Role & Impact of Foreign Direct Investment in India: An Analytical Study with Special Reference to Retail Sector

Transcription

1 36 Role & Impact of Foreign Direct Investment in India: An Analytical Study with Special Reference to Retail Sector Associate Professor Institute of Information Technology and Management D-29, Institutional Area, Janakpuri New Delhi ABSTRACT International Economic Integration plays a vital role in Economic Development of any country. Foreign Direct Investment is one and only major instrument of attracting International Economic Integration in any economy. It serves as a link between investment and saving. Many developing countries like India are facing the deficit of savings. This problem can be solved with the help of Foreign Direct Investment. Foreign investment helps in reducing the deficit of BOP. Foreign investment flows are supplementing the scare domestic investments in developing countries particularly in India. India being a signatory to World Trade Organization s General Agreement on Trade in Services, which include wholesale and retailing services, had to open up the retail trade sector to foreign investment. Given that 95% of the sector constitutes unorganized retail consisting largely of mom and pop stores, the Government has treaded cautiously by building adequate safeguards for the domestic stakeholders in the unorganized sector. Only those foreign retailers who first invest in the back-end supply chain and infrastructure would be allowed to set up multi brand retail outlets in the country. This paper recommends that we should welcome the FDI in the retail sector evidently outweigh the disadvantages attached to it and the same can be deduced from the examples of successful experiments in countries like Thailand and China where too the issue of allowing FDI in the retail sector was first met with incessant protests, but later turned out to be one of the most promising political and economical decisions of their governments and led not only to the commendable rise in the level of employment but also led to the enormous development of their country s GDP. Keywords Foreign Direct Investment, Inflows, Multi Brand Retailing, Single Brand Retailing, Balance of Payment. INTRODUCTION Foreign investment plays a significant role in development of any economy as like India. Many countries provide many incentives for attracting the foreign direct investment (FDI). Need of FDI depends on saving and investment rate in any country. Foreign Direct investment acts as a bridge to fulfill the gap between investment and saving. In the process of economic development foreign capital helps to cover the domestic saving constraint and provide access to the superior technology that promote efficiency and productivity of the existing production capacity and generate new production opportunity. India being a signatory to World Trade Organization s General Agreement on Trade in Services, which include wholesale and retailing services, had to open up the retail trade sector to foreign investment. There were initial reservations towards opening up of retail sector arising from fear of job losses, procurement from international market, competition and loss of entrepreneurial opportunities. However, the government in a series of moves has opened up the retail sector slowly to Foreign Direct Investment (FDI). In 1997, FDI in cash and carry (wholesale) with 100 percent ownership was allowed under the Government approval route. It was brought under the automatic route in percent investment in a single brand retail outlet was also permitted in FDI as defined in Dictionary of Economics (Graham Bannock et.al) is investment in a foreign country through the acquisition of a local company or the establishment there of an operation on a new (Greenfield) site. To put in simple words, FDI refers to capital inflows from abroad that is invested in or to enhance the production capacity of the economy. According to the international monetary fund, FDI is defined as Investment that is made to acquire lasting interest in an enterprise operating in an economy other than that of investor. The investor s purpose is being to have an effective voice in the management of enterprise.

