It refers to the investment made in foreign currency by foreign investors with a view to spread their business and to earn profit. Broadly foreign investment is of two type:
(1). Foreign Direct Investment i.e. FDI
(2). Portfolio Investment

FDI refers to the net inflow of investment to enquire a lasting management interest in an enterprise operating in an economy other than that if investor. It usually involves participation in management, joint ventures, transfer of technology and expertise. It it the best form of foreign investment given its longevity, stability and far reaching objectives. In long term it brings growth, generate employment and fuels economic activities.

FDI has also three categories:
(1) Green Feild FDI : When it is made in new projects.
(2) Brown Field FDI : When it is made in vender develop or under utilised projects.
(3) Acquisition and Merger (A&M)

Portfolio investment is made broadly in capital market in form of bound, debentures and shaves etc. It is quite dangerous fot he health of economy because it acts like hot money and it may leave the country any time. Having the basis theme of foreign investment we can go for the critical analysis if it taking into account the recent. During recent past years the issues of FDI have been hotly debated for following reasons:

(1) FDI in multi-brand retail sector
(2) FDI in civil aviation sector
(3) Increasing the limit of FDI in insurance sector
(4) government ’s slow process of decision making
(5) GAAR issues
(6) Round Tripping FDI
(7) Double taxation avoidance agreement (DTAA)

FDI in retail sector was one of the policy decisions of the government  during the first half of 2012, but of the country and result was the political arena over criticism of the government by the foreign investors. In fact, government is intending 51% FDI in multi-brand retail sector with an view to:

(1) Attract foreign capital
(2) To streamline the supply chain across the country
(3) To ensure direct payment to the farmers or producers through direct procurement of products.
(4) To create a strong infrastructure of storage and warehouse
(5) To make a subsequence control over inflationary trends.

Though, the government  decision was quite clear and but the timing of decision was not correct on the one hand and on the other hand the lack of global vision among same political parties and leaders was proved fatal for the decision and the result was rollback. The only argument against it might be unemployment issue, otherwise FDI in retail sector could be proved instrumental for the economy similarity, on the other trout of FDI government  is also being criticised.

Therefore, the second generation of reforms are being marred due to lack of political will delayed decision etc. Which is coined as ‘Policy Paralysis’. RecentlyMr, Barack Obama, the US President, the eminent industrialists Mr. Ratan Tata like many other big names have expressed their concerned regarding government ’s such lacklustre moves. With respect to FDI during recent past years a newtrend of ‘Round Tripping’ has emerged and being detrimental to the economy.

Round Tripping of FDI is where domestic funds comeback into India as FDI money without any incremental flow of funds into the country. It is a common system of tax evasion where an investor using the tax holiday advantage in Mauritius or some other country with which India has a double Taxation Agreement to take money out of India only to bring it back disguised as foreign investment.

G-20 nations agreed to crack down on tax havens where nearly $11 trillion is parked, the OECD has begun a review of India’s FDI policy to suggest measures that will ease sector specific ceilings as well as look into issues of round tripping. In the budget proposal of 2012-13 the Finance Minister of India proposed a new set of provisions namely GAAR i.e., General Anti-Avoidance Rules. Though, it created serious resentment among the FIIs due to complications and the fear of its misuse by the tax officials. Hence, government  has to clarify it many times and ultimately it has deferred for the next fiscal.

Discussion on the role of foreign capital of foreign capital or foreign investment in a country like India is always be in focus. Therefore, it positive and negative impacts must be taken into account:-

Positive:
(1) It helps in supplementing domestic savings of the developing economy to undertake high level of investment.
(2) It couples with technology and training which fills the technological gap.
(3) It leads to strengthen balance of payment.
(4) A country is not required to borrow commercially and debit trap is avoided.
(5) It leads to better infrastructure and creates employment.

Negative:
(1) It leads to a situation of crony capitalism.
(2) It may create volatility and speculation in the capital market.
(3) It may create structure mismatch in the lending and borrowing system which can cripple the economy.
(4) It can make a country dependant on the foreign capital etc.

TRENDS AND PATTERNS OF FDI FLOWS AT ASIAN LEVEL

• » India, with a share of nearly 75%emerged as a major recipient of global FDI inflows in South Asia region in 2007.

• » As far as South, East and South – East block is concerned India is at 3rd place with a share of 9.2% while China is at number one position with a share of 33% in 2007. Other major economies of this block are Singapore, South Korea, Malaysia, Thailand and Philippines.

• » While comparing the share of FDI inflows of China and India during this decade (i.e. 2000-2007) it is found that India’s share is barely 2.8 percent while china’s share is 21.7 percent.

TRENDS & PATTERNS OF FDI FLOWS AT INDIAN LEVEL

• » Although India’s share in global FDI has increased considerably, but the pace of FDI inflows has been slower than China, Singapore, Brazil, and Russia.

