chapter 1: about fdi in india - Shodhganga [PDF]

CHAPTER 1: ABOUT FDI IN INDIA 1. INTRODUCTION

During the last half a century, the attitude towards the role of Foreign Direct Investment (FDI) in the growth of nations has underwent many changes. In the 1960s, FDI in most of the nations was seen as a partner in the process of development. However, the attitude sharply changed and countries started to view transnational organizations as the agents attacking their sovereignty. The approach therefore was to restrict, track and regulate the FDI inflows. In the 1980s, post the commercial bank debt crisis and reduction in aids, FDI once again became the preferred source of capital. Countries got attracted to this source of private finance, which leads to the creation of zero debt. High attention has been paid by the countries to attract FDI, since then. Large amount of literature on impact of FDI on the economy of host nation has come up arguing the positive as well as negative impact of FDI. In between the varying views the focus has shifted on how to maximize the positive impacts of FDI. Therefore, our attempt is to understand what FDI is and how it is different from Foreign Portfolio Investment.

1.1.

FDI POLICY BEFORE LIBERALIZATION

Though, researchers have not been able to trace the complete history of Foreign Direct Investment (FDI) in India, due to deficiency of reliable and sufficient data. Origin of FDI in India can be dated back to the incorporation of East India Company. British capital flew into India during the colonial era. They started mining, textile and tea businesses in order to further their country’s economic interests. Post the World War- II Japanese too entered

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India and developed trade relations with the country. However, U.K. still remained the dominant player.

The official stance of the country on FDI post- independence was articulated in a statement made in the Constituent Assembly on April 6, 1949, by then Prime Minister, Mr. Jawaharlal Nehru. Foreign Capital Inflows were acknowledged as an important appendage to domestic investments and savings for impeding technological improvements and economic growth. Complete freedom was given to foreign investors for repatriation of earnings. Compensation assurance was provided in unforeseen circumstances of nationalization. Foreign investment proposals, however, were sanctioned only after stringent scrutiny due to India’s frail Balance of Payment (BOP) and scarce foreign exchange reserves. In the post independence era, for more than four decades India kept a selective outlook towards Foreign Direct Investment (FDI) (Kidron, 1965; Goyal, 1979). This outlook has been guided by manifold objectives of self- reliance, protective policy towards domestic industries and entrepreneurs, selective imports of only technological know-how to enhance domestic production and a positive attitude towards exports. This stringent scrutiny hindered FDI inflows into the economy till the mid 1950s except in the oil sector.

The operations of Multi National Corporations (MNCs) as well as foreign capital came under closer attention of the policy maker’s world-over and Indian policy makers developed India’s Foreign Investment policies keeping in mind the interest of the nation. India’s second five year plan (1956-1961), provided major thrust to industrialization. The policy emphasized on increasing technological capacities of indigenous industries for manufacturing high quality capital and intermediate consumer goods. The focus was on imports of technological know-how with financial participation by the foreign suppliers. The government expected to learn from such technological transfers and aimed Page |2

at developing it further with local Research and Development (R&D) initiatives. The objective was to make India technologically self-reliant in all major areas. However, FDI in areas with low technological growth was discouraged with an objective of protecting the local industries and to save the much needed foreign exchange. During the late 1950s and the 1960s foreign investment was encouraged, fiscal incentives were provided and foreign capital was permitted even in industries reserved exclusively for public sector.

The era post 1970s, started off as inward-looking phase for Indian economy and foreign investments were highly regulated. Clear restrains of FDI were imposed in India through Foreign Exchange Regulation Act (FERA) in the year 1973. Under FERA, foreign ownership in Indian enterprises was restricted to the extent of 40%, though this limit could be raised to 74% for technologyintensive, export-intensive, and core-sector industries. Additionally, in order to curb the freedom of operation of foreign organizations operating in India during this time, foreign companies were made subject to “local content” and “foreign exchange balancing” rules. FERA stated that companies incorporated outside India or companies in which foreign promoters held more than 40% stake, shall not, except with the general or special permission of Reserve Bank of India:

i) Carry on in India, or establish in India a branch, office or other place of business for carrying on any activity of a trading, commercial or industrial nature, other than an activity for which permission of the Reserve Bank has been obtained under Section 28, or;

ii) Acquire the whole or any part of an undertaking in India of any person or company carrying on trade, commerce or industry or purchase the shares in India of any such company.

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In order to channelize the activities of foreign firms into high technology and export oriented production, Industrial Licensing System under the Industrial Development and Regulation Act, 1951 and Monopolies and Restrictive Trade Practices Act (MRTPA), 1969 were introduced. Further the companies registered under FERA were treated as a special category companies and most of the times these were obliged to follow similar rules as specified for Companies registered under the Monopolies and Restrictive Trade Practices Act (MRTPA).

Large number of branches and subsidies of foreign companies opened in India prior to the enactment of FERA. However, in the post enactment of FERA the number of subsidiaries reduced substantially (Goyal, 1990). This trend continued despite the fact that majority foreign stake was not barred in high technology and export-oriented companies. Few companies specifically in the pharmaceutical sector, even voluntarily diluted their foreign stake to 40% (Goyal, 1982). Never the less since the year 1991 the policy regime in India changed dramatically and the rationale for regulation and restrictions on FDI which made India partially a closed economy were given up.

1.2.

FDI POLICY UNDER LIBERALIZATION

India has been successful in attracting only a small proportion of the global FDI. Government restrictions and bureaucratic red- tape have hindered the path of globalization. Beginning in the year 1991, India has steadily liberalized its investment regime and reduced the entry barriers for foreign investors. The pace of liberalization has further fastened, since the year 2000. Global investors too have welcomed the liberalization moves of Indian government with enthusiasm leading to increase in FDI inflows. India has a large market potential and pool of cheap labor, which has made it a favored destination for FDI. Page |4

1.2.1. LIBERALIZATION ERA PART I: 1991 TO 2000

The much talked about economic reforms of India came as a result of a balance of payment crisis in 1991, when India was left with an import cover sustainable for only two weeks. The government responded to the situation by bringing in extensive macroeconomic and structural changes under the general acceptance of policy package widely known as Structural Adjustment Program (SAP). Most prominent change was the revision of Industrial Policy Resolution, 1956 and Schedule: A & B, which resulted in opening up of many reserved areas in public sector. Dramatic improvements were introduced in IDRA with the motto of eliminating the entry point hurdles. Registration requirements under MRTPA were done away with. Cap of 40% on foreign-held equity under FERA were removed. Companies were allowed to use foreign brand names in Indian market. Restrictions on FDI entry in low technology consumer goods too were removed. Direct taxes were reduced for both individuals as well as corporate bodies, with the objective that lower tax rates would lead to lesser tax evasions. Indirect tax structure was rationalized; tariff rates too were reduced from 350% in the year 1990-91 to 35% in the year 2000-01. Further conditions of dividend balancing and export obligations were removed, terms for import of technology and royalty payments were liberalized, foreign firms were permitted to invest in small scale units up to a maximum cap of 24%.

Under the new policy regime the FDI proposals need not be accompanied with technology transfer agreements. These efforts were boosted by the enactment of Foreign Exchange Management Act (FEMA), 1999 (which replaced the Foreign Exchange Regulation Act (FERA), 1973) which was less stringent. This along with the sequential financial sector reforms paved way for greater capital account liberalization in India.

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The reforms process of 1991 bought with it two kinds of approval mechanisms for foreign investors in India namely, the automatic route and the approval route. For a set of industries automatic approval route of investment was permitted, with a limit on foreign equity participation. Initially the equity investment limit was fixed at 51%, which in January 1997 was raised to 74% (& 100% in case of Non-Resident Indians NRIs), this was further extended in certain cases. In the present policy regime, Indian companies receiving FDI through automatic route are simply required to inform RBI within 30 days about the said investment in their company for tracking purposes.

