ARTICLE FOR BUSINESS SERIOUSLY

Submitted By:

Ms. Shini Oommen

PGDM – 1, XIMB,
Mob: 09556262806
Email: u110050@stu.ximb.ac.in
Role of FDI in economies like India and the road ahead

Foreign Direct Investment (FDI) can be defined as the flow of capital from one country to
another for purposes like building factories, purchasing businesses etc. In short, it is a kind of
cross border investments. Many a times, the term FDI, may also refer to the purchase of a
controlling interest in existing operations and businesses (often termed as Merger &
Acquisition).

The domestic capital, sometimes, seems to be inadequate as per the growth aspirations of an
economy. FDI has a very crucial role in such cases and is nowadays recognized as a very
important driver of growth for a country. It is preferred over other forms of external finance
because it is non debt creating and non volatile. Most of the Governments around the world
are, therefore, making all efforts to attract and facilitate FDI investments. It also brings in
with it, the technical know-how, business experience and a lot of knowledge from the
investor’s land. FDI acts as evidence, to an open and effective international trade by a
country. It helps in creating a very healthy & competitive environment. It brings onto surface
many entrepreneurial activities and helps human capital formation. The country starts
experiencing massive technological up-gradations, which in turn spurs up the growth, lowers
unemployment, and improves social conditions. A point to be noted here is that, the inflow of
FDI can create issues like monopoly, unhealthy competition to the locals, fragmented
ownership and lesser control.

Table1: Global Scenario - Share of top five investing countries in FDI inflows

Share of top five investing countries in FDI inflows. (2000–

2010)
Inflows Inflows
Rank Country
(million USD) (%)
1 Mauritius 50,164 42
2 Singapore 11,275 9
3 USA 8,914 7
4 UK 6,158 5
5 Netherlands 4,968 4

In India, Foreign Direct Investment is permitted through Financial or Technical

collaborations, Joint Ventures, Capital Markets etc. FDI is not allowed in sectors related to
atomic energy, arms & ammunition, agriculture (except floriculture, horticulture, seed
development etc), lottery, gambling, plantations, railway, coal, mining of iron, manganese,
etc.
A number of researchers have studied the growth history of India after Independence. They
found out that India developed as a socialist economy that was highly protected. The word
‘Foreign’ was not very acceptable. The distrust in the foreign companies led to a structural
bureaucracy which has been acting as a barrier in attracting foreign investments for a long
time.

In the new millennium, India has witnessed a huge growth in FDI. Post liberalisation, the
Indian economy opened up, and the trade policies were made flexible to attract more foreign
investments. The wages in India are comparatively low, the workforce is quite young, and a
huge population can speak English. Moreover the Indian middle class that stands at 300
million is growing fast; it appears to be the market that many multinationals would like to
cash upon. No company in this world, which intends to grow as a global player, can now
ignore the opportunities that India presents. India is one of the few countries which are
currently growing at a rate of 7% to 9 %

Graph 1: GDP Growth Rate India

A recent UNCTAD (United Nations Conference on Trade and Development) survey

projected India as the second most important FDI destination (after China) for transnational
corporations during the period 2010-2012. As per the survey, the sectors which attracted
highest FDI inflows are services, computer software and hardware, telecommunication,
construction activities etc
Table 2: Sectors attracting highest FDI inflows in India

Sectors attracting highest FDI Inflows

Cumulative Inflow
(April '00 to % to total
Rank Sector FY 10 September, 2010 inflows
1 Services 20776 114736 21
Computer Software
2 & Hardware 4351 46285 9
3 Telecommunications 12338 45509 8
Housing & Real
4 Estate 13586 40326 7
Construction
5 Activities 13516 37216 7
6 Power 6908 24276 4
7 Automobile 5754 21647 4
8 Metallurgical 1935 17611 3
Petroleum & Natural
9 Gas 1328 13908 3
Chemicals(excluding
10 fertilizers) 1707 12049 2

Despite of the huge and practical possibilities in India for overseas businesses, the world's
biggest democracy, has failed to experience the enthusiasm that countries like China enjoy.
The political instability, threats by terrorist groups, lack of good infrastructure, corruption,
frequent power shortages, and slow moving bureaucracy; are the major factors due to which
India is ranked as one of the least attractive places for investments. Also, almost all the means
of transportation including ports are terribly strained. Indian economy is highly dependent on
its large internal market. The external trade accounts for only 20% of the country's GDP

India’s diversity, which is often termed as incomparable, can be overwhelming as well as

frustrating. In this land, dozens of religions are practised, thousands of languages (& dialects)
spoken, and the people at different regions have different tastes and preferences. Thus it
becomes very difficult to have a standardised way of approaching the market. The taxes that
are levied in different states are different. This diversity in short, usually confuses an
investor.

Entering Indian marketplace requires a well-designed plan backed by a lot of careful

research. One needs to correctly estimate the potential that the country and its people have
along with a diligent consideration of all the difficulties and uncertainties. The
underestimation of complexities or overestimation of possibilities can create big time
problems. Few recommendations are:

 There should be research firms in India that should take up studies to determine
where, when, and how to enter a market.
  New agencies should be established that would guide a foreign investor about the
opportunities available in India and the difficulties that have to be overcome. They
can also help the investors in performing the research, planning the projects,
financing, resource management, and most important of all in completing all the
paperwork in time.
 Foreign Investors should have an easier access to capital resources as India require
huge investments in the infrastructure projects
 Simplified rules and regulations and tax laws should be enforced
 Time limits should be enforced on all relevant clearances
 A statutory body should be created, that consists of members from private sector also.
This body can advise the government on their approach to attract foreign investment
 More Free Trade Zones, Special Economic Zones and Export Processing Zones
should be created as they attract the investors
 Privatisation has a lot of potential to absorb a huge investment. It should be
encouraged

India's economic growth can be made sustainable and it is highly dependent on how the
government would provide new incentives to enhance FDI flow across a large number of
sectors. The general economic direction in India is toward liberalization and globalization.
But the process is slow. The government in March 2005, amended the rules, and allowed 100
per cent FDI in the construction business. The government needs to create such policies that
would help India to attract more investments while not compromising with its security.

Graph 2: FDI Net Inflow India

India has come a long way in terms of FDI inflows post 1991 reforms. India today, boasts of
a growing and vibrant private sector that is continuing to attract the interest of foreigners,
who have spent considerable amount of time in researching the most lucrative investment that
India can offer. Some foreign investors believe that investment in India is surrounded by too
many constraints. The only way India can convince them is by proving in coming years that
investment can be made in India without many hassles. The government, public as well as
private sector need to come together and make the country a better place to invest in.
 REFERENCES

Text References:

http://dipp.nic.in/fdi_statistics/india_FDI_August2010.pdf

http://www.financialexpress.com/news/India-2nd-best-country-for-biz-investment-Survey/343344/

http://www.unctad.org/Templates/Page.asp?intItemID=1923&lang=1

http://www.investamerica.gov/home/iia_main_001154.asp

Graph References

Graph 1: Source: http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=INR

Graph 2: Source: http://www.google.com/publicdata?ds=wb-

wdi&met=bx_klt_dinv_cd_wd&idim=country:IND&dl=en&hl=en&q=foreign+direct+investment+in+india+trend

Table References

Table 1: Source: http://dipp.nic.in/fdi_statistics/india_FDI_August2010.pdf

Table 2: Source: http://www.dipp.nic.in/fdi_statistics/indian_FDI_September2010.pdf