Dr. LAL MRIGENDRA SINGH BAGHEL
Associate Professor
Editor-Indian Journal of New Dimensions,
Dept. of Economics,
J.N.M.P.G. College, Barabanki (UP).
Dr. VINODINI VERMA
Asst. Professor
Dept. Of Commerce,
Lucknow Public College of
Professional Studies, Lucknow (UP).
Foreign Direct Investment (FDI) is now not only being considered as the most viable means of external finance but also plays a significant role in the development of any economy. Now it has been considered as a instrument of economic growth by meeting the investment requirements of a capital deficit economy by bridging its saving-investment gap. New business with the support of FDI can generate employment, healthy and innovative competition from new companies may able to improve efficiency within the country. FDI It has been seen that there is the increasing competition for FDI inflows. There has also been a remarkable shift of power centers from western countries to the Asia sub-continent especially towards China and India. This was another reason to look in the matter under consideration. Asia has emerged as an economic giant, with the likes of China and India coming up as the two strongest economies. Such a scenario results in new tie-ups in the world of industrialized nations. Keeping these views in mind, whatever sectorial changes have been observed in FDI regime is described below:
Construction sector: The struggling construction sector will be a major beneficiary as radical changes in FDI norms have been brought in to boost demand for steel, cement and spur economic activity, ultimately with an aim to help build 50 million affordable houses for the poor. Several conditions have been removed including the area restriction of floor area of 20,000 sq.m. In construction development projects and minimum capitalization of $5 million which needed to be brought in within six months of the commencement of business. Also, foreign investors have been allowed to exit and repatriate their investment under automatic route before the completion of the project provided they complete a lock-in period of three years.
Defence: Foreign investment up to 49% has been allowed under automatic route from the earlier government approved route. Proposals for foreign investment in excess of 49% will be considered by FIPB. Portfolio investment and foreign venture capital investment, which were restricted to 24%, have now been hiked to 49% and that too through the automatic route. To ensure that ownership and control remain in Indian hands, Government approval, of course, will be required in case of infusion of fresh foreign investment within the permitted automatic route level, resulting in change in the ownership pattern or transfer of stake by existing investor to new foreign investor. Foreign investment above 49% was permitted earlier too, subject to approval of Cabinet Committee on Security on case to case basis, of course only if the investment was to result in access to ‘state-of-art’ technology in the country.
Broadcasting: In terrestrial Broadcasting FM (FM Radio), and in up-linking of ‘News & Government route Current Affairs’ TV Channels FDI upto 49% is allowed through the FIPB route (from the earlier 26%), while 100% FDI is allowed through the automatic route in up-linking of Non-‘News & Current Affairs’ TV Channels. 100% FDI is also allowed (upto 49% automatic route and beyond that through government route) in teleports, direct to home, cable networks, mobile TV, headend in the sky broadcasting service and cable networks.
Banking: In private sector banking, the government has brought in a composite cap by removing the sub-limits for FDI and FII, thereby allowing FIIs/FPIs/QFIs to invest upto the sectoral limit of 74% provided there is no change of control and management of the investee company. The existing foreign portfolio limit of 49% was coming in the way of fund raising plans of private sector banks such as Yes Bank, Kotak Mahindra Bank and Axis Bank. The new rule will give the banks and investors considerable flexibility in raising funds and investing respectively.
Plantation: The government also decided to plantation activities namely; coffee, rubber, cardamom, palm oil tree and olive oil tree plantations also for 100% foreign investment under automatic route. As of now, only tea plantation was open to foreign investment.
NRIs: Investment by companies/trusts/partnerships owned & controlled by NRIs on non-repatriation basis will now be treated as domestic investment.
E-Commerce: Manufacturers have been allowed to sell their product through wholesale and/or retail, including through e-commerce without Government approval. FDI cap is 100 % through automatic route.
Retail: Though the Government stayed away from any mention of multi-brand retail so as to protect the interests of their key vote bank of small traders, it has announced easing of several norms for single brand retail trade (SBRT) and e-commerce 100% FDI is allowed, up to 49% automatic and then after government approval needed . It has now been decided that in case of state of art and cutting edge technology, sourcing norms (that 30% of value of goods will have to be purchased from India) can be relaxed subject to Government approval, a move that will benefit companies such as IKEA. The government also permitted entities who have been granted permission to undertake SBRT, to do e-commerce. The government has eased FDI policy for Single Brand Retail Trading, besides permitting 100% FDI in duty free shops.
Also, a single entity will be permitted to undertake both the activities of single brand retail trading (SBRT) and wholesale with the condition that conditions of FDI policy on wholesale/ cash & carry and SBRT have to be complied by both the business arms separately. Currently, wholesale/cash & carry trader cannot open retail shops to sell to the consumer directly.
MBRT: In Multi Brand Retail Trading (MBRT) 51% FDI is allowed through government approval.
