Latest and Simplified Version of FDI and Balance of Payment

(Based on UGC NET 2019 DEC-COMMERCE Business Environment Syllabus).

Following concepts will be fruitful to Students who write examination based on Business Environment .The important concepts explained are the following-

Business Environment and International Business

Concepts and elements of business environment: Economic environment- Economic systems, Economic policies(Monetary and fiscal policies); Political environment-Role of government in business; Legal environment- Consumer Protection Act, FEMA; Socio-cultural factors and their influence on business; Corporate Social Responsibility (CSR).

Scope and importance of international business; Globalization and its drivers; Modes of entry into international business

Theories of international trade; Government intervention in international trade; Tariff and non-tariff barriers; India’s foreign Trade policy

Foreign direct investment (FDI) and Foreign portfolio investment (FPI); Types of FDI, Costs and benefits of FDI to home and host countries; Trends in FDI; India’s FDI policy

Balance of payments (BOP): Importance and components of BOP.Regional Economic Integration: Levels of Regional Economic Integration; Trade creation and diversion effects; Regional Trade Agreements: European Union (EU),ASEAN, SAARC, NAFTA

International Economic institutions: IMF, World Bank, UNCTAD World Trade Organization (WTO): Functions and objectives of WTO; Agriculture Agreement; GATS; TRIPS; TRIMs

1. Balance of Payment Terms

a. Balance of Trade=Difference between Exports of goods and imports of goods

b. Balance of services=Difference between exports of services and imports of services

c. Balance of unrequired transfers=unrequired receipts-unrequired payments

d. Balance on current Account=Balance of Trade+ Balance of Services+ Balance of un-required transfers

e. Balance on Capital Account=Capital receipts-capital Payments.

f. An example 

Table 1: Major Items of India’s Balance of Payments
(US$ Billion)
	April-June 2018 P			April-June 2017 PR
	Credit	Debit	Net	Credit	Debit	Net
A. Current Account	155.7	171.5	-15.8	139.9	154.9	-15.0
1. Goods	83.4	129.1	-45.7	73.1	115.1	-41.9
Of which:
POL	11.9	34.7	-22.8	7.5	22.8	-15.4
2. Services	48.2	29.5	18.7	45.9	27.6	18.3
3. Primary Income	5.3	11.1	-5.8	4.7	10.6	-5.8
4. Secondary Income	18.8	1.7	17.1	16.1	1.6	14.5
B. Capital Account and Financial Account	142.4	125.9	16.6	155.7	140.2	15.5
Of which:
Change in Reserves (Increase (-)/Decrease (+))	11.3	0.0	11.3	0.0	11.4	-11.4
C. Errors & Omissions (-) (A+B)		0.8	-0.8		0.6	-0.6
P: Preliminary; PR: Partially Revised
Note: Total of subcomponents may not tally with the aggregate due to rounding off.

g. Current account consists of

i. Merchandise exports and imports

ii. travel

iii. transportation

iv. insurance

v. investment income

vi. transfer payments

2.FDI (Foreign Direct Investment)

Features of FDI are as follows

FDI refers to obtaining ownership in foreign business entity.

Investor obtains rights of management and control in the firm.

Active investment mode.

Less flexible investment.

Very high capital is required.

3. FPI (Foreign portfolio Investment)

Features of FPI are as follows- 

No ownership and control of entity

Passive holding

Easy disposal

Volatile investment

Average capital is required

4.Importance of FDI

a. Easy international trade

b. Boost to

i. Human Resources

ii. Economy

iii. Employment

iv. Productivity

v. Competition

vi. Domestic investment.

5.Disadvantages of FDI

i.Affects National security

ii. Over Dependence on

a. Foreign capital

b. Foreign Human Resources

c. Foreign technology

d. Foreign culture

iii. More corruption

6. Types of TDI 

A. on the basis of direction of investment. 

Inward FDI-direct investment by foreign firms

Outward FDI-Indian investment in abroad

B. on the basis of type of activity

i.Horizontal FDI- similar  activity  in home country.

ii.Vertical FDI-make investment in abroad to get raw materials for domestic production

iii.conglomerate FDI-to manufacture products not produced in home country.

