FOREIGN DIRECT INVESTMENT IN INDIAN ECONOMY: PERFORMANCES AND CHANGING TRENDS IN THE POST REFORM PERIOD

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1 Volume 6, Issue 7 (July, 2017) UGC APPROVED Online ISSN Published by: Abhinav Publication Abhinav National Monthly Refereed Journal of Research in FOREIGN DIRECT INVESTMENT IN INDIAN ECONOMY: PERFORMANCES AND CHANGING TRENDS IN THE POST REFORM PERIOD Ramesha K 1 Research Scholar, Department of Economics Bangalore University, Bangalore, India rameshakrp@gmail.com Dr. T. Rajendra Prasad 2 Professor,Department of Economics Bangalore University, Bangalore, India trprasadbub@gmail.com Mukundanaik D M 3 Associate Professor, department of Commerce APS College of Commerce N R Colony, Bengaluru, India dmnaik1964@gmail.com ABSTRACT Any particular economy and its sustainable development largely depend upon the savings and investments. But the modern developing economies have been suffering from shortages of savings due to many factors such as increased expenditure and deficit financing. To make successful of the various ambitious programmes of the government investment plays very critical role. The larger the gap between the domestic savings and investment larger the requirements of external capital inflows particularly foreign direct investment. There is a considerable contribution of the GDP in many economies including India. After the introduction of economic reformation in 1991 India had been adopted liberalization policies and allowed FDI into many sectors in Indian economy. The overall trend shows that, there is considerable increase in the FDI inflows in the post-reform period in many sectors in the economy. Now-a-days there is an increased significance for the FDI to achieve rapid sustainable development. This paper has made an attempt to study the changing pattern and trend in FDI inflows as per the international best practices and Department of Industrial Policy and Promotion in India and also studying the policy framework for FDI in India. Keywords: foreign direct investment, domestic savings and investment, liberalization. INTRODUCTION The modern economies are striving a lot for the eradication of poverty, unemployment, inflation, regional inequalities, income imbalance and other socio-economic ills. But these problems are not been reducing since the direct programmes are being implementing for many years. Later the economists and policy makers have been suggested to attain the economic growth and development to revamp the economy by getting the solutions to these problems. The attainment of economic growth and economic development are the direct solutions of these problems. The economic growth and development will be attained by the sufficient investment. When the domestic savings are less it leads Available online on 1

2 to less investment in the country. Therefore it is necessary to barrow FDI as an external capital inflow into the economy. In this regard FDI occupies a major role in the modern economies. It is also important to examine the changing trend in the FDI inflows in Indian economy to gauge the economic development. OBJECTIVE 1. To study the FDI inflows and changing trends in India as per International Best Practices. 2. To examine the FDI inflows and changing trends in India as per Department of Industrial Policy and Promotions (DIPP s). 3. To know the FDI Policy Framework in Post-Reform Period in India. FDI INFLOWS AS PER INTERNATIONAL BEST PRACTICES The table-1 shows detailed information on the FDI inflows as per international best practices. It includes the FDI inflows FIPB Route/RBI's Automatic Route, Acquisition Route, Equity capital of unincorporated bodies, Investment by FIIs Foreign Investors Fund (net), Re-invested earnings, other capital, Total FDI Flows, Equity capital of unincorporated bodies. From the table-1, it is clear that, during this reference period from to there was percent increase in the FDI equity inflows through FIPB Route/RBI's Automatic Route, Acquisition Route. The FDI inflows in the equity capital of unincorporated bodies were also increased by 20 percent. Re-invested earnings were also increased to percent during these 15 years. The other capital investment was also increased by percent and the total FDI inflows were increased by percent. Table-1: FDI Inflows as per International Best Practices YEAR Foreign Direct Investment (FDI) (Amount in US $) million Investme Equity Reinvested Other Total Annual nt by FIPB Equity capital FDI Growth FIIs Route/R capital of earnings Flows Rates Foreign BI's unincorpora (%) Investors Automati ted bodies Fund c Route/ (net) Acquisiti on Route (April-June 2015) VOL. 6, ISSUE 7 (July, 2017) 2

3 CUMULATI VE TOTAL (from April,2000 to June 2015) Compounded Annual Growth Rate (CAGR) (18.78 %) Source: RBI Bulletin July (20.10%) (13.47% ) (18.19 %) (17.33 %) Graph-1: Annual Growth Rates of FDI equity from FIPB Route/RBI's Automatic Route/Acquisition Route The above graph-1 shows the Annual Growth Rates of FDI equity from FIPB Route/RBI's Automatic Route/Acquisition Route. It is very clear from the graph-1 that during , , , and there was negative growth in the FDI equity inflows. But in the rest of the years there was a positive growth rate in the FDI equity inflows. It is also important to know that, during the year there was high growth of FDI equity inflow into the Indian economy at the rate of 18.1 percent. Graph-2: Annual Growth Rates of Equity capital of unincorporated bodies. The graph-2 shows the Annual Growth Rates of Equity capital of unincorporated bodies. During the years , , , , the FDI equity capital of unincorporated bodies were VOL. 6, ISSUE 7 (July, 2017) 3

