Role Of FDI In Industrial Growth Finance Essay - Free Essay Example

Sample details Pages: 7 Words: 2146 Downloads: 5 Date added: 2017/06/26 Category Finance Essay Type Analytical essay Did you like this example? In todays fast-globalising world,foreign investment is crucial to a countrys economy growth. Here is increasing competition among nations to attract foreign investment to spur economic growth.Foreign investment comes from two ways: foreign direct investment (FDI) and foreign institutional investment (FII). Foreign direct investment (FDI) FDI is defined as an investment made to acquire lasting (business) interest in enterprices operatimg outside of the investors economy. For instance, if a company registered in USA buys a stake in an Indian Company,such an investment is termed FDI. The FDI relationship consists of a parent enterprise and a foreign affiliate, which together form an multinational corporation. FDI, is permitted through financial collaborations, capital markets,joint ventures technical collaborations. The best example of FDI is Maruti Suzuki. Indias experience in the automobile sector with Suzuki ushering in the modern car on Indian roads that has been a force multiplier for the whole automobile sectors can be seen as a typical example of the collateral benefit of FDI. Don’t waste time! Our writers will create an original "Role Of FDI In Industrial Growth Finance Essay" essay for you Create order Foreign institutional investment (FII) (How FDI is different from FII) Foreign institutional investor is an institute (or an investor) that is registered in a country outside of the one in which it is currently investing. Such investors include insurance/reinsurance companies,pensionfunds,mutualfunds,hedgefunds,banks charitable trusts,foundations, and endowments. Where can an FII invest? All FIIs are required to obtain an initial registration with Securities Exchange Board of India (SEBI).For granting registration SEBI takes into account track record of FII. All registered FIIs can invest in equity market in shares ,debentures, mutual funds. One major market regulations pertaining FIIs is ONE FII cannot hold more than 10 % of total issued capital.SEBI also regulates that one company should not contribute more than 30 % share the portfolio of FII. C:UsersJ S CheemaPictures5-12-2010_09-25-03$investinindia_logo.gif How much FII inflow does India attract? As per data released by SEBI, FIIs invested U.S $ 6.6 billion in equities in Jan-Apr 2010, U.S $ 5.94 billion in debt in Jan -Apr 2010.s Number of registered FIIs under SEBI 1711 and registered sub-accounts* rose to 5,382 as of April 30,2010. *Sub-account- Foreign corporates or affiliates estd. outside India on whose behalf investments are proposed to be made in India. FDI in the Pre and Post-reform era of Indian Economy Foreign Investment Policy Pre-1991 era related to import substitution and imputed a highly confined role to FDI in the economy. As a result, foreign equity participation was limited to 40% and FDI was largely restricted to priority industries requiring sophisticated technology. E:LPU DocumentsBUSINESS ENVRNMNTEuro_banknotes.png Policy changes with regard to FDI were brought about consequent to the issuance of Industrial Policy Statements 1980 and 1982. For instance, 100 per cent export- oriented foreign firms were exempted from 40 per cent equity restrictions. Simplification of licensing procedures for MRTP companies; allowing non-resident Indians (NRIs) to invest in Indian companies through equity participation. However in July 1991 there were fundamental changes in policy. The important reforms were:- permitting large firms including foreign firms substantial expansion and diversification; allowing foreign firms upto a maximum of 51 per cent in high priority industries; Foreign investments allowed in 22 consumer goods industries subject to the conditions of dividend being ploughed back; de-reserving ready-made garments manufacturing and opening the industry to large-scale undertakings including foreign companies, subject to the export obligation of 50% and investment limit of Rs. 30 million were other significant policy changes relating to FDI flow. Realizing the importance of large investments special incentives have been offered for attracting FDI in these sectors in infrastructure industries like, power generation, telecommunications, petroleum exploration, petroleum refining, transportation (roads, railways, ports, shipping and air services),. Magnitude of FDI Inflows India was one of the lowest recipients of FDI among developing countries until 1970sIt was only in the 1990s and in the post-2000, India experienced significant inflows of foreign capital in the form of FDI and portfolio capital. India is far behind China in attracting FDI, but it has done remarkably well in recent years as compared to its performance in the past. For instance, FDI flows reached US $4675 million in 2003-04 from a small aggregate FDI inflow of US $ 1130 million