Impact of FDI on Industrial Development of India

Transcription

1 Impact of FDI on Industrial Development of India Foreign capital and technology have been playing a vital role in India s industrial development. At the time of Independence, India inherited an industrial structure restricted to a few industries like textiles and sugar. Today, the industrial structure has been widely diversified covering broadly the entire range of consumer, intermediate and capital goods. In most of the manufactured products, the country has achieved a selfsufficiency with foreign collaboration, but primarily through domestic efforts. This is indicated by the decline in relative share in industrial production of the traditional manufacturing sectors like food and textiles and substantial increase in the production of new sectors like engineering and chemicals. The diversification of industrial structure is further reflected in commodity composition of our foreign trade in which the share of imports of manufactured products has become a growing component of exports. The rapid stride in industrialization has been accompanied by corresponding growth in technological and managerial skills obtained from abroad, not only for efficient operation of highly complex and sophisticated industrial enterprises but also for their planning, design and construction. Foreign capital has also been instrumental in filling the gap between domestic saving and the capital needed for development. Further, foreign capital has helped the country in supplying the much needed foreign exchange thereby filling the foreign exchange gap to a considerable extent. The foreign exchange gap equals the difference between imports and exports which can be filled by net capital inflows. Foreign capital has been a major factor in India s drive towards self-reliance and import substitution in critical areas. Import substitution has led to diversification of domestic production and consequent reduction in imports for certain critical areas like machinery manufacture, crude oil and petroleum products, infrastructural development, etc. The country has been able to export services such as project consultancy, design engineering and project implementation, etc. This has been made possible through the development of indigenous expertise with the help of foreign assistance. Besides, foreign capital has helped in boosting our exports by modernizing and diversifying India s industrial structure. The purpose of this study is to 95

2 point out the impact of foreign direct investment (FDI) on various parameters of Indian development. Industrial Growth during the Post-Liberalization Era The industrial sector registered impressive growth in and during whole of the 1990s. The economic reforms had begun in and it was hoped that industrial growth would pick-up in response to them. However, three years from to industrial growth remained rather low. In industrial sector showed a sign of recovery as overall industrial growth was 8.4 percent. In when rate of industrial growth rose further to 13 percent, both the government and industrialists attributed the excellent performance of the industrial sector to economic reforms. The post-reform boom petered out in The industrial growth in this year was as low as 6.1 percent. The three years that followed did not show much promise as in these years the average rate of industrial growth was 5.8 percent per annum. During , Indian industry appeared to return to a higher growth rate of 8.8 percent. There were buoyant expectations in the corporate sector. A survey of business confidence conducted by the FICCI indicated that about 70 percent of the 424 respondents expected industrial growth to rise to 10 percent in Capacity utilization was also expected to rise to 83 percent, putting an end to the period of slow industrial growth. However, industrial growth in and turned out to be only modest. Industrial production registered a growth rate of 6.7 percent in which was distinctly lower than the expected rate of industrial growth. During industrial production registered a modest growth of 5.0 percent, contributed by 5.3 percent in manufacturing, 4.0 percent in electricity and 3.7 percent in mining. The manufacturing sector grew by only 2.9 percent. Industrial sector registered a modest 5.8 percent growth in As per the index of industrial production, overall growth in the industrial sector improved from 5.7 percent in to 6.9 percent in , supported by growth rates of 5.1 percent in mining, 5.0 percent in electricity and 7.2 percent in manufacturing. Index of industrial production is given in following table 3.1 as per base year

3 Table 3.1: Index of Industrial Production (Base year ) Industry Mining Manufacturing Food products Beverages, tobacco and tobacco product Cotton textiles Fibre textiles Jute rather fibre textiles Textile products Wood & wood products Paper, paper product and printing Leather and fur products Basic chemicals & chemical products Rubber, plastic, petroleum & coal products Non-metallic mineral products Basic metals and alloy industries Metal products Non-electrical tools, machinery and machine Transport equipment Other manufacturing industry Electricity Source: Central Statistical Organization. Impact of FDI on Industrial Development Parameters Generally there are many parameters of industrial development including GDP, BOP, Exports, GFCF, Forex Reserve etc. These parameters are closely linked with the 97

