Foreign Institutional Investment (FII) and Foreign Direct Investment (FDI) have become an integral part of the global economy. In the words of Howard Siverblatt “Investors want it, Institutions want it and Companies are starting to react”. Globalisation has led to Transborder movement of Investment in goods and services. FII/FDI are factored when an organization from one country makes a physical investment in another country; it broadly refers to the acquisition of lasting managerial interest in a company in another country. It differs from Portfolio Investment which is in the form of Indirect Investment whereas FII/FDI is direct investment in building, or machinery equipments, etc.
FII/FDI can take many forms:
· Direct Acquisition
· Licensing of Intellectual property
· Construction of a facility
· Investment in a Joint Venture
· Strategic alliance with a local firm
“No man is an island” proclaimed Poet John Dovine. With the emergence of the flobalisation phenomenon, no country is an island, in itself. FII is facilitated by the onset of the New Information Technology System which makes information travel lamost at the speed of light as Bill Gates says. Ushered by the fast decline in the global communication costs. This in turn has helped the sea change in investment policies and regulatory environments GATT & WTO regime have also revolutionsied Trade policies and Tariff Liberalisation.
As a consequence to increased cross-border flow of FII/FDI, new markets have been opened up. Cheaper Production facilities have come up, due to access to new technologies, she@@ and financing.
Of course, there is also accompanying fear that multinational conglomeration would seek to influence and waken economies in other especially developing countries and destroy local competition. They cite the collapse of the “Asean Tigers” in the early 1990s. However, most of the apprehensions are not well-founded and can be remedied. .
The change is visible traditionally. FII/FDI used to come in the form of Machinery, Equipment and Building via mergers and acquisitions. Now we see even small companies go for FDI.
It can be posited that FII is an important and inevitable factor for globalisation as it facilitates the avoidance of foreign government pressure for local production. It helps in getting across trade barriers. It also helps the economy to move from Domestic export to locally based national sales. Consequently it also increases capacity and productivity, of the enterprises. It also provides opportunity for co-production, joint venture and joint-marketing, providing new market access.
It can be posited that at some stage, if the economy, export of product/services reaches critical mass; at this stage, foreign location may become more cost-effective. This triggers FII/FDI.
II ANALYSES OF THE IMPACT OF FII IN INDIAN CAPITAL MARKET:
From September 14, 1992, FIIs were permitted to invest in financial instruments. Since then foreign portfolio inflows through FIIs in India have acquired a significant place from policy perspective, especially as India has emerged as one of the most attractive investment destinations in Asia. Shareholder-pattern of Public Sector Units (PSU) companies reveal that FIIs have been big buyers in PSU banks. As on June 2009, the net equity investment by FIIs is Rs.252233, crores (Now it will be much more), with 1662 registered investors Dr.Prassanna Chandra stated that improving the efficiency both allocative and operational of the capital market importing greater liquidity to the securities traded in the capital market, maintaining the stability, safety and soundness of the capital market enhancing the p@ to investors, sharing up the confidence in the capital market and globalizing larger amount of capital through capital market are required for a stable and productive investment market.
The analysis the impact of FII on Indian Capital Market has been conducted by Dr.Rangarajan and B.Srinivasan, University of Madras using Multiple depression and Karl Pearson’s Co-efficient of correlation for Nett Investments.
The following table shows the inflow of capital by FII’s in Indian Capital.
From the above table it is seen that in 1992-93 FIIs have not contributed significantly to the capital market because it is the immediate subsequent year of gloablised economy ; but from the year 1993-94, an extra-ordinary percentage increase is seen, which get stabilized, only in the year 1998-99, there is a downward trend of FII flows, this is due to tightened SEBI regulations necessitated by scams. In the year 2003-04 onwards there is a positioning upward scoring due to boost in economy.
Now let us see the impact of the inflows on Capital Market Indices.
From the above analysis the researchers have informed that FIIs have significant impact on the Indian Capital Market. This will help the investor to decide on their investments in stocks and shares.
A sector-wise study had also shown that certain section like construction industry, Banking, Oil and Gas, Real estate etc, have great scope. Delocittes Global Venture Capital study of 2009 anticipates significant increase in Venture Capitals.
FII/FDI PROFILE IN INDIA-CANADA INVESTMENT AREAS
Canada and India are two major democratic countries with sound economies, sharing common values and similar political structures. It is seen that despite the growing depth and dynamism in relationship and the substantially expanded bilateral ties between Canada and India there remains much untapped potential in the relationship.
