ROLE OF FOREIGN DIRECT INVESTMENT IN INDIA

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1 ROLE OF FOREIGN DIRECT INVESTMENT IN INDIA Kirti Verma Assistant Professor (Extn.), Department of Commerce, Govt. College for women P.G. College, Hisar, Haryana, (India) ABSTRACT Foreign direct investment is one of that investment which is made for the benefit of the business interest. FDI is one and only most important instrument of attracting international economic integration in any economy. It serve as a link between saving and investment. Many developing countries like India, are facing the problem of saving. This problem can be solved by foreign direct investment. The flow of foreign investment is a profit making industry like insurance, business services, and real estate and serving as a cause for the growth of economy in India. Today the present study is based on the objectives like(a) to find out the requirement of amount of foreign investment by India, for its economic development and (b) to examine the trend and role of FDI and FIIs in improving the quality of and availability of goods has been beyond doubt. To analyze this all these objectives data have been gathered through secondary sources like publication and reports of govt. and RBI relating to foreign investment. Foreign investment flows are increasing the domestic investment in developing countries particularly in India. Secondary this paper recommends that we should take the benefit of invasion of foreign investment because it enable us to achieve our appreciate goal like making favourable balance of payment, quick economic development, removal of poverty and internal personal imbalnce in the development and also it is very much easy and favourable for Indian economy. Keywords: Foreign Indirect Investment, Portfolio Investment, Merits of FDI, Demerits of FDI. I. INTRODUCTION Foreign direct investment plays a important role in development of any economy as like India. FDI is made by foreign companies in order to establish wholly owned companies in another country and to manage them or to purchase shares of another country for the purpose of managing such companies. The main characteristics of foreign direct investment are that native companies are managed by the foreign companies or new companies are set in India by foreign companies. In this type of investment, it is the foreign investor who takes risk and is solely responsible for profit and loss of such company. Many countries provide many incentives for attracting the foreign direct investment. Need of FDI depends on saving and investment rate. Foreign direct investment act as a link between saving and investment. FDI upto 49% has been permitted in the pension sector.fdi limit of 26% in defence sector increased to 49% under Government confirmation route. Foreign Portfolio Investment up to 24% permitted under automatic route.fdi beyond 49% is also allowed on a case basis with the approval of Cabinet Committee on Security.100% FDI allowed in White Label ATM Operations. 259 P a g e

2 II. OBJECTIVES OF STUDY 1. To study the importance of FDI for developing countries in attaching the gap between the saving and investment. 2. To study the trends of FDI and FIIs in recent past in developing country like India after economic reforms. 3. To study the impact of FDI and FIIs in improving the quality and availability of goods has been beyond doubt. 4. To know the obligation of amount of foreign investment by India, for its economic development. III. RESEARCH METHODOLOGY The present study is based on the ambition like how much amount of foreign investment is required for India s economic growth and to study the trend of FDI and FIIs for economic development and how the status of economy has improved after economic improve. To fulfill all above said objectives data has been gathered from secondary sources like reports and publication of Govt. and RBI relating to foreign investment, journals, books, magazines and internet. IV. FOREIGN DIRECT AND INDIRECT INVESTMENT FDI stands for Foreign Direct Investment a part of country s national financial accounts. Foreign direct investment is investment of foreign assets into domestic structures, equipment, and organizations. The FDI can take any route or forms to enter into any country. The three principles forms of FDI in india are joint ventures, acquisition of assets in a country and Greenfield venture V. FOREIGN INDIRECT INVESTMENT AS PORTFOLIO INVESTMENT Foreign companies and foreign institutional investors (FII) buy shares and debentures of native companies however management and control remain vested with the native\domestic companies themselves. Foreign investment comes in host country in through various route and many forms.rather than attracting as much FDI as possible host country government 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) 2 Foreign indirect investments (FIIs) Flow chart of FDI FDI FDI Portfolio investment Wholly owned subsidiar Wholly owned subsidiary Joint Ventures Acquisition Joint ventures Acquisitions FIIs Investment in FCCBs FII S Investment in GDR s &FCC s 260 P a g e

3 VI. ROUTES OF FOREIGN INVESTMENT INFLOW DIRECT INVESTMENT INDIRECT INVESTMENT I) EQUITY (a) Government (I) GDR\ADR (b) RBI (II)FII (c) NRI (III)off shore funds (d) Acquisition of shares (e) Equity capital i)re invest Dearing ii) Other capital VII. DETERMINANTS OF FOREIGN DIRECT INVESTMENT 1) Size as well as the growth prospects of the economy of the country. 2) Resource availability 3) High per capita income or if the citizens have reasonably good spending capabilities. 4) Population 5) Inexpensive labour force 6) Economic policies 7) Infrastructural factors like the status of telecommunication and railways 7.1 Why Countries Seek FDI 1) Domestic capital is insufficient for the purpose of economic growth; 2) Foreign capital is usually essential, at least as a temporary measure, during the period when the capital market is in the process of development; 3) Foreign capital usually brings it with other scare productive factors like technical know how, bissiness expertise and knowledge. 7.2 Types of Foreign Direct Investment 1) Horizontal FDI : Investment in the same industry abroad as a firm operates in at home 2) Platform FDI : A source country into a destination country for the purpose of exporting to a third country 3) Vertical FDI : It takes place when a firm through FDI moves upstream or downstream in different value chains i.e., when firms perform value adding activities stage by stage in a vertical fashion in a host country. What is the procedure for receiving Foreign Direct Investment in an Indian company? An Indian company may receive Foreign direct investment under the two routes as given under: 1)Automatic Route FDI is allowed under the automatic route without prior approval either of the Government or the Reserve Bank of India in all activities as specified in the FDI policy, issued by Government of India from time to time. 2)Government Route FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the FIPB, Department of economic affairs, ministry of finance The Indian Company having received FDI either under the Automatic route or the Government route. 261 P a g e

