Recent Trends in Indian Economy- An impact of FDI in various sectors Essay

FOREIGN DIRECT INVESTMENT is an important catalyst for accelerating Indian economy. The productivity level of FDI is higher only when a host country has minimum stock of human capital and technology. The liberalized economics policies have increased economic growth. The government is latest economic policy has allowed 51% FDI in Multi Branding and 49% in aviation sector. The Equity inflows by sector are 22% in service sector, 9% in software and hardware, 8% in telecommunications, 8% in housing and real estate, 7% in construction activities, 4% in power, 4% in automobile industry, 3% in metallurgical, 2% in petroleum and natural gas, 2% in chemicals, 31% in other. The increase in flow of foreign currency which raise GDP of Indian economy. The GDP before 1991 was very low and the economy was very weak. In 1991 the government took back foot and introduced LPG which allowe FDI to enter into the Indian economy which bought a tremendous change and India grew. The Indian government allowed FIPB proposal up to $258.3 million. The FDI policy document if effective from April 1, 2010. The foreign bodies authorized by the Indian government who monitors FDI% are: FIPB: Foreign Investment Promotion Board.

SIA: Secretariat for Industrial Board.
FIIA: Foreign Investment Implementation Board.
RBI: Reserve Bank of India, Investment Commission, Project Approval Board.

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INTRODUCTION

FOREIGN DIRECT INVESTMENT is an investment made by a company or entity based in one country, into a company or entity based in another country. FDI differ substantially from indirect investment such as portfolio flows, wherein overseas institution invest in equities listed on a Nation Stock Exchange. The entities making direct investment typically have a significant degree of influence and control over the company into which the investment is made. Open economies with skilled workforce and good growth prospects tend to attract larger amounts of FDI than closed, highly regulated economies speaking FDI refers to capital inflows from abroad that invest in the production capacity of economy are “usually preferred over other forms of external finance because they are non-debt creating, non-volatile and their returns depend on the performance of the projects financed by the investors. FDI also facilitates international trade and transfer of knowledge, skills and technology. ”

RESEARCH QUESTION:
“WHAT WILL BE THE IMPACT OF FOREIGN DIRECT INVESTMENT ON INDIAN ECONOMY?” OBJECTIVE:
The study was conducted to study the impact of FDI on various sectors of Indian economy.

LITERATURE REVIEW:
According to research done by Singer, 1950; Griffin, 1970; Weisskof, 1972, The main argument of these studies was that FDI flows to Less Developing Countries (LDCs) were mainly directed towards the primary sector, which basically promoted the less market value of this sector. Since these primary products are exported to the developed countries and are processed for import, it receives a lower price for its primary product. This could create a base for the negative impact of FDI flows in the economy.

According to research done by Rodan (1961), Chenery and Strout (1966), in the early 1960s argued that foreign capital inflows have a favorable effect on the economic efficiency and growth towards the developing countries. It has been explained that FDI could have a favorable short-term effect on growth as it expands the economic activity.

According to research done by Caves, 1974; Kokko, 1994; Markusen, 1995; Carves, 1996; Sahoo, Mathiyazhagan and Parida 2001, Foreign Direct Investment (FDI) inflow into the core sectors is assumed to play a vital role as a source of capital, management, and technology in countries of transition economies. It implies that FDI can have positive effects on a host economy’s development effort.

According to research done by Feenstra and Markusen, 1994, FDI is an important vehicle for the transfer of technology and knowledge and it demonstrates that it can have a long run effect on growth by generating increasing return in production via positive externalities and productive spillovers. Thus, FDI can lead to a higher growth by incorporating new inputs and techniques.

According to research done by Kumar and Pardhan, 2001, Foreign Direct Investment (FDI) has emerged as the most important source of external financial resource for developing countries and has become a significant part of economy in the development.

According to research done by Basu (2002), tried to find the short run dynamics of FDI and growth. The study reveals that GDP in India is not Granger caused by FDI; the causality runs more from GDP to FDI and the trade liberalization policy of the Indian government had some positive short run impact on the FDI flow.

