Indias experience with fdi role of a game changer

India’s Experience with fdi:
Role of a Game Changer
The Associated Chambers of Commerce and Industry of India
ASSOCHAM Corporate Office:
1, Community Centre, Zamrudpur, Kailash Colony, New Delhi-110048
Tel: 011 46550555 (Hunting Line) | Fax: 011 46536481/82, 46536498
Email: assocham@nic.in | Website: www.assocham.org
January 2012

Contents
I. India’s FDI Overall View.....................................................................4
II. Assessment of Global FDI...............................................................10
III. India’s Sectoral Analysis.................................................................12
IV. Relevance of FDI in India.................................................................24
V. Potential FDI Sectors.......................................................................27
VI. ASSOCHAM’s Suggestions.............................................................40

India’s Experience with FDI: Role of a Game Changer
1
Executive Summary
• The study examines the Role of FDI in India – ASSOCHAM has attempted to
estimate possible foreign investment flows if Pension Funds and Civil Aviation
are opened up for FDI
• Impact of FDI on Indian economy is assessed by analyzing the performance
of three sectors where FDI has been permitted. These sectors were:
 Telecommunications
 Automobiles
 IT/ITES
• Some of the benefits of liberalization of Telecom Sector were:
 Increase Penetration
 Growth in Subscriber Base
 Reduction of Call Rates
• Some of the benefits of liberalization of Automobiles Sector were:
 Increase in Production, Domestic Sales and Exports
 Development of a healthy Auto Component’s Industry
 Greater Choice for the Consumer
• Some of the benefits of liberalization of IT/ITES Sector were:
 High Growth Rates
 India becoming one of the leading exporter’s of software services
• The study further tries to assess the impact of opening up of FDI in other
sectors. Two sectors that have been considered for this purpose are:
 FDI in Pension Funds
 FDI in Civil Aviation

2
• The study of FDI in Pension Funds observed:
 The 12th
Draft approach paper of the Planning Commission suggests the
total infrastructure investment requirement would be US $ 1 trillion.
 Pension Fund investments into infrastructure seem to be a befitting
alternative given the match of interests for both the sectors.
 1 percent of the total pension funds held by pension fund companies
would increase India’s Pension fund assets to GDP ratio from the
current level of 5 percent to close to 17 percent.
 2.1 percent allocation of total pension fund assets to India would increase
its reserves to US $ 342 billion the level of pension assets estimated in
Brazil in 2010.
 CAGR of 16.5 percent would give an equity allocation of US$ 344.95
billion at the end of 2017.
 If 30 percent of the equity allocation goes into Infrastructure Sector
it would mean an investment of US $ 103.49 billion which shall be one
tenth of the infrastructure investment.
• The study of FDI in Civil Aviation observed:
 Huge amounts of additional investments required to realize the
vision of the Civil Aviation industry as suggested in Working Groups
report.
 Airport Infrastructure would require an investment of about Rs.67,500
crore during the 12th
Plan of which around Rs 50,000 crore is likely to
be contributed by the private sector.
 Airlines in India are expected to add around 370 aircrafts worth
Rs.150,000 crore.
 Decade 2000-2010 witnessed a profitless growth. The Airline Industry in
India suffers from huge debt burden – close to US $ 20 billion (Estimated
2011-12).

3
 Allowing foreign airlines to pick up stake in three major Indian Airlines
(Kingfisher, Jet Airways and Spice Jet) would result in capital infusion to
the tunes of :
 Promoters off loading 26% of their Equity Stake can raise
approximately upto Rs. 1341 crore.
 Figure goes approximately upto Rs.2530 crore in case 49 per
cent FDI is allowed.
 Equity valuation at 26% of all issued shares (promoter and non-
promoter) approximately comes out to be Rs.2835 crore.
 Estimates at 49% goes approximately upto Rs.5341 crore.
 The amount raised can be used to address working capital
requirements of the airlines.

4
I. India’s FDI Overall View
The early nineties was a period when the Indian economy faced a severe Balance
of Payment crisis. Exports began to experience serious difficulties. The crippling
external debts were putting pressure on the economy. In view of all these developments
there was a serious threat of the economy defaulting in respect of external payments
liability. It was in the light of such adverse situations that the policy makers decided to
adopt a more liberal and global approach thereby, opening its door to FDI inflows in order
to restore the confidence of foreign investors.FDI provides a situation wherein both the
host and the home nations derive some benefit. The home countries want to take the
advantage of the vast markets opened by industrial growth. Whereas the host countries
get to acquire resources ranging from financial, capital, entrepreneurship, technological
know-how and managerial skills which assist it in supplementing its domestic savings
and foreign exchange.
The contribution or impact of FDI has been well acknowledged in various discussion
papers and studies amongst these in one of the recent study done on India’s FDI inflows
trends and concepts1
it is mentioned that, “The Economic Survey 2008-09 reiterated that:
FDI is considered to be the most attractive type of capital flow for emerging economies
as it is expected to bring latest technology and enhance production capabilities of the
economy. And the National Manufacturing Competitiveness Council specified that: Foreign
investments mean both foreign portfolio investments and foreign direct investments (FDI).
FDI brings better technology and management, access to marketing networks and offers
competition, the latter helping Indian companies improve, quite apart from being good for
consumers. This efficiency contribution of FDI is much more important”.
The evolution of Indian FDI can broadly be divided into three phases classified on the
premises of the initiatives taken to induce foreign investments into the Indian economy:
(a) The first phase, between 1969 and 1991, was marked by the coming into force of
the Monopolies and Restrictive Trade Practices Commission (MRTP) in 1969, which
imposed restrictions on the size of operations, pricing of products and services of
foreign companies. The Foreign Exchange Regulation Act (FERA), enacted in 1973,
limited the extent of foreign equity to 40%, though this limit could be raised to 74%
1
K.S. Chalapati Rao & Biswajit Dhar “INDIA’S FDI INFLOWS Trends & Concepts” by Institute for Studies in Industrial
Development Working Paper No: 2011/01