In June 1998, 100% foreign ownership under automatic route was allowed in power generation, transmission and distribution. However, the maximum investment was capped at Rs. 15 billion. Further in January, 1999 construction and road, highways, toll road, ports and harbor, vehicular tunnels and bridges projects too were permitted 100% foreign ownership through automatic route with similar caps on the size of investment. Since then, almost all manufacturing and many service activities have been allowed 100% foreign ownerships through automatic route.

In the Union Budget of the year 1999-2000, finance minister announced an expansion in the scope of investments through the automatic route. Ease of entry was further expanded in February 2000, with FDI in all industries permitted through the automatic route baring the activities mentioned in the “Negative List”. However, even in the current policy regime, in case the foreign promoter wishes to expand its equity base beyond the permitted limit or to enter other industries it needs to go through the formal approval process, in which Foreign Investment Promotion Board (FIPB) plays a significant role. Under the approval route, the proposals are considered in a time-bound and transparent manner by the FIPB. Approvals on composite proposals involving foreign investment/ foreign technical collaboration as well are granted on the Page |6

recommendations of the FIPB. Current FDI policy in terms of sector specific limits as well as the Negative List has been summarized in Table 1 below: TABLE 1 LIMITS ON FDI IN INDIA Sector

FDI Equity

Cap/ Entry Route

A. Agriculture 1. Floriculture,

Horticulture, 100%

Development

of

Animal

Automatic

Seeds,

Husbandry,

Pisciculture,

Aquaculture,

Cultivation of vegetables & mushrooms

and

services

related to agro and allied sectors 2. Tea

100% sector,

FIPB

including

plantation (FDI is not allowed in any other agricultural sector/ activity) B. Industry 1. Mining

covering 100%

Automatic

exploration and mining of diamonds

&

precious

stones; gold, silver and minerals. 2. Coal & lignite mining for 100%

Automatic

captive consumption by power projects, iron & steel, cement production. 3. Mining

and

mineral 100%

separation of titanium Page |7

FIPB

Other Conditions

TABLE 1 LIMITS ON FDI IN INDIA (CONT..) C. Manufacturing 1. Alcohol:

Distillation

& 100%

Automatic

2. Coffee & Rubber Processing 100%

Automatic

Brewing

& Warehousing 3. Defense production

26%

FIPB

4. Hazardous chemicals and 100%

Automatic

isocyanides 5. Industrial

Explosives- 100%

Automatic

Manufacture 6. Drugs and Pharmaceuticals

100%

Automatic

7. Power includes generation 100%

Automatic

(except

atomic

transmission,

energy); distribution

and power trading. (FDI is not permitted in generation

transmission, and distribution of

electricity produced in atomic power plan/ atomic energy since private investment in this activity is prohibited and reserved for public sector) D. Services 1. Civil aviation (Greenfield 100% projects

and

Automatic

Existing

projects) 2. Asset

reconstruction 49%

FIPB

companies 3. Banking (private) Sector

74%

s.t. minimum

(FDI+FII)

capitalization

FII not to

norms

exceed

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Automatic

Automatic

4. NBFCs:

underwriting, 49%

portfolio

management

services,

investment

FIPB

advisory services, financial consultancy, stock broking, asset management, venture capital, custodian, factoring, leasing and finance, housing finance, forex broking etc. 5. Broadcasting a. FM radio

100%

b. Cable Network

20%

c. Direct to Home

49% (FDI +

d. Hardware

FIPB

facilities FII)

such as up-linking, HUB e. Up-linking

100% a

Automatic

news

and current affairs TV channel 6. Commodity Exchanges

49% (PSUs) FIPB (for 100% (Pvt. PSU) Companies

Automatic (for Private firms)

7. Insurance

26%

FIPB

Clearance from IRDA

8. Petroleum and Natural Gas: Refining Page |9

9. Print Media:

49% PSU

a. Publishing

of 100% (Pvt. Automatic

newspapers

and Companies)

periodicals

dealing

S.t. guidelines

up to 49% from and FIPB Ministry

with news and current

beyond

Information

affairs

49%

and

b. Publishing

of

scientific

journals/

26%

periodicals

10. Telecommunication a. Basic

and

cellular, 100%

unified

access

services, national/international long-distance, V-Sat, public mobile radio 74% trunked

services (including

(PMRTS), mobile

global FDI,

services and others.

FII,

personal NRI,

communication

of

Broadcasting

magazines/specialty

FCCBs,

(GMPCS) ADRs/ GDRs, convertible preference shares etc.

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FIPB

TABLE 1 LIMITS ON FDI IN INDIA (CONT..) Sectors where FDI is Banned 1. Retail trading (except single brand product retailing) 2. Atomic Energy 3. Lottery Business including Government/ private lottery, online lottery etc. 4. Gambling and Betting including casinos etc., 5. Business of chit fund, 6. Nidhi Company, 7. Trading in Transferable Development Rights (TDRs) 8. Activities/sector not opened to private sector investment 9. Agriculture (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms etc. under controlled conditions and services related to agro and allied sectors) and Plantations (Other than Tea Plantations) 10. Real estate business, or construction of farm houses Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes Source: DIPP Publications

In retrospect, to the policy modifications of the year 1991 and rigorous promotion of India as a destination for foreign investment, the amount of approved and received FDI grew sharply, Table: 2 below depicts the increment in financial and technical collaborations between the years 1981 to 2000.

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TABLE 2 TECHNICAL AND FINANCIAL COLLABORATIONS BETWEEN YEARS 1981 TO 2000 No. of approved

Relative Share of

Investment

collaborations

Financial

Approved

Collaborations (Col. 2

(US $ in

as of Col. 4)

Millions)

Year

Financial Technical Total 1981

57

332

389

14.65

2.18

1982

113

477

590

19.15

12.56

1983

129

544

673

19.17

12.38

1984

151

601

752

20.08

22.6

1985

238

786

1,024

23.24

25.22

1986

242

715

957

25.29

21.38

1987

242

611

853

28.37

21.54

1988

282

644

926

30.45

47.96

1989

194

411

605

32.06

63.34

1990

194

472

666

29.13

25.66

1991

289

661

950

30.42

106.82

1992

692

828

1,520

45.53

775.82

1993

785

691

1,476

53.18

1,772.36

1994

1,062

792

1,854

57.28

2,838.00

1995

1,355

982

2,337

57.98

6,414.00

1996

1,559

744

2,303

67.69

7,230.00

1997

1,665

660

2,325

71.61

10,978.00

1998

820

433

1,253

65.44

4,586.00

1999

1,256

489

1,745

71.98

5,893.00

2000

1,482

688

2,170

68.29

7,480.00

Source: SIA Newsletters for the year 1981 to 2000.

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The cumulative amount of investment proposals and the approvals by government

of

India

have

increased considerably

after

the

policy

improvements in the year 1991. In the year 1981, the amount of approved foreign investments was only Rs. 10.9 crores. During the pre-liberalization phase, year 1989 showed the maximum increase of Rs. 316.7 crores of approved investment proposals. Post implementation of SAP in the year 1991 the investment approvals grew up to Rs. 534.1 crores with highest investment approvals in the year 1997 at Rs. 54,890 crores. However, the approved figures of foreign investment do not provide the complete potential of FDI in India, as takeovers, joint ventures and alliances do not figure in the list of approved FDI. For instance, the alliances of Unilever, takeovers of Tata Oil Mills, Kissan, etc. are not reflected in the approved list of FDI.

Even after tremendous increments in FDI since the year 1981 India’s share in global FDI flow continues to remain small. As between the years 2007 to 2011 India ranked at 18th position with barely 1.36% of the world FDI inflows, much below China at 3rd rank with 5.79% of world FDI inflows. (UNCTAD: Economic Intelligence Unit, 2011).

