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Investment Patterns in India
1. India | Investment Patterns
Abhishek Anand | Kunal Ahuja
Group 7 Amit Mirchandani | Nihit Jain
Vaibhav Kukreja | Vaibhav Sathe
2. Agenda
Problem statement
Investment – definition & role
India – Trends & Policies
India – Lesson from China
India - Recommendations
3. Problem Statement
To analyze various forms of investment
across two dimensions- trends and
governing policies and suggest ways to
improve FDI in India
5. Investment
Flow of spending that adds to physical stock of capital
over a given period
3 subsectors
Business fixed investment- plants, machineries
Residential investment- new house
Inventory investment- new inventory
Major Drivers-
Monetary and fiscal policies
Rental Cost of capital – interest rate, depreciation rate
Expectations of Future Level of output
Taxes- corporate income tax, Investment tax credit (affects rental
cost of capital)
Behavior and sentiments of various stakeholders – like Credit
rationing
6. Forms of Investment
Foreign Direct Investment
Investment in enterprises
Gives rise to MNCs
Parent firm should own at least 10% shares
Foreign Institutional Investment
Investment in financial markets by foreign companies
Typical investors – banks, insurance, mutual funds,
hedge funds
Domestic Investment
Public, Private and Household Sector
7. Investment Need in India
Generate sustained economic growth
Create employment opportunities
Multiplier Effect - Investment causes GDP to rise more
than the spending
Contribution of FDI
Spill-over effect – technology, management techniques,
skilled labour
Improving quality of business environment
Accumulation of productive capital for future growth
9. Domestic investment: Trends
Buoying investments due to robust consumption demand
Automobile, Power, Infrastructure and allied industries are
witnessing major capacity addition
Consumer durables pacing up the growth of industrial revival
Although
Public saving-investments balance are negative due to higher fiscal
deficit
Private saving-investments balance though on rise, are not
sufficient
The government measures intend to improve consumer
confidence and effect Demand sharply.
fiscal stimulus package
tax cuts for producers
easing of borrowing costs
10. Domestic Investment: Policies
Budgetary Policy measures in small and medium
enterprises (MSME):
Enhancing allocation by US$ 535.8 million
Increasing the limit for presumptive taxation
Raising the threshold for compulsory auditing
Extension of interest subvention for exports in certain sectors
Exemption from capital gains tax to facilitate conversion of small
businesses to limited liability partnership (LLP) format
Other Policy Initiative
Govt. approved six proposals for setting up of SEZs, tax-free zones,
Food Parks, IT/ITeS tax-free zone
State Investment Promotion Board (SIPB) of states like AP has
approved fast tracked industries aiming to generate jobs
SIPB has also announced to give nearly 50 per cent VAT/CST or
SGST reimbursement for the next 5 years
11. FDI: Policies
Prior to 1991, highly regulated environment
Post liberalization, deregulated regime
FERA amended and consolidated to FEMA
FEMA: less stringent and investor friendly
Consolidated FDI Policy 2010 - FDI permitted in almost all
sectors
12. FDI: Policies
Three primary institutions in India that handle FDI-related
issues
Foreign Investment Promotion Board (FIPB), the Secretariat
for Industrial Assistance (SIA), and Foreign Investment
Implementation Authority (FIIA)
Two other institutions-Investment Commission and India
Brand Equity Foundation also work for the same
13. FDI: Trends
Grew steadily through first half of 1990s
Stagnated between 1996-97 and 2003-04 (3-5%)
Grew at a rapid rate from 2004-05 to 2007-08 (7-9%)
Reasons were liberal policies and growing domestic market of India
Global recession slowed down FDI inflow growth in 2008-09
Following economic recovery, FDI inflows of $30.25 billion
in 2009-10
Brown field investment more than green field
14. FDI: Trends
Sector-wise analysis of FDI from 2001-2009
services sector
21%
computer software and
hardware
telecommunications
50% 10%
housing and real estate
7% construction activities
6% others
6%
15. FII: Policies
Current limit of Foreign Institutional Investors (FII)
investment in Government Securities increased by US $ 10
billion
Current limit of FII investment in corporate bonds also
increased to US $ 20 billion.