2 37 Foreign indirect investment as portfolio investment, Portfolio investment does not seek management control, but it motivated by profit. Portfolio investment occurs when individual investors invest, mostly through stockbrokers in stocks of foreign companies in foreign land in search of profit opportunities. Foreign investment comes in host country in through various route and many forms. Rather than attracting as much FDI as possible host country governments would be well advised to focus their efforts in inviting the right kind of FDI. Among all various routes the two main routes are: 1. Foreign Direct investment (FDI) and 2. Foreign indirect investment (FIIs) The Inflow of Foreign Investment Comes Through Various Routes.viz: 1. Equity (Government, RBI, NRI, Acquisition, shares, Equity capital of unincorporated bodies); Re-invested earning; other capital. 2. Portfolio investment (GDR/ADR, FIIs, OFF shore funds and others) FDI Policy in India Foreign Investment in India is governed by the FDI policy announced by the Government of India and the provision of the Foreign Exchange Management Act (FEMA) The Reserve Bank of India (RBI) in this regard had issued a notification, which contains the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, This notification has been amended from time to time. The Ministry of Commerce and Industry, Government of India is the nodal agency for motoring and reviewing the FDI policy on continued basis and changes in sectoral policy/ sectoral equity cap. The FDI policy is notified through Press Notes by the Secretariat for Industrial Assistance (SIA), Department of Industrial Policy and Promotion (DIPP). The foreign investors are free to invest in India, except few sectors/activities, where prior approval from the RBI or Foreign Investment Promotion Board ( FIPB ) would be required. Table 1: The Sector wise FDI flows in India (US $ million) Source/Industry P P Manufacture 4,777 5,143 4,793 9, Construction 2,237 3,516 1,599 2, Financial Services 4,430 2,206 1,353 2, Real Estate Activities 1,886 2, Electricity and other Energy Generation, Distribution & Transmission 669 1,877 1,338 1, Communication Services 2,067 1,852 1,228 1, Business Services 643 1, Miscellaneous Services 1, Computer Services 1, Restaurants & Hotels Retail & Wholesale Trade Mining Transport Trading Education, Research & Development Others 1, Source: RBI., P: Provisional. Note: Includes FDI through SIA/FIPB and RBI routes only.

3 FDI Policy with Regard to Retailing in India It will be prudent to look into Press Note 4 of 2006 issued by DIPP and consolidated FDI Policy issued in October 2010 which provide the sector specific guidelines for FDI with regard to the conduct of trading activities. a) FDI up to 100% for cash and carry wholesale trading and export trading allowed under the automatic route. b) FDI up to 51 % with prior Government approval (i.e. FIPB) for retail trade of Single Brand products, subject to Press Note 3 (2006 Series) c) FDI is not permitted in Multi Brand Retailing in India. FDI in Multi Brand Retail The government has also not defined the term Multi Brand. FDI in Multi Brand retail implies that a retail store with a foreign investment can sell multiple brands under one roof. In July 2010, Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce circulated a discussion paper on allowing FDI in multibrand retail. The paper doesn t suggest any upper limit on FDI in multi-brand retail. If implemented, it would open the doors for global retail giants to enter and establish their footprints on the retail landscape of India. Opening up FDI in multi-brand retail will mean that global retailers including Wal-Mart, Carrefour and Tesco can open stores offering a range of household items and grocery directly to consumers in the same way as the ubiquitous kirana store. Advantages Increase economic growth by dealing with different international products. 1 million (10 lakhs) employment will create in three years UPA Government. Billion dollars will be invested in Indian market. Spread import and export business in different countries. Agriculture related people will get good price of their goods. Disadvantages Will affect 50 million merchants in India. Profit distribution, investment ratios are not fixed. An economically backward class person suffers from price raise. Retailer faces loss in business. Market places are situated too far which increases traveling expenses. Workers safety and policies are not mentioned clearly. Inflation may be increased. Again India becomes slaves because of FDI in retail sector. OBJECTIVES OF THE STUDY 1) To study the significance of FDI for developing countries in bridging the gap between the saving and Investment. 2) To know the reasons for investing retail industry in India. 3) To analyze the impact of FDI in retail sector in India. 4) To Study the trends in FDI in different sector in India. RESEARCH METHODOLOGY To fulfill all above said objectives data has been gathered from secondary sources like annual reports and publication of Govt. and RBI relating to foreign investment, economic journals, books, magazines and internet etc. The data is also collected from World Bank reports, research reports, already conducted survey analysis, database available. 38

