ECONOMICS PROJECT

Dr. RAM MANOHAR LOHIA

NATIONAL LAW UNIVERSITY

Final draft : The Impact of FDI on Indian

Economy

SUBMITTED BY:

UNDER THE GUIDANCE OF:

SPARSH YADAV

Dr. MITALI TIWARI

ROLL NO: 146

ECONOMICS TEACHER

SECTION B

DR. RAM MANOHAR LOHIYA

B.A. LLB (Hons.), SEMESTER I

NATIONAL LAW UNIVERSITY

ECONOMICS PROJECT

ACKNOWLEDGEMENT
I would like to express my gratitude towards all those whose help and constant
support the project would not have reached its current facet. I would take
advantage of this situation to thank my parents and my guardians without whose
constant support and guidance, I really owe it a lot to them.
However, foremost I would like to thank Dr. Mitali Tiwari, my Economics
teacher for his kind guidance and for quenching my queries on many doubts and
technicalities which I came up during the making of this project; this project
would not have seen the light of the day without his constant direction and
guidance.
I would also like to thank all of my friends and seniors who aided me along the
way. I must also extend my gratitude to the library and library personnel who
provided me with research material and good books to work upon.

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TABLE OF CONTENTS

TOPICS

PAGE

NUMBERS
BACKGROUND
.1
RESEAECH
QUESTIONS
.1
OBJECTIVES
.1
RESEARCH
METHODOLOGY
1
ANALYSIS
.2
CONCLUSION
.2
INTRODUCTION
4
CONTEXTUAL
BACKGROUND.5

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FDI IN
INDIA
..6
FDI INFLOWS IN 200015..7
GOVERNMENT POLICIES AND ITS
EVALUATION.9
POLICIY
SUGGESTIONS
11
CONCLUSION
..14
REFERNCES
..16

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Background :-

FDI refers to capital inflows from abroad that are

invested in or to enhance the production capacity of the economy. Despite
globalization, the essential role of foreign direct investment (FDI) in economic
development has not changed. However, many mechanisms and dynamics of
FDI-assisted development have changed: there is greater variation in the kinds
of FDI, the benefits each offers, and the manner in which each interacts with the
host economy. FDI seen as an important catalyst for economic growth in the
developing countries, It affects the economic growth by stimulating domestic
investment, increasing human capital formation and by facilitating the
technology transfer in the host countries.

Research questions :1) 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?
2) What are the various set of factors which influence the flow of FDI?
3) What are the causes for low inflow in FDI in India?

Objectives :-

The study covers the following objectives:

To study the trends and pattern of flow of FDI.

To assess the determinants of FDI inflows.
To evaluate the impact of FDI on the Indian economy.
To know the flow of investment in India

Research Methodology :SOURCES OF DATA COLLECTION

The study is based on published sources of data collected from various sources.
The data was extracted from the following sources:
1)

Handbook of Statistics on the Indian economy, RBI, various issues

2)

Economic Survey, Government of India, various issues

3)

Department of Industrial Policy and Promotion (DIPP)

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4)

Secretariat of Industrial Assistance (SIA)

5)

Central Statistical Organization (CSO)

PERIOD OF STUDY
The magnitude of FDI inflows is analysed for a period of 15 years from 200001 to 2014-15. The factors which influence the flow of FDI into the country is
analysed during the Post Liberalization period i.e. from 2000 to 2015.

Analysis :- The study attempts to analyse the important dimensions of

FDI in India. The study works out on the pattern and trends of the main
determinants and dimensions of investment flow in India. The study also
examines the role of FDI on economic growth in India for the period 1991
2011. The period of study is important because:
July, 1991, India opened its doors to private sector and liberalized it economy.
Experience of South East Asian countries by liberalizing their economies in
1980s became stars of the economic growth and development in 1990s
India experience with its first generation economic reform and the country`s
economic growth and performance were considered safe heavens for FDI which
led to second generation of economic reform in India in first decade of century.
There is a considerable change in the attitude of both developing and
developed countries towards FDI. They both considered FDI as most suitable
form of external finance
Increase in competition for FDI inflows particularly among developing
nations.
Current issues related to FDI in Retail sector (Multi brand retail)

