Chapter VIII Summary, Findings, Suggestions and Conclusion of the study
328 CHAPTER VIII SUMMARY, FINDINGS, SUGGESTIONS AND CONCLUSION OF THE STUDY FDI consists of investments not merely financial but also direct investments in firm s plant, equipments and other assets. FDI gives the investor ownership and management assets. FDI with its lasting nature and impact that is, as a tool for transfer of technology, managerial skills, access to international markets and enhancement of productive ability is more popular in the globalization era. FDI provides 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 sector. On the other hand, critics of foreign capital pointed out the poor record of multinational corporations in India, their excessive profitability and their limited technology transfer. This controversies and increasing importance of the role of FDI in Indian economy made the researcher to select this issue as a research problem. It is necessary to explore the dimensions of FDI inflow such as trends, pattern, sector-wise FDI inflows, determinants and causal relation between FDI and economic growth on Indian economy. Hence, the present study aims at analysing various dimensions of particular the sector-wise inflow of FDI in India during 1991-2012.
329 The specific objectives of the study are: 1. To review the India s Policy Framework on Foreign Direct Investment since independence it has been discussed under four phases: (i) Phase I Receptive Attitude or Cautious Welcome Approach (1948-66) (ii) Phase II Restrictive Attitude Approach (1967-79) (iii) Phase III Gradual Liberalisation Approach (1980-90) (iv) Phase IV Open Door Policy (1991 onwards) 2. To trace the trends and pattern of Foreign Direct Investment Inflows in India during 1991-2012 in terms of: (i) (ii) Foreign Investment Inflow in India Annual inflow of FDI in India (iii) Country-wise Inflow of FDI into India (iv) Region-wise Inflow of FDI into India (v) Route-wise Inflow of FDI into India 3. To analyse the sector-wise Foreign Direct Investment Inflows in India during 1991-2012. 4. To identify the determinants of Foreign Direct Investment Inflows in various sectors of Indian economy during the study period. 5. To examine the causal nexus between FDI and Economic Growth of India during the study period. 6. To offer suggestions regarding FDI inflows in India based on the findings of the study.
330 Two Hypotheses are framed and tested in this study: Hypothesis I H 0 : There is positive relationship between FDI and FPI H 1 : There is no positive relationship between FDI and FPI Hypothesis II H 0 : FDI is less volatile than FPI H 1 : FDI is more volatile than FPI The present study used only the secondary data obtained from the published sources such as Publications of Secretariat of Industrial Assistance (SIA), Reserve Bank of India, United Nations Council for Trade and Development (UNCTAD) and Economic Survey. The first objective deals with the review of the India s Policy Framework on Foreign Direct Investment since Independence and it has been discussed under four phases. This objective was discussed under definitional issues of FDI in India, forms of FDI in India, routes for clearance of the FDI proposals in India, policy for technical collaboration, entry options for foreign investors, eligibility for investing in India, regulatory policy towards FDI, investment guidance and facilitations, taxation in India, prohibited sectors, permitted sectors and sector specific guidelines for FDI.
331 To discuss the second and third objectives of the study percentages and averages were used to analyse the trends in FDI and also to calculate the country wise, route wise and region wise FDI inflows to India. Coefficient of variation was used for the annual inflow of FDI and foreign portfolio investment and Karl Pearson co-efficient of correlation was used to calculate the correlation between FDI and foreign portfolio investment. A semi log linear model was fitted and compound growth rates were computed for the sector-wise FDI inflows in India. To analyse the fourth objective the researcher identified the determinants of FDI inflows into various sectors of Indian economy, both correlation matrix and multiple regression model were employed. To examine the fifth objective namely, the causal nexus between FDI and economic growth, Granger s causality test was attempted. Augmented Dickey Fuller Test was also employed to test the stationarity of the data series used for this purpose. The two hypotheses framed in this study were tested by using coefficient of variation and Karl Pearson s co-efficient of correlation were used to identify the level of significance. MAIN FINDINGS OF THE STUDY Following are the main findings of the study after analysing the various objectives of the present study.