Release of public sector

reserved areas though liberalization of industrial licensing has been the sole most important decision influencing the sectoral pattern of FDI in India, specifically in power and telecommunications sector.

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TABLE 3 SECTORAL SHARE OF FDI INVESTMENT THROUGH APPROVED ROUTE BETWEEN YEARS 1991 TO 2000 Industry/ Sector

Approved

Investment

(US $ in Millions)

Percent Share in Total

Power & Fuel

10820.786

31.20

Telecommunications

6293.224

18.15

2206.8

6.36

Metallurgical Industries

2196.388

6.33

Service Sector

2192.41

6.32

Transportation Sector

2126.354

6.13

1797.374

5.18

1626.478

4.69

697.722

2.01

552.808

1.59

Chemicals (other than fertilizers)

Electrical

Equipments

(inc. Software) Food

Processing

Industries Hotel and Tourism Textiles (include Dye and Printed)

Source: SIA Newsletters for the years 1991 to 2000

During the first two years post liberalization, power as well as fuel projects accounted for around 40% of the FDI (Goyal et al., 1994). However in the year 1996, telecommunication FDI topped the list at 23.55% (SIA newsletter, 1996). Mentioned above (Table: 3) are the top ten FDI recipient sectors between the years 1991 to 2000 along with their relative share in total FDI inflows.

States across India have been presenting considerable interest in attracting FDI. Due to the increased disparity in industrialization and development of Indian states, the concept of FDI localization has gained P a g e | 14

attention off-lately. Going by the official figures Delhi received the maximum FDI followed with Maharashtra as stated in Table: 4 below. Most of the approvals for cellular and basic phone services carry Delhi, Bombay, Bangalore and Madras as the locations for approvals.

TABLE 4 STATE-WISE DISTRIBUTION OF APPROVED FOREIGN INVESTMENT IN INDIA BETWEEN YEARS 1991 TO 2000 No. of Approvals Amount State

(in Share in Total

Millions of US $) Investment

Delhi

458

3466.072

17.08

Maharashtra

832

2535.278

12.49

Karnataka

434

1098.78

5.41

Tamil Nadu

543

1093.75

5.39

Madhya Pradesh

110

1053.666

5.19

West Bengal

179

1049.91

5.17

Orissa

49

758.158

3.73

Gujarat

251

752.508

3.71

Andhra Pradesh

295

502.254

2.47

Uttar Pradesh

219

488.904

2.41

Source: SIA Newsletters for the years 1991 to 2000

1.2.2. LIBERALIZATION ERA PART II: 2001 TO 2012

Changes in policy environment post the year 1991 have lead to improvements in the attitude of foreign investors towards India. FDI inflows since then have increased considerably from less than US $ 1 billion in early 1990s to more than $ 2 billion in the year 1995. During the early years of the past decade, FDI inflows had been between US $5 to US $7 billion, however post the year 2005 the statistics has showed a steep increase in the inflow of P a g e | 15

FDI from US $ 20 billion in the year 2006 to US $ 36.5 billion in the year 2012. The sharp increment in FDI since the year 2000-01 has been majorly because of the significant changes in the compilation of FDI statistics, which made the strict comparison of inflows inapt. Several studies have suggested that private equity inflows may have contributed to the substantial increase in FDI since the year 2001. TABLE 5 FDI GROWTH IN INDIA 1 Year

/ Mid

March March March March March March

Amount 1948 1964 of

FDI

(in

256

565.5

March

1974

1980

1990

2000

2010

2012

916

933.2

2705

18,486

1,23,378 1,56,953

crores) Source: SIA Newsletters for the years 1948 to 2012

Table: 5 above shows that the liberalization and additional opening of economy in the year 2001 has led to tremendous increase in FDI between the years 1948 to 2012. After the second generation of reforms, India has emerged as one of the most preferred destinations for international investments. A.T. Kearney’s, 2007 Global Services Locations Index, has ranked India second in terms of investment attractiveness and has rated India as one of the most preferred location in terms of financial attractiveness, people and skills availability and business environment. UNCTAD’s World Investment Report, 2005 has rated India as the second most attractive destination among the TransNational Economies.

Cumulative FDI till March’2013 has been Rs. 1,21,907 crores; till March’2014 has been Rs.1,47,518 crores; till March’2015 has been Rs. 1,89,107 crores and till December’2015 cumulative FDI has been Rs. 1,91,063 crores in India.

1

NOTE: FDI data between the last quarter i.e. January’2016 to March’2016 has not yet been published by DIPP and SIA.

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The second generation of reforms introduced after the year 2001 further supported the investment inflows. More sectors have been opened up for investment through the automatic route. The scope of negative list has been narrowed overtime. Rules related to foreign investment have been simplified specifically for foreign investors having tie-ups with local partners. Earlier when an existing investor started a new venture in India, they had to justify that the new initiative shall not be injurious to the pre-existing collaborations. The new rule has shifted the onus of explanation on both the foreign as well as the local partners. Further all such ventures now fall under automatic route unless and until the new venture is into the same line of business as the existing venture.

FIPB is no more required to settle on proposals related to transfer and acquisition of resident shares by non-residents, the process is now put under the automatic route, except for segments with FDI equity caps. The present investment policy has been assisting in easy entry of the foreign capital in almost all areas, subject to certain limits on foreign equity. Prospects on high yield on capital employed in India too have become better, with the removal of provisions like balancing dividend payouts by equal amount of exports. Investment in Special Economic Zones (SEZs) has given foreign investors plethora of incentives like exemption from all sort of taxes, including those on export profits, capital gains, customs duty on imports, dividend distribution and local excise duty. Additionally, investment in specific sectors related with infrastructural development of roads, airports, seaports, solid waste management, electricity generation, transmission & distribution, development of housing and hospitals etc. have been made eligible for complete income tax exemptions. India has also signed Double Tax Avoidance Agreement (DTAA) with 69 nations.

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A non-interventionist foreign investment policy has been consistent with concurrent actions leading to greater amalgamation of Indian economy with the world economy. Introduction of market-base exchange rate management mechanism, removal of import restrictions, convertibility of Indian rupee in current account of the balance of payment, replacement of FERA, 1973 with Foreign Exchange Management Act, 2002 (FEMA) and phased removal of restrictions on capital account transactions have all fitted well with the marketoriented economic restructuring started out in the year 1991.

1.2.3. FDI LINKED INSTITUTIONS IN INDIA

FDI-related issues in India are handled by three institutions, namely: Foreign Investment Promotion Board (FIPB), Secretariat for Industrial Assistance (SIA) and Foreign Investment Implementation Authority (FIIA).

The Foreign Investment Promotion Board (FIPB) comes under the Department of Economic Affairs (DEA); Ministry of Finance is the nodal single-window agency for all matters relating to FDI as well as for promoting investment in the country. It is chaired by the Secretary, Industry (Department of Industrial Promotion and Policy). Its objectives are to promote FDI in India:

i)

By undertaking investment promotion activities in India and abroad;

ii)

By facilitating investment in the country by international companies, non-resident Indians and other foreign investors;

iii)

Through

purposeful

negotiations/discussions

with

potential

investors, and; iv)

Through early clearance of proposals submitted to and by reviewing policies and putting in place appropriate institutional arrangements,

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transparent rules, procedures and guidelines for investment promotion and approvals.

The Secretariat for Industrial Assistance (SIA) has been set up by the Government of India in the Department of Industrial Policy and Promotion, Ministry of Commerce & Industry in order to provide a single-window service for entrepreneurial assistance, investor facilitation, receiving and processing of all applications which require government approval, conveying government decisions on applications filed, assisting entrepreneurs and investors in setting up projects (including liaison with other organizations and state governments) and monitoring the implementation of projects. It also notifies all government policy decisions relating to investment and technology, and collects and publishes monthly production data for select industry groups.

