Introduction:
Foreign Direct Investment (FDI) inflow into the core sectors is assumed to play a vital role as a source of capital, management, and technology in countries of transition economies. It implies that FDI can have positive effects on a host economy's development effort. On this line, it has been argued that FDI can bring the technological diffusion to the sectors through knowledge spillover and enhances a faster rate of growth of output via increased labour productivity in India. There were also few evidences demonstrate that there is a long-run relationship between Gross Domestic Product, FDI and export in India. In fact, many countries like India have offered incentives to encourage FDI to their economies. India is also opened up its economy and allowed MNEs in the core sectors such as Power and Fuels, Electrical Equipment, Transport, Chemicals, Food Processing, Metallurgical, Drugs and Pharmaceuticals, Textiles, and Industrial Machinery as a part of reform process started in the beginning of 1990s. In this context, it is imperative to assess the impact of FDI inflows in to these core sectors in India. It is also motivated by recent political developments in India following the opening of sectors like insurance and telecommunication with increased financial gap for the private players. In particular, the left parties, who are main coalition partner of the present government in India is not in favor of increased financial gap to the private players in the sectors of insurance and telecommunication and also disinvestment of public enterprises. An empirical analysis could offer a basis for the further opening up the economy if FDI inflows into the core sectors set a positive spillover in the economy in India.
Finally, the analysis is also motivated by the current worldwide trend towards assessing the impact of FDI on the core sectors of the economy in transition countries. The evidence to date on this issue is mixed. The positive merits of the FDI inflows in the host economy in practice have begun to be questioned. It has been argued that Multinational Enterprises (MNEs) in the name of FDI may drive out the local firms because of their oligopolistic power, and also, the repatriation of profit may drain out the capital of the host country. Hanson (2001) argues that evidence that FDI generates positive spillovers for host countries is weak. In a review of micro data on spillovers from foreign-owned to domestically owned firms Gorg and Greenwood (2002) conclude that the effects are mostly negative. Lipsey (2002) takes a more favourable view from reviewing the micro literature which argues that there is evidence of positive effect. He also argues that there is need for more consideration of the different circumstances that obstruct or promote positive spillovers. On this line, this paper is set to analyse the impact of FDI inflows into the core sectors of the Indian economy.
Objectives of the study:
To study the trends and pattern of FDI in the Indian economy.
To know the role of FDI in the growth of Indian economy.
To analyse the FDI impact on Indian Economy.
3. Review of Literature:
Chopra Chanchal (2003) in his book "Foreign Investment in India" deals with all aspects of foreign investment and is a piece of literature which covers all aspects of Foreign Institutional Investment, Portfolio investment and other foreign investment especially in the Indian Context. The book has revealed that FDI is an important vehicle for transfer of technology thus contributing to growth of the host country and also contributes in increasing the rate of investment in the economy.
Gopalakrishnan A. and Manonmoney N. (2010) in their book "An Economic Analysis of Foreign Direct Investment in India" provides a comprehensive and in-depth analysis of FDI in India. It analysis the trend and pattern of FDI in India and compare with that of ASEAN and other selected emerging countries. It explores the important economic detenniants of FDI and evaluates the impact on Indian Economy.
Singh R.K. and Kulkarni V.S. (2006) in their book "Foreign Direct Investment and Economic Development" mentioned that the Foreign Direct Investment plays very important role in the Indian economy after 1991. They also emphasis that the FDI brought technology, managerial skill capital etc. in the Indian market which has done the overall development in the economy.
Klaus E Meyer (2003) in his paper "Foreign Direct investment in Emerging Economies" focuses on the impact of FDI on host economies and on policy and managerial implications arising from this (potential) impact. The study finds out that as emerging economies integrate into the global economies international trade and investment will continue to accelerate.
John Andreas (2004) in his work "The Effects of FDI Inflows on Host Country Economic Growth" discusses the potential of FDI inflows to affect host country economic growth. The paper argues that FDI should have a positive effect on economic growth as a result of technology spillovers and physical capital inflows. Performing both cross - section and panel data analysis on a dataset covering 90 countries during the period 1980 to 2002, the empirical part of the paper finds indications that FDI inflows enhance economic Growth in developing economies but not in developed economies.