332 Trends and pattern of FDI inflow Annual global FDI inflows had increased from US $154,073 million in 1991 to US $1,524,422 million in 2011. Global FDI inflows had increased at the compound growth rate of 11.85 per cent per year. FDI inflows into the developed countries had increased from US $ 114,035 million in 1991 to US $ 747,860 million in 2011. Developed countries FDI inflows had increased at the compound growth rate of 10.52 per cent per year. Annual inflow of foreign direct investment inflow in developing countries had increased from US $ 39,834 million in 1991 to US $ 684,399 million in 2011. The FDI inflow in developing countries had increased at the compound growth rate of 13.31 per cent per year. Foreign Direct Investment into the Asian Countries had increased from US $423,157 million in 2011. Asian Countries FDI inflows had been increased at the compound growth rate of 13.20 per cent per year. FDI inflows into South Asian Countries had increased from US $ 447 million in 1991 to US $38,942 million in 2011. It had increased at the compound growth rate of 23.73 per cent per year.
333 The FDI inflows had highest compound growth rate of 23.73 per cent per year in South Asian Countries and the lowest compound growth rate of 10.51 per cent per year in Developed countries. An average India s annual share in the FDI inflows of the world had accounted only 0.93 per cent and it had accounted for 2.62 per cent of the inflows in the developing countries; and for 4.31 per cent of the inflows to the Asian countries; and for 62.82 per cent of the FDI inflows to the South Asian Nations during the period 1991-2011. Annual FDI inflow had increased from Rs.316 crores in 1991-92 to Rs.1,55,000 crores in 2011-2012. But, foreign direct investment inflow s share in the foreign private investment inflow had come down from 96.93 per cent in 1991-92 to 64.42 per cent in 2011-12. However, of the total foreign private investment during 1991-2012, 61.06 per cent was in the form of foreign direct investment and 38.94 per cent was in the form of foreign portfolio investment. FDI inflows into India increased annually by Rs.6,396.138 crores during 1991-92 to 2011-12. The FDI inflows had increased at the compound growth rte of 23.74 per cent per year. Mauritius emerged as a top investing country with the share of 37.92 per cent of the FDI inflow into India during 1991-2012. It was found that Mauritius - India had entered into the Double Taxation Avoidance Agreement with the Mauritius under which the investors
334 through Mauritius were protected from taxation in India. The other investing countries were Singapore (9.70 per cent), the UK (8.86 per cent), the USA (6.52 per cent) and Japan (5.45 per cent). Netherlands with Rs.39,403.35 crores (4.35 per cent), Cyprus with Rs.31,751.96 crores (3.51 per cent), Germany with Rs.25,968.17 crores (2.87 per cent), France with Rs.18,399.11 crores (2.03 per cent), and Switzerland with Rs.11,660.05 crores (1.29 per cent). The five countries, which had dominated the FDI scene in India, had been Mauritius, Singapore, the UK, the USA and Japan. It is important to note that 47.62 per cent of the total FDI inflows into India during the period 1991-2012 came from Mauritius and Singapore only. The other five countries namely the UK, the USA, Japan, Netherlands and Cyprus had collectively accounted for 28.69 per cent of the total FDI inflows into India. Further, it had become clear that the top ten source countries alone had jointly accounted for about 82.50 per cent of the FDI inflows into India during the study period. Of the total investments amounting to Rs.8,69,575.68 crores during the period 2000-2012 the Mumbai/ Maharashtra region has attracted maximum foreign investments accounting for more than 32.56 per cent. Delhi and its neighbouring area, which includes part of Uttar Pradesh like Noida and Haryana like Gurgaon, was the next most
335 important region for foreign investment with a share of 19.27 per cent. Bangalore and Chennai followed in third and fourth place accounting for 5.52 per cent and 5.44 per cent of foreign direct investment respectively. Ahmedabad and Hyderabad was in the fifth and sixth position while taking up a share of 4.47 per cent and 4.06 per cent of investment in India. During the period 2000-2012, Chandigarh, Bhopal and Kochi region had minimum foreign investments accounting for 0.63 per cent, 0.51 per cent and 0.49 per cent respectively. Other states were accounted the 25.93 per cent during the period of 2000-2012. Out of the total amounts of the FDI inflows that had came into India through the different routes during the period 1991-2012; the RBI automatic route with a share of 55.08 per cent followed by the acquisition of shares route with a share of 23.88 per cent, the SIA or FIPB route with 20.04 per cent and the NRI route with one per cent. Out of the total FDI flows received during the period 1991-2012, more than 50 per cent had come through the SIA or FIPB route except during the years 2002-2012; had varied between 8.43 per cent and 44.91 per cent. The FDI inflows through the RBI route had shown a hike from Rs.47.5 crores in 1991 to Rs.84,528.9 crores in 2012. Its share had varied from 6.68 per cent to 71.90 per cent during the study period.
