Foreign Direct Investment In India

Confederation of Indian Industry

FOREIGN DIRECT INVESTMENT IN INDIA - A snapshot The strong macro economic fundamentals, growing size of the economy and improving investment climate has attracted global corporations to invest in India. A major outcome of the economic reforms process aimed at opening up the economy and embracing globalization has led to tremendous increase in Foreign Direct investment inflows into India. According to AT Kearney, India ranks second in the world in terms of attractiveness for FDI. AT Kearney’s 2007 Global Services Location Index ranks India as the most preferred destination in terms of financial attractiveness, people and skills availability and business environment. Similarly, UNCTAD’s World Investment Report, 2005 considers India the 2nd most attractive investment destination among the Transnational Corporations (TNCs). The positive perception as a result of strong economic fundamentals driven by 16 years of reforms has helped FDI inflows grow at about 20 times since the opening up of the economy to foreign investment since August 1991. Foreign Investment (In billion$) Direct Foreign Investment

Portfolio Foreign Investment

19.4

12.5 11.4 9.3 7.7

7.0

6.0

5.0

4.3

2.2 -0.068

1999-00

1.0

2002-03

2003-04

2004-05

2005-06

2006-07

Source: Reserve Bank of India

The major sources of FDI in India are through both the equity route, which accounted for 82 % of the total FDI inflows in India. Reinvested earnings of FDI companies accounted for 15 % of the total Direct Investment. Acquisitions accounted for 32% of total FDI.

Mauritius has been the major route for FDI inflows into India due to the Mauritius’s stature with India as a tax haven and most volume of FDI inflows through Mauritius has been from the USA and the major investor (FDI) in India for the last 16 years has been USA. Country wise FDI Inflows in India (from August 1991 to May 2007)

U.S.A 17%

U.K 11% Mauritius 57% Netherlands 8% Japan 7% Source: Reserve Bank of India

Sectors that have attracted major portion of FDI are manufacturing industries and services such as Financial and Business Services. During the year 2006-07, the major recipient of FDI was Financial and business services (US $ 4.4 billion during 2006-07. Manufacturing was the next largest recipient of FDI at US $ 1.6 billion. Overall, during the period August 1991 to May 2007, Manufacturing attracted the major portion of FDI inflows in India. Shares of Major Sectors in FDI Inflows (From August 1991 to May 2007)

Transportation 11%

Elecrical Equipments 27%

Telecommunicatio n 14%

Miscellaneous Industries 21%

Services Sector 27%

Source: Reserve Bank of India

Confederation of Indian Industry

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Overseas FDI by Indian Corporations Increasing Competitiveness of Indian industry due to globalization of Indian Economy has led to emergence and growth of Indian multinationals. This is evident from the FDI overseas from India, which increased by 13.5 times during the last 7 years. The year 2006-07 witnessed large overseas acquisition deals by Indian corporate to gain market shares and reap economies of scale, supported by progressive liberalization of the external payments regime. 11.01

FDI Abroad (US $ billion)

2.93 1.82

1.93

2002-03

2003-04

1.39

2.27

0.76

2000-01

2001-02

2004-05

2005-06

2006-07

Source: Reserve Bank of India

Overseas investment that started off initially with the acquisition of foreign companies in the IT and related services sector has now spread to other areas such as manufacturing including auto components and drugs and pharmaceuticals. Sectoral share of FDI Abroad (1 April 2003 to 31 March 2007)

Trading 7%

Others 8%

Manufacturing 36%

Non Financial Services 48%

Financial Services 1%

Source: Reserve Bank of India

Confederation of Indian Industry

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