A STUDY ON FOREIGN DIRECT INVESTMENT IN INDIA

A STUDY ON FOREIGN DIRECT INVESTMENT IN INDIA *Dr. Ashwani Kumar *Associate Professor School of Management A P Goyal Shimla University,Shimla(H.P.) ABSTRACT The present Research paper is confined to analyze the FDI in India in the last twelve years. The study also includes year-wise analysis of FDI inflows in India and an attempt has also been made to find out the sectors attracting the highest FDI equity inflows in India and to know about the need of FDI in India. FDI provide opportunities to host countries to enhance their economic development and opens new opportunities to home countries to enhance their earnings by employing their ideal resources. The Globalization, Privatization and liberalization Policy of Indian Government in 1990s has not only given a boost to the Indian economy and also put the economy into a fast track economic growth route. INTRODUCTION The FDI is considered as the main driving force for accelerating the growth of the economy by generation of employment, advancement of technology, global exchange of managerial expertise and the global production activities. India is a Developing country with huge population and low per capita income, which leads to the low rate of domestic savings. This shortfall of savings can be covered up by the Foreign Direct Investments so that the production capacity can be fully utilized to achieve the objectives of sustained development, investment and growth. The developed countries are looking for the emerging markets with the motive to get cheap labour, market for final goods and ultimately high profitability. At the initial stages the FDI was considered as the threat to the domestic investors and industrialists, due to which India followed the conservative approach towards FDI. The New Economic policy was implemented by the Government of India to restructure Indian Economy. The new policy opened the doors for FDI in India. REVIEW OF LITERATURE Bhattacharyya (1994), Jain (1994), Studies by Subramanian, et al. (1996) and Gopinath (1997) examined the determinants of FDI. Cheng, (1993) noted the growing importance of cross-border R & D activities and suggested that additional research on FDI should be done on why firms internationalize their R & D. Anand and Delios (1996) documented that the relatively slow growth of FDI from Japanese MNCs in India as compared to China is attributed to the desire to gain only market access in India. Jaya Gupta (2007) in his paper made an attempt to review the change in sectoral trends in India due to FDI Inflows since liberalization. This paper also examines the changed policy implications on sectoral growth and economic development of India as a whole. As regards 13

the contribution of FDI flows to external financing, one of the three components of FDI, retained earnings, requires special attention.unctad (1997) observes that retained or reinvested earnings may be viewed based on a residence principle and in the absence of transfer from abroad not as an infusion of fresh capital from abroad, but as domestic savings. So, FDI is one of the best substitutes for the staggering domestic savings in developing countries like India.Nair-Reichart and Weinhold (2001), Postulate panel and time series estimators to impose homogeneity assumptions across countries in the relationship between FDI and growth and they marshal evidence to show considerable heterogeneity across countries, Tanay Kumar Nandi and Ritankar Saher (2007), In their work made an attempt to study the Foreign Direct Investment in India with a special focus on Retail Trade, This paper stresses the need of FDI in India in retail sector and uses the augment that FDI is allowed in multiple sectors and the effects have been quite good without harming the domestic economy and The study also suggests that FDI in retail sector must be allowed.azhar and Marimuthu(2012) attempted to make an analysis of FDI in India and its impact on growth. It also focuses on the determinants of FDI and they have concluded that FDI has a direct impact on the GDP of India. The review of existing literature encouraged the further study on FDI to know about the trends of FDI in India and to know about the composition of FDI in various sectors operating in India. OBJECTIVES OF THE STUDY 1. To study the FDI Inflows and FDI Equity Inflows in India 2. To identify the need of FDI in India 3. To Identify the sectors attracting more FDI Equity Inflows in India RESEARCH METHODOLOGY The research is secondary in nature. The data has been collected from Journals, Magazines and Internet Sources. The data collected through the secondary resources has been tabulated, presented, interpreted and analyzed. Indices have been computed to know the percentage growth of FDI Inflows and FDI Equity Inflows. FDI INFLOW IN INDIA The inflow of FDI in India (Table1) has shown the fluctuating trends during the period under research analysis since 2000-01 to 2012-13. Out of thetwelve year taken for the analysis only four years have shown negative growth rate offdi. The highest growth rate has been observed 14