4 declined by 1 percent, 8.3 percent, 6.9 percent, and 4.3 percent respectively. During there was sudden increase in the FDI inflows at the rate of percent. Graph-3: Annual Growth Rates of Re-invested earnings. Graph-3 shows the annual growth rates of re-invested earnings. The economic growth has also been depending upon the reinvestment of earnings of FDI. If we look into the re-invested earnings there was a positive growth except during , , and In these years the growth rates have been declined by 20 percent, 4 percent, 31 percent and 9 percent respectively. Graph-4: Annual Growth Rates of total FDI inflows. The graph-4 shows the Annual Growth Rates of total FDI inflows. The total FDI inflows were increased by percent. There was a decline in the total FDI inflows during (18 percent), (14 percent), (10 percent), (8 percent), and (26 percent). But in the remaining years there was positive significant increase in the FDI inflows. But during there was 155 percent increase in the FDI inflows into the Indian economy. FDI INFLOWS AS PER DEPARTMENT OF INDUSTRIAL POLICY ANDPROMOTIONS (DIPP S) Table-2: FDI Inflows as per Department of Industrial Policy and Promotions (DIPP s) Year Amount of FDI inflows (in Rs. Crores) Annual Growth Rate (%) VOL. 6, ISSUE 7 (July, 2017) 4

5 (April-June 2015) Total Compounded Annual Growth Rate 0.21 (21%) (CAGR) Graph-5: Annual growth rates of FDI Inflows as per Department of Industrial Policy and Promotions (DIPP s): The table-2 and graph-5 clearly indicate that the FDI inflows as per as per the Department of Industrial Policy and Promotions (DIPP s) was Rs crores. During these fifteen years the FDI inflows was increased to 21 percent shows the positive sign. But as per DIPP data there was decline in the FDI inflows during , , , , and by 31 percent, 21 percent, and percent, percent and percent respectively. FDI POLICY FRAMEWORK IN POST-REFORM PERIOD IN INDIA A major shift occurred when India embarked upon economic liberalisation and reforms program in 1991 aiming to raise its growth potential and integrating with the world economy. Industrial policy reforms gradually removed restrictions on investment projects and business expansion on the one hand and allowed increased access to foreign technology and funding on the other. A series of measures that were directed towards liberalizing foreign investment included: VOL. 6, ISSUE 7 (July, 2017) 5

6 1. Introduction of dual route of approval of FDI RBI s automatic route and Government s approval (SIA/FIPB) route. 2. Automatic permission for technology agreements in high priority industries and removal of restriction of FDI in low technology areas as well as liberalisation of technology imports. 3. permission to Non-resident Indians (NRIs) and Overseas Corporate Bodies (OCBs) to invest up to 100 per cent in high priorities sectors. 4. Hike in the foreign equity participation limits to 51 per cent for existing companies and liberalisation of the use of foreign brands name and 5. Signing the Convention of Multilateral Investment Guarantee Agency (MIGA) for protection of foreign investments. These efforts were boosted by the enactment of Foreign Exchange Management Act (FEMA), 1999 [that replaced the Foreign Exchange Regulation Act (FERA), 1973] which was less stringent. This along with the sequential financial sector reforms paved way for greater capital account liberalisation in India. Investment proposals falling under the automatic route and matters related to FEMA are dealt with by RBI, while the Government handles investment through approval route and issues that relate to FDI policy per se through its three institutions, viz., the Foreign Investment Promotion Board (FIPB), the Secretariat for Industrial Assistance (SIA) and the Foreign Investment Implementation Authority (FIIA). FDI under the automatic route does not require any prior approval either by the Government or the Reserve Bank. The investors are only required to notify the concerned regional office of the RBI within 30 days of receipt of inward remittances and file the required documents with that office within 30 days of issuance of shares to foreign investors. Under the approval route, the proposals are considered in a time-bound and transparent manner by the FIPB. Approvals of composite proposals involving foreign investment/ foreign technical collaboration are also granted on the recommendations of the FIPB. Current FDI policy in terms of sector specific limits has been summarized as follows. Sector Specific Limits of Foreign Investment in India FDI Sector Cap/Equity A. Agriculture 1. Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisciculture, and Aquaculture, Cultivation of vegetables & mushrooms and services related to agro and allied sectors. Entry Route 2. Tea sector, including plantation 100% FIPB (FDI is not allowed in any other agricultural sector /activity) B. Industry 1. Mining covering exploration and mining of diamonds & precious stones; gold, silver and minerals. 2. Coal and lignite mining for captive consumption by power projects, and iron & steel, cement production. 3. Mining and mineral separation of titanium bearing minerals 100% FIPB C. Manufacturing 1. Alcohol- Distillation & Brewing 100% Automatic 2. Coffee & Rubber processing & Warehousing. 3. Defence production 26% FIPB 4. Hazardous chemicals and isocyanates 5. Industrial explosives -Manufacture Other Conditions VOL. 6, ISSUE 7 (July, 2017) 6

