UTMS Journal of Economics, Vol. 1, No. 2, pp. 1-16, 2010 M. Shamim Ansari, M. Ranga: INDIA’S FOREIGN DIRECT INVESTMENT: CURRENT STATUS ...

Original scientific paper Received: 27.06.2010

INDIA’S FOREIGN DIRECT INVESTMENT: CURRENT STATUS, ISSUES AND POLICY RECOMMENDATIONS Mohd. Shamim Ansari Mukesh Ranga
Bundelkhand University, Jhansi (UP) India CSJM University, Kanpur (UP) India1 Abstract: Foreign Direct Investment (FDI) as an important driver of growth. It is an important source of non debt financial resources for country for economic development. Besides it is a means of achieving technical knowhow and employment generation of employment. However, many are of the view that FDI is a big threat to sovereignty of host and domestic business houses. Faster exploitation of natural resources for profit may deprive host from such resources in long run. Midst of debate on pros and cons of FDI, world economy has observed a phenomenal change in volume and pattern of FDI. There is clearly an intense global competition of FDI. India is not behind this global race of attracting foreign investment. India emerged as an attractive FDI destination in services but has failed to evolve a manufacturing hub which has greater economic benefit. FDI though one of the important sources of financing the economic development, but not is not a solution for poverty eradication, unemployment and other economic ills. India needs a massive investment to achieve the goals of vision 20-20. Policy makers need to ensure transparency and consistency in policy making along with comprehensive long term development strategy. Key words: Foreign Direct Investment (FDI), analysis of investments in India, flow of FDI, policy recommendation.

INTRODUCTION Foreign Direct Investment (FDI) is now regarded as an important driver of growth. Emerging Market Economies (EMEs) look upon FDI as one the easiest means to fulfill their financial, technical, employment generation and competitive efficiency requirements. Gradually they also realized that substantial economic growth is inevitable without global integration of business process. This created opportunities for locational advantages and thus facilitated strategic alliances, joint ventures and collaborations over R & D. 1 Mohd. Shamim Ansari, PhD., Assistant Professor, Institute of Economics and Finance, Bundelkhand University, Jhansi (UP) India, Mukesh Ranga, Ph.D., Professor, Institute of Business Management, CSJM University, Kanpur (UP), India.

1

UTMS Journal of Economics, Vol. 1, No. 2, pp. 1-16, 2010 M. Shamim Ansari, M. Ranga: INDIA’S FOREIGN DIRECT INVESTMENT: CURRENT STATUS ...

The world economy has observed a phenomenal change in volume and pattern of FDI flow from developed nations to EMEs in 1980s and 1990s compared to earlier decades. The hostile attitude of developing nations regarding multinationals investment has become generous during this transition period. FDI was fostered by liberalisation and market-based reforms in EMEs. The financial sector deregulation and reforms in the industrial policy further paved the way for global investments. There is clearly an intense global competition for FDI. India has emerged as the second most attractive destination for FDI after China and ahead of the US, Russia and Brazil. In view of these facts, the present paper takes stock of current status of FDI in India, aims to find reasons for comparatively lesser flow of FDI and suggest measures to boost flow of FDI to India.

LITERATURE REVIEW Review of various literatures available on FDI reveals that foreign investment is still a matter of debate. Whether FDI is boom or bane for host countries economic growth and development? Opinions are still divided. FDI has its own advantages and disadvantages. Many scholars argue that through FDI developed nations may try to invade the sovereignty of host country. In order to earn quick profit they may exploit the natural resources at the faster rate and thus leave the host country deprived in the long run. It have been feared that FDI is a big threat to survival of domestic players. Many are of the opinion that basic objective of foreign investments is to earn profits by ignoring the overall social & economic development of the host nation. Thus, through this section an attempt has been made to discuss various issues raised by different scholars on the subject. It is universally acknowledged that FDI inflow offers many benefits to an economy. UNCTAD (1999) reported that Transnational Corporations (TNCs) can complement local development efforts by (i) increasing financial resources for development; (ii) boost export competiveness; (iii) generate employment and strengthening the skill base; (iv) protecting the environment to fulfill commitment towards social responsibility; and (v) enhancing technological capabilities through transfer, diffusion and generation. However, Te Velde, (1999) has rightly reported that in the absence of pro-active government policies there are risk that TNCs may actually inhibit technological development in a host country. Borensztein, et. al. (1998) reveals that FDI has a net crowding in effect on domestic private and public investment thus advancing overall economics growth. Crowding in effects of FDI varies with regions. There has been strong evidence of crowding-in in Asia and strong net crowding out effect in Latin America (Agosin and Mayer, 2000). By and large, studies have found a positive links between FDI and growth. However, FDI has comparatively lesser positive links in least developed economies, thereby suggesting existence of “threshold level of development” (Blomstrom and Kokka, 2003 and Blomstrom et. al., 1994). Athreye and Kapur (2001) emphasized that since the contribution of FDI to domestic capital is quite small, growth-led FDI is more likely than FDI-led growth. Dua and Rasheed (1998) indicted that the Industrial production in India had a unidirectional positive Granger-Casual impact on inward FDI flows. They also concluded that economics activity is an important determinant of FDI 2