336 The inflows of FDI through the acquisition of shares route has taken place from 1996 onwards only. It had varied from 3.47 per cent to 36.66 per cent. The FDI inflows through the NRI route was Rs.162.3 crores in the year 1991 and it had increased to the level of Rs.2062.1 crores in the year 1996. It declined to the level of Rs.11.1 crores in the year 2002. After 2002 NRI s route included in RBI s automatic route. Its share had varied from 0.06 per cent to 45.91 per cent during the study period. While the FDI inflows through the automatic route had accounted for 12.95 per cent in the year 1993, its share had declined since then and was only of the order of 4.60 per cent in the year 1998. This was partly due to the fact that the crucial areas like electronics, services and minerals had been left out of the automatic approval route. In the year its share had increased to the level of 71.90 per cent. The reason for the increase might have been due to the liberalisation measures introduced to bring in more sectors under the automatic approval system. Trends of Sector wise FDI Inflows in India The foreign direct investment inflows into Service sector had increased from Rs.11.5 crores in 1992 to Rs.25,261.92 crores in 2012. Maximum foreign direct investment inflows had taken place
337 in service sector. The FDI inflows increased at the compound growth rate of 36.07 per cent per year. The FDI inflows into telecommunication sector had increased from Rs.429.31 crores in 2012. The FDI inflows into the sector increased at the compound growth rate of 37.57 per cent per year. The FDI inflows into metallurgical industries had increased from Rs.33 lakhs in 1991 to Rs.8,447.61 crores in 2012. The FDI inflows into metallurgical sector have increased at the compound growth rate of 40.77 per cent per year. The foreign direct investment inflows into hotel and tourism sector had increased from Rs.74 lakhs in 1992 to Rs.8,096.61 crores in 2012. The FDI inflows have increased at the compound growth rate of 49.18 per cent per year in hotel and tourism sector. FDI inflows into drugs and pharmaceutical industry had increased from Rs.10.41 crores in 1991 to Rs.3,311.71 crores in 2012. Foreign direct investment inflows into drug and pharmaceutical industry had increased at the compound growth rate of 29.046 per cent per year. FDI inflows into Electrical Equipments sector had increased from Rs.20.48 crores in 1991 to Rs.1,403.57 crores in 2012. Foreign direct investment inflows into Electrical Equipments sector had increased at the compound growth rate of 11.40 per cent per year.
338 Annual growth of foreign direct investment inflows in chemical industry had increased from Rs.46.42 crores in 1991 to Rs.1,780.14 crores in 2012. The FDI inflows had increased at the compound growth rate of 14.33 per cent per year in chemical industry sector. FDI inflows into transport industry had increased from Rs.6.11 crores in 1991 to Rs.1,233.42 crores in 2007. The FDI inflows into transport industry had increased at the compound growth rate of 26.49 per cent per year. Annual growth of FDI inflows in fuel sector had increased from Rs.2.6 crores in 1991 to 467.65 crores in 2007. The FDI inflows had increased at the compound growth rate of 28.53 per cent per year in fuel sector. Annual growth of FDI inflow into food processing industry had increased from Rs.20.12 crores in 1991 to Rs.1,715.89 crores in 2012. The FDI inflows had increased at the compound growth rate of 11.739 per cent per year. Economic Determinants of FDI in India Market Size was found to be statistically significant in attracting FDI in India. It reveals that India is still attracting a sizable marketseeking FDI with its large domestic consumption market. Traditional variable such as Export was still remaining important in attracting FDI inflow into India. This result has co-insided with the international trade theories.
