Impact of FDI and FII on Indian Economy

8/3/2019 Impact of FDI and FII on Indian Economy

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Types of Inflows

Types of Inflows

FDI FII

Foreign direct investment is that investment, which is made to servethe business interests of the investor in a company, which is in a

different nation distinct from the investor's country of origin.



ROUTES OF FDI

INVESTING IN INDIA

AUTOMATIC ROUTE

GENERAL RULE

NO PRIOR

PERMISSION

REQUIRED

PRIOR PERMISSION(F.I.P.B.)

EXCEPTION

PRIOR

GOVERNMENT

APPROVAL NEEDED

ONLY

INFORMATION TO

RBI WITHIN 30

DAYS OF INFLOW/

ISSUE OF SHARES

DECISION

GENERALLY

WITHIN 4 TO

6 WEEKS



Foreign Institutional Investment is used to denotean investor - mostly of the form of an institution orentity, which invests money in the financial markets of acountry different from the one where in the institution

or entity was originally incorporated.

FII investment is frequently referred to as hotmoney for the reason that it can leave the country at the

same speed at which it comes in.

Foreign Institutional Investor (FII)



FII Inflow in India

Financial year FII Inflow(Values in INR Crores)

2000-01 9,933.4

2001-02 8762.6

2002-03 2689.32003-04 45,764.7

2004-05 45,881.3

2005-06 41,466.7

2006-07 30,840.4

2007-08 66,179.1

2008-09 -45,811

2009-10 1,42,658

2010-11 1,46,438



FDI Limit in Different SectorSector/Activity FDI Cap/Equity Entry Route

Airports 100% Automatic

Construction

Development 100% Automatic

Petroleum & Natural Gas

(b) Refining26% (For PSUs)100% ( Private companies)

FIPB Automatic

Other than Refining 100% Automatic

Telecommunication

Basic and cellular;STD/ISD 74% Automatic up to 49%

Manufacture of telecomequipment

100% Automatic

Power ( Except Atomicenergy); regulationstransmission, distributionand Power Trading

100% Automatic

Ports 100% Automatic

Roads & Highways 100% AutomaticShi in 100% Automatic



FDI is not permissible in the following cases

Gambling and Betting, or

Lottery Business, or

Business of chit fundHousing and Real Estate business.

Trading in Transferable Development Rights (TDRs)

Retail Trading

Atomic Energy



0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

Financial Year

Us $Billion



41.56%

9.84%7.17%

5%

4.32%

4.15%

3.75%

2.30%

1.87%

1.44%

18.60%

MAURITIUS

SINGAPORE

U.S.A.

UNITED KINGDOM

NETHERLANDS

JAPAN

CYPRUS

GERMANY

FRANCE

UAE

others



20.83%

8.15%

7.99%

7.27%

7.14%

4.67%4.63%

3.23%

2.38%2.20%

31.51%

Service

Computer Software andHardwareTelecommunication

Housing and Real Estate

Construction Activities

Automobile Industry

Power

METALLURGICALINDUSTRIESPETROLEUM & NATURALGASCHEMICALS (OTHER THAN FERTILIZERS)

Others



EconomicGrowth

Trade

Employment

and skill levels

Technology diffusion and

knowledgetransfer

Linkages andspillover todomestic

firms



Crowding out domestic investment

Loss of control

Effects on local culture / sentiments – socio cultural effects





MANUFACTURINGSECTOR





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 andBritish



British Rule established in India

Union Jack Flutters in India



The policies were formed whichfavoredimportsinstead of

exports. TheBritain gotricher. Due to the lack

of skills rawmaterials were

exported fromIndia andfinished goods

were imported.

We developedthe 4th largestRailway network in

world with a

history of 60 years in 1920.

However,actualdevelopmentstarted postindependence



Ranked 2

nd

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 on2007 figures mentioned in the International Yearbook of Industrial Statistics 2009



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 on2007 figures mentioned in the International Yearbook of Industrial Statistics 2009









Attracted only $3.4 billion of

FDI inmanufacturingon an average

every year from2000 to 2008

67% of China’stotal FDI comes

in themanufacturing

sector comparedto 37% in case of India (even 100%

FDI in mostmanufacturing

sectors)

Acc to FICCI Action plan,

India can attract$12billion of FDI

in themanufacturing

sector per annum



FDI IN SERVICE SECTOR



India's large service industry accounts for morethan 57.7% of the country's GDP

It makes up more than 25% Employment

Service sectors like telecommunication, IT enabled

services, insurance, air transport are becomingimportant.



Introduction of LPG in 1991

Growing presence of transnational corporations andthe 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 sevenmonths of 2009-10

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

In 2008-09, attracted the maximum FDI worthUSD 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)





Current issues with FDI in Services Sector

Very weak linkages of service sector with theIndian economy (only few cities)

Requires highly skilled workers

Employee Welfare in time of crisis



Allowed up to100%

Contributes

14.4% to theGDP

Pilotprogramme for

deliveringsubsidy directly

to farmer



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 customeraspiration

Increase 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 likeagriculture, small and medium size enterprises.



FDI in Retail….Drawbacks

Foreign Players would displace the unorganized retailersbecause of their superior financial strengths.

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

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

Increase in real estate prices and marginalize domesticentrepreneurs



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 newgraduates

Presence of a large number of Fortune 500

Real estate investments in India yield hugedividends



Tourism

Raised to $120mn

Major source of employment

Third largest earner of foreign exchange

Private investments through public privatepartnership



Need for FDI in Tourism

Foreign tourist arrivals are expected to grow to 10million by 2010-12

Estimated that tourism in India could contribute

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



Reasons for low FDI

Multitude of taxes

High Taxes

Highest import duty on imported liquor used in

hotelsService Tax on Tour Operators

Inland 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 rateof 5% of the basic ticket price



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Impact of FDI and FII on Indian Economy