Ceiling for overall investment by FIIs- 24% of the paid up
capital of the Indian company.( 20% for PSUs)
16. FII: Trends
Dramatic increase in FII inflows to India over the period
2003-2007
Major reason- stock market rally that climaxed in January
2008
Recent global financial crisis saw FIIs pulling out a record
$13 billion
Recently, an explosive growth in FII’s on account of global
economic recovery and high growth potential of India
18. Highlights
PARAMETER INDIA CHINA
GDP USD 1.2 Trillion USD 7.8 Trillion
GDP Growth Rate 6.7% 9.1%
FDI USD 30 Billion USD 90 Billion
Investment as % of GDP 31% 39.1%
Human Development Index 0.612 0.772
Foreign Exchange Reserve USD 587 Billion USD 2.4 Trillion
*2009 figures
19. China : Manufacturing
Labor intensive growth, rooted in the end of
collectivization of agriculture
Huge focus on small scale rural industry
Strongly linked to export
Extensive infrastructure creation for support of
manufacturing based economy
Nearly 80% of world’s computer and related
hardware is manufactured by Chinese companies
20. China : Foreign Trade
1600000
1400000
1200000
Millions of US $
1000000
800000 Exports: Annual
Imports: Annual
600000 Trade Balance: Annual
400000
200000
0
Source: www.site.securities.com
21. China : FDI
China is the largest country with FDI inflows
FDI now accounts for 15% of China's real estate market
BRIC nations fall below
China: Fixed Assets Investment: ytd the 7-10 days standard of
25000000 developed economies for
new business starting
20000000 lead time
Million RMB
15000000 (World Bank 2010 Report)
COUNTRY NO. OF DAYS TO
10000000 OPEN NEW
Fixed Assets BUSINESS FOR
5000000
Investment: ytd FOREIGN COMPANY
0 Brazil 166 days
Jan-2010
Sep-2010
Jul-2010
Nov-2010
May-2010
Mar-2010
Russia 31 days
India 46 days
China 99 days
22. China : Foreign Reserves
2500
2000
Billion US $
1500
1000
Foreign Reserves: Annual
500
0
23. Regional Disparity
India –
State government policies – stability, SEZ impact
Maharashtra, Gujarat, Karnataka and Andhra Pradesh attracting more
U.P./Bihar less – Per capita income 50% below national average
China
Similar problem existed in Western China which was addressed by China
Western Development Program
Govt. initiated massive infrastructure investment in
agriculture, technology, health and education
Xinjiang GDP increased from 220 Billion RMB in 2004 to 430 Billion RMB in
2009
24. Why India lags in FDI
Poor state of India’s infrastructure
Many towns and villages face daily blackouts averaging 8
hours a day
Ports and airports lag when compared to world-class ports
or airports
Road network insufficient in India
Acute labour market rigidities
Lack of sufficient number of skilled labor
26. Recommendations
Uniform SEZ development
Establishment of SEZs in strategic locations
Quality of FDI Inflows
A large portion of the new inflows in the form of M&As.
Does not necessarily imply new capital infusion
Maximize spill-over benefits from FDI on a sustained
basis
Investment promotion strategy
Effectiveness of Foreign Investment Implementation
Authority (FIIA) to be enhanced
27. Recommendations
Image branding for manufacturing
Need to get rid of the tag that India can only do
services and not manufacturing
Government can play a significant role
Workforce Quality Development
Necessary to monitor the quality of students and of
teachers in educational institutions
Coordination between Union and States
Efficient Financial Markets
Development of a deep and liquid corporate debt
market
28. Recommendations
Intellectual Property
Attracting greater FDI into R&D strengthens India’s
technological prowess and competitiveness
Inadequate safeguards for protection of IPRs cause a
diversion of investment from technology intensive
industries
Hence, needs for strengthening intellectual property
rights or IPRs
Presence of FDI from powerful countries increasing stability and thereby improving the quality of the business environment
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