FOREIGN DIRECT INVESTMENT IN INDIA: OPPORTUNIITIES AND CHALLENGES

BY

Dr SURANJAN BHATTACHERYAY

ASSOCIATE PROFESSOR

INDUS BUSINESS ACADEMY

KANAKPURA MAIN ROAD,BANGALORE-560062

E mail: bhattacheryays@yahoo.co.in

ABSTARCT

Foreign Direct Investment (FDI) is the dispersal and optimisation of resource packages like human,

financial, knowledge, physical and reputational resources. The motivational factors such as natural

resources, market resources, strategic resources, efficiency resources, locational advantages etc

influenced Multinational Enterprises (MNEs) to perform various activities in the host countries.

MNEs internationalise business mainly to acquire intangible assets and for balancing resources which

they do not possess.

India is in receipt of continuous capital flow due to favourable policy management and strong

business environment. Globally, Indian corporates continually display significantly better equity

earnings over other countries both developed and emerging. Government of India is very keen in

simplifying FDI rules with an ultimate aim to attract more investors with zero hazards.

Key Words: Optimisation of resource packages, Reputational resources, Strategic resources,

Efficiency resources, Locational advantages, Strong business environment, Equity earnings.

_________________________________________________________________________

1. Introduction combination of human, financial, knowledge,

Foreign Direct Investment (FDI) is the physical and reputational resources. MNE’s

dispersal and optimisation of resource goal is to perform commercial activities and

packages by Multinational Enterprises to retain strategic control in the host country.

(MNEs) in a host country where a company Host countries are based in another country,

based in another country looks for business having high business potentials. MNE crafts

activities. Resource packages are the value and placates stakeholder desires by

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operating across national borders. Normally, confers higher value to the firm. Host

host countries are historically well aware country’s locational advantage motivates

about the local stake holder requirements. MNEs to conduct economic activities in that

Accordingly, while operating across national location to enlarge their market size.

borders, MNE is in disadvantage position as Locational advantage is the incidence of

compared to firms from host country. MNEs customer’s inclination which leads to procure

engage themselves in Foreign Direct firm’s products. Looking for market by MNEs,

Investment (FDI) if the host country converse is not the same as mere export. It involves

a locational advantage in relation to the home MNEs multiple business activities, helped to

country. Value plan strategy on the foreign transfer/convert bundle of resources and to

activities must be more eye-catching to MNEs retain strategic control over the host country.

than the alternate value enhancement at home. 1.3 Strategic Resource

The under noted key motivational factors MNEs motivation to invest is the aspiration to

influence MNEs to perform various activities improve access to cutting-edge resources of

in the host countries. host country through exploration, recovery and

1.1 Natural Resource then laying into production. MNEs main thrust

This motivation leads to the hunt for financial, areas are to explore the cutting-edge resources,

physical or human resources in host countries. like up- stream, downstream, administrative,

All these means are primarily not easily reputational. The available/hidden resources

available and trademarked. However to make are the locational advantage of the host

them available, MNEs, besides their optimal country and are very difficult to access,

uses, add high value creation. Favourable examples, natural and market resource etc.

institutional environment is the key factor FDI primarily decide by acquiring companies,

which allows MNEs to access these resources. tempting alliance activity/ making an insider

1.2 Market Resource in foreign knowledge group. The main thought

Initially MNEs search for the customers in behind it by MNEs is to become a recognised

host countries and conclude by encompassing industry player in a set of advantageously

productive activities when foreign market knowledge development environment.

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1.4 Efficiency Resource trade-barriers. MNEs success mostly depends

It is the desire of the firm to capitalize on the advantages of favourable local

environmental changes. In the process, MNEs environment. Utilised locational strengths of

international network leads to more attractive the host country are required to be assessed

and ultimately helped to achieve consolidation with the available/ untapped strengths. Further,

with the concentration of Firm Specific an ongoing comparative assessment should be

Advantage’s (FSA’s i.e. having innovation in place with other locations.

capabilities and marketing capabilities) 1.5.1 Location advantages are the key

proprietary resources. Environmental changes contributing factor for FSAs that can be geared

comprise greater economies of scale through a up by locally operating firms relative to firms

rigorous process of technological operating elsewhere, examples are

breakthrough aiming shorter product cycle, 1.5.1.1 Ample natural resources may support

increased industry focus on innovation, higher in creating a prosperous firm in the natural

trigger on R and D investments besides resource industry like Agriculture, Forestry,

smoothening trade and investment barriers. Fishing, Hunting, Mining, Quarrying, Oil and

Locational advantages are the key factors to Gas Extraction etc.

receive new FDI in host countries. 1.5.1.2 A superior scholastic system will help

1.5 Locational Advantages firms that shape classy human resource skills.

Locational advantages (natural and created) 1.5.1.3 The presence of an exciting and

represent the entire set of strengths like fashionable local market for specific products

reputation, skilled labour, growth facilities, will possibly substitute local uprising in the

scope of subsidiary industries, employment relevant industry.

opportunities, common problems, economy 1.5.2 Location advantages do not converse

gain etc, surrounded in a specific location identical strength to all local operational firms

which is in operational at the highest level. vis-à-vis firms operating away. Rather, the

MNEs place focus in a host country where more active and proficient use of locational

natural resource, knowledge, transport etc are advantages made by some firms, are usually

easily available besides having comfortable through grouping of these locational

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advantages besides exploring FSA’s specific advantages. Besides motivation of the firm,

proprietary resources. Location advantages can locational- advantage can also be described in

vary widely based on the geographical the spirit of deployment of firm’s economic

opportunity. It delivered and facilitated all the activity in that location.

firms operating in a particular country when 2. Review of Literature

the government designed an encouraging tax Researchers, Anusha Chari and T. C. A.

regime for some specific economic activities Madhav Raghavan (2011) examined that

or pay attention on talent advancement of India’s retail market remains largely

human resources while boosting general prohibited to large international retailers like

business. While locational advantages Wal-Mart and Carrefour. The liberalization

mounted up in some parts of a country, move was opposed by opposition due to the

economic clusters is positioned on to that parts apprehensions about employment losses,

only. Accordingly, firms that are operating in unfair competition resulting in large-scale exit

that part of the country will receive all out of many domestic retailers.

