FDI in India : Impact of FDI in India

Presented by :

Avi Pipada – 13011Divya Parekh - 13022Jayesh Porwal - 13036Yusuf Shaikh – 13043Rahul Chabukswar - 13051

INDEX :What is FDIWhy FDIDrawbacks of FDIImpact of FDI on host economyStudies on FDI in IndiaFDI policy in IndiaYear wise FDI inflow in the post reforms era

(1990-2010)Top Investors in IndiaTelecommunications sectorRetail Sector in India

What is FDI?

• Foreign direct investment (FDI) is a direct investment into production or business in a country by an individual or company of another country, either by buying a company in the target country or by expanding operations of an existing business in that country.• • Foreign direct investment is in contrast to portfolio investment which is a passive investment in the securities of another country such as stocks and bonds..

Why FDI?

No debt creation on the part of the government.Triggers technology transfer.Assists Human capital formation.Contributes to international integration by promoting

exports.Increases productivity and competitiveness.Improves efficiency of resources.Promotes innovation

Drawbacks of FDI

Local firms may loose business because of the oligopolistic power of foreign firms.

The repatriation of profit may drain out the capital of the host country.

Local population may be displaced out of their jobs if they are unable to cope with the technologically advanced foreign firms.

Impact of FDI on host economy-Review of literatures.

FDI may have a negative impact on the growth of the developing countries (Singer,1950; Griffin, 1970).

Hanson (2001) argues that evidence that FDI generates positive spillovers for host countries is weak.

FDI could have a favorable short-term effect on growth

as it expands the economic activity. However, in the long run it reduces the growth rate due to dependency, particularly due to “decapitalization” (Bornschier, 1980).

Studies on FDI in IndiaBanga (2005) demonstrates that FDI, trade and

technological progress have differential impact on wages and employment.

Higher extent of FDI in an industry leads to higher

wage rate, it has no impact on its employment.

Higher export intensity of an industry increases employment in the industry but has no effect on its wage rate.

Import of technology has unfavorably affected employment in India. The study by Sharma (2000) concluded that FDI does not have a statistically significant role in the export promotion in Indian Economy.

“FDI is not growth stimulant rather it is growth resultant.”

Study by Sahoo and Mathiyazhagan (2003) support the view that FDI in India is not able to enhance the growth of the economy.

Pailwar (2001) argues that the foreign firms are more interested in the large Indian market rather than aiming for the global market.

Export oriented sectors should be opened up for FDI so that a higher growth of the economy could be achieved through the growth of these sectors.

FDI policy in India:

Currently FDI is permitted:a) Through financial collaborations.b) Through Joint Ventures and technical collaborations.c) Through capital markets via Euro issues.d) Through preferential allotments.

India had opened up its economy and allowed MNCs in the core sectors such as Power and Fuels, Electrical Equipments, Transport, Chemicals, Food Processing, Metallurgical, Drugs and Pharmaceuticals, Textiles, and Industrial Machinery.

Telecommunications, Banking, Insurance, Hotel & Tourism, IT.

Mining of titanium keeping India's civilian nuclear ambitions in mind upto100%,a mineral which is abundant in India.

single Brand product retailing where Foreign Investment up to 51% is permitted with prior Government approval. Major debate going on about approving FDI in India’s Retail sector.

Currently FDI is also allowed in:

Year wise FDI inflow in the post reforms era (1990-2001)

2439

0 1000 2000 3000 4000

1992-1993

1993-1994

1994-1995

1995-1996

1996-1997

1997-1998

1998-1999

1999-2000

US $ MILLIONS

FDI

3776337838

0 10000 20000 30000 40000

2000-2001

2001-2002

2002-2003

2003-2004

2004-2005

2005-2006

2006-2007

2007-2008

2008-2009

2009-2010

US $ MILLIONS

FDI

37763

Year wise revised FDI Inflow since 2000-2001 with

expended coverage to approach International

Best Practices.

The growth of FDI inflows in India was not significant until 1991 due to the regulatory policy framework.

There has been a steady build up in the actual FDI inflows in the post-liberalization period. Actual inflows have steadily increased from US $ 143.6 million in 1991 to US $ 37,763 million in 2010.

The pace of FDI inflows to India has definitely been slower than some of the smaller developing countries like Indonesia, Thailand, Malaysia and Vietnam.

India had registered a declining trend of FDI inflows and the FDI- GDP ratio especially in 1998 and 2003 could be attributed to many factors, including the US sanctions imposed in the aftermath of the nuclear tests and Swadeshi movements.

But since 2006 India has seen a remarkably higher growth of FDI in accordance with the general trends of the global economy with a slight dip in the year 2009-2010.

Capital goods sector has more or less been bypassed by FDI. This clearly points out the tendency of foreign investment to exploit the pent up domestic demand for consumer durable goods.

A gradual increase in the mergers and acquisitions during the 1990s which show a tendency of FDI inflows to acquire existing industrial assets and managerial control without actually engaging in new productive activities (Nagraj, 2006).

Top Investors in India:

42

97

54 4 4

2 2

19

0

5

10

15

20

25

30

35

40

45

%a

ge

to

to

tal

Infl

ow

s (

in t

erm

s

of

US

$)

%

Telecommunications sector- A success story

Large number of private operators started operating in the basic/mobile telephony and Internet domains after several series of reforms in the telecom sector. FDI is permitted up to 74% with FDI, beyond 49% requiring Government approval.

As a result of the New Telecom Policy 1999 (NTP99) Total FDI in telecom is currently over US $ 15 billion.

Tremendous improvement in infrastructure, lowest tariff rates in the world and over 250 million users.

In 2007-2008 Vodafone took over Hutch for about US $ 11 billion.

Retail Sector in IndiaRetail industry in India is one of the fastest growing.

Contributes 14% to the national GDP and employs 7% of the total workforce.

The retail industry is divided into organised and unorganised sectors.

Organised trade employs roughly 5 lakh people whereas the unorganized retail trade employs nearly 3.95 crores.

Growth in Retail as a result of economic expansion as well as jobless growth.

Major arguments against adoption of FDI in Retail in India:

FDI driven modern retailing is labour displacing.It can only expand by destroying the traditional retail

sector. Foreign retail firms have deep pockets and can

cause even the organized retail sector to go out of business.

Will buy big from India and abroad and be able to sell low. When monopoly situation is created will will buy low and sell high.

It is true that it is in the consumer’s best interest to obtain his goods and services at the lowest possible price. But collective well being should take precedence.

Suggestive measures to eliminate the negative effects of FDI in Retail

FDI should be aggressively promoted in R&D, Manufacturing, Entertainment to accommodate the people who have lost their jobs.

Import duty should be imposed to protect domestic production units.

Labour laws should be imposed to ensure that no management jobs are outsourced.

Jobs should be reserved for the poor people.

Hindi and local languages as a mode of operation should be encouraged.

Cooperative societies should be formed for the farmers and other agricultural suppliers to take care of their rights.

The foreign retail units should be made to divest a certain percentage of their equity in the Indian financial markets.

Social infrastructure like schools, colleges and hospitals should be developed to promote human capital formation

Bibliography

http://en.wikipedia.org/wiki/Foreign_direct_investment

http://www.sharetipsinfo.com/fdi-retail.htmlhttp://en.wikipedia.org/wiki/

Retailing_in_Indiahttp://toostep.com/debate/what-is-impact-

of-fdi-in-indian-market

THANKYOU !