EMPIRICAL STUDY

ON
“A Study on the Foreign Direct Investment and its impact on Economic

Growth of India”

SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS OF POST

GRADUATE DIPLOMA IN MANAGEMENT

TO
RAMAIAH INSTITUTE OF MANAGEMENT

BY

Vooka Ravi Teja

Reg. No. 171160

UNDER THE GUIDANCE OF

Prof. Dr.Triveni P.

RAMAIAH INSTITUTE OF MANAGEMENT

BANGALORE - 560 054.

Batch 2017 – 2019

 CERTIFICATE BY THE GUIDE

Certified that this dissertation titled “A STUDY ON THE FOREIGN DIRECT INVESTMENT
AND ITS IMPACT ON ECONOMIC GROWTH OF INDIA” is based on an original study
conducted by VOOKA RAVI TEJA REG. NO. 171160 under my guidance. He has attended
the required guidance sessions held. This project report has not formed a basis for the award
of any other Degree / Diploma of any University or Institution.

SIGNATURE OF THE GUIDE:

NAME OF THE GUIDE: PROF.Dr.Triveni P

DESIGNATION: ASSISTANT PROFESSOR

QUALIFICATION: MBA, M. Com, Ph. D

 STUDENT DECLARATION

I hereby declare that the Project Report on “A STUDY ON THE FOREIGN DIRECT
INVESTMENT AND ITS IMPACT ON ECONOMIC GROWTH OF INDIA” under the
guidance of PROF.Dr. Triveni P submitted in partial fulfillment of the requirements for the
degree of POST GRADUATE DIPLOMA IN MANAGEMENT is my original work and the
same has not been submitted earlier for the award of any other Degree/Diploma/Fellowship.

Place: Bangalore Vooka Ravi Teja

Date: January 2, 2019 Reg. No. 171160

 ACKNOWLEDGMENT

I extend my special gratitude to our Dean Dr. H. Muralidharan, Academic Head & Program
Head Dr. Savitha Rani Ramachandran for inspiring me to take up this project and also for their
able guidance and support in completing this internship.

I wish to acknowledge my sincere gratitude and indebtedness to my project guide PROF.

Dr.Triveni P of RAMAIAH INSTITUTE OF MANAGEMENT, Bangalore for her valuable
guidance and constructive suggestions in the preparation of project report.

STUDENT NAME: Vooka Ravi Teja

REGISTER NUMBER:171160
Executive Summary:

FDI consists of investments not merely financial but also direct investments in firm’s plant,
equipment and other assets. FDI gives the investor ownership and management assets. FDI
with its lasting nature and impact that is, as a tool for transfer of technology, managerial skills,
access to international markets and enhancement of productive ability is more popular in the
globalization era. FDI provides the much – needed investible resources and foreign exchange
for reviving Indian industry, improve the poor infrastructure, modernize the technological base
and foster greater competition in Indian manufacturing sector. On the other hand, critics of
foreign capital pointed out the poor record of multinational corporations in India, their
excessive profitability and their limited technology transfer. It is necessary to explore the
dimensions of FDI inflow such as trends, pattern, sector-wise, determinants and causal relation
between FDI and economic growth on Indian economy. The study deals with the trends and
patterns of flow of FDI of various sectors of India where the service sector is the major sector
in attracting FDI and as well as FDI has been constantly increasing in India due to the various
political reforms as well as liberalization of rules. Various economic variables such as Exports,
Foreign Exchange Reserves, GDP is having positive impact upon the FDI which depicts that
the increase in this economic variable will lead to the increase in the FDI which indicates a
direct relationship between each of them. The various neglected sectors are identified and
recommendations for the government towards attracting FDI for such neglected sectors are
made. Thus, the sector-wise inflows of FDI in India shows a varying trend but acts as catalyst
for growth, quality maintenance and development of Indian industries to a greater and larger
extend. The technology transfer is also seen as one of the major changes apart from increase in
operational efficiency, managerial efficiency, employment opportunities and infrastructure
development. India needs high and advanced technology use in production and marketing for
improving efficiency and competitiveness in the industrial sector and it would, therefore, be
analytically useful if sectoral pattern of FDI was one that was biased in favour of technology-
intensive sectors. FDI is an engine of economic growth and development of Indian economy
but in this respect proper directions are needed to improve the quality, quantity and allocation
of FDI in different sectors of the Indian economy as a whole.
 Table of contents:

S.no Topic Pg.no

Introduction 1

1.1 Introduction of foreign direct investment 2

1.2 Meaning of foreign direct investment 3

1.3 Economic growth 4
1.4 Relationship between FDI and Economic growth 5
1.5 Advantages of FDI 6

1.6 Types of FDI 7

1.7 Role of FDI 8

1.8 Need for FDI in India 9

1.9 Factors affecting Foreign Direct investment 10

1.10 Current scenario of FDI inflow in India 12
1.11 The entry routes for FDI 12

1.12 How FDI in India affects economic growth 14

2 Design of the study

2.1 Review of literature summary 17

2.2 Statement of the problem 21

2.3 Scope of the study 21
2.4 Objective of the study 21
2.5 Hypothesis 21
2.6 Methodology 22

2.7 Tools for testing/Plan of analysis 22

2.8 Limitations of research 22

3 Industry analysis
Introduction about services sector, Retail /whole sale trade, Hotel 24
Tourism, Transport, Mining, Construction sectors
s.no Topic Pg.no
4 Data analysis
4.1 Data analysis 32
4.2 Hypothesis testing 43
5 Findings, Conclusion, Recommendations
5.1 Findings 54
5.2 Conclusion 55
5.3 Recommendations 56
Bibliography
 List of tables

s.no Topic Page no.

Table 1 Sector wise analysis of FDI of past 5 years 32
Table 2 Ranking of sector wise analysis of FDI inflows 35
Table 3 Impact of FDI on exports, foreign exchange reserves, 39
GDP
Table 4 Permitted sectors of FDI 50

List of Charts

S.no Topic Page no.

1 Sector wise analysis of FDI of past 5 years 34
2 % of total FDI inflows in different sectors 35
3 Calendar year wise FDI inflows 37
4 Routes for clearance of FDI in India 38
5 FDI and Exports 40
6 FDI and Foreign Exchange Reserves 41
7 FDI and GDP 42
Chapter 1

Introduction

1
1.1 Introduction:

Foreign Direct Investment (FDI) is one of the main engines of globalization. In this globalized
era, foreign capital has assumed a lot of significance in accelerating trade and business
activities of a nation and for increasing the share of a country in international trade. In recent

decades the growth of FDI has served as a catalyst for investment in developing countries. FDI
brings the most needed capital, improved managerial skills, modern marketing techniques,
access to modern technology and global links. Since 1980 both developed and developing
countries have been trying to attract FDI through providing incentives by adopting better
deregulation policies and reliance on market forces in the economies.