UTMS Journal of Economics, Vol. 1, No. 2, pp. 1-16, 2010 M. Shamim Ansari, M. Ranga: INDIA’S FOREIGN DIRECT INVESTMENT: CURRENT STATUS ...

inflows in India and not vice-versa. Tseng and Zebregs (2002) reported that even in case of China causality between market size/growth and magnitude of FDI holds true. There is global race for attracting FDI, but how much it would contribute to host country’s economics development is to be assessed. Developing countries need to have reached a certain level of educational, technological and infrastructure development before being able to benefit from a foreign presence in their markets. Blomstrom et. al., (1994) have rightly observed that, the host country must be capable of absorbing the new technology manifested in FDI. An additional factor that may prevent a country from reaping the full benefits of FDI is imperfect and underdeveloped financial markets (OECD 2002). India appears to be well placed in terms of reaping benefits because it has relatively well developed financial sector, strong industrial base and critical mass of well educated workers (Rajan et. al., 2008).

RESEARCH METHODLOGY Objective of the Study The present study has been undertaken with a conduct empirical analysis of status of FDI in India and made some policy recommendation to boost flow of FDI to India. Thus the objectives of the study can be enumerated as follows: a) To analyze the pattern and direction of FDI flow in India. b) To identify factors those are responsible for comparatively lesser flow of FDI. c) To identify reasons for regional imbalances in terms of flow of FDI. d) To review FDI policy of India e) To address various issue and concern relating to FDI. f) To make policy recommendation to improve the level of FDI. Nature and Source of Data The prese...

