A Critical Study On The Role Of Foreign Direct Investment In India Ms. Babita Yadav, Faculty of Management, Research Scholar, R.D.V.V, Jabalpur E:mail: babitas.yadav@rediffmail.com Dr. Anshuja Tiwari, Assistant Professor, Dept. of Commerce, Barkatullah University, Bhopal ABSTRACT: Foreign direct investment (FDI) as a strategic component of investment is needed by India for achieving the economic reforms and maintains the pace of growth and development of the economy. FDI is a tool for economic growth through its strengthening of domestic capital, productivity and employment. FDI also plays a vital role in the up gradation of technology, skills and managerial capabilities in various sectors of the economy. The paces of FDI inflows in India initially were low due to regulatory policy framework but there is a sharp rise in investment flows from 2005 towards because of the new policy has broadened. The present descriptive and purely secondary based study has been undertaken with the objective to understand the role of FDI in India and effect of foreign inflows in economic growth of India. India is among the third most attractive destination by foreign companies and FDI brings a positive impact on country s GDP, foreign trade, employments are some of the major findings of the study. The paper concludes that the increased inflow of FDI in a country has given a major boost to the country s economy. Keywords: FDI, Economic Growth, GDP, Employment, Foreign Trade. INTRODUCTION: Foreign direct investment (FDI) in India has played an important role in the development of the Indian economy. FDI enabled India to achieve a certain degree of financial stability, growth and development. India has continually sought to attract FDI from the world s major investors. FDI to developing countries in the 1990s was the leading source of external financing and has become a key component of national development strategies for almost all the countries Foreign Direct Investment (FDI) occurs when investor based in one country (the home country) acquired an asset in another country (the host country) within the intent to manage the asset. FDI provide opportunities to host countries to enhance their economic development and opens new opportunities to home countries to optimize their earnings by employing their ideal resources. There are two types of FDI: Inward FDI and Outward FDI. Increasing foreign investment can be used as one measure of growing economic globalization. The rate of FDI is comparatively more in developed or industrialized economy than developing or less industrialized economy. As the industry progresses, opportunities abound in India, which has the world's largest middle class population of over 300 million, is attracting foreign investors by assuring them good returns. Thus the scope of foreign investment in India is unlimited and this can be further enhanced by providing adequate infrastructure, competent human resource and supportive government policies like offering subsidies, tax relaxation and removal of restrictions. REVIEW OF LITERATURE: Syed Azhar and K.N. Marimuthu (2012) in his paper titled An Overview of FDI in India has clearly pointed out that foreign direct investment plays a very crucial role in an economic development of any nation. It brings technology up gradation which fastens the speed of Industrialization and helps in more capital formation and development. The paper analyzes the need, determinants, sources of FDI and its impact on economic growth in India. www.theinternationaljournal.org > RJSSM: Volume: 03, Number: 01, May-2013 Page 6
D.B. Bhanagade and Pallavi A. Shah (2011) reviews the impact of FDI on an Indian economy and concludes that FDI plays an extraordinary and growing role in global business. His study has shown a positive relation or impact of FDI on GDP, employment, foreign trade and capital formation. Samuel Adams (2009) in his paper, Can Foreign Direct Investment help to promote growth in Africa provides a review of Foreign Direct Investment and economic growth literature in the context of developing countries and particularly Sub- Saharan Africa. The main findings of the study are as follows, first, FDI contribution to economic development of the host country in two main ways, augmentation of domestic capital and enhancement of efficiency through the transfer of new technology, marketing and managerial skills, innovation and best practices. Secondly, FDI has both benefits and costs and its impact is determined by the country specific conditions in general and the policy environment in particular in terms of the ability to diversify, the level of absorption capacity, targeting of FDI and opportunities for linkages between FDI and domestic investment. Sapna Hooda (2011) in his thesis titled A study on FDI & Indian Economy has wonderfully explained the concept of FDI in context of Indian economy. According to her studies, FDI playa a crucial role in an economic growth and development. The conducive business environment and improving technology and rising intellectual capital attracts huge volume of FDI and helps in earning foreign currency and more capital formation. By 2023 India would be one of the most attractive and powerful economies of the world. Mahanta Devajit (2012) in his research paper titled Impact of foreign investment on India economy and the main purpose of the study is to investigate the impact of FDI on economic growth in India. Government should design the FDI policy such a way where FDI inflow can be utilized as means of enhancing domestic production, savings and exports through the equitable distribution. NEED OF THE STUDY: FDI is an important tool for maintaining the sustainable growth and economic development of nation. In developing economy like India where capital scarcity, lack of technology, inadequate infrastructure are the major fundamental level problems which hinder the growth of industry and consequently adversely affects the growth of Indian economy. Capital, saving, investment and human resources are the essential hub of development. A large volume of foreign investment brings massive foreign inflow which helps in accumulation of foreign capital and as a result contributes to the development of nation. The present paper is an attempt to critically understand the role and need of FDI and its impact on various economic growth indicators such as foreign trade, employment, GDP. OBJECTIVES OF THE STUDY: 1. To critically analyze the role of FDI in India. 