C. On the basis of investment objective 

i. Resource seeking FDI

ii. Market seeking FDI

iii. Efficiency seeking FDI

D. On the basis of entry modes

i. Green field investments-for creation of new facilities

ii. Merges and acquisitions

iii. Brown investments—purchases or leases existing  production facility

E .On the basis of sector

i. Industrial

ii. Non-industrial 

7. Make in India

A type of Swadeshi movement covering 25 sectors of the Indian economy, was launched by the Government of India on 25 September 2014 to encourage companies to manufacture their products in India and enthuse with dedicated investments into manufacturing.

8.Why India is attractive to FDI?

Population of 1.31 billion out of which 767 million falls in the age group of 15-64 age group, and also set to become the youngest country with average age of 29 years by 2025

2^nd largest Internet users base with 462 million Internet users.

India has demonstrable capability to reach near 100% literacy level by 2025.

Considerable Upward mobility among all sections, more 150 million will be added to middle class by 2025 which will create Huge consumer market base of US$ 3.6 trillion by 2020 (BCG Report).

3^rd largest economy in the world with size of US$ 8.6 trillion by purchasing power parity (PPP) and is expected to rise to US$ 20 trillion in size by 2025.

Fastest growing economy in the world with the rate of 7.6% in 2015-16.

India has an immediate investment opportunity of $1 trillion (Economic Times)

India enjoys stable/positive ratings from major credit rating agencies around the globe and has a total foreign exchange reserves of US$ 371 billion as on 30th Sep 16

2^nd largest Railway Network in the world, used by 23 million travelers every day

2^nd largest Road Network in the world .

9.Latest FDI Policy of India.

FDI under sectors is permitted either through Automatic route or Government route.

Under the Automatic route, the non-resident or Indian company does not require any approval from GoI.

Whereas, under the Government route, approval form the GoI is required prior to investment. Proposals for foreign investment under the Government route are considered by the respective Administrative Ministry/Department.

100% AUTOMATIC ROUTE

Agriculture & Animal Husbandry, Air-Transport Services (non-scheduled and other services under civil aviation sector), Airports (Greenfield + Brownfield), Asset Reconstruction Companies, Auto-components, Automobiles, Biotechnology (Greenfield), Broadcast Content Services (Up-linking & down-linking of TV channels, Broadcasting Carriage Services, Capital Goods, Cash & Carry Wholesale Trading (including sourcing from MSEs), Chemicals, Coal & Lignite, Construction Development, Construction of Hospitals, Credit Information Companies, Duty Free Shops, E-commerce Activities, Electronic Systems, Food Processing, Gems & Jewellery, Healthcare, Industrial Parks, IT & BPM, Leather, Manufacturing, Mining & Exploration of metals & non-metal ores, Other Financial Services, Services under Civil Aviation Services such as Maintenance & Repair Organizations, Petroleum & Natural gas, Pharmaceuticals, Plantation sector, Ports & Shipping, Railway Infrastructure, Renewable Energy, Roads & Highways, Single Brand Retail Trading, Textiles & Garments, Thermal Power, Tourism & Hospitality and White Label ATM Operations

UPTO 100% AUTOMATIC ROUTE

• Infrastructure Company in the Securities Market – 49%
• Insurance – upto 49%
• Medical Devices – upto 100%
• Pension – 49%
• Petroleum Refining (By PSUs) – 49%
• Power Exchanges – 49%

UPTO 100% FDI PERMITTED UNDER AUTOMATuIC & GOVERNMENT

• Airport transport services (scheduled air transport services, regional air transport services) – upto 49% (auto) + above 49% (Govt.)
• Banking (Private sector) – upto 49% (auto) + above 49% (Govt)
• Biotechnology (brownfield) – upto 74% (auto) + above 74% (Govt)
• Defence – upto 49% (auto) + above 49% (Govt)
• Healthcare (Brownfield) – upto 74% (auto) + above 74% (Govt)
• Pharmaceuticals (Brownfield) – upto 74% (auto) + above 74% (Govt)
• Private Security Agencies – upto 74% (auto) + above 74% (Govt)
• Telecom Services – upto 49% (auto) + above 49% (Govt)

LIST OF PROHIBITED SECTORS:

• *Lottery Business including Government/ Private lottery, online lotteries etc.
• Chit Funds
• Trading in Transferable Development Rights (TDR)
• Manufacturing of Cigars, cheroots, cigarillos, and cigarettes (tobacco or tobacco substitutes)
• *Gambling and betting including casinos
• Nidhi Company
• **Real Estate Business or Construction of Farm Houses
• Sectors not open to private sector investments – atomic energy, railway operations (other than permitted activities mentioned under the consolidated FDI Policy)