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Foreign Direct Investment in India

ANIL DUGGAL

Chaudhary Ranbir Singh University, Jind, Haryana, India

*Corresponding Author:
ANIL DUGGAL
Chaudhary Ranbir Singh University
Jind, Haryana, India
Tel:
9034499557
Email: niladuggal@gmail.com

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Abstract

Investment is very important for the growth and prosperity of an economy. Domestic investment and foreign investment both are equally important. Domestic investment may lead to the creation of domestic savings, consumption, and employment. Foreign Investment can decrease the domestic saving gap. The main objective of the study is to examine the trends and patterns of foreign direct investment in India. The descriptive design has been adopted for a study purpose. Secondary data has been used. Statistical tools ANOVA, average, percentage, and CAGR have been applied. Data has been taken from 2005 to 2017. Showing the data of total FDI and total foreign investment in India during the period 2005-17, the study highlights the trends in the aggregate inflow of FDI in India during 2005-2010 and 2010-17. At the overall level RBI automatic route is found contributing the maximum share of 64.98% to the total FDI inflow.

Keywords

FDI; FIPB; Domestic Investment; CAGR; RBI

INTRODUCTION

Investment, or creation of capital, is a vital determinant of economic growth. In general, the investment may lead to the creation of physical capital goods, finance, and human capital. In grouping with other factors of production and technology, investment determines the levels and growth through changes in production and consumption of goods and services. Investments consist of foreign investment and domestic investment. Foreign investment can decrease the domestic saving gap. Hence, notwithstanding the domestic saving gap, economic growth can be increased in an open economic with inflows of foreign investment. The foreign investment in India would encourage the domestic investment. The foreign investments are approving to economic growth and developing countries like India. The multinational corporation is a suitable device to integrate world economy. The growth of foreign investment directly associated growth of multinational corporations. If backward and underdeveloped countries are interested in rapid economic development, they will have to import machinery, technical know-how, entrepreneurship, and foreign investment. One of the methods of paying for the import is to set up exports or second alternative is getting foreign technology and equipment and it also depends upon foreign assistance is some forms or the other. Most countries of the world which enhance the road to economic development, had to depend on foreign capital to some economic fact cannot be devised that foreign capital contributed in many important way process of economic growth and industrializations. Foreign direct investment is an investment involving a long term link reflects a lasting interest and control of a resident entity in one financial system on an entity resident in an economy other than that of the foreign direct investor, individual as business entities may undertake FDI, such investment involve both the transaction between the two entities and all following transaction between them among foreign affiliated.

REVIEW OF LITERATURE

Gupta and Singh [1] studied the inter-relationship between FDI and economic growth, net FDI inflows (US bn.$) and GDP (US bn.$) series are used. The sample countries for the analysis are all five BRICS nations individually viz. Brazil, Russia, India, China and South Africa. Khatun and Ahamad [2] examined the causal relationship between FDI in the energy and power sector, and economic growth in Bangladesh for the period 1972–2010. Related trend reveals a considerable gap between energy production and energy use during this period. Moreover, inflow trend of FDI was also fluctuating over the studied period. It found that there are robust positive and unidirectional short-run causal relationships running from FDI to energy use and from energy use to GDP growth. Athukorala [3] It suggested that horizontal (market seeking) FDI has continued to dominate South Asian intra-regional FDI, with a significant shift in recent years in favor of services sector activities. Khan and Hye [4] asserted that enhancing the inflow of foreign direct investment (FDI) and ultimately to increase the economic growth. This study makes an analysis of the impact of liberalization (financial and trade) in Pakistan, on the inflow of FDI using the time series data of 1971-2009. Duperon and Cinar [5] asserted that corruption is one of the major barriers that could potentially disrupt the inflow of FDI via the inherent risk of illegitimacies. The study suggested that transparent policies are essential to attracting long-term investments. Rai [6] suggested that India needs to provide incentives for foreign investors and remove the barriers to foreign investment and technology transfer into India and to further improve its investment environment condition such as political and legal factors to absorb foreign capital and advanced technology. Bransteeten, et al. [7] analyzed that Intellectual Property Rights, Imitation, and FDI: Theory and Evidence have the effect of strengthening Intellectual Property Rights (IPRs) on the level and composition of industrial development in the developing countries. They developed a North-South Product cycle model in which Northern innovation, Southern imitation, and FDI are all endogenous variables.