4 What are the modes of payment allowed for receiving Foreign Direct Investment in an indian company? An Indian company issuing shares/convertible debentures under FDI scheme to a person resident outside India shall receive the amount of consideration required to be paid for such shares /convertible debentures by: (i)inward remittance through normal banking channels. (ii)debit to NRE/FCNR account of a person concerned maintained with an AD category bank (iii)conversion of royalty/lump sump/technical know how fee due for payment or conversion of ECB, shall be treated as consideration for issue of shares. (iv)conversion of import payables / pre incorporation expenses/ share swap can be treated as consideration for issue of shares with the approval of FIPB. What are the sectors where FDI is not allowed in India both under Automatic Route a well as under the Government Route? FDI is prohibited under the Government Route as well as the Automatic Route in the following sectors: (i)atomic Energy (ii)lottery Business (iii)gambling and Betting (iv)business of chit fund (v)manufacture of cigars, cheroots, cigarillos, cigarettes, of tobacco or of tobacco substitues. (vi)trading in Transferable Develpoment Rights(TDRs) VIII. MERITS OF FDI FDI has lot to advantages to its favour which can be summarized as below: 1) Increase in government revenue : Government revenue are going to be increased because of FDI. Government revenues will increase by 25 to 30 billion which is really abig amount. This government revenue can help a lot in the develpoment of Indian economy. 2) Higher remuneration for farmers: Another advantage of FDI is that it will help a lot in improving the miserable condition of Indian farmers who are committing suicides on daily basis. But FDI will certain help a lot in improving their condition as the farmers are going to get 10 to 30% higher remuneration because of FDI. 3) Increase in employment opportunities: FDI is certainly going to increase the employment opportunities in india by providing around 3 to 4 million new jobs. Not only this another 4 to 6 million jobs will be created in logistics, labour etc. because of FDI. 4) More consumer saving: One of the biggest advantage of FDI is that it will increase the saving of Indian consumer as he will get good quality products at much cheaper rates. Consumer savings are likely to increase 5 to 10% from FDI. 5) Increase in saving and investment: Another advantage of FDI is that it act as a link between the saving and investment. 262 P a g e

5 IX. DEMERITS OF FDI 1) No real benefit to farmers: Critics of FDI are also of the view that it is a misconception that the farmers are going to benefit in any way because of the entry of foreign chains in India rather it will make the Indian farmers a slave of these big chains & the farmers will entirely be on their mercy. Thus FDI is only going to deteriorate the already miserable conditions of Indian farmers. 2) Shrinking of jobs: Many critics of FDI are of the view that entry of big foreign chains like Wal Mart,Carrefour etc. are not going to generate any jobs in reality in India. At best the jobs will move from unorganised sector to unorganised sector while their nimber will remain same or lesser but not more. 3) Destruction of small entrepreneurs: The biggest fear from FDI is that it is likely to destroy the small entrepreneurs or small kirana shops as they will not be able to withstand the tough competition of big entrepreneurs as these entrepreneurs are going to provide all the goods to the consumers at much lesser prices. 4) Try to monopolise: Large giants of the world try to monopolise and take over the highly profitable sectors. 5) Such foreign companies invest more in machinery and intellectual property than in wages of the local people. FDI Equity inflows to India by source country (April-November 2014) (US $million) A sectoral analysis: Sector wise, the telecommunication sector beneffitted most from FDI equity flows for the current fiscal year to November This sector alone represented 13% of total FDI, a share almost double the 7% share the sector has attracted on a cumulative basis from April 2000 onwards. With 9.8% of FDI equity, the services sector, including,financial,banking,insurance,non-financial/business. Other key recipients for the current fiscal year to November 2014 are the automobile industry and the drugs and pharmaceuticals sector. India s growth prospects looking good India s growth figures(%)_ 263 P a g e

6 (Forecast) 2015(Estimate) SOURCE: World Bank India authorities expect the economy to grow 5-5.5% in the current fiscal year before accelerating to 6-6.5% in as the impact of the reform measures unveiled by the modi government kick in. According to world bank by 2016 the Indian economy is forecast to grow at 7%. X. CONCLUSION & RECOMMENDATION On the basis of study we draw a conclusion that maximum global foreign investment flows are attracted by the developed countries rather than developing and under developing countries. Foreign investment flows are increasing the domestic investments in developing countries particularly in India. But Foreign investor never adopts environment friendly technique to build up their profit. These investment met the financial requirement for building up the basic and essential infrastructure industries of priority sector. But we finds that the highest amount of FDI gone to financing sector, insurance sector, real estate,and business services.we should welcome inflow of foreign investment in such way that it should be convient and favourable for Indian economy and enable us to achieve our appreciate goal like rapid economic development, removal of poverty and making our Balance of payment favourable. REFERENCES [1.] FICCI s FDI Survey2002, 2003 and 2004: The Experience of Foreign When to make India a manufacturing base. [2.] German Federal Statistics and International Trade Statistics(2005).. [3.] KPMG Corporate Tax Rates Survey USA (2004). [4]. Alam MS. (2000) FDI and economic growth of India and Bangladesh: a comparative study Indian Journal of Economics vol.80 [4.] Bhandari, L.S Gokara. A. Tandon (2002), Background paper: Reforms and foreign direct investment in India DRC working paper: Reforms and foreign direct. [5.] Balasubramanyam V.N, Sapsford David (2007): Does India need a lot more FDI, Economic and Political Weekly. 264 P a g e