Foreign direct investment in India

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Foreign Direct Investment
Foreign direct investment in India:
Liberalization of the Indian economy in the early 1990s boosted the inflow of Foreign Direct Investments (FDI) to India. It also helped to open Indian markets to foreign direct investment. Further the government of India simplified the procedures for foreign direct investment in the country in order to encourage the foreign investors to invest in the country. Foreign direct investment in India, came from non resident Indians, international companies, and other foreign investors. FDI inflows to India grew significantly over the years and assumed significant proportions by 2006-2007.
Sectors attracting FDI inflows in India during 2006- 2007 are:
• Real estate
• Construction activities
• Services sector
• Telecommunications
• Electrical equipments that includes electronics and computer software
Countries contributing to FDI inflows in India during 2006- 2007 are:
• USA
• Singapore
• UK
• Netherlands
• Mauritius
In 2006-07, FDI comprised 2.31% of the GDP of India. This was merely 0.77% in 2003-04. FDI comprised 6.42% of total investments in India in 2006-07 which was a significant growth 2.55% in 2003-04. The remarkable growth of FDI in India during 2006-07 had major impacts on the economic growth of the country boosting output and employment significantly.
The rapid growth of the economy, favourable investment regime, liberal policy changes and procedural relaxations, has resulted in a horde of global corporations investing in India. The generous inflow of FDI is playing a significant role in the economic growth of the country.
In 2007-08, India's FDI touched US$ 25 billion, up 56 per cent against US$ 15.7 billion in 2006-07, and the country's foreign exchange reserves had crossed US$ 341 billion as on May 21, 2008. In 2005-06, the growth was even sharper at 184 per cent, up from US$ 5.5 billion in 2004-05.
Projections say that the country will attract US$ 35 billion in FDI in 2008-09 (as per data released by the Ministry of Commerce and Industry).
India: A much favoured destination
India has been rated as the fourth most attractive investment destination in the world, according to a global survey conducted by Ernst and Young in June 2008. India was after China, Central Europe and Western Europe in terms of prospects of alternative business locations. With 30 per cent votes, India emerged ahead of the US and Russia, which received 21 per cent votes each.
According to a report by the National Council of Applied Economic Research (NCAER), "In the first nine months of 2007-08, the net capital flows rose to US$ 83 billion from US$ 30 billion the country received during the corresponding period of the previous year." The funds coming in as foreign direct investment (FDI) or external commercial borrowing, had also upped portfolio funds, as between FY 2004 and FY 2008, the reserves increased by more than US$ 150 billion. The influx of foreign funds during the period was sufficient to finance the current account deficit, the report further said.
As per the global survey of corporate investment plans carried out by KPMG International, released in June 2008, (a global network of professional firms providing audit, tax, and advisory services), India will see the largest overall growth in its share of foreign investment, and it is likely to become the world leader for investment in manufacturing. Its share of international corporate investment is likely to increase by 8 per cent to 18 per cent over the next five years, helping it rise to the fourth, from the seventh position, in the investment league table, pushing Germany, France and the UK behind.
According to the AT Kearney FDI Confidence Index 2007, India continues to be the second most preferred destination for attracting global FDI inflows, a position it has held since 2005. India topped the AT Kearney's 2007 Global Services Location Index, emerging as the most preferred destination in terms of financial attractiveness, people and skills availability and business environment. Similarly, UNCTAD's World Investment Report, 2005 considers India the 2nd most attractive investment destination among the Transnational Corporations (TNCs).
A recent survey conducted by the Japan Bank for International Cooperation (JBIC) shows that India has become the most-favoured destination for long-term Japanese investment.
Sector-wise FDI
A large portion of the FDI has been flowing into the skill-intensive and high value-added services industries, particularly financial services and information technology. India, in fact, dominates the global service industry in terms of attracting FDI with its unassailable mix of low costs, excellent technical and language skills, mature vendors and liberal supportive government policies.
Now, global investors are also evincing interest in other sectors like telecommunication, energy, construction, automobiles, electrical equipment apart from others.
• Leading Japanese, Korean, European, French, and American automobile companies have set up their manufacturing base in India.
• Currently, FDI inflows into the Indian real estate sector are estimated to be between US$ 5 billion and US$ 5.50 billion. Investment in the Indian realty market is set to increase to US$ 20 billion by 2010. Prominent foreign players include Emaar Properties (Dubai), IJM Corp (Malaysia), Lee Kim Tah Holding (Singapore) and Salim Group (Indonesia).
• Many big names in international retail are also entering Indian cities. Global players, such as Wal Mart, Marks & Spencers, Roseby, etc, have lined up investments to the tune of US$ 10 billion for the retail industry.