LLP: 100% FDI in Limited Liability Partnerships (LLPs) has been permitted under automatic route.
Aviation: Regional Air Transport Service will be eligible for foreign investment up to 49% under automatic route. Under the present FDI policy, foreign investment up to 49% is allowed only in Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline.
Foreign equity caps of certain sectors: Non-Scheduled Air Transport Service, Ground Handling Services, Satellites-establishment and operation and Credit Information Companies have now been increased from 74% to 100%. Further, sectors other than Satellites- establishment and operation have been placed under the automatic route. Other changes in rules: No government approval is required for investment in automatic route by way of swap of shares. For infusion of foreign investment into an Indian company which does not have any operations and also does not have any downstream investments, Government approval will not be required for activities under the automatic route and without FDI-linked performance conditions.
RECENT SIGNIFICANT FDI ANNOUNCEMENTS
Some of the recent significant FDI announcements are as follows:
– In June 2018, Idea’s appeal for 100 percent FDI was approved by Department of Telecommunication (DoT) followed by its Indian merger with Vodafone making Vodafone Idea the largest telecom operator in India.
– In May 2018, Walmart acquired a 77 percent stake in Flipkart for a consideration of US$ 16 billion.
– In February 2018, Ikea announced its plans to invest up to Rs 4,000 crore (US$ 612 million) in the state of Maharashtra to set up multi-format stores and experience centres.
– In November 2017, 39 MoUs were signed for investment of Rs 4,000-5,000 crore (US$ 612-765 million) in the state of North-East region of India.
– In December 2017, the Department of Industrial Policy and Promotion (DIPP) approved FDI proposals of Damro Furniture and Super Infotech Solutions in retail sector, while Department of Economic Affairs, Ministry of Finance approved two FDI proposals worth Rs 532 crore (US$ 81.4 million).
– The Department of Economic Affairs, Government of India, closed three foreign direct investment (FDI) proposals leading to a total foreign investment worth Rs 24.56 crore (US$ 3.80 million) in October 2017.
– Kathmandu based conglomerate, CG Group is looking to invest Rs 1,000 crore (US$ 155.97 million) in India by 2020 in its food and beverage business, stated Mr Varun Choudhary, Executive Director, CG Corp Global.
– International Finance Corporation (IFC), the investment arm of the World Bank Group, is planning to invest about US$ 6 billion through 2022 in several sustainable and renewable energy programmes in India.
RECENT GOVERNMENT INITIATIVES
– In January 2018, Government of India allowed foreign airlines to invest in Air India up to 49 percent with government approval. The investment cannot exceed 49 percent directly or indirectly.
– No government approval will be required for FDI up to an extent of 100 percent in Real Estate Broking Services.
– In September 2017, the Government of India asked the states to focus on strengthening single window clearance system for fast-tracking approval processes, in order to increase Japanese investments in India.
– The Ministry of Commerce and Industry, Government of India has eased the approval mechanism for foreign direct investment (FDI) proposals by doing away with the approval of Department of Revenue and mandating clearance of all proposals requiring approval within 10 weeks after the receipt of application.
– The Government of India is in talks with stakeholders to further ease foreign direct investment (FDI) in defence under the automatic route to 51 percent from the current 49 percent, in order to give a boost to the Make in India initiative and to generate employment.
– In January 2018, Government of India allowed 100 percent FDI in single brand retail through automatic route.
A study and pertinent analysis of the FDI inflow trends at the international level and those at the national and regional level implies that India has normally been able to attract significantly higher inflows of FDI in sync with the strong domestic economic routine and steady FDI policy liberalization as an integral component of the watchful process of capital account liberalization. Even when the world was in a turmoil during the economic crisis, India did not lag behind too much when it came to attracting FDI inflows in comparison to the global performance, and also in the case of other EMEs.
But on the contrary, when the recovery process of international FDI flows to EMEs took place during 2010-11, the country didn’t perform well on the FDI inflows front even though it showed comparatively better performance on the domestic economic front way above the speed of global recovery. This has put some question marks, mainly on account of the largening of the gap between its current account deficit above the 3% sustainable level.
With a view to analyze the factors responsible for such moderation, RBI had conducted an empirical study and it did suggest the impact of some institutional factors behind the FDI inflows slowdown even though despite the macroeconomic variables showed great deal of robustness. The study comprising a panel survey for 10 major EMEs demonstrated that factors like growth prospects, policy environment, openness, labour cost, and macroeconomic sustainability greatly affect FDI.