Conclusion :- FDI plays an important role in the long-term

development of a country not only as a source of capital but also for enhancing
competitiveness of the domestic economy through transfer of technology,
strengthening infrastructure, raising productivity and generating new
employment opportunities
The huge market size, availability of highly skilled human resources, sound
economic policy, abundant and diversified natural resources all these factors
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enable India to attract FDI. Further, it was found that even though there has
been increased flow of FDI into the country during the post liberalization
period, the global share of FDI in India is very less when it is compared to other
developing countries. Lack of proper infrastructure, instable government and
political environment, high corporate tax rates and limited export processing
zones are considered to be the major problems for low FDI into the country. To
overcome this situation, the Government should revise the sectoral cap and
bring more sectors under the automatic route. Therefore, there is an urgent need
to adopt innovative policies and good corporate governance practices on par
with international standards, by the Government of India, to attract more and
more foreign capital in various sectors of the economy to make India a
developed economy.

INTRODUCTION

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Foreign Direct Investment (FDI) is a 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 contributes positively towards economy on the
other hand if it is for short-term the purpose of making profit then it may be less
significant. FDI can be a powerful catalyst to spur competition in industries,
characterized by low competition and poor productivity. Examples include the
cases of consumer electronics in Brazil and India, food retail in Mexico, and
auto in China, India, and Brazil. Since economic reforms initiated in 1991,
Government of India has taken many programs to magnetize FDI inflows to
improve the Indian economy. While domestic investments add to the capital
stock in an economy, FDI plays a complementary role in overall capital
formation and in filling the gap between domestic savings and investment. At
the macro-level, FDI is a non-debt-creating source of additional external
finances. At the micro-level, FDI is expected to boost output, technology, skill
levels, employment and linkages with other sectors and regions of the host
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.

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CONTEXTUAL BACKGROUND
The historical background of FDI in India can be traced back with the
establishment of East India Company of Britain. British capital came to India
during the colonial era of Britain in India. After Second World War, Japanese
companies entered Indian market and enhanced their trade with India, yet U.K.
remained the most dominant investor in India. Further, after Independence
issues relating to foreign capital,
operations of MNCs, gained attention of the policy makers. Keeping in mind the
national interests the policy makers designed the FDI policy which aims FDI as
a medium for acquiring advanced technology and to mobilize foreign exchange
resources. With time and as per economic and political regimes there have been
changes in the FDI policy too. The industrial policy of 1965, allowed MNCs to
venture through technical collaboration in India. 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, aluminium 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 interministerial 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.

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FORIEGN DIRECT INVESTMENT IN INDIA

Foreign Direct Investment (FDI) is integral to the growth of the economy. It
plays an important role in the long-term economic development of a country
not only as source of capital but also for enhancing competitiveness of the
domestic economy through transfer of technology, strengthening infrastructure,
raising productivity and Generating new employment opportunities. FDI has an
important role on enhancing exports.
FDI is considered a development tool and as an important driver of
economic growth in India. India, the largest democracy in the world, with its
consistent growth performance and abundant skilled manpower, provides
enormous opportunities for investment, both domestic and foreign. India is the
fourth largest economy in terms of Purchase Power Parity and tenth largest
industrialised country in the world. Major initiatives that include industrial
decontrol, simplification of investment procedures, enactment of competition
law, safeguarding intellectual property rights, financial sector reforms,
liberalisation of exchange regulations, etc., have been taken which provide a
liberal, attractive and investor-friendly investment climate.
Foreign Direct Investment is of great importance for a developing
country like India. Most countries of the world which embarked on the road to
economic development had to depend on foreign capital to some extent. The
degree of dependence however varies with the extent to which domestic
resources could be mobilized, the state of domestic economy in respect of
technical progress, the attitude of the respective governments. But this fact is
beyond doubt that foreign capital contributes in many ways to the process of
economic growth and industrialisation. There are a number of factors
responsible for arising need for foreign capital for a developing country like
India which are as follows:
Domestic capital is inadequate required for economic growth and hence it
adds to the need to invite foreign capital.
There may be potential savings in a developing country like India, but
this may come forward in a higher level of economic activity. It is,
therefore, the foreign capital should help in speeding up economic
activity in the initial phase of development.

