

positively to the policy changes. However, FDI flows declined during the later part

of the 1990s, which could be on account of various exogenous shocks experienced

by the Indian economy during the period. We also found inflows through the

government (FIPB) route to form the bulk of FDI inflows into India. The share of

the automatic route, however, has increased in recent years indicating greater

97

inflows through the route subsequent to the significant expansion of its scope after

March2000.

98

Appendix J_

A Chronological Evolution ofFDI Policies during the 1990s and thereafter35

1. November 19, 1991: Companies already holding foreign equity were permitted to expand the foreign equity levels to 51 per cent, as part of an expansion programme, in the high-priority industries figuring in Annexure III of the industrial policy statement of 1991. It was not necessary for the companies themselves to be engaged primarily in activities relating to Annexure III - only the expansion programmes were to be exclusively in such areas. Dividend balancing conditions were to be applicable. 2. June 26, 1992: The dividend balancing condition was withdrawn for all foreign investment approvals except in consumer goods industries. 3. October 25, 1994: FDI upto 51 per cent in bulk drugs, intermediates and formulations were granted automatic approval. Though bulk drugs were included in Annexure III of the new industrial policy, till now, foreign investment approvals were guided according to provisions of the Drug Policy of 1986. 4. November 5, 1996: The earlier condition of the amount of foreign equity covering foreign exchange requirements for import of capital goods - as applied to automatic approvals for 51 per cent FDI- was withdrawn. 5. January 17, 1997 : The existing list of industries eligible for automatic approval of FDI upto 51 per cent was expanded by adding three categories of industries with automatic approval up to 50 per cent, thirteen more categories for approval upto 51 per cent and nine categories for approval upto 74 per cent. 6. June 13, 1998: Projects for electricity generation, transmission, and distribution, were permitted for automatic approval up to 100 per cent FDI provided the amount of foreign equity involved was not more than Rs 1 ,500 crore. 7. August 26, 1998: FDI upto 100 per cent was permitted in manufacture of cigarettes (subject to licensing provisions under the Industries (Development and Regulation) Act, 1951. 8. September 1, 1998 : For attracting FDI in private sector banks upto the permissible level of 40 per cent in case of NRI involvement, multilateral financial institutions were allowed to contribute foreign equity by the extent of shortfalls in NRI contributions. 9. October 15, 1998: FDI upto 49 per cent of total equity was permitted in licensee companies operating global mobile personal communications by satellite (GMPCS) services. 10. January 4, 1999 : Projects for construction and maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels, ports and harbours were perinitted FDI upto 100 percent under the automatic approval route subject to a ceiling ofRs 1,500 crore. 11. April 12, 1999 : Foreign owned Indian holding companies were allowed to make downstream investments, without prior approvals, in activities eligible for the automatic route and within the specified foreign equity ceilings. , 12. February 11, 2000: FDI in all items/activities was put under the automatic route except for the following: i) Proposals requiring industrial licenses under the Industries (Development and Regulation) Act, 1951. ii) All proposals involving FDI greater than 24 per cent of equity capital in items reserved for small-scale industries.