business advantages and framed Research Scholar, Mr Rajib Bhattacharyya

simultaneously the heart of the cluster besides (2012) opined that the spectacular and

creating the cluster boundaries. Geographical unprecedented growth of FDI in the global

opportunities may economic landscape, over the last two

1.5.2.1 extend to a narrow cluster, decades, evidenced that FDI is an integral part

1.5.2.2 be a broader region within a country of the development strategy of both the

1.5.2.3 be a country or a region across more developed /underdeveloped and developing

than a country nations. FDI in the retail can enlarge market

1.5.3 Location advantages also spread across size by reducing transaction and

the country borders intending to craft transformation costs besides adoption of

advantages to insiders at the expense of advanced supply chain.

outsiders. Most of the regional trading and Ms Neha Dangi (2013) expressed that FDI is

investment agreements spoke exceedingly for the lifeblood for the economic development of

the creation of cross border location any country as it plays an important role in

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the long-term development, not only as a Mr Desti Kannaiah and Mr A.

source of capital but also for enhancing Vinayagamoorthy (2016) studied that India

competitiveness of the domestic economy. being second most-populous country has

FDI in multi-brand retail supports the immense scope for retail expansion besides

government’s role of achieving remunerative increasing consumerism.

prices for farmers. Dr. Kishor Jagtap and Smt. Sushma Verma

Mr Bobby Srinivasan ( 2014) opined that the (2016) studied that FDI globally is considered

Modi government is committed to ease FDI to be a significant component of development

flows particularly in the areas of defence, strategy of any country. India is no exception

insurance and infrastructure besides to it. Indian Market is constantly on the path of

smoothening the tax regime for investors. growth due to its increasing size and rise in

Nupur Goel (2015) had done a small sample purchasing power of the people.

survey for analysing the impact of foreign Mr Dheerendra Kumar Baisla (2016) opined

direct investment on unorganized retail sector. that FDI is a method of allowing financial

Outcome was on high impact on business in resources, technology, and techniques, raises

regard to profit declination, unemployment in the diverse sector of economy. Basically it

besides establishing the monopolistic type of is considered as a tool to economic

situation in the retail market. development. Indian retail sector is one which

Ashima Mangla ( 2015 ) conducted study on carries great potential for attracting FDI.

Indian Retail Sector wherein the researcher Ms Sanghamitra Samal and Mr D.Venkatrama

expressed that FDI in retail will play an Raju (2016) studied that the economic

important role in the long term development of development of a country is based on its

a country by enhancing the competitiveness of “Industry Revolution” with more production

domestic economy. India is being looked by and promotion which are mostly possible

many foreign investors due to rise in through the revolution of agriculture,

purchasing power, growing consumerism and industries etc. Inflows through Foreign Direct

brand proliferation. Investment (FDI) are the major facilitator to

achieve the above.

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3. Research Methodology Indian economy today, compared to what it

Researcher made this paper based on the was in 1991, undergone a veritable sea change.

secondary data, sourced and collected from 4.1 Following tasks are being carried out, in

various books, media, journals, government phases, to attract foreign investors’ attention.

publications, newspapers etc. The paper is 4.1.1 Credible evidence-based policy options

descriptive in nature. Collected data is for improved India-ASEAN economic,

presented in the form of tables. Tabled data trade and external relationship: India has

analysed and studied in the form of charts, been hunting a combined multilateral, regional

diagrams. Requisite internet searching has also and bilateral approach to trade policy with its

been done for this purpose. Researcher also major trade partners i.e. the Association of the

took help from some web sites and placed South East Asian Nations (ASEAN), which

some charts etc from their sites in the paper. made them to form a long relationships

4. Preparedness of India aiming to establish a major regional research

Multinational companies internationalise and policy hub.

business mainly to acquire intangible assets 4.1.2 Trade, FDI and economic growth

and balancing resources which they do not linkages in selected south Asian countries:

possess and which are essential to develop a The linkages between FDI and economic

competitive advantage for survival in more growth had been the focus of sizable research

competitive environments. Dynamics that for many years. However, the linkages are

formerly paying FDI attention to developing- subject to empirical scrutiny and remain the

countries, were political steadiness, policies in topic of debate all-time.

place and availability of cheap labour but now 4.1.3 Financial decoupling of Emerging

size of the market, expected growth potential Asset Markets from Japan and US:

and skilled labour, dominate. The Financial Organizations have anxieties to

transformational impact of liberalization persuade customers to invest newly developed

during the last twenty five years of Indian Exchange Traded Funds(ETF), designed to

Economy, has been profound and substantial. track the performance of emerging markets.

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 4.2 Non-Financial Debts (NFDs) include be a sustenance in reducing Government’s

amounts owed on credit cards, loans made to fiscal deficits to a great extent.

households in the form of mortgages, Domestic corporate’s growth rate roving

government agencies, non-profit organizations around at an average of 7%, displays

/corporations i.e. those are not in the significantly better than average equity

financial sector. NFDs have been played also earnings growth rate amongst 23 developed

as a source of finance under FDI for the and 23 emerging markets. Near future looks

economic- development of any country. better due to expected tax rate reduction in

Foreign -companies investing India, have coming years and abolition of all taxes by

goals to avail the benefits of the prevailing replacing goods and services tax(GST).As per

moderately lower wages and distinctive Bloomberg’s data, average corporate earnings,

investment advantages such as tax reliefs etc. MSCI India Index, will likely to be over 16%

FDI facilitates host country to achieve in near future.

technical expertise besides employment A transparent, predictable and easily

generation. The main reasons for continued comprehensible policy agenda on FDI has

foreign - capital flow in India, are for been put in place by the Government with a

favourable policy management and strong provision to update every year, even as and

business environment. Investors like the when needed, to capture and to keep pace with

Indian monetary policy discipline such as the global/domestic regulatory changes.

inflation management, fiscal management. Government of India is very keen in

Government’s continuous focus in narrowing simplifying FDI rules further by enhancing

the fiscal deficit , will ultimately facilitate investment limit in the existing sectors and to

Central Bank in lowering interest rates. In the bring more sectors afresh both under

process, domestic currency has become stable automatic and approval route. Government’s

and strong, easing reduction in forex risk to ultimate aim is to attract more investments

overseas investors. Lower oil price coupled with zero hazards.

with improving fiscal management policy like

shrinking government subsidies, will definitely

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4.3 Government Initiatives up their balance sheets, are allowed 100 %

Latest Budget has commended various reform FDI under automatic route. The main purpose

steps under FDI Policy which will ease is to manage growing concern of declining

operations in number of potential areas like asset quality of Commercial Banks.