4 performance of industry. Parameters of industrial development with reference to FDI are explained here: Foreign Direct Investment and GFCF Table 3.2: Foreign Direct Investment and Gross Fixed Capital Formation during Amount ` in crores Year FDI Agriculture Manufacture Trade Finance Public Total Growth and allied Source: National Income Statistics, CMIE, July 2009, pp. 189, ,201,210,214. This table 3.2 shows that inflows of foreign direct investment from ` 316 crore in the year 1992 to ` 9338 crore in the year 2000 registering an increase of times on the base year Inflow of FDI increased upto ` crore in the year 2001 registering an increase of 8.77 times over the base year Inflows of FDI are having fluctuating rate 98

5 trends during the study period. It is more or less the same during the study period. The table 3.2 further shows that inward inflows of FDI as a percentage of gross fixed capital formation by industry origin including agriculture and allied activities sector, manufacturing sector; trade, hotels, transport and communication sector; financing, insurance, real estate and business services; and community, social and personal services have increased from ` crore to ` crore; ` crore to ` crore; ` crore to ` crore; ` crore to ` crore; and ` crore to ` crore respectively during the above said period. The share of the industrial sector in Gross Fixed Capital Formation shows increasing trends during the period. The share of industrial sector has increased from ` crore to ` crore during the same period. While the growth rate of the industrial sector in GFCF turns out to be 6.72, 5.25, 7.70, 10.81, 9.28, 9.20, 9.52, 10.65, 9.48, 9.90, 10.20, 11.79, 14.39, 16.97, 19.11, 21.05, percent during the time period of 1992 to 2009 respectively. Analysis In order to measure the impact of FDI inflows in expressing their share as a percentage of gross fixed capital formation, multiple correlation technique has been used. Correlation co-efficient is a measure of degree of covariability between FDI and GFCF during the period However, the share of industrial sector to GFCF for a period of 18 years has been classified as under: 1. Agriculture and allied activities sector; 2. Manufacturing, electricity, gas and water supply sector; 3. Trade, hotels, transport and communication sector; 4. Financing, insurance, real estate and business service sector; 5. Community, social and personal services sector. Table 3.3: Correlation result of FDI and the GFCF at factor cost by industry of origin Technique Agriculture Manufacturing Trade Financial Community and allied Correlation co-efficient (r) Co-efficient of determination r Probable error

6 6PE r>6pe r<6pe r>6pe r>6pe r>6pe The results of multiple correlation, co-efficient of determination and probable error (PE) have been presented in the table 3.3. The results disclose that the correlation (r) between FDI and trade sector is found to be as high as.95 and its co-efficient of determination (r 2 ) is.90, which represents a positive high significant correlation and the dependent variable (i.e. GFCF of trade, hotels, transport and communication sector) shall be expected to have influenced to the extent of 90 percent in response to the change in the independent variable (i.e. FDI). Correlation co-efficient between FDI and manufacturing, electricity, gas and water supply, construction sector found at.43 with r 2 of.18, also positive low significant correlation and the independent variable (FDI) shall influence the dependent variable (i.e. GFCF of manufacturing, electricity, gas and water supply construction factor) to the extent of 18 percent. Correlation between FDI and other sectors being.87,.79 and.91 respectively in case of agriculture and allied activities sector, financing, insurance and business services sector and its co-efficient of determination (r 2 ) are.76,.62 and.83 respectively which represents a positive high significant correlation and the dependent variable (i.e. GFCF of agriculture and allied sector; financing, insurance, business activities and community and social, personal services sector) shall be expected to have influenced to the extent of 76, 82 and 83 percent in response to the change in the independent variable (i.e. FDI). Added to this, the analysis has been done with the help of probable error. Since the co-efficient of correlation is found more than six times of probable error except the manufacturing sector, so it can be regarded as significant. 100

