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FDI IN SERVICE SECTOR- SOME POLICY ISSUES
Sonia Chawla*
ABSTRACT
The economic role of FDI is increasingly become significant in Indian economy with the
transition of FDI policy .From a restrictive phase of seventies and early eighties to a
relatively liberal phase of nineties .In service sector it is tool for economic growth through
its strengthening of domestic capital productivity and employment . FDI inflows to service
sector have been phenomenal in the past few years. Since the onset of the liberalization of the
Indian economy in 1991, the country has experienced a huge increase in the inflow of foreign
sector. According to latest data of industrial ministry India’s FDI inflows into service sector
increased by a mere 5% to $ 3.6 billion during the period of April- October 2012. As far as
overall FDI concern they decline by about 27 % during 2012. This paper analyzes the growth
dynamics. This study intends to see whether the growth in FDI has any significant impact on
the service sector growth and also investigate whether a growth in this sector cause the GDP
to grow. This paper also focuses on some major policy issues for India’s service sector.
*Assistant professor in P.G Department of Economics, ARYA P.G. College, Panipat
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INTRODUCTION
The economic role of FDI is increasingly become significant in Indian economy with the
transition of FDI policy .From a restrictive phase of seventies and early eighties to a
relatively liberal phase of nineties .In service sector it is tool for economic growth through its
strengthening of domestic capital productivity and employment . FDI inflows to service
sector have been phenomenal in the past few years. Since the onset of the liberalization of the
Indian economy in 1991, the country has experienced a huge increase in the inflow of foreign
sector. According to latest data of industrial ministry India’s FDI inflows into service sector
increased by a mere 5% to $ 3.6 billion during the period of April- October 2012. As far as
overall FDI concern they decline by about 27 % during 2012.
OBJECTIVES OF STUDY
1) To study the FDI inflows in Indian Service Sector from 1991-2012.
2) To explore the Service Sector wise distribution of FDI inflows
3) To rank the sectors based upon highest FDI inflows.
4) To study the relationship between service sector growth and India economy
RESEARCH METHODOLOGY
The study is based on secondary sources of data. The main source of data is various
Economic Surveys of India and Ministry of Commerce and Industry data, RBI bulletin,
online data base of Indian Economy, journals, articles, news papers, etc
DETERMINANTS OF FDI
•
Stable policies
•
Economic cheap and skilled labor.
•
Basic infrastructure.
•
Unexplored markets
•
Availability of natural resources
NEED FOR FDI IN INDIA
As India is a developing country, capital has been one of the scare resources that are usually
required for economic development. Capital is limited and there are many issues such as
Health, poverty, employment, education, research and development, technology global
competition. The flow of FDI in India from across the world will help in acquiring the funds
at cheaper cost, better technology, employment generation, and upgraded technology transfer,
scope for more trade, linkages and spillovers to domestic firms. The following arguments are
advanced in favor of foreign capital
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1. Sustaining a high level of investment
2. Technological gap
3. Exploitation of natural resources
4. Understanding the initial risk
5. Development of basic economic infrastructure
6. Improvement in the balance of payments position
7. Foreign firm’s helps in increasing the competition
FDI IN INDIA
FDI being a non debt capital flow is a leading source of external financing, especially for the
developing country (like India). It not only brings in capital and technical knowhow but also
increase the competitiveness of the economy. Overall it supplements domestic investments
much required for sustaining the high growth rate of country. Since 2000 significant changes
have been made in the FDI policy regime by the government to ensure the India becomes an
increasingly attractive and inverter friendly destination.
UNCTAD’S FDI REPORT IN INDIA
The united nation conference on trade and development (UNCTAD) stated that inflows of
FDI into India fell 13.5 per cent in 2012. FDI inflows into India declined from $ 31.5 billion
in 2011 to $ 27.3 billion in 2012, UNCTAD said in a report on global investment trend. The
report however edits that India’s prospects in attracting more FDI were higher because of its
attempts to open certain sector for trade. It also showed for the first time in history FDI
inflows to developing countries were higher than those into developed countries by $ 130
billion. “According to UNCTAD the global FDI inflows fell 18 percents in 2012 to 1.31
trillion dollar due to weakening Macroeconomic environment, slow growth in GDP and
environment”.