5
for technology-intensive, export-intensive, and core-sector industries. A selective
licensing regime was instituted for technology transfer and royalty payments and
applicants were subjected to export obligations.
(b) The second phase, between 1991 and 2000, witnessed the liberalisation of the FDI
policy, as part of the Government’s economic reforms program. In 1991 as per the
‘Statement on Industrial Policy’, FDI was allowed on the automatic route, up to 51%,
in 35 high priority industries. Foreign technical collaboration was also placed under
the automatic route, subject to specified limits. In 1996, the automatic approval route
for FDI was expanded, from 35 to 111 industries, under four distinct categories (Part
A–up to 50%, Part B–up to 51%, Part C–up to 74%, and Part D-up to 100%). A Foreign
Investment Promotion Board (FIPB) was constituted to consider cases under the
government route.
(c) The third phase, between 2000 till date, has reflected the increasing globalisation of
the Indian economy. In the year 2000, a paradigm shift occurred, wherein, except
for a negative list, all the remaining activities were placed under the automatic route.
Caps were gradually raised in a number of sectors/activities. Some of the initiatives
that were taken during this period were that the insurance and defence sectors were
opened up to a cap of 26%, the cap for telecom services was increased from 49%
to 74% , FDI was allowed up to 51% in single brand retail. The year 2010 saw the
continuation of the rationalisation process and all existing regulations on FDI were
consolidated into a single document for ease of reference.
The evolution of the FDI policy, towards more rationalisation and liberalisation, has
narrowed down the instruments regulating FDI policy broadly to three2
:
(i) Equity caps: restricting foreign ownership of equity capital
(ii) Entry route: requiring prior Government oversight, including screening and
approval
(iii) Conditionalities: comprising of operational restrictions/licencing conditions,
such as nationality criteria, minimum-capitalisation and lock-in period etc.
2
http://dipp.nic.in/English/Discuss_paper/DiscussionPaper_relevance_23June2011.pdf

6
A. FDI INFLOWS Trends: 1991-2011
The data on FDI inflows into the country shows that foreign investors have shown a keen
interest in the Indian economy ever since it has been liberalized. An increasing trend of
flows can be observed since 1991 with the peak of FDI flows being reached in 2008-09.
(Chart 1) Therefore the trend gives support to the fact that as and when the government
has taken initiatives to open up and liberalize the economy further, the investors have
welcomed the initiative and reciprocated by infusing investments into India. There are
various reasons which work in favour of India and increase the level of interest shown in
by foreign organization’s some of them being its demographics’ with a young population
there is a huge consumer base that is to be tapped, the growing middle class, increased
urbanization and awareness, rising disposable incomes.
Chart 1: Trends of FDI Inflows
Source: DIPP
B. FDI Inflow by Components:
There has been a change in the method of estimation of FDI inflows since 2000-01, prior
to this only equity inflows was taken as the FDI inflow figure however post 2000-01 the RBI
has started following the international practice and taken into account other components
of FDI inflows namely re-invested earnings and other capital. A look at the contribution of
various components of FDI reveals that the share of re-invested earnings was rising from
2000 onwards uptil 2005-06 after which it has constantly been declining. The share of
equity inflows has risen sharply since 2000-01 when it stood at 59.6 per cent to 74.3 per
cent in 2010-11. (Chart 2)

7
Chart 2: Share of FDI Components
Source: DIPP
C. Ways of receiving Foreign Direct Investment by an Indian company3
i. Automatic Route
FDI up to 100 per cent is allowed under the automatic route in all activities/sectors except
where the provisions of the consolidated FDI Policy, paragraph on ‘Entry Routes for
Investment’ issued by the Government of India from time to time, are attracted.
FDI in sectors /activities to the extent permitted under the automatic route does not require
any prior approval either of the Government or the Reserve Bank of India.
ii. Government Route
FDI in activities not covered under the automatic route requires prior approval of the
Government which are considered by the Foreign Investment Promotion Board (FIPB),
Department of Economic Affairs, Ministry of Finance.
Indian companies having foreign investment approval through FIPB route do not require
any further clearance from the Reserve Bank of India for receiving inward remittance and
for the issue of shares to the non-resident investors.
As can be seen that since 2005-06 there has been a significant difference in the amount
of FDI inflows through the two routes a possible explanation for which could be that
with the investment climate in India improving and healthy competition among states to
3
http://www.rbi.org.in/scripts/FAQView.aspx?Id=26

8
attract FDI, the government eased foreign investment regulations leading to a spurt in FDI
coming through the RBI route, which is a positive sign. As per the data available there
is an increase in share of inflows through the RBI’s automatic route, a decrease in the
shares of inflows through the SIA/FIPB. (Chart 3)
Chart 3: Trend of Equity inflow through FIPB and Automatic Route
Source: RBI
D. Sectoral FDI Flow:
Changing Dynamics of Investment:
• Overall FDI into almost all the sectors had declined in the year 2010-11, a reason
for which could be the global situation that prevailed during that time frame.
• Although services sector remain the sector attracting the highest FDI inflows since
2006-07 its share has been constantly declining.
• The FDI flows into computer hardware and software has been downward ever
since 2005-06. It has drastically gone down from 24.8 per cent in 2005-06 to 4.0%
in 2010-11.
• Housing & Real Estate have shown an upward trend in terms of their share in FDI
inflows.
• Investments in chemicals and metallurgical industries have been erratic as no clear
trend could be observed for the time period 2005-06 to 2010-11.