-01 -02 -03 -04 -05 -06 -07 -08 -09 -10 -1296374 -15017 -16 -160381 -167684 -20 -200 -2000 -2009 -25 -26413 -312522 -566088 -7 -8 -91 /fdistatistics/ /wir /wp/wp0701b.pdf 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.9 01 025 08 080 1 1.1 1.2 1.3 1.6 1.9 10 10.7 100 100539 101098 1039 105429 10543 1072843 1079436 108025 108312 10837 1085 109 10918 109552 11 11.4 11.9 110 112643 1133 11442 11472 115 1158 1169 11727 1174 11786 12 12.5 12.8 12.9 12069 120808 12261 122707 122919 12319 123288 123508 1238 124 1254 1258 12621 1284 12887 129575 13 13.0 13.5 13.8 130 130778 131 1350 138910 1396916 14 14.0 14.6 14.8 1420 14344 14352 144492 14494 145179 146 1460 1461074 147949 14871 14909289 14th 15 15.3 15.4 15.6 1505 15320 1533 153875 15483 155 15585 15658 15660498 156623 15727 1595 159799 16 16.1 16.2 16.4 16.5 16.6 1613 16205663 16224 16226586 16236 16421 1645 16468 1647 165580 1657 168358 168515 1697259 1697353 17 17.8 1705 17074 17281 1736167 17517 176 17685 1771086 17758 17768 1785584 18 18.0 18.1 18.3 18.6 18182 1832 1833 1841 1847 1857734 1859 186105 1889 1892 19 19.2 19.3 190 1904 191 1919333 1931 193348 1942207 19539 1978838 1980s 1990 19902000 1990s 1991 19912000 1994 1995 1998 1999 2 2.3 2.8 2.9 20 20.9 2000 2001 20012009 2002 2003 2004 2005 2006 2007 2008 200809 2009 2010 2011 2032582 20328 20336 204196 20518 206621 20691 20734 2075 2098 21047 210533 21160 2121 213999 2146522 215282 2155 2157 218482 2195 2197 22 22.8 2201 220194 223130 22469 226 22826 2291 23 230134 231288 2339 2356649 2360772 23869 24 24.7 2402 24383 243858 245 24573 25 25.0 25.1 25.4 25127 25621 2574 2578 2581 2583855 26506 26589 266 2662 2666 2697 27 27.06.2010 27.3 270 27329 2750 2760 27758 27768 2780 279 27909 27928 2824 283402 28411 2843929 285486 2857 28759 28th 29.1 29.3 29.8 2905 290702 2915311 292 292710 2941724 29775 2978 3 3.1 3.3 3.4 3.5 3.6 3.7 3.9 30 30104 3075 31003 31059 32 3225 32487 3250 327087 328023 329328 329927 33 332682 336 3385 33982 34 3427 34718 34746 34835 34th 3515 35180 35536 358412 36 367565 3687 369 377 378083 37829 382 3831 3840 384414 3861 3875 388709 38934 390 3904 3922 4 4.1 4.2 4.3 4.5 4.8 40 401 4029 41554 4157 4164 42040 422 4273 4275982 428 42924 4322 433764 4377 438 4382 4393354 44 44080 4424 44483 4455 45 458 46 460 4628 463 465621 4686 4690 4696 47156 48 483 488 489 49 492528 492674 493665 495 5 5.0 5.1 5.8 5035 50669 5070 50794 508 51 5103 5142 5146 51555 517 5197 52 5212 52150 522562 528 52929 529344 529593 53 5392 54 540 5408 5438 5491 5540 5590 56162 5623 5641 5729 5757360 578098 5828 583 5983 5992 6 6.0 6.1 6.4 6.5 6.7 6.9 60145 6051 6060 6069882 6088 61 61052 6130 61349 613815 61523 61765 620733 62313 633 6373 64158 6419 6428 6430 65297 6639 666 67710 6795 6830 6919 6989 7 7.1 7.4 70630 713 718 72 72406 72715 7329 757 7577 7606 76763 7679 77 770 77849 7846 7866 8 8.2 8.3 8.5 8.7 8188 82 8220 826 83 83330 83521 8389 84424 852489 862358 8686 873809 874 8749 878988 879 8792 886596 892 896 8961 9 9.1 9.2 9.4 9.6 9.7 9.8 9.9 920 930 94341 95799 973329 98664 99 9926 a.i abl absenc absolut absorb abstract abund accord account achiev acknowledg acquisit activ actual acut addit address advanc advantag affect age agenc agosin agreement agricultur ahead aim air airport al alarm alcohol allianc allow alon along also aluminum america among amount analysi analyt analyz ancillari andhra annexur annual ansari appear applic appropri approv april april-jun archiv area arecelor arecelor-mitt argu around asher asia asian assess assist athrey atom attempt attitud attract attribut auto automat automobil automot avail averag avoid await b back back-offic backward balanc bane bank base basic bauxit becom behind benefit bengal besid best better big bihar blomstrom blomström bodi bond boom boost borensztein brand brazil brew broaden bundelkhand buoyant bureaucraci busi c call cannot cap capabl capit case cash casual caus causal ceil census cent center centr cert certain chanc chang chapter chemic chhattisgarh china cigar cigarett citi citizen claim class classif clear climat collabor collect commenc commerc commerci commit compani compar compet competit complement complet compon composit comprehens comput con concentr concern concess conclud conclus condit conduc conduct confid consider consist construct continu contract contribut contributor controversi convert cooper copi corpor correspond cost could counti countri country-wis cours creat credit crisi critic crore crowd crowding-in csjm cumul currenc current cut cyclic cyprus d d.w daigram daisuk data date davo day de debat debt decad decemb delhi demand demand-suppli depart depend depriv depth deregul destin determin develop diagram differ diffus dimens direct disadvantag discuss dispar disput distil distribut divid doesn dollar domest domin done doubl drink driver drug dua due dummi e earlier earn easiest econom economi economist ed educ effect effici effort either eiu electr eme emerg emphas empir employ encourag end endow