7 6. Drugs and Pharmaceuticals 7. Power including generation (except Atomic energy); transmission, distribution and power trading. (FDI is not permitted for generation, transmission & distribution of electricity produced in atomic power plant/atomic energy since private investment in this activity is prohibited and reserved for public sector.) D.Services 1. Civil aviation (Greenfield projects and Existing projects) 2. Asset Reconstruction companies 49% FIPB 3. Banking (private) sector 74% (FDI+FII). FII not to Automatic exceed 49% 4. NBFCs : underwriting, portfolio management services, investment advisory services, financial consultancy, stock broking, asset management, venture capital, custodian, factoring, leasing and finance, housing finance, forex broking, etc. 5. Broadcasting a. FM Radio b. Cable network; c. Direct to home; d. Hardware facilities such as up-linking, HUB. e. Up-linking a news and current affairs TV Channel 6. Commodity Exchanges 20% 49% (FDI+FII) 100% 49% (FDI+FII) (FDI 26 % FII 23%) FIPB FIPB 7. Insurance 26% Automatic 8. Petroleum and natural gas : a. Refining 9. Print Media a. Publishing of newspaper and periodicals dealing with news and current affairs b. Publishing of scientific magazines / speciality journals/periodicals 10. Telecommunications a. Basic and cellular, unified access services, national / international long-distance, V-SAT, public mobile radio trunked services (PMRTS), global mobile personal communication services (GMPCS) and others. 49% (PSUs). 100% (Pvt. Companies) 26% 100% 74% (including FDI, FII, NRI, FCCBs, ADRs/GDRs, convertible preference shares, etc. FIPB (for PSUs). Automatic (Pvt.) FIPB FIPB Automatic up to 49% and FIPB beyond 49%. s.t.minimum capitalization norms Clearance from IRDA S.T.guidelines by Ministry of Information & broadcasting VOL. 6, ISSUE 7 (July, 2017) 7

8 SECTORS WHERE FDI IS BANNED 1. Retail Trading (except single brand product retailing). 2. Atomic Energy. 3. Lottery Business including Government / private lottery, online lotteries etc. 4. Gambling and Betting including casinos etc. 5. Business of chit funds. 6. Nidhi Company. 7. Trading in Transferable Development Rights (TDRs). 8. Activities/sector not opened to private sector investment. 9. Agriculture (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms etc. under controlled conditions and services related to agro and allied sectors) and Plantations (Other than Tea Plantations). 10. Real estate business, or construction of farm houses, Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco or of tobacco substitutes. CONCLUSION Foreign direct investment has been gained a significant importance in the modern days especially after the liberalization period in Indian economy. The growing sectors are suffering from inadequate investments for their structural transformation and to attain the sustainable development. Investment is the true strategic weapon for the development of the economy in both short run and long run. In this way this study has been gained importance to examine the FDI inflows into the Indian economy. REFERENCES 1. RBI Bulletin July Gulshan Akhtar (2013), Inflows of FDI in India: Pre and Post Reform Period, International Journal of Humanities and Social Science Invention, ISSN (Online): , ISSN (Print): , PP Economic Survey of India Vishal Shah and Alka Parikh (2012), Trends, Changing Composition and Impact of Foreign Direct Investment in India, International Journal of Economics Research, 2012, ISSN: , PP Rajdeep Kaur, Sirsa, and Nikita (2014), Trends and Flow of Foreign Direct Investment in India, Abhinav National Monthly Refereed Journal of Research in Commerce & Management, Volume 3, Issue 4, Online ISSN , pp Pankaj Kumar Mandal (2016), Make in India and Recent Trend of FDI Inflow, IRACST International Journal of Commerce, Business and Management (IJCBM), ISSN: Vol. 5, No.1, pp VOL. 6, ISSUE 7 (July, 2017) 8