FDI: To be or not to be??

Times of India, Feb 12, 2009: With the Government decision to ease the entry modes of FDI into the country, a great leap is expected in the areas of the already hyped retail sector, telecom, insurance etc. Earlier when a company invested in a company in India, it had to enter into a joint venture with an Indian partner. Suppose the contribution of the Foreign partner in this JV (Joint Venture) was 49% and that of the India Partner was 51%, and this JV started its own subsidiary in India, this subsidiary was supposed to be constituted of 49% FDI.

Now, with the cabinet decision on wednesday, a subsidiary from the above example would be considered as a 100% Indian entity.

It seems India has started changing much of its tactics, keeping in mind the fact that most of the past stock trends have been affected due to FII's instability.

India now seems to be locking horns with China, which has less FDI restrictions, but has more restrictions over the equity market. As a result, FII's find it very hard to enter China.

FDI entry and exit is a very difficult affair. First of all, there are the limitations which a foreign company can't exceed. Exit is also difficult, as Industrial laws mention that diluting a company employing more than 100 companies needs prior Government approval.

Now that the entry has been made easy, Indian's can expect more increase in FOREX levels. But there are also problems associated with this. Remember my earlier blog on Mao's cookie crumbling (http://fingertipfinance.blogspot.com/2009/02/renminbi.html)? Well, India could loose its cookie too, as more FDI in makes the value of Indian Rupee appreciate against the US dollar. This happens because the supply starts exceeding the demand. Imagine a shopkeeper holding excess of a particular product which he has to sell before it reaches the expiry. What does he do?? He lowers the rate of the item. That's what will happen with the dollar. 1$ that I used to get at Rs. 50 will now be available say at Rs. 42. So an American can now only get Rs. 42 of work done out of me for his 1$. Now he has to look for cheaper substitutes. That's where India looses.

Also, Indian goods could loose out their competitive value. Interest rates start coming down.

So even I am puzzled....Should we or shouldnt we....the choice is yours.

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