1. Foreign Direct Investment

2. The Economic Times: February 8, 2007
FDI equity inflows during April 2006 to November
2006 were $7.2 billion, which is the highest ever for
equity capital since economic liberalization
A T Kearney’s FDI confidence index India’s rank as a FDI investment
destination has improved from number 15 in 2003 to number 2 in 2006
Importance of FDI in the country’s economy in terms of not only
generating economic activities and jobs, but equally in facilitating
transfer of technology and managerial capabilities, which helps enhance
India’s global competitiveness.
FDI inflow doubles in 2007

3. What is FDI?
 Investment made to acquire lasting interest in enterprises
operating outside of the economy of the investor.
 Consists of a parent enterprise and a foreign affiliate which
together form a Multinational corporation (MNC)
 Investment must afford the parent enterprise control over its
foreign affiliate

4. FDI Policy in India
Foreign Direct Investment (FDI) is permitted as under
 Through financial collaborations.
 Through joint ventures and technical collaborations.
 Through capital markets via Euro issues.
 Through private placements or preferential allotments.
Forbidden Territories:
 Arms and ammunition.
 Atomic Energy.
 Railway Transport.
 Coal and lignite.
 Mining of iron, manganese, chrome, gypsum
 Mining of sulphur, gold, diamonds, copper, zinc.

5. FDI Policy in India
FDI is permitted in India via 2 routes
 Automatic Approval by RBI
 Non-Automatic Approval by FIPB Board
RBI v/s FIPB Approvals
 RBI grants an automatic approval within 2 weeks
 FIPB grants an FDI approval within 4-6 weeks
 RBI approvals can be sought for specific sectors as below:
 foreign equity up to 50% in 3 categories relating to
mining activities (List 2).
 foreign equity up to 51% in 48 specified industries (List
3).
 foreign equity up to 74% in 9 categories (List 4).
 where List 4 includes items also listed in List 3, 74%
participation shall apply
 FIPB grants approvals for all other cases where the parameter
for automatic approval is not met.

6. FDI Statistics
FDI in India 1991 - 2007
165
393
654
1,374
2,141
2,770
3,682
3,083
2,439
2,908
4,222
3,134
2,776
2,549
5,549
15,700
0 5,000 10,000 15,000 20,000
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
$ Million

7. In India, prior to economic reforms initiated in 1991, FDI was discouraged by
(a) imposing severe limits no equity holdings by foreigners and
(b) restricting FDI to the production of only a few researched items.
The initial policy stimulus to foreign direct investment in India came in July
1991 when the new industrial policy provided, inter alia, automatic approval
for projects with foreign equity participation up to 51 per cent in high priority
areas.
The Policy for FDI allows freedom of location, choice of technology,
repatriation of Capital and dividends.
India has one of the most transparent and liberal FDI regimes among the
developing countries with strong macro-economic fundamentals, its share in
FDI inflows is dismally low.
The country still suffers from weaknesses and constraints, in terms of policy
and regulatory framework, which restricts the inflow of FDI.
FDI in India 1947 to 2007: Policies, Trends and Outlook

8. Indian economy statistics
Sector Wise Break-up ($ Million)
39421
31083
15877
10609
8484
8387
6659
5983
5166
4572
0 5000 10000 15000 20000 25000 30000 35000 40000 45000
Services
IT
Telecom
Construction
Automobile
Housing & Real Estate
Power
Chemicals
Drugs & Pharma
Metallurgical Industries
Investments in various sectors:

9. FDI – Top 10 investors in India

10. FDI Statistics - India v/s Rest of the World
With China first, India is now a preferred foreign direct
investment (FDI) destination over the US, Russia and Brazil
Key drivers of India foreign direct investment (FDI) are US
companies such as General Motors and IBM and Japanese
companies such as Toyota and Nissan
Its latest FDI Confidence Index puts the United States and the
United Kingdom in the No. 3 and No. 4 positions
China grabbed $69.5 billion from FDI in 2006
India snagged $15.7 billion from FDI in 2006
“Both developed and developing country investors will
continue to cite India and China as their most preferred
destination for first-time investments”

11. FDI – Why FDI ?
 Triggers Technology Spill-Over
 Assists Human Capital Formation
 Contributes to International Integration by promoting exports
 Enhances Industry Competitiveness
 Increases Total Factor Productivity
 Improves Efficiency of Resources
 Promotes Innovation

12. FDI – Drawbacks
 Political Opposition from groups like Swadeshi Jagran Manch,
Farmers association & Left parties.
 Can result in Domestic Industries losing control to foreign
companies.
 National Security may be impacted if foreign companies
operate in sensitive areas like airports, ports, defense, etc.
 Wealth created may not necessarily be reinvested and may be
ploughed back overseas.

