Role of FDI in India

An analysis on Telecom, Automobile & I.T./ITES sectors

Research Paper (postgraduate), 2013

42 Pages


Table Of Contents



Historical Roots
FDI INFLOWS Trends: 2000-2011

Relevance ofFDI in India

Economic Liberalisation: Role ofFDI in shaping the three sectors ofEconomy

India's Specific Sector Analysis
A. Telecommunications
Sector Performance:
Outcomes of the FDI policy:
B. Automobiles
Sector Performance:
Outcomes of the FDI policy:

Sector Performance:

Economic Liberalisation: Challenges Ahead



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Foreign Direct Investment (from now on to be referred as FDI) does not have a fixed definition due to the presence of a large number of authorities. Generally speaking, FDI[1] usually means the capital inflow from abroad via MNCs in the production capacity of the economy and which are “usually preferred over other forms of external finance because they are non-debt creating, non-volatile and their returns depend on the performance of the projects financed by the investors. FDI also facilitates international trade and transfer of knowledge, skills and technology.(ToT)”[2]

Moreover, FDI is described as a source of economic development, modernization and also of employment, where the overall benefits “...triggers technology spillovers, assists human capital formation, contributes to international trade integration and particularly exports, helps create a more competitive business environment, enhances enterprise development, increases total factor productivity and, more generally, improves the efficiency of resource use.”[3]

In fact, the amount of Foreign Direct Investment in India rocketed from less than US $2 billion in 1991, when the economy was liberalised, to more than US $45 billion in 2005[4]. According to the Finance Minister, P. Chidambaram, “FDI (had) worked wonders in China and can do so in India”[5]

Consequently, intense discussion has taken place among policy makers with regards to the role played by FDI in advancing the Indian economy as a method to solve perceived problems of the license raj system.

As such, the objective of this paper is to assess the impact ofFDI on the Indian automobile, telecommunications and IT sectors.

Historical Roots

FDI growth in our country was rather uneven in the beginning. Indeed, the view from the Indian Ministry of Finance in 1992 was that the contribution ofForeign Investment was bound to remain minor[6]. At the time, the focus was more on inward development to solve problems such as the BoP (Balance ofPayments) crisis. Furthermore the public sector strongly opposed the economic liberalisation[7]. Moreover, large scale political opposition such as the RSS’s ‘fight’ against ‘western imperialism’ contributed towards the unevenness ofFDI growth in India. Also, capitalists to feared external competition and as a result lobbied the government to maintain protection of its industries.[8] Due to this the Prime Minister appointed committees to look into all the contentious issues[9].

The three major national parties presented their election manifestoes for the (BJP, CPI(M) and the Congress), the Congress realised that “such foreign investment will not be at the cost of self-reliance”.[10] Even when the Congress came to power, there was no clear cut way in which FDI was defined. The goals of the govt. then was to consolidate gains, controlling problems and “the government’s capacity to pursue the social goals of generating employment, removing poverty and promoting equity”.[11]

Only in 1993-1994, did the realisation of FDI slowly permeate the minds of the people. It took another year before the policies could actually reach down to the state level. The role of the state governments is very important because the factors of production, such as land, water, power generation and roads come under the control of the State Government.

People started reaching a unanimous decision, in the year, 1995-1996 when the government began to show the progress made due to FDI. The future of growth and output of the country was connected to the FDI and it was unanimously decided that FDI was necessary for the country for its growth and development.[12] Also, it was only in 1995-1996, did the government alleviate the fears related to FDI by stating that “fears of foreign investment swamping our domestic industry or creating unemployment are unfounded or grossly exaggerated”[13]


(Economic Liberalisation: Role of FDI in shaping the Telecom, Automobile & the IT/ITES sectors of Economy) 14

The Contribution or impact of FDI has been well acknowledged in various discussion papers and studies amongst these in one of the recent study done in India’s FDI inflows trends and concepts ,it is mentioned that ,’’The Economic Survey 2008-2009 reiterated that: FDI is considered to be the most attractive type of capital flow for emerging economies as it is expected to bring latest technology and enhance production capabilities of the economy and the National Manufacturing Competitiveness Council15 : Foreign investments mean both foreign portfolio investments and foreign direct investments (FDI).FDI brings better technology and management ,access to marketing networks and offers competition, the latter helping Indian companies improve, quite apart from being good for consumers. This efficiency contribution of FDI is much more important ‘’