339 Import and FDI were moved in same direction, but the variable import co-efficient was not significant. However, Exchange Rate, Tax was found to be not significant when the influence of other variables captured in multiple regression model. It shows that the efficiency-seeking FDI in India is yet to flow considerably. Debt-GDP ratio remained not significant in the correlation matrix analysis and also possesses positive sign when the influence of the related variable that is Foreign Exchange Reserve is captured in the model. It implies that in the absence of Foreign Exchange Reserve, Debt-GDP remains not significant in attracting FDI inflow in India. Export and Cost of Labour were significant but inversely related in attracting Foreign Direct Investment Inflow. Cost of Labour was the most influencing factor of FDI inflow in India during the study period. Foreign Exchange Reserves was significant in attracting of FDI during 1991-92 to 2011-2012. Variables representing financial strength of India such as Foreign Exchange Reserves and export influence on the inflow of FDI in India.
340 FDI and Economic Growth of Indian Economy The analysis of the nexus between FDI and Economic Growth has revealed that the direction of causality relationship was from economic growth to FDI and there was no causality relationship from FDI to economic growth. In other words, GDP in India was one of the factors that affecting foreign direct investment. However, the high or low FDI did not have an effect on the presence of GDP in India during the study period. In the long run the economic growth of India attracted the FDI and the foreign investors interested in the continuous stability in economic growth in India. Therefore the foreign investors were not much influenced by the economic growth of India. Thus it is inferred that India s economic growth was independent of foreign direct investment during 1991-92 to 2011-2012. Results of Testing of Hypothesis The first hypothesis namely FDI is less volatile than foreign portfolio investment in India was tested by computing co-efficient of variation for both annual inflow of foreign direct investment and foreign portfolio investment in India during the study period. The result showed that 122.09 per cent variation in FDI where as 155.54 per cent variation in the portfolio investment. Hence, the first hypothesis showed that the foreign direct investment is less volatile than the
341 foreign portfolio investment. Therefore the first hypothesis is accepted. The second hypothesis namely, there is a positive correlation between the Foreign Direct Investment and Foreign Portfolio Investment. The calculated Karl Pearson s co-efficient of Foreign Direct Investment and Foreign Portfolio Investment was 0.4788; which meant that 47.88 per cent of positive association between these two variables. Thus the null hypothesis is accepted. There was low inter-relationship between these variables. But both the variables were moved in the same direction. So the foreign investment components of Foreign Direct Investment and Foreign Portfolio Investment were more or less independent of each other and they were not much related. SUGGESTIONS AND POLICY IMPLICATIONS OF THE STUDY Developing countries have to make more business friendly environment and to create this business friendly environment, developing countries have to develop some necessary institutions to reduce the extent of corruption and to control the factors that increase both visible and invisible business start-up costs. The policy makers of India need to ensure transparency and consistency in policy making along with comprehensive long term development strategy and have to focus more on attracting diverse
342 types of FDI and to design policies where foreign investments can be utilized as means of enhancing domestic production, savings and exports and also as medium of technological learning and diffusion and also in providing access to the external market. The Government has to impose the relevant policies like joint venture in order to give opportunities to the domestic producers to become part and enjoy the profit together with the foreign direct investors. This will benefit the local partner as they are exposed to higher technology. To companies for investment, there is a need to extend a friendly environment for foreign investor by providing essential guarantees for investors to (a) Enter and Exit, (b) Operate on equal terms alongside local operators, and (c) Repatriate their investment needed. Steps have to be taken to diversify the sources of foreign direct investment by attracting FDI from developing countries. Special Economic Zones (SEZ), Free Trade Zones have to be established more in numbers to attract multinational corporations to invest in India. The Government has to ensure the equitable distribution of inflows among states and has to give more freedom to states, so that they can attract inflows at their own level.
343 In order to improve technological competitiveness of India; research and development has to promoted, various issues pending relating to intellectual property rights, copy rights and patents need to be addressed on priority. Special package can be also instrumental in mobilizing FDI in Research and Development. India has a well developed equity market but does not have a well developed debt market. Steps have to be taken to improve the depth and liquidity of debt market as many companies may prefer leveraged investment rather than investing their own cash. India can take advantage of its low labour costs and attractive investments. However, the low costs need not necessarily equate with productivity. Thus, importance to be on rational labour policies, which protect the interest of both workers and employers thorough fair labour practices and arbitration. More FDI is needed in the export oriented industries to perk up the employment level in the organised sector. But it is considered that FDI alone is not enough to raise employment levels; it has to be accompanied by higher exports. Continued export growth and careful management of India s import would also be crucial in maintaining India s ability to maintain and continue to build international equity.