The Government of India has set up the Foreign Investment Implementation Authority (FIIA) to facilitate quick translation of Foreign Direct Investment (FDI) approvals into implementation, and to provide a pro-active one-stop after-care service to foreign investors by helping them obtain necessary approvals, sort out operational problems and meet with various government agencies to find solutions to their problems.

1.3.

RECENT FDI TRENDS

In the Ernst and Young’s Indian Attractiveness Survey, 2012; 25% respondents rated India among the top three destinations for manufacturing. The new Manufacturing Policy introduced by Government of India has received positive response and is expected to help boost the manufacturing activities. Despite the global economic slowdown post the financial crisis of the year 2008-09, FDI projects in India have increased by almost 20% in the year 2011. India has successfully attracted 932 projects creating approximately 2, P a g e | 19

55,416 jobs in the country. Out of the 932 projects, 288 projects have been in the manufacturing sector mainly in the areas of automobile sector, industrial equipment and metal industry. This has lead to the creation of around 1,42,235 new jobs in India. Another 238 projects have been back-office and Business Process Outsourcing (BPO) projects creating around 30,000 new IT jobs. Growing domestic market and possibility to operate at lower costs have been the main drivers attracting foreign investors to India. In the year 2012, India stood at 4th place in terms of destination country for FDI projects next only to USA, China and UK. In terms of value, foreign investment in India has been ranked 3rd next only to China at 1st place and Brazil at second.

FDI inflows into India have radically increased since liberalization in the year 1991; inflows have further stepped up post reforms in the year 2000. During the year 2011-12 FDI inflows to India have reached $ 46.5 billion, which is nearly an increment of 34% from the previous year. Table: 6 below depicts the growth of FDI inflows in India during the years 2000 to 2012. TABLE 6 FOREIGN DIRECT INVESTMENT IN INDIA DURING YEARS 2000 TO 2012 Financial Year (AprilMarch)

Equity

Reinvested Earnings

Other Capital

Total FDI Inflows: in US$ terms (in Millions)2

Equity Capital of unincorpo rated Bodies

2000-01

FIPB Route/ Automatic Route/ Acquisition Route 2,339

61

1,350

279

4,029

2001-02

3,904

191

1,645

390

6,130

% change over previous financial year

Total FDI Inflows during April’2012 to March’2013 has been $36,860 million; April’2013 to March’2014 has been $36,396 million; April’2014 to March’2015 has been $ 44,877 million and between April’2015 to December’2015 cumulative FDI has been $ 38,917 million. 2

NOTE: FDI data between the last quarter i.e. January’2016 to March’2016 has not yet been published by DIPP and SIA

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+ 52%

TABLE 6 FOREIGN DIRECT INVESTMENT IN INDIA DURING YEARS 2000 TO 2012 (CONT..) Financial Year (AprilMarch)

Equity

Reinvested Earnings

Other Capital

Total FDI Inflows: in US$ terms (in Millions)3

% change over previous financial year

Equity Capital of unincorpo rated Bodies

2002-03

FIPB Route/ Automatic Route/ Acquisition Route 2,574

190

1,633

438

5,035

- 18%

2003-04

2,197

32

1,460

633

4,322

- 14%

2004-05

3,250

628

1,904

369

6,051

+ 40%

2005-06

5,540

435

2,760

226

8,961

+ 48%

2006-07

15,585

896

5,828

517

22,826

+ 146%

2007-08

24,573

2,291

7,679

300

34,843

+ 53%

2008-09

31,364

702

9,030

777

41,873

+ 20%

2009-10

25,606

1,540

8,668

1,931

37,745

- 10%

2010-11

21,376

874

11,939

658

34,847

- 08%

2011-12

34,833

1,021

8,205

2,494

46,553

+ 34%

Source: Monthly reports of DIPP and SIA for the years 2000 to 2012

Though foreign investors have started to view India as a favorable destination for investment, the source countries of FDI inflows into India have been highly concentrated with 70% of inflows coming from five countries. The largest direct investor in India has been Mauritius with US $ 64,169 million total equity inflows between the years April 2000 to March, 2012. This scenario has emerged mainly due to the double-taxation treaty between India and Mauritius. Many companies located outside India, have been using Total FDI Inflow during April’2012 to March’2013 has been $36,860 million; April’2013 to March’2014 has been $36,396 million; April’2014 to March’2015 has been $ 44,877 million and between April’2015 to December’2015 cumulative FDI has been $ 38,917 million.

3

NOTE: FDI data between the last quarter i.e. January’2016 to March’2016 has not yet been published by DIPP and SIA

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Mauritian holding companies to gain the advantage of Double Taxation Avoidance Agreement (DTAA) between Mauritius and India. It has been helping them bypass the capital gain taxes payable in India. Singapore has stood the second largest investor with a cumulative investment of $ 17, 153 million amounting to 10% of the total FDI flows to India. Next in line have been U.K, Japan and USA with investment of $ 15,896 million, $ 12313 million and $ 10,564 million respectively. Table: 7 below depict the source countries of FDI in India with their relative share.

TABLE 7 TOP INVESTING COUNTRIES FDI EQUITY INFLOWS TO INDIA BETWEEN YEARS 2000 TO 2012 4 Cumulative Country

FDI

April’00-March’12 terms of US$)

b/w %

age

to total

(in inflows (in terms of US$)

Mauritius

64,169

38

Singapore

17,153

10

United Kingdom

15,896

9

Japan

12,313

7

United States of America

10,564

6

Netherlands

7,109

4

Cyprus

6,400

4

Germany

4,621

3

France

2,927

2

U.A.E.

2,243

1

TOTAL FDI INFLOWS

1,70,407

Source: Monthly Newsletters of DIPP & SIA for the years 2000 to 2012

Between April’2000 to December’2015 the share of top investing nations has been: Mauritius (34%), Singapore (16%), U.K. (8%), Japan (7%), USA (6%), Netherlands (6%), Cyprus (3%), Germany (3%), France (2%) & UAE (1%). Total FDI inflow from all countries during this timeframe stands at $ 2,78,076 million. 4

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Services sector consisting of financial services in Banking, Insurance and Non-Financial Services including R & D, Courier, Technology, Testing and Analysis, has received the highest share of FDI inflows between the years April, 2000 to March, 2012 amounting to US $ 35,952.04 million, which is 19.37% of the cumulative foreign investment inflows. Construction development has been another prominent sector having a total share of 11.54% of total foreign investment inflows into India. During the year 2011, numbers of FDI projects in Infrastructure have grown by almost 90%. The sector has contributed around to 4% of the total number of FDI projects and has created 9% of the total jobs in the country. The Automobile sector has received US $ 7,500.75 million cumulative FDI during the years 2000 to 20125. Power Sector too has been a prominent recipient of FDI with inflows of 4.12% of the total FDI inflows.