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For want of experience, domestic capital and entrepreneurship may not

flow into certain lines production. Foreign capital can show the way for
domestic capital.
Foreign capital along with it brings other scarce productive factors, such
as technical know-how, business experience and knowledge, which are
equally essential for economic development.
FDI is of paramount importance to the growth of the economy. FDI inflows
into India have gone up especially in the post-reform period. The share of
FDI inflows to India is not significant when it is compared to other
developing economies. However, India is a competitor in the market for FDI
inflows with the other developing countries. In this context, it is pertinent to
assess the determining forces of the FDI inflows into India so as to take
policy initiative to create a favourable atmosphere for FDI. Thus, the present
section tries to explore the determining factors of FDI inflows into India at
the macro level and the factors are known as the pull factors of FDI inflows.

FDI Inflows from 2000-2015

Financial Years
S 2000-01 to 2014-15
no. (up to February
2015)

1
2
3
4
5
6
7
8
9
10
11
12
13
14

2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15 (Apr
15
Feb, 2015)

Equity

FDI Flows into India

FIPB Route/ RBIs Equity capital of

Automatic Route/ unincorporated
Acquisition Route bodies

Total
FDI
Flows

2339
3904
2574
2197
3250
5540
15585
24573
31364
25606
21376
34833
21825
24299

61
191
190
32
528
435
896
2291
702
1540
874
1022
1059
975

4029
6130
5035
4322
6051
8961
22826
34843
41873
37745
34847
46556
34298
36046

%age growth
over previous
year (in US$
terms)
-0
(+) 52%
(-) 18%
(-) 14%
(+) 40%
(+) 48%
(+) 146%
(+) 53%
(+) 20%
(-)10%
(-)8%
(+)34%
(-)26%
(+) 5%

28815

863

41223

not applicable

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GOVERNMENT POLICIES AND ITS

EVALUATION
The Indian Government has taken a number of steps to show its
willingness to allow more foreign direct investment in the country. In the
infrastructure development sector, it has relaxed the norms pertaining to area
restriction, the laws regarding gaining a comfortable exit from a particular
project and the requirements relating to minimum capitalization. If companies
are ready to commit 30 percent of their investments for affordable housing, then
the rules for minimum capitalization and area restriction will be waived off. It is
expected that this will benefit the construction sector a lot, especially in the
form of greater investment inflow.
The situation will only get better once sectorial conditions are further
relaxed and the terms that have been used in the policy are clarified up to a
greater extent. This is likely to get more investment especially in the newer
areas. This will also act as a fillip for entities eagerly interested in developing
plots for serviced housing. This is going to be a major development considering
the fact that the land in the urban areas is inadequate. One also needs to factor in
the high costs of land in this regard. It will also lead to the creation of costbeneficial, affordable houses. It will help with the Smart Cities programme as
well. In the insurance sector too, the government has increased the upper limit
of FDI from 26 percent to 49 percent. It is an amalgamation of different areas of
investment such as:
Foreign portfolio investment
Foreign venture capital investment
Foreign institutional investment
Non-resident investment
Qualified foreign investment

