FDI & Economic Growth

: AN INDIAN CASE STUDY

Presented By:Chinmay Jagga (91013)

Cejil Diclause (91014)Darrick Arora (91015)

Deepinder Singh (91016)Divanshu Kapoor (91017)

Gaurav Sharma (91018)

Agenda

Overview of FDI Inflows

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

0

1000

2000

3000

4000

5000

6000

US

$ m

illi

on

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

Relationship b/w FDI and Growth

indicators: GDP & Exports

Regression Analysis: GDP vs FDI

Log of GDP = 4.12 + 0.466 Log of FDI

2 2.2 2.4 2.6 2.8 3 3.2 3.4 3.6 3.8 45

5.2

5.4

5.6

5.8

6

6.2

Log of FDI

Log

of

GD

P

Regression Analysis: Exports vs FDI

Log of Exports = 2.40 + 0.676 Log of FDI

2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.94

4.2

4.4

4.6

4.8

5

5.2

5.4

Log of FDI

Log

of

Exp

ort

s

Economic Growth

Trade

Employment and skill

levels

Technology diffusion

and knowledge

transfer

Linkages and

spillover to domestic

firms

FDI Benefits

FDI ChallengesCrowding out domestic investment

Technology transferred

SECTORAL ANALYSIS

MANUFACTURING SECTOR

Europeans enter into India

in 15th century

What attracted them ?

Our prosperity in the areas

of food and crop

production, textiles, glass

etc

Our per capita income was

at a satisfactory level.

Portuguese establish there control over the west coast of Goa

Battle of Plassey is fought between Portuguese and British

British Rule established in India

Union Jack Flutters in India

What Happened then?

The policies were formed which favored imports instead of exports. The Britain got richer.

Due to the lack of skills raw materials were exported from India and finished goods were imported.

We developed the 4th largest Railway network in world with a history of 60 years in 1920.

However, actual development started post independence

Current Scenario

Ranked 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.

In electrical machinery and apparatus, it is ranked 5th.

According to a United Nations Industrial Development Organization (UNIDO) analysis based on 2007 figures mentioned in the International Yearbook of Industrial Statistics 2009

Current Scenario

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.

According to a United Nations Industrial Development Organization (UNIDO) analysis based on 2007 figures mentioned in the International Yearbook of Industrial Statistics 2009

Foreign Direct Investment (FDI) up to 100% is permitted in all manufacturing

activities except:-

Defense Industry

Cigars & Cigarette

manufacturing

Where the foreign investor has an

existing joint

venture in India in

the same field.

Where more than

24% foreign

equity is proposed

to be inducted

for manufactu

re of items reser

ved for Small

Scale sector

FICCI Study in Indian Manufacturing Sector: Salient Points

Attracted only $3.4 billion of FDI in

manufacturing on an average every year from 2000 to 2008

67% of China’s total FDI comes in the

manufacturing sector compared to 37% in case of India (even 100% FDI in most

manufacturing sectors)

Acc to FICCI Action plan, India can

attract $12billion of FDI in the

manufacturing sector per annum

Sub-Sectors where FDI is negligibleIndia’s share in outward FDI stock is

negligible (Chemicals, Automobiles, Food Processing, Electrical & Electronic Equipment, Metals and Machinery Equipment)

Sectors like Industrial Machinery, Agricultural Machinery, Ship Building, Medical & Surgical Devices and Computer Hardware

Rather India import these items

FDI Inflows for Selected Sectors in India (Jan 2000 to September 2008)

Sector FDI Inflows ($ million)

Ship Building 59.15

Industrial Machinery 283.77

Agricultural Machinery 148.37

Earth Moving Machinery 134.51

Medical and Surgical Appliances

140.77

Computer hardware 99.7

Defence 0.15

FICCI’s Suggestions

A concrete and

comprehensive Action plan FDI Policy

should aim at incentivizing

maximum value

addition

Incentivize technology transfer by adopting

‘Swap Technology for Market’

policy

Rationalizing complex

regulatory procedures

and reducing delays in the

project approvals.

FDI IN SERVICE SECTOR (WITH FOCUS ON INSURANCE

SECTOR)

India's large service industry accounts for more than 50% of the country's GDP

It makes up more than 25% Employment

Service sectors like telecommunication, IT enabled services, insurance, air transport are becoming prominent

Reasons for growth in Services SectorIntroduction of ‘Manmohanomics’ in 1991

Growing presence of transnational corporations and the technological progress

Liberalization of many service sectors activities (telecom, transport, finance etc.)

FDI contribution to Services Sector

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.

FDI Policy in Services Sector

100% FDI is permitted for many service sectors

(Real estate, construction, hotels, tourism, films, IT and IT - enabled services, consultancy, renting, medical,

education, advertising etc)

Phased manner: to allow domestic companies to prepare for global competition (Banking, Insurance, Media, Retail Trade,

Restricted sectors in ServicesAtomic Energy, Lottery Business,

Gambling and Betting, Business of Chit Fund, and any activity/sector that is not opened to private sector investment.

Besides the above, FDI is not allowed in plantations.