Nirupam Bajpai and Jeffrey D. Sachs (2006) in their paper "Foreign Direct Investment in India: Issues and Problems", attempted to identify the issues and problems associated with India's current FDI regimes, and more importantly the other associated factors responsible for India's unattractiveness as an investment location. Despite India offering a large domestic market, rule of law, low labour costs, and a well working democracy, her performance in attracting FDI flows have been far from satisfactory. The conclusion of the study is that a restricted FDI regime, high import tariffs, exit barriers for firms, stringent labor laws, poor quality infrastructure, centralized decision making processes, and a very limited scale of export processing zones make India an unattractive investment location.
Kulwinder Singh (2005) in his study "Foreign Direct Investment in India: A Critical analysis of FDI from 1991-2005" explores the uneven beginnings of FDI, in India and examines the developments (economic and political) relating to the trends in two sectors: industry and infrastructure. The study concludes that the impact of the reforms in India on the policy environment for FDI presents a mixed picture. The industrial reforms have gone far, though they need to be supplemented by more infrastructure reforms, which are a critical missing link.
Trends and Pattern of FDI in the Indian Economy:
Although India's share in global FDI has increased considerably, but the pace of FDI inflows has been slower than China, Singapore, Brazil, and Russia. Due to the continued economic liberalization since 1991, India has seen a decade of 7 plus percent of economic growth. In fact, India's economy has been growing more than 9 percent for three consecutive years since 2006 which makes the country a prominent performer among global economies. At present, India is the 4th largest and 2nd fastest growing economy in the world. It is the 11th largest economy in terms of industrial output and has the 3rd largest pool of scientific and technical manpower. The dimensions of the FDI flows into India could be explained in terms of its growth and size, sources and sectoral compositions. The growth of FDI inflows in India was not significant until 1991 due to the rigid regulatory policy framework. However, under the new policy regime, it is expected to assume a much larger role in catalysing Indian economic development. It could be observed that there has been a steady build up in the actual FDI inflows in the post-liberalization period. Actual inflows have steadily increased from US $ 143.6 million in 1991 to US $ 36,500 million in 2012 (Table 1). However, the pace of FDI inflows to India has definitely been slower than some of the smaller developing countries like Indonesia, Thailand, Malaysia and Vietnam. In fact, India has registered a declining trend of FDI inflows and the FDI- GDP ratio especially in 1998 and 2003 could be attributed to many factors, including the US sanctions imposed in the aftermath of the nuclear tests, the East Asian melt-down and the perceived Swadesh image of the Bharatiya Janata Party, which was ruling government during that period in India. It is also important to note that the financial collaboration has outnumbered the technical collaboration over the years.
Source: ESCAP, based on data from UNCTAD stat. (2012)
Table 1: FDI flow in India from 1991-2012
The analysis of the origin of FDI inflows to India shows that the new policy has broadened the source of FDI into India. There were 86 countries in 2000 which increased to 106 countries in 2003 and 113 countries in 2010 as compared to 29 countries in 1991 whose FDI was approved by the Indian Government. Thus, the number of countries investing in India has increased during the period of reform. Nevertheless, still a lion's share of FDI comes from only a few countries. Table 2 shows the actual investment flows of top ten countries (and percentage to the total FDI) during the period 2006-07 to 2009-10.
Table 2: Country-wise FDI Inflows - Top 10 Countries (From 2006-2010)
(Amount Rupees in Crores)
Rank
Country
2006-07
2007-08
2008-09
2009-10
Cumulative
Inflows
% to
total
inflows
1
2
3
4
5
6
7
8
9
10
Mauritius
Singapore
USA
UK
Netherlands
Cyprus
Japan
Germany
UAE
France
28759
2662
3861
8389
2905
2666
382
540
1174
528
44483
12319
4377
4690
2780
3385
336
2075
1039
583
50794
15727
8220
3840
3922
5983
1889
2750
1133
2098
42924
8188
7577
1841
3687
6419
5197
2581
2824
1158
204196
42040
35536
34746
19539
16468
16421
12069
6830
6639
44
9
8
5
4
4
4
3
1
1
Total FDI Inflows
70630
98664
122919
100539
493665
83%
Source: Government of India (GOI) (2010). FDI Statistics, Ministry of Commerce & Industry, Dept. of Industrial Policy and Promotion
The FDI stock for the period of 2006-2010 from Mauritius is the largest (44%) followed by Singapore (9%) and USA (8%) of the total FDI inflows. The other top eight countries viz., UK, Netherlands, Cyprus, Japan, Germany, UAE and France collectively shared 22 per cent of the total actual FDI inflows to India for a decade. It implies that these top ten countries accounted for well over 83 per cent of the FDI inflows during the above period. Nevertheless, the geographic concentration of FDI inflows in the reform period is lower than in the pre-reform period. In 1990, only six countries, viz. the US, UK, Germany, Japan, Italy and France were responsible for over two-thirds of the total FDI inflows in India. The country-wise annual growth rate of the FDI inflows shows that Mauritius, which was not in the picture till 1992, has the highest growth rate. A lion's share of such investment is represented by the holding companies of Mauritius set up by the US firms. It means that the investment flowing from the tax havens is mainly the investment of the multinational corporations headquartered in other countries. Now an important question arises as to why the US companies have routed their investment through Mauritius. It is because, firstly, the US companies have positioned their funds in Mauritius, which they like to invest elsewhere. Secondly, because the tax treaty between Mauritius and India stipulates a dividend tax of five per cent, while the treaty between Indian and the US stipulated a dividend tax of 15 per cent (World Bank, 1999).
