Siddharth Alok is pursuing BBALLB (Hons), Galgotias University, Greater Noida
ABSTRACT
This paper attempts to make an analysis of Foreign Direct Investment (FDI) in India and its challenges and future prospects on growth. It also focuses on the determinants and needs of FDI, year-wise analysis, sectoral analysis and sources of foreign direct investment, and reasons. One of the economic aspects of globalization is the fact that increasing investments in the form of foreign direct investments. Today, India was being turned upward by numerous outside countries as the extent of speculation is seen to be high in our nation for the accessibility of enormous assets. Indian government promotes Foreign direct investment (FDI) in retail sector by providing up to 51% for single brand segment and 100% in wholesale segment. It gives an open door for the worldwide retail monsters to enter India. India is not behind this global race of attracting these investments. FDI though it is an one of the important sources of financing the economic development, this is not a sufficient solution for, unemployment, poverty eradication and many other economic ills. This paper focus around the issues and prospects of FDI in Indian retail segment in multi-brand portion which expects to give a concise thought regarding the ramifications of outside interests in retail segments. The paper argues that raising investment is more important than just raising the (FDI) component of such investment. It identifies measures to raise such foreign direct investment (FDI) and improve its effectiveness. Also, some areas which need improvement are also highlighted so that it can open gates for more and more investors to invest in India though foreign direct investment (FDI) through which India could become and remain No.1 as most favourite destination of (FDI) investment across the globe. Among the various forms of foreign investment, foreign direct investment (FDI) flows are usually preferred over other forms of external finance because they are non-debt creating, non-volatile and their returns depends on the performance of projects financed by the investors.
Keywords: FDI, Growth & Development, Globalization, Investment
Foreign direct investment is one of the area of growing economic globalization. In India, investment has always been an issue for its development. Those countries which are already developed are now focusing on new markets where there is abundant labours, scope for production, and high profit are achieved. In India, most of the FDI is directed towards infrastructure and energy resources. Most of the approvals were made in the non-manufacturing sector as compared to the manufacturing sector. The service sector in India recorded in its share during the period of 1992-1994, but it slackened off due to shortfall of demand. During the last 5-6 years this growth has again picked up in the nation. Apart from being a demanding driver of economic growth, foreign direct investment (FDI) is a major source of non-debt financial resource for the economic development of India. Foreign companies invest in India to take advantage of relatively lower wages, special investment privileges such as tax exemptions, etc. For a country where foreign investments are being made, it also means generating employment and achieving in technical aspects.
The Indian government’s favourable policy regime and robust business environment have ensured that foreign capital keeps flowing into the country. The government has taken many initiatives in recent years such as relaxing FDI norms across sectors such as defence, PSU Oil refineries, power exchanges, telecom and stock exchanges, among others.
There are several key subjects such as educational, health, roads, property rights, electricity etc. lie within the scope of the individual state, and the progress of the administrative reforms at the state government level is an important determinant of it.
The verifiable foundation of FDI in India can be followed back with the foundation of East India Company of Britain. English capital came to India during the pilgrim time of Britain in India. After the Second World War, Japanese organizations entered the Indian market and upgraded their exchange with India, yet the U.K. remained the most predominant financial specialist in India. Further, after Independence issues identifying with remote capital, tasks of MNCs picked up consideration of the strategy producers. Remembering the national interests the approach creators structured the FDI strategy which points FDI as a mechanism for securing trend-setting innovation and to assemble remote trade assets. With time and according to monetary and political routines there have been changes in the FDI approach as well. The modern approach of 1965, permitted MNCs to wander through specialized joint effort in India. Subsequently, the legislature embraced a liberal demeanour by enabling progressively visit value interest to remote undertakings, and to acknowledge value capital in specialized joint efforts. In any case, because of Significant surge of outside stores as settlements of profits, benefits, eminences and so forth, and the administration needs to receive stringent international strategy in the 1970s. During this period the legislature embraced a specific and exceedingly prohibitive international strategy to the extent outside the capital, kind of FDI and possessions of remote organizations was concerned.