35 See Ministry of Commerce and Industry, Government oflndia (2001)

99

iii) Proposals requiring industrial licenses in terms of locational policy requirements under the Industrial Policy of 1991. · iv) All proposals in which the foreign collaborator has a previous venture/tie-up in India. v) All proposals relating to acquisition of shares in existing Indian companies in favour of foreign/NRRl/OCB investors. vi) All proposals falling outside notified sectoral policy/caps relating to the automatic route, or in sectors where FDI is not permitted. FDI proposals qualifying under (i)-(vi) above were to be considered by the FIPB. The list subsequently came to be defined as the 'negative list'. 13. March 31, 2000: Holding companies with 100 per cent foreign equity engaged irr. non­banking financial services, and having minimum capital of US$ 50 million, were allowed to set up 100 per cent downstream subsidiaries. Such subsidiaries, however, were required to disinvest 25 per cent of their equity through public offering within three years. 14. July 14, 2000: FDI upto 100 per cent was permitted in e-commerce subject to the condition that companies would divest 26 per cent of their equity in favour of the Indian public within five years. The dividend balancing condition was withdrawn from the remaining twenty two consumer goods industries. The investment ceiling of Rs 1,500 crore on FDI under the automatic route for projects involved in electric generation, transmission, and distribution, was taken off, and FDI in oil refining was permitted up to 100 per cent under the automatic route. 15. September 8, 2000 · i) FDI upto 100 per cent was pern1itted under the automatic route in all manufacturing activities located in Special Economic Zones (SEZs), except for arms & ammunition, explosives and allied items of defence equipment, defence aircraft, warships, atomic substances, narcotics and psychotropic substances and hazardous chemicals, distillation and brewing of alcoholic drinks, and cigarettes, cigars and manufactured tobacco substitutes. ii) FDI up to 100 per cent was allowed in the telecommunications sector for _Internet Service Providers (ISPs) not providing gateways, infrastructure providers providing dark fi.bre, electronic mail and voice mail. 16. October 19, 2000: FDI under the automatic route was permitted upto 26 per cent in the insurance sector subject to approval from the Insurance Regulatory and Development Authority (IRDA). 17. April 17, 2001: Foreign investors were allowed to set up 100 per cent operating subsidiaries in non-banking financial activities without the condition of disinvesting 25 per cent of equity to Indian entities. 18. May 21, 2001: The following announcements were made: a. FDI upto 100 per cent was permitted under the automatic route for manufacture of drugs and pharmaceuticals. b. FDI upto 100 per cent was permitted in airports (proposals beyond 74 per cent to be decided by the FIPB). c. FDI was permitted upto 26 per cent in defence industry subject to licensing. d. FDI upto 100 per cent was permitted for development of integrated townships, including housing, commercial premises, hotels, resorts, city and regional level urban infrastructure facilities like roads and bridges, mass rapid transit systems and manufacture of building materials. · e. FDI upto 100 per cent was permitted under the automatic route in hotel and tourism. f. FDI upto 100 per cent was permitted in courier services with prior government approval. g. FDI upto 100 per cent under automatic route was permitted in mass rapid transport systems in all metropolitan cities, including associated commercial development of real estate.

100

h. FDI upto 74 per cent was permitted for Internet service providers with gateways, radio paging and end-to-end bandwidth. i. FDI upto 49 per cent was permitted in the banking sector under the automatic route. 19. April 2002: FDI upto 100 per cent was permitted in the automatic route for advertising. While FDI in films was already permitted upto 100 per cent under the automatic route, accompanying restrictions (track records of companies, minimum paid-up capital, dividend balancing etc.) were withdrawn. 20. July 5, 2002 : FDI upto 100 per cent was allowed in tea industry, including plantations,

with the specific condition of divestment of 26 percent equity in favour of Indian entities.

101

Appendix 2

A Summary of Sector-Specific Guidelines for FDI36

1. Private banks FDI upto 74 per cent is permitted from all sources under the automatic route.

2. Non-Banking Financial Companies CNBFCs). a. FDI/NRI investments are permitted under the automatic route 1n the following NBFC

activities: merchant banking, underwriting, portfolio management services, investment advisory services, financial consultancy, stock braking, asset management, venture capital, custodial services·, factoring, credit reference, credit rating, leasing & finance, housing finance, foreign exchange braking, credit card business, money changing, micro credit and rural credit.

b. Fund based NBFCs have to satisfy some minimum capitalisation norms. For projects involving foreign equity upto 51 per cent, a minimum of US$ 0.5 million is to be brought upfront. Similarly for FDI levels between 51-75 per cent, US$ 5 million is required to be brought upfront. Finally, for FDI between 75-100 per cent, the minimum capitalisation is US$50 million, out of which US$7.5 million is required upfront, and the rest within 24 months. For all non-fund based NBFCs, the minimum capitalisation level is US$ 0.5 million upfront.

c. Foreign investors can establish 100 per cent operating subsidiaries in all NBFC activities mentioned in (a).

3. Insurance FDI is permitted upto 26 per cent under the automatic route.

4. Domestic Airlines FDI is pem1itted upto 40 per cent. However, NRI investment is allowed upto 100 per cent.

5. Airports FDI is pem1itted upto 100 per cent (upto 74 per cent under the automatic route).

6. Telecommunications a. In basic, cellular, value~added services, and global mobile personal communications by

satellite, FDI is permitted upto 49 per cent. b. In ISPs with gateways, radio paging, and end-to-end bandwidth, FDI is permitted upto 74

per cent (upto 49 per cent under automatic route). c. FDI upto 100 per cent is allowed in ISPs not providing gateways (both satellite and

submarine cables), infrastructure providers providing dark fibre, electronic mail and voice mail. In all these activities, FDI upto 49 per cent can be brought in through the automatic route. However, for all proposals involving FDI upto 100 per cent, there is the condition to divest 26 per cent of equity in favour of Indian stakeholders within five years.