Asset Reconstruction Companies (ARC), 4.3.3 FDI in construction sector contribute

Stock Exchanges, Insurance and Pensions more than 8% of India's GDP. Recent

besides smoothening fund raising and amended policy on construction

governing norms i.e. more transparency in tax development Sectors includes

related matters, higher FDI limits and 4.3.3.1 Simplification of area restriction

establishing systems for speedy approvals norms: Area restriction and minimum

process. To facilitate the budget plan, capitalisation norms will not apply, if 30%

concerned-department, outlined liberalised project costs of any housing project, spent

FDI policy-rules by bringing more sectors towards affordable housing.

under the automatic route. The main focus is 4.3.3.2 Minimum capitalisation norms

to establish quicker approval process to exhibit reduction i.e. US $5M. FDI is now allowed in

India as an attractive investment destination. any construction project, irrespective of size.

Key initiatives are outlined below; 4.3.3.3 Simplification of exit norms from

4.3.1 Ministry of Finance (India) framed the project: Foreign investors are allowed to exit

residency permit policy for the foreign from construction development projects,

companies executives: earlier 3 years locking periods, removed.

4.3.1.1 Executives can enjoy long stay by 4.3.4 FDI (100%) under Government approval

investing US$ 2 bn or more, in India, through on trading for food products originated in

residency permits besides the benefits of India, includes through E-commerce also.

special package on upscale housing, cheap 4.3.5 Under automatic route 49% FDI in

rates for utilities etc defense sector, above, on approval by

4.3.2 Asset Reconstruction Companies (ARC) Government on case to case basis besides

that purchases bad assets or NPAs from banks permitting to manufacture small arms and

at a negotiable price and helps banks to clean ammunition.

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4.3.6 Direct-to-home, mobile TV and teleports 4.3.13.1 Investment made by Persons of Indian

under “Broadcasting Carriage Services” up-to Origin in Non-repatriable mode.

100 % allowed under automatic route. 4.3.13.2 Overseas Indian Citizens

4.3.7 FDI-74%, allowed in private security 4.3.13.3 Non Resident Indians.

agencies, against the existing norms of 49 %. 4.3.14 Insurance cap under FDI rose from 26

4.3.8 49% automatic route under FDI for % to 49 %.

Single Brand Product Retail Trading, beyond 4.3.15 FDI up to 100%, allowed in railway

under Government route. Local sourcing norm infrastructure (excluding operations) for

for the foreign firms relaxed initially for three founding network and providing requisite

years of their commencement. On completion, facilities for running bullet trains.

next five years the Foreign Company have to 4.3.16 Relaxed-norms for tea plantation,

meet the annual average rate of 30% domestic animal husbandry, mining .petroleum, natural

sourcing norm. Afterwards effective norms gas sectors for the overall economic growth.

will be, on an annual basis, on trading on 4.3.17 Recent Sweeping Reforms

Retail Single Brand Product. The Government has recently made sweeping

4.3.9 Under Multi Brand Retail Trading 51% reforms in the areas of defense, civil aviation,

has been allowed under Approval Route. single-brand retail and pharma sectors for

4.3.10 74% FDI on pharmaceuticals industry attracting more foreign investments

through automatic route, over 74% under 4.3.17.1 Earlier, FDI beyond 49% was

government approval process. permitted through approval route in cases of

4.3.11 74% FDI allowed in Private Bank, access to modern and “State-of-the-art”

includes FII’s investments. technology. Government has done away with

4.3.12 Foreign Direct investment, on “State –of- the-art” technology clause.

regulated Non-Banking Finance Companies 4.3.17.2 100 percent (Existing 74%) FDI

(NBFCs), under the automatic route. under automatic route in brownfield airports

4.3.13 The following cases are to be (where funds are pumped into an existing

considered as domestic investments and will airport) has been permitted.

be exempted under FDI Cap Criteria’s:

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4.3.17.3 In pharma, it has been decided to 4.3.18.3 Indian capital market can foresee

permit up to 74% FDI under automatic route overall growth and development.

in brownfield projects. 4.3.19 Till now, Foreign Portfolio Investors

4.3.18 Similar to domestic institutions, are only, having access in secondary market.

Foreign shareholding limit in Indian Stock Henceforth, they can also acquire shares

Exchanges rose from current 5% to 15%, through initial allotment.

applicable for banking company, stock 4.3.20 Limit described above on Foreign

exchange, depository, commodity derivative shareholding limit in Indian Stock Exchanges

exchange and insurance company. It, (15%), applicable for the following;

ultimately facilitates the following, 4.3.20.1 Foreign Investment under Foreign

4.3.18.1 Enhancement of global Portfolio Investment,

attractiveness and competitiveness: It 4.3.20.2 Investments by FIIs (Foreign

comprises of 12 pillars such as Institution, Institutional Investors)

Infrastructure, Macroeconomic Environment, 4.3.20.3 Qualified foreign investment

Health and primary education, Higher 4.3.20.4 Investment by Foreign Venture

education and training, Good Market Capital

Efficiency, Labor Market Efficiency, Financial 4.3.20.5 Non-Resident Investment

Market Development, Technological 4.3.21 Almost all the regulators, under

Readiness, Market Size, Business various sectors, have fixed minimum

Sophistication and Innovation. capitalization norms. The norms are

4.3.18.2 Scope of acquiring and adopting exclusively eliminated under FDI policy.

updated technology and to implement 4.4 Remittance and Repatriation

best practices, well accepted globally: In finance, repatriation means the process of

Among the main available sources of Foreign converting foreign currency into domestic

Technology, FDI plays a pivotal role, currency and subsequent remittances thereof

especially for countries having less advanced or vice-e-verca. It depends on the exchange

stage of technological development. rate between the two currencies.

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4.4.1 Remittances of proceeds on Sale, on 4.4.3 Dividend Repatriation

winding up and for Liquidation of Free Repatriation, subject to Tax deduction at

Companies: source / Dividend Distribution Tax at source,

4.4.1.1 Remittances for share and securities without any limit.

sales proceeds, are directed by “The Foreign 4.4.4 Repatriation of Interest

Exchange Management (Remittance of Assets) Free Repatriation, net of applicable taxes,

Regulations, 2000”. without any restrictions.