Foreign Direct Investment is an essential tool for the economic growth and development. Most
of the governments improve FDI as first priority, mostly in low income and transition
economies. Foreign Direct Investment not only promotes capital formation but also because it

can attract the huge value of the capital stock.

FDI can transfer technologies and its spill over’s affect domestic firms, which may make them
more competitive and of a higher standard to that necessary to struggle with foreign firms and
products. FDI can also bring positive externalities to the economy such as training and labour

management opportunity from Multinational Companies. These may then be made generally

available in the economy and lead to an increase in the standards of production.

The UNCTAD (2008) reports that FDI inflows have the potential to build employment, transfer
skills and technology, raise productivity, increase exports, reduce imports and continue the
long-term economic growth and development of developing countries. Foreign Direct
Investment is also seen as the major source of external financing for developing and developed
countries.

2
1.2 Foreign Direct Investment:

Foreign Direct Investment (FDI) acting an amazing and growing role in international business.
For a host country or the foreign firm which receives the investment, it can provide a source of
innovative technologies, new market and marketing channels, organizational techniques,
capital, products, cheaper production facilities, management skills and financing and as such
can provide a strong progress to economic development. FDI is appraising of foreign

ownership of domestic productive assets such as lands, factories and organizations. Foreign
Direct Investments have become the main economic driver of globalization, accounting for
over head of every cross-border investments.

Foreign Direct Investment is a fundamental part of an open and effective international

economic structure and a major catalyst to economic development. The benefits of FDI do not

build up automatically and evenly across sectors, countries and local communities. National
policy and the international investment structural design for attracting FDI to a larger number
of developing countries and gathering the full benefits of Foreign Direct Investment for
development.

IMF define Foreign Direct Investment as “Investment that is made to acquire a lasting interest
in an enterprise operating in an economy other than that of the investor, the investor’s purpose
being to have an effective voice in the management of the enterprise”.

3
1.3 Economic Growth:

Economic Growth is the permanent development in the capacity to satisfy the demand for
goods and services, resulting from improved production scale and increased productivity
(innovation in products and processes). Factors improving productivity are particularly
important sources of growth for developed economies with mature industries, but face
increasing global competition and rapid technological progress.

Economic Growth is when the overall level of production by an economy increases. The

concept of overall level of production is an important one. This means that the economy is

generally producing more of all goods and services. Theoretically, the total production of an
economy should be roughly equal to the total income such as wages, rent, interest and profit
earned by the economy.

Most commonly used measures of Economic Growth are Gross Domestic Product and Gross
National Product.

1.3.1 Gross Domestic Product (GDP):

Gross Domestic Product is the total market value of all final products and services produced
within a country over the course of particular year. OECD is defined as “an aggregate measure
of production equal to the gross values added of all resident, institutional units engaged in
production”.

GDP = Consumption + Investment + Government Spending + (Exports - Imports).

1.3.2 Gross National Product (GNP):

Gross National Product is the market value of all the products and services produced in one
year by labour and property supplied by the citizens of a country.

GNP = GDP + NR (Net income inflow from assets abroad or Net Income Receipts) – NP (Net
payment outflow to foreign assets).

4
1.4 Relationship between FDI and Economic Growth:

Sustainable economic growth is hugely determined by the rate of investment which in turn is
mainly determined by the Foreign Direct Investment inflows. Foreign Direct Investment is a

main source of capital to connect the gap between savings and the required investment level.
The International Trade and Foreign Direct Investment are main factors of the driving forces
for economic growth. All arguments regarding the potential negative impact of FDI on growth
point to the importance of certain enabling conditions to ensure that the negative effects do not
outweigh the positive impacts. At present, the compromise seems to be that there is a positive
association between FDI inflow and economic growth, provided the enabling environment is
created.

A number of empirical studies have been undertaken to establish healthy results in regard to
the causal relationship of Foreign Direct Investment to Economic Growth, its impact and
determinants. The results of the studies showed different evidence with some indicating that
Foreign Direct Investment causes Economic Growth, others showing the reverse relationship
and, in some cases, there is no relationship. Recent empirical studies show that the impact of
Foreign Direct Investment on Economic Growth is not traditional forward as previously
predicted but it depends on country specific factors.

5
1.5 Advantages of FDI:

FDI can bring a number of benefits to developing countries. FDI inflows can accelerate the

process of economic growth through increase in investment.

i. FDI is an important source of private capital for developing countries. FDI can

contribute to the objective of reducing poverty.

ii. Foreign Investment fills the gap between domestic saving and investment
iii. The problem with a large number of developing economies is that they have proper FDI
policies and their implementation is poor. FDI can also promote domestic investment

though the backward and forward linkages with the domestic industries.

iv. In developing countries FDI inflows plays a vital role in its industrial sector. It has been
increasing the production and enhancing the employment opportunity and in turn
reducing the poverty.
v. FDI improves industrial technology, managerial expertise and marketing know- how
and networks to aid growth, employment and productivity and export performance.
vi. FDI contributes to export growth, productivity growth and finance for the balance of
payments. It supports increases in national income that offer the potential to benefit the

poor. In this case, FDI does not reduce poverty directly. However, it helps to create a

congenial economic environment.

vii. The evidence that FDI contributes to economic growth is encouraging rather than
compelling, as growth by itself does not guarantee poverty reduction. Evidence also
suggests that economic conditions and government policies determine in part the extent
to which FDI contributes to growth.
viii. The Asian Development Outlook (ADO) 1999, points out that FDI has led to a transfer
of production of labour-intensive products and exports from high wage source nations
to lower–wage host nations.
ix. FDI allows the transfer of technology particularly in the form of new varieties of capital
inputs–that cannot be achieved through financial investment or trade in goods and
services. FDI can also promote competition in the domestic input market.

6
 x. Profits generated by FDI contribute to corporate tax revenues in the host country.
Furthermore, the developing Asian countries’ comparative advantage is caused by
rapidly growing FDI flows.

1.6 Types of FDI:

FDI is categorized in a variety of ways FDI can be classified from the investor’s perspective
and from the country’s perspective.