The Indian Ministry of Finance has also proposed that 100 percent FDI
will be allowed in railways-related infrastructure. However, this does not
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include the operational aspects. While it is true that the foreign investors will
not be allowed to intervene in railway operations, they will be able to provide
for high-speed trains, such as bullet train, and enhance the overall network in
the process.
The ruling NDA government in the centre has announced a lot of
relaxations for FDI and the business done under the FDI umbrella in India. The
Union Budget presented in the Lok Sabha (the Lower House of the Parliament)
by Finance Minister Arun Jaitley mentioned that the procedures through which
the corporate houses attract foreign investment into India will be simplified and
made uncomplicated. From now onwards, there will hardly be any difference
between 'Portfolio Foreign Investment' and 'Foreign Direct Investment'. The
composite cap has replaced the concept of individual cap; for instance, there is
now a composite cap of 49 percent foreign investors allowed in the insurance
sector.
The Indian government, during the 2014-15 fiscal year, announced that it
would allow FDI worth US$ 14.65 billion into the railways infrastructure. Some
of the most expensive and largest railway projects will be carried out under
these investments.
During the next three years, ADAMA Agrochemicals, an Israeli firm, has
set its targets to spend US$ 50 million in India. The company plans to enhance
R&D and manufacturing facilities in India to grow at a better rate than the
current industry growth rate. Hundred percent FDI into the health sector will be
allowed by the Department of Industrial Policy and Promotion (DIPP) to enable
indigenous manufacturing and reduce imports of medical devices. By the next
fiscal year, the value of medical devices in the world market will be worth US$
400 billion. The equity investment in the real estate is expected to go twofold as
the Indian government has allowed 100 percent FDI into the construction sector.
As per the real estate experts' beliefs, the demand from foreign property buyers
will rise. Currently valued at US$ 1.5 billion, the real estate equity will reach a
value of US$ 3 billion in a few years, the experts and analysts opine.

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POLICY SUGGESTIONS
The Indian economy requires FDI to fill the gap between domestic savings and
investment and to boost productivity- and investment-led growth. Although
Indian FDI policy has been progressive, inflows have been far lower than
expected and lag behind those of competitors like China. Low levels of
investment and trade, combined with decelerating growth, have been causes for
concern in India. Manufacturing growth, which is essential for job creation, has
been sluggish due to flip-flops in government policymaking, a lack of policy
reforms, and an unfavourable investment climate in recent years. Some of the
factors that affect FDI inflow to India are inadequate infrastructure, inflexible
labour markets, difficult land-acquisition procedures, lack of progressive FDI
reforms, and lack of centre-state coordination. However, the government led by
Prime Minister Narendra Modi has undertaken a number of initiatives to restore
investor confidence, and several other positive reform measures are expected to
be implemented before the 2015-16 budget.
Policy Implications
Increasing the availability of quality infrastructure is critical to attracting
FDI, yet a number of legal and bureaucratic factors may limit future
developments. To create a healthy environment for infrastructure
development, the Modi administration needs to establish an appropriate
institutional framework that incorporates a dispute resolution mechanism,
independent regulatory authority, and a special investment law and tariff
policy.
Although the national government is aiming to encourage economic
experimentation, special economic zones (SEZ) in India have not been
successful. The government needs to rethink the size of SEZs, which are
currently relatively small, and provide SEZs sufficient transportation
infrastructure to connect to markets. Before approving SEZs, there is also
a need to ensure that utilities such as land, water, and power are available.
Bureaucratic obstruction is one of the major reasons for the slow
realization of FDI relative to approvals. Useful steps would be to
encourage every state to have a single nodal agency for approval and
clearances, and to improve coordination between the central government
and state-level nodal agencies.
China gets maximum FDI in the manufacturing sector, which has helped
the country become the manufacturing hub of the world. In India the
manufacturing sector can grow if infrastructure facilities are improved and
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labour reforms take place. The country should take initiatives to adopt
more flexible labour laws.
Though the Government has hiked the sectoral cap for FDI over the years,
it is time to revisit issues pertaining to limits in such sectors as coal
mining, insurance, real estate, and retail trade, apart from the small-scale
sector. Government should allow more investment into the country under
automatic route. Reforms like bringing more sectors under the automatic
route, increasing the FDI cap and simplifying the procedural delays has to
be initiated. There is need to improve SEZs in terms of their size, road and
port connectivity, assured power supply and decentralized decisionmaking.
The issues of geographical disparities of FDI in India need to address on
priority. Many states are making serious efforts to simplify regulations for
setting up and operating the industrial units. However, efforts by many
state governments are still not encouraging. Even the state like West
Bengal which was once called Manchester of India attracts only 1.2% of
FDI inflow in the country. West Bengal, Bihar, Jharkhand, Chhattisgarh
are endowed with rich minerals but due to lack of proper initiatives by
governments of these states, they fail to attract FDI.
India has a well-developed equity market but does not have a welldeveloped debt market. Steps should be taken to improve the depth and
liquidity of debt market as many companies may prefer leveraged
investment rather than investing their own cash. Therefore it is said that
countries with well-developed financial markets tend to benefits
significantly from FDI inflows.
India has a huge pool of working population. However, due to poor
quality primary education and higher education, there is still an acute
shortage of talent. FDI in Education Sector is lesser than one percent. By
giving the status of primary and higher education in the country, FDI in
this sector must be encouraged. However, appropriate measure must be
taken to ensure quality education. The issues of commercialization of
education, regional gap and structural gap have to be addressed on
priority.
India should consciously work towards attracting greater FDI into R&D
as a means of strengthening the countrys technological prowess and
competitiveness.
Finally, it is suggested that the policy makers should ensure optimum
utilisation of funds and timely implementation of projects. It is also
observed that the realisation of approved FDI into actual disbursement is
quite low. It is also suggested that the government while pursuing prudent
policies must also exercise strict control over inefficient bureaucracy, red
- tapism, and the rampant corruption, so that investors confidence can be
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maintained for attracting more FDI inflows to India. Last but not least,
the study suggests that the government should ensure FDI quality rather
than its magnitude.

