Saturday, 6 June 2015

PROS AND CONS OF FOREIGN DIRECT INVESTMENT IN INDIA




                                                                                                                -Dr. S. Vijay Kumar
         
       India with current population of more than 1.28 billion having youngest median age group of 26.6 years in the world. If we can convert this population into skilled one than it can revamp our lives. According to current scenario we are the 3rd largest purchasing power parity (PPP) nation. India is a developing country and the part of the global village. Its growing rate is immensely good since last decade. Whole world is keep watching us on our developing strength, here are many sectors which require vast investments. Nowadays, Indian government is opening its door of market for many investors in various sectors like telecom -100%, Insurance-49%, retail single brand -100% and retail multi brand -51% etc. many companies shows their interest like Ikea (Netherlands), Wal-Mart (USA), Damini (Italy) etc. In our country, Reserve bank of India (RBI) and Foreign Investment Promotion Board (FIPB) are the responsible for FDI.

        FDI is a term of investment where one or more companies /people from a particular nation put their capital into other nation according to their development needs. In more specific words according to International monetary fund (IMF) the total capital of 10% or more of a foreign company/people into a unit is considered as FDI, below this limit is only a shareholding.
Brief History: In early 1498 Vaskodigama a Portuguese arrived at Calicut. He saw the prosperity of Indians. He introduced India to whole world. Later, Portuguese, Dutch, British and French established their premises in India and started trading with Indian people and dynasty. Sir Thomas Roe was the first British who came as the ambassador of British emperor and got the permission of trading in Mughal India. After this they created the ‘East India Company’ and started their business. It was the initial form of FDI in India. Later on due to the concept of globalization with unprecedented growth of multinationals got many changes according to the world’s financial status and became more popular by words as Foreign direct investment (FDI) and the more similar word called Foreign institutional investors (FIIs) is a portfolio investment into another country’s economy by means of financial instruments such as stocks and bonds. The Foreign Exchange Regulation Act, 1973 (FERA) was repealed and a new Act called the Foreign Exchange Management Act, 1999 (FEMA) came into force with effect from June 1, 2000, with a view to facilitating external trade and payments and promoting orderly development and maintenance of foreign exchange market in India. Government introduced reforms in 1991 - LPG (Liberalization, Privatization, Globalization) aimed at liberalizing, globalizing our economy.
Why FDI?
High competition in the industry and naturally companies tend to expand their business in order to survive in the global arena. The countries use Foreign Direct Investment as a key to internationalize their business. The real reason may be to take advantage of cheaper wages, special investment privileges like tax exemptions offered by the target country.
*Head & Associated Professor (Retired), Department of Economics, Kakatiya Government (UG&PG) College, Hanamkonda, Warangal District – 506 001, Telangana State. 
Importance of FDI:
1. Helps to avoid foreign government pressure for local production.
2. Aids in circumventing trade barriers, hidden and otherwise.
3. Enables making the move from domestic export sales to a locally-based national sales office.
4. Helps in increasing the total production capacity.
5. Presents greater opportunities for co-production, joint ventures with local partners, joint marketing arrangements, licensing, etc.
Why countries like India seek FDI?
1.      Generally the available domestic capital is insufficient for the purpose of economic growth.
2.      It is usually preferred over other forms of external finance because FDI is a non-debt creating and non-volatile kind of capital, which does not face redemption pressures for the investors.
3.      With Foreign Capital, come scarce resources like technical know-how, business expertise and knowledge.
4.      It can be useful, even if as temporary measure if the capital market of the target country is undergoing development.
5.      Since it generally leads to increase in capacities of target companies, it can help in employment generation and increase in production.
6.      It also helps in increasing healthy competition within the local market. This in turn brings higher efficiencies in sector getting FDI.
7.      Since revenues also increase, it helps government generate higher tax revenues.
Entry Routes for FDI:
Automatic Route: FDI is allowed under the automatic route without prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time.
Government Route: Under the Government Route, prior approval of the Government of India through Foreign Investment Promotion Board (FIPB) is required. Proposals for foreign investment under Government route as laid down in the FDI policy from time to time are considered by the Foreign Investment Promotion Board (FIPB) in Department of Economic Affairs (DEA), Ministry of Finance.
The activities/sectors not covered under the automatic route, require prior approval of the government through the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, and Ministry of Finance. There are a few sectors like Atomic Energy, Lottery, Gambling, Agriculture, Cigarettes, Tobacco, etc. where FDI is prohibited under the Government Route as well as the Automatic Route.
Methods of FDI:
1.      Through financial collaborations
2.      Through joint ventures and technical collaborations
3.      Through capital market
4.      Through private placements or preferential allotments
 Fears of FDI:
1.      Domestic companies fear that they may lose their ownership to overseas company.
2.      Small enterprises fear that they may not be able to compete with rich large companies, because there is a perception that such FDI-backed companies invest more in machinery and intellectual property than in wages of the local people.
But, there are both pros and cons of having FDI in the country. Eventually, it is the responsibility of the government to maintain a balance to benefit both the economy as a whole and the working population up to the grassroots level.
Factors contributing to the development of FDI:
1.      Some of them are Internet, technological advancement, flexible rules and regulations of the country and lesser communication costs.