9
Table
Sectors Attracting Highest FDI Equity Inflows (US $ Million)
Sector 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
Services Sector 543
(9.8)
4664
(37.3)
6615
(26.9)
6138
(22.5)
4353
(16.8)
3403
(17.5)
Computer Software &
Hardware
1375
(24.8)
2614
(20.9)
1410
(5.7)
1677
(6.1)
919
(3.6)
784
(4.0)
Telecommunications 624
(11.3)
478
(3.8)
1261
(5.1)
2558
(9.4)
2554
(9.9)
1665
(5.8)
Housing & Real Estate 171
(3.1)
467
(3.7)
2179
(8.9)
2801
(10.2)
2844
(11.0)
1127
(5.8)
Construction Activites 151
(2.7)
985
(7.9)
1743
(7.1)
2028
(7.4)
2862
(11.1)
1125
(5.8)
Automobile Industry 143
(2.6)
276
(2.2)
675
(2.7)
1152
(4.2)
1208
(4.7)
1331
(6.9)
Power 87
(1.6)
157
(1.3)
967
(3.9)
985
(3.6)
1437
(5.6)
1252
(6.4)
Metallurgical Industries 147
(2.7)
173
(1.4)
1177
(4.8)
961
(3.5)
407
(1.6)
1105
(5.7)
Petroleum & Natural
Gas
14
(0.3)
89
(0.7)
1427
(5.8)
412
(1.5)
272
(1.1)
578
(3.0)
Chemicals 390
(7.0)
205
(1.6)
229
(0.9)
749
(2.7)
362
(1.4)
398
(2.0)
Total Fdi 5540 12492 24575 27330 25834 19427
Source: DIPP

10
II. Assessment of Global FDI4
UNCTAD’s recent world investment report 2011 has some interesting insights into the FDI
pattern during 2010. Certain key highlights of the report are:
4
http://www.unctad-docs.org/files/UNCTAD-WIR2011-Full-en.pdf
Global foreign direct investment (FDI) flows rose moderately to $1.24 trillion in 2010,
but were still 15 per cent below their pre-crisis average. For the first time, developing
and transition economies together attracted more than half of global FDI flows. Outward
FDI from those economies also reached record highs, with most of their investment
directed towards other countries in the South. In contrast, FDI inflows to developed
countries continued to decline.
Emerging economies are the new FDI powerhouses
Developing economies increased further in importance in 2010, both as recipients of
FDI and as outward investors. As international production and, recently, international
consumption shift to developing and transition economies, TNCs are increasingly
investing in both efficiency- and market-seeking projects in those countries. For the
first time, they absorbed more than half of global FDI inflows in 2010. FDI outflows from
developing and transition economies also increased strongly, by 21 per cent.
Services FDI subdued
Sectoral patterns. FDI in services, which accounted for the bulk of the decline in
FDI flows due to the crisis, continued on its downward path in 2010. All the main
service industries (business services, finance, transport and communications
and utilities) fell, although at different speeds. FDI flows in the financial industry
experienced one of the sharpest declines.
FDI policies interact increasingly with industrial policies, nationally and
internationally
The challenge is to manage this interaction so that the two policies work together
for development. Striking a balance between building stronger domestic productive
capacity on the one hand and avoiding investment and trade protectionism on the
other is key, as is enhancing international coordination and cooperation.

11
FDI trends in various EME’s (Emerging Market Economies) in US $ Millions
Source: UNCTAD
• As can be seen from the figures China is way ahead of other emerging economies
in terms of FDI flows.
• Mexico has been witnessing a steady flow of foreign funds through the years.
• India alongwith Russia has witnessed increase in FDI flows in recent years.
• South Africa is the one that has been lagging behind other EME’s in terms of
foreign investments.

12
III. India’s Sectoral Analysis
A. Telecommunications
The growth in certain key industries is indicative of the economic development taking
place in an economy. Increased efficiency and reach provided by the telecom sector
has been instrumental in improving the operations of various sectors such as IT, banking,
or Media & Advertisement industry. The liberalization process that took place and the
subsequent policy initiatives has paved the way for influx of private players. (Fig 1) The
regulatory body overseeing the functioning of the sector is The Telecom Regulatory
Authority of India (TRAI) and its main objective is to ensure a level playing field that
encourages greater but fair competition so as to provide the consumers a better ambit of
services at an affordable price. The Indian government has relaxed the limits on FDI into
the sector considerably. (Table 1), which has lead to an increase of foreign capital into the
sector. (Table 2) FDI helps in attracting large amount of funds, advanced technology and
market competition which results in better services for the customer.
Figure 1: Evolution of Telecom in India

13
Table 1: Investment caps and other conditions for specified services are given
below:5
Telecom services 74% Automatic upto 49% Government route
beyond
(a) ISP with gateways
(b) ISP’s not providing gateways i.e.
without gate-ways (both for satellite
and marine cables)
(c) Radio paging
(d) End-to-End bandwidth
74% Automatic upto 49% Government route
beyond 49% and up to 74%
(a) Infrastructure provider providing
dark fibre, right of way, duct space,
tower (IP Category I)
(b)Electronic Mail
(c) Voice Mail
Note: Investment in all the above
activities is subject to the conditions
that such companies will divest 26%
of their equity in favour of Indian
public in 5 years, if these companies
are listed in other parts of the world.
100% Automatic upto 49% Government route
beyond 49%
Table 2: Telecom Sector FDI Equity Inflows (US $ Million)
Sector 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
(upto
Sep.
2011)
Telecom 624 478 1261 2558 2554 1665 1901
Source: DIPP
Sector Performance: India with its favourable demographics and growing economy
provides telecom players from world over an exciting and profitable opportunity. (Table 3)
Rising demand for a wide range of telecom equipment, particularly in the area of mobile
telecommunication which comprises of products like cell phones, chipsets, DSL and cable
5
http://dipp.gov.in/Fdi_Circular/FDI_Circular_012011_31March2011.pdf

14
modems and networking devices,, has provided excellent opportunities to domestic and
foreign investors in the manufacturing sector. The mobile phone has been transformed
from being a luxury to being an essential device required by almost everyone. Such
a change has been possible due to various reasons either at the policy level or at the
operators or manufacturers end. Low priced handsets and tariffs alongwith increased
connectivity has helped in the progress of various other sectors as well.
Table 3: Sector’s Performance
There is a huge difference in terms of the PSU and private sector networks, thereby
suggesting that it is the private players which actually are responsible for the significant
growth of telecom in the economy.