1.6.1 From the Investors Perspective:

FDI can be distinguished as horizontal, vertical and Conglomerate FDI. Horizontal FDI is
normally undertaken to produce the same or similar kind of goods in the host country, as in the
home country. It is undertaken to exploit more fully certain monopolistic or oligopolistic

advantages, if expansion were to violate anti-trust laws. Vertical FDI is undertaken to exploit
raw materials or to be nearer to consumers through the acquisition of distribution outlets
conglomerate FDI it involves both the horizontal FDI and Vertical FDI. It involves mergers

and acquisitions.

1.6.2 From the Perspective of the Host Country:

FDI can be classified into: Import substituting FDI and Export-increasing FDI and
Government-initiated FDI.

1.6.3 Import Substituting FDI:

Production of those goods previously imported by the host country, which implies decline of
imports by host country and exports by the investing country. The host countries' market,

transportation costs, and trade barriers will determine this type of FDI.

1.6.4 Export – Increasing FDI:

It is motivated by the desire to seek new sources of input such as raw materials and intermediate
goods. This kind of FDI is exporting in the sense that the host country will increase its exports

7
of raw materials and intermediate goods to the investing country and other countries where
subsidence's of the MNCs are located.

1.6.5 Government Initiated FDI:

This type of FDI is initiated by the Government of host country to eliminate the balance of
payment deficit.

1.7 Role of FDI:

FDI provides the much – needed investible resources and foreign exchange for reviving Indian
Industry, improve the poor infrastructure, modernize the technological base and foster greater
competition in Indian manufacturing. On the other hand, critics of foreign capital point to the
poor record of multinational corporations in India, their excessive profitability and their limited
technology transfer.

FDI contributes to growth. There are several studies done on FDI and growth. Countries like
China have experienced large FDI inflows and high growth in recent years, while Korea grew
rapidly without significant levels of foreign capital. Many Latin American countries have had
periods of slow growth despite openness to foreign capital, while much of sub–Saharan African
has experienced low growth and poor investment flows. In general, foreign capital flows can

equally support a consumption boom or an investment boom. Some of the recent surge in
capital flows to India has been in the form of portfolio capital rather than FDI in Greenfield
ventures. FDI flows to India are likely to remain small relative to the size of the economy.
Indeed, many commentators have found that FDI inflows seem to have a negative effect on
domestic investment. In view of this evidence, it may be over – optimistic to believe that

growth in FDI alone can increase the rate of growth.

8
1.8 Need for FDI in India:

India is a developing country therefore capital has been one of the scare resources that are
usually required for economic development. Capital is limited and there are many issues such
as health, poverty, employment, education, research and development, technology obsolesce
and global competition. The flow of FDI in India from across the world will help in acquiring
the funds at cheaper cost, better technology, employment generation, and upgraded technology
transfer, scope for more trade, linkages and spill overs to domestic firms. The following

arguments are advanced in favour of foreign capital.

All the under-developed and the developing countries want to industrialize and develop
themselves; therefore, it becomes necessary to raise the level of investment substantially. Due

to poverty and low GDP the savings are low. Therefore, there is a need to fill the gap between

income and savings through foreign direct investments.

In Indian scenario there is need for technical assistance from foreign source for provision if
expert services, training of Indian personnel and educational, research and training institutions
in the industry. It only comes through private foreign investment or foreign collaborations. In
India there are abundant natural resources such as coal, iron and steel but to extract the
resources foreign collaboration are required. In developing countries as capital is a scare

resource, the risk of investments in new ventures or projects for industrialization is high.

Therefore, foreign capital helps in these investments which require high risk.

In the recent year’s foreign financial institutions and government of advanced countries have
made substantial capital available to the under developed countries. FDI will help in developing

the infrastructure by establishing firms in different parts of the country. There are special
economic zones which have been developed by government for improvising the industrial
growth.

The inflow FDI will help in improving the balance of payment. Firms which feel that the goods
produced in India will have a low cost, will produce the goods and export the same to other
country. This helps in increasing the exports. Foreign firms have always come up with better

technology, process, and innovations comparing with the domestic firms. They develop a

completion in which the domestic firms will perform better to survive in the market.
9
1.9 Factors affecting Foreign Direct investment:

In the host country so many factors affect the foreign investment. Foreign investors study about
the host country barriers which is negatively influences the foreign investors because no one
needs the loss in business after investment. There is so many reasons due to that foreign

enterprise not invest in the host country.

(i) Rate of Interest/ Foreign Exchange Rate: One of the most important stimuli to foreign
capital movements is the difference in the rate of interest prevailing at different places.
Other things being the same, capital has a tendency to move from a country with a low
rate of interest to a country where it is higher. If the foreign exchange rates are unstable
and there is possibility of decline in future, the foreign investment movement is very
slow in this situation.

(ii) Speculation: The Short-term capital movements may be influenced by speculation

pertaining to anticipated changes in the interest rates. The portfolio investment is a type

of speculation in the host country market. If the host country market has high level of

speculation, the foreign investors reduce the investment. Due to this the movement of

foreign investment is low in the host country.

(iii) Profitability: The Private foreign capital movement is influenced by the profit motive.
Hence, other things being equal, private capital will flow to countries where the return
on investment is comparatively higher. On the other hand, foreign investors aim to earn
high profit, if in the host country the opportunity of future profit is low the movement
of foreign investment will also be low.

(iv) Costs of Production: The Private capital movements are encouraged by lower costs of
production in foreign countries. We may distinguish between two types of cost reducing

investment. The first arises from the need to obtain raw materials from abroad. Such
materials may be either unavailable at home or obtainable only at extremely high costs,

10
 but they are essential for the production and sale of final products at home or abroad.

Without them profit opportunities would remain unexplored. Indeed, vast investments
in the extractive industries are motivated by the fact that the capital must go where the
resources are, the second type of cost-reducing investment pertains to costs of
commodities other than materials, primarily labour.

(v) Economic Conditions: The economic conditions, particularly the market potential and
infrastructural facilities, influence private foreign investment. The size of the
population and the income level of a country have an important bearing on the market
opportunities.

(vi) Government Policies: The government policies, particularly towards foreign

investment, foreign collaboration, remittances, profits, taxation, foreign exchange
control, tariffs and monetary, fiscal and other incentives, are important factors that may
influence foreign investment in a country.