• According to Mines Minister, Sis Ram Ola, "FDI of about US$ 2.5 billion per annum is expected in the mining sector from the fifth year of implementation of the new National Mineral Policy (NMP)."
• The surge in mobile services market is likely to see cumulative FDI inflows worth about US$ 24 billion into the Indian telecommunications sector by 2010, from US$ 3.84 billion till March 2008.
Aggressive Investment Plans
The surging economy has resulted in India emerging as the fastest growing market for many global majors. This has resulted in many companies lining up aggressive investment plans for the Indian market.
• Panasonic is planning to line up US$ 200 million investment in India over the next 3 years for setting up new units, brand positioning and upgrading its facilities.
• Japanese engineering major, Toshiba plans to put up a power boiler plant at Ennore, north of Chennai with an initial investment of around US$ 232.91 million.
• Dell would be investing more in India to commensurate with the growth of its products.
• Intel Corp will invest US$ 40 billion in partnership with Indian IT companies to create an end-to-end IT solution for the health sector in the country.
• Cairn India, the Indian arm of British oil and gas company Cairn Energy, will invest about US$ 2 billion over the next 18 months for the development of oil fields and building a pipeline.
• HPCL and Mittal Energy will together put in US$ 81.94 billion worth investment in developing a petrol hub.
• Havells India will bring in US$ 64.92 million as issue of shares and convertible warrants.
• Essar Power will infuse up to US$ 2 billion as foreign equity for undertaking various downstream projects, including power and coal mining.
• Coca Cola India plans to invest US$ 250 million over the next three years in equipment purchases, brand promotion and marketing.
• Goldman Sachs (Mauritius) NBFC LLC will invest US$ 46.51 million in NBFC activities.
• A Merrill Lynch & Co entity had bought 49 per cent equity in seven residential projects in Chennai, Bangalore, Kochi and Indore for US$ 345.78 million.
• Zoom Entertainment Network will bring in US$ 28.02 million through induction of foreign equity.
• Toyoda Gosei Company Ltd of Japan will set up a wholly owned subsidiary worth US$ 10.51 million to manufacture automobile safety systems, body sealing and steering parts.
• Another Japanese company, T S Tech Company, will invest US$ 3.50 million to set up a joint venture firm to manufacture seats and interior of doors for cars.
• UAE mobile retailer, Cellucom, will invest US$ 116.79 million for rolling out 500 stores across India by the end of 2009.
Government Initiatives
The Indian Government's approach towards foreign investment has changed considerably during the past decade. Foreign investment, which was permitted only in restricted industries under exceptional conditions, has been liberalised across the board, excluding certain restricted or prohibited industries. The sweeping economic reforms undertaken by the government aimed at opening up the economy and embracing globalisation have been instrumental in the surge in FDI inflows.
The government has taken various steps to further facilitate and augment the inflow of foreign investment into India.
• The government would soon remove the compulsory disinvestment clause on overseas companies in major sectors like food processing and chemicals, a move aimed at simplifying foreign direct investment (FDI) rules further. The finance ministry is weighing the proposal after the Department of Industrial Policy and Promotion (DIPP, which formulates FDI policy) suggested waiving the clause for all companies that have decided on divestment.
• The government may allow 49 per cent FDI in segments such as gems & jewellery and apparel after National Council of Applied Economic Research (NCAER), which studies the effects of multi-brand retail in India, submits its report.
• Restructuring the Foreign Investment Promotion Board (FIPB).
• Shri Kamal Nath, Union Minister of Commerce & Industry, has stated that Foreign Direct Investment (FDI) up to 100 per cent is permitted under the automatic route in most of the sectors.
• Establishment of the Indian Investment Commission to act as a one-stop shop between the investor and the bureaucracy.
• Progressively raising the FDI cap in other sectors like telecom, aviation, banking, petroleum and media sectors among others.
• Removal of the investment cap in the small scale industries (SSI) sector.
• Companies will now require only an FIPB approval for investments up to US$ 231.90 million (Rs 1,000 crore). Clearance from Cabinet Committee of Economic Affairs (CCEA) will be imperative only for investments above US$ 231.90 million (Rs 1,000 crore).
These measures will greatly enhance the global community's confidence in the fundamentals of the Indian economy, and reflect the efforts of the Indian Government to integrate with the global economy. With government planning more liberalisation measures across a broad range of sectors and continued investor interest, the inflow of FDI into India is likely to further accelerate. Already, upbeat due to the buoyant FDI growth in the country, the government has put a target of US$ 35 billion in FDI, in 2008-09.