TABLE 8 SECTORAL SHARE OF FDI DURING YEARS APRIL 2000 TO MARCH 2012 6 Sector

FDI Inflows (in %age US $ million)

Services Sector ( Fin., Banking, Insurance,

Non

35,952.04

of

total

FDI Inflows 19.37

Fin/Business,

Outsourcing, R&D, Courier, Tech. Testing and Analysis, Other )

Between April’2000 to December’2015 cumulative FDI in Automobile Sector has increased to $14,318 million, which accounts to 5% of total FDI inflows to India. 5

Between April’2000 to December’2015 the sectoral share of FDI has changed to: Services Sector (17%), Construction Development (9%), Computer Software & Hardware (7%), Telecommunications (7%), Automobile Industry (5%), Drugs & Pharmaceuticals (5%), Chemicals (4%), Trading (4%), Power (4%), Hotel & Tourism (3%) 6

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TABLE 8 SECTORAL SHARE OF FDI DURING YEARS APRIL 2000 TO MARCH 2012 (CONT..) Sector

FDI Inflows (in %age US $ million)

Construction

11.54

Telecommunications

12,600.57

6.79

Computer Software & Hardware

11456.48

6.17

Drugs & Pharmaceuticals

9775.03

5.27

Chemicals (Other than fertilizers)

8,745.45

4.71

Power

7,655.60

4.12

Automobile Industry

7,500.75

4.04

Metallurgical Industries

7,255.95

3.91

Hotel & Tourism

6,483.97

3.49

Infrastructure

Housing, And

total

FDI Inflows

21,430.16

Townships,

Development:

of

Built-Up

Construction-

Development Projects

Source: Monthly Newsletters of DIPP/ SIA for the years 2000 to 2012

Foreign players have been attracted to India not only because of the economic progress made by the nation but also its low labor cost. Salaries in India have been relatively lower than those in the developed nations. The average salary of employees in manufacturing sector in India has been approximately US $1,270. However, the salaries of skilled employees have been much higher than this, but still they have been considerably lower than that of the salaries in the developed nations. The entry level salaries for manager’s range between US $30,000 to US $50,000 and the unit heads have been earning a yearly salary of around US $75,000 (Kaushik & Sasi, 2005). P a g e | 24

1.4.

LOCALIZATION OF FDI IN INDIA

Agglomeration economies have been recognized as a major issue in Foreign Direct Investment. They have been considered as determinants of industrial location of foreign investors in the works of Marshal (1920), Arrow (1972) and Krugman (1991). Researchers like Head et al (1999) & Guimaraes et al (2000) have also revealed that foreign investors tend to co-locate. Following the early work of Marshall (1920), many approaches have been adopted by researchers in recognizing the external economies which have lead to agglomeration or co-location of similar firms.

Industry’s technological

intensity and its focus on linkages have been identified as some of the major factors leading to agglomeration.

Industrial location and specialization

structure are determined by the relationship between the features of an industry and those of the regions. Hence, while factor endowments differ geographically, factor intensity of industries also differs. Out of these regional characteristics agglomeration economies are the key factors determining the location of FDI.

Foreign Direct Investment and imports have long been identified as a source of technological spillover advantages. In fact the major thrust of second five year plan of India had been to promote FDI in technologically driven sectors. It has been presumed that the import of technologically sophisticated intermediate goods, help local producers learn the production process and thus facilitate in home production of similar goods at lower cost.

Further co-

location of domestic firm with similar nature of foreign firms may help domestic players learn the expertise of foreign players, through the transfer of firm specific knowledge assets i.e. manpower (Fosuri et al., 2001). The extent of knowledge sharing and its impact on the host country’s economy has been a subject of research in many studies. Empirical results provide significant P a g e | 25

evidence of the existence of technological spillovers and knowledge sharing in the embodied form between large and small size firms (Helpman, 1997). FDI inflows into India have been highly concentrated with top five cities attracting almost 42% of the total foreign investment projects coming to India. Additionally, 36% of the total jobs generated through foreign investment in India have been concentrated in these 5 cities namely: Mumbai, Pune, New Delhi, Bangalore and Chennai. Individual statistics on each city is mentioned in the Table: 9 along with the state specific initiatives taken by the regional governments in order to attract FDI to these states. •

Mumbai

Mumbai is considered the commercial capital of India. The city has been successful in attracting 461 FDI projects between the years 2007 to 2011. The said projects have helped in creation of 54,900 jobs in the city. Overall, Maharashtra state has received the highest share of FDI during the years April 2000 to March 2012. Manufacturing and services sector have been the key attractions for foreign investors in the state. Maharashtra state government has introduced policies in Biotech, e-governance, infrastructure, IT, SEZs and tourism in order to attract Foreign Investors. •

Pune

Pune has the largest industrial base and a prominent amount of foreign investment has been made in the region. Manufacturing sector is the major thrust area of the city and off lately it has been turning out to be a key IT and software hub as well. The city has attracted around 248 foreign projects during the years 2007 to 2011.

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•

New Delhi

The city is the preferred investment destination for foreign investors in automobile manufacturing and services sector. Aviation Industry too, has a prominent presence in the city. Nearby areas of Faridabad, Ghaziabad and Noida as well have been successful in attracting FDI in food processing, manufacturing and mining. During the years 2007 to 2011 the city attracted 305 FDI projects creating 34,100 jobs. •

Bangalore

The city is the global hub for IT, engineering and biotech industries. Karnataka State’s Millennium Biotech Policy and Millennium IT Policy have given a variety of incentives to the foreign firms. Major thrusts to foreign investors in the state have been the availability of educated workforce and good quality of infrastructure. During the years 2007 to 2011 the city has received 474 projects creating 1,10,140 jobs as stated in the Table: 9 below. •

Chennai

The city is also called the Detroit of India, with major thrust on automobile sector. Chennai has maximum FDI in automobile manufacturing and design development. It has good investment climate for foreign investors along with well developed SEZs. It has successfully attracted 338 foreign projects during the years 2007 to 2011.

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TABLE 9 FDI SHARE OF TOP FIVE INDIAN CITIES

City

Number of FDI Projects between 2007 to 2011

Number State Government of FDI Key Investment Areas Incentives jobs generated • • • • •

Mumbai

461

54,900 • • •

Pune

248

70,700

• • • • • •

New Delhi

305

34,100 • • • •

P a g e | 28

Energy, Transportation, Software and Banks / Financial Services Institutions. Telecommunicati on Electrical Equipment Manufacturing Sector IT Automobile

To facilitate investment, the state government has policies for • Biotech, • egovernance, • Infrastructur e, • IT, • Special Economic Zones (SEZ) and • Tourism

IT & Consultancy The state Automobile has Telecommunicati government policies for on • eElectrical governance, Equipment Branch Offices • Infrastructur Pharmaceuticals e, Mining and • IT, minerals • SEZs Food Processing

TABLE 9 FDI SHARE OF TOP FIVE INDIAN CITIES (CONT..) Number of FDI Projects between 2007 to 2011

City

Bangalore

Chennai

474

338

Number of FDI Key jobs Areas generated

Investment State Government Incentives

1,10,140

• IT, • Engineering & • Biotech

• Millennium IT Policy • Millennium Biotech Policy Offers a variety of incentives, which make it attractive destination for technology companies

1,08,708

• Automobile • Railway Coach Manufacturing • Auto design development and testing

State policies work towards creating a stable investment climate for foreign players

Source: fDi Intelligence, Government of Karnataka, Maharashtra Industrial and Economic Development Association

Further, an evaluation of the regional concentration of FDI equity inflows between the years April 2000 to March 2012, has revealed that 71% i.e. US $ 1,20,691 million of the total FDI (in value terms) in India has been invested in only 6 states/regions of the country, with Maharashtra & New Delhi toping the chart7. For statistical purposes, Department of Industrial Policy and Promotion (DIPP) has divided India into 16 regional offices. Table: 10 below depicts a detailed view of the regional concentration of FDI in India. 7

Between April’2000 to December’2015; 75% i.e. US $ 202506 million of the total FDI in India has been invested in 6 states/ regions, with Maharashtra and New Delhi at the top.

P a g e | 29

TABLE 10 STATE-WISE CONCENTRATION OF FDI INFLOWS IN INDIA BETWEEN YEARS 2000-12 8

States

Cumulative Inflows % age to total b/w April’00inflows (in March;12 terms of US$) (in terms of US$)

Maharashtra (includes Dadra & Nagar Haveli, Daman & Diu)

54,620

32

Delhi (inc. parts of UP and Haryana)

33,071

19

Karnataka

9,761

6

Tamil Nadu (including Pondicherry)

8,273

5

Gujarat

8,157

5

Andhra Pradesh

6,809

4

West Bengal (including Sikkim, Andaman & Nicobar Islands)

1,182

1

Chandigarh, Punjab, Haryana & H.P.