36 For detailed guidelines, See Ministry of Commerce, Government oflndia (2004)

102

7. Petroleum (other than refining) a. FDI upto 100 per cent is permitted under the automatic route in oil exploration in small and

medium size fields, petroleum product marketing and petroleum product pipeline. b. FDI upto 100 per cent is permitted for natural gas/LNG pipelines. c.. Establishment of 100 per cent Wholly Owned Subsidiaries (WOS) is permitted for market

study and formulation and for investment/financing.

8. Petroleum refining FDI is permitted upto 26 per cent in Public Sector Undertakings (PSUs) and upto 100 per cent under the automatic route in private Indian companies.

9. Housing and Real Estate a. FDI is permitted up to 100 per cent only in development of integrated townships and

settlements. However, NRis are allowed to invest in development- of serviced plots and construction of built up residential premises, construction of residential and commercial premises (including business centres), development of townships, urban infrastructure facilities, manufacture of building materials and housing finance institutions.

10. Coal and Lignite a. FDI upto 100 per cent (upto 50 per cent under automatic route) is allowed in private

Indian companies setting up or operating power projects and coal or lignite mines for captive consumption.

b. FDI up to 100 per cent (upto 50 per cent under automatic route) is allowed for establishing coal processing plants provided the company does not undertake coal mining and does not sell washed/sized coal from its plants in the open market.

c. FDI upto 74 per cent (upto 50 per cent under automatic route) is allowed for exploration/coal mining/lignite for captive consumption.

11. Venture capital a. Offshore venture capital funds/companies are permitted to invest in domestic venture

capital funds and undertakings as well as other companies through the automatic route subject to SEBI regulations.

12. Trading a. FDI is permitted upto 51 per cent under automatic route in trading provided it is

, primarily meant for export activities. b. FDI upto 100 per cent is permitted in trading companies forexports, bulk imports, cash

and carry wholesale trading, after sales services, trading of hi-tech items requiring specialized after sales services, items for social sector, trading of hi-tech medical and diagnostic items, domestic sourcing of products for exports, test marketing of items for which companies have approval for manufacture and fore-commerce activities37

•

37 All the activities are subject to provisions ofEXIM Policy.

103

13. Investing companies in infrastructure/services sector a. FDI is permitted upto 49 per cent provided the management of the company is with

Indian owners.

14. Atomic minerals a. FDI/NRI investments are permitted in mining and mineral separation, value addition to

products of mining and mineral separation and integrated activities of mining and mineral separation.

b. FDI is permitted upto 74 per cent for both pure value addition and integrated projects.

15. Defence and strategic industries a. FDI/NRI investment is permitted upto 26 per cent with prior government approval.

16. Agriculture (including plantation) a. FDI/NRI investment upto 100 per cent is permitted only in tea plantation with the

condition of compulsory divestment of 26 per cent equity in favour of Indian partners within five years.

1 7. Print media a. FDI up to 100 per cent is permitted in publishing/printing scientific and technical

magazines, periodicals and journals. b. FDI upto 26 per cent is permitted in newspapers and periodicals dealing in news and

current affairs provided the managements rests with Indian residents.

18. Broadcasting

a. FDI upto 100 per cent is allowed in TV software production provided no broadcasting is undertaken from Indian soil without Government approval. '

b. FDI is allowed upto 49 per cent in cable network and direct-to-home broadcasting facilities.

19. Power a. FDI is allowed upto 100 per cent in respect of projects relating to electricity generation,

transmission, and distribution, other than atomic reactor power plants.

20. Drugs & Pharmaceuticals a. FDI upto 100 per cent is permitted under the automatic route for manufacture of drugs

and pharmaceuticals.

21. Roads & highways, ports and harbours a. FDI upto 100 per cent is permitted for construction and maintenance of roads,

highways, vehicular bridges, toll roads, vehicular tunnels, ports and harbours.

22. Hotels & tourism a. FDI up to 100 per cent is permissible under the automatic route.

23. Mining a. FDI upto 74 per cent is allowed under the automatic route for exploration and mining of

diamonds and precious stones.

104

b. FDI upto 100 per cent under the automatic route is allowed for exploration and mining of gold and silver and minerals other than diamonds and precious stones, metallurgy and processing.

24. Postal services a. FDiupto 100 per cent is permitted in courier services, excluding distribution of letters.

105