RESEARCH METHODOLGY:
The study is descriptive in nature and therefore the information presented is based on secondary data. Secondary information has been collected from various documents such as books, newsletters, reports, magazines, journals, daily newspaper, websites related to foreign direct Investment (FDI).

To study the impact of FDI first we have to see the impact of FDI globally.

Global Outlook on FDI

Global flows of foreign direct investment (FDI) have halved in the last two years, Emerging markets have edged ahead of developed markets as the major destination. As higher-growth economies, emerging markets have proven better than developed markets at attracting FDI during the global downturn.

Structural Shift in Global FDI

The decline in global FDI flows in 2009 was accompanied by a distinct shift in the pattern of FDI. Economic theory tells us that capital should flow from capital-abundant rich countries to capital-scarce poor countries. In practice, that has not been the case as developed countries have consistently attracted the bulk of global FDI flows. High risk in many emerging markets, the benefits of advanced institutions and infrastructure and a superior overall business environment in developed countries have tended to outweigh the attractions of greater market dynamism and lower
costs in emerging markets. The share of emerging markets in global FDI has tended to rise during recessions as slumps in M&A have hit the developed world disproportionately. Despite the steadily increasing share in recent years of emerging markets in cross-border M&A, this still remains mainly a developed country phenomenon. In 2008 some 80% of cross-border M&A sales were still in developed states. However, the influence of the M&A factor has been reinforced by other developments which pushed the share of emerging markets in global FDI inflows to a record level in 2009. However, the relatively weak global recovery and continuing financial sector problems mean that the recovery in FDI will be gradual and we are unlikely to see a new surge in FDI any time soon. According to Economist Intelligence Unit forecasts, global FDI inflows in 2011 will still, in US$ terms, be slightly below the peak reached in 2007.

Indian Scenario of FDI

India’s economy is mostly dependent on its large internal market with external trade accounting for just 20% of the country’s GDP. Until the liberalization of 1991, India was largely and intentionally isolated from the world markets, to protect its economy and to achieve self-reliance. Foreign trade was subject to import tariffs, export taxes and quantitative restrictions, while foreign direct investment (FDI) was restricted by upper-limit equity participation, restrictions on technology transfer, export obligations and government approvals; these approvals were needed for nearly 60% of new FDI in the industrial sector. The restrictions ensured that FDI averaged only around US$200 million annually between 1985 and 1991; a large percentage of the capital flows consisted of foreign aid, commercial borrowing and deposits of non-resident Indians. India’s exports were stagnant for the first 15 years after independence, due to the predominance of tea, jute and cotton manufactures, demand for which was generally inelastic. Imports in the same period consisted predominantly of machinery, equipment and raw materials, due to nascent industrialization. Since liberalization, the value of India’s international trade has increased sharply. India’s major trading partners are the European Union, China, the United States and the United Arab Emirates. The exports during April 2007
were $12.31 billion up by 16% and import were $17.68 billion with an increase of 18.06% over the previous year. In 2006-07, major export commodities included engineering goods, petroleum products, chemicals and pharmaceuticals, gems and jewellery, textiles and garments, agricultural products, iron ore and other minerals. Major import commodities included crude oil and related products, machinery, electronic goods, gold and silver. Its September 2010 exports were reported to have increased 23% year-on-year to US $18.02billion, while its imports were up 26.1% at $27.14billion. At US$13.06billion August’s trade gap was the highest in 23 months but the economy is well on the road to cross $200 billion mark in exports for the financial year 2010-11. India is a founding-member of General Agreement on Tariffs and Trade (GATT) since 1947 and its successor, the WTO. While participating actively in its general council meetings, India has been crucial in voicing the concerns of the developing world. For instance, India has continued its opposition to the inclusion of such matters as labour and environment issues and other nontariff barriers into the WTO policies.