The analysis of sector-wise FDI inflows shows that service sector, computer software & hardware, telecommunication, power and fuels, chemicals, housing and real estate, construction activities, metallurgical industry, sectors attracted more FDI, which together accounted for more than 70 per cent of total FDI inflows during 2006-2010 (Table 2). Among these core sectors, service sector accounted for 22 per cent followed by computer software & hardware with 9 per cent, and telecommunication sector with 8 per cent of the total investment. The share of the FDI inflows to the top sectors is not very encouraging baring electrical equipment, telecommunications and power and fuels sectors in recent years
Table 3: Sectors attracting highest FDI Equity Inflows
(Amount Rupees in Crores)
Ranks
Sector
2006-07
2007-08
2008-09
2009-10
%age to total inflows (in terms of rupees)
1
Services Sector (Financial and Non-Financial)
21047
26589
28411
17074
22
2
Computer Software & Hardware
11786
5623
7329
2857
9
3
Telecommunications
2155
5103
11727
11442
8
4
Housing and Real Estate
2121
8749
12621
11472
8
5
Construction Activities
4424
6989
8792
10543
7
6
Power
713
3875
4382
6088
4
7
Automobile
1254
2697
5212
4696
4
8
Metallurgical Industries
7866
4686
4157
1613
3
9
Petroleum and Natural Gas
401
5729
1931
1085
2
10
Chemical (Excluding Fertilizers)
930
920
3427
1258
2
Source: Government of India (2010) FDI Statistics, Ministry of Commerce & Industry, Dept. of Industrial Policy & Promotion.
Role of FDI in the growth of Indian Economy:
Those who advocate a more liberal regime claim that FDI will provide the much-needed investible resources and foreign exchange for reviving Indian industry, improve the poor infrastructure, modernize the technological base, and foster greater competition in Indian manufacturing. On the other hand, critics of foreign capital point to the poor record of multinational corporations in India, their excessive profitability, and their limited technology transfer.
Countries like China have experienced large FDI inflows and high growth in recent years, while Korea grew rapidly without significant levels of foreign capital. Many Latin American countries have had periods of slow growth despite openness to foreign capital, while much of sub-Saharan Africa has experienced low growth and poor investment flows. In general, the relationship between FDI and growth seems to depend on countries-specific factors. Moreover, even if we did find some positive correlation between FDI and growth, the issue of causality remains unresolved. Does foreign capital increase the growth rate, or does the prospect of higher growth attract investment flows? In general, foreign capital flows can equally support a consumption boom or an investment boom. Rapid capital inflows to Mexico in the early 1990s fuelled a consumption boom, accompanied by large current account deficits, and eventual default. A sudden reversal of flows has catastrophic effects on investment, output, and the balance of payments, as evident from the experience of Mexico and East Asian countries in the 1990s. In such circumstances, volatility in capital flows leads to economic instability. Indeed many commentators have made a case for dampening international capital flows, especially flows of portfolio capital. Notably, some of the recent surge in capital flows to India has been in the form of portfolio capital rather than FDI in Greenfield ventures.
FDI flows to India are likely to remain small relative to the size of the economy. Two, econometric analysis of FDI flows to large developing countries found that FDI inflows seem to have a negative effect on domestic investment. In view of this evidence, it may be over-optimistic to believe that growth in FDI alone can increase the rate of growth.
