Trends And Patterns Of Fdi In India Essay

In the present epoch turning importance of FDI in developing states has led to the consequence to maintain in head that the benefits coming here from MNCs ( in the signifier of engineering spillover, coaction and competition ) to local houses is non a direct effect of foreign investing. These benefits can merely be realized if local houses achieve minimal threshold degree for absorbing spillover from MNCs, and if there exists effectual intercession of province policy to streamline the spillover from MNCs to domestic manufacturers. Furthermore, it depends on the factor gift in the state. For case, the handiness of quality substructure, scientific cognition, human capital, research and development activities, etc. , play a critical function in the drip down procedure from MNCs to local houses. In the absence of equal factor gift and effectual intercession of the regulative authorization, the entry of foreign investing may herd out the local investing and take to market concentration.

Against this background, the present survey efforts to analyse the influxs of FDI into India in response to assorted liberalisation steps announced by the Government of India since 1991. To be more specific, the aims of the survey are:

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Policy Overview

In the early old ages of independency, India ‘s development scheme was inward-oriented. The authorities emphasized on autonomy to construct a strong industrial base, particularly after the Second Industrial Policy Resolution of 1956. Subramanian ( 1996 ) identified four stages in the development of India ‘s FDI policy. The first stage of FDI was from 1948 to mid-1960. In this period, the Government of India announced two industrial policy declarations ( 1948 and 1956 ) , where the entry of FDI was marked by cautious welcome. The commanding involvement was expected to be with the Indians. During this period, the authorities introduced the Industries ( Development and Regulation ) Act, 1951 to modulate and command the development of private sector. The basic aim was to salvage scarce capital resources and to use these resources for development of precedences. The 2nd stage began by the mid-1960 and lasted till the late seventiess.

Monopolies and Restrictive Trade Practices ( MRTP ) Act was introduced in 1969 to forestall concentration of economic power and to command monopoly. Thereafter, the Industrial Policy Statement ( 1973 ) was formulated which made licencing compulsory for all the houses above certain size. In this period, external balance was non favourable and FDI outflows through reassign payment farther deepened the state of affairs. Therefore, the Government of India in 1973 formulated the Foreign Exchange Regulatory Act ( FERA ) 3 that came into consequence in January 1, 1974, to restrict the escape of foreign exchange. With tightening of limitations, this stage saw the issue of many taking MNCs, like IBM, Coca-Cola, etc. , from India.

By late seventiess, the state entered into the 3rd stage with partial liberalisation policy marked by selective relaxation of controls in line with the recommendation of assorted commissions set up by the authorities in the context of industrial stagnancy since the mid- sixtiess. In this stage, peculiarly in the 1980s, foreign houses were allowed to put in India, but in coaction with Indian houses. 100 % foreign-owned houses were permitted merely in extremely export-oriented industries. Industrial Policy, 1980 was drafted with the purpose to better the fight of domestic houses along with technological up-gradation and modernisation.

Likewise, MRTP Act was amended in 1985, the maximal plus bound for identified monopolies was raised and big concerns were permitted to put in some restrictive sectors. A figure of policy and procedural alterations were announced in 1985 and subsequent old ages, with the aim to get the better of the inefficiency developed in Indian industries during the restrictive policy government. Following this partial liberalisation stage, the Government of India announced a series of liberalisation steps in the early 1990s with the purpose of bettering industrial fight every bit good as to fix Indian industries to stand on their ain to confront international competition.

In line with the liberalisation steps announced during the 1980s, the Government of India announced ‘New Industrial Policy ‘ ( NIP ) on July 24, 1991 as a portion of ‘New Economic Policy ‘ . With the proclamation of 1991 reform bundles, India entered into the 4th stage known as the period of ‘open door policy ‘ or ‘market-led development scheme ‘ . The NIP deregulated the industrial economic system in a significant mode. Among others, the cardinal purpose of 1991 industrial policy was to better efficiency and thereby to achieve international fight by bettering fight of Indian industries ( Government of India, 2001 ) . To achieve these aims, the authorities introduced a series of enterprises with respect to policies such as industrial licensing, public sector policy, MRTP Act, 1969, foreign investing and engineering coaction, industrial location policy, phased fabrication plans for new undertakings, and FERA.

The royalty payment bounds were increased to promote engineering import. Furthermore, foreign equity keeping degree was raised to 50 % , 74 % and 100 % . Thereafter, the authorities allowed free repatriability, except where FDI blessing was capable to specific conditions. In the visible radiation of the above treatment, one can state that India ‘s FDI policy became extremely broad in the post-reform period. Now, FDI in India is approved through two paths: automatic and individual authorities blessing.

