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The Role of Foreign Direct Investment (FDI) in India-

An Overview
Dr.S.SHALINI
ASSOCIATE PROFESSOR
CHRIST ACADEMY INSTITUTE OF LAW,
BANGALORE.

ABSTRACT

FDI plays an important role in the Economic development in India, because it helps to bring close the different
economies of the country by investing capital through FDI in various areas like manufacturing, infrastructure, transport,
technology, productivity and hospitality etc. Foreign capital is seen as a means of filling in gaps between domestic
savings and investment. India attract record levels of foreign investment is an explicable source of pride. Between the
market size, investment reform, and economic growth rates, India has the right mix of openness and chance. Yet, India
seems to be suffering from many restrictions and challenges regarding opening its markets completely too universal
investors. Some of the major challenges in the area of FDI are: political instability, infrastructure Facility, tax policies,
corruption, governmental regulations and so on .The present article has focused on the trends of FDI Flow in India .and
the patterns of foreign investment into India . This article tries to present “The Role of Foreign Direct Investment
(FDI) in India”

1.1 INTRODUCTION

Foreign direct investment (FDI) has increased financial stability, growth and positive growth rate in GDP in India. FDI
as a planned component of investment is needed by India for achieving the economic reforms. The government should
plan the FDI policy in such a way where FDI inflow can be utilized as a means of improving domestic production,
savings and exports through the equitable distribution among states. The impact of FDI inflows into India in recent
years is highly significant. The tremendous growth of global FDI around the world makes it an essential component for
the development of both the developed and developing nations. Both home and host countries are interested in taking
advantages out of FDI like market openness, technological advancement, managerial skills and increase in foreign
exchange.

The impact of globalization has made India to open the country’s market to foreign investments. They further allowed
FDI in India after making necessary changes in economic policy. Trade barriers were removed, Indian industry had a
tremendous growth in all sectors. As a result India has improved a lot in terms of technological development, improved
exports- imports,

This article tries to reveal “The Role of Foreign Direct Investment (FDI) in India and also mainly focused on
pattern of investment in India and the sector wise investment in India. It also tries to analyse the relationship between
foreign direct investment and GDP contribution.

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1.2 REVIEW OF LITERATURE

Ramesh Abhishek (2018)1 DIPP Secretary said Foreign direct investment in India increased to USD 61.96
billion in 2017-18. He also said that during the last four years, foreign inflows jumped to USD 222.75 billion
from USD 152 billion.

According to the UNCTAD’s Investment Trends Monitor (2018)2 India was the 10th largest recipient of global
FDI in 2017 and remained to be the topmost destination for Greenfield capital investment – even ahead of China
and the US, if reckoned on an approval basis. FDI inflows were mostly in Mauritius and Singapore due to
amended double taxation avoidance agreement between these countries. Further, the increase in foreign capital
was mainly due to higher flows into the communication services, retail and wholesale trade, computer services
and financial services.

Roohi Javed and Farheen Javed (2018)3, in their study outlines the definition of foreign direct investment (FDI)
and the non-adherence to international norms in measuring the FDI inflows by India. The study also finds that
portfolio investors and round-tripping investments have been important contributors to India’s reported FDI
inflows. The FDI inflows during 1991–1992 to April 2015–December 2015 were taken for study. FDI as a strategic
component of investment is needed by India for achieving the economic reforms and maintaining the pace of
growth and development of the economy. The impact of FDI inflows into India in recent years is highly significant.

Vanita Tripathi, Ritika Seth and Varun Bhandari (2015)4 in their article attempts to find out the relationship between
FDI and six macroeconomic factors like Exchange rate (` per $), Inflation (WPI), GDP/IIP (proxy for Market size),
Interest rate (91 days T-bills), Trade Openness and S&P , CNX 500 Equity Index (profitability) using monthly and
quarterly data for the period starting from July 1997 to December 2011. The results reveals a significant correlation
between FDI and all macroeconomic variables (except for Exchange rate). Causality results reveals that IIP/GDP, WPI
and S&P CNX 500 Equity Index are Granger causing FDI inflows in India while Trade Openness is Granger caused
by the same. All the macroeconomic variables taken in the article (except exchange rate) are significantly affecting
FDI inflows and the overall explanatory power of the regression model, Since, they found positive relationship between
FDI and profitability and also a higher investor’s confidence in domestic market act as a stimulus in getting more FDI
inflows.

Sahana Joshi and R.V. Dadibhavi (2008), in their paper aims to identify a set of factors based on economic literature
and theory that influence FDI flows across 19 Indian states. The study also analyses the influence of totality of
investment climate using nine variables viz., market size, availability of good quality physical infrastructure as proxied
through Telecommunication infrastructure and power availability, level of urbanisation, and industrialisation,
availability of quality human capital and technical manpower, presence of Research and Development Institutions and
export oriented units.

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1.3 OBJECTIVES OF THE STUDY

The following are the objectives of the present study.

