FDI(Foreign Direct

Investment)
BY
CHANDRIKA TEWATIA RAJ
 INVESTMENT

Portfolio investment
Investment that does not involve obtaining a degree of control
in a company

Foreign Direct Investment

Purchase of physical assets or a significant amount of the
ownership (stock) of a company in another country to gain a
measure of management control
Invesment in India
AUTOMATIC ROUTE PRIOR PERMISSION (FIPB)

General Rule By Exception

No prior permission Prior Government

required Approval needed.
Inform Reserve Bank Decision generally
within 30 days of within 4-6 weeks
inflow/issue of shares
FDI
Direct investment into production or business in a country by a
company in another country.

Either by buying a company in the target country or by expanding

operations of an existing business in that country.
Sector-wise FDI inflows in
India
 Advantages of FDI
Increase investment level and thereby income & employment

Increase tax revenue of government

Facilitates transfer of technology

Encourage managerial revolution through professional management

Increase exports and reduce import requirements

Increase competition and break domestic monopolies

Improves quality and reduces cost of inputs

 Limitations of FDI
Flow to high profit areas rather than main concern areas

Through their power and flexibility, MNC can undermine economic autonomy
and control

Sometimes interferes in the national politics

Sometimes engage in unfair and unethical trade practices

Sometimes result in minimizing / eliminating competition and create

monopolies or oligopolistic structures
100% FDI permitted in India
 Engineering & Manufacturing sectors
 Roads & Highways, Ports and Harbors
 Industrial model towns/industrial parks

 Hotels & Tourism

 Pollution Control and Management

 Advertising & Film industry

 Power generation (hydro-electric, coal/lignite, oil or gas based)

 Information Technology including E-Commerce

Prohibited activities
Atomic energy
Arms and ammunition
Lottery business
Betting and Gambling
Aircraft and warships
Coal lignite
Factors affecting FDI
Profitability: Attract where return on investment is higher

Costs of production: Encouraged by lower costs of production like raw

materials, labor .
Economic Conditions: Market potential, infrastructure, size of population,
income level etc
Government policies: Policies like foreign investment, foreign collaboration,
remittances, profits, taxation, foreign exchange control, tariffs etc.
Political factors: Political stability, nature of important political parties and
relations with other countries.
Major impediments to larger
FDI inflows in India
In addition to India’s poor performance in terms of competitiveness, quality
of infrastructure, and skills and productivity of labor, there are several other
factors that make India a far less attractive ground for direct investment
than the potential she has.
1. Restrictive FDI regime
Rule should be scrapped in favor of automatic approval for 100-percent
foreign ownership except on a small list of sectors that may continue to
require government authorization.
The banking sector, for example, would be an area where India would like to
negotiate reciprocal investment rights.
Besides, the government also needs to ease the restrictions on FDI outflows
by non-financial Indian enterprises so as to allow these enterprises to enter
into joint ventures and FDI arrangements in other countries.
Further deregulation of FDI in industry and simplification of FDI
procedures in infrastructure is called for.
2. Lack of clear cut and transparent
sectoral policies for FDI
Expeditious translation of approved FDI into actual
investment would require more transparent sectoral policies,
and a drastic reduction in time-consuming red-tapism.

3. High tariff rates by international standards

India’s tariff rates are still among the highest in the world, and
continue to block India’s attractiveness as an export platform
for labor-intensive manufacturing production.
Much greater openness is required which among other things
would include further reductions of tariff rates to averages in
East Asia (between zero and 20 percent).
Most importantly, tariff rates on imported capital goods used
for export, and on imported inputs into export production,
should be duty free, as has been true for decades in the
successful exporting countries of East Asia.
4. Lack of decision-making authority
with the state governments
The reform process so far has mainly concentrated at the central level.
India has yet to free up its state governments sufficiently so that they
can add much greater dynamism to the reforms.
In most key infrastructure areas, the central government remains in
control, or at least with veto over state actions. Greater freedom to the
states will help foster greater competition among themselves. The state
governments in India need to be viewed as potential agents of rapid and
salutary change.
Brazil, China, and Russia are examples where regional governments take
the lead in pushing reforms and prompting further actions by the
central government.
In Brazil, it is São Paulo and Minais Gerais which are the reform leaders
at the regional level; in China, it is the coastal provinces, and the
provinces farthest from Beijing, in the lead; in Russia, reform leaders in
Nizhny Novgorod and in the Russian Far East have been major spurs to
reforms at the central level.
No liberalization in exit barriers