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CONCLUSION
Indias Foreign Direct Investment (FDI) policy has been gradually
liberalised to make the market more investor friendly. The results have been
encouraging. These days, the country is consistently ranked among the top three
global investment destinations by all international bodies, including the World
Bank, according to a United Nations (UN) report.
The Modi government has introduced a number of initiatives to both
attract FDI and liberalize FDI policy. These include improving infrastructure,
revisiting the land-acquisition law, reforming the labour law, and streamlining
the process for obtaining environmental clearances.
The next level of reforms and policies will need to address a broad range
of issues. Indian policymakers need to create a better environment for
infrastructure development with an appropriate institutional framework such as
a dispute-resolution mechanism, independent regulatory authority, and special
investment law. India will also need to revisit outdated laws, controls,
regulatory systems, and government monopolies affecting investment. As part
of this, both states and the national government need to agree on a Uniform
Labour Code after an independent review and proper consultation with
stakeholders. To make SEZs more attractive, proper planning and design should
include local-level solutions for land acquisition and infrastructure connectivity
to SEZs, along with sector-specific policies to attract FDI. Finally, to address
concerns raised by international stakeholders, Indian policymakers need to work
to increase FDI caps in sectors with FDI potential and allow more sectors to
come under the countrys automatic approval route to decrease the hurdles to
investing in India.
Foreign investors still find it difficult to navigate Indias bureaucratic
controls and procedures to get the necessary clearances and approvals.
Therefore, improving coordination between the states and the central
government for project clearance is imperative. The new government has
instructed different ministries to work together, and meetings are now
frequently held between ministries to sort out differences for quick project
clearance. However, this happens only at the level of the central government,
and it is yet to be seen how the Modi government will coordinate with state
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governments to eliminate outdated laws and improve governance. While the

Modi government is serious about improving the investment climate, foreign
firms need to better understand the Indian market and have their own R&D in
India to design products to cater to the price sensitivity of the Indian consumer
market. Although the reform measures announced by the new government are
only small steps, these measures have revived the hope of investors that in the
coming months, the Modi government will take more incremental steps to
restore investor confidence and once again make India into one of the most
attractive destinations for FDI in the world.

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REFERCENCES
1) Kapita, U. (Ed.). (2009). India's economic development since 1947 (4th ed., pp. 808810). New delhi: Academic foundation.
2) Gupta, K., & Gupta, J. (2013). Indian economy (Vol. 2). New delhi: Atlantic and
distributors (p).
3) Taneja, R. (2010). Fdi and globalization. New delhi: Eastern book company.
4) Bhasan, N. (2009). Fdi in India 1947-48 to 2007-08. New delhi: New century
publications.
5) Collins, D. (n.d.). The BRICS states and their outward FDI. Oxford University Press.
6) CIA World Facebook. (n.d.). Retrieved August 12, 2015, from
http://www.cia.gov/library/publications/theworldfacebook/

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