4.4.1.2 Remittances, net of applicable taxes, 5.Recent Major Investments/Developments

permitted against the sale of shares and After through study, the researcher could find

securities to the outside resident, if security the following significant FDI announcements

puts on repatriation basis. made during the recent past:

4.4.2 Remittance on winding up/liquidation 5.1 Honeywell International Inc declared to

of Companies: Remittances, generated out of establish a refining technology hub and the

winding up proceedings of companies on same will be used by Indian refineries for

liquidation, allowed, subject to applicable getting global standard transportation fuel.

taxes and on providing the following; The aim is to curve crude oil imports besides

4.4.2.1 No objection /Tax clearance certificate. producing ecologically preferable diesel fuels.

4.4.2.2 Auditor's certificate confirming full 5.2 Apple Inc permitted to open its first

payment of the domestic liabilities or stores in India besides manufacturing in the

sufficient provisioning thereof. country under new foreign investment rules

4.4.2.3 All winding up formalities under that exempt 3 years to foreign retailers in

Indian Companies Act, complied and sourcing 30 percent of the goods sold in

supported with Auditor's certificate. company-owned stores locally. Apple now can

4.4.2.4 If winding up took place outside any sell iPhones, iMacs and iPads through

court in India , requisite auditor’s certificate resellers and to set up its own shops in

covering that no legal actions are undecided India.Its first development centre will generate

in any Indian court, either on the company or employment potential of around 4,500 people.

on the applicant.

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5.3 The new rules applicable to retailers also 5.11 Japan Government agreed to extend loan

help Swedish furniture-retailer IKEA for for US$ 8110M for constructing first bullet

setting up stores in India. train in India.

5.4 A refrigerator plant worth INR2500M 5.12 Cool-pad Group Limited, China declared

(US$ 37.28M) already installed by Panasonic to set up their Research and Development (R

Corporation. They further planned to invest and D) centre at US$ 300M.

at its existing facility, around INR 200M (US$ 5.13“Indian Railways” granted Diesel

3M) for lithium ion batteries. Locomotive Factory project worth INR

5.5 Vital Paper Products planned to set up a 1,46,560M (US$ 2190M) to General Electric

packaging product unit worth INR 600M (US$ 5.14 French transport major “Alstom”, has

8.95 M). It is globally famous for the major been awarded electric locomotive project

supply chain players in the paper industry. worth INR 200,000M (US$ 2980M ).

5.6 Vistra Group Ltd, one of the reputed Hong 5.15 Foxconn will set up a manufacturing

Kong based professional services provider, plant US$ 5000M over the next three years.

acquired largest Corporate Trust Services 5.16 ThyssenKrupp group’s elevator unit,

provider named IL and FS Trust Com Ltd. Germany-based company, plans to set up a

5.7 Banana-Republic, reputed US- fashion manufacturing plant EUR 44M (US$ 50.5M)

brand plans to open its first partnership store. with a target to double its group’s revenue to

5.8 Hong Kong based, Silver Spring Capital US$ 1000M in next three-four years.

Management plans to invest over 20,000M 5.17 PepsiCo will invest INR22110M

(US$ 298 M) for construction of highways. (US$329M) for setting up a new core

5.9 Amazon will be set up 2.9 million sqft , the production facilities. Pepsi further decided to

second largest global delivery centre, establish a juice manufacturing unit worth

employing 13,500 people against the existing INR5000M (US$74.56 M).

1000 employees across different offices. 5.18 BSH Home Appliances Group, to

5.10 One big seed plant by Biotechnology develop local technologies, opened its first

giant, Monsanto is in the process to set up. technology centre in India.

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5.19 Ford Motor Co. planned to set up a within the ten top countries like US, Hong

mobility solutions, business services and Kong, China, Ireland, Netherlands,

product development centre at INR 13,000M Switzerland, Singapore, Brazil, Canada. RCEP

(US$ 189.2M) aiming to establish a global report also demonstrated that on account of

technology and business centre. continued economic turnaround in India, the

5.20 Around 175-200 hotels will be set up by FDI inflows are exhibiting an upward trend in

JW Marriott over the next four years. India. Global Competitiveness Index makes

5.21 Holitech Technology (China), produces ranking grade for considered countries on

basic chemical materials and electronic specified factors like country’s quality of

products, plans to invest US$ 1 bn. institutions, prevailing macroeconomic

5.22 UAE-based Gamma Group will invest environment, quality of education, potential

around INR 3,000 crore (US$ 436.5 million) market size and infrastructure potential etc.

in the infrastructure, health and education India improved its position by 16 marks to 55

sectors and will generate around 2,000 indirect amongst 140 countries as per the latest

and direct jobs. Competitiveness Index by World Economic

5.23 For better efficient logistics market, FM Forum’s.

Logistic Asia plans to invest EUR 50 million 6.1 FDI restrictions: On-going reforms on

(US$ 52.9 million) in the next four years FDI restrictions are the major contributor

5.24 For the development of tourism and which can well define a country’s performance

hospitality, 86 Memoranda of Understanding in inviting foreign investment. The reforms are

(MoUs) aggregating INR 15,000 crore (US$ made through an investment package by

2180M) were signed in the first Incredible improving different policy areas. The FDI

India Tourism Investment Summit- 2016. regulatory restrictiveness index measures

6. Global Positioning statutory restrictiveness on Foreign Direct

Regional Comprehensive Economic Investments across 22 economic sectors.