1,154

1

Kerala, Lakshadweep

839

1

Madhya Pradesh, Chhattisgarh

777

1

Goa

762

1

Rajasthan

553

0.3

U.P., Uttaranchal

317

0.2

Between April’2000 to December’2015 state-wise concentration of FDI has been: Maharashtra, Dadra & Nagar Haveli, Daman & Diu (31%), Delhi, Parts of UP & Haryana (20%), Tamil Nadu & Pondicherry (6%), Karnataka (6%), Gujarat (4%), Andhra Pradesh & Telangana (4%), West Bengal, Sikkim, Andaman & Nicobar Islands (1%), Chandigarh, Punjab, Haryana & Himachal Pradesh (1%), Madhya Pradesh, Chhattisgarh (0.5%), Kerala & Lakshadweep (0.5%), Goa (0.4%), Rajasthan (0.3%), Orissa (0.2%), UP & Uttaranchal (0.2%).

8

NOTE: Till December’ 2015 no official figure has been published by DIPP with regards to Andhra Pradesh and Telangana separately. The DIPP and SIA data has been divided into 16 regions only, wherein many regions like Chandigarh, Punjab, Haryana & HP; Andhra Pradesh & Telangana, etc. have been taken together with no separate statistics on each state/region.

P a g e | 30

TABLE 10 STATE-WISE CONCENTRATION OF FDI INFLOWS IN INDIA BETWEEN YEARS 2000-12 (CONT..) Cumulative Inflows % age to total b/w April’00inflows (in March;12 terms of US$) (in terms of US$)

States

Orissa

289

0.2

Assam, Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Tripura

73

0.1

Bihar, Jharkhand

30

0

42,918

25

Regions Not Indicated Source: DIPP Monthly Publications for the years 2000 to 2012

Rest of the 25 states/ 10 regions have accounted for barely 5.8 % of the total FDI inflows. DIPP has divided India into 16 major regions, due to which separate data on many individual states such as Punjab, Haryana, Andhra Pradesh, Telangana etc. is not available, which is a major limitation of DIPP statistics on FDI. Further, it must also be noted that a major i.e. 25% of the FDI inflow regions, have not been indicated by DIPP in its reports, which leads to major reporting disparity and may mislead the analysis.

1.5.

INDIAN AUTOMOBILE SECTOR AND ITS GROWTH POTENTIAL

In the early years post independence Indian automobile industry was beleaguered by unfavorable government policies. The only passenger car available on Indian roads was 1940s Morris Model called Ambassador. In the year 1903, Samuel John Green of Simpson & Co, Madras, manufactured India’s first steam car and lead to a revolution on the country roads. With the P a g e | 31

establishment of TVS by T V Sundram Iyengar in the year 1912, the face of motor transportation changed in South India. In the year 1920 realizing the potential of Indian markets Ford and General Motors, as well started companies in India to sell and service their cars and trucks. In the year 1922, after the lifting of government restrictions on imported vehicles of all types; Sundram Iyengar & Sons started vehicle dealership in the country. In the year 1928, General Motors India Ltd. started assembly line of their cars & trucks in Mumbai. Two years post this in the year 1930 Ford Motor Co. of India Ltd. commenced assembly of their vehicles in Madras, followed by assembly lines in Mumbai and Calcutta in the year 1931. In 1942 Hindustan Motors Ltd., a Birla Group started manufacturing in Calcutta followed by Premier Automobile Ltd. in Mumbai. In 1953, Indian government in collaboration with private sector started to build the foundation of Indian Automobile manufacturing Industry.

The growth between the 1950s and 1960s, was slow due to license raj and nationalization policies of Indian government. In the year 1957, Indian Tariff commission changed its strategies and instead of encouraging imports shifted focus to encourage the manufacturing of automobiles and auto-spare parts in India. With this move many importers such as: The Birla Group, The Doshi Group (Premier Automobile), Standard Heralds (Standard Motors in Madras), Tata Group (TELCO, lately named as Tata Motors in Bihar) and Ashok Leyland in Madras changed to become manufacturers

However, with the extensive licensing regime under the MRTP Act, 1963 most of the above mentioned players have become non-operational except for Tata Motors and Ashok Leyland. Moreover, since the early 1970s government had a restraining view towards inward FDI, both in terms of entry and permissible capital investment. All this resulted in the stagnation of Indian Automobile Industry till the mid 1980s. In the year 1982, Government of India P a g e | 32

entered into a joint venture with Suzuki Motors to start Maruti Udhyog Ltd. (MUL) in Delhi. With these moves, by mid 1990s Indian auto industry had flourished and started to grow leaps and bond with around 24 assemblers of different vehicles and 350 large and medium sized firms in the organized sector. In the year 1991 government opened the Indian economy after which automobile sector experienced rapid growth and positive changes.

During the year 1995 to the year 2000, major international car manufacturers entered Indian markets, the trend has continued even today. Increased competitive pressures and safety regulations, technological improvements have been introduced during this phase. Companies have started to invest in the development of services and support network. Auto financing has emerged as the major driver for demand during this phase.

The present automobile industry comprises of all types of vehicles which includes 2-3 wheelers, passenger cars and multi-utility vehicles, light and heavy commercial vehicles and agricultural tractors and earth moving machines etc. as stated in Figure 1 below. About 80% of the industry comprises of 2-3 wheelers. In fact India ranks as the largest manufacturer of motorcycles and second largest manufacturer of scooters and tractors in the world.

P a g e | 33

FIGURE

1

COMPOSITION

OF

INDIAN

AUTOMOBILE

INDUSTRY

Source: ACMA, India

In terms of location as well as suitability of macro-economic factors Indian automobile industry has growth potential in terms of both domestic and well as export markets. With major proportion of country’s working population falling in the age group of 25 to 35 years, there’s a likelihood of escalating demand for passenger cars and two wheelers. Increased income and easier access to automobile finance is further expected to boost the demand for automobiles. Increase in the number of female drives too is going to provide additional support to the industry. Automobile sector has been a key growth driver for Indian economy amounting to 4% of the GDP and has generated approximately 2, 00,000 jobs.

FDI and technological alliances between foreign and Indian firms has lead to improved technology and larger product range in all segments. There has been a tremendous improvement in the service and distribution network over the past decade. Automobile ancillary hubs in 4 major auto-clusters i.e.

P a g e | 34

Mumbai- Pune Cluster, Chennai-Bangalore Cluster, NCR region & SanandDholera Cluster have been as strong driver of growth.

At present India’s per capita car ratio has been the lowest out of the world’s top ten automobile markets. The dual scenario of increasing income and low car infiltration followed with increased variants of vehicles in all segments along with reduced costs could lead to increased demand.

1.6.

AUTO POLICY 2002

In the year 2002, government introduced the Auto Policy of India. The primary goal of this policy has been “to establish a globally competitive automobile industry in India and to double its contribution to the economy by 2010”. Key objectives outlined in the 2002 policy include modernizing the domestic industry; fostering domestic design, research, and development; developing alternate propulsion technologies; and establishing domestic environmental and safety standards at par with international standards. In an important change, the 2002 policy has permitted 100 percent foreign ownership of automobile and automobile parts manufacturing firms without minimum investment criteria. The policy has also addressed import tariffs, with a stated objective of “facilitating development of manufacturing capabilities as opposed to mere assembly without giving undue protection; ensuring balanced transition to open trade, promoting increased competition in the market and enlarging purchase options to the Indian customer.”

