India becoming Major Destination for FDI Inflow

by K. R. Sudhaman, Economic Affairs Editor, Ticker Plant News

Investment from abroad before economic reforms began in 1991 used to just trickle as foreign investors were wary of opportunity in India. But situation changed rapidly and more and more investment started pouring in with new policy in place. As various sectors were opened up gradually the FDI flow started steadily increasing and it cumulatively stood at 130 billion dollars by 2009.

India is far behind China, which attracts around 60 billion dollars annually. But today things have changed and India is becoming a major destination for FDI inflow. India received around 35 billion dollars in 2008-09 including reinvestments by foreign investors. In 2009-10 too FDI inflow is expected to be around 35 billion dollars, same as previous year despite global slowdown in the face of financial crisis.

Global slowdown in FDI flow
UNCTAD’s 2009 World Investment Report had noted a fall of global FDI inflows, from a historic high of 1.97 trillion dollars in 2007 to 1.69 trillion dollars in 2008, a decline of 14%. UNCTAD had subsequently predicted a fall in global FDI investment flows by 30% from 1.7 trillion in 2008 to 1.2 trillion in 2009.

The Commerce and Industry Minister Shri Anand Sharma said recently that even Organisation for Economic Cooperation and Development in its latest report on investment released in March 2010 has stated there would be a significant stagnation in the global investment activity.

OECD has noted that the average monthly Merger and Acquisition (M&A) activity in the past 12 months was just below 50 billion dollars. The last time monthly M&A activity fell below 50 billion dollars was in April 2006.

Year on Year global M&A activity is now at its lowest level since the beginning of the global economic crisis at around 35% of the levels reached two years ago.

Government sets $50 bln FDI by 2012 &$75 bln by 2014
These are clear evidences that hard times are ahead for global capital flows but India seems to be an exception where capital flows are surging resulting in appreciation of Indian rupee.

Shri Anand Sharma said the Government has set a target to raise FDI inflow into the country to 50 billion dollars annually by 2012 and raise it further to 75 billion dollars annually by 2014. These are not unrealistic targets and one would not be surprised if FDI in-flows into India become more than that of China in the coming years.

Global Community wants India to grow
The Global community wants India to grow and it is time to take advantage of the situation, the Prime Minister Dr. Manmohan Singh said while returning from his eight-day tour of U.S. and Brazil recently.

The World takes a benign view of India’s growth. We should take advantage of that (situation) because we don’t know how long it will last, Dr. Singh told reporters.

The Prime Minister was returning from Brazil after attending India-Brazil-South Africa (IBSA) and Brazil-Russia-India-China (BRIC) summits there.

All these show the enthusiasm the World business community and polity had on investments and confidence they had on India.

Renowned Mangement guru C.K.Prahalad, who died in U.S. recently wanted India to become a manufacturing hub of the World. He was developing manufacturing strategy in collaboration with Planning Commission based on India’s core competences.

Foreign Direct Investment into India is a capital account transaction under the Foreign Exchange Management Act (FEMA). The Government and Reserve Bank of India regulate such transactions.

While in some of the sectors, Foreign Direct Investment is allowed 100% and in some others, it ranges from 26% to 74%. There are some other sectors considered sensitive and hence are not opened up. There are few sectors like retail where allowing Foreign Direct Investment would help the economy particularly perishable commodities like fruits and vegetables in which annual loss is put at Rs 30,000 to Rs 40,000 crore due to lack of cold storage and pan-India market facility.

But there is stiff opposition to opening up retail sector as some fear that it would be a threat to kirana shops. Nearly 90% of retail trade is by small traders and shopkeepers in the country. But experience of the developed world show that retail chains and small shops can exist side by side as in United States and other developed countries.

Government keen to push FDI liberalisation further
There is therefore need for further opening up and allowing of more sectors for foreign direct investment.

As the Minister Shri Anand Sharma himself said that it had been felt, through interaction with various investors, counterpart government organisations and other stakeholders, that there is a need for further simplification and consolidation of the FDI policy framework, so as to make it more comprehensible to all investors and stakeholders.

Consolidated FDI policy announced
Accordingly the Government recently announced a consolidated FDI policy framework which would ensure that all information on FDI policy is available at one place.

There are as many as 178 RBI notifications and Government press notes regarding FDI policy issued from time to time. What the Government has done is to compile a single policy document to facilitate investors. This is a welcome development as plethora of notifications, were not only confusing, difficult to lay one’s hand besides comprehending them.

While consolidating the FDI policy documents, Government has ensured that overlapping policy statements, redundant instructions and outlived policy issues were weeded out.

The Prime Minister Dr. Manmohan Singh said at the 2008 World Economic Forum that our policy will be guided by the desire to make India even more attractive for Foreign Direct Investment. We are particularly keen to rationalise the simplify procedures so as to create an investor friendly environment.

The consolidation of FDI policy was a step in that direction. It has integrated all prior regulations on FDI, contained in FEMA, RBI circulars and various press notes to reflect the current regulatory framework.

This consolidation provides simplification of the FDI policy, greater clarity of investment rules and predictability of policy. This document will be updated every six months to facilitate investors.

FDI is allowed in some sectors and up to certain limit is allowed through automatic route. Some others are approved by Foreign Investment Promotion Board. The major ones particularly those which are sensitive and involve huge investments are cleared by the Cabinet.

Limit for FIPB approval raised to Rs 1200 cr
Recently the Government raised the limit for approval of those foreign direct investment proposals, which needed FIPB clearance. Earlier FIPB, headed by Finance Secretary, is to clear foreign investments up to Rs 600 crore, which has to be finally approved by the Finance Minister. Now that limit has been doubled to Rs 1,200 crore, helping the investors. Any foreign investment beyond Rs 1,200 crore only will have to go to cabinet for approval.

India has come a long way since economic reforms were started in 1991 in attracting foreign investment. This has helped in boosting country’s foreign exchange reserves to nearly 300 billion dollars now. Also it has helped in injecting competition, bringing in new and sophisticated technology particularly in manufacturing and services sectors and get new markets abroad boosting country’s exports.

But as Dr. Manmohan Singh himself says, a lot more needed to be done and more reforms and more opening up particularly the financial sector, retail and like are widely expected.