The new Modi government is committed to improving the foreign direct investments in India, particularly in the areas of defence, insurance and infrastructure. The companies which are considering in investing in India will look at several parameters.1
In the last few years, the land prices have shot through the roof. One estimate shows that the production costs in India is very much affected because of the land prices. The BJP government should ponder over this problem before they arrive at a reasonable tax rate for multinational companies. Things such as education cess and surcharge should be totally removed to lower the tax rate. Unfortunately for India the tax collected from individuals is limited since less than 4.5% of the population pay income tax at all. India continues to be a welfare state and most of the costs associated with welfare are borne through deficits. India met its fiscal deficit target for 2018-19, which came in at 3.39 percent of GDP, slightly lower than 3.4 per cent estimated in the revised estimates of the Budget.2
According to Department for Promotion of Industry and Internal Trade (DPIIT), FDI equity inflows in India in 2018-19 stood at US$ 44.37 billion, indicating that government's effort to improve ease of doing business and relaxation in FDI norms is yielding results. FDI equity inflows into India declined by 1% in this term. India has become the most attractive emerging market for global partners (GP) investment for the coming 12 months, as per a recent market attractiveness survey conducted by Emerging Market Private Equity Association (EMPEA). Annual FDI inflows in the country are expected to rise to US$ 75 billion over the next five years, as per a report by UBS. The Government of India is aiming to achieve US$ 100 billion worth of FDI inflows in the next two years. The World Bank has stated that private investments in India is expected to grow by 8.8 per cent in FY 2018-19 to overtake private consumption growth of 7.4 per cent, and thereby drive the growth in India's gross domestic product (GDP) in FY 2018-19.
India's foreign direct venture (FDI) equity inflows fell without precedent for a long time in the year finished 31 March, underscoring the monetary arrangement difficulties looked by the legislature when Narendra Modi begins his second innings as PM. The decrease in FDI inflows comes when residential markers as of now point towards a slowdown in utilization and venture action. India's economy developed at the slowest pace in five quarters at 6.6% in the three months ended December, prompting the measurements office to trim its 2018-19 estimate from the 7.2% recently gauge to 7% in February. The first set of macro data the new government will have to deal with is the fourth-quarter GDP data (to be announced on 31 May) that may further decelerate to 6.4%. The two segments where FDI inflows dropped the most in 2018-19 are media communications (fell 56% to $2.7 billion) and pharmaceuticals (dropped 74% to $266 million). However, FDI in the administrations' segment, including monetary, banking, protection and redistributing organizations, rose 37.3% in 2018-19, capturing the degree of the decline in FDI inflows.
Political : Amongst the top things is the political insecurity of the nation. On one hand, the way that India is the world's biggest popular government adds a feeling of pride and security, yet the hard the truth is that there is unfavourable flimsiness present. Simply the way that the administration around the 2000s has been founded on alliances between a couple of gatherings is reason enough to be doubtful. Also, each new government has certain arrangements which are unique concerning the decision government and if there is a successive change in government, this will prompt changes in approach and expanded vulnerability.
Security : Another significant factor that should be handled carefully and worked upon is the ever present security hazard. This hazard incorporates the geopolitical hazard with Pakistan and the continuous disagreement about the Kashmir issue, which on various events has brought these two nations outfitted with atomic weapons to the edge of war. The other security dangers would incorporate occurrences of household fear based oppression, in the Kashmir valley as well as in Assam, Manipur and Nagaland, where various separatists gathering work.
Infrastructure: It certainly is a special reward to the speculator if there is satisfactory foundation present in the nation. In India, there is a significant absence of powerful foundation around the nation, for example, appropriate streets, roadways, satisfactory supply of clean water, the uninterruptible supply of power and so on. Be that as it may, there is a flipside to this absence of Infrastructure.
Equity challenge: India is certainly creating in a lot quicker pace now than previously however disregarding that it very well may be distinguished that advancements have occurred unevenly. This implies while the more urban regions have been tapped, the less fortunate areas are deficiently misused. To get the total picture of development, it is fundamental to ensure that the rustic area has pretty much a similar measure of improvement as the urbanized ones. Along these lines, encouraging social uniformity and in the meantime, reasonable financial development.