13. After 1991 reforms program, this potential is being kinetized and a
reasonably good response has come from the rest of the world in
terms of investment inflow (Gupta, 1998). There are several good
reasons for investing in India, which are given as under:
 India is the 3rd
largest economy in Asia after Japan and China.
 The country is home to 1.2 billion people with a middle class
population of 300 million consumers.
 India has an open economy with FDI being permitted in most
sectors except a few sensitive areas.
 Indian Government has been active in terms of policy making so
as to facilitate easy access to foreign companies.
Reasons for Investing in India and their Impact

14.  The country has a large pool of human resource talent in
terms of scientists, engineers, technicians and managers.
 The country has a rich natural resource base in terms of
minerals, agricultural resources, etc.
 India has one of the largest manufacturing sectors in the
world, spanning almost all areas of manufacturing activities.
 India is a democracy with a sophisticated Legal and
Accounting System
 Free and full repatriation of capital, technical fee, royalty
and dividends
Reasons for Investing in India and their Impact

15. Case Study
FDI has had a tremendous impact on certain sectors in the Indian
Economy. Lets look at 2 Sectors which has really become world
class.
Telecom Sector
• Total FDI investment in telecom is over $ 15 Billion
• In 2007-08 Vodafone took over Hutch in one of the largest
FDI deals for an amount of $ 11 Billion
• India now boasts of over 250 million mobile phones
• Tariff rates in India are the lowest thanks to the intense
competition
Automobile Sector
• $ 8 Billion invested by Foreign companies.
• In 2007-08, India sold over 1 million passenger cars.
• Key players in the sector like Hyundai Motors, Suzuki Motors,
Toyota, General Motors and Ford have changed the dynamics of the
Indian Car Market.

16. Food / Clothes are the basic necessities of life ……..
What is the cost of 1 Kg Rice or 1 quintal of cotton?
Its not Just Money....

17. Farm Suicides in India,
The Result of unavailability of Institutional Credit System
HARD FACT - 1
Someone is paying a big price

18. Farmer realizes only 25 % of the end price.
Who Gains??? – Middle Men
HARD FACT - 2
Someone is paying a big price

19. Lack of Information & infrastructure
Result – Poor agricultural practises & low productivity
HARD FACT - 3
Someone is paying a big price

20. Farm bonanza fails to save India's dying farmers
HARD FACT - 4
Someone is paying a big price

21. Loan Waiver - Background
V P Singh waived all farm loans amounting to Rs 10,000 per farmer in 1990.
That sounded the death knell for most cooperative banks in the country and
the government was never able to make good the losses.
At that time, Rajiv Gandhi had put the money under the head
of plan expenditure in the Budget

22. Loan Waiver – Today’s Scenario
• The proposal comes in the backdrop of increasing farmer suicides because
of rising indebtedness.
• Small and marginal farmers are unable to make repayments for loans due
to loss of crops as a result of natural calamities or other reasons.
• If farmers continue to be defaulters, they are unable to avail of fresh loans.
Such circumstances have forced many to approach moneylenders to get
credit for which they are charged sky-high rates
The Concept
• This scheme will strengthen the balance sheet of the bank to a large
extent as NPAs in agricultural lending are comparatively much higher, owing
to the fact that most of the credit is related to small and marginal farmers,
who are vulnerable to any adverse situation

23. The finance minister has announced a complete loan waiver for marginal
farmers with land holdings of up to two hectares.
For other farmers, he has proposed a one-time settlement (OTS), with
the government giving a rebate of 25% if a farmer pays 75% of the loan
overdue.
The burden on the exchequer will be Rs 60,000 crore
- Loan waiver of Rs 50,000 crore
- OTS relief of Rs 10,000 crore
Loan Waiver – Today’s Scenario
The Concept

24. Farmer’s Scenario on loans – The facts
• Only 51.3% of all farmers have access to institutional (bank)
credit. Private moneylenders accounted for Rs 40,000-crore debt,
according to NSSO figures.
• Debt from non-institutional sources, a major portion of which
was
from moneylenders, carried an interest rate greater than 30%.
• There is an urgent need to relieve the farmers from private debt
carrying high interest rate by transferring it to institutional
agencies. This loan waiver doesn’t affect these farmers at all.