15

16
Outcomes of the FDI policy:
Some of the benefits
Industry Consumers
• Provided private players to tap the
existing potential in the sector.
• Assisted the industry in upgrading its
technology quotient by being exposed
to international standards.
• Opening up international markets for the
telecom equipment manufacturers
• Provided the sector with the much
needed financial assistance to set up
the infrastructure required to distribute
the benefits of the telecom revolution.
• More Choices in terms of service
provider
• Prices of products and services have
come down substantially
• A lot more products to choose from in
terms of handsets
• Greater connectivity assists customers
from all walks of life, be it the trader,
farmer, entrepreneurs
• Increased usage of internet has meant
new models of imparting education can
be adopted in the form of e-learning
B. Automobiles
Although the delicensing of the passenger car sector was initiated in 1993 the quantitative
restrictions still prevailed. Therefore most of the foreign firms had to enter into joint
ventures during the 1990’s. (Fig 2) However since 2002 when the equity caps for foreign

17
investors had been lifted the automobile industry has witnessed a healthy growth in the
inflow of foreign funds. As reported in the data the FDI flow in 2005-06 was approximately
143million US$ which in 2010-11 became 1331million US$. (Table 4)
Fig 2: Evolution of Automobile FDI Policy
Table 4: Automobiles Sector FDI Equity Inflows (US $ Million)
Sector 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
Automobile Industry 143 276 675 1152 1208 1331
Source: DIPP
Sector Performance: India is considered to be one of the fastest growing auto markets
in the world owing to its huge market size, expanding middle class, availability of finance
options and a high percentage of young aspirational population. Apart from these from
the viewpoint of a manufacturer India provides auto companies with low cost production
facility, a growing talent pool of technical personnel, and a growing and competent auto
components market. A look at some of the key parameters of the industry shows that
the sector has been growing continuously thereby benefitting both the manufacturers
as well as the consumers. A look at the production, sales and exports figures suggest
that all the three indicators have shown an upward trend alongwith the rise in FDI flows
into the sector. The growth of the automobile sector has assisted India in developing a
healthy auto component industry, with its turnover and investments rising almost every
year since 2005-06. (Table 5) An indicator of increase in the competitiveness of the Indian
auto components market can be judged by the fact that a major share of the exports of
these products is to Tier 1 OEM’s.

18

19

20

21
Outcomes of the FDI policy:
Some of the benefits
Industry Consumers
• Has increased the competitiveness of
domestic players.
• The growth in the sector assisted the
development of the auto component
industry which not only produces
products of global standard’s but has
also resulted in increased employment.
• The productivity levels within the
sector have improved as a result of
following globally recognized models of
manufacturing.
• The technological capability of Indian
firms has also seen improvements over
the years.
• FDI bought the required capital into the
sector which assisted players in scaling
up their supply thereby assisting their
overall efficiency and growth.
• Consumer choices have increased by
many folds both in terms of product
range within a price range as well as
across price range.
• The Indian consumer today has access
to global brands
• The quality of products in terms of
customer experience as well as other
parameters such as safety, accessories
have improved tremendously.
• Over the years there have been new
product categories that have been
created keeping in mind the change
in customer preferences. The recent
surge in demand for luxury and high
end automobiles has been noticed by
various international brands which have
now started looking at India as a future
growth driver.
C. IT/ITES
100% FDI is permitted in the Electronic hardware sector and the Software development
sectorundertheautomaticapprovalroute.IndustrialLicensinghasbeenvirtuallyabolished
in the Electronics and Information Technology sector except for manufacturing electronic
aerospace and defence equipment. In order to promote domestic investment, foreign
direct investment, transfer of technology / process know-how, technical collaboration,
joint venture etc in India and export IT software products and services from India to the
global market, both Government of India and State Governments in India have been
offering a series of policy packages including tax breaks, import duty concessions etc.
The rapid growth in the sector is a consequence of highly skilled human resource, low
wage structure, quality of work and the various policy initiatives as discussed earlier. The

22
recent fall in FDI flow to the sector could be due to the turmoil prevailing in most of the
developed nations which are a big market for the Indian IT industry. (Table 6)
Table 6: Computer Software & Hardware Sector FDI Equity Inflows (US $ Million)
Sector 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
Computer Software &
Hardware
1375 2614 1410 1677 919 784
Source: DIPP
Sector Performance: The Information Technology (IT) sector in India is one of the
sunshine sectors of the Indian economy and amongst the fastest growing in the country.
The demand for IT services has been fuelled by subsequent growth in allied sectors such
as telecom, banking, insurance, retail, healthcare and automobiles. Abundant investment
opportunities exist in the following thrust areas in India. Hence IT sector is attracting
considerable interest not only as a vast market but also as potential production base
by international companies. The trend over the last few years indicates a healthy rate of
growth both in terms of production and exports. (Table 7).

23

24
IV. Relevance of FDI in India
The 12th Plan’s draft approach paper of the Planning Commission mentions that
“Thus the average investment rate needed during the Twelfth Plan period is estimated
to be 38.5 per cent of GDP for the 9.0 per cent growth scenario with 4.5–5.0 average
inflation. It would have to rise as much as 41.4 per cent of GDP for the 9.5 per cent growth
scenario with 5.0–5.5 rate of inflation” and in terms of investment in infrastructure the
same document suggests that “The total investment in infrastructure would have to be
over Rs.45 lakh crore or $ 1 trillion during the 12th Plan period. Financing this level of
investment will require larger outlays from the public sector, but this has to be coupled
with a more than proportional rise in private investment”.
It is seen that every nation world over is the race of attracting more FDI inflows to accelerate
the pace of economic progress India’s case is no different as in order to achieve and
sustain a healthy rate of growth India would require huge investments which cannot be
financed locally therefore the government needs to look at alternate avenues of building
up investments, FDI in this context is a very useful mechanism. Recent reports have also
suggested that greater FDI inflows must be encouraged to meet capital requirements.6
Aside from using FDIs as investment channel and a method to reduce operating costs,
many companies and organizations are now looking at FDI as a way to internationalize.
FDI should be looked upon as a means of industrialisation and development.
The Benefits of FDI Inflows can be broadly identified as:7
• Bridging the financial gap between the quantum of funds needed to sustain a level
of growth and the domestic availability of funds
• Technology transfer coupled with knowledge diffusion that leads to improvement
in productivity. It can, thus, fasten the rate of technological progress through a
‘contagion’ effect that permeates domestic firms
• The transfer of better organisational and management practices through the linkages
between the investing foreign company and local companies.
6
http://www.financialexpress.com/news/more-fdi-must-for-fund-requirements/754904/0
7
http://dipp.gov.in/oecd_backpaper/FDI%20AND%20INFRASTRUCTURE.pdf