The evolution of Indian FDI can broadly be divided into three phases classified on the premises of the initiatives taken to induce foreign investments into the Indian economy :

a) The First phase between 1969 and 1991, was marked by the coming into force of the Monopolies and Restrictive Trade Practices Commission (MRTP) in 1969, which imposed restrictions on the size of operations, pricing of products and services of foreign companies. The Foreign Exchange Regulation Act (FERA),enacted in 1973,limited the extent of the foreign equity to 40% though this limit could be raised to 74% for technology-intensive, export-intensive, and core-sector industries. A selective licensing regime was instituted for technology transfer and royalty payments and applicants were subjected to export obligations.

b) The second phase, i.e. between 1991-2000, witnessed the liberalisation of the FDI policy, as a part of the Government’s economic reforms program. In 1991 as per the ‘Statement on Industrial Policy’, FDI was allowed on the automatic route, upto51 %, in 35 high priority industries. Foreign technical collaboration was also placed under[14] [15] the automatic route, subject to specified limits. In 1996, the automatic approval route for FDI was expanded, from 35to 111 industries, under four distinct categories :

(PartA-up to 50 %, Part -up to 51 %, Part C-up to 74 %, PartD-up to 100 %) A foreign Investment Promotion Board (FIPB) was constituted to consider cases under the government route.

c) The third phase, between 2000 till date (2011), has reflected the increasing globalisation of the Indian economy. In the year 2000, a paradigm shift occurred, wherein, except for a negative list, all the remaining activities were placed under the automatic route. Caps were gradually raised in a number of sectors/activities. Some of the initiatives that were taken during this period were that the insurance and defence sectors were opened up to a cap of 26 %, the cap for telecom services was increased from 49%to74%, FDI was allowed upto51 % in single brand retail. The year 2010 saw the continuation of the rationalisation process and all the existing regulations on FDI were consolidated into a single document for ease of reference.

The evolution of the FDI policy, towards more rationalisation and liberalisation, has narrowed down the instruments regulating FDI policy broadly to three[16]

1) Equity caps : restricting foreign ownership of equity capital
2) Entry route: requiring prior Government oversight, including screening and approval
3) Conditionalities: comprising of operational restrictions/licencing conditions, such as nationality criteria, minimum-capitalisation and lock-in period etc.

Table 1 : List ofcountries with a higher FDI than India.17

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FDI INFLOWS Trends: 2000-2011

The data on FDI inflows into the country shows that foreign investors have shown a keen interest in the Indian economy ever since it has been liberalized. An increasing trend of flows can be observed since 1991 with the peak of FDI flows being reached in 2008-09. Therefore the trend gives support to the fact that as and when the government has taken initiatives to open up and liberalize the economy further, the investors have welcomed the initiative and reciprocated by infusing investments into India. There are various reasons which work in favour of India and increase the level of interest shown in by foreign organization’s some of them being its demographics’ with a young population there is a huge consumer base that is to be tapped, the growing middle class, increased urbanization and awareness, rising disposable incomes.[17]

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Table 2

FDI invested ( US $ million) from the year 2000 to the year 2012[18]

Relevance of FDI in India

The 12th Plan’s draft approach paper of the Planning Commission mentions that “Thus the average investment rate needed during the Twelfth Plan period is estimated to be 38.5 per cent of GDP for the 9.0 per cent growth scenario with 4.5-5.0 average inflation. It would have to rise as much as41.4 per cent of GDP for the 9.5 per cent growth scenario with 5.0-5.5 rate of inflation” and in terms of investment in infrastructure the same document suggests that “The total investment in infrastructure would have to be over Rs.45 lakh crore or$1 trillion during the 12th Plan period. Financing this level of investment will require larger outlays from the public sector, but this has to be coupled with a more than proportional rise in private investment”.

It is seen that every nation world over is the race of attracting more FDI inflows to accelerate the pace of economic progress India’s case is no different as in order to achieve and sustain a healthy rate of growth India would require huge investments which cannot be financed locally therefore the government needs to look at alternate avenues ofbuilding up investments, FDI in this context is a very useful mechanism. Recent reports have also suggested that greater FDI inflows must be encouraged to meet capital requirements.[19]

Aside from using FDIs as investment channel and a method to reduce operating costs, many companies and organizations are now looking at FDI as a way to internationalize.

FDI should be looked upon as a means of industrialisation and development.

The Benefits of FDI Inflows can be broadly identified as:[20]

- Bridging the financial gap between the quanta of funds needed to sustain a level of growth and the domestic availability of funds.
- Technology transfer coupled with knowledge diffusion that leads to improvement in productivity. It can, thus, fasten the rate of technological progress through a ‘contagion’ effect that permeates domestic firms
- The transfer of better organisational and management practices through the linkages between the investing foreign company and local companies.