Partnership (RCEP) plans to ease existing The OECD FDI restrictiveness index reveals

investment rules. India likely to be awarded that India is among the top reformers of FDI

the most favoured nation (MFN) treatment regulatory restrictiveness index 2016. The

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highest, the more restriction. As per the countries, are less dependent on external

OECD Report (2017), presently, China is the demand, resulted as the most popular picks for

most restricted country followed by Indonesia investors besides making strategic call.

and India. FDI restrictiveness Index is the 6.2.2 Tokyo-based emerging-markets trader

lowest in Germany . Masakatsu Fukaya recently told “The best

Exhibit: 1 pick is India because of its good fundamentals,

room for further rate cuts and higher yields, all

of which are making good conditions to attract

fund inflows,”

6.2.3 Western Asset Management Co, widely

known for its global fixed income products,

Source: OECD report’17
Domestic restrictions on FDI were remained favors Indian Bonds. 

relatively high in 2015 in relation to many 6.2.4 Pioneer Investment Management, a

emerging economies and OECD countries and global investment manager, dedicated to keep

subsequently made ease afterwards. always “overweight” positions due to

6.2 Recent Global Comments Government’s on going reform processes,

Foreign Direct Investment plays an important improving growth and relatively high yields.

role for any country’s overall economic 6.2.5 I G Asia, a service provider, contracts

growth. Accordingly, countries are required for difference (CFDs) with IG – the flexible

to showcase, on a routine basis, their way to trade the financial/forex markets,

preparedness/competitiveness to raise the favors Indian equities.

confidence level of the global investors. As 6.2.6 CLSA Ltd, a global analysist, and BNP

per the A T Kearney Foreign Direct Paribas, like Indian shares.

Investment (FDI) confidence index report, 6.2.7 Peter Kohli, CEO of DMS Funds,

India has placed himself globally in to 8th recently told, India will follow bull market for

rank in the year 2017. the next five years.

6.2.1 Recent global thoughts, Indian Stocks,

Bonds, Currencies, in the Asian emerging

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6.2.8 Global beliefs that India is expected to 7.1.1 Number of Indian Companies, including

have the fastest GDP growth rate, to beat Special Purpose Vehicle (SPV), Public-Private

China, very fast. Partnership and Limited Liabilities

6.2.9 “Emerging Global Thought” on India, Partnerships (LLPs) that reported Foreign

are most favourable as the current forward Liabilities and Assets in the year 2015-16.

valuation levels exhibit sustainable growth at a Table:1

Direct Investment
(No of Companies)
sound price for the long term. Category Types of
In- In- Out-
Company
ward ward ward
7. Growth Summery and Only Only
Out
ward
IFDI (July’2017) reached at US$ 3409Million. Companies Foreign 357 3,551 ---
(Unlisted) Associates
in India
Average FDI since 1995 to 2017 was Foreign 181 10,501 ---
Subsidiarie
s in India
US$1252.56 Million. The inflow was all Others - 125 1,528
TOTAL 538 14,177 1,528
time high at US$5670Million in Feb’2008 and (16,243)
Foreign 76 129 -
Companies Associates
was low at US$60Million in Feb’2014. (Listed) in India
Foreign 35 77 -
Subsidiarie
7.1 Present Position s in India
Others - - 448
Ending March’ 2016, out of 18,549 reporting Total (765) 111 206 448
Grand Total (17,008) 649 14,383 1,976

Indian companies, 17,008 companies, had in Source: FIPB

their balance sheet, FDI or Overseas Direct 7.1.2 Financial and Non-Financial FDI

Investment (ODI). Ending March 2016, 649 Companies: Foreign Equity Participation

companies had investments on bi-directional (Amount in bn ending March’2016)

direct investment. FDI was attracted by 14,383 Table:2

Category Compa Equity Equity Equity % of
nies and Amount under Equity
and ODI was invited by 1,976, Companies. In (Numb Debt (Resident FDI share
ers) and Non- under
Resident) FDI
the same period, 15,032 companies reported to Finance 684 933.8 886.9 582.5 65.7
Com
Non- 14,348 4,852.3 4,440.6 3,461.7 78.0
have inward direct investment, include 10,794- Financial
Com
Foreign Subsidiaries Companies i.e. single Total 15,032 5,786.1 5,327.5 4,044.2 76.0
Source: FIPB
foreign investors, more than 50% equity

holding. ODI reporting Indian companies

stood at 2,625 and out of which 2,093 having

3,320, Foreign- Subsidiary Companies.

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7.1.3 Listed and Unlisted FDI Companies 7.1.6. Inward Direct Investment: Country

with Foreign Equity Participations (FEP) wise distribution – March’16(Amount in bn

(Amt in bn INR at face value: March 2016) INR at market value)

TABLE:3 TABLE:6,
Category Unlisted Listed Total Countries FDI EQUITY DEBT

Company Company All Countries 20,140.0 18,806.6 1,333.4

Mauritius 4,194.9 3,977.8 217.1

Amt % Amt % Amt
USA 3,497.4 3,319.3 178.1
No of Comp 14,715 97.9 317 2.1 15,032
UK 3,040.5 2,978.8 61.7
PUC 5,373.6 92.9 412.5 7.1 5,786.1
Singapore 2,199.2 1,967.3 231.9
Equity 4,972.3 93.3 355.2 6.7 5,327.5
Japan 1,615.1 1,471.0 144.1
FDI Equity 3,926.2 97.1 118.0 2.9 4,044.2
Germany 1,381.9 1,326.1 55.8
Source: FIPB
Netherlands 1,043.9 934.5 109.4
7.1.4 Inward/Outward Direct Investment Switzerland 972.3 947.7 24.6

(Amount at market value in bn INR as of Korea Rep 392.6 284.5 108.1

France 295.1 274.4 20.7

March 2016) TABLE: 4
Direct Inward Outward Source: FIPB
Investment 2015 2016 2015 2016
7.1.7 ODI Stock: Country-wise Distribution
Equity 18,639.8 18,806.6 4,460.7 4,659.3
March 2016 (Amt in bn INR at market value)
Debt 1,173.6 1,333.4 1,176.3 1,130.9
TABLE:7
Total 19,813.4 20,140.0 5,637.0 5,790.2 Countries ODI:TOTAL Equity Debt

Source: FIPB All countries 5,790.2 4,659.3 1,130.9

Singapore 1,190.2 1,041.1 149.1

7.1.5 Direct Investment Companies with
Mauritius 1,022.4 764.7 257.7
Foreign Liabilities/Assets (Other) (Amount
Netherlands 813.5 742.7 70.8

in bn INR as of March 2016) TABLE: 5 USA 593.8 339.3 254.5

Liabilities Assets
Investment Outstanding with Outstanding with UAE 301.1 218.0 83.1
(Other) Unrelated party unrelated party
Bahrain 293.3 35.0 258.3
2015 2016 2015 2016
Trade 2,046.9 1,871.9 1,035.5 1,150.7 Jersy 279.7 275.7 4.0
Credits
Loans 4,460.9 4,543.8 1,759.4 1,844.4 UK 193.1 155.7 37.4
Currency 2,533.8 3,034.1 566.1 393.3
and Cayman Islds 132.3 129.9 2.4
Deposits
Other 3,291.5 3,191.0 822.9 1,047.1 Cyprus 128.0 127.0 1.0
Receivable
and Source: FIPB
Payable
accounts
Total 12,333.1 12,640.8 4,183.9 4,435.5
Source: FIPB