(vii) Political Factors: The Political factors like political stability, nature of important
political parties and relations with other countries also influence capital movements.
On the other hand, political influence on the business practices like change in taxes,
industrial polices adversely effects the movement of foreign investment in the country.

11
1.10 Current scenario of FDI inflow in India:

Since economic reforms initiated in 1991, Government of India has taken many programs to
magnetize FDI inflows to improve the Indian economy. An important objective of promoting
FDI in India and other developing countries has been to promote efficiency in production and
increase exports. However, any increase in equity stake of the foreign investors in existing joint
ventures or purchase of a share of equity by them in domestic firms would not automatically
change the direction of the firm. That is “the aim of FDI investors would be to benefit from the

profit earned in the Indian market. As, a result, in such cases FDI inflows need not be
accompanied by any substantial increase in exports, whether such investment leads to
modernization of domestic capacity or not”. Therefore, it is a challenge for a developing
country like India to channelize its capital inflow through FDI into a potential source of
productivity gain for domestic firms.

1.11 The Entry Routes for FDI in India:

Prior to 1991, all FDI proposals were approved on a case by case basis with a 40% total foreign
equity participation cap. Since July, 1991 India has significantly liberalised its foreign

investment policy. As per the rules, policies and procedures of liberalisation, FDI comes
through four routes in India as follows:

i. RBI (Automatic Route):

This route was introduced to facilitate FDI inflows. Foreign investment in an Indian

entity does not require prior government approval in this route. Companies proposing
foreign investment under this route can issue shares up to the limit of foreign equity
capital prescribed or the foreign investors. Remittances can also be received for same.

The reporting period for this purpose to the RBI is 30 days. Approval is automatic is

sixty categories of industries.

12
 ii. Government (SIA/FIPB):
Route are Non-Automatic route, the schemes which are non-automatic in nature are
referred to FIPB. In the organisational structure, industry secretary is the chairman of

FIPB. The other member is finance secretary, commerce secretary and secretary

(economic relations), ministry of external affairs. This apex board gives clearance on a

case by case basis. Such cases include sectors that require industrial licenses, foreign
investment exceeding 24% of equity in small scale industries, foreign investment where
the foreign interest has an existing venture in some field India, and all proposals falling
outside the predetermined sectoral caps or in sectors where FDI is usually not permitted
but authorised in certain cases at the discretion of GOI. FIPB gives clearance after

consulting the concerned ministries and considering the size of investment. Normal

processing time is four to six weeks. FIPB adopts liberal approach for all sectors and

all types of proposals. The rejections are almost negligible. SIA assists FIIA while
processing FDI Proposals FIPA (Foreign Investment Implementation Authority) assist
foreign investors which have got central government approval in clearance of state level
problems.

iii. NRI’s Investments:

A Non- Resident is an individual who is either a citizen of India or a person of Indian
origin but also who is not ‘resident’ in India. NRIs also include companies, partnership
firms, trusts, societies and corporate bodies where 60% of the equity is owned by the
NRIs. There is a sizable population of Indians living outside. Indian government offers

various opportunities to attract surplus funds of NRIs. They can deposit in India through
banks accounts like non-resident external rupee account NRI, foreign currency non-
resident (Bank) account FCNR(S) and Non-Resident ordinary Rupee (NRO) account.

iv. Acquisition of Share:

Acquisition route has been introduced since January, 1996. This was included as a part
of FDI under section 29 of the FERA (foreign exchange regulation act), 1973, now it
comes under section 5 of FEMA (foreign exchange management act) 1999. According

13
 to new provisions of FEMA, the proposals for FDI involving acquisition of share in
already existing companies are considered only if application made by Indian company
or related proposal is supported by board resolution of Indian company.

1.12 How FDI in India affect economic growth?

Economic development of any country is mainly influenced by the growth of the Foreign Direct
Investment inflows. The health of the economy is closely related to the soundness of its
investment systems. Foreign Direct Investment (FDI) plays an important role in the growth and
development of an economy. It is more important where domestic savings is not sufficient to
generate funds for capital investment. Not only it supplements the investment requirements of
an economy but also it brings new technology, managerial expertise and adds to foreign
exchange reserves. FDI inflow is more beneficial particularly to developing and emerging
countries than the developed ones.

Prior to 1980s, economic theories were not delving extensively on the aspects of foreign direct
investment and Multi-lateral enterprises (MNEs). During last three decades globalization has
been the key to almost all countries' economic policies. An important aspect of globalization is
FDI inflows from home countries to host countries. Though there is no general rule of
developed and developing countries as home and host countries respectively, however, mostly
it is seen that FDI flows from developed countries to developing and emerging countries. There
has been growing competition among developing and emerging countries to attract FDI. India
is not left behind in this regard.

FDI is believed to play many important roles in the host countries. It has different effects on
different countries based on the host country policies, investment climate and other domestic
macroeconomic conditions. The first and foremost is, it acts as a capital supplement to the
domestic capital for investment demand. Apart from capital it brings new, innovative
technology to the host countries. In many countries it also promotes competition among the
domestic firms to improve their level of technology adoption. Effectively, they invest more in
research and development (R & D) to upgrade their technology. With increased investment as
supplement to domestic capital, it also generates more employment opportunities. With keen
interest in the investee firms through FDI, the foreign firms improve their managerial
competence, which also improves managerial skills in the country through competition and
dissemination of the new ideas and skills.

14
The firms with improved technology and competition produce quality products, which are
exportable, thus it improves the level of export and degree of openness of the host countries.
With foreign partners, there are better tie ups with the importing firms abroad for potential
exportable domestic products. With improvement in exports the foreign exchange earnings of
the host countries gets boosted. Capital flow through FDI and improved export earnings can
also increase the level of foreign exchange reserve in the host countries.

With higher foreign exchange reserve, the demand for domestic currency will go up. Hence the
domestic currency of the host country is expected to appreciate as against the basket of foreign
currencies mostly of trade partners. FDI is also believed to improve the Gross domestic product
(GDP) of the host country through improved production and competition among the domestic
firms. With improved production and more employment, it also can improve gross domestic
capital formation (GDCF) which cater to the increasing requirement of domestic investment in
the country. Further, with competition, improvement in technology, the performance of the
investee firms as well as other domestic firms can improve. Thus, it can have a positive impact
on return on capital and thereby on the stock prices.

