fdi in india its pros and cons
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Shri Ramdeobaba College Of Engineering & Management, Katol Road, Nagpur – 440 013An ISO – 9001: 2000 Certified Institution
Foreign Direct Investment in
India-Its Pros and [email protected]
9225982220Associate Professor
Department of Industrial EngineeringShri Ramdeobaba College of Engineering and Management
Gittikhadan,Katol Road,Nagpur 13
9960876158Assistant Professor
Department of Industrial EngineeringShri Ramdeobaba College of
Engineering and ManagementGittikhadan,Katol Road,Nagpur 13
Abstract This research paper is based on FDI in India- Its Pros & Cons. Some important features of Indian economy 1. Indian market is one of the largest market with high
purchasing power.2. Lot s of work to be done in the field of logistics & supply
chain management 3. It is not possible for Indian government alone to
developed world class infrastructure and other allied facilities because of huge investment requirement .
4. FDI in India has in a lot of ways enabled India to achieve a certain degree of financial stability, growth and development.
5. In order to create new & more jobs ,FDI is the success mantra now.
6. FDI no doubt is creating innovation in retail sector but simultaneously it may pull down the local and domestic retailers of India which is surely a concern to worry about for Indian government.
In this research we have just tried to bring down maximum
thoughts in lieu of FDI and form a constructive view over it.
Government and FDI: 1. FDI is a sturdy source of money. 2. This money has allowed India to focus on the areas that needed a
boost and economic attention, and address the various problems that continue to challenge the country.
3. In 1998 and 1999 Indian government has designed number of reforms to promote investment in India.
4. FDI are permitted through financial collaborations, through private equity or preferential allotments , by way of capital markets through euro issues and in joint ventures.
5. FDI is not permitted in the arms ,nuclear ,railway ,coal or mining industries.
6. FDI can work in number of areas like electricity generation its distribution and transmission.
7. FDI finds difficulty in doing business because of the large beauracratic structure of central government. They find the red tape paper work very inefficient and slow.
8. It can also work in development of roads and highways. 9. Indian government granted financing to FDI for development of roads as
INR 1500 cores . 10.With growing use of credit cards business FDI is currently allowed in
financial services. 11.Foreign investors are allowed to own up to 45 % of shares of companies in
global mobiles personal communication and also up to 40% of the equity in private banks.
12. According to Statistics available, India received 145 cores of huge growth but which was significantly less what china experienced of 570 cores in 2007.
13.Here is the worry of Indian government. Being far upper handed in the area of skilled labor and filled with resources why India lags in FDI profits and gains .
14.A critical study and interviews of foreign investors states that physical infrastructure is one of biggest obstacle.FDI interest in only few specific regions which offers them every thing keeping in mind the physical infrastructure. The slow development of tele communication, roads and railways restricts many investors in majority areas which actually required the attention of FDI.
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The role of FDI presently is noteworthy especially for developing countries. It is not only improving the economic scenario but also helping in stabilizing political scenario.1. In most part America and Europe FDI for banks holds the
maximum share. But this is significantly very less in Asia. 2. Emerging market economies working in financial institution
areas have given a diversified area globally. 3. It emphasis on risk adjusted profitability. These include
expansion into local retail banking and securities in markets, where elements such as client relationships and reputation are important components of the franchise value of operations.
4. Such factors have tended to raise the costs of exiting a country and hence increase the permanence of FSFDI.
FDI in FINANCIAL SECTOR
5. Financial institutions in advanced economies increasingly searching for profit opportunities at the customer and product level, FSFDI offered a means of access to EME markets with attractive strategic opportunities to expand.
6. An important benefit of FSFDI is its effect on financial sector efficiency that arises from local banks’ exposure to global competition.
7. Host countries benefit from the technology transfers and innovations in products and processes commonly associated with foreign bank entry.
8. Foreign banks exert competitive pressures and demonstration effects on local institutions. This results better risk management, more competitive pricing and in general a more efficient allocation of credit in the financial sector as a whole.
9. Foreign banks presence helps to achieve greater financial stability in host countries.
10. Host countries benefit immediately from foreign entry. 11.The better capitalization and wider diversification of foreign
banks, along with the access of local operations to parent funding, may reduce the sensitivity of the host country banking system to local business cycles and changing financial market conditions.
12.Their use of risk-based credit evaluation tends to reduce concentration in lending and in times of financial distress, fosters prompter recognition of losses and more timely resolution of problems .
13.The growing involvement of foreign firms in the financial systems of EMEs has given rise to a situation where majorities of EME banking assets have become foreign owned.
14.Accordingly, developing pertinent technical skills is considered be an important area of cooperation between authorities in advanced and EME countries.
15. In some markets, foreign-owned banks have been prominent in the rapid expansion of consumer lending and foreign currency lending to both households and businesses.
16.One essential component among host country policy is commitment for growth and stability.
17.Another is the protection of property rights and equal treatment of banks irrespective of ownership.
18.From this point of view a more extensive implementation of the internationally recognized set of financial standards and codes can help to reduce country risk. strengthening of legal frameworks act as a parameter for reducing country risk.
