Impact of Foreign Direct Investment on Indian economy

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. 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 study tries to find out how FDI seen as an important economic catalyst of Indian economic growth by
stimulating domestic investment, increasing human capital formation and by facilitating the technology
transfers. The main purpose of the study is to investigate the impact of FDI on economic growth in India.

Keywords: Economic growth, FIPB, foreign direct investment, inflow

Introduction

Foreign Direct Investment (FDI) is fund flow between the countries in the form of inflow or outflow by which one can
able to gain some benefit from their investment whereas another can exploit the opportunity to enhance the productivity
and find out better position through performance. The effectiveness and efficiency depends upon the investors
perception, if investment with the purpose of long term then it is contributes positively towards economy on the other
hand if it is for short term for the purpose of making profit then it may be less significant. Depending on the industry
sector and type of business, a foreign direct investment may be an attractive and viable option. Any decision on
investing is thus a combination of an assessment of internal resources, competitiveness, and market analysis and market
expectations.

The FDI may also affect due to the government trade barriers and policies for the foreign investments and leads to less
or more effective towards contribution in economy as well as GDP of the economy. The studies try to find out the
implications which affect the economic scenario and also measure the level of predominance by the factors for
economic contribution to India.

Contextual Background

After independence in India 1947, FDI gained attention of the policy makers for acquiring advanced technology and to
mobilize foreign exchange resources. In order to boost the FDI inflows in the country Indian government allowing
frequent equity participation to foreign enterprises apart from provides many incentives such as tax concessions,
simplification of licensing procedures and de-reserving some industries like drugs, fertilizers, aluminum etc. But due to
significant outflow of foreign reserve in the form of remittances of dividends, profits, royalties etc in 1973 government
of India set up Foreign Investment Board and enacted Foreign Exchange Regulation Act in order to regulate flow of FDI
to India. Further Government of India set up Foreign Investment Promotion Board (FIPB) for processing of FDI
proposals in India. The Board is the apex inter-ministerial body of the Central Government that deals with proposals
relating to FDI into India for projects or sectors that do not qualify for automatic approval by the Reserve Bank of India
(RBI) or are outside the parameters of the existing FDI policy.

It could be observed that there has been a steady build up in the actual FDI inflows in the pre-liberalization period in
table-1. But measures introduced by the government to liberalize provisions relating to FDI in 1991 increased FDI
Rs.2705 crores in 1990 to Rs.123378 crores in 2010. The list of investing countries to India reached to 150 in 2010 as
compared to 29 countries in 1991. Nevertless, still a lion’s share of FDI comes from only a few countries.

Table-1
FDI inflows in India (from 1948-2010)
Amount of FDI Mid 1948 March 1964 March 1974 March 1980 March 1990 March 2000 March 2010
In crores 256 565.5 916 933.2 2705 18486 123378

International Science Congress Association 29

Research Journal of Management Sciences
_______________________________________________ The growth of FDI gives opportunities to Indian industry
_________ISSN 2319–1171 for technological up gradation, gaining access to global
Vol. 1(2), 29-31, September managerial skills and practices, optimizing utilization of
(2012) human and natural resources and competing
1
internationally with higher efficiency .
Table-2
Share of top ten investing countries in FDI inflows (Financial year
wise)Review of Literature: This section reviews the empirical
Ranks Country 2008-09 2009-10 studies on the relation between FDI and economic
(April- (April-
March) March) activities in India. One school of thought argued that FDI
1 Mauritius 508993.1 496333.7 has a negative impact on the growth of India because FDI
2 Singapore 157266.7 112948.2
3 U.S.A. 80017.8 92304.3 flows mainly towards the primary sector which basically
4 U.K. 38404.1 30941.5 promoted the less market value2. However another school
5 Netherlands 39215 42826.7
of thought argued that FDI inflow into the core sectors is
6 Japan 18885.6 56704
7 Cyprus 59828.3 77275.8 assumed to play a vital role as a source of capital,
8 Germany 27497.3 29800.4 management and technology in countries transaction
9 France 20980.5 14368.3
10 U.A.E 11333.3 30168.2 economies3.
Total FDI Inflows 1230248.8 1231196.4