15
 Chapter 2

Design of The Study

16
2.1 Review of Literature Summary

Khandare and Babar (2012) in their paper entitled “Structure of foreign direct investment in
India during globalisation period” attempted to study the changing structure and direction of
India’s foreign direct investment during globalisation period. Percentage analysis had been

used in this study. The result showed that India accounted 2,525milllion of US Dollar in 1996

to 34,613 million of US Dollar in 2009. The service sector had attracted highest (21 per cent)

FDI inflows; then computer software and hardware (9 per cent) during 2008 and 2010 .
Mauritius (42 per cent) had been largest investor in India, followed by Singapore (9 per cent)
during 2008 and 2010 among top ten countries. They concluded that, India have to take steps
continuously to ensure enabling business environment to improve India’s attractiveness as an
investment destination and a global manufacturing hub.

Parul Mital and Sandeep Agarwal (2012) study entitled “Analysis of FDI Inflows and
Outflows in India”; The purpose of this paper was to provide an examination of foreign direct
investment in various sectors and also aimed to present unique understanding of FDI in the
context of liberalisation and the prevailing political climate. The study period was restricted

from 2001 to 2011. To have an empirical idea about the status of FDI in India trend analysis

had been used. For this purpose parameter such as FDI equity inflows country-wise, sector-
wise, region-wise and foreign technology approval and transfer from different country to
different sector had been taken into consideration. The result showed that more than 50 per
cent of the total FDI inflows received by India during the period from 1991 to 2010 came from
Mauritius and the USA. Among the different sectors, the electrical and equipment had received

the larger proportion followed by service sector and telecommunication sector. Net FDI in

India was valued at $76.93 million in the 2006-07 Indian fiscal years and nearly doubled, to

$15,401 million during 2007-08 fiscal years. Almost 35 per cent of the FDI was invested in

Mumbai followed by 19 per cent in New Delhi. They concluded that investors were showing

their growing confidence in the immediate and medium term prospects of Indian economy.

FDI of course might be one of the important sources of financing the economic development.
Policy makers need to ensure transparency and consistency in policy making along with
comprehensive long-term development strategy.

17
Eatzaz Ahmad and Anis Hamdani (2003), their research study on “The role of Foreign Direct
Investment in Economic Growth”, indicated that effects of FDI, Government Expenditure,
Domestic Private Investment and Labour on Economic Growth. The study used 1965 to 1992
data for 32 developing countries. These authors presented that the involvement of Domestic
Private Investment to Growth is more dependable and consistent than the role of FDI. Hence,
FDI loses its attraction as an engine of Economic Growth if the poor Balance of Payments
consequences of the resulting profit repatriation are also taken into account. The findings of
the study suggested that the contribution of Government Expenditure to Growth is insignificant
and the productivity of labour is low, indicating that the growth policy that neglects Human
Capital can’t yield long-term profits.

Niels Hermes and Robert Lensink (2003), conducted a research study on “Foreign Direct
Investment, Financial Development and Economic Growth”, painted the growth of the
financial structure of the beneficiary country is an essential condition for FDI is positive impact
on EG. The study was carried out to analyze whether the improvement of the financial structure
is positively association between FDI and Growth. Their experimental analysis suggested that
the case of sixty seven countries, thirty seven countries have a satisfactorily developed financial
structure in regulate to permit Foreign Direct Investment contribute positive Economic Growth.
Thus, it can be concluded that the countries have improved domestic financial structure before
liberalizing the capital account to permit the huge FDI inflows.

Lyroudi Katerina et al. (2004), in the study entitled “Foreign Direct Investment and Economic
Growth in Transition Economies”, discovered the effects of FDI on EG mostly focused on US
and Western European countries. The study investigated the existence and the nature of FDI
on the rate of growth of a panel of transition economies. The authors applied Bayesian
Analysis. The results of the study revealed FDI do not show any important relationship with
EG for the transition Economies.

18
Baharom et al. (2008), in their survey on entitled “The relationship between Trade Openness,
Foreign Direct Investment and Growth: Case of Malaysia”, observed that the role of TO and
FDI in influencing EG in Malaysia. The study based on the time period from 1975 to 2005.
The study used the Bounds Testing Approach. The results established the Openness is positive
relationship on EG, equally short and long term. The result of the survey recommended that
FDI is positive relationship in short term and negative relationship in long term.

Yousaf et al. (2008), in their study titled “Economic Evaluation of Foreign Direct Investment
in Pakistan”, analyzed that impact of FDI in Pakistani Imports and Exports through time series
data. The paper applied the Unit Roots Test to measure the stationarity data series used in the
analysis. The study was carried out co integration technique was used to analyze the long run
association between these variables. The study Error Correction Model is used for more
analysis. The results of the import model explored that the Foreign Direct Investment positively
impacted on imports in the short run and long run. Further, the research results of export model
showed that the FDI has negative association with real exports in short and positive association
in long term.

Muawya Ahmed Hussein (2009)17, he has done a research study entitled “Impacts of Foreign
Direct Investment on Economic Growth in the Gulf Cooperation Council (GCC) Countries”,
investigated the data relating to FDI in the six countries consisting the Cooperation Council for
the Arab States countries. The design of this study was to determine whether the what range of
these countries have identified the significance of FDI in the method of growth and therefore
what are the events attracting Foreign Capital and encourage FDI. The research study identified
the determinants of FDI. This study based on current Economic Growth Theories and Statistical
Techniques to examine the association among FDI and Growth. This paper revealed that the
negative association among FDI and GDP in GCC countries. These findings of the study
supported the endogenous Economic Growth hypothesis, at least for these GCC countries.

19
Samuel Adams (2009) , in his article entitled “Can Foreign Direct Investment (FDI) help to
promote growth in Africa?” analyzed that some variables such as Natural Resources, Political,
Market Size, Economic and Legal. This research study suggested that two major findings, 1)
The FDI donates to EG of host country in two ways, addition of DC and improvement of
efficiency through the Marketing and Managerial Ability, Transfer of Technologies,
Modernization and Best Practices. 2) Foreign Direct Investment has jointly benefits and costs.
The policy environment in particular in terms of the Absorption Capacity, Capability to
Diversify, Target of FDI and opportunity for link among FDI and DI.

Research Gaps:

There is huge regional disparity in FDI flow in India for the past couple of years. There is a
need to make relevant suggestions to increase FDI inflow by analysing trends and patterns of
FDI. The FDI inflow is restricted to few sectors to increase the growth of all sectors of the
economy it is necessary to identify the sectors not funded by FDI . The previous study
is conducted on the variables such as imports, gold reserves and the impact of FDI.Further
study is to be made on FDI’s impact on few economic variables such as Foreign exchange
reserves, exports, GDP..

