Foreign Direct Investment In India And Its Relation With Selected Economic Indicators Of India: A Critical Evaluation

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1 Volume 2, No7, July 213 Foreign Direct Investment In India And Its Relation With Selected Economic Indicators Of India: A Critical Evaluation Ajay Kumar, Assistant Professor, Department of Business Administration, PCTE Group of Institutes, Ludhiana ABSTRACT Foreign Direct investment in any country has been a driver of growth. While allowing FDI the country opens and gives the multinational organization an opportunity to exploit the untapped market. At the same time it gives lots of opportunities to the host country in terms of providing new job opportunities, bringing capital, technology, new skills, better work culture and expertise and so on. It leads to a better economic phase and become an important factor which gives the country s GDP a boost. In India after liberalisation privatization and globalization act 1991, the market became open. It led the country in an era of better economic development which leads to continuous growth in GDP. By the entrance of MNCs in different sectors, which were closed till now; Country has become one of the fastest growing economies of the world. Because of FDI a huge flow of capital came in the country which helped and helping the different secotrs a various ways. And all these sectors are contributing more in the growth of country s GDP. Now it is the third largest economy of the world in terms of Purchasing power parity. The country has gained the growth rate of over 6% after the LPG act on an average. The flow of FDI started after the LPG act. This research focuses on the flow of FDI in India and its impact on the economy while critically evaluating the impact on GDP. Introduction Investment Investment is usually understood as financial contribution to the capital of an enterprise or purchase of shares in the enterprise. Foreign investment is investment in an enterprise by a Non- Resident irrespective of whether this involves new capital or re-investment of earnings. Foreign investment is of two kinds (i) Foreign Direct Investment (FDI) and (ii) Foreign Portfolio Investment. Definition International Monetary Fund (IMF) and Organization for Economic Cooperation and Development(OECD) define FDI similarly as a category of cross border investment made by a resident in one economy (the direct investor) with the objective of establishing a lasting interest in an enterprise (the direct investment enterprise) that is resident in an economy other than that of the direct investor. The motivation of the direct investor is a strategic long term relationship with the direct investment enterprise to ensure the significant degree of influence by the direct investor in the management of the direct investment enterprise. Direct investment allows the direct investor to gain access to the direct investment enterprise which it might otherwise be unable to do. The objectives of direct investment are different from those of portfolio investment whereby investors do not generally expect to influence the management of the enterprise. Who Can Invest In India? a) A non-resident entity (other than a citizen of Pakistan or an entity incorporated in Pakistan) can invest in India, subject to the FDI Policy. A citizen of Bangladesh or an entity incorporated in Bangladesh can invest in India under the FDI Policy, only under the Government route. b) NRIs resident in Nepal and Bhutan as well as citizens of Nepal and Bhutan are permitted to invest in the capital of Indian companies on repatriation basis, subject to the condition that the amount of consideration for such investment shall be paid only by way of inward remittance in free foreign exchange through normal banking channels. c) OCBs have been derecognized as a class of Investors in India with effect from September 16, 23. Erstwhile OCBs which are incorporated outside India and are not under the adverse notice of RBI can make fresh investments under FDI Policy as incorporated non-resident entities, with the prior approval of Government of India if the investment is through Government route; and with the prior approval of RBI if the investment is through Automatic route. Blue Ocean Research Journals 15