Aditya and Nigam [8] in his work “Globalization in the Indian Pharmaceutical Industry FDI spillovers and implications on Domestic Productivity: 1991-2007”, made an attempt to analyze and study the impact of globalization in the pharmaceutical industry and FDI spillovers in various forms to the domestic pharmaceutical industry in terms of domestic productivity and competitiveness etc. Narula and Lal [9] emphases that the factors that led to an optimization of the benefits from FDI for the host country. “With weak local capabilities, industrialization has to be more dependent on FDI. However, FDI cannot drive industrial growth without local capabilities”.

Blomstrom and Kokko [10] suggested that the strongest theoretical motives for financial subsidies to attract investment are spillovers of foreign technology and skills to local industry. Lyamoto [11] indicates that a high level of human capital is one of the key components for attracting FDI as well as for the host countries to get maximum benefits from these activities. Pradhan and Prakash [12] stated that for developing countries with higher human development, the impact of domestic investment on growth is not only positive but also statistically important, whereas, it has no significant impact in the case of developing countries with lower human development [13,14].

OBJECTIVE OF THE STUDY

To examine the Trends and patterns of foreign direct investment in India.

Hypothesis of the Study

Null hypotheses

H0: It is hypothesized that there is no significant difference in routes of FDI.

RESEARCH METHODOLOGY

The present research is mainly of quantitative nature, as most of the findings of the present study are based on quantified measures.

Research Design

In the present study, mainly descriptive research design has been adopted.

Data Collection

For this purpose, the prime sources of secondary data include DIPP, Reserve Bank of India Bulletins, etc. The Internet has also remained as an important source of secondary data.

Data Processing and Analysis

For analyzing the data, advanced statistical tools have been used. In some cases, simple statistics like average, percentage and CAGR have been applied. Exploratory research, require some advanced tools; therefore to test the various hypothesis of the study, ANOVA. The test was conducted at 95 percent confidence level (or 5 percent level of significance).

Period of the Study

The period of last 13 year from 2005-2017 and latest is taken for the present study.

This Table 1 clearly explains that the percentage share of foreign direct investments inflow is found more than 44.00 percent of total foreign investment throughout the study period, except the year 2005 and 2006. The table further shows that the total foreign direct investment of US$ 6051 million in 2005 to the inflow of US$ 60082 million in 2017 is a long journey of 13 years and represents an increase of 9.92 times. In 2012 inflow of FDI increased by 7.69 times touching the figure of US$ 46555 million. In the year 2010 FDI inflow declined to the US$ 37745 million due to slow FDI inflows in India. FDI decreased after the year 2012, touching the figure of US 46555 million in the year 2009 representing 149.45 percent of its total foreign investment. During the period of three (2009 to 2011) years’ inflows of FDI started declining, fluctuating, in different years. From the year 2012, the inflow of FDI again started increasing and touched the figure of US$ 46555 million in 2012. After that in 2013 FDI has been decreased and at last the inflow of FDI again started and touched the figure of US$ 60082 million in 2017. The CAGR of FDI is 19.31 percent. In the case of foreign investment, the CAGR is 12.12 percent. In the year 2009,2014 and 2016 inflow of FDI have increased to the level of US$ 41873, 36046 million and the US$ 55559 million and its percentage is 149.45,87.76 and 108.05 of total foreign investment respectively (Figure 1).

Table 1: Foreign direct investment and total foreign investment in India during 2005-2017.

