Impact of International Capital Flows

on India's Economic Growth

BACKGROUND: INDIA TRANSFORMED

Yesterday
Slow rate of growth
Bureaucratic
Protected and slow

Small consumer markets

Weak infrastructure

Today

Strong macro economic fundamentals

Encouraging foreign investment
Outsourcing destination

Growing consumerism
Impetus on infrastructure development

INTRODUCTION
International capital flows have significant potential benefits for
economies around the world.
Capital flows are most helpful when the magnitude of those flows is steady
and stable.
The international capital flow such as direct and portfolio flows has huge
contribution to influence the economic behavior of the countries positively
and negatively.

FACTORS AFFECTING FOREIGN INVESTMENT

Rate of interest
Speculation
Profitability

Costs of production
Economic condition
Government policies

SIGNIFICANCES OF FOREIGN INVESTMENT

Expansion in employment
Consumer benefit
Technological improvement

Import export
Growth in economy
Government benefits

Competition
Global relationship

LIMITATIONS OF FOREIGN INVESTMENT

Work on the high profit areas rather than priority sector
Technological advancement
Unfavourable effect towards balance of payment

Interferes in the national politics

Unfair & unethical trade practices
Unfavourable for countries economy

EXPORT AND IMPORT

Exports (US$ Mn.)

Imports (US$ Mn.)

307651
257629

190670
157056
118908
85,206

2004-05

105152

2005-06

166162

189001

128888

2006-07

193820
117580

2007-08

2008-09

2009-10

FOREIGN INVESTMENTS
Wholly Owned
Subsidiary
Direct Investment
(FDI)

Joint Venture

Acquisition
Foreign Investment

Portfolio Investment
(FPI)
Institutional
Investment (FII)

Investment In
GDRs, ADRs

FOREIGN DIRECT INVESTMENT (FDI)

MEANING OF FDI
Foreign direct investment is investment of foreign assets into domestic
structures, equipment, and organizations.

TYPES OF FDI

1. Wholly owned subsidiary

2. Joint venture
3. Acquisition

WHY FDI IN INDIA ?

Liberal, Largest Democracy, Political Stability
Second Largest emerging market (US$2.4 trillion)
Skilled & Competitive labors force

Highest rates of return on investment

Growth over the past few years averaging 8%
Destination for BPO, KPO, etc.

Second largest English speaking, scientific, technical &executive

manpower
Low costs & Tax exemptions in SEZ

FACTORS ATTRACT FDI

Qualified, educated/skilled labor pool

Large English speaking population

Long term market potential

Well-established legal system with

independent judiciary

Access to natural resources

Large size of the economy,
particularly the large and growing
middle class
Political & environment stability

Financial incentives (funds from local

govt.)
Fiscal incentives (exemption from
import duties)

Open door policy towards FDI

Indirect incentives (provides land &

other resources)

Large and growing market

Availability of natural resources

Gradual reduction in barriers to trade

SIGNIFICANCE OF FDI
Financial transfer in foreign
exchange
Physical resources like machinery
tools equipment etc.

Financial resources for expansion

Employment generation
Contribution to exports growth

Information & database

Access to international markets

Worldwide contacts

Good relation between two

countries

Research & development

Trade channels
Economic growth
Management expertise

Government earns in the form of

licenses fees, registration fees,
taxes which is spend for public
expenditure

FOREIGN INSTITUTIONAL INVESTMENT (FII)

FOREIGN INSTITUTIONAL INVESTMENT (FII)

FIIs are defined under SEBI Regulations as
an institution that is a legal entity established or incorporated outside India
proposing to make investments in India only in securities.
It includes foreign pension funds, mutual funds,
charitable/endowment/university funds etc. as well as asset management
companies and other money managers operating on their behalf.

TYPES OF FIIS

1. Portfolio Investment

2. Investment In GDRs, ADRs

WHY INDIA NEED FII ?

Large unused natural resource
To share technical know-how
To bring in new technology in country

To make good foreign relation

FII: HOW TO IMPACT INDIAN ECONOMY

FII leads to appreciation of the currency
Problems of Inflation
Cant be used for long term
Problems for small investors
Adverse impact on exports: if our Indian currency appreciates just because of FII (net
inflow in India) there is adverse effect on our export. Our export industry will become
uncompetitive due to appreciation of rupees.
FII and stock market: when cap on FII is high then they can bring in lot of funds in country
stock market.
FII and inflation: the huge amount of FII fund flow creates the huge demand for Indian
rupees. In that situation RBI print more money in the market. This situation could lead to
excess liquidity thereby leading to inflation.