Import duties on components and completely knocked down (CKD) kits have been reduced to 30 percent in the year 2003 and to 15 percent in the year 2005. Coupled with a reduction in local content requirements, these changes have encouraged FDI by making it more economical to assemble vehicles in India. The 2002 automobile policy has also provided for incentives for R&D P a g e | 35

and tax concessions. To further enhance automobile exports, Government of India has created a Focus Market Scheme, which has provided auto manufacturers with cash incentives of up to 5% on export of vehicles.

Foreign Investors consider India as an attractive FDI destination for manufacturing of automobiles in India due to the availability of skilled workforce, low-cost supplier base and strong domestic demand for vehicles. Additionally, India is a strong manufacturing base and has huge potential for exports. Investors believe that Indian automobile companies need to focus on R & D and quality improvements in order to succeed as global suppliers for intermediate auto- goods.

1.6.1. AUTOMOBILE MISSION PLAN 2006–2016

Recognizing that “the concept of attaining competitiveness on the basis of cheap and abundant labor, favorable exchange rates, low interest rates and concessional duty structure have become inadequate and therefore, not sustainable,” to address the issue the Indian government introduced the Automobile Mission Plan (AMP) in September 2006, and finalized the same in March 2007. The policy has stated that industry investment in R&D is needed to “increase innovative breakthroughs for vehicle design as well as in manufacturing technology” and that the Indian government has a role to play in attracting this investment. The vision statement of the AMP has been:

To emerge as the destination of choice in the world for design and manufacture of automobiles and auto components with output reaching a level of $145 billion, accounting for more than 10% of the GDP and providing additional employment to 25 million people by 2016. These goals have been expected to be addressed via large investments from both industry and the P a g e | 36

government; according to the AMP, output targets “would require incremental investment of $35–40 billion, by 2016.” If successful, India would emerge, by 2016, as the world’s seventh largest passenger car producer as, compared to its current eleventh rank.

The AMP has envisioned that the role of the Indian government would entail facilitating infrastructure creation, promoting the country’s capabilities, creating a favorable and predictable business environment, attracting investment, and promoting R&D. Under this scenario, the role of industry would include designing and manufacturing world-class vehicles, improving cost competitiveness and labor and capital productivity, achieving economies of scale and R&D capabilities, and showcasing India’s products in the potential markets. The key recommendations of AMP 2006-16 include: • Investment Incentives i) A tax holiday for auto industry investment exceeding $133 million; ii) One-stop clearance of FDI proposals; iii) Tax deductions of 100 percent of export profits; iv) 30 percent deduction of net (total) income for 10 years for new industrial undertakings; v) Duty suspension for machinery for a Greenfield plant or for expansion of an existing operation; vi) 50 percent deduction on foreign exchange earnings and vii) Actions on the part of state governments to ensure power supply and/or promote captive generation and provide preferential land allotment.

P a g e | 37

• Export Measures i) Reforming the tariff and tax structure; ii) Creating a Special Auto-Component Parks system to promote components exports; iii) Creating ‘virtual SEZs’; iv) Adjusting existing export promotion schemes to ensure that they are WTO compatible and v) Extending product and market focus schemes to the auto sector. • Research and Development i) Implement the National Automobile Testing and R&D Infrastructure Projects; ii) Encourage collaboration between industry, research and academic institutions; iii) Further develop the facilities and programs of the technical institutes; iv) Emphasize fuel economy and alternate propulsion technologies; v) Consideration by the Ministry of Finance of R&D tax concessions, grants of 100 percent for fundamental research, 75 percent for precompetitive technology/application, and 50 percent for product development and vi) Zero taxes on technology transfers (products, features, alternate fuel, etc.); increased weighted deduction for expenditures incurred on R&D from 150 percent to 200 percent; and excise duty concession for ‘Made-In-India’ products.

P a g e | 38

• Education, Training, and Labor Law Reform i) Creation in the Eleventh Five-Year Plan period a National Level Specialized Education and Training Institute for Automobile Sector; ii) Providing for multi-year sabbaticals for national laboratory and university R&D personnel to work in industry; iii) Expansion of working hours from 48 to 60 per week with a concomitant expansion of allowable hours per day; iv) Allowing contract labor in core areas for temporary periods; v) Allowing fixed term contacts in certain core activities; vi) Increasing flexibility in recruitment and lay-off of workers in response to changes in market demand and vii) Creation by companies of a supplementary unemployment benefits fund. • Infrastructure Development i) Continued government investment in road, rail, port, and power infrastructure; ii) Creation of three auto export hubs near Mumbai, Chennai, and Kolkata, with an ability to handle 500,000 vehicle exports each annually by 2015 and iii) Allowances for automobile retail trade and service infrastructure.

P a g e | 39

1.7.

FDI IN INDIAN AUTOMOBILE SECTOR

Post the economic downturn Indian automobile industry has turned out to be stronger with increased sales in all vehicle segments. The industry has great potential and is a major source of Foreign Direct Investment. From January, 2000 to March, 2012 Indian automobile sector has received a cumulative FDI of Rs. 29,898.95 crores (US$ 6.60 billion) which is 3.98% of the total FDI inflows9. Passenger cars have been the major recipient of the FDI in auto sector amounting to 1.91% of 3.98% FDI received by the sector. Mentioned below in Table: 11, is the sub-sectoral division of FDI in Automobile sector, during the years January 2000 to March 2012. TABLE 11 SUB-SECTORAL DIVISION OF AUTOMOBILE FDI 10 Sub Sectors of FDI inflows

Amount

of

FDI %age

(US$ in Millions)

with

FDI inflows

Automobile industry

1,625.66

0.98

Passenger cars

3,158.02

1.91

809.46

0.49

Others (transport)

1,007.98

0.61

Total

6,601.12

3.98

Auto ancillaries/parts

total

Source: Compiled using Department of Industrial Policy and Promotion Reports on Auto FDI for years January, 2000 to March, 2012

Between April’2000 to December’2015 cumulative FDI in Automobile Sector has increased to Rs. 76,362 crores, which is 5% of the total FDI received in India. 9

Between January’2000 to December’2015 sub-sectoral division of FDI in Automobile sector has been: Automobile industry (1.64%), Passengers Car (1.87), Auto-ancillaries/parts (0.80), Other (Transport) (0.69). 10

P a g e | 40

Five countries contribute about 70% of the total FDI received by automobile sector in India as shown in Table: 12 below.

TABLE 12 SHARE OF TOP 5 FDI INVESTORS IN INDIAN AUTOMOBILE INDUSTRY11 Ranks

Country

Amount

of

Inflows

(US$

Millions)

FDI %age with FDI inflows in for Automobile industries

1

Japan

1,677.27

25.41

2

U.S.A

856.44

12.97

3

Netherlands

777.40

11.78

4

Italy

691.74

10.48

5

Mauritius

652.30

9.88

4,655.15

70.52

Total of above

Source: Compiled using Department of Industrial Policy and Promotion Reports on Auto FDI between years January, 2000 to March, 2012

Approximately 91% of the total Foreign Direct Investment in Indian Automobile Industry is getting invested in the 4 major auto clusters namely Mumbai-Pune Cluster, Chennai-Bangalore Cluster, NCR Region, and SanandDholera Cluster. Individual share of Automobile FDI during the years January, 2000 to March, 2012 in each clusters in mentioned in Table 13 below.

