Fdi in Automobile Sector in India Essay

Custom Student Mr. Teacher ENG 1001-04 14 October 2016

Fdi in Automobile Sector in India


The study aims at providing the overall view of the Foreign Direct Investment into India, its classifications, trends and importance of FDI in pre and post reform era. Wherein, the post economic reform shows an increase in the growth of FDI.It emphasises on the importance of FDI in retail sector.country – wise FDI inflows into the country are carefully observed in order to arrive at appropriate conclusions in order to understand the trend of FDI inflows into Indian economy.

Literature review involves the analysis of various articles and research papers which were done on the similar lines of study to get an insight of the FDI and its performance in various sectors and also to understand the research gap of the study. The articles and the research papers reviewed talks about the importance of FDI in retail sector. They also give a comparitive study of FDI in India with China which is helpful in making comparisons about the inflow of FDI from various countries indicating the financial stability of the country which is the main reason in attracting the foreign investors. In many articles, factors affecting the inflow of FDI in different countries for better understanding of the aspects which are preventing the growth of FDI.

Research design gives a brief summary about the over all research carried out. It defines the problem and states the importance of FDI in India in various sectors referring to the country‟s economic growth.A brief description of research methodology talks about the type of data collected, its sources and various statistical tools used in analysis. Limitations are some of the factors affecting the study which are also discussed.

Research design is then followed by the Analysis and interpretation of the data collected. Theoretical analysis of various determinants of FDI in India is made in order to understand the effects of determinants in the inflows of FDI in India. St Joseph‟s College Of Commerce

A study on the foreign direct investment in India with reference to retail sector

Trend analysis is used to forecast the FDI inflows from 2011 to 2016 with the data available from 2006 to 2010. The third objective being to study the recent trends in FDI in retail sector, various articles from newspaper and journal is been analyzed to understand the advantages and dis advantages of allowing FDI in multi brand retail sector.

Findings mainly reveal the facts which are arrived at from the study it includes the trend analysis of retail FDI from 2006 to 2010, the forecasted retail FDI had a positive trend which shows that there will be a increase in FDI inflows in to India in coming years. Theoretical analysis of determinants of FDI help us to understand determinants of FDI in Indian context. In another theoretical study to learn the recent trends in FDI in India it was found that it had both positive as well as negative impact on the economy like unemployment, high prices monopoly of foreign retailers etc.

St Joseph‟s College Of Commerce

A study on the foreign direct investment in India with reference to retail sector


Foreign Direct Investment, or FDI, is a type of investment that involves the injection of foreign funds into an enterprise that operates in a different country of origin from the investor. Investors are granted management and voting rights if the level of ownership is greater than or equal to 10% of ordinary shares. Shares ownership amounting to less than the stated amount is termed portfolio investment and is not categorized as FDI. (Source:
Economic watch) FDI does not include foreign investments in stock markets. Instead, FDI refers more specifically to the investment of foreign assets into domestic goods and services.

Classifications of Foreign Direct Investment

FDIs can be classified as; Inward FDI and Outward FDI, depending on the direction of flow of money. Inward FDI occurs when foreign capital is invested in local resources. The factors propelling the growth of inward FDI include tax breaks, low interest rates and grants. Outward FDI, also referred to as “direct investment abroad”, it means firms in the country expand their business to other countries in the form of green field investments, mergers or acquisition etc.

The host country aspires to receive FDI inflows because of the potential benefits, that the FDI supplements the domestic savings of a nation. Other benefits include access to superior international technologies, exposure to better management and accounting practices, and improved corporate governance. On the other side, foreign investors are motivated by profits and access to natural resources available in the host country. Therefore, large and growing domestic markets are likely to receive more FDI. Countries with abundant natural resources such as mines, oil reserves and manpower attract the foreign investors to invest in that country.

A study on the foreign direct investment in India with reference to retail sector


The history of FDI in India was located with the establishment of East India Company by the British in 1612. Initially the investment came in the form of loans to government, railway companies and agro based industries like cotton and jute, public utilities engaged in plantation of tea and coffee. During this period there were no efforts to provide economic and financial infrastructure to the industries therefore the foreign investors had hardly any incentive in manufacturing in India other than creating a raw material base.

After the First World War, India granted protection to the dawning industries, this profitability of these industries attracted more foreign capital. The inflow of British capital which wasUSD15 million in 1913-14, increased toUSD29 in 1921 andUSD36 million in 1922. In the middle of the two world wars, the investment flowed into a number of consumer industries like cigarettes, matches, rubber, tyres, paints, chemical industries, paper, cement, textile, sugar etc.

During the Second World War government established new industries to replace imports as well as to support war efforts. It was during this period that the foreign investment had diversified into engineering industries, chemical industry and oil industry for defense purpose. By 1948 the foreign private investment in India amounted to Rs 2.5 billion. Of which 21 percent was in the manufacturing industries, 16 percent in plantation, 4percent in mining, 27 percent in trading and 14 percent in banking. India‟s foreign investment policy was first initiated in 1949. The guiding principles of the policy were:

All undertakings Indian or foreign had to conform to the general requirements of the governments industrial policy.

Foreign enterprises would be treated in par with Indian enterprises.