16
 7.1.8 Indian Companies Equity 7.1.10 Cumulative FDI Flows into India

Participation (Activity wise: Mfg and 2000-2016 TABLE:10

Cumulative (FDI) amount of US
Inflows (Equity plus $453.183bn
Services), March 2016 (Amount in bn INR Re-invested earnings plus other
capital)
at face value) TABLE: 8 Cumulative(FDI) inflows (Equity INR US
Amount) (Excluding remitted 16,400bn $310.137bn
amount through RBI’s(Central
Activity Equity Equity % share of Bank)“NRI Scheme”
Amt under FDI Equity
(Resident under FDI
Source: FIPB
& Non – 7.2Key Findings (March 2016)
Res)
Plantations & 12.8 10.6 82.8
Allied activities To reach a conclusion, researcher has analysed
(Agri related)
Mining 64.1 32.6 50.9 the findings based on the tabled data.
Manufacturing 2,161.4 1,820.7 84.2
Gas, 336.4 197.2 58.6
Conditioning Subsequently, a decision statement is made on
Supply, Steam,
Electricity
Waste 6.9 4.7 68.1 the overall assessment.
management,
Sewerage, 7.2.1 Coverage: (Tables1,2 and 3) Unlisted
Water supply
and
remediation companies have played a pivotal role, like-
activities
Construction 223.0 165.7 74.3
Information 504.4 287.9 57.1 7.2.1.1 Majority received inward FDI.
and
Communication
Other Services 2,018.5 1,524.8 75.5
7.2.1.2 Unlisted companies attracted share at
Total 5,327.5 4,044.2 75.9
Source: FIPB face value of FDI equity capital (INR3926.2

7.1.9 FDI in 15,032 companies with major bn) vis-à-vis, listed Company (INR 118.0 bn ).

Activity wise Distribution as of March 2016 7.2.1.3 The share(face value) of foreign equity

(Amount at market value in bn INR) participation for non-financial companies was

TABLE-9 much larger (Rs3461.7bn) in comparison,

Activities No of Equity Debt Total
Compa
nies
Finance Companies (INR582.5 bn).
Plantations/ Allied Activities82 49.2 2.4 51.6
( Agriculture-related) 7.2.2 Inward and Outward Direct
Mining 116 457.0 19.3 476.3
Manufacturing 3821 9,338.7 667.6 10,006.3
Gas, Steam and Air 375 402.1 75.9 478.0 Investment: (Table:4) FDI(Inward) raised at
Conditioning and
Electricity supply
INR 20,140 bn at market value with a much
Water supply/ 68 4.2 0.7 4.9
sewerage/ waste
management/ larger share (93.4 %) than debt. Prior year FDI
remediation activities
Construction 728 392.8 139.3 532.1
Services 9842 8,162.6 428.2 8,590.8 was INR 19,813.4 bn. Total market value of
Total 15,032 18,806.6 1,333.4 20,140.0
Source: FIPB ODI reached at INR 5,790.2 bn from the

previous year of INR 5,637 bn. Under ODI,

80.5%, a major share, contributed Equity

17
participation. A marginal increase on market (INR10208.1 bn a year ago) and INR 8,590.8

value i.e. from 28.5 % to 28.7 %, in the bn (INR7748.4 bn a year ago) respectively.

proportion of outward to inward direct More foreign attraction was noticed in

investment, was noticed. manufacturing and services sectors.

7.2.3 Other Direct Investment: (Table 5) 7.2.6 CUMULATIVE FDI FLOWS IN TO

Other investments liability comprise deposits, INDIA (2000-2016): (Refer Table-10)

currency, trade credit, loans. Other outstanding Around 69 % of investments received under

liabilities through unrelated non-resident FDI, are made through equity, long term

publics put up at INR 12640.8 bn in March’ 16 financial instruments. Long term investment

against INR12333.1 bn as on March’15. on the host country, thought when the

Corresponding overseas assets as of March’ investors have confident on the strategic

2016, accounted for 35 % of such liabilities. growth in that country. Total FDI as of

7.2.4 Inward and Outward FDI (Source/ March’2016 reached US$ 40 bn, 29%

Destination Countries): (Tables 6 and 7) increase over and above the same period of

Mauritius was on the top of the list of 2015 ( US$ 30.93 bn).

countries, contributed 20.8 % followed by 7.2.6.1Service sector attracted the highest

USA (17.4 %), UK (15.1 %), Singapore (10.9 equity inflow under FDI at US$ 6.9 bn during

%) and Japan (8.0%). Indian company, 2015-16.Computer hardware/ software sector,

attracted ODI mainly, from Singapore (20.6%) ranked after service sectors with US$ 5.9 bn.

followed by Mauritius (17.7%), Netherlands 7.2.6.2 Equity inflow through FDI, for the

(14.0 %) and USA (10.3 %). month of March 2016 alone, reached at US$

7.2.5 Inward FDI (Activity/Sector Wise): 2.47 bn, 0.35bn over in the same period last

(Tables 8 and 9) a major foreign year, witnessing year on year growth of

participation through equity investments (75.9 16.5%. Highest equity inflows witnessed

%) attracted by Manufacturing and Services from Singapore at US$ 13.69 bn. Mauritius,

sectors only. FDI, at market value, comprising ranked 2nd with US$8.35bn, followed by USA

Equity and Debt through Manufacturing and at US$ 4.19bn, Netherlands US$2.64bn and

Services sectors, contributed INR10006.3 bn Japan at US $2.61bn.

18
7.2.6.3 During the year 2016, total 7.3.2.1 FDI received under equity mode till

inbound M and A value reached at $30.8 bn March’2017 stood at US$ 43.476 bn, rose by 9

comprising 176 deals vis-à-vis $19bn, a 62.3 % in dollar term , year-on-year basis. FDI in

per cent over the corresponding year 2015. equity inflow under services sector attracted

7.3 Latest Position the highest, amounting US$ 8.68 bn, followed

7.3.1 FDI Inflows during April’2016 to by telecommunications – US$ 5.56 bn and

March’17 TABLE: 11 trading-US$ 2.33 bn. FDI equity inflows for

Total Inflows(FDI) into US$
India (Equity+Re- invt 60.082bn
earnings +Other Capital)
March 2017 alone, was US$ 2.45 bn.