20
2.2 Statement of the Problem:

India's poor performance in attracting FDI inflows compared to many other developing
economies raise questions regarding the determinants of FDI in India. Even after the
liberalization of multiple policies in India FDI inflows had not shown much improvements in
India towards attracting FDI. Hence the study need to be made towards the impact of FDI on
the economic growth of India.

2.3 Scope of the study:

The study is aimed to understand the flow of FDI in the Indian economy. Finding out the

reason for the difference in FDI inflows. How FDI is affecting various sectors of economy

where the data has been collected for the past 5 years (2011- 2016).

2.4 Objective of the Study:

1.To study the trends and patterns of flow of FDI of various sectors of India.

2.To analyse the impact of foreign direct investment on the economic variables such as exports,

GDP, Foreign Exchange Reserves of India.

3.TO study how FDI can be attracted to neglected sectors of the economy so as to result

growth of all sectors of the economy

2.5 Hypothesis:

H0: FDI doesn’t affect the economic growth of the Indian economy.

H1: FDI affect the economic growth of the Indian economy.

21
2.6 Methodology: Descriptive Research

Type of Research:

Secondary data will be used to compare the performance evaluation of growth Foreign direct
investment and its impact on economic growth.

2.7 Tools for testing / Plan of Analysis:

1. Correlation Analysis and Regression analysis to determine whether the foreign direct
investment changes impact the economic growth of the country.

2.Ranking Analysis is used in ranking the reason for selecting the particular growth variables.

2.8 Limitations of Research:

1.The size of present study is relatively small to generalize the results in Indian context.

2.It’s not only FDI that effects the growth of economy there are other factors such as FII,

Monetary policy and government policies.

3.FDI data keeps on changing.

22
 Chapter 3

Industry Analysis

23
Services sector:

Economists have for some time been accustomed to a threefold division of the economy, a
division which date back to the time of Plato and Aristotle and reappeared again in the work of
Fisher (1935) and Colin Clark (1940) have divided the economy into primary sector, secondary
sector and tertiary sector. In the primary sector which covers tangible goods in agriculture,
forestry, fishing, and hunting. The secondary sector includes mining, manufacturing and such
activities as gas, electricity and water supply involving activities with a tangible end product.
The tertiary sector consists of trade and public services. But this is not a clear-cut division on
economic activities as economist change the activities in the list and also there is overlapping
of economic activities.

Later on, the economic activities have been shifted from one sector to another sector. At
present the primary sector includes agriculture, forestry, animal and husbandry and fisheries
etc., the secondary sector activities incorporate mining, manufacturing, electricity, gas, water
supply, construction etc., the service sector activities include trade, commerce, transport,
communications, hotel and restaurant, banking and finance, health and education, tourism,
share market, film industry, insurance, astrology industry, advertisement industry, sports, legal
service, publishing industry, mass media etc.,

In the portion of economy that produces intangible goods according to the U.S. Census Bureau,
the service sector primarily consists of truck transportation, messenger services and
warehousing; information sector services; securities, commodities and other financial
investment services; rental and leasing services; professional, scientific and technical services;
administrative and support services; waste management and remediation; health care and social
assistance; and arts, entertainment and recreation services.

Service sector also known as the tertiary sector of the economy is expanding at a faster rate. It
is one of the three sectors of the economy. “Soft” part of the economy in the service sector
includes all activities which people offer their knowledge and time to improve productivity,
performance, potential and sustainability and also known as advice, experience and discussion
include in the service sector. Service sector involves of activities beginning from the production
of goods and service until it reaches to the consumer. For the last 30 years there has been a
substantial shift from the primary and secondary sector to the service sector. Now it has become
a largest sector of the economy.

24
Further, the service sector activities can be grouped into:

1. Trade, hotel and restaurants.

2. Transport, storage and communication. Transport includes roads and railways, airways and
inland and overseas, water transport.

3. Financial institutions, banking and insurance, real estate and business services.

4. Community, social and personal services. Community services include government

establishment and its departments and personal services such as health, and education, NGOs
etc.

Retail & Wholesale trade:

The Retail sectors have become one of the most dynamic growing sectors in recent times.
Retailing has always been an integral part of economic development. Nations with strong retail
activity have enjoyed greater economic and social progress. It contributes to the development
by matching the individual requirements of the population with the producers and suppliers of
merchandise. By bringing the product to the customers, they are helpful in creation of demand
of new offers leading to expansion of market. The Indian retail industry is not only one of the
most fragmented in the world, but also the most challenging due to its unorganised nature.

The retail sector is broadly classified in to two groups; organised and unorganised retail sector.
The organised retailing refers to trading activities undertaken by licensed retailers, that is, those
who are registered for sale tax, income tax, etc. These include the corporate – backed
hypermarkets and retail chains, and also privately-owned large retail businesses. It is not just
stocking and selling but is more about efficient supply chain management, developing vendor
relationships, quality customer service, efficient merchandising and timely promotional
campaigns. On the other hand, the unorganised retailing refers to the traditional formats of low-
cost retailing, for example, the local kerana shops, owner managed general stores, convenience
stores, hand cart and pavement vendors, etc. This market is characterised by typically small
retailers, more prone to tax evasion and lack of labour law supervision. This market is more
common in developing countries

25
Hotel & Tourism:

Travel and tourism industry in India are playing vital role globally and contributing adequate
support into total GDP. With over one billion tourists travel to a world destination each year,
business has become a number one economic sector, contributing 10 percent of worldwide
GDP and 6 percent of world’s total exports. Representing over simply economic strength, these
numbers mirror tourism's large potential and increasing capability to deal with a number of the
world's most pressing challenges, as well as socioeconomic growth, comprehensive
development and environmental preservation (WTTC, 2017). Tourism may be a major engine
of economic process and a crucial supply of exchange earnings in several countries as well as
India. it's nice capability to make massive scale employment of various kind – from the
foremost specialised to the unskilled and thus will play a serious role in creation of further
employment opportunities. It also can play a crucial role in achieving growth with equity
(WTTC, 2017).