While the reforms implemented so far have helped remove the entry
barriers, the liberalization of exit barriers has yet to take place
this is a major deterrent to large volumes of FDI flowing to India.
An exit policy needs to be formulated such that firms can enter and
exit freely from the market.
it is also important to recognize that safeguards if wrongly designed
and/or poorly enforced would turn into barriers that may adversely
affect the health of the firm.
The regulatory framework, which is in place, does not allow the
firms to undertake restructuring.
Stringent labor laws
Large firms in India are not allowed to retrench or layoff any workers, or
close down the unit without the permission of the state government.
While the law was enacted with a view to monitor unfair retrenchment
and layoff, in effect it has turned out to be a provision for job security in
privately owned large firms.
This is very much in line with the job security provided to public sector
employees.
Most importantly, the continuing barrier to the dismissal of unwanted
workers in Indian establishments with 100 or more employees paralyzes
firms in hiring new workers.
Labor-intensive manufacturing exports require competitive and flexible
enterprises that can vary their employment according to changes in
market demand and changes in technology, so India remains an
unattractive base for such production in part because of the continuing
obstacles to flexible management of the labor force.
Financial sector reforms
Reform of India’s financial sector is crucial for large FDI flows into India.
However, only some partial steps have been undertaken and these are by no
means going to make any meaningful changes to the existing system. India’s
banking and insurance companies were nationalized more than two decades
ago.
While a number of countries had undertaken such actions in the 1970s and early
1980s, for instance Mexico, France, and Chile, however, they have almost
completely reversed this policy by now.
Be that as it may, India still continues to rely on a state-owned, state-run
banking system and the insurance sector till very recently remained a
government monopoly.
This as one would expect has had highly adverse results, both in terms of
availability of funds for investment and a negligible presence of foreign banks
and no presence of foreign insurance companies in the country.
High corporate tax rates
Corporate tax rates in East Asia are generally in the range of 15 to 30
percent, compared with a rate of 48 percent for foreign companies in
India.
High corporate tax rate is definitely a major disincentive to foreign
corporate investment in India.
 Custom Duty/Tariff
Need to protect domestic industry. Need to be sheltered from aggressive
foreign competition.
A high or low customs duty structure not only has an impact on revenue as
argued earlier, but it is also an issue in fostering comfortable or tense
international economic relations. By raising the customs duty structure very
high, import from any country can be effectively blocked.
Sometimes it is directed against cheap imports of selected goods from some
country against which the indigenous industry cannot compete, which may
go well beyond the infant industry argument.\
Duty on cars in India has been high to protect the car industry. High duty on
agricultural goods in India also makes agricultural imports unprofitable.
And the limit imposed by the WTO in this respect is high enough that has
enabled India to keep its duty rates within that limit.
Custom Duty is imposed under the Indian Customs Act
formulated in 1962 by the Constitution of India under the Article
265, which states that “no tax shall be levied or collected except by
authority of law.
The Indian Customs Duties are major source of revenue for the
Union Government and constitute around 30% of its tax revenues.
Together with Central Excise duties, the contribution amount to
nearly three-fourth of total tax revenue of the Union Government.
Custom duty not only raises money for the Central Government but
also helps the government to prevent the illegal imports and
illegal exports of goods from India.
The Central government has emergency powers to increase import
or export duties whenever necessary after a notification in the
session of Parliament.
 As per Section12 of the India Customs Act, Custom Duty is imposed on Goods, belonging
to Government as well as goods not belonging to Government. Section 2(22), gives
inclusive definition of ‘goods' as - 'Goods' includes:
1. Vessels, aircrafts and vehicles
2. Stores
3. Baggage
4. Currency and negotiable instruments and
5. Any other kind of movable property.

Objectives of Custom Duties

The customs duty is levied, primarily, for the following purpose:
Restricting Imports for conserving foreign exchange.
Protecting Indian Industry from undue competition.
Prohibiting imports and exports of goods for achieving the policy objectives of the
Government.
Regulating export.
Co-coordinating legal provisions with other laws dealing with foreign exchange such
as Foreign Trade Act,Foreign Exchange Regulation Act, Conservation of Foreign
Exchange and Prevention of Smuggling Act,etc.
three modes of imposing
Customs Duty
Specific Duties: - Specific custom duty is a duty imposed on each and
every unit of a commodity imported or exported. For example, Rs.5 on
each meter of cloth imported or Rs.500 on each T.V. set imported. In
this case, the value of commodity is not taken into consideration.
Advalorem Duties: Advalorem custom duty is a duty imposed on the
total value of a commodity imported or exported. For example, 5% of
F.O.B. value of cloth imported or 10% of [Link]. value of T.V. sets
imported. In case of Advalorem custom duty, the physical units of
commodity are not taken into consideration.
Compound Duties: - Compound custom duty is the combination of
specific and advalorem custom duties. In this case, the quantities as
well as the value of the commodity are taken into consideration while
computing tariff. For example, 5% of F.O.B. value plus, 50 paisa per
meter of cloth imported.