Table-2 shows the actual investment flows of top ten

countries during the period of 2008-09 to 2010-11. The
FDI stock for this period from Mauritius is the largest 42
percent. The other top nine countries are Singapore, USA,
UK, Netherlands, Japan, Cyprus, Germany, France and
UAE. It implies that these top ten countries accounted for
well over 78 percent of the FDI inflows during the above
period. The Mauritius which was not in the picture till
1992 has the highest growth rate because such investment
is represented by the holding companies of Mauritius set
up by the US firms. The reason behind the US companies
have routed through Mauritius is the tax treaty between
Mauritius and India stipulates a dividend tax of five
percent while the treaty between Indian and US stipulated
a dividend tax of 15 percent.
 investment prospects India has been ranked at the third
Despite India offering a large domestic market and low place in global foreign direct investments in 2009 and will
labour costs due to restricted FDI regime, high imports continue to remain among the top five attractive
tariffs, exit barriers for firms, stringent labour laws, poor destinations for international investors 2010-11 7.
quality infrastructure, centralized decision making
processes and a very limited scale of export processing To sum up, it can be said that government should
zones make India an unattractive investment location 5. simplifying and relaxing entry barriers for business
However there have different views in this context 6. The activities and providing investor friendly laws and tax
new economic liberalization policy in 1991 the FDI inflow system for foreign investors. Somewhere, a restriction
in India in-depth in the last fourteen years makes the related to the track record of Sub-Accounts is also to be
country progress in both quantity and the way India made on the investors who withdraw money out of the
attracted FDI. The study also finds out that R&D as a Indian stock market who have invested with the help of
significant determining factor for FDI inflows for most of participatory notes. We have to modernize and also have to
the save our culture. Similarly the laws should be such that it
protects domestic investors and also promote trade in
industries in India. According to 2005, United Nations country through FDI.
Conference on Trade and Development report on world
Policy Initiatives
In the comparative study of FDI and economic growth for
Indian and Canada found that India does not figure very The Government of India has released a comprehensive
much in the investment plans of Canadian firms due to FDI policy document effective from April 1, 2010.
lack of information of investment opportunities in India. Furthermore, the government has allowed the Foreign
To come forward and enhancing Canadian FDI in India he Investment Promotion Board (FIPB), under the Ministry
suggested highlighted opportunities in India through of Commerce and Industry, to clear FDI proposals of up to
4
publishing newsletter . US$ 258.3 million. Earlier all project proposals that
involved investment of above US$ 129.2 million were put
up before the Cabinet Committee of Economic

International Science Congress Association 30

Research Journal of Management Sciences ________________________________________________________ISSN
2319–1171
Vol. 1(2), 29-31, September (2012) Res. J. Management
Sci.
member of Multilateral Investment Guaranty Agency
Affairs (CCEA) for approval. The relaxation would (MIGA) is making its presence felt in the economic
expedite FDI inflow. landscape of globalised economies which will help a
conducive and healthy atmosphere for foreign investors
During April 2010, Mauritius invested US$ 568 million in and thus resulting in substantial amount of FDI inflows in
India, followed by Singapore which invested US $434 the country.
million and Japan that invested US $327 million
according to latest data released by DIPP. It shows that State wise FDI inflows show that Maharashtra, Delhi,
there has been a significant shift in the character of global Karnataka, Gujarat and Tamil Nadu together accounted
capital flows to the India in recent years in that the more 75 percent of inflows during 2000-2010 because of
predominance of private account capital transfer and the infrastructural facilities and favourable business
especially portfolio investment increased considerably. environment provided by these states. Despite troubles in
the world economy, India continued to attract FDI inflows
The importance of FDI received special impetus towards mainly because Government of India open-up with
the end of 1992 when the Foreign Institutional Investors flexible investment regimes and policies prove to be the
(FIIs) such as pension funds, mutual funds, investment horde for the foreign investors in finding the investment
trusts, asset management companies, nominee companies opportunities in the country.
and incorporated / institutional portfolio managers were
permitted to invest directly in the Indian stock markets. In
order to attract portfolio investments which prefer
liquidity, it has been advocated to develop the Indian stock
markets. The foreign portfolio investment not only do they
expand the demand base of the stock market, but also
stabilize the market through investor diversification.

In order to have a flow of FDI, India maintained Double

Tax Avoidance Agreements (DTAA) with nearly 70
countries of the world. India has signed 57 (up to 2006)
numbers of Bilateral Investments Treaties (BITS). The
numbers of BITS are signed with developing countries of
Asia 16, the Middle East 9, Africa 4, and Latin America 1
apart from the developed nations 27. India as the founding
member of General Agreement on Tariffs and Trade
(GATT), World Trade Organization (WTO), a signatory
member of South Asian Free Trade Area (SAFTA) and a
 1. Ministry of Finance, Report of the economic survey,
Conclusion Government of India, New Delhi (2003-04)

Foreign Direct Investment (FDI) as a strategic component 2. Weisskof T.E., The impact of foreign capital inflow
of investment is needed by India for its sustained on domestic savings in underdeveloped countries,
economic growth and development through creation of Journal of International Economics, 2, 25-38 (1972)
jobs, expansion of existing manufacturing industries, short
and long term project in the field of healthcare, education, 3. Sahoo D. Mathiyazhagan M.K. and Parida P., Is
research and development (R & D) etc. Foreign Direct Investment an engine of growth?
Evidence from the Chinese economy, Savings and
Government should design the FDI policy such a way Development, 4, 419-439 (2002)
where FDI inflow can be utilized as means of enhancing
domestic production, savings and exports through the 4. Nayak D.N., Canadian Foreign Direct Investment in
equitable distribution among states by providing much India: Some observations, Political Economy Journal
freedom to states, so that they can attract FDI inflows at of India, 8, 51-56 (1999)
their own level. FDI can help to raise the output,
productivity and export at the sectoral level of the Indian 5. Srivastava S., What is the true level of FDI flows to
economy. However, it can observed the result of sectoral India?, Economic and Political Weekly, 19, 1201-
level output, productivity and export is minimal due to the 1209 (2003)
low flow of FDI into India both at the macro level as well
as at the sectoral level. Therefore for further opening up of 6. Basu P., Nayak N.C. and Vani A., Foreign Direct
the Indian economy, it is advisable to open up the export Investment in India: Emerging Horizon, Indian
oriented sectors and higher growth of the economy could Economic review, 25, 255-266, (2007)
be achieved through the growth of these sectors.
7. Weisskof T.E., The impact of foreign capital inflow
References on domestic savings in underdeveloped countries,
Journal of International Economics, 2, 25-38 (1972)