Travel tourism industry business enterprise business is an important economic activity and has
direct economic impact on most of the countries globally; moreover, the trade has vital indirect
and economic impacts. The international organisation Statistics Division-approved business
Satellite Accounting methodology quantifies alone the direct contribution of travel tourism
industry business but world travel and tourism council recognize huge contribution of travel
and tourism industry with objectives to hold its indirect and induced impacts through its yearly
analysis. Travel tourism industry business is also a key sector for economic development and
job creation throughout the world. In 2016, travel tourism industry business directly
contributed US$2.3 trillion and 109 million jobs worldwide. Taking its wider indirect impacts
into consideration, the thereafter contributed US$7.6 trillion to the planet economy and
supported 292 million jobs in 2016. This was capable 10.2% of the world’s GDP, and a few
one in 10 of all jobs.

26
Direct Contributions of Travel & Tourism to GDP:

27
Transport:

Transport is a most important part in economic growth and globalization, but most types cause
air pollution and use large amounts of land. While it is heavily subsidized by governments,
good planning of transport is essential to make traffic flow, and restrain urban sprawl.
Transport demand in most Indian cities has increased substantially, due to increases in
population as a result of both natural increase and migration from rural areas and smaller towns.
Availability of motorized transport, increases in commercial and industrial activities have
further added to transport demand. A close link between infrastructure spending and GDP
growth has been established studies have revealed that 1 percent growth in the infrastructure
stock is associated with 1 percent growth in per capita GDP (Government of India, 2011). “If
agriculture and industry can be compared to human body and bones, transport is compared to
its nerves” as the saying goes moving wheels reflect civilization Transport helps in overall
development of a country. Thus, transport is regarded as civilization.

Among various urban services, urban transport is a most important service for the overall
development of the country. Urban transport provides mobility of people and goods, access to
employment, education, shopping, health, and entertainment opportunities. It is also affecting
the income level of people, land values and environment. However, it determines the quality
of life in an area. Urban areas in India, which include a wide range of megacities, cities and
towns, are not all that fortunate in terms of intercity transportation. Many cities 4 are unable to
meet the increasing demands for travel due to the prevailing imbalance in the modal split;
inadequate transport infrastructure and its sub- optimal use lack of integration between land-
use and transport planning and no improvement or little improvement in city bus services, these
factors collectively encourage a shift to more personalized modes of travel. These changes have
exacerbated the demand for transport a demand that many Indian cities have not been able to
meet. The main reason for this is the prevailing imbalance in modal split besides inadequate
transport infrastructure and sub-optimal use. Although mobility and accessibility have
increased tremendously in the urban areas there are severe problems such as delay, congestion
accidents, air and noise pollution energy wastage etc.

28
Mining:

Environment of a region is a feature of the interplay between natural and human activities at
any given period of time. For a healthy environment, all its components should be protected
from pollution and be free from the severity of degradation of natural resources. It is therefore
necessary to ensure a balance between the availability and utilization of natural resources, and
the needs of human settlements, as well as all living beings in any area. It has been the
endeavour of many communities and governing authorities to strive for harmonious living
within a region and to maintain a balance with its natural environment.

Today, basic elements essential for survival of the human race like land, water and air are
showing signs of high pollution in many parts of the world. The states of India are no exception
to this. Increase in population is a matter of great concern, as it is this very factor that is a major
cause for all problems of pollution as well as the frequent irreversible depletion of available
resources. Since the availability of natural resources is limited, growing human needs will only
intensify the use and over extraction of existing resources. Mining is one such sector which is
dependent on the extraction of finite no replenishable natural resources.

Mining has continued to influence cultures, shape societies, and impact local and regional
economies all over the world. The Lok Sabha Secretariat, Government of India (2013) says
that:

Iron resources are not just raw materials for obtaining metals and alloys like iron and steel but
in fact critical and valuable resources for catalysing the industrial growth and development of
any economy. Indeed, the mainstay of human civilization depends on the level of per capita
consumption of steel and is treated as an important index of socioeconomic development and
living standard of the people of any country. All major industrial economies are characterized
by the existence of a strong steel industry and the growth of many of these economies has been
largely shaped by the strength of their steel industries in their initial stages of development.
(Lok Sabha Secretariat, Government of India, 2013, p9).

However, mining has also negatively impacted the state of natural environment and irreversibly
changed sensitive habitats. There is an inherent conflict evident in the fundamental position of
iron and steel in economies at all levels, and the negative impacts wrought by the extraction of
iron ore and the subsequent production of steel. There is a need to study, understand and assess
the combined and overlapping impacts of mining on the environment, society, and economy in

29
a region that has not only large ore deposits but also rich natural ecology and eco sensitive
habitats.

Construction:

The construction industry is the second largest sector next to Agriculture in India. This industry
forms the backbone of the Indian Economy. It not only provides infrastructure for all other
industries but is also one of the largest single sectors in the economy on its own, according to
gross domestic product (GDP).

India’s new economic policy has opened up new avenues and vistas for the development and
growth of various sectors. It is essential that infrastructure development should keep pace with
the developmental activities of the other sectors. This has resulted in a lot of pressure on the
construction activities.

The construction sector employs over 35 million workmen and creates assets worth over Rs.
20,000 crores. Every year it is estimated that the investment in the construction industry is
steadily growing at the rate of 6.5% per year. It contributes more than 5% to the nation’s GDP
and 78% to the gross capital formation. Total capital expenditure of state and central
Governments will be Rs. 8,62,687 crores in 2011 – 12 from Rs. 1,43,587 crores in 1999 – 2000.
The Planning Commission estimated that investment requirement in infrastructure sector will
be about Rs. 14,50,000 crores or US $320 billion during the 11th five-year plan period
(Government of India report of planning Commission, 2006)

30
 Chapter – 4

Data Analysis and Interpretation

31
4.1 Analysis Of sector wise inflows of FDI in India:

The FDI inflows in India for various sectors has been analysed based on the
following objectives of the Study:

1.To study the trends and patterns of flow of FDI in various sectors in India for the last five
years.

2.To analyse the impact of foreign direct investment on the economic variables like GDP,

Exports and foreign Exchange Reserves of India.

3.To study and identify FDI neglected sectors of the Indian economy

Table 4.1

Objective 1: To study the trends and patterns of FDI of various sectors in

India.

The following objective focus on the various sectors which have been fetching the foreign
direct investments in India for the past couple of years due to its reforms and its regulations.
The Government of India has been succeeded in attracting the foreign direct investments for
the few sectors which they have been lacking in attaining for the few sectors where the laws
should be amended.