4 NEED OF FOREIGN INVESTMENT IN INDIA India is suffering from the scarcity of financial resources and low level of capital formation because it has to majorly depend upon the external sources of Finance. Also the domestic resources are entirely inadequate to carry out development programmes. Table 2: Saving-Investment Rates in India Source: CMIE, Economic Survey Table 2 shows that rate of investment in India is less than saving rate from to & , and So that it is necessary to attract more and more foreign investment to reduce the gap between saving & investment and the deficit of trade of India. THE REASONS FOR INVESTING RETAIL INDUSTRY IN INDIA AT Kearney (a globally famous international management consultancy) recognized India as the second most alluring and thriving retail destination of the world, among other thirty growing and emerging markets. At present, other profitable retail destinations of the world are China and Dubai of Asia. Diverse foreign direct investment in Indian retail is greatly cherished by most of the major and leading retailers of USA and European countries, including Walmart (USA), Tesco (UK), Metro (Germany), and Carrefour (France). Liberalization of trade policy and loosening of barriers and restrictions to the foreign investment in the retail sector of India, have collectively made the FDI in retail sector quite easy and smooth. Our services are easily and economically available for the following ways of FDI in Indian retail. The Retail sector of India is vast, and has huge potential for growth and development, as the majority of its constituents are un-organized. The retail sector of India handles about $250 billion every year, and is expected by veteran economists to reach to $660 billion by the year The business in the organized retail sector of India, is to grow most and faster at the rate of per cent every year, and can reach the level of $100 billion by the year Here, it is noteworthy that the retail sector of India contributes about 15 per cent to the national GDP, and employs a massive workforce of it, after the agriculture sector. India s growing economy with a rate of approximately 8 per cent per year, makes its retail sector highly fertile and profitable to the foreign investors of all sectors of commerce and economy, of all over the world. Global Jurix, a full-fledged legal organization prominent worldwide, provides all-encompassing services and advice for most lucrative and secured FDI in Indian retail sector. 39

5 S. No. Sector 40 Table 3: FDI Inflows in Different Sectors in India Amount of FDI Inflows (In Rs. (In US $ Crore) Million) 1 Services Sector Telecommunications Computer Software & Hardware Housing & Real Estate (Including Cineplex, Multiplex, Integrated Townships & Commercial Complexes Etc.) Construction Activities Drugs & Pharmaceuticals Power Automobile Industry Metallurgical Industries Petroleum & Natural Gas Chemicals (Other Than Fertilizers) Hotel & Tourism Trading Electrical Equipments Information & Broadcasting (Including Print Media) Cement And Gypsum Products Miscellaneous Mechanical & Engineering Industries Consultancy Services Industrial Machinery Ports Agriculture Services Food Processing Industries Non-Conventional Energy Hospital & Diagnostic Centres Electronics Textiles (Including Dyed, Printed) Sea Transport Fermentation Industries Mining Paper And Pulp (Including Paper Products) Prime Mover (Other Than Electrical Generators) Medical And Surgical Appliances Ceramics Education Rubber Goods Air Transport (Including Air Freight) Machine Tools %Age With Total FDI Inflows (+)

6 38 Soaps, Cosmetics & Toilet Preparations Diamond, Gold Ornaments Vegetable Oils and Vanaspati Fertilizers Printing Of Books (Including Litho Printing Industry) Railway Related Components Commercial, Office & Household Equipments Agricultural Machinery Glass Earth-Moving Machinery Tea And Coffee (Processing & Warehousing Coffee & Rubber) Photographic Raw Film And Paper Industrial Instruments Leather, Leather Goods And Pickers Retail Trading (Single Brand) Boilers And Steam Generating Plants Sugar Timber Products Coal Production Scientific Instruments Dye-Stuffs Glue And Gelatin Defence Industries Coir Mathematical, Surveying And Drawing Instruments Miscellaneous Industries Sub. Total RBI S- NRI Schemes ( ) Grand Total Source: DIPP, Federal Ministry of Commerce & Industry, Government of India. Table 3 clearly indicates the FDI inflows in different sector for the period of April 2000 August The FDI in Automobile Industry has experienced huge growth in the past few years. The increase in the demand for cars and other vehicles is powered by the increase in the levels of disposable income in India. The options have increased with quality products from foreign car manufacturers. The introduction of tailor made finance schemes, easy repayment schemes has also helped the growth of the automobile sector. For the past few years the Indian Pharmaceutical Industry is performing very well. The varied functions such as contract research and manufacturing, clinical research, research and development pertaining to vaccines are the strengths of the Pharma Industry in India. Multinational pharmaceutical corporations outsource these activities and help the growth of the sector. The Indian Pharmaceutical Industry has been experiencing a vast inflow of FDI.