25
Some of these benefits have been seen in the cases of automobile and the telecom
industry as discussed in the study earlier. Moreover it can be seen that a promotion and
growth in one industry simultaneously fuels the growth in its interconnected sectors as
well.
It is well accepted that India’s rising growth would require a simultaneous expansion
of its infrastructure facilities to support it. The Government of India has been frequently
taking initiatives to liberalize and incentivize its foreign direct investment policies to
attract investments however the recent decision to suspend FDI in retail as well as hold
all other FDI decisions could dampen the international investor’s confidence, as the initial
announcement and then the rollback of the initiative might be interpreted as a sign of
political instability in taking key policy decisions.
In today’s global scenario when investors might be looking at alternate avenues, to invest
their money there are only a few nations across the world that provide opportunities to
foreigncompanies,withahighlypotentialmarketanda lowcostmanufacturingopportunity
and India is one of them. FDI in retail would have been an opportunity to attract inflow of
funds which would have resulted in major benefits for the Indian economy:
1. Agriculture: Organized retailing would have led to a complete overhauling of
the existing agricultural supply chain. It would have led to bypassing of various
intermediaries thereby reducing costs. Investments made by them would have
helped in creating back end infrastructure like warehousing and distribution centres,
transport and cold storage facilities. It would have created both direct as well as
indirect employment at various levels. All these would have resulted in enhanced
farmer’s realizations, improved quality of products and reduction in consumer
price.
2. Growth in allied industries: The inflow of funds into retailing would have
simultaneously led to the growth of allied industries as happened in the case of
automobiles, which led to the growth of auto components sector. Likewise FDI in
retail would assist growth in supplier industries such as food-processing and textiles
moreover, growing demand for retail space, construction of real estate would have
also taken place.
3. Increase in Employment: As mentioned in the previous point the growth in a number
of allied industries would also result in the growth of employment opportunities across
sectors. Both direct and indirect labour would be required to support the industrial
and operational machinery that would have been formed as a result of opening up of
the sector.

26
4. ImprovementofGovernmentRevenues:Anothersignificantadvantageoforganized
retailing is its contribution to government revenues. Organized retailers, by virtue
of their being corporate entities need to file tax returns periodically whereas in the
unorganized sectors there have been leakages in the collection of central and state
taxes.
Source: PIB’s Website
Recent Development
Farmers have reiterated their support for Cabinet’s decision to allow FDI in Multi-Brand
Retail. In a meeting with the Minister of Commerce, Industry and Textiles Shri Anand
Sharma, Secretary General of Consortium of Indian Farmers Associations (CIFA), Shri
P. Chengal Reddy conveyed the desire of various farmers’ body to implement the
decision as soon as possible. “FDI in retail will free farmers from the middleman and
will get the remunerative price for the produce to the farmer” said Shri Reddy after the
meeting.
Shri Reddy also informed about the CIFA’s efforts to engage state governments on
the issue of FDI in retail. “Many states are reconsidering their opinion as we have
explained to them various details because of which FDI will help the small farmers in
the long run as it builds competitiveness” informed Shri Reddy.

27
V. Potential FDI Sectors
A. FDI in Pension Funds
As per the 12th Draft Approach paper of the Planning Commission The total investment
in infrastructure would have to be over Rs. 45 lakh crore or $ 1 trillion during the
12th Plan period. The year wise requirement of infrastructure investments is given in the
table below:
Table: Projected Investment in Infrastructure during the Twelfth Five Year Plan
(Rs crore at 2006-07 prices)
Year
Base Year
(2011-12)
2012-13 2013-14 2014-15 2015-16 2016-17
Total 12th
Plan
GDP at
market
prices (Rs
crore)
63,14,265 68,82,549 75,01,978 81,77,156 89,13,100 97,15,280 4,11,90,064
Rate of
growth of
GDP (%)
9.00 9.00 9.00 9.00 9.00 9.00 9.00
Infrastruc-
ture invest-
ment as %
of GDP
8.37 9.00 9.50 9.90 10.30 10.70 9.95
Infrastruc-
ture invest-
ment (Rs
crore)
5,28,316 6,19,429 7,12,688 8,09,538 9,18,049 10,39,535 40,99,240
Infrastruc-
ture invest-
ment (US$
billion) @
Rs 40/$
132.08 154.86 178.17 202.38 229.51 259.88 1,024.81
Source: Mid-Term Appraisal of the Eleventh Five Year Plan
Such high level of investments cannot be financed by traditional sources of public
finance alone. Moreover, with increased globalization, provisions will have to be made
to counter any global risks that might be prevailing as is the case with Euro zone crises
currently.
In the light of such events therefore the Central Government might have to pursue an even
more cautious approach while incurring expenditures. This could lead to a significant

28
infrastructure gap and therefore there is need to recognize the importance of private
sector’s role in developing the infrastructure requirements of the nation.
The share of private sector investments in infrastructure has been marginally on a
rise. Please refer to the figure below:
Figure: Share in Total Investment
Source: Mid-Term Appraisal of the Eleventh Five Year Plan
However amidst a slowing economy and a fall in corporate performance there might
be a situation wherein even the private sector might have monetary constraints to
fund huge infrastructure projects.
To fill this Infrastructure Gap
• Pension Fund investments into infrastructure seem to be a befitting alternative
given the match of interests for both the sectors.
• FDI in pension funds would further increase the volume of assets that can be
invested into infrastructure and help in realizing the infrastructure needs of the
country.
Characteristics of infrastructure projects that assist in attracting investments from pension
funds:
 Long term income streams
 Stability

29
 Predictable cash flows
 Low default rates
 Diversification of projects
 The project stands to benefit the society at large
Given the large infrastructure financing requirements, all potential resources must be
tapped into by channeling available domestic and international funds into project finance.
However, long-term investors, such as pension and insurance funds, have had a
limited presence in the Indian market due to regulatory restrictions. The contribution
of Pension and Insurance companies to infrastructure financing has been relatively small
as indicated by their percentage share as sources of debt during the Eleventh Five Year
Plan. Please refer to table below:
Table: Likely Sources of Debt Financing for Infrastructure (Rs crore 2006-07 price)
2007-08 2008-09 2009-10 2010-11 2011-12 Total
Eleventh
Plan
Pension/Insurance
Companies
9077 9984 10983 12081 13289 55414
External Com-
mercial Borrowing
(ECB)
19593 21768 24184 26868 29851 122263
Estimated Require-
ment of Debt
131718 155704 187333 229571 283709 988035
% Share of Pen-
sion/Insurance in
Estimated Require-
ment of Fund
6.9 6.4 5.9 5.3 4.7 5.6
% Share of ECB’s in
Estimated Require-
ment of Fund
14.9 14.0 12.9 11.7 10.5 12.4
Source: Eleventh Five Year Plan
Therefore it is imperative that financial sector reforms continue in order to offer
products and services to meet financing and risk management of the needs
infrastructure projects.