2.      FDI stimulates competition, capital, technological and managerial skills which has a positive effect on both host and home country's economic growth. The importance given to FDI by other country is astounding. One such example is US which has a separate department called 'Bureau of Economic Analysis'. The department monitors FDI inflows and outflows and introduce FDI attraction schemes for successful results.
Facts of FDI in India:
We get 38% of FDI from Mauritius root due to tax relaxation treaty with this. Shungalu committee analysed the issue and gives a solution as GAAR (General Anti Avoidance Rule) which is yet to implement. Apart from Mauritius leading sources of FDI for India are Singapore, United Kingdom and Japan. Highest FDI was recorded in the services, telecommunication, construction activities and computer hardware and software and hospitality sectors. According to United Nations Conference on Trade and Development (UNCTAD) in a report on world investment, India is the second lucrative place for FDI after china. Few sectors are not permitted for FDI like atomic energy, railway, real estate and mining of coal and metals.
India Foreign Direct Investment 1995-2015:
According to the latest government data, as of April-February period of 2014-15, FDI grew by 39 per cent year-on-year to $28.81 billion. Meanwhile, recently in a move aimed at further improving the ease of doing business, the government has said companies need not approach the Foreign Investment Promotion Board (FIPB), which is the nodal agency for attracting foreign investment for M&As (Mergers and Acquisitions) in sectors where FDI is allowed under the automatic route. India ranks 142 out of the 189 countries on ease of doing business list of the World Bank.
Foreign Direct Investment in India decreased to 2706 USD Million in March of 2015 from 3793 USD Million in February of 2015. Foreign Direct Investment in India averaged 1063.34 USD Million from 1995 until 2015, reaching an all time high of 5670 USD Million in February of 2008 and a record low of -60 USD Million in February of 2014. Foreign Direct Investment in India is reported by the Reserve Bank of India. The FDI Report 2015 reveals that 2014 was a difficult year for FDI, with Greenfield capital investment increasing by only 1%. The number of FDI projects actually declined slightly in 2014, by 1%.The FDI in India declined from 3,500 million dollars in May, 2015 to 1749 million dollars in June, 2015.

Global Greenfield Investment Trends - The FDI Report 2015:

Our annual assessment of global cross border investment is out now. Key foreign direct investment trends spotted include:
·         China becomes the largest foreign investor into the US.
·         Capital investment into the automotive OEM sector increases by 71%.
·         Number of FDI projects into India grows by 47%.
FDI into Latin America and the Caribbean declines sharply, with a 39% drop in capital investment. 
Government Plans Raising FDI Limit in Private Banks to 100%: Seeking to further relax foreign investment norms, the government is considering increasing the foreign direct investment (FDI) limit in private banks to 100 per cent, from the existing 74 per cent.
FDI upto May, 2015
     The sector-wise information on FDI equity inflow received upto May, 2015 is as below:

S.No
Sector
Amount of FDI Inflows


(In Rs crore)
(In US$ million)
1
COMPUTER SOFTWARE & HARDWARE
14,428.43
2,273.13
2
AUTOMOBILE INDUSTRY
6,355.14
1,006.84
3
TRADING
4,186.78
663.47
4
SERVICES SECTOR (Fin.,Banking,Insurance,Non Fin/Business,Outsourcing,R&D,Courier,Tech. Testing and Analysis, Other)
3,091.15
488.06
5
CONSTRUCTION (INFRASTRUCTURE) ACTIVITIES
2,357.32
373.90
6
TELECOMMUNICATIONS
2,320.27
363.75
7
SEA TRANSPORT
1,147.55
182.33
8
HOSPITAL & DIAGNOSTIC CENTRES
1,028.20
163.27
9
DRUGS & PHARMACEUTICALS
1,010.25
158.66
10
HOTEL & TOURISM
999.91
157.58
11
POWER
976.37
154.82
12
CHEMICALS (OTHER THAN FERTILIZERS)
951.44
149.96
13
SOAPS, COSMETICS & TOILET PREPARATIONS
830.78
132.35
14
MISCELLANEOUS INDUSTRIES
697.42
110.29
15
ELECTRICAL EQUIPMENTS
681.29
107.82
16
TEXTILES (INCLUDING DYED,PRINTED)
570.26
90.54
17
RUBBER GOODS
484.38
76.72
18
METALLURGICAL INDUSTRIES
466.99
73.80
19
EDUCATION
464.29
73.77
20
INFORMATION & BROADCASTING (INCLUDING PRINT MEDIA)
454.23
71.55
21
NON-CONVENTIONAL ENERGY
449.26
71.06
22
INDUSTRIAL MACHINERY
413.47
65.44
23
FOOD PROCESSING INDUSTRIES
373.96
59.02
24
MISCELLANEOUS MECHANICAL & ENGINEERING INDUSTRIES
353.84
56.04
25
ELECTRONICS
353.58
55.55
26
EARTH-MOVING MACHINERY
276.28
44.02
27
PRINTING OF BOOKS (INCLUDING LITHO PRINTING INDUSTRY)
189.67
30.00
28
CONSULTANCY SERVICES
185.82
29.29
29
MEDICAL AND SURGICAL APPLIANCES
150.20
23.90
30
DIAMOND,GOLD ORNAMENTS
114.21
17.91
31
TIMBER PRODUCTS
102.97
16.14
32
CERAMICS
101.05
16.10
33
PRIME MOVER (OTHER THAN ELECTRICAL GENERATORS)
101.26
15.87
34
SUGAR
90.00
14.34
35
VEGETABLE OILS AND VANASPATI
78.37
12.28
36
CEMENT AND GYPSUM PRODUCTS
57.20
9.12
37
RAILWAY RELATED COMPONENTS
41.05
6.54
38
AGRICULTURE SERVICES
37.64
5.99
39
PETROLEUM & NATURAL GAS
31.35
5.00
40
LEATHER,LEATHER GOODS AND PICKERS
31.34
4.98
41
MACHINE TOOLS
22.18
3.51
42
INDUSTRIAL INSTRUMENTS
21.97
3.44
43
AIR TRANSPORT (INCLUDING AIR FREIGHT)
21.57
3.39
44
COMMERCIAL, OFFICE & HOUSEHOLD EQUIPMENTS
16.27
2.59
45
PAPER AND PULP (INCLUDING PAPER PRODUCTS)
15.03
2.36
46
MINING
13.88
2.21
47
FERMENTATION INDUSTRIES
12.70
2.00
48
CONSTRUCTION DEVELOPMENT: Townships, housing, built-up infrastructure and construction-development projects
12.06
1.90
49
GLASS
6.02
0.95
50
AGRICULTURAL MACHINERY
5.14
0.81
51
SCIENTIFIC INSTRUMENTS
1.32
0.21
52
DYE-STUFFS
0.25
0.04