7 Table 4: Route wise Foreign Investment in India Source: RBI s bulletin May Table 4 depicts that route wise foreign investment inflow of FDI from to Table shows that FIPB, RBIs, Automatic and Acquisition have the maximum contribution in total FDI in India. Their shares remain more than 50 %. It was minimum (50.83 %) in and maximum (72.22%) in FDI through equity was minimum (0.74%) in and maximum (8.72%) in FDI through Reinvested was minimum (22%) in and maximum (36.40%) in FDI through Other Capital was minimum (0.83%) in and maximum (14.64%) in It shows the very high fluctuation in FDI in India. It shows negative growth also. Fig 1: FDI Inflows in Different Sectors in India 42

8 Table- 5 Share of Top ten investing countries FDI inflows in India S. No. Country Cumulative FDI inflows ( Aug) % of Total Inflows US$ Rank 1 Mauritius 3,03, Singapore 82, U.K. 77, Japan 64, U.S.A. 49, Netherlands 37, Cyprus 31, Germany 23, France 13, U.A.E. 10, Total 8,19, Source: DIPP, Federal Ministry of Commerce & Industry, Government of India. Table 5 shows that out of top ten countries investing in India, Mauritius plays major role in FDI inflow in India. The main reason for higher levels of investment from Mauritius was that the fact India entered into a double taxations avoidance agreement (DDTA) with Mauritius were protected from taxations in India. Singapore and U. K. equally invest (10 per cent) in India during the study period. Japan and U.S.A. are following countries with 8 per cent and 6 per cent respectively. IMPACT OF FDI IN RETAIL SECTOR IN INDIA Retail Growth story in India is not only prodding domestic players to take their businesses to a new orbit but is also attracting foreign players as they are left with little or no hope to grow further in their structured home markets. The increasing disposable income among the Indian middle class, the burgeoning young population is touted as the main reason for such attractive optimism. The positivity about Indian retail scene has also led to an intense lobbying by certain sections for opening Foreign Direct Investment in this sector. India has positioned itself as a promising market for retailers worldwide by virtue of its undernoted strengths: India has witnessed a frenetic pace of retail development over the past five years. Goldman Sachs has estimated that the Indian Economic growth could actually exceed that of China by Retail which contributes 10 per cent of our GDP is the largest source of employment after agriculture. The Indian Retail market was estimated to be US $ 427 billion by 2010 & US $ 637 billion by This will bring modern technology to the country. Improve rural infrastructure. It would help build infrastructure and create a competitive market. Reduce wastage of agricultural produce. Enable our farmers to get better prices for their crops. Consumer will get commodities of daily use at reduced prices. Biggest beneficiary of this would be small farmers, to would be able to improve productivity and realize higher remuneration by selling directly to large organized players and shorten the change the form to consumers. 43

9 Government too stands to gain by this move through more transparent and accountable monetary goods and supply chain management systems. It can expect to receive an additional US$ 25 to 30 Billion by way of Taxes. Opening of retail can be seen solution for food inflation, which has been a confirmed policy- maker. FDI in retail would help in building much needed back end infrastructure. FINDINGS OF THE STUDY 1) The study reveals that the saving rate is less than investment rate in the study period. 2) The foreign investment increased in both term i.e. FDI and FIIs. 3) The FDI has better performance that attracts the percent amount of total foreign investment inflow. 4) Equity is the important route of FDI inflow that is billion dollar in India. 5) The highest amount 6878 billion dollars of FDI in India came from Mauritius which is percent of total cumulative FDI in study period while USA has 2nd and UK has 5th place. 6) The highest amount of FDI has gone to financing, Insurance, Real Estate and Business services which are percent and minimum went to research & scientific services which is 0.07 percent of total cumulative inflow of FDI study period in India. CONCLUSION On the basis of study I draw conclusion that large number of changes that were introduced in the country s regulatory economic policies herald the liberalization era of the FDI policy regime in India and brought about a structural break trough in the volume of the FDI inflows into the economy maintained a fluctuating and unsteady trend. During the study period it was found that maximum global foreign investment s flows are attracted by the developed countries rather than developing and under developing countries. Foreign investment flows are supplementing the scare domestic investments in developing countries particularly in India. But foreign investor never adopts environment friendly technique to maximize their profit. These investments met the financial requirement for building up the basic and essential infrastructure industries of priority sector. It might be of interest to note that more than 50 per cent of the total FDI inflows received by India came from Mauritius, Singapore and the USA. The main reason for higher levels of investment from Mauritius was that the fact that India entered into a double taxation avoidance agreement (DTAA) with Mauritius were protected from taxation in India. Among the different sectors, the service sector had received the larger proportion followed by computer software and hardware sector and telecommunication sector. It can be said that the advantages of allowing unrestrained FDI in the retail sector evidently outweigh the disadvantages attached to it and the same can be deduced from the examples of successful experiments in countries like Thailand and China where too the issue of allowing FDI in the retail sector was first met with incessant protests, but later turned out to be one of the most promising political and economical decisions of their governments and led not only to the commendable rise in the level of employment but also led to t he enormous development of their country s GDP. RECOMMENDATION During the study it is find that the highest amount of FDI gone to financing sector, insurance sector, Real estate and Business services which is percent of total cumulative inflow of FDI in study period in India. It s a serious matter in context of foreign direct investment objectives. Main reason of this sifting is high risk and low profit in concern sectors. Because the FDI are associated with various types of risks which are expected to provide various linkages in the development of Indian economy. But there is an upward trend in the flows of foreign investment particularly in study period. We should provide the better environment for attracting the foreign investment through direct as well as indirect methods. We should welcome inflow of foreign investment in such way that it should be convenient and favorable for Indian economy and enable us 44

