FDI in Services and India
| DOI | 10.1177/0015732513496620 |
| Date | 01 August 2013 |
| Author | Tanu M. Goyal,Arpita Mukherjee |
| Published date | 01 August 2013 |
| Subject Matter | Commentaries |
FDI in Services
and India
Arpita Mukherjee
Tanu M. Goyal
Abstract
Developing countries, including India, are increasing relying on foreign direct
investments (FDI) for raising finance for infrastructure development and other
projects. Consequently, countries are undertaking policy reforms for facilitating
investment flows. In India, services sector is the largest recipient of inward and
outward FDI since liberalization. Yet, India continues to face certain challenges to
both inward and outward foreign investments as a result of which, it has not been
able to exploit its full potential. This article studies the trends and patterns in
India’s inward and outward investment flows and analyzes its international agree-
ments to examine the degree of openness across different services sector, assess
barriers and suggest reforms. The article uses the Fink and Molinuevo (2008)
framework to examine the architectural design of India’s trade agreements and
their level of openness in investment in services. The article found that despite
progressive liberalization, India continues to impose operating restrictions and
regulatory barriers on foreign investors. India is not willing to take forward-
looking commitments in investment in services and bind the autonomous regime.
The article suggests that FDI is a ‘market access’ issue and it should be delinked
from domestic regulation. Domestic regulation should not discriminate between
foreign and domestic investors.
JEL: L8, F21, F53, F68
Keywords
FDI, services, India, trade agreements, policy
Foreign direct investment (FDI) is a key source of capital for financing develop-
ment and infrastructure in countries like India. It contributes to productivity gains
by providing new investment, better technology, managerial skills and export
markets (Borensztein et al., 1998; Harrison, 1994; Sahoo, 2006). Studies have
shown that companies in developing countries are gradually shifting towards FDI
as the source of funds for financing their operations as compared to private
Commentary
Foreign Trade Review
48(3) 413–430
©2013 Indian Institute of
Foreign Trade
SAGE Publications
Los Angeles, London,
New Delhi, Singapore,
Washington DC
DOI: 10.1177/0015732513496620
http://ftr.sagepub.com
Arpita Mukherjee, Professor, ICRIER, New Delhi, India. E-mail: arpita@icrier.res.in
Tanu M. Goyal, Research Associate, ICRIER, New Delhi, India. E-mail: tgoyal@icrier.res.in
Foreign Trade Review, 48, 3 (2013): 413–430
414 Arpita Mukherjee and Tanu M. Goyal
borrowings and loans (Amirahmadi and Wu, 1994), due to benefits such as tech-
nology transfer. This trend is stimulated by the changing policy environment and
liberalization, establishment of global supply chains and large and unsaturated
domestic markets for countries like India (Amirahmadi and Wu, 1994; Banga,
2003; Reardon et al., 2003; Sahoo, 2006).
Over the past few years, there has been a shift in the global trend in FDI—from
mining and manufacturing to services. A decade ago, services represented only
about a quarter of the total world’s share of FDI; today this share is close to 50 per
cent and it accounts for around 60 per cent of annual FDI inflows. In the past, the
bulk of FDI flows was between developed countries. However, this trend has
changed and north–south flows now account for a large part of FDI due to trade
complementarities (Yeaple, 2003).
Among developing countries, India is one of the largest recipient of services-
related FDI. In 2011, FDI into India rose by 31 per cent compared to an 8 per cent
rise in FDI inflows into China (United Nations Conference on Trade and
Development [UNCTAD], 2012). India is also an important source of outward
investments. Liberalization and privatization led to the emergence of large domes-
tic entrepreneurs, who, after strengthening their presence in the Indian market,
started global expansion. The Indian government encouraged overseas invest-
ments by giving financial support to companies and by removal of restrictive
conditions to FDI outflows (Khan, 2012). In the past, the bulk of India’s outward
FDI was in manufacturing, but since 2010, services account for the largest share
in FDI outflows.
The growing importance of foreign investments in India’s services sector is
also reflected in India’s policy regime. Since the reforms of the 1990s, India has
autonomously liberalized a large number of services for FDI. India is also an
active proponent of services liberalization in the World Trade Organization (WTO)
and in its bilateral agreements. It has signed several bilateral investment treaties
(BITs), double taxation avoidance agreements (DTAAs) and comprehensive
agreements covering investment in services to attract FDI into the services
sector.
This article examines India’s FDI in services, analyzes how investment in serv-
ices is treated in India’s trade agreements, identifies barriers to investments and
suggests policy measures to enhance FDI flows.
FDI Inflows and Outflows in the Services Sector
In India, FDI inflow is allowed through two routes—the automatic route and the
government route. Under the automatic route, a non-resident investor or company
does not require approval from either the government or the Reserve Bank of
India (RBI). Under the government route, prior approval of the government
through the Foreign Investment Promotion Board (FIPB) is required. For sub-sectors
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