1. To study the trends and patterns of flow of FDI into India from 2013-14 to 2017-18
2. To analyse the share of top investing countries FDI inflow.
3. To know the relationship between FDI inflow and GDP

1.4 METHODOLOGY

The present study is based on the secondary data collection from various published and unpublished sources i.e.,
Reserve Bank of India (RBI), United Nations Conference for Trade and Development (UNCTAD), journals,
economical survey report, etc. Statistical tools such as percentage, Trend analysis and correlation have been used in
the study. For data illustration, suitable diagrams and charts have also been used.

1.5 Determinants of FDI in India

 Stable policies attract investors across the border and they prefer those countries with stable policies.
 Economic factors like tax exemption and subsidies to foreign investors will attract FDI
 Availability of abundant labours both skilled and unskilled at low cost will be attracted
 Infrastructure facility , information and communication is a must for development of business. FDI helps in
achieving the same
 Availability of natural resources attracts FDI in to the country

1.6 Advantages of FDI

The growth of FDI in our country will bring the following advantages:

 Development of various industrial units will boosts the economic life of the people
 More opportunities in trading of goods and services in terms of import and export.
 Increase in number of employment opportunities.
 Technological Advancement in all areas
 Outsourcing of knowledge from one country to other
 Helps in stabilizing the economic situation

1.7 Challenges for low FDI flow to India

India, considered to be the safe haven for foreign investors and also has more reasons for attracting FDI. Yet, it also
suffers from various challenges. Some of the major challenges are

 Inadequate infrastructure facilities discourages many foreign investors in investing in India

 Labour laws, Allegations of Corruption and lack of institutional reforms are one of the important hurdles for
inflow of FDI.
 Inadequate decision making capacity among the authorities in the country will slow down FDI inflow.
 Unclear and changing incentive packages
 Domestic industries struggle to survive due to monopoly and overflow of cheap products.
 Unethical behavior is increasing day by day.
 Increase in foreign dependency will affect our overall development

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1.8 Need for FDI in India

As a developing country India need more capital for economic development of the country. India is facing various
challenges in health sector, education, infrastructure development, technological upgradation and global completion.
The flow of capital will help India to meet and overcome the challenges. Still there are various positive reasons for
inflow of FDI in India. The study focuses on the trend of FDI inflows in our country , also tries to analyse the share of
investors from various country wise and sector wise.

1.9 FDI ENTRY ROUTES INTO INDIA

India gets FDI through automatic route and Government routes. By Automatic route FDI is allowed without prior
approval by government or Reserve Bank of India. By Government Route prior approval is needed . Foreign Direct
Investment in India does not have a uniform rate. Some industries allow 100% FDI, i.e. the entire funds of the business
can be from foreign direct investment. The percentages vary from 26% to 49% to 51%. There are a few industries
where FDI is strictly prohibited under any route.

1.10 DATA ANALYSIS:-

1.10.1 SECTOR WISE FDI EQUITY INFLOWS IN INDIA:
The sector wise FDI equity inflow of data was analysed for the year 2016-17 and 2017 - 18
Table 1
Table showing sector wise FDI Equity Inflows in India
Amount in Rs. crores (US$ in million)
Sector 2016-17 2017-18 % age to total Inflows (In terms of
US$)
1 Services Sector 58214 43249 21
2 Computer Software &
Hardware 24605 39670 19
3 Telecommunications 37435 39748 19
4 Trading 15721 28078 13
5 Construction (Infrastructure)
Activities 12478 17571 8
6 Automobile Industry 10824 13461 6
7 Power 7473 10473 5
8 Chemicals (Other Than
Fertilizers) 9397 8425 4
9 Drugs & Pharmaceuticals 5723 6502 3
10 Construction Development 703 3472 2
182573 210649 100
(source: http://dipp.nic.in/)
Table No 1 shows the FDI inflow into India in various sector. Among all the major sectors the highest investment
attracted by way of FDI is in service sector followed by computer software & hardware and telecommunication.
Construction Development are least attracted by FDI in India

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Sector wise FDI inflow

70000
60000

percentage
50000
40000
30000
20000
10000 2016-17
0
2017-18

Chart No: 1 Sector wise FDI inflow

1.10.2 SHARE OF TOP INVESTING COUNTRIES FDI EQUITY INFLOWS

The share of top ten investing countries in India in terms of FDI were analysed for the period 2016-17 and 2017-18

Table No:2
Share Of Top Investing Countries FDI Equity Inflows
2016-17 %age of growth over
Country (April – 2017-18 (April previous year
March) % share –March) % share
MAURITIUS 105587 40 102492 41 41
SINGAPORE 58376 22 78542 32 32
JAPAN 31588 12 10371 4 4
UK 9953 4 5473 2 2
NETHERLANDS 22633 9 18048 7 7
USA 15957 6 13505 5 5
GERMANY 7175 3 7391 3 3
CYPRUS 4050 2 2680 1 1
FRANCE 4112 2 3297 1 1
UAE 4539 2 6767 3 3
263970 100 248566 100 100
(source: http://dipp.nic.in/)

As per Table No.2 , in respect of share of top investing countries in FDI equity inflows, it is found that Mauritius and
Singapore ranked top in inflows for the period. The highest investment was made by Mauritius in both the years
followed by Singapore whereas lowest investment was invested by Cyprus and France followed by UK.

