Impact of FDI on Industrial Development of India

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

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 1995-96 and during whole of the 1990s. The economic reforms had begun in 1991-92 and it was hoped that industrial growth would pick-up in response to them. However, three years from 1991-92 to 1993-94 industrial growth remained rather low. In 1994-95 industrial sector showed a sign of recovery as overall industrial growth was 8.4 percent. In 1995-96 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 1996-97. 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 1999-2000, 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 2000-01. Capacity utilization was also expected to rise to 83 percent, putting an end to the period of slow industrial growth. However, industrial growth in 1999-2000 and 2000-01 turned out to be only modest. Industrial production registered a growth rate of 6.7 percent in 1999-2000 which was distinctly lower than the expected rate of industrial growth. During 2000-01 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 2002-03. As per the index of industrial production, overall growth in the industrial sector improved from 5.7 percent in 2002-03 to 6.9 percent in 2003-04, 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 1993-94. 96

Table 3.1: Index of Industrial Production (Base year 1993-94) Industry 1999-2000 2000-01 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Mining 126.7 130.3 146.9 153.9 154.9 163.2 171.6 176.0 Manufacturing 159.4 167.9 196.6 214.6 234.2 263.5 287.2 295.1 Food products 140.3 154.5 167.9 167.3 170.6 185.2 198.2 178.9 Beverages, tobacco and 192.1 200.4 312.1 343.9 400.3 444.5 498.0 578.5 tobacco product Cotton textiles 123.7 127.3 117.4 126.3 137.0 157.3 164.0 160.9 Fibre textiles 197.8 209.3 240.5 249.0 248.9 268.4 281.2 281.2 Jute rather fibre textiles 105.0 105.8 103.4 107.2 107.7 90.7 120.7 108.6 Textile products 156.1 162.4 184.3 219.6 255.5 285 295.5 312.5 Wood & wood products 101.4 104.3 81.7 74.8 70.5 91 127.9 115.6 Paper, paper product and 180.5 164.0 208.7 230.7 228.6 248.6 255.3 260.0 printing Leather and fur products 135.5 150.0 147.0 156.9 149.3 150.2 167.8 156.3 Basic chemicals & 164.6 176.6 208.4 238.6 258.5 283.4 313.4 326.3 chemical products Rubber, plastic, petroleum & coal products 137.2 153.4 187.7 192.2 200.5 226.3 246.4 242.6 Non-metallic mineral 220.8 218.2 240.6 244.3 271.1 305.8 323.2 327.0 products Basic metals and alloy 146.9 149.6 186.0 196.1 227.0 278.9 312.7 325.1 industries Metal products 137.8 158.5 157.3 166.3 164.4 183.2 172.9 165.9 Non-electrical tools, 182.5 195.8 233.3 279.4 312.8 357.1 394.4 429.1 machinery and machine Transport equipment 194.1 190.3 272.6 283.7 319.7 367.7 378.4 387.9 Other manufacturing 142.5 159.1 186.6 221.2 276.9 298.4 357.4 358.9 industry Electricity 148.5 154.4 172.6 181.5 190.9 204.7 217.7 223.7 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

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 1992-2009 Amount ` in crores Year FDI Agriculture Manufacture Trade Finance Public Total Growth and allied 1992 316 23928 121900 38886 28137 33415 246266-1993 965 30263 122989 38234 35880 35454 262820 6.72 1994 1838 27417 130160 39757 39029 35748 272111 5.25 1995 4126 25724 145116 47240 41972 43105 303160 7.70 1996 7172 26084 188008 51982 44796 41896 352766 10.81 1997 10015 27904 195163 50320 46025 41079 360491 9.28 1998 13220 30680 212164 46521 50671 42114 382150 9.20 1999 10358 31526 217058 52038 54856 54929 410407 9.52 2000 9338 46375 202304 70012 83764 53711 456166 10.65 2001 18406 43631 193218 84600 79993 54938 456380 9.48 2002 29235 54960 180507 76360 108271 69909 490007 9.90 2003 24367 53210 202304 85861 104072 77145 522592 10.20 2004 19860 51124 265198 96734 102051 79445 594552 11.79 2005 27188 55570 353485 110194 91660 95992 706901 14.39 2006 39674 61987 424042 140847 108015 96580 831471 16.97 2007 103367 69256 501820 162093 109332 109844 952345 19.11 2008 138276 74933 547877 193231 126213 133377 1075631 21.05 2009 161481 81234 586980 223451 146213 139456 1177334 22.24 Source: National Income Statistics, CMIE, July 2009, pp. 189,193-195,201,210,214. 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 29.55 times on the base year 1992. Inflow of FDI increased upto ` 161481 crore in the year 2001 registering an increase of 8.77 times over the base year 2001. Inflows of FDI are having fluctuating rate 98