FDI POLICY IN INDIA
Under the current phase of FDI policy regime, there are three broad entry options for FDI:
 In few sectors FDI is not permitted (Negative list).lottery business, chit funds, atomic
energy, railways.
 In small category of sector FDI is permitted only till a specified level of foreign
equity participation like defence ,information services, print media
 Third category comprising all the other sectors is where foreign investment up to 100
per cent of equity participation is allowed. It has two subsets.
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•
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On consisting of sector where automatic approval is granted for FDI (often foreign
equity participation less that 100 per cent like’s floriculture, development of
seeds, animal husbandry.
•
Other consisting of sector where prior approval from the foreign investment
approval board (FIPB) is required. Like tea plantation.
Sector Specific Limits of Foreign Investment in India
Sector
A. Agriculture
1. Floriculture, Horticulture, Development of Seeds,
Animal Husbandry, Aquaculture, Cultivation of
vegetables & mushrooms and services related to agro
and allied sectors.
2. Tea sector, including plantation
FDI
Cap/Equity
Entry Route
100%
Automatic
100%
FIPB
(FDI is not allowed in any other agricultural sector /activity)
B. Industry
1. Mining covering exploration and mining of
diamonds & precious stones; gold, silver and minerals.
100%
Automatic
2. Coal and lignite mining for captive consumption by
power projects, and iron & steel, cement production.
100%
Automatic
3. Mining and mineral separation of titanium bearing
minerals
100%
FIPB
1. Coffee & Rubber processing & Warehousing.
100%
Automatic
2.Defence production
26%
FIPB
3. Hazardous chemicals and isocyanates
100%
Automatic
4. Industrial explosives –Manufacture
100%
Automatic
5. Drugs and Pharmaceuticals
100%
Automatic
6. Power including generation (except Atomic
energy); transmission, distribution and power trading.
100%
Automatic
100%
Automatic
C. Manufacturing
D. Services
1. Civil aviation (Greenfield projects and Existing
projects)
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2. Asset Reconstruction companies
3. Banking (private) sector
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49%
FIPB
74%
(FDI+FII).
FII not to
exceed 49%
Automatic
4.Pharaceutical sector
100%
Green field
100 %
Automatic
Existing Companies
100 %
Government
26%
Automatic
49% (PSUs).
100% (Pvt.
Companies)
FIPB (for PSUs).
Automatic (Pvt.)
26%
FIPB
100%
FIPB
5 Insurance
6 Petroleum and natural gas :
Refining
7 Print Media
Publishing of newspaper and periodicals dealing with
news and current affairs
Publishing of scientific magazines / specialty
journals/periodicals
Sectors where FDI is Banned
1. Atomic energy2 .Lottery Business
3. Gambling
4. Chit fund
5. Nidhi fund
6. 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 )
FDI INFLOWS DECLINE
Foreign direct investment inflows during September- October 2012 stood at $ 3184 million
which is only about 40 per cent of the FDI inflows attained during 2011.
FDI INFLOWS IN 2011
$ 7785 MILLION
FDI IN FLOWS IN 2012
$ 3184 MILLION
FDI IN SERVICE SECTOR
The global economic and financial crises had a dampening effect on overall FDI inflows. FDI
in services which accounted for the bulk of the decline in FDI inflows due to the crises
continued on its downward path in 2011.FDI in all main service industries (Business services,
financial services, Transport and communications and utilities) fell although at different
rates.FDI projects in the service sector declined from U.S $ 392 billion in 2009 to U.S $ 338
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billion in 2010, resulting in its share in sectoral FDI declining from 33 per cent to 30 per cent
in this period.