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Chart No 2 : Percentage share of top Investing countries

Share of Top investing countries

45
40
35
Percentage

30
25
20
15 2016-17
10 2017-18
5
0

1.10.3 SHARE OF TOP INVESTMENT COUNTRIES CUMULATIVE FDI INFLOWS

The cumulative share of top ten investing countries in India in terms of FDI were analysed

Table 3
Share of Top Investment Countries cumulative FDI inflows
cumulative %age of share
inflows
Country (Apr'00 -
June '18
MAURITIUS 698498 32.31
SINGAPORE 436914 20.21
JAPAN 158521 7.33
UK 135373 6.26
NETHERLANDS 140846 6.52
USA 126362 5.85
GERMANY 60410 2.79
CYPRUS 49672 2.30
FRANCE 34346 1.59
UAE 33529 1.55
2161624 100

As per Table No 3, the share of the top investing countries cumulative inflow into India for the years 2000 -2001 to
2017 -18. The highest investment was invested by Mauritius in India which covers 32% of the total investment among
the top investing countries in India. The lowest investment was invested by UAE which covers 1.55

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Chart No 3 : Share of Top Investment Countries cumulative FDI inflows

Percentage of Cummulative Inflow of

FDI
32.31

20.21

7.33 6.26 6.52 5.85

2.79 2.30 1.59 1.55

1.10. 4 FDI inflows - Trend Analysis

FDI inflows in India over the selected 5 years period were analysed

Table 4
FDI inflows in India

Year FDI
2013-14 24299
2014-15 30931
2015-16 40001
2016-17 43478
2017-18 44857

The inference of Table 4 in terms of FDI inflows in India from 2013-14 to 2017-18 reveals that FDI inflows increased
due to major reforms taken up by Indian government. The liberalization process motivated higher inflow during the
year 2015-16.

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Chart No 4 : FDI inflows in India

FDI
50000

45000

40000

35000 FDI
Linear (FDI)
30000

25000

20000
0 2 4 6 8

1.10.5 Correlation between FDI inflows in India and GDP

To study the effect of GDP on the FDI inflows in India Correlation analysis were used. For studying correlation of
FDI inflows, GDP contribution were taken from the year 2013-14 and 2017-18 and will try to find out how strongly
these two variables are related to each other. The Pearson Product-Moment Correlation Coefficient of these values can
be calculated using the Excel Pearson function, as follows:
=PEARSON( A2:A21, B2:B21 )

Hypothesis:

“There is no significant relationship between FDI inflows and GDP contributions”.

Table No:5 FDI inflows in India and GDP

FDI GDP
2013-14 24299 1856
2014-15 30931 2039
2015-16 40001 2102
2016-17 43478 2274
2017-18 44857 2597

Interpretation

Using the data (Table No 5) correlation analysis were done to show how the FDI and GDP are strongly related to
each other. Correlation Analysis gives the result 0.87310, which indicating a strong positive correlation between the
two sets of values.

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Correlation between FDI inflows and GDP ( r) =0.873

Coefficient of Determination: r2 =(0.873)2 = 0.7621
76% 0f FDI inflows get influence because of GDP contribution
As calculated value is greater than expected significance value our null hypothesis will be accepted, which
means there is no significant relationship between FDI inflows and GDP contributions.

SUMMARY
OUTPUT

Regression Statistics
Multiple R 0.873109
R Square 0.76232
Adjusted R
Square 0.683094
Standard
Error 4959.344
Observations 5

ANOVA
Significance
df SS MS F F
Regression 1 2.37E+08 2.37E+08 9.622023 0.053215
Residual 3 73785276 24595092
Total 4 3.1E+08

Standard Upper Lower Upper

Coefficients Error t Stat P-value Lower 95% 95% 95.0% 95.0%
Intercept -23010.3 19380.92 -1.18726 0.320566 -84689 38668.46 -84689 38668.46
-
X Variable 1 27.47676 8.857932 3.101939 0.053215 -0.71313 55.66665 0.71313 55.66665

Significant correlation with r=0.87. Approximately 76% of variation in FDI inflow and GDP. Significant linear
regression with p value is 0.053215.

R is 0.87 which shows that there is correlation between FDI and GDP but it is greater than 0.5 which shows the
correlation is significant. It can also be interpreted from the r square value which is 0.76 which shows significance
correlation.

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CONCLUSION

The research paper was mainly focused on study of foreign direct investment in India and pattern of investment in India
and different sectors in India. The analysis shows that service sector in India is the one of the sector in which foreign
direct investment is consistent in couple of years, followed by which is the manufacturing and construction sector.
Service Industry, telecommunication sector , construction activities followed by trading activities are major sectors
which attracted higher inflows of FDI in India. Countries like Mauritius and Singapore were among the leading sources
of FDI in India. The research paper also focused on studying influential effect of GDP contribution & growth rate on
FDI inflows in India. After studying data on FDI inflows and GDP detailed analysis was done by using correlation and
regression analysis which shows that there is no such significance relationship between FDI inflows and GDP. Hence
as a conclusion we can say that FDI inflows hardly get influenced by GDP contribution and growth rate of industries.

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