Federal Challenge: Very important among the major challenges facing larger FDI, is the need to speed up the implementation of policies, rules, and regulations. The fundamental part is to keep the implementation of policies in all the states of India at par. Thus, asking for equal speed in policy implementation among the states in India is important.
India must also focus on areas of poverty reduction, trade liberalization, and banking and insurance liberalization. Challenges confronting bigger FDI are not simply confined to the ones referenced above, in light of the fact that exchange relations with remote speculators will continually acquire new difficulties in ventures.
Quoting the Former Prime Minister Dr. Manmohan Singh on a speech at the NYSE:3
When I talk to business people, they tell me, ‘Well, India’s infrastructure is a problem’. I do agree with them that infrastructure is our biggest problem and also the biggest opportunity. In the next 10 years we must invest at least $150 billion to modernize and to expand India’s infrastructure, and we have major investments needed in energy sector, in power sector, in oil exploration, in roads programme, in modernizing our railway system, food system, airports. This is where, I feel, we need a new experimentation with public-private sector participation because the public sector may have a role, but by itself it cannot meet all the requirements. As I see an expanding and very profitable role of foreign direct investment in meeting the challenge of modernizing India’s infrastructure.
So the lack of infrastructure can be seen as a blessing in disguise and be a substantial source of FDI in the year 2004, but quoting the Prime Minister Shri Narendra Modi on a speech at the Network-18 Rising India Summit.4
India is now the fastest growing major economy; FDI is at an all-time high; poverty is reducing rapidly, as per international reports; pace of infrastructure development is faster than before; and tourism is rising. He said all of this could not be possible without employment opportunities also increasing.
He also spoke of the increase in numbers of professionals, and commercial vehicles sold. He said that under the Pradhan Mantri Mudra Yojana, more than 15 crore entrepreneurs have been given loans worth more than 7 lakh crore rupees. He said that this too, would lead to creation of jobs..
The largest inflow of FDI’s over a period of April 2000 to March 2019 have been received from Mauritius, it’s share in these inflow have been as high as 32%. Singapore is the second with the share of 20%. Japan stand third with the total share of 7%. The other major sources of foreign direct investment are from Netherlands, U.K., U.S.A., Germany, Cyprus, United Arab Emirates and France with their respective share of inflow of foreign direct investment are 7%, 6%, 6%, 3%, 2%, 2%, 2% respectively. The inflows from U.S.A. are routed from Mauritius due to tax advantages. The tax advantage originate from the double tax avoidance agreement that India has with that country USA. This agreement means that any foreign investor has the choice of paying tax either in India or in Mauritius. The tax rates in Mauritius are amongst the lowest in the world. The other big investors included Singapore, the US, Britain and the Netherlands. While investors get higher returns on their money in India, those from Mauritius “get even higher returns on their capital as we have a double taxation avoidance treaty (DTAT) (with the island nation),” Crisil principal economist, Mr. D.K. Joshi.5
Ranks | Country | 2016-17 (April – March) | 2017-18 (April – March) | 2018-19 (April – March) | Cumulative Inflows (April, 00 - March,19) | %age to total Inflows (in terms of US $) |
---|---|---|---|---|---|---|
1. | MAURITIUS | 105,587 (15,728) | 102,492 (15,941) | 57,139 (8,084) | 738,156 (134,469) | 32% |
2. | SINGAPORE | 58,376 (8,711) | 78,542 (12,180) | 112,362 (16,228) | 505,946 (82,998) | 20% |
3. | JAPAN | 31,588 (4,709) | 10,516 (1,633) | 20,556 (2,965) | 173,332 (30,274) | 7% |
4. | NETHERLANDS | 22,633 (3,367) | 18,048 (2,800) | 27,036 (3,870) | 162,251 (27,352) | 7% |
5. | U.K. | 9,953 (1,483) | 5,473 (847) | 9,352 (1,351) | 140,370 (26,789) | 6% |
6. | U.S.A. | 15,957 (2,379) | 13,505 (2,095) | 22,335 (3,139) | 146,372 (25,556) | 6% |
7. | GERMANY | 7,175 (1,069) | 7,245 (1,124) | 6,187 (886) | 65,477 (11,708) | 3% |
8. | CYPRUS | 4,050 (604) | 2,680 (417) | 2,134 (296) | 51,544 (9,869) | 2% |
9. | UAE | 4,539 (675) | 6,767 (1,050) | 6,356 (898) | 39,310 (6,652) | 2% |
10. | FRANCE | 4,112 (614) | 3,297 (511) | 2,890 (406) | 36,825 (6,643) | 2% |
TOTAL FDI INFLOWS FROM ALL COUNTRIES * | 291,696 (43,478) | 288,889 (44,857) | 309,867 (44,366) | 2,378,886 (420,142) | - |
*Includes inflows under NRI Schemes of RBI.