INDIA: India’s growth in GDP in the recent decade is around 8% per annum, even against the backdrop of global recession. It has also witnessed sectoral transformation in economy with phenomenal growth in Service sector. It has risen to 53.49% GDP. In 2008-09. There is a paradigm shift in the sectoral contribution from agriculture to industry to service which is an indicator of a vibrant and intelligent economy.
INDIA CANADA MERCANTILE TRADE
India is the 16th largest importer and 27th largest exporter in the global arena. India’s total user merchandise trade in 2008 was US $ 165 billion. Canada was ranked India’s 30th trading partner in this too in Chemical products (25.2%) textiles and apparels (24.9%%) etc. Canada’s trade in merchandise exports to India through showing an increasing trend, is a modest US$ 4 billion covering mostly traditional areas. It is seen that the total trade between India and Canada is three times smaller than the dimension of trade between India and Australia, eventhough Canadian economy is about 50% larger than that of Australia.
INDIA-CANADA SINCE TRADE
Over the past decade, bilateral trade in services between Canada and India nearly tripled to reach US $ 693 million in 2007 from US $ 241 million in 1999. Canada’s leading service receipts from India at 50% of the total is travel. Canada’s export of commercial services to India peeked in 2001 and 2002, and since then is decling. India’s export in services have expanded rapidly from US $ 16 million in 1999 to US $ 130 million in 2007. The leading area is India’s export of computer and information services and business services to Canada in the age of services outsourcing. Hence Canada’s net importer of services from India.
INDIA – CANADA INVESTMENT RELATIONSHIP
While this shows an increasing rend, in quantum, it remains not very significant to the level of investment that each country receives from the rest of the world. As of 2008, India is Canada’s 20th largest source of Foreign Investment, while Canada is India’s 40th largest service of FDI. However, the recent trends are positive. The stick of Canadian Investment in India has reached US$ 753 million in 2008 while Indian investment in Canada reached US$961 million, thus Canada becoming a net importer of FDI from India.
While India’s GDP growth is about 7.8% p.a., despite global recession, Canada’s GDP growth is around 2.6% p.a. year 2009 showed a negative growth due to recession. Exports to India have grown by annual compounded rate of 24%. Import from India have grown by 13% p.a.
INVESTMENT PROFILE (1) CANADA AS DESTINATION
FDI from India in Canada is in extra-active sectors like Oil and Gas, steel and Aluminum and in strategic sectors like Chemicals, Pharma, Banking, Automobiles and IT. India is the fifth largest investor in Canada from Asia/oceanic and @@ Investor globally. Yet it comprises only 0.5% of total FDI in Canada in 2009-10,.
There is a great scope for substantial increase of Indian FDI in Canada. Economic Intelligence Unit ranks Canada as the best business place among the G7 countries for the next 5 years. World Bank also has reported that Canada is the country which has the most stream-lined business set up process.
By 2009 Indian FDI in Canada is US $ 2.8 billion which is a 11.4% increase.
CANADIAN FDI IN INDIA
UNCTAD reports that Indian growth recipient of FDI flows in 2008 of the order of 85.1%, which is the highest growth rate globally. The cumulative total in US $ terms comes to 46.5% only. This itself indicates India as a favourable destination for FDI. The Special Economic Zones in India have acted as @ for the growth of FDI.
Canadian FDI in India in 2009, stands at US $ 574 millions. India is the eleventh largest recipient of Canadia FDI in Asia/oceaic.
The foregoing analysis indicates tht there is a tremendous scope for the increase in trade and investment between these two countries which share common policies and democratic set up. To facilitate this a joint study group was set up to examine the feasibility of a comprehensive.
ECONOMIC PARTNERSHIP AGREEMENT
(CEPA) between the two countries whose commodities have been approved at the policy levels. It is necessary to have a business model which has specific parameters based on CEPA that would facilitate the bilateral flow of goods and services and investments.
IV ECONOMIC MODELLING FOR INDIA-CANADA FLOWS
v The economic impacts of the CEPA between Canada and India can be empirically examined with a computable general equilibrium (CGE) model. In this Chapter, we use the Global Trade Analysis Project (GTAP) model for this purpose.