SERVICES SECTOR CONTRIBUTION TO THE INDIAN ECONOMY
The Services Sector contributes the most to the Indian GDP. The Sector of Services in India
has the biggest share in the country’s GDP for it accounts for around 53.8% in 2005. The
contribution of the Services Sector in India GDP has increased a lot in the last few years. In
2012 Services Sector contributed 58% to the Indian GDP. This shows that the Services
Sector in India accounts for over half of the country's GDP Real estate and business services,
community services (public administration and defense) and other services. This sector
provides services of final consumption nature as well as intermediate nature, the latter
accounting for a major share. Substantial parts of services such as transport and
communications are in the form of intermediate inputs for production of other goods and
service.
FDI INFLOWS INTO INDIA’S SERVICE SECTOR SHOWS 62 %
GROWTH
FDI inflows into service sector in India went up by 62 per cent during April -March (period
2011-2012) on account of unfavorable condition of the western market.
 The financial and non financial service sector attracts FDI worth $ 4.83 billion during
the 10 month period of 2011-2012.
 Despite taxation and policy issues the Country enjoy the investor’s confidence as is
evident from 53 per cent increase in total FDI inflows to $ 26.19 billion during the 10
month period (2011-2012)
RANK OF SECTOR WISE FDI INFLOWS
SECTORS
RANK
SERVICE SECTOR
1
COMPUTER HARDWARE AND
SOFTWARE
2
TELECOMMUNICATION
3
HOUSING AND REAL ESTATE
4
CONSTRUCTION ACTIVITIES
5
POWER
6
AUTOMOBILE INDUSTRY
7
METALLUGRICAL INDUSTRY
8
PETROLEUM AND NATURAL GAS
9
CHEMICAL
10
(Source:fact sheets on FDI, DIPP)
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FDI FLOWS TO SHIFT FROM CHINA TO INDIA, ASEAN
HSBC has said in a research report that it expects a shift in FDI flows China to India and
ASEAN countries because:
•
Driven by higher wage
•
Currency application in China
Report shows that Textile manufacturing inflows into China contracted by 18.9 per cent from
January 2102 to October 2012 even as manufacturing FDI inflows into Indonesia and
Thailand rose 66 per cent and 43 per cent respectively. The beneficiaries are expected to
India, Indonesia and Vietnam, which has large labour force and strong domestic market.
ANALYSIS OF FDI INFLOWS AND INTERPRETATION
SECTOR ATTRACTING HIGEST FDI EQUITY INFLOWS IN INDIA
SECTOR
SERVICE SECTOR (FINANCIAL AND
NON FINANCIAL)
TELECOMMUNICATION
CONSTRUCTION ACTIVITIES
COMPUTER SOFTWARE AND HARD
WARE
HOUSING AND REAL ESTATE
POWER
AUTOMOBILE INDUSTRY
(Source:-http://dipp.nic.in)
% OF TOTAL INFLOWS (U.S
$)
20%
8%
7%
7%
7%
4%
4%
POLICY MEASURES TO PROMOTE FDI IN INDIA

POLICY INITIATIVES- After recognizing the importance of FDI the Government
of India has framed several suitable policies for inciting foreign capital. DIPP in its report
states that India has already emerged as one of the most preferred destination for foreign
investment. Some initiatives are as
•
Company formation and company law services.
•
Establishment of joint venture.
•
Corporate and commercial law services.
•
Setting up subsidiaries.
•
Tax planning.
•
Project finance.
•
Dispute resolution.
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
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ALLOW FDI FROM PAKISTAN – For the first time in the history of Indo-Pak
relation, India allowed FDI from Pakistan through Government route, strengthening the
bilateral relation even further. The decision has been implemented with immediate effect and
accordingly the consolidated FDI policy effective from April 10, 2012 has also been
amended. Government has allowed all sorts of investment from Pakistan without any limit on
the quantum to be invested (excluding specific sectors such as defense, Space and atomic
energy.