2 Volume 2, No7, July 213 Key Factors Attracting FDI in INDIA a) Open economy, highh growth rate b) Large GDP and Market Potential c) Favorable Laws d) Political and economic stability e) Cheap labor f) Skilled Labor force g) Low environmental protection h) Low Taxation i) Natural resources j) Infrastructure facilities k) Trade facilitation Entry Routes For Investment Investments can be made by non-residents in the equity shares/fully, compulsorily and mandatorily convertiblee debentures/ fully, compulsorily and mandatorily convertiblee preference shares of an Indian company, throughh two routes; the Automatic Route and the Government Route. Under the Automatic Route, the non-resident investor or the Indian company does not requiree any approval from the RBI or Government of India for the investment. Under the Government Route, prior approval of the Government of India through Foreign Investmentt Promotion Board (FIPB) is required. Proposals for foreign investment under Government route as laid down in the FDI policy from time to time are considered by the Foreign Investmentt Promotion Board (FIPB) in Department of Economic Affairs (DEA), Ministry of Finance. Objective Of The Research a) To determine the trend of FDI in India for the past as well as the coming years. b) To analyze thee sectors attracting the FDI. c) TO know thee relation between FDI and the various economic indicators. Research Methodology Research design: In this research project, the research design is descriptive in nature. The historical data has been collected from the various sources which are secondary in nature. Manyy statistical tools have been used for analysis of data and their interpretation in this research which are as follows: a) Arithmeticc Mean b) Pearson Correlation c) Regression d) Trend Analysis e) Two tailed significance f) Null Hypothesis g) Bar Graph h) Line Graph FLOW OF FDII IN INDIA Graph: 4.1. Sectors attracting highest FDI Equity (Inflows in INDIA from April'-January'13 in Rs. Crore) Flow of Fdi in SectorsIn Rs. Crore Poly. (Flow of Fdi in SectorsIn Rs. Crore) Note: (i)** Services sector includes Financial, Banking, Insurance, Non-Financial / Business, Outsourcing, R&D, Courier, Tech. Testing and Analysis (ii) Cumulative Sector- wise FDI equity inflows (from April, 2 to January, 213) are at - Annex- B. (iii) FDI Sectoral data has been revalidated in line with that of RBI, which reflects minor changes in the FDI figures (increase/decrease) as compared to the earlier published sectoral data. (iv) Amount is in Rs. Crores Blue Ocean Research Journals 16

3 Volume 2, No7, July 213 Graph: 4.2. Inflows OF FDI in Services Sector (In Rs. Crores) Cumulative Inflows of FDI in Service SSector In Rs. Crores(April' Dec.'1) Poly. (Cumulative Inflows of FDI in Service SSector In Rs. Crores(April' Dec.'1)) Graph:4.3. Inflows of FDI in Computer Software & Hardware Sector (In Rs. Crores) Flow of FDI in Computer SoftwareIn Rs. Crores Poly. (Flow of FDI in Computer SoftwareIn Rs. Crores) Graph:4.4. Inflows of FDI in Telecommunications (In Rs. Crores) Telecomunic Blue Ocean Research Journals 17

4 Volume 2, No7, July Graph:4.5. Inflows of FDI In Housing & Real Estate Sector (In Rs. Crores) Housing & Real Estate Poly. ( Housing & Real Estate) Graph:4.6. Inflows of FDI In Construction Activities (In Rs. Crores) (April March) Construction Activities Poly. (Construction Activities) Graph:4.7. Inflows of FDI In Power Sector (In Rs. Crores) (April March) Power Poly. (Power) Graph:4.8. Inflows of FDI in Automobilee Sector (In Rs. Crores) Autom Blue Ocean Research Journals 18

5 Volume 2, No7, July Graph:4.9. Inflows of FDI in Metallurgicall Industry (In Rs. Crores) Metallurgical Industry Poly. (Metallurgical Industry) Graph:4.1. Inflows of FDI In Petroleum & Natural Gas (In Rs. Crores) (April March) (April March) Petroleum & Natural Gas Poly. (Petroleum & Natural Gas) 2 Graph:4.. Inflows of FDI in Chemicals (Other than Fertilizers) (In Rs. Crores) Chemicals (April March) Blue Ocean Research Journals 19

6 Volume 2, No7, July 213 Graph:4.12. FINANCIAL YEAR-WISE FDI INFLOWS DATAA (In Rs. Crores) As Per International Best Practices: (Data on FDI have been revised since 2-1 with expended coverage to approach International Best Practices) (Amount US$ million) 35 FIPB Route/RBI'S 3 Automatic 25 Route/Acquisiti 2 on Route 15 Equity capital of unincorporated 1 bodies 5 RE Invested Earnings Source: (i) RBIs Bulletin March, 213 dt (Table No. 34 FOREIGN INVESTMENTT INFLOWS). (ii) Inflows under the acquisition of shares in March, 2, August, 2 & October, 2, include net FDI on account of transfer of participating interest from Reliance Industries Ltd. to BP Exploration (Alpha). (iii) RBI had included Swap of Shares of US$ 3.1 billion under equity components during December 26. (iv) Monthly data on components of FDII as per expended coverage are not available. These data, therefore, are not comparable with FDI data for previous years. (v) Figures updated by RBI up to January, 213. Figures for equity capital of unincorporated bodies for 21- are estimates. (P) All figures are provisional + Data in respect of Re-invested earnings & Other capital for the years 29-1,, 21- & are estimated as average of previous two years. Graph: 413. Total FDI Flows (amount USD Million) Amount In USD Million Financial Years 2 1 to (up to January, 213)Total FDI Flows( amount USD Million) Blue Ocean Research Journals 2