Grand Total
47,183.37
7,454.64

Conditions to be fulfilled by foreign countries to enter Indian markets:
There are some basic requirements which must be fulfilled by the foreign companies to enter Indian retail market which are as follows –
1) Amount of investment:
If any foreign company wants to enter into the Indian market the very first condition is it must invest at least 100 million dollars or more into the Indian market.
2) Places of opening stores:
They should open their stores only in those cities, the population of which is 1 million or more.
3) Other conditions:
Apart from this there are certain other conditions like at least 50 % of their investment should be in back-end infrastructure like warehouses etc. and they have to take permission of the concerned state government, where they want to establish their chains.
Pros of FDI:
1.      Sufficient flow of capital towards development in various sectors as well as revenue generation.
  1. Improvement in technology and skill which reduce the cost and increase the efficiency of working process.
  2. Increase in job opportunities in many sectors, resulted as uplifting in their life style and acceptability.
  3. Infrastructure and administrative reforms which create effectiveness and accountability of nation.
  4. Social and economic growth due to awareness from various sources like schools, colleges, constitutional body and information technology etc. which is possible due to FDI.
  5. The healthy competition will increase, so at the end customer will be in profit.
In Retail Market:
More consumer savings:
One of the biggest advantages of FDI is that it will increase the savings of Indian consumer as he will get good quality products at much cheaper rates. Consumer savings are likely to increase 5 to 10% from FDI.
Higher remuneration for farmers:
Another advantage of FDI is that it will help a lot in improving the miserable condition of Indian farmers who are committing suicides on daily basis because of lesser return from their agricultural produce. But FDI will certainly help a lot in improving their conditions as the farmers are going to get 10 to 30 %higher remuneration because of FDI.
Increase in employment opportunities:
FDI is certainly going to increase the employment opportunities in India by providing around 3 to 4 million new jobs.
Increase in government revenue:
Government revenues are certainly going to increase a lot because of FDI. Government revenues will increase by 25 to 30 billion dollars which is a really big amount. This government revenue can help a lot in the development of Indian economy.
Cons of FDI:
  1. Domestic industries are seeking due to overflow of cheap products and monopoly which makes them uncomfortable to survive.
  2. Political pressure always tries to control the flow of FDI to get advantages which create the obstacle in development.
  3. Inflation is on high due to lower value of money, we have to pay high due to lack of money in the market because it is shifting to FDI companies.
  4. Unethical behaviours like corruption, redtapism and selfishness is increasing day by day because of money matter for example Wal-Mart issue.
  5. Our foreign dependency will be increased so it will affect our overall development in technology, agriculture, production etc.
In Retail Market:
Destruction of small entrepreneurs:
The biggest fear from FDI is that it is likely to destroy the small entrepreneurs or small kirana shops as they will not be able to withstand the tough competition of big entrepreneurs as these entrepreneurs are going to provide all the goods to the consumers at much lesser prices.
Shrinking of jobs:
Many critics of FDI are of the view that entry of big foreign chains like Wal-Mart; Carrefour etc. are not going to generate any jobs in reality in India. At best the jobs will move from unorganized sector to organized sector while their number will remain the same or lesser but not more.
No real benefit to farmers:
Critics of FDI are also of the view that it is a fallacy that the farmers are going to benefit in any way because of the entry of foreign chains in India rather it will make the Indian farmers a slave of these big chains & the farmers will entirely be on their mercy. Thus, FDI is only going to deteriorate the already miserable conditions of Indian farmers.
Foreign direct investment incentives may take the following forms:
·         Low corporate tax and individual income tax rates
·         Tax holidays
·         Special economic zones (SEZs)
·         Export Processing Zones (EPZs)
·         Bonded Warehouses
·         Free land or land subsidies
·         Relocation & expatriation
·         Infrastructure subsidies
·         R&D support

To conclude, as we live in an increasingly globalised economy, foreign direct investment is becoming a more and more accessible option, but one has to balance between risk and reward of FDI (like China, one has to develop indigenous industrial, agricultural sectors and marketing strategies to capture the global market and at the same time giving importance to FDI) by avoiding over foreign dependency which will affect our overall development in technology, agriculture, production etc.

1 comment:

  1. Sir, put your thought on current (june ,2016) scenario and effect on manufacturing and domestic market.
    devavaish@gmail.com

    ReplyDelete