The modeling results should be considered in the context of both the advantages and limitations of the model, and of CGE models in general. The GTAP model integrates data on bilateral trade flows, trade protection and domestic support together with national input-output tables that describe the sale and purchase relationships between producers and consumers for 113 economies/regions. This allows the model to generate estimates of the impact of trade policy changes, such as preferential tariff elimination under free trade agreements, on trade flows, the level of national economic output and employment.
v However, the GTAP model can reflect only the expansion of trade in products already traded in the bilateral relationship, and cannot predict the creation of trade in new product areas, which is particularly important when the existing trade relationship is fairly narrow, as is the case between Canada and India.
v Further, increases in trade do not drive gains in productivity in the GTAP model, although it is possible to introduce a productivity increase in the model.
v Finally, the GTAP model only allows for analysis of gains from liberalization in goods and services trade, and does not include gains from liberalization and enhanced economic cooperation in other areas (investment being a key example).
v Economic modeling to identify the possible economic impact of trade liberalization. Simulations using the GTAP were carried out by both Canada and India. The simulations covered a wide range of liberalization issues such as trade in goods and services and trade facilitation, and they examined the implications of productivity gains and increases in the supply of labor and capital, and their consequent impact on the economies of the contracting parties.
Estimates of GDP gains range from US$6-15 billion for Canada and US$6-12 billion for India. The potential gains from liberalizing trade between Canada and India are substantial. Further, the gains are fairly symmetric. Bilateral trade increases significantly with export gains for Canada ranging between 39% to 47% and for India, between 32% to 60%.
FUTURE PATH FOR GROWTH
The sina-qua-non for CEPA to be operative is to case the path for the flows and remove bottlenecks.. Restructure tariffs can have a dampening effect on trade so too, non-tariff barriers like technical regulations industrial standards and sanitary and physio-sanitary requirements which differ from country to country. They should not become asphyxiating restrictions on trade.
To facilitate easy flow (1) restrictive tariff be removed, replaced by a national tariff profile (2) rules of origin to be simple and easily implementable with low costs (3) customes duty regulations are to be made easier (4) Trade facilitation be smooth and effective (5) removal of technical barriers to trade (6) Logical Rational leaking of physio-sanitary issues with appropriate approach particular to the country (7)Logical emergency Provisions (8) remedial provisions.
Great strides have been made by both the countries in certain areas, while action remains to be taken in other areas. Regarding rational tariff profile in 2010 Canadian Budget E@ removed most of the tariffs. India is given general preferential Tariff (GPT) status by Canada. India has receiprocated by group customs duty reliefs to Canada. India follows the practice of regional trade agreement (RTA) as building block that supplant the gam@ from multilateral trade liberation.
We will examine the future path to be delineated for effective implementation of CEPA in the relevant areas as given below:
v Trade Liberlization Requirement for FII:
• Rational Tariff Profile
In 2010 Canadian Budget Estimates removed most of the tariffs. India is given “Genereal Prefrential Tariff” (GPT) status by Canada.
• India has also reciprocated by giving Custom Duty Relief’s.
v “Rules of Origin”:
To qualify for preference under CEPA
• made simple.
• Customs Duty Regulation to be easier.
• Trade facilitation.
• Removal of Technical Barriers to Trade.
• Phyto Sanitary Issues.
Emergency Provisions
v India has recently signed and negotiating with number of CEPAs, and will seek ROO with Canada that are consistent with her currently pursued practices. However, further implements are necessary, as per the committee recommendations.
v Rules of Origin
The following points may be considered for the India-Canada JSG for Rules of Origin.
Ø Rules are clear and simple in design with low compliance costs;
Ø Rules are economically efficient;
Ø Rules recognize the increasingly globally integrated nature of manufacturing process;
Ø Rules acknowledge the principles of competitive and comparative advantage; and
Ø Rules facilitate trade between the two countries.
v Customs (Origin) Procedures
A Canada-India CEPA should include provisions that allow for the effective and transparent administration of the rules of origin. Such procedures should help ensure compliance with the rules of origin without creating unnecessary obstacles to trade. The broad objectives could include:
Ø simplify and harmonize customs procedures;
Ø ensure predictability, consistency and transparency in the application of customs laws, regulations and administrative policies and procedures;
Ø facilitate bilateral trade and ensure the security of such trade;
Ø provide a means for customs-customs consultation to enable early resolution of any issues affecting the movement of trade across borders; and
Ø rules of origin should be readily enforceable at the border without involving additional administrative costs.