7 Volume 2, No7, July 213 Analysiss The earlier research has shown that FDI has a positive impact on the economy of the host country. The various economic determinants have been taken to analyze the impact of FDI on Indian economy. The first economic determinant that has been taken to see the effect of FDI is Grosss domestic product of India. The GDP of India is increasing continuously from the last decadee at a positive rate in spite of the fact thatt the world has gone severe economic recession in 28-1 and economic slowdown in 2-1. The gross domestic product of Indiaa is highly correlated with the flow of foreign direct investment in the country. The correlation is.878 * **. This shows that thee FDI has a positive impact on the increasing GDP of the country. Graph:-5.1: Gross Domestic Product at Factor Cost By Industry off Origin (Rs. Crore) Grosss Domestic Product at Factor Cost Poly. (Gross Domestic Product at Factor Cost) Table: 5.1:- Correlation between GDP and FDII GDP GNP PERCAPITAA EXPORT GROSSSAVING FDI GDP Pearson Correlation 1.978**.98**.982**.79**.878** Sig. (2-tailed) N 1 **. Correlation is significant at the.1 level (2-tailed). Gross National Product Net National Product is the other economic determinant on whichh the impact of FDI is to be measured As we can see from the graph that the GNP and the net national product varies from each other. The FDI and the GNP of the country is highly correlated. According to the karl pearson correlation method the correlation is.835**. Blue Ocean Research Journals 21

8 Volume 2, No7, July 213 Graph:-5.2: Gross National Product & Net National Product att Factor Cost (Rs. Crore)- At Current Prices 1 Gross National Product at Factor Cost(Rs. Crore) At Current Prices Net National Product at Factor 6 cost( (Rs. Crore) At Current Prices Table: 5.2:-Correlation between GNP and FDI GNP GDP GNP Pearson Correlation Sig. (2-Tailed) N. 978**. 1 PER CAPITA EXPORT GROSS SAVING FDI 1.* *..991***..832**.1.835**.1 **. Correlation is significant at the.1 level (2-tailed). The next economic factor is Per Capita Net National Product in Rs. At Current Prices As we can see the per capita income of the country is raising at a very high rate. While the world was facing the great economic recession, in India the per capita income wass raising at a very faster rate. This leadss to the attraction for the foreign investment. From the correlation table it is significant that both thesee factors are very highly correlated Graph:-5.3: Per Capita Net National Productt In Rs. At Current Prices Per Capita Net National Product In Rs. At Current Prices Poly. (Per Capita Net National Product In Rs. At Current Prices) Blue Ocean Research Journals 22

9 Volume 2, No7, July 213 Table: 5.3: -Correlation between Per Capita Income and FDI PER CAPITA Pearson Correlation Sig. (2-tailed) N GDP GNP.98** 1.**.. PERCAPITA EXPORT GROSSSAVING FDI 1.992**.831**.84**..2.1 **. Correlation is significant at the.1 level (2-tailed). Exports (Including Re-Export) In Rs. Crore. As export is the greatest factor for the growth of any economy. Increasing export resembless the economy which is growing. The foreign investment done in various sector leads to higher production due to increased technology and with lesser labor cost the per unit cost decreases which leads to better export. The FDI and EXPORT go together for any economy. We can see from the correlation table that both these economic factors highly correlated with each other Graph: 5.4: Exports (Including Re-Export) In Rs. Crore Exports(Including Re Export) Poly. (Exports(Including Re Export)) Table: 5.4:-Correlation between Export and FDII EXPORT Pearson Correlation Sig. (2-tailed) N GDP GNP PERCAPITA EXPORT. 982**.991**.992** GROSSSAVING FDI.84***.883***.3. **. Correlation is significant at t the.1 level (2-tailed). leadss to situation where people are earning more than Gross Domestic Saving (Household/Privatee theree daily necessities. So it very important economic Corporate & Public) is the factor based on whichh factor of any country which shows the extra income the strength of an economy is to be considered. As generated by the people of the country. In India we the savingss of the common people risess the economy can see that it is increasing at very good rate. The relation between foreign investment and the savings is once again correlated. It shows as the investment Blue Ocean Research Journals 23