FDI Inflow in India( in US$ millions) 50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 0 FDI Inflow Growth rate %age of FDI Inflow in India 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0-0.2-0.4 %age Growth during the year 2006-07 (146%). With the liberalized policies of Reserve bank of India and Government of India, the total Inflow of FDI has been Increased from 4,029US $ million in 2000-01 to 46,553 US $million in the year 2012-13, which can be considered as the success of the liberalized polices of the Indian Government. The positive growth rate of FDI during the recession period 2007-08 and 2008-09 shows that India has managed to achieve the growth rates of 53% and 20% respectively. Further, a negative growth rate has been observed during the year 2010-11 (- 0.8%) which has shown a recovery in the year 2011-12 with a positive growth rate of 34%. 15

FDI EQUITY INFLOW IN INDIA The Equity Capital Inflow in India ( Table 2) has also shown the positive growth rate during the period taken for the study except the four years i.e. 2002-03, 2003-04, 2010-11 and 2011-12 which have recorded the negative growth rates of -33%,-19%,-18% and -25% respectively. 40000 TOTAL FDI EQUITY INFLOW IN INDIA 35000 30000 25000 20000 15000 10000 TOTAL FDI EQUITY INFLOW ( IN US$ MILLION) 5000 0 %AGE GROWTH OF FDI EQUITY INFLOW IN INDIA 1.4 1.2 GROWTH RATE (%AGE) 1 0.8 0.6 0.4 0.2 0-0.2-0.4-0.6 16

The highest Equity Inflow has been observed during the year 2006-07(6,952 US$ million). The variation in the Equity inflows is higher than the variation in the Total FDI Inflow in India both in case of positive or negative growth rates. NEED OF FDI IN INDIA The Developed economies like USA, UK, Japan and France etc. are looking for the suitable investment avenues. It provides an opportunity to the developing countries to attract FDI for the growth and development of the economy. India is a developing country and is amongst the five best countries of the world attracting the FDI. The FDI can generate more employment opportunities, provides better technology and provides global production activities. The Foreign Direct Investment is needed due to following reasons: The FDI can help to raise the amount of investments in the different sectors operating in the country. Better technology can be implemented with the help of foreign collaborations The introduction of Foreign Capital helps to improve the infrastructures in the country Quality products and services provided to the people of the country. The GDP can be increased which leads to the higher rate of economic growth of the country. The funds are available at cheaper rates. India has been ranked at the second place in global FDI in 2010 and will continue to remain among the top five attractive destinations for Foreign Investors during the period 2010 to 2012 according to United Nation Conference on Trade and Development (UNCTAD) in a report on World Investments Prospects. The Fund management can be more efficient in different sectors. Healthy and competitive market environment can be created fort for both domestic as well as for foreign Investors. Better technology for the farmers and a place to sell their agricultural products directly from their fields. SECTORAL COMPOSITION OF FDI EQUITY INFLOWS IN INDIA The largest Equity inflow has been received by the service sector (Table 3) including financial and non-financial services. The flow of FDI in Indian service sector is boosting the growth of Indian economy, this sector contributing the large share in the growing GDP of India. This sector attracts a significant portion of total FDI in Indian economy and it has shown especially during the period of study. The total Equity inflow in service sector has been 1, 49,751 US$ million during the years 2000-01 to 2011-12, which is 19% of the Total Equity Inflow. Telecommunications and Construction activities received 7% (each) of total Equity Inflows, whereas 6% of total equity inflows has been received by Computers sector, Housing and real state and Drugs and pharmaceuticals sector respectively. 17

%AGE OF TOTAL INFLOWS IN DIFFERENT SECTORS SERVICE SECTOR 19% TELECOMMUNICATIONS 32% CONSTRUCTIONS ACTIVITIES COMPUTERS 7% HOUSING DRUGS 7% CHEMICALS POWER 4% 4% 4% 5% 6% 6% 6% AUTOMOBILE INDUSTRY METALLURGICAL IND. OTHERS FDI has helped to raise the output, productivity and employment in some sectors especially in service sector. Indian service sector is generating the proper employment options for skilled worker with high perks.during the year 2005-06 the biggest share in GDP was contributed by Service sector i.e. 53.8% which is more than fifty percent of the total GDP of the country. The majority of equity investments have been made in financial service sector because the investors get a chance to generate more profits. CONCLUSION AND FINDINGS The Inflow of FDI as well as FDI Equity Inflow in India has shown positive and growing trends even at the time of recession period i.e, 2007-08 and 2008-09. The growth rate of FDI is also positive in majority of years taken for the Analysis, so it can be concluded that India has managed to attract more FDI as well as FDI Equity inflows in the country. The total Inflow of FDI has been Increased from 4,029US $ million in 2000-01 to 46,553 US $million in the year 2012-13, which can be considered as the success of the liberalized polices of the Indian Government. The service sector has attracted a significant portion of total FDI in Indian economy, which indicates that with few more steps and efforts by Government of India and RBI we can attract more and more FDI in India. India has been ranked at the second place in global FDI in 2010 and will continue to remain among the top five attractive destinations for Foreign Investors during the period 2010 to 2012 according to United Nation Conference on Trade and Development (UNCTAD) in a report on World Investments Prospects so The further inflow of FDI as well as FDI Equity Inflow can be expected in the coming years. The FDI can help to generate more employment opportunities, better technological development and healthy and competitive Work environment. India has attracted FDI equity inflows of US$ 2,014 million in December 2010. The cumulative amount of FDI equity inflows from April 18