Source: DIPP
The sectoral composition of Foreign Direct Investment over the period of April 2000 to March 2019, we can find that the largest recipient of such investment is service sector ( Financial, Banking, Insurance, Non Financial/ Business, Outsourcing, Research and Development, Courier, Technology Testing and Analysis, Other). The share of this sector in cumulative FDI flows is 17.65% of the total foreign direct investment. The foreign investors are intrested mainly in financial services due to it’s profit generating advantage. This sector gives scope for the foreign investors to take back the profits to their home country. As in service sector the services are consumed in their host country. The second recipient is computer software and hardware sector which shares 8.87% of total FDI. Telecommunications, Construction Development: (Township, housing, built-up infrastructure and construction-development projects), Trading, Automobile industry, Chemicals (other than fertilizers) shares 7.82%, 5.96%, 5.48%, 5.09% and 3.95% respectively. Whereas all other sector totally contribute about 45.18% of total FDI. The key takeaways regarding global flows are – the increase in the relative share of developing countries as both destination and sources and flow to the sector gaining over manufacturing. Financial year wise FDI inflow can be seen in Annexure as Table 1.
Sl. No. | Sector | Amount of FDI Inflows | %age of Total Inflows | |
---|---|---|---|---|
(In Rs crore) | (In US$ million) | |||
1. | SERVICES SECTOR (Fin.,Banking,Insurance,Non Fin/Business,Outsourcing,R&D,Courier,Tech. Testing and Analysis, Other) | 416,301.22 | 74,149.38 | 17.65 |
2. | COMPUTER SOFTWARE & HARDWARE | 221,756.00 | 37,237.89 | 8.87 |
3. | TELECOMMUNICATIONS | 188,248.86 | 32,825.79 | 7.82 |
4. | CONSTRUCTION DEVELOPMENT: Townships, housing, built-up infrastructure and construction-development projects | 119,613.96 | 25,045.80 | 5.96 |
5. | TRADING | 143,598.82 | 23,021.12 | 5.48 |
6. | AUTOMOBILE INDUSTRY | 123,988.58 | 21,386.65 | 5.09 |
7. | CHEMICALS (OTHER THAN FERTILIZERS) | 91,062.19 | 16,581.98 | 3.95 |
8. | Others* | 1,074,316.03 | 189,898.33 |
*Includes inflows under NRI Schemes of RBI.
To raise Foreign Direct Investment(FDI), the Government has set up a investor-friendly policy, wherein except from a little negative rundown, most areas are open for 100% FDI under the Automatic course. Further, the policy on FDI is evaluated on a progressing premise, to guarantee that India stays alluring and speculator agreeable goal. Changes are made in the policy in the wake of having escalated interviews with partners including summit industry chambers, Associations, agents of businesses/gatherings and different associations thinking about their perspectives/remarks. The FDI strategy is relevant over the parts/businesses and similarly applies to the SME segment.