10 Volume 2, No7, July 213 rises in the country the opportunity for extra income (more than the daily household necessities) increases. Graph: 5.5: Gross Domestic Saving (household/ d/private Corporate & Public) 3 Gross Domestic Saving(Household/Private Corporate & Public) 25 Poly. (Gross Domestic Saving(Household/Private Corporate & Public)) Table:-5.5 correlation between gross saving and FDI GDP GNP PERCAPITAA EXPORT GROSSSAVING FDI GROSS SAVING Pearson Correlation.79**.832**.831**.84** Sig. (2-tailed) N **. Correlation is significant at the.1 level (2-tailed). Blue Ocean Research Journals 24

11 Volume 2, No7, July 213 Table:-5.6 Correlations PER GROSS GDP GNP CAPITA EXPORT SAVING FDI GDP Pearson Correlation **.98 **.982 **.79 **.878 ** Sig. (2-tailed) N GNP Pearson Correlation.978 ** 1 1. **.991 **.832 **.835 ** Sig. (2-tailed) N PER CAPITA Pearson Correlation.98 ** 1. ** **.831 **.84 ** Sig. (2-tailed) N EXPORT Pearson Correlation.982 **.991 **.992 ** 1.84 **.883 ** Sig. (2-tailed) N 12 GROSS SAVING Pearson Correlation.79 **.832 **.831 **.84 ** Sig. (2-tailed) N FDI Pearson Correlation.878 **.835 **.84 **.883 ** Sig. (2-tailed) N **. Correlation is significant at the.1 level (2-tailed). References [1] Brimble, Peter (22), The Foreign Direct Investment: Performance and Attraction The Case of Thailand, 22. Workshop on Foreign Direct Investment: Opportunities and Challenges for Cambodia, Laos and Vietnam in Hanoi, August. [2] Eichengreen Barry and Hui Tong (25), Is China s FDI coming at the Expense of Other Countries? NBER Working Paper No. 335, May. [3] Fortanier, Fabienne (21), Foreign Direct Investment and Sustainable Development, OECD, November. [4] Fung, K.C., HitomiIizaka, Sarah Tong (22), Foreign Direct Investment in China: Policy, Trend and Impact, IMF Working Paper No.74 [5] Jenkins, Carolyn and Lynne Thomas (22), Foreign Direct Investment in Southern Africa: Determinants, Characteristics and Implications for Economic Growth and Poverty Alleviation, October. [6] Kearney A.T. (21), A. T. Kearney Global Management Consultants : Expanding Opportunities for Global Retailers, The 21 A.T. Kearney Global Retail Development Index. Blue Ocean Research Journals 25

12 Volume 2, No7, July 213 [7] Lipsey, Robert E. (27), Defining and Measuring the Location of FDI Output, NBER Working Paper No , March. [8] Long, Guoqiang (25), China s Policies on FDI: Review and Evaluation In Does Foreign Direct Investment Promote Development?, eds., Moran Theodore H, Edward M. Graham and Magnus Blomström, Institute of International Economics. [9] Piteli,Eleni E. N. (21), Determinants of Foreign Direct Investment in Developed Countries: A Comparison between European and Non-European Countries, Contributions to Political Economy Vol. 29, pp [1] Rajan,Ramkishen S., Sunil Rongala and Ramya Ghosh (28), Attracting Foreign Direct Investment (FDI) to India, April. [] Department of Industrial Policy & Promotion. (n.d.). Retrieved may 2, 213, from dipp.nic.in [12] fdi-inflow-list-of-sectors-where-fdi-isallowed-in-india [13] ntent.aspx?id=2513 Blue Ocean Research Journals 26