Year FDI Total Foreign Investment Percentage
2005 6051 15366 39.38
2006 9697 22189 43.70
2007 22826 29829 76.52
2008 34843 62114 56.10
2009 41873 28018 149.45
2010 37745 70121 53.83
2011 34847 66318 52.55
2012 46555 63964 72.78
2013 34298 62067 55.26
2014 36046 41075 87.76
2015 44291 88353 51.10
2016 55559 51429 108.03
2017 60082 67994 88.36
CAGR 19.31% 12.12% -
internet-banking-investment

Figure 1: Foreign direct investment and total foreign investment in India during 2005-2017.

Trends in Aggregate Inflow of FDI in India

The yearly aggregate inflow of FDI has been computed on the basis of balances appearing on the last day of the financial year (31 March) in India. The total inflow of FDI accepted by the various channels under study can be reviewed with the help of the table. The data has been divided into two time periods according to the availability of data source. The scheme of data period has been categorized as follows 2005-2010 and 2011-2017 (Tables 2 and 3).

Table 2: Trends in Aggregate Inflow of FDI in India during 2005-2010.

Year Amount Index No. Growth Rate
2005 6051 100 -
2006 9697 160.25 60.25
2007 22826 377.23 138.61
2008 34843 575.82 158.60
2009 41873 692.00 148.00
2010 37745 623.78 104.76

Table 3: Trends in Aggregate Inflow of FDI in India during 2011-2017.

Year Amount Index No. Growth Rate
2011  34847 100 -
2012 46555  133.60 33.60
2013 34298  98.42 (0.79)
2014 36046  103.44 1.15
2015  45148  127.10 6.78
2016  55559  151.74 7.16
2017  60082  159.88 2.62

Table 2 shows that the aggregate inflow of FDI which stood at the US$ 6051 million in the year 2005 increased to the US$ 37745 million in the year 2010. The inflow of FDI increased at a high growth rate of 158.60 in the year2008 over the base year 2005. After analyzing the behavior of aggregate inflow of FDI it is concluded that the inflow of FDI has increased with a high growth rate within this 2005 to 2008. The inflow of FDI in India, as tabulated in Table 2 shows that they have gone up to US$ 44291 million in the year 2015 as against the US$ 34847 million in the year 2011. The inflow of FDI decreased in the year 2013 and 2014 in comparison to the base year 2011. But after the year 2013, it has been increasing consistently till the year 2017. The index number of the inflow of FDI varied between 98.42 to 159.88 during this period. The growth rate of this inflow of FDI was -0.79 in the year 2013 and growth rate of inflow of FDI was 2.62 in the year 2017.

FDI Inflows: Route wise Analysis

FDI is the most important source of foreign investment inflows in developing countries like India. Before 1991, the inflows of FDI in India were not at all satisfactory. But after the announcement of new industrial policy in July 1991, India has experienced acceleration in the inflows of FDI into the country (Table 4).

Table 4: Route wise inflow of FDI during the period 2005-2017.

Year FIPB % RBI % Other % Total
2005 1062 28.11 1258 33.30 1458 38.59 3778
2006 1862 38.70 2233 46.41 716 14.88 4811
2007 2156 13.08 7151 43.39 7174 43.53 16481
2008  2298 8.55 17127 63.75 7439 27.69 26864
2009 5400 16.84 21332 66.53 5334 16.63 32066
2010 3471 12.79 18987 69.94 4688 17.27 27146
2011 1945 8.74 12994 58.40 7311 32.86 22250
2012 3046 8.50 20427 56.97 12383 34.54 35856
2013 2319 10.13 15967 69.77 4598 20.09 22884
2014 1185 4.69 14869 58.83 9220 36.48 25274
2015 2219 6.96 22530 70.66 7163 22.45 31912
2016 3574 8.69 32494 79.04 5044 12.27 41112
2017 5900 13.20 30417 68.04 8388 18.76 44705
Total 36437 10.87 154875 64.98 67458 24.14 335139

The Table 4 further shows that the total amount of actual inflows of FDI during 2005-2017 accounted for the US$ 335139 million, out of which inflow of RBI’s automatic route had a significant share of 64.98 percent; government’s FIPB approval accounted for 10.87 percent and remaining 24.14 percent shared by another route. Government (FIPB) route has gained a lot of significance for inflow of FDI (Figure 2).

internet-banking-inflow

Figure 2: Route wise inflow of FDI during the period 2005 to 2017.

