INTRODUCTION from countries which are large enough in

INTRODUCTION

Foreign direct investment is one of the
measures of growing economic globalization. There has been always issue with
investment for the developing nations such as India. The world has been
globalizing and all the countries are liberalizing their policies and welcoming
investment from countries which are large enough in capital resources. The
developed economies are focusing on new markets where there is existence of
abundant labors, scope for products, and high profits are achieved. Hence,
Foreign Direct Investment (FDI) has become a battle ground in the emerging
markets. The main idea behind allowing FDI is to supplement and complement domestic
investment is to achieve a higher level of economic development and providing
opportunities for technological upgradation also access to global managerial
skills and practices.

South Asian countries such as China have
incorporated open door policies during 1980’s but India liberalized its
policies in 1991.India followed conservative policies before pre-liberalization
to protect the indigenous industrialist and investors, therefore could not
achieve economic growth. In 1991, the then congress government had implemented
liberalization policies to restructure the Indian economy.

NEED FOR FDI IN INDIA

Capital has been one of the scare resources as
India is a developing nation that are usually required for economic
development. As the capital is limited, there are many issues such as health,
poverty, employment, education, research and development, technology obsolesce,
global competition. The flow of FDI in India from across the world will help in
acquiring the funds at cheaper cost, better technology, employment generation,
and upgraded technology transfer, scope for more trade, linkages and spillovers
to domestic firms. The following arguments are advanced in favor of foreign
capital 

Ø  Sustaining A Greater
Level Of Investment: All the under-developed and the developing countries want to industrialize
and develop, hence it becomes necessary to increase the level to investment
substantially. Because of poverty and low GDP the saving are low. Therefore,
there is a need to fill the gap between savings and income through foreign
direct investments.

Ø   Technological Gap: In Indian scenario
we need technical assistance from foreign source for provision if expert
services, training of Indian personnel and educational, research and training
institutions in the industry. It only comes through private foreign investment
or foreign collaborations.

Ø   Exploitation Of Natural Resources: We have abundant
natural resources such as coal, iron and steel but we require foreign
collaboration to extract the resources.

Ø   Understanding The Initial Risk: As
capital is a scare resource in developing countries, there is high level of
risk in investing in new ventures or projects for industrialization Hence, foreign
capital helps in these investments which require high risk. 

Ø   Development Of Basic Economic
Infrastructure: The foreign financial institutions and government of
advanced countries have made enough capital available to the under developed
countries. FDI will help in developing the infrastructure by establishing
firm’s different parts of the country.

There
are special economic zones which have been developed by government for
improvising the industrial growth. 

Ø   Improvement In The Balance Of Payments
Position: The inflow FDI will help in improving the balance of payment.
Firms which feel that the goods produced in India will have a low cost, will
produce the goods and export the same to other country. This helps in
increasing the exports.

Ø   Foreign Firm’s Helps In Increasing The
Competition: Foreign firms have always come up with better technology, process, and
innovations comparing with the domestic firms. They develop a completion in
which the domestic firms will perform better it survives in the market.

India announces new Foreign Direct Investment Policy, 2017 –
2018

The ability to entrance large scale
Foreign Direct Investment (FDI) into India has been a key driver for
policy making by the Government. Prime Minister Modi is along the right track,
with India receiving FDI inflows worth USD 60.1 billion in 2016-17, which is
all-time greater. Therefore, the FDI policy of India is always closely watched
and carefully amended.

The Department of Industrial Policy
and Promotion (DIPP) had issued the updated and revised Foreign Direct
Investment Policy, 2017 – 2018 (FDI Policy 2017) on August 28,2017. The
FDI Policy 2017 incorporated various notifications issued by the Government of
India over the past year.

The key amendments brought by the FDI
Policy 2017 to the erstwhile FDI Policy of 2016 and their potential impact on
FDI in India:

New Streamlined Procedure for
Government Approval

Ø  Abolition of the Foreign Investment Promotion
Board (FIPB): The most remarkable amendment
to the FDI regime has been the institutional change brought by notification
dated June 5th, 2017 issued by the Department of Economic Affairs
confirming the eradication of the FIPB (the erstwhile government body
authorised to approve proposals for FDI requiring government approval); and the
introducing the ‘Foreign Investment Facilitation Portal’ (FIFP), an administrative
body to smoothen the path of FDI applicants.

Ø  Introduction of ‘Competent Authorities: The FDI Policy 2017 lists and defines sector-specific administrative
ministry / department as ‘Competent Authorities’ empowered to grant government
approval for FDI. Competent Authorities listed in the FDI Policy 2017 include
the DIPP in respect of applications for FDI in the Single Brand, Multi Brand
and Food Product retail trading and the Department of Economic Affairs of India
for FDI in the financial services sector.

Ø  Introduction of ‘Standard Operating
Procedure’ (SOP) to process FDI proposals: The DIPP had also issued the SOP which sets out a detailed procedure
and timeline for applications as well as the list of ‘competent authorities’
for processing government approvals for FDI in India.

Revisions to existing provisions
of the FDI Policy of 2016

The FDI Policy 2017 also incorporates
all Press Notes issued by the DIPP during the course of the year. Set out below
are the sector-specific significant amendments brought about in the last year:

Ø  Manufacturing: To further modify the manufacturing sector (which allowed 100% FDI
under the automatic route), 100% FDI under government approval route was
allowed for retail trading, including through e-commerce produced in India ,in
respect of food products manufactured.

Ø  Civil Aviation: In existing projects the threshold for FDI under the automatic route
was raised from 74% to 100%.