Economic Liberalisation: Role of FDI in shaping the three sectors of Economy

FDI has been allowed in a variety of sectors. Although the Govt of India has put restrictions in the various sectors to due to concern for the marginal producers, a certain amount ofFDI is permitted. The following table looks into that very matter.

Table 3 : Sector Specific Limits of Foreign Investment in India

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[1] FDI, as defined by the Oxford English Dictionary is “investment by a company in a country other than that in which the company is based.

[2] Planning Commission of India.2002. Report of the Steering Group on Foreign Direct Investment: Foreign

Investment India. [Government report]. p 11. New Delhi: Planning Commission, Governmentof India. Available at Internet.

[3] OECD.2002. Foreign Direct Investment for Development: Maximizing benefits minimizing costs Report of the Steering Group on Foreign Direct Investment: Foreign Investment India. p 5. Paris: OECD. Available at: Internet.

[4] According to government estimates, India receivedUS$ 19 billion in FDI inflows in 2006.

[5] (Indian Express, November 11, 2005)

[6] “compared to domestic investment the contribution of foreign investment is bound to remain minor” Economic Department, Ministry of Finance & Company Affairs. 1992. Economic Survey 1991-1992. New Delhi: Ministry of Finance & Company Affairs, Government of India. p 23.

[7] Boutron Isabelle. 2005. The Swadeshi Jagaran Manch: An Economic Arm of the Hindu Nationalist Movement. In Critical Issues in Indian Politics: The Sangh Pariwar. A Reader edited by Christope Jaffrelot. Page 394. New Delhi: Oxford University Press.

[8] Tharoor, Shashi. 1997. India: from midnight to the millennium. India: Penguin Books. p 173.

[9] Ibid

[10] Indian National Congress (Congress Party of India). 1991. Manifesto. At 1991/manifesto91_1.html. Internet

[11] Economic Department, Ministry of Finance & Company Affairs. 1992. Economic Survey 1991-1992. New Delhi: Ministry of Finance & Company Affairs, Government of India. p. 2.

[12] Economic Department, Ministry of Finance & Company Affairs. 1992. Economic Survey 1995-1996. New Delhi: Ministry of Finance & Company Affairs, Government of India. p.15.

[13] FDI has proved to be the most effective and rapid method of technology transfer (in the form of knowledge, technical and marketing skills, organization and management systems, now materials, and products) and effective promotion of comparative advantage through exports. Even when it forms a small fraction of the total investment, its catalytic role is out of proportion to its size. For India to aspire to sustained growth of 7 to 9 percent over the next few decades we have to be prepared to encourage a rapid increase of FDI to levels comparable to China’s 30 billion or more per year. Government of India. Ministry of Finance. 1995-1996. Economic Survey. 15 Available at : HNu1R8C&pg=PA 147&lp g=PA 147&dq=fears+of+foreign+investment+swamping+our+domestic+industrv+or +creating+unemplovment+are+unfounded+or+grosslv+exaggerated&source=bl&ots=Xw7MLn - pi&sig=Ani6lsqDXYcB21n3VHnCutJFgtw&hl=en&sa=X&ei=0vekUOLED6fNmOWIooCABA&ved=0CDgQ 6AEwA0#v=onepage&q=fears%20of%20foreign%20mvestment%20swampmg%20our%20domestic%20indust ry%20or%20creatmg%20unemployment%20are%20unfounded%20or%20grossly%20exaggerated&f=false

[14] CDS-KNRaj Library,INDIA’S FDI INFLOWS TRENDS & CONCEPTS,Posted on Febrauary 25,2011 by Anitha.

[15] K.S. Chalapati Rao & Biswajit Dhar ‘’ INDIA’S FDI INFLOWS Trends & Concepts’’ by Institute for Studies in Industrial Development Working Paper No : 2011/01


[17] World Investment Report, 2010 and Global Investment Trends Monitor, UNCTAD

[18] Source of graph : DIPP, Policies/FDI policv.aspx And -bn-fdi-number-mean-anvthing/

[19] http://www.financialexpress.eom/news/more-fdi-must-for-sund-requirements/754904/0


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Role of FDI in India
An analysis on Telecom, Automobile & I.T./ITES sectors
National University of Study & Research in Law
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ISBN (Book)
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Navneet Toppo, Economic Liberalisation, FDI, Foreign Direct Investments, Telecom, I.T, ITES, Autommobiles
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Navneet Toppo (Author)Rommel Khan (Author)Vivek Raj (Author), 2013, Role of FDI in India, Munich, GRIN Verlag,


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