7 Foreign Direct Investment and Gross Domestic Product Table 3.4: Foreign Direct Investment and Gross Domestic Product during Amount ` in crores Year FDI Agriculture and allied Mining and quarrying Manufacture Trade Finance Public Total Growth rate Source: National Income Statistics, CMIE, July 2009, pp. 15,20,21,24,25,27,36,40,41. As the table 3.4 exhibits that inflows of foreign direct investment from ` 316 crore in the year 1992 to ` 9338 crore in the year 2000 registering an increase of times on the base year Inflows of FDI increased upto ` crore in the year 2009 as compared to ` crore in the year 2001 registering an increase of 8.77 times over the base year Inflows of FDI were found having fluctuating trends during the study period. It is more or less the same during the study period. The share of the industrial 101

8 sector in Gross Domestic Product (GDP) by agriculture and allied activities sector; mining and quarrying sector; manufacturing, electricity, gas and water supply, construction sector; trade, hotels, transport and communication sector; financing, insurance, real estate and business services; and community, social and personal services sector have increased from ` crore to ` crore; ` crore to ` crore; ` crore to ` crore; ` crore to ` crore; ` crore to ` crore; and ` crore to ` crore respectively during the study period. The share of the industrial sector in Gross Domestic Product (GDP) is increasing during the period. The share of industrial sector has increased from ` crore to ` crore during the same period. While the growth rate of the industrial sector in GDP turns out to be 14.70, 16.66, 18.57, 20.58, 22.44, 22.66, 24.57, 25.08, 24.89, 25.31, 25.51, 27.27, 29.56, 32.32, 35.74, percent during the time period of 1992 to 2009 respectively. Analysis To analyse the impact of FDI on the industrial share to Gross Domestic Product (GDP) multiple correlation technique has been applied. Correlation co-efficient is a measure of degree of covariability between FDI and GDP during the period However, the share of industrial sector to GDP for a period of 18 years has been classified as under: 1. Agriculture and allied activities sector 2. Mining and quarrying sector 3. Manufacturing, electricity, gas and water supply sector 4. Trade, hotels, transport and communication sector 5. Financing, insurance, real estate and business service sector 6. Community, social and personal services sector. Table 3.5 Correlation result of FDI and the GDP at factor cost by industry of origin Technique Agriculture Mining and Manufacturing Trade Financial Community and allied quarrying Correlation coefficient (r) Co-efficient of

9 determination r 2 Probable error P.E..24 r>6pe.18 r>6pe.12 r>6pe.12 r>6pe.18 r>6pe.18 r>6pe The results of multiple correlation, correlation coefficient of determination and probable error (PE) have been presented in the table 3.5. The above results disclose that the correlation (r) between FDI and manufacturing, electricity, gas and water supply construction sector is found to be as high as.93 and its co-efficient determination (r 2 ) is.86, which represents a positive high significant correlation and the independent variable (FDI) shall influence the dependent variable (i.e. GDP of manufacturing, electricity gas and water supply, construction sector) to the extent of 86 percent. Correlation co-efficient between FDI and trade, hotels, transport and communication sector found at.92 with r 2 of.85, also shows positive high significant. Correlation co-efficient between FDI and financial, insurance, real estate and business services sector is.90 indicates positive high significant correlation and its co-efficient of determination is.81, which indicates that the dependent variable (i.e. GDP of financing, insurance, real estate and business service sector) shall be expected to have influenced to the extent of 81 percent in response to the change in the independent variable (i.e. FDI). Whereas, correlation between FDI and other sector being.88,.89 and.90 respectively in case of agriculture and allied activities sector, mining and quarrying sector, and community, social and personal services sector and its co-efficient of determination (r 2 ) are.77,.79 and.81 respectively, which represents a positive high significant correlation and the dependent variable (i.e. GDP of agriculture and allied sector, mining and quarrying sector and community, social and personal service sector) shall be expected to have influenced to the extent of 77, 79, 81 percent in response to the change in the independent variable (i.e. FDI). This analysis has been done with the help of probable error. Since the co-efficient of correlation is found more than six times of probable error, so it can be regarded as significant. 103