ADVANTAGES OF FII
Increase forex reserve
Large availability of capital
Increases domestic saving and investments

FIIS can individually purchase up to 10% and collectively up to 24% of the

paid-up share capital of an Indian company
This limit of 24% can be increased to sectorial cap/ statutory limit
applicable to the Indian company by passing A board
resolution/shareholder resolution
Proprietary funds, foreign individuals and foreign corporates can register
as A sub- account and invest through the FII. Separate limits of 10% / 5% is
available for the sub-accounts

FDI is prohibited in

FII is prohibited in

Chit funds

Business of chit fund

Real Estate Business

Agricultural or plantation activities

Arms & Atomic Energy

Trading in Transferable Development Rights

(TDRs)

Railway Transport
Agriculture & Plantation
Gambling and Betting including casinos etc.
Lottery Business including Government
/private lottery, online lotteries, etc.
Manufacturing of Cigars, cheroots and
cigarettes, of tobacco or of tobacco
substitutes

Real estate business or construction of farm

houses (real estate business does not include
development of townships, construction of
residential/commercial premises, roads or
bridges

REGULATION FOR FDI FORMATION

Automatic Approval By RBI
The RBI allows automatic approval within a period of two weeks (subject
to compliance of norms) to all proposals and permits foreign equity up to
24%; 50%; 51%; 74% and 100% is allowed depending on the category of
industries and the sectorial caps applicable.
Investments in high priority industries or for trading companies primarily
engaged in exporting are given almost automatic approval by the RBI.

REGULATION FOR FDI FORMATION

The Foreign Investment Promotion Board (FIPB) Route
FIPB Approves all other cases where the parameters of automatic approval
are not met. Normal processing time is 4 to 6 weeks.
Its approach is liberal for all sectors and all types of proposals, and
rejections are few.
It is not necessary for foreign investors to have a local partner, even when
the foreign investor wishes to hold less than the entire equity of the
company.
The portion of the equity not proposed to be held by the foreign investor
can be offered to the public.

WHAT FIIS CAN DO?

A Foreign Institutional Investor may invest only in the following:1. Securities in the Primary & Secondary markets including shares,
debentures
2. Commercial paper
3. Security receipts
4. Indian Depository receipts

5. Units of schemes floated by domestic mutual funds including Unit Trust

of India, whether listed on a recognized stock exchange or not

DIFFERENTIATION BETWEEN FDI & FII

FDI

FII

It is long-term investment

It is generally short-term investment

Investment in physical assets

Investment in financial assets

Aim is to increase enterprise capacity or

productivity or change management control

Aim is to increase capital availability

Leads to technology transfer, access to markets

and management inputs

FII results in only capital inflows

FII flows into the secondary market

FDI flows into the primary market

Entry and exist is relatively easy

Entry and exit is relatively difficult

FII is eligible for capital gain

FDI is eligible for profits of the company

No direct impact on employment of labour

and wages

Direct impact on employment of labour and

wages

Financial Year Wise FDI In Flow From

2000-2012
IN INDIA
50000GROWTH OF FDI
146%

40000

46847

41874

34835

1.4

37745

1.2

34847

30000

0.8

22826

20000

52%
40%

10000
0

4029

6130

5035

4322

6051

0
-18%

-10000

1.6

-14%

48%

0.6

53%
34%

8961

0.4
0.2

20%

-8%

-8%

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
FDI In Flow
4029
6130
5035
4322
6051
8961
22826
34835
41874
37745
34847 46847
% INCREASE
0
52%
-18%
-14%
40%
48%
146%
53%
20%
-8%
-8%
34%

0
-0.2
-0.4

EXPERTS VIEWS ON FDI IN INDIA

"The safest form of financing is through
FDI, without any doubt because its long
term... If you can make more financing
through FDI, you are safer and so to the
extent we can open up more to FDI ...
There will be efficiency, because there will
be more competition in local economy,"

Chief Economic Adviser

Raghu ram Rajan

"We Have To Be Careful

That We Are Not Overtly
Dependent On External
Investors That This Is An
Environment When The
External Investor Is Quite
Fickle...,"