30
Size of Pension Funds Market
As per an OECD report8
“According to the OECD calculations, the funded pensions
market (both occupational and work related) has a size of US$ 24.6tr worldwide. Of this,
US$ 16.2tr is held by pension funds”.
According to another report9
The OECD (Organization for Economic Cooperation and
Development) countries account for more than 90 percent of the world’s private pension
assets and the US account for nearly half of the total assets of private pension assets.
Pension fund assets in BRIC countries are relatively low in relation to their GDP
(17 percent in Brazil, 2 percent in Russia, 5 percent in India, and one percent in
China).
The total pension assets in 13 markets at the end of 201010
are given in the table below:
Table: Pension Fund Assets
Country Plan % GDP
Australia 1261 103
Brazil 342 17
Canada 1140 73
France 133 5
Germany 471 14
Hong Kong 87 38
Ireland 100 49
Japan 3471 64
Netherlands 1032 134
South Africa 256 72
Switzerland 661 126
UK 2279 101
US 15265 104
Total 26496 76
Source: Global Pension Asset Study 2011 Towers Watson
8
Georg Inderst “Pension Fund Investment in” published by OECD, Working Papers on Insurance and Private Pensions
No. 32
9
Global Pension Funds : Overview FT Knowledge Management Company Limited Vol 1I No. 32I October 25, 2010
10
Global Pension Asset Study 2011 Towers Watson

31
As per the Global Pension Asset Study 2011 the trend observed in the allocation of
pension assets at a world level are:
Table: Asset Allocation in 2010
Asset Allocation Percentage Allocated
Equity 47
Bonds 33
Other 19
Cash 1
Source: Global Pension Asset Study 2011 Towers Watson
Pension Fund Assets in India
Table: Current Status
Rs. Crores USD Billion
India’s GDP at
(constant price
2004-05) in 2010-11
4877842 97556
Exchange Rate
taken as 1 US$ =
50 Indian Rupees
Pension Fund
Assets
48.78
As stated earlier
pension fund asset
in India is 5 per
cent of the GDP
Fund Allocation
Equity 22.93 Assuming that
allocation is done
as per the world
trend indicated in
the earlier table
Bonds 16.10
Other 9.27
Cash 0.49
ASSOCHAM’s Calculations
Allowing FDI in Pension funds would give access to global pension fund companies to
the vast untapped Indian market and assuming that opening up of FDI in Pension
Funds shall help India in attracting slightly more than 1 percent of the total pension
funds held by pension fund companies (size of pension fund holdings assumed to
be US $ 16.2 trillion as given in an OECD report).
11
Global Pension Funds : Overview FT Knowledge Management Company Limited Vol 1I No. 32I October 25, 2010

32
 India would be able to raise the share of Pension fund assets to GDP from the
current level of 5 percent to close to 17 percent which would be similar to that of
another emerging economy Brazil’s level in 2010.
Moreover a 2.1 percent allocation of total pension fund assets to India would increase
its reserves to US $ 342 billion the level of pension assets that were there in Brazil in
2010.
• If Pension Funds reach 17 per cent of India’s GDP then this would result in
assets worth US$ 165.85 Billion
• Moreover if India is able to reach the levels witnessed in Brazil in 2010 then
going by the world trends the Equity allocation of these alone could be as high
as US$ 160 Billion
• A CAGR of 16.5 percent as witnessed by Brazil would result in total pension
assets of US$ 733.93 Billion, of which equity would be US$ 344.95 Billion.
Of this even if 30 per cent goes into Infrastructure Sector then it would mean an
investment of US $ 103.49 billion which is close to one tenth of the infrastructure
investment requirement of the 12th
Plan.
Table: Potential Scenario
Asset Alloca-
tion
Percent-
age Allo-
cated
Pension
Fund As-
sets at 5
per cent
of GDP
(current
status)
Pension
Fund
Assets
at 17
per cent
of GDP
Pension
Fund As-
sets at
Brazil’s
Current
Level
Pension Fund As-
sets at the end of
2017 (starting at
US $ 342 billion
in 2012) if CAGR
is 16.5 percent*
Total Avail-
able Assets
(USD Billion)
48.78 165.85 342.00 733.93
Equity 47 22.93 77.95 160.74 344.95
Bonds 33 16.10 54.73 112.86 242.20
Other 19 9.27 31.51 64.98 139.45
Cash 1 0.49 1.66 3.42 7.34
ASSOCHAM’s Calculations
*CAGR is taken as 16.5 per cent as this has been the rate achieved by Brazil in the period 31/12/2000
to 31/12/2010 as per Global Pension Asset Study 2011 Towers Watson

33
Other Benefits
• A vast majority of India’s population is not covered by any formal old age income
scheme and is dependent on their earnings and transfer from family members.
• The unorganized sector has no access to formal channels of old age economic
support.
• As indicated in remarks made on the pension system in India12
:
 Only about 12 per cent of the working population in India is covered by some
form of retirement benefit scheme.
 The total pension liability on account of the Central Government employees
has increased at a compound annual growth rate of more than 21% during the
1990s, the comparable rate for the State Government was 27% per annum.
 The implications of demographic dynamics for pension planning in India
becomes more evident when one takes into account the fact that average life
expectancy at age 60, which is currently 17 years, is likely to rise to more than
20 years in the next three decades and that the population over 60 years of age
will approach 200 million in 2030.
Therefore large scale reforms are required to ease the pressure on the treasury, to
provide for a social security net for growing numbers of senior citizens as well as a
growing workforce.
12
Pension Reform in India – A Social Security Need ( D. Swarup, Chairman, PFRDA)

