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Foreign direct investment (FDI) inflows into India have been steadily rising in importance since the early 2000s until the global financial crisis.
In absolute terms and as a share of GDP, net FDI inflows peaked in 2008, representing around 3% of the share inworld FDI flows (figure 1).
While the global financial crisis initially contributed to a slowdown in FDI inflows, the rather sharp downward trend and the consequent sluggish recovery of FDI that
can be observed in the post global financial crisis phase has primarily been a result of a host of domestic factors.
Policy challenges on multiple fronts, including issues of governance, inadequate structural reforms, tax and political uncertainties, all contributed to the lacklustre
performance of FDI in India.
While there are signs of stabilisation in net FDI inflows, India still has a long way to go to return to the pre- global financial crisis peak. In this light, it is not
surprising that the Modi government has reiterated that the countrys FDI regime is highly open and conducive for attracting such flows of foreign capital.
Until 2012, about 40% of FDI inflows used to come from Mauritius, just under 10% from Singapore, and another 5% from the Netherlands.
These tax havens and offshore financial centres (OFCs) together made up just over half of all FDI inflows to India. In 2013, however, the composition changed, with
Singapores share rising to 25% (boosted by the double taxation avoidance agreement the two countries have signed which has incorporated a Limitation of Benefit
LoBprovision), Mauritius with about 20% and the Netherlands at around 5%.
While Singapore and Mauritius have swapped places as top investors in India, stillabout 50% originates from these offshore financial centres. Clearly, these are not the
original sources of external financing with the offshore financial centresresponsible for a degree of round-tripping of funds from India and transshipping of funds from
third countries. Accordingly, an analysis based on such data can be quite misleading when trying to understand economic linkages between countries.
If one wants to get a sense of the original source of these FDI flows, i.e. who is actually doing the investment in India and to understand the de facto real linkages at
the bilateral level, mergers and acquisitions (M&A) data could offer a better, albeit partial, picture for that purpose. This is so as M&A data are based on actual
ownership of the company as opposed to flow of funds. The M&A data only include direct investment that is foreign in nature and not merely round-tripping back
to India from domestic sources.
However, one has to be careful in comparing M&A versus FDI data. First, not allFDI are M&As as they could be greenfield investments as well. Second, M&A
transactions do not necessarily result in international capital flows across borders (for example, swapping of shares). Third, M&A data refer to the total deal value as
at the date of completion though the deal value may be paid out over a number of years. Fourth, unlike FDI data, M&A data do not include retained earnings (which is
a significant share of global FDI flows).
A comparison of the available FDI data to M&A data for India reveals an entirely different picture (figure 2). Countries like the US and the UK together make up 50%
of M&A acquisitions into India, and Japan is responsible for another 10%. This triad is effectively responsible for three-fifths of FDI inflows into India (of the M&A
variety at least). This provides us a more useful geographic breakdown of who is actually doing the investments in India.
A sectoral analysis of FDI inflows suggests that, on average, between 2000 and 2012, more than 35% of FDI inflows have gone into services, telecom and
construction sector, with pharmaceuticals, chemicals and computer sector each receiving about 5% of the countrys total FDI inflows over the corresponding period.
However, M&A data at the sectoral level for the same time span suggests telecom and pharmaceuticals (and healthcare) have attracted over one-third of the foreign
M&A acquisitions in India. Of late, pharmaceuticals has attracted a greater share of M&As, with the sector taking about 20% of inbound M&A acquisitions between
2010 and 2013 (figure 3).
What does the foregoing discussion imply for policy? Obviously, first and foremost there is a need for better appreciation of the actual sources and destinations of FDI
to and from India as well as the sectoral composition of FDI flows. In fact, while not discussed here, as Indian companies invest
overseas more aggressively,better quality data on gross inflows and outflows at country and sectoral levels are needed.
Much more attention is also needed with regard to FDI quality at a moredisaggregated level (i.e. new FDI versus retained earnings and greenfield versus M&A).
While it is important for India to attract FDI, it is pertinent to ask the question whether a policy to attract FDI should be careful in distinguishing between the kind of
FDI it wants to attract. All FDI are not the same and are not attracted by the same factors. The prime objective must be to align FDI
withnational development objectives, consistent with being an open economy.