19.Smooth functioning of the market for corporate control would be assisted by greater international compatibility of accounting standards,takeover rules, and insolvency codes.
20. Regional integration among EME financial systems, often within a framework for broader economic integration in the region, is another complementary approach to this objective.
21. There is substantial evidence of major benefits from regional compacts such as those of the European Union and NAFTA.
22.In the case of very poor countries where there is some special support for FSFDI may be merited provided political risk insurance if properly designed, could be useful.
India and US :1. India and the US have multi faceted relations in the field of
politics, economics and commerce . 2. India-US economic relations in the form of bilateral investments
and trade constitute important elements in India-US bilateral relations particularly because India is now the second fastest growing economy in the world and USA is the world’s largest economy.
3. Economic Reforms introduced since 1991 have radically changed the course of the Indian economy and has led to its gradual integration with the global economy.
4. The effect of this reform process on trade and investment relation with US is profound. USA is the largest investing country in India in terms of FDI approvals, actual inflows, and portfolio investment.
5. US investments cover almost every sector in India, which is open for private participants.
6. India’s investments in USA are picking up. USA is also India’s largest trading partner. By 2003, India became the 24th largest export destination for the US.
7. In terms of exports to the US, India now ranks eighteenth largest country.
US investment in India :1. With regards to FDI U.S. is one of the largest foreign direct
investors in India. 2. The stock of actual FDI Inflow increased from 875 crore in
1991 to 19901 crore (approx) as on August 2004 recording an increase at a compound rate of 57.5 percent per annum.
3. The FDI inflows from the US constitute about 11 percent of the total actual FDI inflows into India.
4. Top sectors attracting FDI from USA are: Fuels (Power & Oil Ref.) (35.93%), Telecommunications (radio paging, cellular mobile & basic telephone services (10.56%) Electrical Equipment (including Computer Software & Electronics) (9.50%), Food Processing Industries (Food products & marine products) (9.43%), and Service Sector (Fin. & Non-Fin. Services) (8.28%).
US investment in India :1. With regards to FDI U.S. is one of the largest foreign direct
investors in India. 2. The stock of actual FDI Inflow increased from 875 crore in 1991
to 19901 crore (approx) as on August 2004 recording an increase at a compound rate of 57.5 percent per annum.
3. The FDI inflows from the US constitute about 11 percent of the total actual FDI inflows into India.
4. Top sectors attracting FDI from USA are: Fuels (Power & Oil Ref.) (35.93%), Telecommunications (radio paging, cellular mobile & basic telephone services (10.56%) Electrical Equipment (including Computer Software & Electronics) (9.50%), Food Processing Industries (Food products & marine products) (9.43%), and Service Sector (Fin. & Non-Fin. Services) (8.28%).
India’s investment in US 1. India’s direct investment abroad was initiated in 1992. 2. Streamlining of the procedures and substantial liberalization has
been done since 1995. As of now, Indian corporate /Registered partnership firms are allowed to invest abroad up to 100% of their net worth and are permitted to make overseas investments in business activity.
3. The overall annual ceiling on overseas investment and also the requirement of prior approval of RBI for diversification of activity and for transfer by way of sales of shares have been done away with.
4. The need for opening up the regime of Indian investments overseas has been the need to provide Indian industry access to new markets and technologies with a view to increasing their competitiveness globally.
5. Since 1996 and up to September 2004, the total approved Indian investment abroad amounts to 58740 crore, of which 60.9% has been the actual outflow.
6. US share (INR 11024 crore) constitutes 18.77% of the total approval.
7. Since 1996, USA attracted highest Indian direct investments (INR 11024 crore) followed by Russia (INR 9280 crore), Mauritius (INR 5024 crore) and Sudan (INR 4833 crore).
8. India’s outgoing investments has been largest in the field of manufacturing (54.8%) followed by non-financial services including software development (35.4%).
9. In 2004-2005 USA attracted highest Indian direct investments (INR 664 crore) followed by Australia (INR 616 crore), Kazakhstan (206 crore) and Hong Kong (INR 150 crore).
10.India’s outgoing investments is largest in the field of manufacturing at INR 1478 crore followed by non-financial services (including software development) at 398 crore,
11.Others at INR 324 crore and Trading Sector at INR 159 crores. 12.The returns on account of repatriation of dividend, royalty,
consultancy fee etc. 13.From overseas JV/WOS during April-August, 2004 amounted to
INR 217 crore. 14.The US investor community is increasingly sharing confidence in
the future of the Indian economy presently. 15.The growing synergy between the two countries in the
technology sectors and mutually shared respect for democracy, rule of law and well established business practices have considered the two countries natural business partners from time to time.
Sectors Attracting FDI Though the services sector in India constitutes the largest share in the Gross Domestic Product, still it has failed to some extent in attracting more funds in the forms of investments. Important sectors of the Indian Economy attracting more investments into the country are as follows:
Electrical Equipments (Including Computer Software & Electronic)
Telecommunications (radio paging, cellular mobile, basic telephone service)
Transportation Industry
Services Sector (financial & non-financial)Fuels (Power+ Oil Refinery)
Chemical (other than fertilizers)
Food Processing Industries
Drugs & Pharmaceuticals
Cement and Gypsum Products
Metallurgical Industries
FDI Inflows in last few years: Opening up of door policies adopted by the Government of India through its new economic policies has attracted more investments in to the country. Indian Industries have gone global and in the same direction the inflow of FDI in to the country has increased at a faster rate.