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 ` 23928 crore to ` 161481 crore; ` 121900 crore to ` 586980 crore; ` 38886 crore to ` 223451 crore; ` 28137 crore to ` 146213 crore; and ` 33415 crore to ` 139456 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 ` 246266 crore to ` 1177334 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, 22.34 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 1992-2009. 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).87.43.95.79.91 Co-efficient of determination r 2.76.18.90.62.83 Probable error.04.13.02.06.03 99

6PE.24.78 0.12.36.18 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

Foreign Direct Investment and Gross Domestic Product Table 3.4: Foreign Direct Investment and Gross Domestic Product during 1992-2009 Amount ` in crores Year FDI Agriculture and allied Mining and quarrying Manufacture Trade Finance Public Total Growth rate 1992 316 176166 15096 137954 112119 73112 79721 594168-1993 965 197569 17409 160679 132191 81072 92597 681517 14.70 1994 1838 229172 20249 184653 156202 97928 103946 792150 16.66 1995 4126 263895 22839 225143 186425 110673 116265 925240 18.57 1996 7172 286946 25467 276025 224259 133235 137357 1083289 20.58 1997 10015 345020 27918 312711 264967 146991 163104 1260711 22.44 1998 13220 366125 33677 341711 303755 167381 189284 1401933 22.66 1999 10358 420486 35955 385293 347864 195133 231351 1616082 24.57 2000 9338 446515 41594 410646 387514 233550 266707 1786526 25.08 2001 18406 449565 45706 458431 428855 254772 287688 1925017 24.89 2002 29235 486617 47871 483661 476230 292862 310485 2097726 25.31 2003 24367 472060 62742 535732 525968 330685 334228 2261415 25.51 2004 19860 532342 63882 602030 604683 371452 363781 2538170 27.27 2005 27188 552422 84776 726302 706073 405081 403047 2877701 29.56 2006 39674 625635 94533 849421 809870 452469 450457 3282385 32.32 2007 103367 686044 106024 1007283 947096 524019 508917 3779383 35.74 2008 138276 782597 117431 1157462 1090708 594096 578589 4320883 39.20 2009 161481 861753 125414 1296900 1246718 691221 711176 4933182 42.96 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 29.55 times on the base year 1992. Inflows of FDI increased upto ` 161481 crore in the year 2009 as compared to ` 18406 crore in the year 2001 registering an increase of 8.77 times over the base year 2001. 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

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 ` 176166 crore to ` 861753 crore; ` 15096 crore to ` 125414 crore; ` 137954 crore to ` 1296900 crore; ` 112119 crore to ` 1246718 crore; ` 73112 crore to ` 691221 crore; and ` 79721 crore to ` 711176 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 ` 594168 crore to ` 4933182 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, 39.20 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 1992-2009. 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.88.89.93.92.90.90 (r) Co-efficient of.77.79.86.83.81.81 102

determination r 2 Probable error.04.03.02.02.03.03 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