However, FDI could serve as a catalyst for growth. There is some evidence of positive technological spillovers from R&D expenditure of multinational firms in India, and it is likely that business practices introduced by multinational firms can improve the international competitiveness of domestic firms. Of course, there is the legitimate concern that foreign direct investment could make sectors more concentrated in the long run. Historically, there is evidence that industrial concentration and foreign presence were positively correlated across industrial sectors in India. In the post-liberalization period, there is a tendency towards increasing concentration in some sectors. Multinational companies have been remarkably active in acquisitions, accounting for nearly a third of all corporate acquisitions over the period 1991-1997. Hindustan Lever, a 51 per cent foreign-owned subsidiary of Unilever, is one of the largest Multinationals in India, with interests in soap, detergents, tea, processed food, cosmetics, edible oil, etc. In a series of mergers and acquisitions after 1992, Hindustan Lever acquired Tata Oils (its principal rival in oil), Brooke Bond Lipton (previously an associate company), Pond's India (cosmetics), Kwality and Milkfood (both processed foods).
FDI Impact on Indian Economy:
Foreign Direct Investment (FDI) plays a fundamental role in the long-term economic development of a nation, not only as a source of capital but also provides opportunity for technological transfer and up gradation, access to global managerial skills and practices, optimal utilization of human capabilities and natural resources, making industry internationally competitive, strengthening infrastructure, raising productivity, opening up export markets, providing backward and forward linkages and access to international quality goods and services and augmenting employment opportunities.
FDI has - in many ways - enabled India to achieve a certain degree of financial stability, growth and development. This money has allowed India to focus on the areas that may have needed economic attention, and address the various problems that continue to challenge the country. India has continually sought to attract FDI from the world's major investors and is permitted through financial collaborations, through private equity or preferential allotments, by way of capital markets through Euro issues, and in joint ventures.
Constantly, India has been classified as among the most attractive investment destination by a various reputed international rating organizations. With its highly skilled & cost-effective work force, it offers immense opportunities not only for Business Process Outsourcing but also increasingly for the higher end of value chain in Knowledge Process Outsourcing & Engineering Process Outsourcing. A continuous review of the FDI policy & the associated procedures which includes, progressive simplification of procedures, dispensing with the need of multiple approvals from the regulatory authorities, extending the automatic route to more & more sectors, & allowing FDI in new sectors, is earnestly undertaken to create a more liberal, attractive & conducive investment climate.
Foreign investment brought by MNCs is also playing an important role in economic development of the India. Economic liberalization that swept across the world has very significantly changed the environment for foreign investment in India. It has attracted number of MNCs in India, which accounts for a significant share of the world's industrial investment, production, employment and trade. FDI can stimulate local entrepreneurship by providing increased competition. It lowers fixed cost of developing new products and therefore increases the rate of growth and is increasingly recognized as an important contributor for developing country's economic performance and international competitiveness.
Developing countries are liberalizing their foreign investment regimes and are seeking FDI not only as a source of funds and foreign exchange but also more importantly as a dynamic and efficient vehicle to secure the mush needed industries technology managerial experts and marketing expertise to improve on growth employment, productivity and export performance
Conclusion:
Foreign Direct Investment (FDI) is just like a panacea for ill economy of any country. FDI inflows have been increased in the post reform period and India now seems to be quite attractive place for such kind of investments. The study reveals the following points:
It is observed that FDI inflow in India was continuously increasing till 2008 but after that it is slightly reduced.
It has been observed that some of the countries like Israel, Thailand, Hong Kong, South Africa and Oman increased their share gradually during the period under study. It is also interesting to note that some of the new countries such as Hungary, Nepal, Virgin Islands, and Yemen are making significant investments in India.
Though service sector is one of the major sources of mobilizing FDI to India, plenty of scope exists.
Indian economy is largely agriculture based. There is plenty of scope in food processing, agriculture services and agriculture machinery. FDI in this sector should be encouraged.
Economic growth and development strongly depends on FDI and it plays a significant role in overall development of the country.
FDI has a large impact on country's trade balance, increasing labour standards and skills, transfer of technology and innovative ideas, skills and the general business climate.
FDI also provides opportunity for technological transfer and up gradation, access to global managerial skills and practices, optimal utilization of human capabilities and natural resources, making industry internationally competitive, opening up export markets, access to international quality goods and services and augmenting employment opportunities.