2. To understand the impact of FDI on economic growth of India. 3. To provide effective suggestions to further accelerate FDI inflows in India. RESEARCH METHODOLOGY: The present study is analytical and descriptive in nature and purely based on secondary data sources. The main sources of data are various economic surveys of India and ministry of commerce and industry data, RBI bulletin, online data base of Indian economy, journals, articles, news papers, etc. The study is based on the time period from 2001-02 to 2009-10. Simple percentage method has been used to depict the growth rate of India and contribution of FDI in it. Graphs and tables have also been used where ever required to depict statistical data of FDI during the study. www.theinternationaljournal.org > RJSSM: Volume: 03, Number: 01, May-2013 Page 7
Limitations: The present study is purely based on secondary data sources and based on the selected dimensions. FDI & IMPACT ON INDIAN ECONOMY FDI & Economic Growth FDI is one of the most significant and dominating factor influencing a growth of an economy. Capital, saving and Investment are three major elements on which growth of any economy depends. A huge volume of all three have a positive effect on the economic growth. FDI is important in utilizing of our economic resources and generating the employment in country as well as important for creating economic prosperity. A foreign direct Investment enables flow of money in economy and thus helps in effective utilization of resources which generates employment for both skilled and unskilled class of labor. With rise in employment, the per capita income gets increases and an individual is capable of purchasing more goods and services from the market. Here three major economic indicators have been covered i.e. GDP, Foreign trade and employment. The detail illustration of these three is mentioned as below: Hence, we can say FDI leads to favorable impact on the economic growth of India. Table 1. FDI Inflows in India from the FY (2001-2002 to 2009-2010) Financial FDI Inflows (In US$ FDI Inflows (In % Growth over the previous Year million) Crores) year 2001-02 4065 18,654 65 2002-03 2705 12,871-50 2003-04 2188 10,064-19 2004-05 3219 14,653 47 2005-06 5540 24,584 72 2006-07 12,492 56,390 125 2007-08 24,575 98,642 97 2008-09 27,330 123,025 11 2009-10 25,834 123,120-05 (Source: RBI Bulletin) Interpretation: It reveals from the Table no. 1 that FDI inflows has been constantly increased from the year 2001-02 to 2009-10, except downfall in the year 2002-03 with FDI inflows of Rs. 12,871 crores with a negative growth of 50% as against the previous of Rs. 18,654 crores in 2001-02. In 2003-04 the FDI inflows again declined to Rs. 10,064 crores with a negative growth of 19% but in 2004-05 the inflow of FDI increased to Rs. 14,653 crores with a positive growth of 47% and from there onwards there has been a significant increase in the amount FDI inflows in India and reached to Rs. 123,120 crores in the year 2009-10. FDI & GDP GDP stands for gross domestic product and it is one of important dimension to measure economic growth of any country. High percentage of GDP indicates higher economic growth and vice-versa. FDI plays a prominent role in economic growth and increase in foreign investment contributes more to GDP of that economy. www.theinternationaljournal.org > RJSSM: Volume: 03, Number: 01, May-2013 Page 8
Table 2. Relationship Between GDP and FDI Financial Year GDP (%) FDI Inflows (In Crores) 2001-02 3.5 18,654 2002-03 4 12,871 2003-04 8.5 10,064 2004-05 7.5 14,653 2005-06 8.4 24,584 2006-07 9.4 56,390 2007-08 9.1 98,642 2008-09 6.7 123,025 2009-10 8.0 123,120 (Source: World Bank, World development Indicators 2010) Interpretation: It can be inferred from the Table no. 2 that the relation between FDI and GDP is positive. India s GDP improves with more inflow of foreign capital and this is due to enormous growth in service sectors like banking, telecommunication, financing, IT and Infrastructure after allowing the entry of foreign investors in to our economy. Hence there is a positive but not a direct relation with GDP and FDI because some other factors like income, employment, and Industrial growth also influenced the GDP rate of an economy. FDI & Foreign Trade Foreign trade is the transaction with outside country in the form of export and import. The growth of FDI gives opportunities to Indian industry for technological up gradation, gaining access to global managerial skills and practices, optimizing utilization of human and natural Table 3. Relationship between Foreign Trade and FDI Financial Year Import ( US $ Billion) Export ( US $ Billion) FDI Inflows (In US $ Billion) 2001-02 - - 4065 2002-03 61.52 52.81 2705 2003-04 78.28 63.95 2188 2004-05 111.89 83.81 3219 2005-06 149.65 103.42 5540 