Sector Wise Inflow of FDI

Source/Industry
2007-08
2008-09
2009-10 P
2010-11 P
2011-12 P
US$ Million Sector-wise Inflows
Manufacture
3,726
4,777
5,143
4,793
9,337
Construction
2,551
2,237
3,516
1,599
2,634
Financial Services
3,850
4,430
2,206
1,353
2,603
Real Estate Activities
1,336
1,886
2,191
444
340
Electricity and other Energy Generation, Distribution ; Transmission 829
669
1,877
1,338
1,395
Communication Services
66
2,067
1,852
1,228
1,458
Business Services
1,158
643
1,554
569
1590
Miscellaneous Services
1,901
1,458
888
509
801
Computer Services
1,035
1,647
866
843
736
Restaurants ; Hotels
280
343
671
218
870
Retail ; Wholesale Trade
200
294
536
391
567
Mining
461
105
268
592
204
Transport
816
401
220
344
410
Trading
176
400
198
156
6
Education, Research ; Development
156
243
91
56
103
Others
884
1,097
384
506
419
P : Provisional.
Note : Includes FDI through SIA/FIPB and RBI routes only.

MEASUREMENT DESIGN:
As the research is an ex facto research, so the data would be extracted from past records, i.e. secondary source of data would be used. The trends would be studied and what growth each sector has attained from their respective FDI. The scaling technique that would be used would be ranking scale, paired comparisons. The study setting is unobtrusive, and the data so collected would be unobtrusive source of data. The tools for data collection would be records, the records of RBI and the companies. Even projective technique and observation can also be taken into notice.

Expected Outcome

The positive effects of inward FDI for workers in host economies suggest that FDI-friendly policies could be a useful component of an integrated policy
framework for development. When designing policies to promote FDI, policy-makers should take into account that these may not only affect the volume of inward FDI, but also its composition and, as a result, its corresponding benefits. The OECD Policy Framework for Investment provides a useful starting point. For a start, removing specific regulatory obstacles to inward FDI could be important.

There are two types of implications i.e. positive and negative as per following

Positive Implications

1. Foreign investors are able to finance their investments projects better and often cheaper. 2. Foreign corporations create new workplaces.
3. Foreign corporations usually help increase the level of wages in the target economy. 4. Foreign corporations usually have a positive effects on the trade balance.

Negative Implications

1. Repatriation of the profits can be stressful on the balance of payments. 2. Foreign corporations may cut working positions.
3. Possible environmental damage.
4. Missing tax revenues if the foreign players are getting tax holidays. BIBLIOGRAPHY:

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1. Barro, R. and Sala-i-Martin (1999) Economic Growth, MIT Press, Cambridge 2. Caves, R. (1996) Multinational Enterprise and Economic Analysis. Cambridge, England: Cambridge University Press.

3. Chakraborty, C. and P. Basu (2002) Foreign Direct Investment and growth in
India. 4. Dua, P. and A. I. Rasid (1998) FDI and Economic activity in India. Indian Economic Review, 33, No. 2, pp. 153-168.

5. Griffin, K. B. (1970) Foreign Capital, Domestic Savings and Development. Oxford Bulletin of Economics and Statistics, 32, pp. 99-112.
6. Reserve Bank of India (2001) RBI, Handbook of Statistics on the Indian Economy 7. Rodan, R. P. N. (1961) International Aid for Underdeveloped Countries. Review of Economics and Statistics, 43, pp. 107-138

8. Sahoo, D. and Mathiyazhagan M.K. (2003): “Economic Growth in India: Does Foreign Direct Investment Inflow matter?”, The Singapore Economic Review, 48, pp. 151-171 9. Kumar, N., and J.P. Pradhan (2002). Foreign Direct Investment, Externalities and Economic Growth in Developing Countries: Some Empirical Explorations and Implications for WTO Negotiations on Investment. RIS Discussion Papers 27, Research and Information System for the Non- Aligned and Other Developing Countries, New Delhi

10. Nagaraj, R. (2003) Foreign Direct Investment in India in the 1990s, Trends and Issues. Economic and Political Weekly, XXXVIII, No. 17, pp. 1701-1712

11. Nagaraj, R. (2003): “Foreign Direct Investment in India in the 1990s, Trends and Issues”, Economic and Political Weekly, XXXVIII, pp. 1701-1712 12. Pailwar, V. (2001) Foreign Direct Investment Flows to India ; Export Competitiveness. Productivity, 42, No. 1, pp. 115-122