FDI Equity Inflows INR2916.96bn US$43.476bn 7.3.2.2 Ending March’2017, FDI equity

Source: FIPB inflows were highest from Mauritius (US$

7.3.2 FDI EQUITY INFLOWS (MONTH- 11.16 bn), then Singapore (US$ 5.46 bn),

WISE) DURING FY 2016-17 TABLE:12 Japan (US$ 2.56bn), and USA (US$ 2.03 bn).

Amount of FDI Equity Inflows 7.3.3 As per Grant Thornton India’s report
Financial Year INR in bn US$ in bn
(Assurance, Tax and Advisory firm), there
2016-17
were 59 PE transactions worth $1.22 billion in
April 2016 223.450 3.362

May2016 132.710 1.983 July’2017, against 88 deals worth $826 million

June 2016 151.110 2.245 in the corresponding month last year. As the
July2016 274.300 4.081
market consolidation is much expected in
August2016 321.500 4.803

Sept2016 343.660 5.149 sectors like e-commerce, telecommunication

Oct’16 413.530 6.195 due to facing cash crunch, Mergers and

Nov’16 316.310 4.677
acquisitions are likely to be the favored
Dec’16 227.270 3.347

Jan’17 270.670 3.976 route for foreign direct investment flows

Feb’17 81.180 1.210 into India in the coming years.

March’17 161.260 2.448
7.3.4 As per The Financial Times report-
FY 2017 2916.950 43.476

FY 2016 2623.220 40.001 2017, India was ahead of China and the US in
% growth over last +11% +9% regard to FDI inflows.
year (Rupee term) (Dollar term)
7.3.4.1The main reasons for the continuous
Source: FIPB
growth, are government's thrust in improving

19
“Ease of doing business”, relaxing FDI norms 8.1 Data Collection

in various sectors. In the last three years, the For the purpose of ascertainment, FDI inflow

government eased 87 FDI key rules across 21 data were collected from the “Foreign

major sectors. Under the ease-of-doing- Investment Promotion Board’s, India

business drive, the government launched a (FIPB) latest reports.
portal to replace the website of the “Foreign 8.2 Methodology: To test the success level,
Investment Promotion Board”, a body was pre 5 years and post 5 years FDI inflow data
responsible earlier for FDI approval. Now the of the earlier and the present ruling
approval is entrusted to respective ministry. Government are collected.Keeping in view the
7.3.4.2 Foreign Direct Investment (FDI) grew objective of the study, t-test was employed.
by 37 per cent to USD 10.4 billion during the This has been used as a statistical tool to find
first quarter of the current fiscal.(April- out whether the initiative for attracting FDI by
June’2017) vis-à-vis . USD 7.59 billion during the present Government had any significant
the same period last year. effect over the earlier Government. t-test is
7.3.5 FDI is estimated at a CAGR of 20-24 % carried out, based on the following equation:

) √ NN +NN
and is expected to touch US$ 68 bn by 2025,

from only US$ 1 bn in 2015.

t= (X 2−
S
X1
1
1 2

7.3.6 India’s balance of payments (BoP) X 1 is the mean of pre 5 years period
Where,
improved, due to continued-inflow of foreign
and
X 2 is the mean of 5 years FDI inflows,
investments resulted stabilising international

during the present Government .

N 1 and N 2
value of Indian currency.

8. Success of the Present Government in are the number of observations. S is the

bringing FDI during their Ruling: combined standard deviation. For a confidence

To ascertain, the Researcher took out FDI level of 95%, we have a t-value of 2.306 for a

Inflows for the years 2008-to 2012 (Before the total sample size of ten. If we have an

ruling of the present Government) and for the outcome with a t-value greater than 2.306,

years 2013 to 2017 i.e. during the ruling of the then Hypothesis H1 is considered true else H0

present Government. is considered true.

20
Hypothesis H0 (Null Hypothesis): There is As the t value is less than 2.306 it is not

no significant difference between pre and post- statistically significant. However, FDI inflow,

period. since 2015, has increased significantly during

Hypothesis H1: Significant difference the tenure of the present Government with an

between pre and post periods persist. average y-o-y growth of19%, exhibited below:

FDI Inflows: TABLE:13 FDI Inflows: Exhibit:2

Year In Million US$

2007-08 34843

2008-09 41873

2009-10 37745

2010-11 34847

2011-12 46556

2012-13 34298

2013-14 36046 9. Sensex :

2014-15 45148 SENSEX is the benchmark index pertaining to

2015-16 55559
the capital market of any country. It needs to
2016-17 60082
be technically formulated in such a way that
Source: FIPB
should have a wide acceptance among the
8.3 t test: Calculation
global individual investors, institutional
X 1 (Mean from 2008- to 2012)=US$39173M
investors fund managers and foreign investors.
X 2 (Mean from 2013 to 2017)=US$46227M
9.1 The goals of the index are

S1 (Pre period Standard Deviation)=5032, 9.1.1 Market movement’s measurement.

S2 (Post period Standard Deviation =11469, 9.1.2 Benchmarking of funds’ performance

S (Combined SD) 9.1.3 For index based derivative products

√
−− −−
BSE Sensex Index adopts, globally accepted,
∑ ( X 1 −X 1 )2 + ∑ ( X 2 − X 2 )2
= N 1 + N 2−2 =8856 "Free-float Market Capitalization" i.e.

39 ,173−46227
Then t = 8856 √ 5X 5
5+5
proportion of shares of a publicly traded

company that is traded in the stock market,

t = 1.26
considered for index building. Major global

21
index providers like S & P, Dow Jones etc

used Free-float methodology.