344 The Government can encourage FDI investors to park their fund in sectors like energy, communication, infrastructure and other essential sectors. The Government has to formulate the policies to attract more foreign investment in manufacturing sector instead of service sector. Accept the recommendations of steering committee (set by Planning Commission in August 2001). A few of them are as follows: Enact Foreign Investment Promotion Law (FIPL) to incorporate and integrate relevant aspects for promoting FDI. Empower the Foreign Investment Promotion Board (FIPB) for granting initial central-level registrations and approvals, wherever possible for speeding up the implementation process. Empower Foreign Investment Implementation Authority (FIIA) for expediting administrative and policy approvals. Enact a special investment law relating to infrastructure in states in order to increase investment in infrastructure as well as remove hurdles in the process of promoting infrastructure. Develop Special Economic Zones (SEZs) as internationally competitive destination for export-orientated FDI.
345 If these suggestions are implemented, FDI would play a more important role in the economic progress of India in the near future. TOPICS FOR FUTURE RESEARCH ON FDI 1. An Economic Analysis of Foreign Direct Investment Inflows in India A Case Study of TamilNadu. 2. A Comparative Study on Foreign Direct Investment Inflows in India and China. 3. A Study on Impact of Foreign Direct Investment on Domestic Industries in India. 4. An Economic Analysis of Foreign Direct Investment Effect on Retail Sector of India. 5. A Comparative Study on Foreign Direct Investment Inflow into Manufacturing Sectors and Service Sectors in India. CONCLUSION The present study throws light on the trends and pattern of FDI in India. The changes in the FDI policy in India have helped to attract a sizeable inflow of FDI but, unfortunately not to the desirable extent. It implies that the Government of India has to pursue a steady but a cautious approach along with efficiently implementing and effectively monitoring mechanisms.
346 The sector wise analysis of FDI inflow in India, maximum FDI has taken place in the service sector including telecommunication and many others. The service sector is followed by manufacturing sector in terms of FDI. High volumes of FDI take place in Metallurgical industry, Drugs and Pharmaceutical industry, Electrical Equipment sector and other manufacturing sector. The Indian sectors have been growing continuously with the help of more inflow of FDI. The Government policies have also to encourage the investment of the foreign investor in these sectors. Now these Indian sectors are found in the growing path and it would continue in the future also. Factors such as market size, foreign exchange reserves, export and cost of labour were found to be statistically significant and had a positive signs in explaining the variations in FDI inflows except cost of labour and export. The cost of labour has a negative relation with FDI. Even though, FDI has increased due to low labour cost, the Government has to take necessary steps to increase the cost of labour to the optimum level inorder to protect the labour welfare. The additional benefits and labour laws have to be enforced in MNCs, to provide job security. Government has to give emphasis and give priority in the approval for export oriented FDI but at the same time it must also be less import-intensive.
347 The present study has also found that the economic growth of India is independent of foreign direct investment. Hence, India must take multidimensional policy measures to accelerate the pace of economic growth, which in turn would attract FDI and ensure further economic growth. Hence, right policies and proper execution could help India to maximize the benefits and minimise the cost of inflows of FDI and other related problems to promote economic stability in our country. Thus, the sector-wise inflows of FDI in India shows a varying trend but acts as catalyst for growth, quality maintenance and development of Indian industries to a greater and larger extend. The technology transfer is also seen as one of the major changes apart from increase in operational efficiency, managerial efficiency, employment opportunities and infrastructure development. India needs high and advanced technology use in production and marketing for improving efficiency and competitiveness in the industrial sector and it would, therefore, be analytically useful if sectoral pattern of FDI was one that was biased in favour of technology-intensive sectors. The Government of India has to welcome inflow of foreign investment in such way that is to be convenient and favourable for Indian economy and enable to achieve cherished goal like rapid economic development, removal of poverty, enhancing exports, removing internal
348 disparity in the development and making our Balance of Payment favourable. FDI is an engine of economic growth and development of Indian economy but in this respect proper directions are needed to improve the quality, quantity and allocation of FDI in different sectors of the Indian economy as a whole.