Based on previous agreements, Canada and India have different views in respect of certification and verification of origin. In the framework of a bilateral agreement, we may have an opportunity to find innovative solutions for customs procedures.
v Trade Facilitation
Ø Facilitate trade between the two countries;
Ø Build upon the WTO work with a view of avoiding duplication;
Ø Support the objective of reducing cost for the trading community;
Ø Support innovation and promote the use of new technologies where appropriate;
Ø Are in accordance with the Parties respective confidentiality and protection of information requirements; and
Ø Ensure that appropriate security measures are maintained.
In the context of a CEPA, India and Canada should initiate negotiations related to Trade Facilitation as early as possible so as to improve customs efficiency through bilateral cooperation. Such cooperation could include:
Ø Appropriate controls to combat offences against law administered by customs and facilitate legitimate trade;
Ø Ensuring efficient, economical customs border administration and the expeditious clearance of goods;
Ø Ensuring harmonized systems of customs valuation, in line with the Agreement on Implementation of Article VII of the GATT, 1994), duties and documentation may be evolved across all notified or authorized ports of entry in both the countries; and
Ø Procedures of handling of goods at ports and customs clearance that may be simplified and made more efficient.
v Technical Barriers to Trade
A Canada-India CEPA should include a TBT Chapter, which should:
Ø Build on the foundations of the WTO TBT Agreement and seek to improve its implementation;
Ø Ensure that standards, technical regulations, and conformity assessment procedures do not create unnecessary obstacles to trade, primarily by establishing enhanced transparency disciplines;
Ø Seek to reduce transaction costs for exporters by exploring methods to facilitate the recognition of conformity assessment;
Ø Enhance joint cooperation between the Parties; and
Ø Create a bilateral mechanism to address specific TBT issues.
In addition, in order to facilitate trade in goods, both sides could explore opportunities for mutual recognition in the area of technical regulations, standards and conformity assessment procedures.
v Sanitary and Phytosanitary Issues
A Canada-India CEPA should include provisions on SPS issues that:
Ø Affirm that SPS trade-related measures shall be governed by the WTO SPS Agreement; and
Ø Ensure an effective bilateral mechanism to provide a forum for ongoing cooperation and information exchange, as well as facilitate discussion on bilateral SPS issues in order to avoid disputes, taking into account existing mechanisms.
Ø Emergency Action
Ø If necessary, a Canada-India CEPA could include an emergency action chapter that provides for a transitional, tariff-based emergency action mechanism that covers all goods and establishes clear parameters for any resulting actions, the conditions under which they may be imposed, and limits the length of time for which the action may be maintained.
Ø Trade Remedies
Ø It is recommended that trade remedies could be discussed with the objective of maintaining appropriate protection from unfair trading practices, including a potential discussion of global safeguard measures, while ensuring that the benefits of trade liberalization are not undermined and allowing potential exports to be realized, in accordance with the rights and obligations established by the WTO Agreement.
Ø Liberalization Paradigm
Ø In Completive and knowledge based economies, service sector place important role.
Ø 72% of GDP in Canada in Services.(Ranked 18th in the World)
Ø 57% of GDP in India in 2009-10.
This is due to the fact that service section is more resilient to Global Turned out than goods.
v Bilateral Trade in Services
The Canada-India CEPA should include a Trade in Services Chapter that provides for:
Ø Liberalization of trade in services with substantial sectoral coverage, measured in terms of numbers of sectors, volume of trade and modes of supply; including sectors and modes with trade potential and complementarities;
Ø A considerably higher level of ambition than the current WTO commitments, with the aim of achieving market access, non-discrimination and compliance with Article V GATS;
Ø Disciplines in domestic regulation that would be a useful complement to market access and non-discrimination and would play a positive role in facilitating trade in services; and
Ø Provisions to facilitate the mutual recognition of professional qualifications.
There are other important areas like Intellectual Property Rights, Energy Issues Labour and environment, Social Security, completion Policies etc. which are to be discussed and worked out to ensure a perfect symbiosis between the economies of these two large countries.
CONCLUSION
The world to survive today should move from restrictive cut throat competition to constructive co-operativon in all spheres. India and Canada, sharing the same ideas should develop constructive approach and methodologies though instruments like CEPA to entures “greatest happiness for the greates pssoible member”.
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