2000 to December 2010 stood at US$ 186.79 billion, according to the data released by the Department of Industrial Policy and Promotion (DIPP). REFERENCES 1. Nayak, Amar KJR (2000), Patterns of FDI in India, Master s Dissertation, Graduate School of Business, Kobe University, Japan. 2. Kojima, Kiyoshi. Foreign Direct Investment: A Japanese Model of Multinational Business Operations, London: Croom Helm, 1978. 3. Garg,R., G.Kumra, A. Padhi & A. Puri.1996 Four Opportunities in India s Pharmaceuticals Market. 4. FDI in India and its growth linkages, NCAER, August 2009 5. Reserve Bank of India (2002), Report of the Committee on Compilation of Foreign Direct Investment in India. 6. Reserve Bank of India (2005), Financial Performance of FDI Companies in India, Reserve Bank of India Bulletin. 7. United Nations Conference on Trade and Development (UNCTAD) report on world Investment Prospects titled, 'World Investment Prospects Survey 2009-2012'. 8. 2010 survey of the Japan Bank for International Cooperation 9. UK Trade & Investment (UKTI) Report-2010 10. FDI Inflows in Indian Industry and Bhupal Singh (2005). Methodology, Compilation and Reporting of Foreign Direct Investment Statistics: The Indian Experience, Reserve Bank of India, Mumbai Annexures TABLE 1 FINANCIAL YEARWISE FDI INFLOWS IN INDIA YEAR TOTAL FDI INFLOW GROWTH RATE (%AGE) ( IN US$ MILLION) 2000-01 4029-2001-02 6130 +52% 2002-03 5035-18% 2003-04 4322-14% 2004-05 6051 +40% 2005-06 8961 +48% 2006-07 22826 +146% 2007-08 34843 +53% 2008-09 41873 +20% 2009-10(P) 37745-10% 2010-11(P) 34847-8% 2011-12(P) 46553 +34% SOURCE: RBI Bulletin and Department of Industrial policy and promotion Note: P- Provisional Data 19

TABLE 2 FINANCIAL YEARWISE FDI EQUITY INFLOWS IN INDIA YEAR TOTAL FDI EQUITY INFLOW GROWTH RATE (%AGE) ( IN US$ MILLION) 2000-01 2463-2001-02 4065 +65% 2002-03 2705-33% 2003-04 2188-19% 2004-05 3219 +47% 2005-06 5540 +72% 2006-07 12492 +125% 2007-08 24575 +97% 2008-09 31396 +28% 2009-10(P) 25834-18% 2010-11(P) 19427-25% 2011-12(P) 36504 +88% SOURCE: RBI Bulletin and Department of Industrial policy and promotion Note: P- Provisional Data TABLE 3 SECTORWISE FDI EQUITY INFLOWS IN INDIA SECTOR(S) TOTAL FDI EQUITY INFLOW %AGE OF TOTAL INFLOWS (2000-01 TO 2011-12) ( IN US$ MILLION) SERVICE SECTOR 1,49,751 19% TELECOMMUNICATIONS 57,111 7% CONSTRUCTIONS ACTIVITIES 53,204 7% COMPUTERS 50,422 6% HOUSING 50,422 6% DRUGS 44,957 6% CHEMICALS 39,092 5% POWER 33,741 4% AUTOMOBILE INDUSTRY 31,298 4% METALLURGICAL IND. 28,583 4% OTHERS 2,93,369 32% SOURCE: RBI Bulletin and Department of Industrial policy and promotion NOTE: Percentages are computed to the nearest decimal point. 20