Ø  Single Brand Retailing: Sourcing norms applicable for FDI were unwinded and won’t be
applicable up to 3 (three) years from commencement of the business which means
the opening of the first store for entities undertaking single brand retail
trading of products having ‘state-of-art’ and ‘cutting-edge’ technology and
where local sourcing is impossible.

Ø  Other Financial Services: The previously applicable capitalisation norms for non-banking
financial services companies were dissolved, with applicability of sectoral
laws and all other financial sector activities by entities already regulated by
financial sector regulators fall under the 100% automatic route of investment. (Savani, 2017)

Table-1

FDI
inflows to Major Sectors from Top Five Host Countries (in per cent) from
2011-12 to 2015-16(November) (Rupees in Crores)

 
      
Sectors
 

 
Singapore

 
Mauritius

 
Netherlands

 
US

 
Japan

Service Sector

18.6

18.9

15.4

19

20

Computer software and hardware

13.6      

6.2

3.2

9.8

1

Trading

11.8

2.4

10

3.2

4.6

Telecommunications

8.6

11.5

0.3

2

0.1

Drugs & pharmaceuticals

6.6

1.0

0.6

2

3

Power

5.0

6.1

2.7

4

0.3

Construction(infrastructure)

3.5

3.9

0.2

3.5

0.5

Hotel tourism

2.3

10.6

0.6

0.8

0.1

Automobiles

1.9

1.5

8.7

17.8

21

Chemicals

NA

1.6

8.9

1.8

2.7

Petroleum and natural gas

0.7

1.1

8.4

0.1

1.2

 

Mauritius largest source of FDI in India, says RBI

 According to a census by the Reserve
Bank, Mauritius was the largest source of foreign investment in India (21.8
percent share at market value), followed by the US and the UK. Singapore (19.7
percent) and Japan were the next two sources of foreign direct investment, said
the Census on Foreign Liabilities and Assets of Indian Direct Investment
Companies 2016-17, released by RBI.

Out of the 18,667 companies that participated
in the census, 17,020 had FDI/overseas direct investment in their balance
sheets in March 2017, 96% of the responding companies were unlisted in March
2017 and many of them had received only inward FDI. Further, over 80 per cent of the
15,169 companies that reported inward FDI were subsidiaries of foreign
companies (single foreign investor holding over 50 per cent of the total
equity).

From 3.6 a year ago, the ratio of market values of
inward to outward direct investment, increased to 4.3 in March 2017; equity
participation accounted for 94 per cent and 79 per cent shares in inward and
outward FDI, respectively.

(https://timesofindia.indiatimes.com/business/india-business/mauritius-largest-source-of-fdi-in-india-says-rbi/articleshow/62571261.cms,
2018)

 

Types of Routes

There
are two routes where India gets FDI:

Automatic
route: Without the prior approval by Government or Reserve
Bank of India FDI is allowed by this route

Government route: By this route prior approval by government
is needed. The application needs to be made through Foreign Investment
Facilitation Portal, which will smoothen single window clearance of FDI
application under Approval Route. The application will be carried forward to
the respective ministries which will act on the application as per the standard
operating procedure.

 

Few Sectors in which FDI is allowed
in India

AGRICULTURE

AGRICULTURE AND ANIMAL
HUSBANDRY

 
                    Sector/Activity

% of Equity/FDI cap

Entry Route

a)     
Floriculture, Horticulture, and
cultivation of Vegetables Mushrooms under controlled conditions;
b)     
Development and Production of seeds
and planting material;
c)     
Animal Husbandry (including
breeding of dogs), Pisiculture, Aquaculture, Apiculture
d)     
Services related to agro and allied
sectors

100%

Automatic

 

The
term “under controlled conditions” means the following:

Cultivation
under controlled conditions for the classification of horticulture,
floriculture, mushrooms is the practice of cultivation wherein temperature, air
humidity, rainfall are controlled artificially.

 

PLANTATION SECTOR

  

        
Sector/Activity

%of Equity/FDI
 Cap

Entry Route

a)     
Tea sector including tea
plantations
b)     
Coffee plantations
c)     
Rubber plantations
d)     
Cardamom plantations
e)     
Olive oil tree plantations
f)      
Palm oil tree plantations

100%

Automatic

 

MANUFACTURING

The
FDI in manufacturing sector is automatic route. Therefore, a manufacturer is
permitted to sell the products which are manufactured in India through
wholesale and/or retail, including through e-commerce, without Government
approval. There is change in FDI policy provisions on trading sector, 100% FDI
under Government approval route is allowed for retail trading, including
e-commerce, and also food products manufactured and/or produced in India.

DEFENCE

Sector/Activity

% of Equity/FDI Cap

Entry Route

Defence Industry subject to Industrial
license under the Industries
(Development & Regulation) Act,
1951; and
Manufacturing of small arms and
ammunition under the Arms Act, 1959

100%

Automatic up to 49%
 
Government route beyond 49% wherever it
is likely to result in access to modern technology or for other reasons to be
recorded

CONCLUSION

Even
during the recession period India has managed to show a positive GDP growth and
has been one of the developing countries. Compare to the average growth rate of
world GDP India has performed very well. India acquires all the variables such
as fine infrastructure, potential markets, abundant labour, availability of
natural resources, and at last the economic and trades policies which favours
FDI. India is rated as the second-most favoured destination for FDI in the
world after China, As India has a large proportion of young population it is
expected that in future India would beat China with one of the fastest growing
economies. The government should formulate more policies which can attract more
foreign investment in manufacturing sector rather than service sector.