Comparison between the real FDI inflows and the attainable level, which was calculated on the grounds of macroeconomic fundamentals, demonstrated that the real FDI which was at par with the attainable level till the year 2009-10, was below the mark by a significant figure of around 25% during the year 2013-14. Besides the impact of institutional factors, many other factors like some sectors such as agriculture does not allow FDI, and in some like insurance and media where there are sectoral caps, FDI is quite low when you compare it internationally. What is noteworthy here is that there are various domestic limitations, and as such, no uniform standards exist which suit all nations. But still, India needs to rethink the sectoral caps, mainlly in the insurance sector, because of the simple fact that now the economy is interacting more and more with the global economy. Also, what we need to rethink is the strategy on the FDI inflows restrictions, mainly in in multi-brand retail.
Further, given the international experience, it is argued that FDI in retail would help in reaping the benefits of organised supply chains and reduction in wastage in terms of better prices to both farmers and consumers. The main apprehensions in India, however, are that FDI in retail would expose the domestic retailers – especially the small family managed outlets – to unfair competition and thereby eventually leading to large-scale exit of domestic retailers and hence significant job losses.
A balanced and objective view needs to be taken in this regard. Another important sector is the generation, transmission and distribution of electricity produced in atomic power, where FDI is not permitted at present, may merit a revisit. In this context, it may be noted that electricity distribution services is a preferred sector for FDI. According to UNCTAD four out of top ten cross-border deals during 2009 and 2014 were in this segment, which led to increase in FDI in this sector even in the face of decline in overall FDI.
The move of raising the previous FDI limit of 26% to 49% in the insurance sector is being hailed, taking into account the changing demographic patterns as well as the role of insurance companies in supplying the required long term finance in the economy. In order to liberalize Foreign Investment in India and to attract more number of foreign Investors the Government attempts to maintain a practice to continuously review the Foreign Investment policy. The acceptance of the recommendations to increase the Foreign Investment Limits in the respective sectors will not only attract Foreign Investment in India but will also provide growth opportunities to Indian Companies who can collaborate with Foreign Companies to start business in various new sectors. The withdrawal of requirement of Government Approval for Investment in different sectors will also act as an incentive to initiate various business prospects and will expedite the launch of new projects.
Although it seems that FDI inflows have a positive trend since beginning. But we want to check whether FDI inflows post liberalization is monotonically increasing on statistical significance or not.
H0: There is no monotonic trend in FDI inflows.
H1: Flow of FDI shows a positive monotonic trend in the post-reform period (after 1990s)
Table 4.07: FDI Inflows (US$ Million) in India Post-Liberalization
Year FDI Inflows Year FDI Inflows Year FDI Inflows
1990 237 1999 2168 2008 47102
1991 75 2000 3588 2009 35634
1992 252 2001 5478 2010 27417
1993 532 2002 5630 2011 36190
1994 974 2003 4321 2012 24196
1995 2151 2004 5778 2013 28199
1996 2525 2005 7622 2014 34582
1997 3619 2006 20328 2015 44064
1998 2633 2007 25350 2016 44486
Source:UNCTADSTAT,http://unctadstat.unctad.org/wds/TableViewer/table View.aspx? ReportId=96740.
Here we are using Mann-Kendall trend test for monotonic trends for following set of FDI data.
From the FDI inflows time series of post reform period, n=27>8
Thus, as a consequence, we may accept null hypothesis at 5% level of significance. Thus, statistically, monotonicity of trend is not significant although long term pattern is positive or upward. It has been considered by the various earlier studies that FDI plays a positive role in enhancing the economic growth of the country like India similarly our findings are also not differ in the long term pattern. Thus, it can be concluded the contribution of FDI to economic growth is one of the most important factor influencing the level of India’s economy. In order to sustained economic development the government should improve the investment friendly environment with the assurance economic and political stability in the nation.
REFERENCES:
1- R. Nagaraji. “What Has Happened since 1991: Assessment of India’s Economic Reforms” (PDF). Igidr.ac.in
2- Salisu, A. Afees (2006): “The Determinants and Impact of Foreign Direct Investment on Economic Growth in Developing Countries: A study of Nigeria”, Indian Journal of Economics, Vol. LXXXVI, No. 342, January 2006, pp. 333-342.
3- Nagaraj R (2003): “Foreign Direct Investment in India in the 1990s: Trends and Issues”, Economic and Political Weekly, pp.1701-1712.
4- Chakraborty Chandan, Peter Nunnenkamp (2006): “Economic Reforms, FDI and its Economic Effects in India”, www.iipmthinktank.com/publications/archieve.
5- Nayak D.N (1999): “Canadian Foreign Direct Investment in India: Some Observations”, Political Economy Journal of India, Vol 8, No. 1, pp. 51-56.
6- Kulwinder Singh (2005): “Foreign Direct Investment in India: A Critical analysis of FDI from 1991-2005”, papers.ssrn.com/sol3/papers.cfm_id_822584.
7- LMS Baghel -“Expected Dimensions of FDI in Retailing: Experiences from China”, UPUEA Economic Journal, Vol. 9, No. 9, October, 2013, pp. 645-647.