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

Sub Sector Analysis: Insurance Sector

Fifth largest life insurance market in the emerging insurance economies globally

Insurance laws (amendment) bil l 2008:

• To increase FDI cap from 26% to 49%• For Life/General insurance minimum paid

up capital to Rs 50 crore(from 100 crore).

Why increasing FDI Cap in Insurance Sector is required?

Boost to the insurance sector Infuse liquidity in the financial system

with increase in FDI inflowIncreasing Insurance penetration

(specially to rural areas)Increase in employment, tertiary sectors

like IT/ITeS,

Boost to Health insurance (1 percent of the country’s population is presently covered under health insurance policies. )

Insurance Law ‘08 gives provision to companies exclusively into the business of health insurance

Micro insurance (accounts for just .1 % of total insurance premium

Flip Side of increasing Cap

Many foreign companies have to be rescued by their own governments.For eg: AIG

Road ahead for Insurance companies depend heavily on FDI cap.

Allowed up to 100%

Contributes 19% to the

GDP

Pilot programme

for delivering

subsidy directly to

farmer

FDI in Agriculture

FDI in Agriculture….Developments

To connect 66,800 habitations To construct 1,46,000Km of new rural roads To Upgrade and modernize 1,94,000Km of

existing rural roadsTo provide corpus of Rs. 8000 crore RIDF

FDI in Retail….WHY INDIA?Low share of organized retailing Increase in disposable income and

customer aspirationIncrease in expenditure for luxury items

FDI in Retail….Benefits Generate 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.

The indirect benefits like better roads, online marketing,

expansion of telecom sector etc. Will give a ‘big push’ to

other sectors like agriculture, small and medium size

enterprises.

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.

Induce unfair trade practices like predatory pricing, in the absence of proper regulatory guidelines.

Increase in real estate prices and marginalize domestic entrepreneurs

FDI in Real Estate Second-most favoured destination for FDI

in the world Norms to allow 100% FDI Mar 2005 100 acre criterion to 25 acre criterion

FDI in Real Estate….Why Invest??

India produces an estimated 2 million new graduates

Presence of a large number of Fortune 500

Real estate investments in India yield huge dividends

TourismRaised to $120mnMajor source of employmentThird largest earner of foreign exchangePrivate investments through public private

partnership

Need for FDI in Tourism Foreign tourist arrivals are expected to

grow to 10 million by 2010-12Estimated that tourism in India could

contribute Rs.8,50,000 crores to the GDP by 2020

Reasons for low FDI Multitude of taxesHigh TaxesHighest import duty on imported liquor

used in hotelsService Tax on Tour OperatorsInland Air Travel Tax

Attract more FDI in Tourism Sector

Rationalize the taxation on the hotel industry

Service Tax should be computed based on the value of service provided

Inland Air Travel Tax should be applied at the rate of 5% of the basic ticket price

FDI Inflow in India Vs China

COMPARATIVE STUDY

Definition of FDI in China

China practices the international systems of recording FDI which consist of three main categories.

-Equity flows

-Reinvested earnings

-Inter-company

debt transactio

ns.

Round-tripping of Chinese capital is common knowledge .

-swelling of

investment from

neighboring

countries(Taiwan and Macao) .

Estimates suggest that round-tripping FDI accounted for one-fourth of China's total FDI.

FDI Policies in China

In 1980, set up four Special

Economic Zones

(SEZs) in Shenzhen,

Zhuhai, Shantou,

and Xiamen.

This concept of SEZs was extended to

another fourteen coastal cities .

Twelve of the fourteen

cities were designated Technology Promotion Zones in 1985 to

expedite the transfer of technology.

The government

also attempted to

guarantee further the

autonomy of joint

ventures from

external bureaucratic interference.

Active promoting through

preferential treatment.

FDI Policies in India

FDI Policy permits FDI up to 100 % from foreign/NRI investor without prior approval in most of the sectors. Known as the automatic route.

The FDI policies in INDIA are formulated on 4 parameters:

-Increased capital flow.

-Improved technology.

-Management expertise.

-Access to international markets. Hence 100% inflow was allowed in sectors like Power,

Renewable energy , Agriculture, mining etc.Also sectors like insurance and defence have a cap of

26% and the banking sector has cap of 49%.

FDI Inflow in India

Some of the Major Investing Countries

FDI Inflow in China

Neighborhood Theory- India and China

• FDI inflow in China and India is based on the concepts of neighborhood and extended neighborhood

Acc to Prof. Arindam, Prof. Pradip K Bhaumik (IMI, New Delhi) .

Regional Flow of FDI in China

Regional Flow of FDI in India

ConclusionsFDI may provide better access to technologies for the local economy.

FDI can also lead to indirect productivity gains through spillovers.

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

MNCs may also provide training of labor and management which may make them become available to the economy in general.

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

Hence measures must be taken in order to ensure that the flow of FDI in both these countries continues to grow.

Attract ‘Quality’ FDI

Attract technology and

localize production

Focus on Export-oriented FDI

Target specific sectors

Increase ease of doing business

Final Recommendations