Since it has accounted for 28.11 percent to 13.20 percent of the total inflow of FDI from 2005 to 2017 in FIPB. RBI (automatic) route has attracted for 33.30 percent to 79.04 percent of the total inflows of FDI during the study period. The share of FDI inflows through other route has been in the decreasing order starting at peak 38.59 percent in 2005. Hence RBI’s automatic route is the most popular route till date (Table 5).

Table 5: FDI and FIPB, RBI and Other Routes.

Source of variation Sum of square Degree of freedom Mean square F
Between Group 1374.339 2 687.170  20.426
Within Groups  1211.105 36  33.642 -
Total  2585.444 38 - -

Inference

Since, the calculated value between FDI FIPB, RBI and Other Routes 20.426 is greater than the table value at 3.32 at 5 percent level of significance. Therefore the (H0) hypothesis is rejected and H1 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 FIPB, RBI and Other Routes.

FINDINGS AND CONCLUSION

FDI and Total Foreign Investment

The percentage share of foreign direct investments inflow is found more than 44.00 percent of total foreign investment throughout the study period, except the year 2005 and 2006. The table further shows that the total foreign direct investment of US$ 6051 million in 2005 to the inflow of US$ 60082 million in 2017 is a long journey of 13 years and represents an increase of 9.92 times. In 2012 inflow of FDI increased by 7.69 times touching the figure of US$ 46555 million. In the year 2010 FDI inflow declined to the US$ 37745 million due to slow FDI inflows in India. FDI decreased after the year 2012, touching the figure of US 46555 million in the year 2009 representing 149.45 percent of its total foreign investment. During the period of three (2009 to 2011) years’ inflows of FDI started declining, fluctuating, in different years. From the year 2012, the inflow of FDI again started increasing and touched the figure of US$ 46555 million in 2012. After that in 2013 FDI has been decreased and at last the inflow of FDI again started and touched the figure of US$ 60082 million in 2017. The CAGR of FDI is 19.31 percent. In the case of foreign investment, the CAGR is 12.12 percent. In the year 2009,2014 and 2016 inflow of FDI have increased to the level of US$ 41873, 36046 million and the US$ 55559 million and its percentage is 149.45,87.76 and 108.05 of total foreign investment respectively.

Aggregate Inflow of FDI in India

The aggregate inflow of FDI which stood at the US$ 6051 million in the year 2005 increased to the US$ 37745 million in the year 2010. The inflow of FDI increased at a high growth rate of 158.60 in the year2008 over the base year 2005. After analyzing the behavior of aggregate inflow of FDI it is concluded that the inflow of FDI has increased with a high growth rate within this 2005 to 2008. The inflow of FDI in India, as tabulated in Table 2 shows that they have gone up to US$ 44291 million in the year 2015 as against the US$ 34847 million in the year 2011. The inflow of FDI decreased in the year 2013 and 2014 in comparison to the base year 2011. But after the year 2013, it has been increasing consistently till the year 2017.

Route wise Analysis of FDI

The amount of Foreign Direct Investment in India has been approved by various routes such as government route (FIPB), RBI automatic route and other routes. It is observed that the US$ 335139 million of total foreign direct investment was received through all the three routes during the period from 2005-2017 under review. Out of the total amount, RBI accounted for the US$ 2,17,786 millions, forming 64.98 percent of total investment claiming a giant share. The government route (FIPB) and other route accounted for 10.87 percent and 24.14 percent respectively.

REFERENCES

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