34
B. FDI in Civil Aviation
I. Importance
The aviation industry is critical for any nation to gain from participation in the global
economy. Civil Aviation in its role of a key infrastructure sector facilitates:
• Growth of other industries
• Trade - by offering a reliable and faster mode of transport services to move products
and personnel across long distances
• Tourism
• Generates both direct and indirect employment opportunities
The vision for the Indian civil aviation industry for the 12th
Plan period is:
“To propel India among the top five civil aviation markets in the world by providing
access to safe, secure and affordable air services to everyone through an appropriate
regulatory framework and by developing world class infrastructure facilities”
II. Potential
A growing middle class supplemented with rise in disposable incomes, change in lifestyles,
a globalized economy all act as drivers that project a huge potential for the industry.
Another way of looking at the potential of the sector is by comparing the domestic tariff
of another emerging economy China. Domestic traffic in China is believed to be five
times the size of India’s despite having a population just 10% larger.
Forecast of air traffic carried out for 12th
plan13
period suggests:
• Domestic passenger throughout would grow at an average annual rate of around
12%.
• Domestic passenger throughout is expected to touch around 209 million by FY-17
from 106 million in FY-11.
• International passenger throughout is estimated to grow at an average annual rate of
8% during the 12th
Plan period
• International Passengers to reach 60 million passengers by FY-17 from 38 million in
FY-11.
13
Report of Working Group on Civil Aviation for formulation of Twelfth Five Year Plan (2012-17)

35
III. Investment Required
Huge amounts of additional investments will have to be made into the sector to
develop more airports, increase the existing capacities as well as improve and create
additional support infrastructure if India intends to harness the existing potential
efficiently.
Broad Investment requirements:
Expense On Amount (Rs. Crores)
Airport 67,500
Fleet Expansion 147,600
Total 2,15,100
Estimates given in the Report of Working Group on Civil Aviation suggest the investments
requirement would be:
a) Airport Infrastructure
Estimates received from AAI and the industry indicate that the Indian airports would
require an investment of about Rs 67,500 crores during the 12th Plan of which around
Rs 50,000 crores is likely to be contributed by the private sector. Please refer to the Table
below:
Table: Expected investments in airports during 12th
Plan
Investor Investment Category INR (Crores)
AAI Airport projects 17500
Private By Airport Operator 40,000
Investments By Others (Concessionaires, Third Party, etc.) 10,000
Subtotal 50,000
TOTAL 67,500
Source: Report of Working Group on Civil Aviation for formulation of Twelfth Five Year Plan
(2012-17)
b) Airlines
Airlines in India are expected to add around 370 aircrafts worth Rs 150,000 crores to
their fleet by FY-17. Fleet expansion at this scale would require airlines to explore multiple

36
funding options including capital markets, long-term borrowings and leasing etc. Please
refer to table below:
Table: Expected fleet expansion by Indian carriers
Airline Number of aircrafts expected
to be added by 2017
Estimate value of aircrafts to
be added (Rs. crores)
Air India 40 18,000
Go Air 22 8,100
Jet Airways 79 32,000
JetLite 20 7,600
Kingfisher 78 29,700
Spicejet 68 26,100
Indigo 69 26,100
TOTAL 376 147,600
Source: Report of Working Group on Civil Aviation for formulation of Twelfth Five Year Plan
(2012-17)
Realization of the civil aviation industry’s vision would require huge amounts of
funds to be invested.
However, looking at the existing financial status of the industry the achievement of
set objective seems to be ambitious14
.
• The decade 2000-2010 witnessed a profitless growth phase of the air lines industry.
• During the three year period between 1 Apr 2007 and 31 Mar 2010, Indian carriers
incurred an accumulated operational loss in excess of Rs 26,000 crores.
• As per certain estimates the Airline Industry in India suffers from huge debt burden –
close to US $ 20 billion (estimated for 2011-12).
• Half of this debt is aircraft related and the rest for working capital loans, payments to
airport operators and fuel companies.
• High costs of operation and competitive pricing mechanism followed has adversely
dented the financials of the airline sector.
14
Report of Working Group on Civil Aviation for formulation of Twelfth Five Year Plan (2012-17)

37
IV. Foreign Airlines Equity Participation
Raising huge amounts of investments would require the government to adopt more
progressive and positive fiscal regime as well as develop a collaborative approach
with the industry.
Civil Aviation industry would require not only large but continuous flow of funds if the next
phase of growth needs to take place. For this to happen the government must relook at its
FDI policy which disallows foreign airlines from purchasing equity of domestic airlines.
Direct investment by foreign airlines would:
• Provide managerial and technical expertise needed to improve productivity.
• Raise much-needed capital for the private-sector players
• Improve operating standards and services
An estimation of the amount of capital that can be raised by three prominent Indian
Private Airlines shows: (foreign non- airline investor’s equity has not been considered in
estimation).
• The promoters by off loading 26 % of their Equity Stake can raise upto Rs.
1341.45 crores.
• This figure goes up to Rs. 2528.3 crores in case 49 per cent FDI is allowed.
• Combined equity valuation (promoter and non-promoter) at 26 % comes out to
be Rs. 2834.27crores.
• The valuation at 49 % goes upto Rs. 5341.52 crores.
The capital raised from equity sale can be used to address the working capital requirements
of the airlines.
Estimates:
Table: Estimates of capital that can be raised
Condition
Amount of Capital Raised (Rs. Crores)
At 26 per cent At 49 per cent
(a) Promoters off load their stakes 1341.54 2528.29
(b) total available equity(promoter and
non-promoter) is diluted
2834.27 5341.51
ASSOCHAM’s Calculation