Separate information regarding investment made by foreign companies in Small and Medium Enterprises (SMEs) is not maintained. Further, investment by foreign companies who invested in India is maintained remittance wise, which is extremely voluminous. Foreign Investment in various sectors bring international best practices and latest technologies leading to economic growth in the country and providing much needed impetus to manufacturing sector and job creation in India. In line with the policy to provide boost to the manufacturing sector and give impetus to the ‘Make in India’ initiative, the Government has allowed a manufacturer to sell its items through discount or potentially retail, including through web based business under programmed course. To look after the interest of Indian SME sector, certain arrangements have been given to FDI in retail trading sector. For retail trading of single brand items, in respect of proposals involving foreign investment beyond 51%, sourcing of 30% of the estimation of merchandise bought, has been mandated to be done from India, preferably from MSMEs, village and cottage industries, artisans and craftsmen, in all sectors.
With a view to deliver profit to farmers, give impetus to food processing industry and create vast employment opportunities, 100% FDI under Government route for trading, including through web based business, has been allowed in regard of sustenance items made as well as delivered in India.
Foreign Direct Investment as a vital component of investment and is needed by India for its development and sustained economic growth through the formation of jobs, expansion of existing manufacturing industries, education and research and development etc. It is advisable to open up the export-oriented sectors and the development of the economy would be higher achieved through the growth of these sectors. India has been one of the developing countries and has managed to show a positive GDP growth even during the recession period. It has relatively performed well, then the average growth rate of world GDP. India has all the variables such as fine infrastructure, abundant labour, availability of natural resources, potential markets, and at last the economic and trades policies which have been favouring FDI. India is currently appraised as the second-most favoured destination for FDI in the world after China, however, it is expected that in future India would beet china out as it has a large proportion of the young population with one of the fastest-growing economies.
Mishra, S.K and Puri, V.K, Indian Economy, Himalaya Publishing House, 36th Revised Edition, 2018
Pant, Manoj and Srivastava, Deepika FDI in India, Orient Blackswan Pvt. Ltd., First Edition, 2015
Department of Industrial Policy & Promotion, Ministry of Commerce and Industry.
Source: DIPP, http://dipp.nic.in/publications/fdi-statistics
Source: DIPP, https://dipp.gov.in/foreign-direct-investment/foreign-direct-investment-policy
PM's speech at the NYSE, September 22, 2004, New York, https://archivepmo.nic.in/drmanmohansingh/speech-details.php?nodeid=29
Source: Business Standards, https://www.business-standard.com/article/news-ians/india-s-2018-19-fiscal-deficit-at-3-39-of-gdp-lower-than-target-119053101722_1.html
Statistics Times http://statisticstimes.com/economy/gdp-growth-of-india.php
‘Make in India’ pitch from 25 September. The Hindu 6 September 2016 https://www.thehindu.com/business/Economy/modi-to-launch-make-in-india-campaign-on-sep-25/article6422804.ece
UNCTAD, FDI data base online, Investment Country Profiles, India 2013 https://unctad.org/en/PublicationsLibrary/webdiaeia2013d4_en.pdf
TABLE 1
FINANCIAL YEAR-WISE FDI INFLOWS
Year | Total FDI Inflow US$ (in Million) | Growth Rate % |
---|---|---|
2000-01 | 4,029 | - |
2001-02 | 6,130 | (+) 52 % |
2002-03 | 5,035 | (-) 18 % |
2003-04 | 4,322 | -) 14 % |
2004-05 | 6,051 | (+) 40 % |
2005-06 | 8,961 | (+) 48 % |
2006-07 | 22,826 | (+) 155 % |
2007-08 | 34,843 | (+) 53 % |
2008-09 | 41,873 | (+) 20 % |
2009-10 | 37,745 | (-) 10 % |
2010-11 | 34,847 | (-) 08 % |
2011-12 | 46,556 | (+) 34 % |
2012-13 | 34,298 | (-) 26% |
2013-14 | 36,046 | (+) 5% |
2014-15 | 45,148 | (+) 25% |
2015-16 | 55,559 | (+) 23% |
2016-17 | 60,220 | (+) 8% |
2017-18 | 60,974 | (+) 1% |
2018-19 | 64,375 | (+) 6% |
Source: Department of Industrial Policy & Promotion (March-2019), Ministry of Commerce and Industry.