energi enforc enhanc ensur enterpris entrepreneur enumer environ equip equiti era erad essenti estat et etc even evid evolv exampl exceed except excess exchang exchequ exclud exempt exist exploit explor explos export f face facil facilit fact factor fail far farmer faster favour fc fccbs fdi fdi-l fdi.india fear feder fertil fifth fii file financ financi find fipb firm first five fix float flow focus follow food foreign forget form format forum foster found franc friend friendlier fuel fulfil full fund gain gambl gap gas gdp gdr/adrs/fccbs gdrs/adrs gdrs/adrs/fccbs generat generous geneva geograph germani ghoshc given global goal goi good govern gradual granger granger-casu grant greater greenfield gregorio gross group grow growth growth-l gujarat h hard hardwar haryana hazard head health high higher highest hold hong host hostil hour hous howev hub huge human i.e idea identifi iem ignor ii iii il il-fc ill imbal imf immedi impact imperfect impli import impress improv incent includ inclus increas indepth index india india1 indian indic indict industri inevit inflow inform infrastructur infus inhibit initi inr institut instrument insur integr intellectu intellig intens interest intern internet intra intra-compani intracompani introduc introduct invad invest investor invit inward issu itali iv j japan jhansi jharkhand job joint journal june kanpur kapur karnataka key kilomet kind knowhow knowledg kokka kokko kong kpos kumar labour lack lag land larg last latin least leav led lee less lesser lesson level leverag liber liberalis licens like limit link lipsey liquid list literatur loan local locat london long look loss lot lotteri low lump m m.g machineri macroeconom made magnitud maharashtra main major make maker manag manchest mani manifest manpow manual manufactur margin market market-bas mass massiv matter mauritius maxim maximis may mayer mean measur medic medium memorandum mention merger metallurg methodlog midst might million mine miner minimis minimum ministri minus miss mittal mncs mobil mohd moreov mou movement much mukesh multin multipl mumbai must n nadu nation natur nber ncr necessarili need negat net netherland new newli nine no.02/3 no.146 no.9489 non norm normal note notifi nri number object observ obtain oceania oecd offer offic one one-fifth open oper opinion opportun order organis orient origin orissa otherwis outflow outsourc outstand outward overal oversea overview oxford p packag pain pakistan panacea paper paramet pari part particular partner patent pattern pave payabl payment pend per percent percentag perform period permit persist petroleum ph.d pharmaceut phd phenomen pictur place player plenti polici pool poor poorer popul popular port posit potenti poverti power pp pp.115-135 pp.153-168 pp.399-424 pp.521-533 practic pradesh prefer presenc present press pressur prevail prevent previous primari prioriti privat pro pro-act problem procedur process product professor profit project promot proper properti pros prospect protect provid public publish purpos qualiti quantiti quick quit r r.s race railway rais rajan rajana ramkishen ramya ranga rank rashe rate rather ratio rational rbi reach real realiz reap reason rebat receiv recent recess recommend record recoveri reduc refer refin reform regard region region-wis regist regul regulatori reinvest relat relax relev remain remark remov repercuss report requir research reserv resourc respect respons rest restrict result retail return reveal revers review rich right rigid rise risk road role rongalab rose rout royalti rs.5 rule run rupe rural russia sale scale scholar scientif scope second secondari section sector sector-wis secur seek seem select sentiment serious servic set seven shake shamim share shortag show sia similar simpl simplifi sinc singapor singl situat size/growth skill small smaller social softwar solut sourc south sovereignti special spread stabil state statist status step still stock stori strateg strategi strengthen strive strong structur studi sub subject subsidi substanti substitut success suggest sum sunil suppli support surg surviv sustain sweetest system tabl taiwan take taken talent tamil target tariff tax taxat te technic technolog telecommun term territori thailand therebi though threat threshold thus time tncs tobacco today top total tough toward track trade transcript transfer transfer-diffusion-gener transit transnat transpar transport treat trend tri true tseng two two-fifth u.k uae uk unctad underdevelop underinsur understand undertak undertaken unemploy unidirect unincorpor union unit univers unskil upon upto us usa use utm v vargil vari various veld ventur versa vice vice-versa view vision vol volum w wage want way week wef well weltwirtschaftlich west whether whichev whole wide window wir wise within without word work worker world worth would www.spp.nus.edu.sg www.spp.nus.edu.sg/wp/wp0701b.pdf www.unctad.org www.unctad.org/fdistatistics/ www.unctad.org/wir year york zebreg zejan