9.1.4 S & P BSE Sensex Index

Yearly Sensex movement of Bombay Stock

Exchange for the past five years. Source: Bloomberg

Table: 14 BSE’s mid and small cap indices also hit a
Year Open High Low Close
new high. Normal gross domestic product is
2013 19,513.45 21,483.74 17,448.71 21,170.68
expected to grow at 11%.
2014 21,222.19 28,822.37 19,963.12 27,499.42

2015 27,485.77 30,024.74 24,833.54 26,117.54 10. Road ahead

2016 26,101.50 29,077.28 22,494.61 26,626.46
India require around US$ 1tn, under their 12th
2017 26,711.15 32,686.48 26,447.06 31,388.39
Five-Year Plan (2012–17), for the holistic
Source: BSE Report
infrastructure sectors growth comprising
Remarkable 49% growth, in the Indian equity
highways, ports, airways etc. A major supports
market has been observed during the last five
are required from FDI inflows. Major
years. Since the globalisation process takes
activities, attracting FDIs at market prices
place, the stock market efficiently managed
contributing around 50%, like Manufacturing
global competitiveness in spite of delicate
Sector followed by service sectors, covered
activities by various bull and bears. Similarly,
about 40 % includes ‘Information and
Sensex trend for the decade exhibited booms
Communication Services’, ‘Financial and
and busts of the Indian equity market also.
Insurance Activities’ etc. Global FDI is
9.2 Market Capitalisation
expected to rise by 5% to $1.8 trillion in 2017.
The value of India’s listed companies recently
India retains 3rd spot on UNCTAD’s list of
reached a new high at Rs135.84tn. It was Rs
investment destinations.
106.89tn as on 2/1/2017, 27% growth in 9
10.1 To continue the present status, India
months’ period. Exhibit: 3
needs to adopt the following;

10.1.1 Emphasis on the right balance between

regulations in place and liberalization process,

22
encouraging investment for sustainable have to step up and provide platforms which

development. are tuned to Indian ecosystems. Furthermore,

10.1.2 Further relaxation in liberalizing the the core to “Make in India” campaign is to

entry requirements of the key economic bring more foreign MNCs to set their facilities

factors such as infrastructures, aviation, in India, which will create employment

mining, financial services and real estate. opportunities for the countrymen.

10.1.3 Continue to have restrictions, on the India currently ranks 99th in labour market

national security and related areas, a great efficiency among 148 countries. India needs to

challenge. provide an efficient employable workforce

The positive business climate was further i.e. skilled labourers. Simultaneously, India

kindled with the launch of “Make in India” needs amendment in the restrictive labour and

initiative in September 2014 by the PM. PM’s land laws. India’s further preparedness is

ambitious ‘Make in India’ initiative has been required to boost its manufacturing sector

able to attract the world’s attention to India as through road-rail-sea-air infrastructure linking,

a manufacturing hub. The program aimed at required to bring in Raw material to

driving new innovativeness designed to stand- manufacturing plants as fast as possible and to

in uniqueness, to protect intellectual property take finished goods as quickly as possible to

and to facilitate investment through building rural, urban and international markets.

best-in-class manufacturing infrastructure. The While Government keenness on attracting

success of the program will largely depend on foreign investment into the country to boost

the preparedness to provide the necessary the country’s economy faster, the make in

infrastructure in terms of energy, technology, India Lion can roar out loud only when more

skilled manpower, land, simpler regulations to policies are prepared enough to support and

the industry to become a manufacturing super nurture the manufacturing sector to grow and

power nation. make India as world’s manufacturing hub.

To enable technology in manufacturing Foreign Institutional Investors which started

companies and run 100% integrated digital selling after Trump's win also upturned their

supply chain, domestic software companies trend in the recent past and invested in shares

23
worth US$43.476bn.(2016- 2017).Historically, 4. Reuter Report (June16):India opens door

India's economy is founded through cash for Apple retail, new FDI rules.

transactions. Moreover, a substantial 5. PTI Report (17):Amazon gets Govt nod to

transaction operates, informally. Privileges of invest in food retail in India

the Government on the recent move on 6. Money Control: Report(2017):India retains

demonetisation (flushing out illegal cash) are world's highest FDI recipient crown, attracts

to resist corruption and tax evasion besides $62 bn in 2016:

crippling criminal enterprises and terrorists. 7. Central Bank:

After the recent demonetisation move and I. Central Bank’s Master Circular No.

GST implementation, the Sensex gathered 15/2015-16(Dated July 01, 2015,Updated

substantial points and Nifty also traded firmly up to October 30, 2015)

above its crucial psychological level, signifies II. Foreign Exchange Management (Transfer

strong global markets. Rupee also traded at or Issue of Security by a Resident outside

higher level, near 1-month high, 65.36 against India) (Second Amendment) Regulations,

the US dollar, boosting the sentiment in equity 2016

markets. Less cash economy will ultimately III. Census of Foreign Liabilities and Assets

march into a digitized credit system to frame of Direct Investment Companies: Press

India as one of the best attractive country in Release dated 19/12/2016

the eyes of global investors. 8. Central Government: Consolidated

References: FDI Policy Circular of  2016 (Effective from

1. NDTV Report (2017) : India Retains 762016) Circular dated 762016

World's Highest FDI Recipient Crown 9. Alain Verbeke (2015): International

2. TIMES Report(2017):India’s FDI inflows Business Strategy: topics

at a record $60.1 billion I. Conceptual foundations of international

3. Economic Times (Press Releases-17): business strategy

Indian Government to unveil portal to II. The critical role of firm-specific advantages

facilitate FDI proposals soon. III. The nature of home country location

advantages

24
IV. The problem with host country location

advantages

V. Combining firm-specific and location

advantages in a multinational network

10. Bombay Stock Exchange guidelines on

Foreign Direct Investment through stock

exchange

11. Department of Industrial Policy and

Promotion (DIPP) of India’s role in FDI policy

formulation through circulars released from

time to time.

12. Bloomberg report (2017) on FM’s removal

of key foreign investment in budget

13. Journal of Quantitative Economics: page

121-133(Vol-10,No-1:Jan’12)-Author:TV Hoa

14. Foreign Direct Investment, Trade and

Economic growth: Challenges and

Opportunities: Author J Morton (CH-8)

15. World Economic Forum: Global

Competitiveness Report (14-15)

16. OECD economic surveys (India) 2017

17. Grant Thornton India’s Report on Private

Equity

18. The United Nations Conference on Trade

and Development’s (UNCTAD’s) World

Investment Report’2017

19. A.T. Kearney Foreign Direct Investment

(FDI) Confidence Index report-2017

25