25. Farmer’s Scenario on loans – The facts
• The average indebtedness for a farmer with landholding upto 2
hectares is only Rs 8,870, according to the Radhakrishna report.
Most of this is not under the head “crop loan” but under livestock,
implements and even marriages. This waiver is only for crop
loans.
• This step is likely to benefit poor farmers in richer, more
developed areas of the country for the simple reason that it is in
these areas that farmers have access to institutional credit.
• Average outstanding debt per farmer household has been found
to be higher in the state of Punjab followed by Kerala, Haryana,
Andhra Pradesh and Tamil Nadu all relatively developed and
better-banked states.

26. Farmer’s Scenario on loans – The facts
Among the main reasons responsible for farm distress is:
-Increasing costs of production and lack of adequate support and market
prices for
produce, repeated crop failures;
- Lack of irrigation facilities
- Lack of adequate crop insurance.
It had even recommended setting up a moneylenders’ debt redemption
fund to get over the most important problem that ails the farmers
“On the other hand, the incidence of indebtedness as well as outstanding
debt per farmer was low in the states of central, eastern and north-
eastern regions, pointing to the inadequacy of banking services,” points
out the Radhakrishna report.

27. Loan Waiver – Impact
• The debt waiver and one-time-settlement are expected to provide benefit to
about 30 million small and 10 million marginal farmers.
• After being relieved of the debt burden, farmers will be eligible to get fresh loans
for agricultural operations
• The banking system is expected to have an additional Rs 60,000 crore of
liquidity for lending over a period of three years, but it is not yet clear in what
form commercial banks of both public and private sectors will be compensated by
the government
FARMER-FRIENDLY
Farm credit as % of total loans
ICICI Bank 1.9
HDFC Bank 3.6
Axis Bank 2.8
Bank of Baroda 3.7
Bank of India 4.0
OBC 3.9
Indian Bank 5.8
Corporation Bank 2.6
Vijaya Bank 4.0
PNB 5.8Canara Bank 4.7

28. Loan Waiver – Points to Ponder ????
• A key issue is how much of the write-off will be borne by the banks ?
• Full cost of the waiver of Rs 50,000 crore will have to borne by whom?
• It is suggested that the government may not provide capital to banks
but will provide them bonds worth Rs 60,000 crore. But how giving
banks bonds constitutes “liquidity”?
• A big chunk of the cost of Rs 60,000 crore may have to be borne by
the banks themselves. Bank capital will then be eroded and banks’
ability to make fresh loans to farmers will be impaired. How will this
benefit farmers?

29. Loan Waiver – Impact on FDI
FDI is directly connected with the GDP growth rate. The loan
waiver will impact FDI indirectly by the impact it has on GDP
growth.
Impact on GDP
 Excess money (earlier paid as interest) will now be utilized
towards consumption, thereby enhancing economic growth.
 Farmers would now be in a position to take fresh loans so as
to invest in better technology, seeds, etc. thereby improving
agricultural productivity
 Foreign Banks may be reluctant to go to the rural sector going
by past experiences with loan waivers, thereby reducing the
potential for growth.

30. CONCLUSION
 The loan waiver in itself will not have a great impact on FDI…….. It
may actually discourage Foreign banks from investing in the rural
economy.
 Agriculture can contribute to increase in FDI, provided the entire
agriculture sector is overhauled
• better infrastructure (irrigation, roads, refrigeration),
• better access to credits (loans from banks),
• better technology (high quality seeds, fertilizers, farming techniques),
• reduction of layers of middle man
• better access to information (what to produce when)
The above measures will result in an increase in rural income which in
turn would result in GDP growth encouraging FDI.
Today India is witnessing reverse flow of FDI with Indian
companies like Tata Steel, Tata Motors, Hindalco, etc taking over
foreign companies.

31. Thank You !