10 to achieve our cherished goal like rapid economic development, removal of poverty, internal personal disparity in the development and making our Balance of Payment favorable. REFERENCES 1) Agarwal, Vibhuti; Bahree, Megha (7 December 2011). "India puts retails reforms on hold". The Wall Street Journal. 2) Alam Feroz Mohd. (2005) Impact of foreign direct investment on Indian Economy since economic liberalization, public opinion monthly survey, vol.2, no.8. 3) Alam MS. (2000) FDI and economic growth of India and Bangladesh: a comparative study, Indian Journal of Economics vol.80. 4) Anand Dikshit (August ). "The Uneasy Compromise Indian Retail". The Wall Street Journal. 5) Cappelli, Peter, Harbir Singh, Jitendra Singh & Michael Useem (2010), The India Way: How India s Top Business Leaders are Revolutionizing Management. 6) CMIE (2010), Monthly Review of Indian Economy, Economic Intelligence Service, July 2010, p. 7. 7) "FDI in retail is first major step towards reforms in agriculture, feels Sharad Joshi". The Economic Times. December ) FICCI s FDI Survey 2002, 2003 and 2004: The Experience of Foreign When to make India a manufacturing base. 9) German Federal Statistics and International Trade Statistics (2005). 10) Gupta K.L and Harvinder Kaur, New Indian economy and reforms Deep and Deep Publication Pvt. Ltd New Delhi. 11) Gupta, M.S. (2004), Foreign direct investment in India: Trend and policies, Bihar Economic Journal. 12) Ikea shelves Indian retail market move". The Financial Times. 22 January ) Indian retail: The supermarket s last frontier". The Economist. 3 December ) "India's retail reform: No massive rush". The Economist. December, ) KPMG Corporate Tax Rates Survey USA (2004). 16) Mahajan V.S. Economic reforms and liberalisation Deep and Deep Publication Pvt. Ltd New Delhi. 17) "Major Benefits of FDI in Retail". The Reformist India. 30 November ) Majumder, Sanjoy (25 November 2011). " Changing the way Indians shop". BBC News. 19) Mishra S.K and V.K Puri Indian Economy. Himalayan Publishing house, Mumbai.2008.p, ) Prajnan (2008), Journal of social and management sciences vol. xxxvii no.2 July-Sep )"Retailing in India Unshackling the chainstores". The Economist. 29 May ) S.Sinha Swapna et al. (2007) Comparative analysis of FDI in china and India, Journal of Asia Entrepreneurship and Sustainability Volume III. 23) Sharma, Amol; Sahu, Prasanta (11 January 2012). "India Lifts Some Limits on Foreign Retailers". The Wall Street Journal. 24) "The Bird of Gold - The Rise of India's Consumer Market". McKinsey and Company. May