10 Foreign Direct Investment and Foreign Exchange Reserves during the year Table 3.6: Foreign Direct Investment and Foreign Exchange Reserves during US $ million Year FDI Forex Reserve Growth Rate CAGR Source: Foreign Trade & BOP, CMIE, October 2009, p Table 3.6 shows that the inflows of foreign direct investment have increased from US $129 million US $ million in the period from 1992 to Inflows of FDI show 104

11 fluctuating trends during the same period. The amount of Forex Reserve has increased from US $ 9220 million to US $ million during the period under study. It has an increasing trend during the same period except the year It is revealed from the table that the growth rate of Forex Reserve turns out to be 6.64, 54.41, 57.66, 33.80, 37.32, 36.42, 36.06, 39.07, 39.84, 48.68, 65.94, 93.76, , , , , percent during the time period of 1992 to 2009 respectively. The CAGR of Forex Reserve is percent during the above said period. Analysis To analyse the FDI and Forex Reserve, correlation analysis has been used. Correlation co-efficient is a measure of degree of covariability between FDI and Forex Reserve during the period is presented below: r =.93 r 2 =.86 PE =.022 The result shows that the correlation co-efficient between the selected variable i.e. FDI and Forex Reserve is.93 indicates positive high significant correlation and its co-efficient of determination (r 2 ) is.86 which indicates that the independent variable (FDI) shall influence the dependent variable (Forex Reserve) to the extent of 86 percent. This analysis has been done with the help of probable error. Since the coefficient of correlation is found more than six times of probable error, so it can be regarded as significant. Testing of Hypothesis H 0 : It is hypothesized that there is no relationship between Foreign Direct Investment and Forex Reserves. H 1 : It is hypothesized that there is relationship between Foreign Investment and Forex Reserves. The value has been further tested through the analysis of variance (ANOVA) technique. Table 3.7 FDI and Forex Reserve Source of Sum of square Degree of Mean square F variation freedom Between FDI and Forex 105

12 Within years Residual Total Result: Since, the calculated value between the two variables (i.e. FDI and Forex Reserve is greater than the table value 4.45 at 5 percent level of significance. Hence, the (H 0 ) hypothesis is rejected and H 1 is accepted, it means there is a significance relationship between FDI and Forex Reserves. The calculated value of 1.59 within the years is less than the table value 2.22 at 5 percent level of significance. Therefore, the (H 0 ) hypothesis is accepted and H 1 is rejected. It means there is no (H 0 ) significant relationship within years. Foreign Direct Investment and Export Table 3.8: Foreign Direct Investment and Export during US $ million Year FDI Export Growth Rate

13 CAGR 35.56% 13.93% - Source: Directorate General of Commercial Intelligence and Statistics, Nov. 2009, pp This table 3.8 shows that the inflows of Foreign Direct Investment from US $ 129 million in the year 1992 to US $ 2155 million in the year 2000 registering an increase of times on the base year Inflows of FDI increased upto US $ million in the year 2009 as compared to US $ 4029 million in the year 2001 registering an increase of 8.73 times over the base year Inflows of FDI shows fluctuating trends during the study period. The amount of export has increased from US $ million to US $ million in the period from 1992 to It has an increasing trend during the same period. It is revealed from the table that the growth rate of exports turns out to be 3.76, 12.24, 15.79, 19.49, 17.47, 15.99, 12.28, 13.26, 16.60, 14.53, 17.74, 21.45, 28.28, 34.08, 40.51, 50.82, percent during the time period of 1992 to 2009 respectively. The CAGR of export is percent in the above said period. Analysis The analysis is based on assumption that the other factors being constant, export performance of the Indian industry is due to liberalization of foreign direct investment regime. It can be inferred that the FDI has an impact on the export promotion by the Indian industry. Whereas the impact is significant we are not or not is tested by using correlation techniques. Correlation co-efficient and a measure of degree of covariability between FDI and export during the period is presented below: r = 0.96 r 2 = 0.92 PE = The analysis shows that the correlation co-efficient between the selected variables i.e. FDI and exports is.96 indicates positive high significant correlation and its co-efficient of determination (r 2 ) is.92, which indicates that the independent variable (FDI) shall influence the dependent variable (export) to the extent of 92 percent. Added to this, the analysis has been done with the help of probable error. Since the co-efficient of correlation is found more than six times of probable error, so it can be regarded as 107

