Unit 5Foreign Direct Investment

& Its Impact on Indian Economy

Foreign Direct Investment & Its Impact on Indian Economy

Key Issues related to FDI & Indian Economy

• Meaning & Definition of FDI• Structure of FDI In India• Summary Statistics related to FDI• Case Study : FDI in Retail Sector• A) Domestic big Firms In Retail • B) Joint Venture Retailer• Role & Performance with reference to Retail trade in Agriculture non

Agriculture Product.• Recommendation & Suggestions• Concluding Remarks

Meaning & Definition of FDI

IMF Definition

• FDI refers to the net inflows of investment to acquire a lasting management

interest (10 percent or more of voting stock) in an enterprise operating in an

economy other than that of the investor. It is the sum of 

Department of Industrial Policy & Promotion (DIPP)

• FDI‘ means investment by non-resident entity/person resident outside India

in the capital of an Indian company under Schedule 1 of Foreign Exchange

Management Regulations 2000”.

Equity Capital Reinvested Earnings Direct Capital

Structure of FDI

Foreign Direct Investment

Flows

Inflow

Outflow

Entry ModesMergers &

Acquisitions

Green Field

Investment

Licensing

Joint venture

TypesHorizontal

FDI

Vertical FDI

Complex FDI

Entry RouteAutomati

c Government

Foreign Investme

nt Promotion Board (FIPB)

Mergers & Acquisitions • Tata Steel’s mega takeover of European steel major Corus for $12.2 billion• Vodafone’s purchase of 52% stake in Hutch Essar for about $10 billion.• HDFC Bank acquisition of Centurion Bank of Punjab for $2.4 billion Green Field Investment• Mercedes Benz’s production facility in Pune, India Joint Venture : Maruti-Suzuki , Birla Sun Life.

Summary Statistics

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

0

2

4

6

8

10

12

FDI & GDP

FDI InflowFDI Out FlowGDP(%)

TIME

US $

Million

GDP (%)

Key Statistics

MAU-RITIUS38%

SIN-GAPO

RE10%

U.K9%JAPA

N7%

USA6%

Others30%

Top Five Investing Countriesin Inida% of total Inflows

Service Sector; 19%

Construction Development;

12%

Telecommu-nications; 7%

Computer Software &

Hardware; 6%Drugs & pharmaceuticals;

6%

Others; 50%

Top Five Sectors Attracting FDI% Of Total Inflow

Source : Factsheet on FDI, June 2012, DIPP

14

Indian Retail Scenario

• The Rs 18,673 billion (US$ 401 billion) Indian retail market is only 3 per cent of Global retail….

• Of this only 6% is organized retail as of 2011.

• The rest 94% remains unorganized:– What we call Kirana Stores,

‘mom-and-pop’ stores, people selling on footpaths and so on…

Indian Government (comprised of a coalition of political parties called the UPA)

has announced (Sept. 2012):

51 % FDI in multi-brand retail.. 100 % FDI in single brand retail

Present Policy Framework & Riders

Foreign investor should make Minimum investment of $100 million. 50% of the investment is to be in backend infrastructure development.

(Investments made to wards processing, manufacturing, distribution, design improvement, quality-control, cold chain, warehouses and packaging, will constitute back-end.

30% of all raw materials has to be procured from India's small and medium industries.

Permission to set up malls only in cities with a minimum population of 10 lakh.

Government has the first right to procure material from the farmers. Products should be sold under the same brand internationally. Foreign investor should be the owner of the brand.

So, what are the THREATS of allowing global retailers in

India..?

Some key concerns are

With 51% equity interest, foreign retailers can control the Indian operations and consolidate the financials with the parent company.

The minimum amount fixed for foreign investment is only $100.

The foreign retailer can purchase locally all agricultural produce, and sell them in their stores. Thus they can virtually corner the market and trade in these products.

Domination in warehouse infrastructure business (“back-end infrastructure clause)

Policy of 30% of the procurement of manufactured and processed products should be sourced from “small industry”. Critics point out that the Indian retail trade sources far more than 30% currently from small industry. So this is no concession.

The policy states that retail locations should be restricted to cities with one million plus population. This is to protect the smaller cities and rural areas from the predatory practices of the foreign retailers (which means the small retailers in the cities are sacrificed).

It will lead to Huge Unemployment Situation as it is the second largest employment providing sector after Agriculture.

But let us take a look at the other side of the coin..

Some Advantage of Allowing FDI

It will increase competition which is always beneficial for the customer.

It will remove the middleman from the equation. It will reduce costs which in turn will reduce prices. It will create 1.5 million more jobs in 5 years. Apart from the huge number of indirect employment.

More choices for consumers.

Global retailers are bound to bring in global best practices and technology that will lead to a more competitive marketplace benefiting the consumers.

The sourcing clause (30%) will lead to a direct benefit for the Small Medium enterprises (SME) sector.

With better infrastructure investment the wastage in food produce can be minimized and thus it will help control food inflation. We are the second highest producer of fruits and vegetables in the world but still we are not able to utilize it properly because of inadequate infrastructure facilities. Existing Public Distribution System may not be sufficient to solve the food crisis.

• With around 20 to 30 crore Indians sleeping hungry every night and over 7000 Indians dying of hunger every day, such waste is not less than a criminal offence.

• Food wasted in FCI godowns could have fed 2500 lakh families for 10 years!!!

Concluding Remarks

FDI in retail can result into developing “farm-to-fork” infrastructure consisting of integrated storage, cold chain and transport links..

A much needed repair of our grossly leaking distribution system…

• What ultimately matters is :

– Operational efficiencies..– Best deal to the final customer..– True globalization…

The big fuss overFDI in INDIAN RETAIL..

So that’s it about..

And, doesn’t this big fuss over liberalization in retail industry

remind us of..

• The big fuss before 1991 reforms…?

• The big fuss before letting global telecom players enter Indian Telecom Industry before 2000…?

We know very well that these have actually

fuelled

The Great India Growth Story*

*Not factoring in the great Indian 2G Scam…

with all these angry birds around..

What kind of bird should we be right now....?

The end.? ?