38
A. Investment flow through FDI
Promoter’s share is diluted
Airline
No of
shares
% Share
Total Value
(Rs Crores)
Amount of Capital Raised
(Rs. Crores) if
FDI 26% FDI 49%
Kingfisher 263085543 56.08 4268.56 1109.82 2091.59
Jet Airways 10183 0.06 .57 .15 .28
Spice Jet 156528305 38.61 890.65 231.57 436.42
Total 1341.54 2528.29
Overall (promoter and non-promoter’s) share is diluted
Airline No of shares
Total Value (Rs
Crores)
Amount of Capital Raised (Rs.
Crores) if
FDI 26% FDI 49%
Kingfisher 469107140 7611.26 1978.92 3729.51
Jet Airways 17275436 983.17 255.62 481.75
Spice Jet 405378065 2306.6 599.72 1130.23
Total 2834.27 5341.51
B. Individual Airlines
Kingfisher
Category
No of
shares
% Share
Total Value
(Rs Crores)
(Rs. Crores) if
FDI 26% FDI 49%
Promoter 263,085,543 56.08 4268.56 1109.82 2091.59
Non Promoter 206,021,597 43.92 3343.11 869.20 1638.12
Total 469,107,140 100 7611.26 1978.92 3729.51
Note: Rs 162.27 that is the average of highest share price and lowest share price in the
last four years has been used to calculate the valuation.

39
Jet Airways
Category
No of
shares
% Share
Total Value
(Rs Crores)
(Rs. Crores) if
FDI 26% FDI 49%
Promoter 10,183 0.06 .57 .15 .28
Non Promoter 17,265,253 99.94 982.60 255.47 481.47
Total 17,275,436 100 983.17 255.62 481.75
Note: Rs 569.13 that is the average of highest share price and lowest share price in the
last four years has been used to calculate the valuation.
Spice Jet
Category
No of
shares
% share
Total Value
(Rs Crores)
(Rs. Crores) if
FDI 26% FDI 49%
Promoter 156,528,305 39.68 890.65 231.57 436.42
Non Promoter 248,849,760 60.32 1415.96 368.15 693.82
Total 405,378,065 100 2306.60 599.72 1130.23
Note: Rs 56.9 that is the average of highest share price and lowest share price in the last
four years has been used to calculate the valuation.

40
VI. ASSOCHAM’s Suggestions
FDI since 1991 has proved to be game changer for wide segments of Indian industry.
FDI has change quality, productivity, and production in areas where it has been
allowed. FDI has led to the creation of new activities such as IT-BPO, which was initiated
by select foreign companies.
India needs huge investment in the 12th
Plan period, it is calling for investments
to the tune of $1 trillion in the infrastructure sector alone. We need among many
other infrastructure facilities infrastructure in retail as well as those for food & perishable
products. Opening of FDI in retail would have led to the creation of such farm infrastructure.
This apart mining and manufacturing sectors also require huge investments and FDI can
supplement domestic efforts significantly. There is also an urgent need for India to
augment the investment absorption capacity.
Moreover it has to be understood that India is competing for foreign investments
with other emerging economies and so far a comparative analysis suggest that India
has not been a large recipient of FDI.
It is in this context that ASSOCHAM studied the role of FDI in Indian economy and
particularly in select sectors. While ASSOCHAM feels that FDI liberalization should be
pursued we also recommend some immediate ground level reforms for increasing the
ease of doing business in India. Therefore we would like to propose a few suggestions
to the policymakers for their consideration:
• Bureaucratic delays and various governmental approvals and clearances involving
different ministries need to be fastened so as to increase the absorption rate of FDI
into the country.
• Restrictions on sector caps and entry route to sectors other than those of national
importance need to be liberalized further and constant reviewing of policies must be
done.
• Government must ensure consistency of policy so as to improve the business and
investor confidence.

41
• It is in the interest of the industry at large if a mechanism could be developed which
facilitates a consultation between Centre and State governments before a policy
rollout so that once the decision is taken its implementation does not get affected.
• Government must recognise that good regulations and efficient processes are key
catalysts for FDI. Accessible and reliable information and efficient and predictable
actions by public institutions help create a business environment conducive to
investment.
• Time bound, non-discretionary, simplified and less number of procedures and
approvals would also help in uplifting the international investor’s confidence and
help foster more investment into India.
HHH

About ASSOCHAM
ASSOCHAM acknowledged as Knowledge Chamber of India has
emerged as a forceful, pro-active, effective and forward looking
institution playing its role as a catalyst between the Government and
Industry. ASSOCHAM established in 1920 and has been successful
in influencing the Government in shaping India’s economic, trade,
fiscal and social policies which will be of benefit to the trade and
industry.
ASSOCHAM renders its services to over 3,50,000 members which
includes multinational companies, India’s top corporates, medium
and small scale units and Associations representing all the sectors
of Industry. ASSOCHAM is also known as a Chamber of Chambers
representing the interest of more than 350 Chambers & Trade
Associations from all over India encompassing all sectors.
ASSOCHAM has over 100 National Committees covering the
entire gamut of economic activities in India. It has been especially
acknowledged as a significant voice of Indian industry in the field of
Corporate Social Responsibility, Environment & Safety, Corporate
Governance, Information Technology, Agriculture, Nanotechnology,
Biotechnology, Pharmaceuticals, Telecom, Banking & Finance,
Company Law, Corporate Finance, Economic and International
Affairs, Tourism, Civil Aviation, Infrastructure, Energy & Power,
Education, Legal Reforms, Real Estate, Rural Development etc. The
Chamber has its international offices in China, Sharjah, Moscow,
UK and USA. ASSOCHAM has also signed MoU partnership with
Business Chambers in more than 45 countries.
The Associated Chambers of Commerce and Industry of India
ASSOCHAM Corporate Office
1, Community Centre, Zamrudpur, Kailash Colony, New Delhi-110048
Tel: 011 46550555 (Hunting Line) | Fax: 011 46536481/82, 46536498
Email: assocham@nic.in | Website: www.assocham.org

Indias experience with fdi role of a game changer

Empfohlen

Empfohlen

Weitere ähnliche Inhalte

Was ist angesagt?

Was ist angesagt? (20)

Ähnlich wie Indias experience with fdi role of a game changer

Ähnlich wie Indias experience with fdi role of a game changer (20)

Kürzlich hochgeladen

Kürzlich hochgeladen (20)

Indias experience with fdi role of a game changer