Foreign enterprises would have freedom to remit the profits to home country, subject to foreign exchange considerations.

If foreign company were compulsorily acquired, compensation would be paid on a fair and equitable basis; and

A study on the foreign direct investment in India with reference to retail sector

As a rule, the major interest, ownership and effective control of an undertaking should be in hands of India.

The above policy was to govern the entry of fresh foreign investments into India in future, but it was silent on regulation of existing foreign private investment in Indian industry. It was only in 1973 that legislative measures were taken to cope up with the problem posed by the existing foreign owned companies. This was done by amending the foreign exchange regulation act (FERA), in 1973 which regulated the entry and channelised the growth of existing foreign investment into the country. (Abraham, 1988)

The government felt the need of FDI after independence not only to provide adequate capital but also to gain scientific, technical and industrial know how. The industrial policy of 1965 allowed MNCs to venture in India. However the country faced two main problems in the form of foreign exchange and financial resources mobilization during the second five year plan (1956 -61). Thus to overcome this problem adopted the policy of frequent equity participation to foreign enterprises and to accept equity capital in technical collaborations. The government also provided many incentives such as tax concessions, simplification of licensing procedure and de reserving some industries such as drugs, aluminum, heavy electricals, fertilizers etc. in order to improve FDI inflows into the country.

This called forth investments from US, Japan, Germany and other countries into India. This eventually led to significant outflow of foreign reserves in the form of dividends, profits etc, and the government had to adopt stringent foreign policy in 1970s to overcome this situation. During this period the government adopted a selective and highly restrictive foreign policy as far as foreign capital, type of FDI and ownerships of foreign companies was concerned. Government setup Foreign Investment Board and enacted Foreign Exchange Regulation Act in order to regulate flow of foreign capital and FDI

A study on the foreign direct investment in India with reference to retail sector flow to India. In 1980s the government had to make necessary changes in the foreign policy due to the Continuous rise in oil prices, low exports and deterioration in Balance of Payment position. The government encouraged FDI in MNCs thus resulting in partial liberalization of the Indian economy.

It is during this period the government encourages FDI, allow MNCs to operate in India. Thus, results in partial liberalization of Indian economy. The government introduces reforms in the industrial sector, aimed at increasing competency, efficiency and growth in industry through a stable, pragmatic and non-discriminatory policy for FDI flow.

In the early nineties, Indian economy faced severe Balance of payment crisis. Exports began to sink. There was a marked increase in petroleum prices because of the gulf war. The external debts and low foreign exchange reserves for were disabling the economic development of the country. The outflow of foreign currency which was deposited by the Indian NRI‟s gave a further jolt to Indian economy. The overall Balance of Payment reached at Rs.-4471 crores. Inflation reached at its highest level of 13%. Foreign reserves of the country stood at Rs.11416 crores. The continued political uncertainty in the country during this period adds further to worsen the situation.

As a result, India‟s credit rating fell in the international market for both short- term and long-term borrowing. All these developments put the economy at that time on the verge of default in respect of external payments liability. In this critical face of Indian economy the then finance Minister of India Dr. Manmohan Singh with the help of World Bank and IMF introduced the macro – economic stabilization and structural adjustment program. As a result of these reforms India open its door to FDI inflows and adopted a more liberal foreign policy in order to restore the confidence of foreign investors.

Under this new foreign investment policy Government of India constituted FIPB (Foreign Investment Promotion Board) whose main function was to invite

A study on the foreign direct investment in India with reference to retail sector

and facilitate foreign investment through single window system from the Prime Minister‟s Office. The foreign equity cap was raised to 51 percent for the existing companies.

Government had allowed the use of foreign brand names for domestically produced products which was restricted earlier. India also became the member of MIGA (Multilateral Investment Guarantee Agency) for protection of foreign investments. Government lifted restrictions on the operations of MNCs by revising the FERA Act 1973. New sectors such as mining, banking, telecommunications, highway construction and management were open to foreign investors as well as to private sector.(Source: Sapna Hooda, 2011)

1.3 Trends in Foreign Direct Investment Inflow to India after economic reform After the initiation of liberal foreign investment policy b y government of India in 1991, FDI inflow has shown an upward trend in stock sense but varied in size over the period of twenty years (1991-92 to 2010-11). FDI inflow in India increased fromUSD129 million in 1991-92 to 27024 million in 2005 in. The inflow of FDI to the country has witnessed fluctuations during the period under consideration. It increased fromUSD 129 million in 1991-92 toUSD3557 million in 1997-98, which declined toUSD2155 million in 1999-2000.

It increased to a peak ofUSD6130 million in 2001-02 before declining in the subsequent years in 2002-03 and 2003-04. The inflow again increased to USD6051 million in 2004-05. There was tremendous growth till 2009-10 to USD37763 and a decline in 2010-11 to USD 27,024. The year wise FDI inflow to India along with Compounded Annual Growth Rate (CAGR) is shown in table 1. In terms of CAGR, growth rate of FDI inflow to India during the period 1991-2011, growth rate of FDI inflow to India was negative for six years (1998-99, 1999-2000, 2002-03, 2003-04, 2009-10 and 2010-11) as shown in the table.

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