In order to mobilise investing from the NRIs Overseas Corporate Bodies, the authorities has allowed them to put in lodging and existent estate development sector. Furthermore, authorities has allowed them to keep up to 100 % equity in civil air power companies, where earlier merely up to 40 % foreign equity was allowed. As a consequence of the liberalisation of India ‘s extremely regulated FDI policy, there has been a voluminous addition in the influx of FDI into our state.

Data Beginnings and Methodology

The information on FDI influxs were taken from assorted secondary beginnings such as and Secretariat for Industrial Assistance ( SIA ) . SIA is published by Ministry of Commerce and Industry and it provides informations on FDI influxs at sector/industry degree every bit good as the information on FDI by beginning state is besides available. But the information on FDI influxs across state is non available. Therefore, the informations on FDI influxs of other states were collected from World Investment Report, yearly published by UNCTAD ( united states bureau ) . From World Investment Report, we can acquire country-wise tendencies in FDI influxs and escapes.

To obtain the tendencies and forms of FDI in India, we calculated the compound mean one-year growing rate of FDI in assorted fabricating industries. Further, the ratios of India ‘s FDI inflows to the universe FDI and to India ‘s GDP were besides calculated.

Observed Tendencies and Patterns of FDI

It is observed from the aforesaid treatment, that the Government of India has initiated assorted liberalisation steps to pull FDI inflows into India. As a consequence of these policy, The 1956 industrial policy had reserved 17 industries for the public sector. The 1991 industrial policy reduced this figure to eight. By May 2001, merely three industries were reserved entirely for public sector. With the amendment of FERA 1973, the ceiling bound of 40 % foreign equity was removed. FERA was subsequently replaced by FEMA.

Through automatic path, the foreign investor does non necessitate anterior blessing from the authorities. Investing can increase through automatic path and there is a demand to inform the regional subdivision of the Central Bank of India about the investing within 60 yearss of investment.8 Industries that do non fall under automatic blessing can acquire their proposals cleared through Foreign Investment Promotion Board.

Given the policy enterprises announced by the Government of India, the FDI inflows into India increased aggressively in the post-reform period ( Table 1 ) . It is deserving observing that the informations since 2000-01 are non comparable to the informations prior to it. This is because of the alteration in the definition of FDI to convey it in line with the international patterns. In an attempt to convey the Indian definition in line with that of IMF, the coverage of FDI since 2001-02 includes, besides equity capital ( i.e. , RBI automatic path, SIA/FIPB path, NRI acquisition of portions, etc. ) , reinvestment net incomes ( including net incomes of FDI companies ) , and other direct capital ( like, intercorporate debt minutess between related entities ) .

On history of the remotion of limitations on FDI influxs by most of the developing economic systems since the late seventiess, it is non merely of import, but besides worthwhile to compare the FDI inflows into India with that of the other developing economic systems ( Table 1 ) . It is noticed that the FDI inflows into developing economic systems grew quickly during the post-reform epoch. Comparing India ‘s FDI tendency with that of China and other states reveals that it is non so singular, but compared to India ‘s past FDI influxs, it has increased at an unprecedented rate in the recent period.

Furthermore, the interesting point to be noted here is that the FDI influx into India has improved at much faster gait in comparing to that of the other developing states since 2000 ( see Table 1 ) . For case, the FDI influx into India increased from $ 7.61 bn in 2005 to $ 22.95 bn in 2007. As per UNCTAD ( 2007 ) , India emerged as the 2nd most of import finish after China for foreign investors.

Table 2 presents the portion of India ‘s FDI in universe FDI. It is apparent that India ‘s portion in universe FDI has increased well during the liberalisation period. For case, India ‘s portion in universe FDI increased from 0.11 % in 1990 to 0.79 % in 2005, and later to 1.25 % in 2007. However, it is observed that FDI inflows into India have fallen in 2000. This lag in FDI might be attributed to the negative spillover caused by the East Asiatic Crisis in 1997.

Table 3 presents the portion of major foreign investors ( states ) in India. It is apparent that Mauritius emerged as one of the largest foreign investors in India during the period 1991-2007. The houses based in Mauritius accounted for about 41 % of entire FDI inflows into India during the period August 1991-March 2007. The US ( 11.39 % ) , the Netherlands ( 5.67 % ) , and Japan ( 5.02 % ) followed at 2nd, 3rd and 4th places, severally.