2006-07 162.30 112.40 12,492 2007-08 122.64 147.21 24,575 2008-09 127.84 93.0 27,330 2009-10 132.32 64.1 25,834 (Source: Bulletins of RBI & SIA Newsletter) Interpretation: It can be observed from the Table 3 that the impact of FDI on India s foreign trade means in terms of volume of exports and imports. Over a period of ten years, both import and export has been increased but the volume of import is comparatively higher than the export due to more demands and shortage of supply of certain imported goods in our country. An export leads to capital inflow and import causes outflow of capital from home to host country. For a stable economic growth, every country s tries to maximize exports and minimize import in order to avoid excessive financial debt. FDI & Employment The rate of employment has increased manifold with the entry of large no. of foreign players in the Indian market. Service sectors alone contribute more than 50% of the total FDI Inflow. In sectors like www.theinternationaljournal.org > RJSSM: Volume: 03, Number: 01, May-2013 Page 9
banks, insurance, automobile, telecommunication and power the employment has raised more than 25%. Skilled and cheap availability of abundance human resource provides an attractive opportunity to many foreign firms for opening of business in India. Therefore foreign investment has a positive impact on the employment. The no. of service sector jobs has increased in India. According to the survey of Labor Ministry the employment in the industry rose to 15.72 million and two sectors have shown the strongest improvement in terms of hiring levels a) IT sector and other is Business process Outsourcing sector. Owing to large amount of FDI inflow leads to high capital formation at cheaper rates. Technological transformations and human resource mobility leads to emergence of many business undertakings. Table 4. Sectors Attracting Highest FDI Inflows in India: (From 2000-2010) Sector-Wise FDI Inflows (In US$ million) FDI Inflows (In Crores) Service Sector 26,454.15 118,273.91 Telecommunications 10,257.97 46,727.06 Transport Industry 5662.29 25,628.07 Chemicals 2848.51 12,880.07 Petroleum & Natural gas 3206.84 13,979.19 Cement & Gypsum products 2,315.58 10,278.99 Source: Reports on Ministry of Commerce and Industry Interpretation: The above table no. 4 indicates about the sectors attracting highest FDI Inflows in India in the period of 2000-2010. India s Service Sector attracts maximum FDI Inflows followed by telecommunication, automobile, Chemical and so on. The service sector alone contributes more than 50% of the total FDI Inflows and therefore this sector needs an extra attention to get more and more foreign capital through FDI s and generates massive employment in the economy. SUGGESTIONS : 1. The policy makers should design policies where foreign investment can be utilized as means of enhancing domestic production, savings, and exports; as medium of technological learning and technology diffusion and also in providing access to the external market. 2. It is suggested that the government should push for the speedy improvement of infrastructure sector s requirements which are important for diversification of business activities. 3. Government should ensure the equitable distribution of FDI inflows among states. The central government must give more freedom to states, so that they can attract FDI inflows at their own level. 4. Government should open doors to foreign companies in the export oriented services which could increase the demand of unskilled workers and low skilled services and also increases the wage level in these services. 5. Government must target at attracting specific types of FDI that are able to generate spillovers effects in the overall economy. 6. By promoting conducive business environment and political stability more FDI would be possible to attract in the coming years. CONCLUSION: Foreign Direct Investment (FDI) as a strategic component of investment is needed by India for its sustained economic growth and development through creation of employment, foreign trade, technological up gradation and effective utilization of resources for achieving greater productivity. The www.theinternationaljournal.org > RJSSM: Volume: 03, Number: 01, May-2013 Page 10
increased flow of FDI inflow in a country has given a major boost to the country s economy. FDI not only brings foreign inflows but also improves per capita income by providing mass employment and also increase trade with International companies. Hence FDI has multiple benefits and regular investment by foreign companies ensure greater development & progress of an economy. References: 1. Azhar. S & Marimittu. K (2012) An Overview of FDI in India, Excel International Journal of Multidisciplinary Management Studies, Jan Vol. 2, Issue 1, pp. 202-206. 2. Mahanta Devajit (2012): Impact of FDI on Indian Economy, Research Journal of Management Sciences, September Vol. 1, Issue 2, pp. 29-30. 3. Samuel Adams (2009): Can Foreign Direct Investment help to promote growth in Africa, African Journal of Business Management Vol.3 (5), pp.178-183. 4. Hooda.S (2011) in his thesis titled A study on FDI & Indian Economy, Department of Management, Kurukshetra University. 5. D.B. Bhanagade and Pallavi A. Shah (2011), FDI on an Indian economy, Online IJER Journal Issue March-April 2011, pp. 10-17. 6. Mishra, S.K and Puri, V.K (2006), Indian Economy, 24th Revised Edition. 7. World Bank, World Development Indicators 2010. 8. Various Bulletins of RBI & SIA Newsletter. 9. Reports of Department of Finance and Ministry. www.theinternationaljournal.org > RJSSM: Volume: 03, Number: 01, May-2013 Page 11