The Inflow of FDI into the country over various years is as follows:
Year (April-March) Amount of FDI inflows (In US$ million)
1991-1992 (Aug-March) 875 crore
1992-1993 2067 crore
1993-1994 3433 crore
1994-1995 7282 crore
1995-1996 11347 crore
1996-1997 14681 crore
1997-1998 19530 crore
2000-2001 21353 crore
2001-2002 32489 crore
2002-2003 26685 crore
2003-2004 22906 crore
2004-2005 32070 crore
2005-2006 47493 crore
2006-2007 120977 crore
2007-2008 184625 crore
2008-2009 200541 crore
2009-2010 200143 crore
2010-2011(up to nov) 100710 crore
1998-1999 16340 crore
1999-2000 12927 crore
Average Reported FDI Equity Inflows during Different Periods
1. It has emerged as one of the most dynamic and fast paced industries accounting for over 10 per cent of the country's GDP.
2. This growth has become major attraction for foreigners to enter in India.
3. The reason why retailing has not given success to many India is because of the requirement of huge financial assistance.
4. However then increasing purchasing power of customers made India 4th largest economy in world after Japan, USA and China.
5. In January 2006, the Government relaxed FDI (foreign direct investment) controls on retailing to allow foreign retailers to participate directly in the Indian market for the first time by allowing equity ownership in `single brand' retailing.
FDI in INDIAN RETAIL
6. Thus, foreign entities are now allowed to operate their stores, but only if they are single-brand stores and only up to 51 per cent ownership.
7. The impact of the consequent increase in FDI, in Indian retail, is expected to not just develop strong backward linkages but also create a domestic supply chain of international standards. 8. What is encouraging now for these global majors is the new policy thrust, which intends to further liberalize the
FDI regime in Indian retail.
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PROS of FDI It reduces the gap between farm prices and retail prices. Gives best management practices from all over the world. It makes market intelligent and also provides good understanding and practical knowledge to he domestic retailers . To achieve expected growth in India GDP: India is targeting for its GDP to grow by 8 to10 percent per year. This requires raising the rate of investment as well as generating demand for the increased goods and services produced. Provide an aid to Indian agriculture to become lowest cost source of farm produce. To bring trade balance and to increase liquidity by the way of foreign exchange reserves
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The status of the human resources in a country is also instrumental in attracting direct investment from overseas. countries like China that have taken an active interest in increasing the quality of their workers and have made compulsory for every Chinese citizen to receive at least nine ears of education. This has helped in enhancing the standards of the laborers in China. If a particular country has plenty of natural resources it always finds investors willing to put their money in them. A good example would be Saudi Arabia and other oil rich countries that have had overseas companies investing in them in order to tap the unlimited oil resources at their disposal. Infrastructure is very important for FDI. So if a country keens to have overseas investors they have to focus on infrastructure.
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CONS of FDI
Threats on organized and unorganized retail players. Replacement of established national brands by the brands of the retail gains. For e.g Wal-Mart is committed to buying the best goods at the cheapest prices to give its customers the best value for money. That is why it sources so heavily from China. 70% of merchandise in Wal-Mart contains components made in China. Even though Wal-mart may not continue heavy operations in china but would continue heavy sourcing from china market to cater to the world markets at lower prices. Low prices of Chinese products can easily convince Indian price consciousness mentality. Acceptance towards Chinese brands can create a direct threat on Indian established brands providing best quality products with reasonable prices
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While the levels of FDI tend to be resilient during periods of economic uncertainty, it has the potential of adversely affecting the net capital flow of a developing economy especially if it does not have a healthy and sustainable FDI scheduleFDIs may enter the host country for unique strategic reasons but there is ultimately the need to achieve returns on investments. For e.g. paying a premium for the price of labor may improve the consumption power of workers, but it also has the detrimental ability of disrupting the local employment market. When prices rise, supply increases while demand falls. Similarly, when the price of labor increase, wage premiums in this case, this creates a distortion and creates disequilibrium in the labor market. Job matching stops being efficient and may even create unemployment.
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Conclusion: On the basis of above research and discussion FDI has both positive and negative impact on India Economy. Government should promote FDI and in order to lower down its negative impact it should have redesigned framework for the local players. Government should encourage FDI on gradual basis depending on products from one area to other Product category wise clauses should be developed to allow FDI.
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To keep pace with growing GDP government should encourage foreign investments. India needs inflows to drive investment in infrastructure, a lack of which is often cited as restricting the country’s economic growth. Investment is also needed to expand capacity and technology in sectors such as autos and steel, as well as to offset a big current account deficit. In a nutshell, FDI should be encouraged with strict feasible and mutually beneficial regulations. “Better Investment Climate” Need of the Hour.
Asso. Prof. M.R. Jain&
Asst. Prof (Ms.)Rakshal Agrawal