for the period 1981-90. India is among the top four Asian destinations for foreign direct investments. The inflow of US $ 4.3 billion during 2003 was 26.47 per cent higher over the previous years inflow of US $3.4 billion. The share of FDI in both total foreign capital (TFC) and gross domestic product (GDP) reached over 2.3 per cent by 2002, from 0.025 per cent during the 1980s. The sudden jump in FDI inflows may be attributed to the policy of liberalisation since 1991. Trends in Sectorwise Share of FDI, 1921 2000 Adnatages of FDI FDI is usually preferred over other forms of external finance because it is non-debt creating; non-volatile,and its returns depend on the performance of the projects financed by the investors.C:UsersJ S CheemaPicturesFDI-logo21-300300.png FDI facilitates- international trade by promoting transfer of knowledge, skills, technology. In a world of cut throat competition and rapid technological change,FDIs catalytic complimentary role can be very valuable. Reasons that make India an attractive investment destination India is the worlds largest democracy with a stable political environment. India has an abundant English speaking, educated, skilled human resource base which offers its services at far cheaper rates than that may be found in any other developing or developed country. India is worlds leader in global outsourcing with more than 80% of the market. India has at this time a young population with roughly 80% of its population below 45 years of age. The India market is made more attractive by the fast growing consumer-class that is markedly western in its orientation . With favourable foreign investment policies, tax incentives and strong economic fundamentals, India offers attractive returns to prospective investors India is also being seen as the global destination for RD, engineering design and prototype development and a manufacturing hub for high technology products. Adequate natural resources and raw materials- Iron ore, Coal, bauxite, Fruits and Vegetables. A middle class of 250 million persons growing by 20 million annually major consumer of consumption goods, white goods and other durables. Judicial System- Established rule of law and a vibrant three tiered democracy The Entry Process- Investing in India Automatic Route-General rule Inform RBI within 30 days of inflow/issue of shares Location is in conformity with the prescribed parameters Units undertake to achieve exports and value addition norms as prescribed in the Export and Import Policy in force; Prior Permission-By exception Approval of Foreign Investment Promotion Board needed.Decision generally within 4-6 weeks. Proposals attracting compulsory licensing Items of manufacture reserved for the small scale sector Extension of foreign technology collaboration agreements Foreign Technology Transfer- Foreign technology is encouraged by the Government both through FDI and through foreign technology collaboration agreements. Approvals are not required in respect to all those foreign technology agreements which involve: a lump sum payment of up to USD 2 million royalty payable up to 5% on net domestic sales and 8% on exports, subject to a total payment of 8% on sales, without any restriction on the duration of royalty payments. Note It is permissible for an Indian Company to issue equity shares against lumpsum fee and royalty in convertible foreign currency. Is FDI allowed in all sectors? MAIN SECTORS WITH LIMIT FDI equity limit-Automatic route FDI requiring prior approval Insurance 26% Domestic airlines 49% Telecom services- Foreign equity 74% Private sector banks- 74% Mining of diamonds and precious stones- 74% Exploration and mining of coal and lignite for captive consumption- 74% Defence production 26% FM Broadcasting foreign equity 20% Broadcasting- cable, DTH, up-linking foreign equity 49% Trading- wholesale cash and carry, export trading, etc., 100% Tea plantation 100% Development of airports- 100% Sectors in which FDI is allowed 100% SECTORS UNDER AUTOMATIC ROUTE UPTO 100% FDI INFRASTRUCTURE SECTORS UNDER AUTOMATIC ROUTE UPTO 100% FDI Most manufacturing activities Non-banking financial services Drugs and pharmaceuticals that do not attract compulsory licensing or involve use of recombinant DNA technology Food processing Electronic hardware Software development Film industry Advertising Hospitals Private oil refineries Pollution control and management Exploration and mining of minerals other than diamonds and precious stones Management consultancy Venture capital funds/companies Setting up/development of industrial park/model town/SEZ Petroleum Products Pipeline Wholesale Trading Electricity Generation (except Atomic energy) Electricity Transmission Electricity Distribution Mass Rapid Transport System Roads Highways Toll Roads Vehicular Bridges Ports Harbours Hotel Tourism Townships, Housing, Built-up Infrastructure and Constr uction Development Project Greenfield Airports How much FDI does India attract? According to Ernst and Youngs 