By Ramkishen S Rajan & Sasidaran Gopalan
Ramkishen S Rajan is an adjunct fellow, Research and Information Systems for Developing Countries, New Delhi. Sasidaran Gopalan is a post-doctoral research
fellow at the Institute for Emerging Market Studies and Institute of Advanced Study at Hong Kong University of Science and Technology
In line with Prime Minister Narendra Modis Make in India campaign, Railway Minister Suresh Prabhu has finally given green signal to the two much awaited bigticket FDI proposals for setting up diesel and electric locomotive plants in Bihar at a cost of Rs 2,400 crore.
Ending the suspense over the fate of Madhepura electric locomotive plant and Marhora diesel locomotive plant, Railways has finalised the financial bidding for the
high-value joint venture projects after considerable delays, re-thinking and prolonged due diligence amid repeated revision of bidding documents.
The Request for Proposals (RFP) containing financial bidding documents for both the plants are ready and the shortlisted bidders have been intimated the same, said a
senior Railway Ministry official.
While four global firms Alstom, Siemens, GE and Bombardier have been shortlisted for the proposed electric locomotive factory at Madhepura, two
multinationals GE and EMD are vying to bag the diesel locomotive plant at Marhora.
The estimated cost of the factories is about Rs 1,200 crore each. The financialbidding will be opened on August 31 and there will be two pre-bid meetings held in
between, the official said.
With the government allowing 100 per cent FDI in the railway sector, setting up of the two locomotive plants in joint venture model is crucial for Railways to give
aboost to its infrastructure. The two projects are among top eight infrastructureprojects being monitored by the PMO.
The Madhepura plant will manufacture 800 electric locomotives of 12,000 horse power (HP) over 11 years. While five electric locomotives will be imported, 795 will
be manufactured at Madhepura, as per the bidding condition.
Marhora plant will produce 4500 HP and 6,000 HP diesel locomotives using state-of-the-art technology.
In the course of about 10 years after commissioning, the proposed Marhora plant is expected to manufacture about 1,000 diesel-electric locomotives, that is 100
locomotives annually.
While 700 diesel locomotives will be equipped with 4,500 horse power (HP), 300 diesel locomotives will be manufactured with 6,000 HP, said the official.
Railways will have 26 per cent equity while the global players will have 74 per cent equity in each of the plants at Madhepura and Marhora.
CNR Corporation and CSR Corporation, both based in China, had submitted qualifying bids through request for quotation (RFQ) for both the factories but were
rejected in the qualifying bid in May 2014.
The proposals for the diesel and electric locomotive factory in Bihar were announced in 2008 by the then Railway Minister Lalu Prasad.
Both factories are to be set up in PPP model and there are many changes in the bidding documents over the clauses of transfer of technology and maintenance since
the announcement.
In order to give a boost to the infrastructure sector, setting up of these two factories on PPP mode is crucial for the current economy scenario and the PMO is also
monitoring these projects, the official said.
Bidding documents were earlier discharged on November 2011 and Railways called for fresh proposals for the two factories.
Scope of maintenance work for the proposed factories was revised significantly and amended bid documents were approved by the Cabinet on January 20 last year
and subsequently RFQ followed by RFP for both plants were finalised, the official said.
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Direct investment can be a lucrative endeavor as long as the investor does the right research and is well insulated against global currency shifts.
Related Articles
The pros and cons of a direct investment, which entails purchasing a controlling interest in a foreign firm, will depend of the specific deal. Factors include
the political climate in a country, the type of product the business produces and the tax rules both in the investor's home country and abroad. All of these
should be considered very closely before deciding to invest in a particular business in a particular region. Before delving into the particulars of a deal, it is
good to get a general idea of the pros and cons of small business direct investment.
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Keeping in Touch
Clearly, even in the digital age, distance is a significant con when it comes to small business direct investment. Investing in a small business abroad
means adding impediments to tracking and protecting your investment. This extends beyond operational issues and into cultural ones. Following the
foreign news, including local issues affecting the business as well as national news affecting taxes and civil issues, can be difficult or even impossible. This
can make forecasting and risk management difficult. For people who want to be "hands on" when it comes to investments, small business direct
investment might not be the right choice.
Planning to Fail
Possible the greatest con of small business direct investment is investors must deal with multiple taxing agencies and rules. Investments abroad are
taxable and require special reporting to the Internal Revenue Service. Moreover, part of a good small business direct investment strategy must include
securing the right to claim losses should the business fail. Making certain the investment has a clear value and claiming losses regularly can help. Tax
rules require the loss be taken in the tax year of the closure. But if a small business fails catastrophically, it can take years to sort out the potential loss.