“INVEST INDIA”CONSTITUTE – A joint company of public and private sector
named “Invest India” has been constituted for promoting foreign direct investment in the
country. This company will provide investment information to foreign investors. It will work
on ‘No profit - No loss’ basis. In its capital of rupees 1000 crore, the government and FICCI
have the share of 49:51. The principals are –
1. To promote FDI in India.
2. To provide the feedback to government on Industrial policy.
3. To provide the processing facilities to foreign investors.
4. To act as coordinator among various ministries.

FOREIGN INVESTMENT PROMOTION BOARD (FIPB)
It offers a single window clearance for foreign direct investment proposals in India that are
not allowed access through the automatic route.
•
It comprises Secretaries from Department of Commerce, Department of Industrial
Policy & Promotion and Ministry of External Affairs as members, with Secretary in
Department of Economic Affairs in the Ministry of Finance as the chairperson.
•
To expedite flow of foreign investment into the country, the Union government has
allowed the FIPB to clear proposals from overseas entities worth up to Rs. 1,200
crore. Earlier the limit was Rs. 600 crore.
FINDINGS
 FDI is an important stimulus for the economic growth of India.
 FDI shows a tremendous growth in decade (2000-2012) that is Three times than the
first decade of FDI in service sector.
 Service sector is first and banking and Insurance is second segment of which pick the
growth in second decade of reform.
 FDI in service sector create high perks job for skilled employee in Indian service
sector.
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 Mauritius and Singapore is the two top Countries which has maximum FDI in India.
 FDI plays an important role in the development of Infrastructure because many
Counties invest in the Infrastructure, service and banking finance sector.
CONCLUSION
FDI has proved stimulate economic growth and development in many Countries. It not only
promote capital formation but also improve the quality of capital stokes. In order to promote
competitiveness markets, developing nations must reduce restriction on FDI. We need to
learn from the experience of successful Countries. The ultimate motive should be to minimize
the”bads” and maximize the “benefits”. It can be observed from the above analysis that the
sectoral level of the Indian economy FDI has helped to raise the output productivity and
employment in some sectors especially in service sector. Indian service sector is generating
the proper employment option for skilled workers with high perks on the other hand banking
and Insurance sector help in providing the strength to the Indian economic condition and
developed the Foreign exchange system in India. So we can conclude that FDI always helps
to create the employment and also support the small scale Industry to put an impression on
the world wide level through liberalization and globalization.
REFERENCES
1. Department of Commerce, Government of India, 23-Feb-2005, Press Release on 'FDI
in Organized Retail to generate Employment, but should not displace ongoing Retail
activities', available at http://commerce.nic.in/PressRelease/pressrelease_detail.asp?
id=1673.
2. A.T. Kearney's Report on Indian Retail, 2008 FDI Consolidated Policy
3. Economic Survey (2010-11), Ministry of Finance, Government of India, New Delhi,
2010 available at http://indiabudget.nic.in/es2010-11/ economy.html.
4. ICRIER study, "Impact of Organized Retailing on the Unorganized Sector" May 2008
from http://siadipp.nic.in/policy/icrier_report_27052008.pdf
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Assessment", Academic Foundation, NewDelhi.5
6. Dipakumar Dey-Aspects of Indian Economy-Google search
7. Kearney A.T., (2006) "Retail in India – Getting organized to drive growth". DIPP.
(2010), Discussion paper on foreign direct investment (fdi) in multi-brand retail
trading, Department of Industrial Policy and Investment Promotion, New Delhi.
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8. Mohanty, J.P, Sharma Kamal, Guruswamy Mohan, Korah Thomas J. FDI in India's
Retail Sector – More Bad Than Good. Center for Policy Alternatives (CPAS), New
Delhi.
9. Mukherjee Arpita and Patel Nitisha (2005), "FDI in Retail Sector: India", Academic
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10. Websites:
11. http://www.oecd.org
12. www.financialexpress.com
13. http://www.iie.com
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