• » Due to the continued economic liberalization since 1991, India has seen a decade of 7 plus percent of economic growth. Infact, India’s economy has been growing more than 9 percent for three consecutive years since 2006 which makes the country a prominent performer among global economies. At present India is the 4th largest and 2nd fastest growing economy in the world. It is the 11th largest economy in terms of industrial output and has the 3rd largest pool of scientific and technical manpower.

• »  India has considerably decreased its fiscal deficit from 4.5 percent in 2003-04 to 2.7 percent in 2007-08 and revenue deficit from 3.6 percent to 1.1 percent in 2007- 08.

• » There has been a generous flow of FDI in India since 1991 and its overall direction also remained the same over the years irrespective of the ruling party. » India has received increased NRI’s deposits and commercial borrowings largely because of its rate of economic growth and stability in the political environment of the country.

• »  Economic reform process since 1991 have paves way for increasing foreign exchange reserves to US$ 251985 millions as against US$ 9220 millions in 1991-92.

• »  During the period under study it is found that India’s GDP crossed one trillion dollar mark in 2007. Its domestic saving ratio toGDP also increases from 29.8 percent in 2004-05 to 37 percent in 2007-08.

• »  An analysis of last eighteen years of trends in FDI inflows in India shows that initially the inflows were low but there is a sharp rise in investment flows from 2005 onwards.

• » It is observed that India received FDI inflows of Rs.492302 crore during 2000- 2010 as compared to Rs. 84806 crore during 1991-1999. India received a cumulative FDI flow of Rs. 577108 crore during 1991to march 2010.

• »  A comparative analysis of FDI approvals and inflows reveals that there is a huge gap between the amount of FDI approved and its realization into actual disbursements. A difference of almost 40 percent is observed between investment committed and actual inflows during the year 2005-06.

• »  It is observed that major FDI inflows in India are concluded through automatic route and acquisition of existing shares route than through FIPB, SIA route during 1991- 2008.

• »  In order to have a generous flow of FDI, India has maintained Double Tax Avoidance Agreements (DTAA) with nearly 70 countries of the world.

• »  India has signed 57 (upto 2006) numbers of Bilateral Investments Treaties (BITs). Maximumnumbers of BITS are signed with developing countries of Asia (16), theMiddle East (9), Africa (4) and Latin America (1) apart from the developed nation (i.e. 27 in numbers). India has also become the member of prominent regional groups in Asia and signed numbers of Free Trade Area (nearly 17 in number).

• »  Among the sectors, services sector received the highest percentage of FDI inflows in 2008. Other major sectors receiving the large inflows of FDI apart from services sector are electrical and electronics, telecommunications, transportations and construction activities etc. It is found that nearly 41 percent of FDI inflows are in high priority areas like services, electrical equipments, telecommunications etc.

• »  India has received maximum number of financial collaborations as compared to technical collaborations.

• » India received large amount of FDI from Mauritius (nearly 40 percent of the total FDI inflows) apart from USA (8.8 percent), Singapore (7.2 percent), U.K (6.1 percent), Netherlands (4.4 percent) and Japan (3.4 percent).

• »  It is found that India has increased its list of sources of FDI since 1991. There were just few countries (U.K, Japan) before Independence. After Independence from the British Colonial era India received FDI fromU.K., U.S.A., Japan, Germany, etc. There were 120 countries investing in India in 2008 as compared to 15 countries in 1991. Mauritius, South Korea, Malaysia, Cayman Islands and many more countries predominantly appears on the list of major investors in India after 1991. This broaden list of sources of FDI inflows shows that India is successful in restoring the confidence of foreign investors through its economic reforms process.

• »  It is also found that although the list of sources of FDI flows has reached to 120 countries but the lion’s share (66 percent) of FDI flow is vested with just five countries (viz. Mauritius, USA, UK, Netherlands and Singapore).

• »  Mauritius and United states are the two major countries holding first and the second position in the investor’s list of FDI in India. While comparing the investment made by both countries, one interesting fact comes up which shows tha t there is huge difference in the volume of FDI received from Mauritius and the U.S. It is found that FDI inflows from Mauritius are more than double from that of the U.S.

• »  State- wise FDI inflows show that Maharashtra, NewDelhi, Karnataka, Gujarat and Tamil Nadu received major investment from investors because of the infrastructural facilities and favourable business environment provided by these states. All these states together accounted for nearly 69.38 percent of inflows during 2000-2008.

• »  It is observed that among Indian cities Mumbai received maximum numbers (1371) of foreign collaborations during 1991-2008.

Courtesy: Mr. LS Mishra

Related Topics:

• Basic Economy

• Fiscal System

• Foreign Investment

• Monetary System

• Capital Market

• Inflation

• National Housing Bank - NHB