14 significant. However, this impact has been further tested through analysis of variance (ANOVA) by using two-way classification model. Testing of Hypothesis H 0 : It is hypothesized that there is no relationship between Foreign Direct Investment and Exports. H 1 : It is hypothesized that there is relationship between Foreign Direct Investment and Exports. Applying the analysis of variance technique, we get the following result: Table 3.9: FDI and Export Source of Sum of square Degree of Mean square F variation freedom Between FDI and Export Within years Residual Total Result: Since, the calculated value between FDI and export is greater than the table value at 4.45 at 5 percent level of significance. Therefore the (H 0 ) hypothesis is rejected and H 1 is accepted. It means there is a significant relationship between two variables. It indicates that there is a highly significant relationship between Foreign Direct Investment and Export. The calculated value within the years 2.35 is greater than the table 2.22 at 5 percent level of significance. Hence, the (H 0 ) hypothesis is rejected and H 1 is accepted. It means there is a significance relationship within years. Foreign Direct Investment and BOP Table 3.10: Foreign Direct Investment and Balance of Payments in India during US $ million Year FDI BOP Growth Rate 108

15 Source: Directorate General of Commercial Intelligence and Statistics, Nov. 2009, pp Table 3.10 shows that the inflow of foreign direct investment increased from US $ 129 million US $ million in the period from 1992 to Inflows of FDI are having fluctuating trends during the same period. The amount of balance of payment has increased from US $ 2599 million in 1992 to US $ million in the year 2008 except the year 1993, 1996 and It IS revealed from the table that the growth rate of balance of payments (BOP) turns out to be , , 40.89, , 32.27, 12.26, 8.92, 18.29, 13.98, 35.24, 50.32, 92.41, 69.73, 34.22, 87.23, , percent during the time period of 1992 to 2009 respectively. Analysis To analyse the FDI and BOP correlationship analysis has been used. Correlation coefficient is a measure of degree of covariability between FDI and BOP during the period is presented below: 109

16 r =.45 r 2 =.20 PE =.13 The result shows that the correlation co-efficient between the selected variable i.e. FDI and BOP is.45 indicates low positive low significant correlation and its co-efficient of determination (r 2 ) is.20, which indicates that the independent variable (FDI) shall influence the independent variable (BOP) to the extent of 20 percent. This analysis has been done with the help of probable error. Since the coefficient of correlation is found less than six times of probable error, so it can be regarded as not significant. The value has been further tested through the analysis of variance (ANOVA) technique. Testing of Hypothesis H 0 : It is hypothesized that there is no relationship between Foreign Direct Investment and Balance of Payments. H 1 : It is hypothesized that there is relationship between Foreign Direct Investment and Balance of Payment. Table 3.11: FDI and BOP Source of Sum of square Degree of Mean square F variation freedom Between FDI and Forex Within years Residual Total Result: Since, the calculated value between the two variables (i.e. FDI and BOP) 2 is less than the table value 4.45 at 5 percent level of significance. Hence, the H 0 hypothesis is accepted and it means there is no significant relationship between FDI and BOP. The calculated value within the years 2.65 is greater than the table value 2.22 at 5 percent level of significance. Therefore, the (H 0 ) hypothesis is rejected and H 1 is accepted. Its mean there is a significance relationship within years. 110

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