Between January’2000 to December’2015 the share of top 5 FDI Investors has been: Japan (26.68%); Netherlands (12.33%), Germany (10.85%), USA (9.57%) and Mauritius (8.22%)

11

P a g e | 41

TABLE 13 SHARE OF FDI IN FOUR AUTOMOBILE CLUSTERS12 Rank

Automobile Clusters

1 2 3

Mumbai-Pune Cluster NCR Cluster ChennaiBangalore Cluster 4 SanandDholera Cluster Total of above

Amount of FDI %age with FDI inflows Inflows (US$ in for Automobile Millions) industries 2,515.47 38.11 1,850.97 28.04 1,261.68

19.11

479.99

7.27

6,108.11

92.53

Source: Compiled using Department of Industrial Policy and Promotion Reports on Auto FDI between years January, 2000 to March, 2012

1.7.1. FORMATION OF AUTOMOBILE CLUSTERS IN INDIA

• Chennai- Bangalore Cluster Starting up of the passenger car manufacturing facility of Ford Motor Company in Maraimalainagar, 45 kms south of Chennai was the trigger point for the growth of Chennai Automobile Cluster. Initially it was a 50:50 joint venture between Ford Motor and Mahindra & Mahindra, later Ford bought the majority stake in the company in the year 1998 and the company was renamed Ford India. Later in the year 1996 Korean Car-maker Hyundai started a plant near Sriperumbudar. As of date, 7 out of the top 20 global auto-makers are located in the Chennai area and it is called the “Detroit of India”. Of the 452 automobile manufacturers and automobile component manufacturers, 92 automobile and component manufacturers are located in the ChennaiBangalore cluster. Between January’2000 to December’2015 the share of FDI in four automobile clusters has been: Mumbai-Pune Cluster (36.96%), NCR (27.37%), Chennai-Bangalore (25.89%) and SanandDholera (6.05%).

12

P a g e | 42

Major automobile manufacturers in the cluster include Ford, Hyundai, BMW, Daimler, Mitsubishi, and Renault-Nissan. The French car manufacturer Peugeot too has shortlisted a place near Chennai, for its car plant. The growth in the automobile and auto-components sector has been phenomenal. State’s Deputy Chief Minister MK Stalin once quoted from a study by Nokia “the total cost of manufacturing in Chennai is over 11% cheaper than China in Net Productivity Value (NPV) terms”. As per M. Velmurugan (Tamil Nadu Industries Department Guidance Bureau Executive Vice-Chairman) “The state accounts for 35% of the $ 18 billion worth of automobile components production in India”.

• Mumbai-Pune Cluster Mumbai-Pune belt accounts for about 24% of the automobile and automobile components manufacturing in India. There are approximately 107 firms located in this region. Mumbai-Pune cluster is one of the biggest automobile clusters in India. The beginning of this cluster dates back to the 1940s. In the year 1940, Kisloskar manufactured India’s first diesel engine in the state. Mahindra & Mahindra which first operated in Punjab, as well moved to the region in the year 1945. Tata Motors and Bajaj Auto subsequently opened there manufacturing units in the cluster. Tata motors in association with Daimler-Benz manufactured its first commercial vehicle in the cluster in the year 1954.

In 1958, Force Motors which was earlier named as Bajaj Tempo was established in the cluster. By 1990s many foreign automobile manufacturers opened their manufacturing units in Maharashtra. Mercedes-Benz was the first foreign company to enter Maharashtra in the year 1995, followed by Skoda (VW group) in 2001, Joint Venture between Renault Mahindra in 2005, and Joint Venture between Fiat & Tata in 2007, Volkswagen and Audi in 2007. 21 P a g e | 43

Indian manufacturers are located in the cluster. Further, out of 18 International automobile manufacturers, 7 are located in Maharashtra. • NCR Cluster The NCR cluster includes New Delhi and Parts of Haryana & Uttar Pradesh. The cluster has about 30.58% of the total Automobile and Automobile components manufacturers in India. Inception of Maruti Udyog Ltd. in the year 1982, a joint venture between Suzuki Motor Corporation and Government of India laid down the foundation of this cluster. MUL’s 1st plant was set up in Gurgaon, Haryana. In terms of plant layout, equipments & operational principals this plant operated in line with Suzuki’s plant in Kosai, Japan. In the year 1992, MUL started its second plant in Gurgaon followed by a 3rd one in Noida. In the year 2003, Suzuki Motor Ltd. and Maruti Udhyog Ltd. opened a foundry named Suzuki Metal India Ltd. In 1990s, Daewoo Corporation started car manufacturing in the region under the name Daewoo Motors India Ltd. It was a joint venture with the Korean firm Daewoo Corporation. However, the firm ceased its operations within few years due to the failure of its parent in Korea. Other Japanese firm Honda corporation started their manufacturing in the region under the Joint Venture named Honda Siel Cars India Ltd. the company started its production in the year 2000-01.

Maruti Udyog Ltd. is the main vigor driving the growth of NCR Cluster. Maruti Udyog has not only helped in the advancement of Automobile manufacturing in the region but has also lead to the development of many Small and Medium Enterprises (SMEs) involved in Automobile component manufacturing. Maruti’s effort to develop 1st tier supplier network in the region has lead to expansion & competence up-gradation of many SMEs. 96% of the parts used in Maruti 800 have been manufactured by the local supplier in India. P a g e | 44

MUL and Suzuki have been the drivers of technical transfer in many Indian 1st tier supplier firms, they hold stake in many of these firms. Suppliers of massive objects such as chairs, oil tanks, rubber parts etc like Bharat Seats, Macino Plastics are situated in the same building as the manufacturing plants of MUL. In addition to this, MUL and Suzuki have also facilitated tie ups between Indian Suppliers and Suzuki’s Supplier in Japan. • Sanand- Dholera Cluster Off lately Gujarat’s Sanand seems to be on its way to become the next big automobile hub in the country. Though, currently only 5.38% of the country’s automobile& components manufacturers are located in the state, the figures are all set to improve with many large firms like Tata, MUL eying the state. Tata was the one of the early entrants in the region, followed by Ford and Peugeot autos plants in the pipeline. Sanand is located 40 Kms from Ahmedabad and is quickly and quietly evolving into the next big automobile cluster.

Current players in the state include Canadian firm Bombardier. It manufactures railway wagons in a facility near Vadodara. Wagons for Delhi metro are manufactured in the Bombardier’s Gujarat facility. General Motors India too has one of its two car manufacturing units of India at Vadodara district’s Halol. The plant was set up in the 1990s and was the first major investment in automobile sector in the state. Ceat tyres has its radial tyre plant at Halol. Apollo Tyres is present in Vadodara with its Limda plant since the year 1991. Nano car manufacturing plant of Tata Motors is located in Sanand.

By the year 2014, American automobile company Ford and French auto giant Peugeot will also start manufacturing at Sanand. Maruti too is looking for land to set up its manufacturing facility in Sanand. Hero and Bajaj may as well open their manufacturing plants in the area. P a g e | 45

Policy consistency and transparency in implementation have been the major driving force behind the growth of Gujarat as an automobile cluster. Government of Gujarat has been extremely proactive in acquiring land in most clear manner and for the same has paid generous compensations to the farmers. The roads and nearby infrastructure is being built up at a fast and superior pace. Proximity to Ahmedabad gives added benefit of availability of labor as well as reduces the cultural difference between the investing country and the state (cultural proximity). To take care of the port connectivity for export oriented investment and FDI, a dedicated freight corridor is already under construction.

1.7.2. FUTURE OF INDIAN AUTOMOBILE SECTOR

The key to continued FDI in India’s auto sector rests with continued expansion of the domestic market, which seems ensured. For the further development of India as an automobile export hub, “much shall depend upon individual corporate strategies, specifically in terms of manufacturing locations in relation to the markets served.” Moreover, because of extensive forward and backward linkages, the viability of the Auto Manufacturing Plant (AMP) and the accomplishment of its goals are reliant on related industries and domestic developments. The slow progress in improvements in the transportation infrastructure and the uncertainty in the availability of inputs such as steel may make it difficult for India to meet its AMP targets. Meeting these targets further depends on the expansion of the railway network in order to move iron ore, coking coal, and finished steel around the country. The supply of fuel for individual motorists is also problematic in India. Some automakers also note that frequently changing government policies have a negative impact on their investment decisions.

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