Foreign Direct Investment and Foreign Exchange Reserves during the year 1992-2009 Table 3.6: Foreign Direct Investment and Foreign Exchange Reserves during 1992-2009 US $ million Year FDI Forex Reserve Growth Rate 1992 129 9220-1993 315 9832 6.64 1994 586 19254 54.41 1995 1314 25186 57.66 1996 2144 21687 33.80 1997 2821 26423 37.32 1998 3557 29367 36.42 1999 2462 32490 36.06 2000 2155 38036 39.07 2001 4029 42281 39.84 2002 6130 54106 48.68 2003 5035 76100 65.94 2004 4322 112959 93.76 2005 6051 141514 110.37 2006 8961 151622 110.32 2007 22826 199179 137.35 2008 34360 309723 203.70 2009 35168 251985 154.89 CAGR 35.56 20.17 - Source: Foreign Trade & BOP, CMIE, October 2009, p. 345. Table 3.6 shows that the inflows of foreign direct investment have increased from US $129 million US $ 35168 million in the period from 1992 to 2009. Inflows of FDI show 104

fluctuating trends during the same period. The amount of Forex Reserve has increased from US $ 9220 million to US $ 251985 million during the period under study. It has an increasing trend during the same period except the year 2009. 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, 110.37, 110.32, 137.35, 203.70, 154.89 percent during the time period of 1992 to 2009 respectively. The CAGR of Forex Reserve is 20.17 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 1992-2009 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 55115.310 1 55115.310 17.36 and Forex 105

Within years 85570.794 17 5033.576 1.59 Residual 53984.767 17 3175.574 Total 194670.871 35 Result: Since, the calculated value between the two variables (i.e. FDI and Forex Reserve 17.36 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 1992-2009 US $ million Year FDI Export Growth Rate 1992 129 17865-1993 315 18537 3.76 1994 586 22238 12.24 1995 1314 26330 15.79 1996 2144 31795 19.49 1997 2821 33470 17.47 1998 3557 35006 15.99 1999 2462 33218 12.28 2000 2155 36822 13.26 2001 4029 44560 16.60 2002 6130 43827 14.53 2003 5035 52719 17.74 2004 4322 63843 21.45 2005 6051 83536 28.28 2006 8961 103090 34.08 2007 22826 126414 40.51 2008 34360 163132 50.82 106

2009 35168 186903 55.66 CAGR 35.56% 13.93% - Source: Directorate General of Commercial Intelligence and Statistics, Nov. 2009, pp. 199-202. 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 16.71 times on the base year 1992. Inflows of FDI increased upto US $ 35168 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 2001. Inflows of FDI shows fluctuating trends during the study period. The amount of export has increased from US $ 17865 million to US $ 186903 million in the period from 1992 to 2009. 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, 55.66 percent during the time period of 1992 to 2009 respectively. The CAGR of export is 13.93 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 1992-2009 is presented below: r = 0.96 r 2 = 0.92 PE = 0.013 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

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 26600.468 1 26600.468 33.67 and Export Within years 31509.850 17 1853.521 2.35 Residual 13431.211 17 790.071 - Total 71541.529 35 - - Result: Since, the calculated value between FDI and export 33.67 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 1992-2009 US $ million Year FDI BOP Growth Rate 108

1992 129 2599-1993 315-590 -122.70 1994 586 83535 114.20 1995 1314 5787 40.89 1996 2144-1222 -36.75 1997 2821 6793 32.27 1998 3557 4511 12.26 1999 2462 4222 8.92 2000 2155 6402 18.29 2001 4029 5868 13.98 2002 6130 11757 35.24 2003 5035 16985 50.32 2004 4322 31421 92.41 2005 6051 26159 69.73 2006 8961 15052 34.22 2007 22826 36606 87.23 2008 34360 92164 215.38 2009 35168-20080 -51.33 Source: Directorate General of Commercial Intelligence and Statistics, Nov. 2009, pp. 210. Table 3.10 shows that the inflow of foreign direct investment increased from US $ 129 million US $ 35168 million in the period from 1992 to 2009. 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 $ 92164 million in the year 2008 except the year 1993, 1996 and 2009. It IS revealed from the table that the growth rate of balance of payments (BOP) turns out to be -122.70, 114.20, 40.89, -36.75, 32.27, 12.26, 8.92, 18.29, 13.98, 35.24, 50.32, 92.41, 69.73, 34.22, 87.23, 215.38, -51.33 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 1992-2009 is presented below: 109

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 339.813 1 339.813 2.00 and Forex Within years 7648.556 17 449.915 2.65 Residual 2888.384 17 169.903 Total 10876.753 35 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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