The major ball of FDI inflows into India from the top investors is chiefly invested in fuels, electrical equipment, telecommunications, nutrient processing, service, power, and transit sectors ( SIA Newsletter, 2007 ) . Indeed, it needs to be pointed out that the FDI influx from Mauritius to India is misdirecting. This is so because Mauritius has a really low rates of revenue enhancement and it has entered into an understanding with India to avoid double-taxation for corporations. In order to acquire benefits out of the low revenue enhancement understanding between Mauritius and India, big figure of foreign houses and even some Indian houses started dummy companies in Mauritius, and so invested in India via Mauritius.

FDI inflows into India as per centum of Gross Domestic Product ( GDP ) increased from 0.03 % in 1990-91 to 0.66 % in 1995-96 ( Table 4 ) .

FDI inflow farther increased from 0.96 % in 2000-01 to 2.36 % in 2006-07. The ascertained rise in FDI influxs was about 79 times between 1990-91 and 2006-07. This implies that FDI inflow as per centum of GDP has improved significantly during the liberalisation epoch.

Some research workers province that the sudden rise in FDI was the consequence of liberalisation of India ‘s extremely regulated FDI policy and betterment in structural factors, such as market size, quality of substructure, revenue enhancement grant etc.

The alteration in blessings and the per centums of realisation of FDI over clip indicates that India ‘s attack ( policy and processs ) toward FDI has undergone important alterations.

Table 5 shows that FDI blessings were much higher than the existent realisation of FDI influxs in the early old ages of economic reforms in India. This may be because FDI blessing took clip for existent realization.9 Since 2002, the realisation of FDI influx has been more than that of blessing of FDI. For case, existent realisation of FDI influx increased from 18.1 % in 1992 to 71.67 % in 2000 and farther to 218 % in 2006. This is because of the puting up of the Foreign Investment Implementation Authority for speedy transmutation of FDI blessings into realisations. Further, routing most of the FDI through automatic blessing, enabled India to turn FDI blessings into existent influxs of FDI.

Table 6 shows the compound growing rate of FDI influxs in some selected fabrication industries of India. The growing rate of FDI influxs was found to be positive in selected fabrication industries, which indicated that the influx of foreign investing rose across assorted industries during the period 1996-2006. However, the growing rate of FDI inflow differs from industry to industry. Some industries such as electrical equipment, transit, telecommunications, metallurgical, and drugs and pharmaceuticals, showed really high rate of growing of foreign investing compared to the fuel and chemical industries.


The chief aim of the survey was to research the emerging tendencies of FDI inflows into India against the background of a series of liberalisation steps introduced in mid-1980s and further in 1991.The major findings of the survey are as follows: First, it is observed that India ‘s FDI policy has passed through four major stages. A major alteration has been observed in the 4th stage ( started in 1991 ) of FDI policy, wherein the limitations on FDI influxs were eliminated to a considerable extent. Now, FDI in India gets approved through two paths: automatic and individual blessings. Second, the FDI influx into India has increased aggressively during the post-reform period. India ‘s portion in universe ‘s entire FDI influx besides experienced a positive tendency and increased by 11.36 times between 1990 and 2007.

Further, in comparing to China and other East Asiatic economic systems, the tendency of FDI influx into India was non really impressive boulder clay tardily 1990s, but improved unusually in the subsequent period peculiarly after 2000. As per World Investment Report ( 2007 ) , India emerged as the 2nd most of import finish after China, for foreign investors in the recent period.

Third, the ratio of India ‘s FDI inflows to GDP besides increased between 1990-91 and 2006-07, from 0.03 % in 1990-91 to 2.36 % in 2006-07. Furthermore, the per centum of existent realisation of FDI influx to blessing has improved surprisingly after 2000. The puting up of the Foreign Investment Implementation Authority for speedy transmutation of FDI blessings into realisation and routing most of the FDI through automatic blessing enabled India to turn FDI blessings into existent influxs of FDI. Nonetheless, the growing rate of FDI influxs in selected fabrication industries was besides found to be positive though it varied from industry to industry. The concentration of FDI has shifted from fabricating sector to services sector as India ‘s service sector has experienced high growing in the recent old ages.

From the above treatment, it is apparent that FDI inflow into India increased aggressively in the post-reform period. The tendency of FDI has been positive in India and at planetary degree in the post-reform period. The increasing influx of FDI into India is partially attributed to lifting influx of FDI at planetary degree and partially to liberalization policies proclaimed in the late eightiess and early 1990s. Further, the MNCs expanded their activities in other developing states with the aim of cut downing their cost of production on the one manus, and to seek for new markets on the other.