2010 European Attractiveness Survey, India is ranked 4th most attractive FDI destination in 2010. India attracted FDI equity inflows of U.S $1.2 billion during March 2010. The cumulative figure from August 1991 to March 2010 stood at U.S $ 132.4 billion,according to report released by Department of Industrial Policy and Promotion (DIPP). FDI equity inflows during financial year 2009-10 were U.S $ 26 billion. ROLE OF FDI IN INDIAS MANUFACTURING EXPORTS India is a union of states with a strong centre. Economic Reform decisionin 1995 allowed state governments to retain foreign exchange income which was was a landmark decision. State governments were free to identify the industries in which they wanted investment. In terms of foreign investment 1st tier western southern states have been the most successful- Tamil Nadu, Maharashtra and Karnataka in particular, have attracted US$ 6-10billion each (approvals) over the 1991-98 period. The 2nd tier comprises Gujarat, Andhra Pradesh, West Bengal and Uttar Pradesh (between $3.6 and $4.6 billion each). Madhya Pradesh and Kerala come next, with $2.4billion and $1.4 billion respectively. Investment in Punjab, Haryana, Himachal Pradesh and Bihar was tiny, while eleven states received no foreign investment at all. Disadvantage of FDI- Promotion remains controversial and depends on the motive for investment. If the motive is to capture domestic market (tariff-jumping type of investm ent) it may not contribute to export growth. It puts an impact on local entrepreneur growth. Growth Sectors of economy for foreign investment- IT- India is worlds leader in global outsourcing with more than 80% of the market share. 100% FDI permitted without any prior approvals. 400 of Global Fortune 500 companies are clients of Indian firms RD base of over 100 FORTUNE 500 companies Joint Software development in a variety of applications Hardware manufacturing Telecommunications- Continuous increase in no. of phone internet subscribers Investment Opportunities Setting up manufacturing facilities; Supply of hand sets and equipments Telecom Value added service. Special Economic Zones (SEZs)- An SEZ is an export oriented duty free enclave, which is deemed to be outside the customs territory of India. Twenty two operational SEZs in India and over 200 SEZs are in various stages of approval and development. Tax deduction of 100% for 10 years for SEZ developer. Exemption from dividend distribution tax for SEZ developer. Exemption of Sales Tax on purchases from Domestic Tariff Area for both developer and a SEZ unit. Exemption from Service Tax for both developer and a SEZ unit. 15 year corporate tax exemption on export profits to a SEZ unit. No minimum export obligation. A 100% permitted under the automatic route for SEZ development. Branches of foreign companies in SEZs are eligible to undertake manufacturing activities. C:UsersJ S CheemaPicturespie_chart_Newsletter_11_05_10.gif Biotechnology and Bioinformatics- 100% FDI permitted without prior approval. 100% pass through Tax incentive to VCFs (venture capitalists) and FVCIs One main reason for growth implementation of product patent regime in India in accordance TRIPS. Nanotechnology 100% FDI permitted without prior approval. 100% pass through tax incentive to VCFs and FVCIs Manufacturing India is seen as the global destination for RD, engineering design and prototype development and a manufacturing hub for high technology products. expansion in core sectors in India such as Steel Chemicals and petrochemicals Consumer durables IT hardware and telecom Transportation Automobile- Opportunities to leverage on low cost, high-skilled manpower to reduce cost of production Auto Production 2005-06: 9 million Passenger Cars: 1 million Two wheelers: 7.6 million Retail Trading- Multi brands are expected to get permission soon. 50% FDI allowed in retail trading (Single Brand) Fashion lines worldwide looking to enter India market C:UsersJ S CheemaPicturesFDI-in-Aviation.jpg Tourism- India has fast emerged as one of the most enticing destinations for the global leisure traveler. 100% FDI is also allowed in hotels, which includes restraints, beach resorts and other tourist complexes providing accommodation and/or catering and food facilities to tourists. The tourism sector in India is expected to grow at 8% per annum, between 2007 and 2016. As travelers surge into India, the demand for rooms, across segments, has skyrocketed. Governments major policy initiatives for tourism include: Liberalization in aviation sector Rationalization in tax rates in the hospitality sector Tourist friendly visa regime Allowing setting up of Guest Houses Immigration services Making available land for construction of hotels C:UsersJ S CheemaPicturespie_chart_Newsletter_18_06_10.gif Other growing sectors- Energy Infrastructure Non- Banking Financial Services Banking Real Estate Media/Broadcasting Food Proces Sources Reference- Department of Industrial Policy and Promotion (Government of India) www.google.com