32
 (US $ million)

Sector 2012- 2013- 2014- 2015- 2016- Cum. %

13 14 15 16 17 Inflows share
April
2000 to
sep
2017
Services sector 3,742 3,737 6,984 13,535 14,229 62,393 17.5
1,416 1.9

Education, R &d 150 107 131 394 205

24,656 6.9

Construction 1,319 1,276 1,640 4,141 1,564

Hotel & 3,129 361 686 889 430 10,613 3.0

Tourism
Transport 213 311 482 1,363 891 8,971 3.0

Retail & 15,664 4.4

Wholesale trade 551 1,139 2,551 3,998 2,771

Mining 69 24 129 596 141 2,271 2.9

33
Chart 4.1:

Interpretation:

➢ The sector wise analysis of FDI inflow in India reveals that maximum FDI has taken place
in the service sector including the telecommunications, information technology, travel and
many others
➢ The service sector is followed by the construction, Retail & Wholesale Trade, Hotel &
Tourism in terms of FDI. High volumes of FDI take place in telecommunication, real estate,
construction, power, automobiles etc
➢ Service sector has been receiving the highest FDI inflow in the country in the third decade
of economic reform
➢ Services sector comprises of financial and banking services, insurance, business services,
outsourcing, research and development etc during the past 5 years
➢ Cumulative FDI inflow in the service sector was 62,393 million dollars since 2000 to 2017

Inference:

Service sector is the major sector in attracting FDI in India based on the inflows for the past
couple of years because of splendid improvements in the technology where there Is a scope for
the services which comprises of financial, telecommunications and others for constant growth
in the future.
34
Ranking of sector wise FDI inflows in India since April 2000 – September
2017

Table 4.1.1

Industrial Sector Rank

Services sector 1
Construction 2
Retail & Wholesale Trade 3
Hotel & Tourism 4
Transport 5
Mining 6
Education, R&D 7

Chart 4 .1.1

Pie chart representing %of Total FDI inflows in different sectors

Chart Title

2.9
4.4

3 17.5

6.9

1.9

Services sector Construction Retail & Wholesale Trade

Hotel & Tourism Transport Mining
education,R&D

35
Interpretation:

➢ Construction sector derived demand from the infrastructure industry in India. The
construction sector’s capacity in India exceeds the domestic demand which shows potential
for increasing exports and improving utilization
➢ The construction equipment sector in India was estimated to have generated US $ 6.4
billion in revenues in FY13, and is expected to reach USD 9.9 billion in FY15 and USD

22.2 billion in FY 20
➢ The increased FDI inflows to Metallurgical industries in India have helped to bring in the
latest technology to the industries
➢ Further the increased FDI inflows to metallurgical in India has led to the development,
expansion and growth of the industries
➢ All this has helped in improving the quality of products of the Metallurgical industries in
India. The government allows 100 percent FDI under automatic route in the metals and
mining sector
➢ By 2020 the metals and mining sector in India has the potential to contribute around USD
150 billion to GDP, create new employment for 2.3 million people and contribute USD 40

billion to the government revenues.

➢ Under the automatic path, 100 percent FDI is allowed in hotels and tourism. Travel and
tourism are a US$32 billion business in India with an input to 5.3 percent of Indian GDP
➢ Many world-wide hotel groups are setting up their business in India and global tour
operators are establishing operations in the country
➢ The government of India has allowed for 100% FDI in the education sector in the automatic
route.
➢ However, despite allowing 100% FDI in the educational sector, there has hardly been any
investment in this sector the primary issue behind the lack of investment in this sector is
the fact that the investment has to be done through a not-for-profit-entity. This not-for-

profit requirement has become a major bottleneck for attracting investments.

➢ FDI in transport sector has experienced huge growth in the past few years
➢ The disruption of the technology in the market is the major factor for the development of
the transport sector from the last couple of years.

36
➢ Inference:
Thus, the sector wise inflows of FDI in India shows a variety trend but acts as a catalyst for
growth, quality maintenance and development of Indian industries to a greater and larger
extend. The technology transfer is also seen as one of the major changes apart from increase
in operational efficiency, managerial efficiency, employment opportunities and
infrastructure development.

Chart 4.1.2

Calendar year wise FDI annual inflows (capital components)

Source: www.rbi.org

Interpretation:

➢ FDI increased due to adoption of more liberal foreign policy and series of measurements
taken by Government of India
➢ According to Department of Industrial policy and Policy and promotion (Dipp), the total
FDI investments in India April-June 2018 stood at US$ 12.75 billion, indicating that
government’s effort to improve ease of doing business and relaxation in FDI norms is
yielding results

37
➢ Date for April-June 2018 indicates that the services sector attracted the highest FDI inflow
of US$2.43 billion

Chart4.1.3:

ROUTES FOR CLEARANCE OF THE FDI PROPOSALS IN INDIA

source: www.rbi.org

Interpretation:

FDI was freely allowed in all the sectors including the service sector, except in a few sectors
where the existing and notified sectoral policy did not permit FDI inflows beyond a ceiling
limit

➢ Under the present policy, two major routes exist for the clearance of FDI proposals in the
country, namely the RBI route and the Foreign Investment Promotion Board or Secretariat
of Industrial Assistance route

38
➢ FDI, virtually for all items or activities could be brought into India through the automatic
route under the powers delegated to the RBI. Proposals under the automatic route were
approved by the RBI

Objective 2: To analyse the impact of foreign direct investment on the

economic variables such as GDP, Foreign exchange reserves, exports of
India (in US $ Million)

Table 4.2:

Years FDI GDP Reserves Exports

1991 74 2,90,687 4,190 24,746
1992 277 2,91,925 6,326 52,982
1993 550 2,84,972 10,722 28,251
1994 973 3,28,472 20,303 32,386
1995 2,144 3,70,522 18,631 40,316
1996 2,821 3,90,520 20,848 40,881
1997 3,577 4,20,040 25,304 45,494
1998 2,462 4,28,750 27,948 47,330
1999 2,155 4,54,952 33,159 52,885
2000 2,339 4,68,970 38,341 61,886
2001 3,904 4,83,466 46,497 61,619
2002 8,574 5,03,954 68,237 73,144
2003 4,585 5,92,535 99,806 87,543
2004 5,474 6,88,803 1,26,972 1,30,540
2005 6,598 8,08,884 1,32,567 1,61,471
2006 20,336 9,03,226 1,70,843 2,02,354
2007 25,127 11,41,346 2,67,582 2,41,711
2008 41,554 12,52,403 3,06,429 2,71,645
2009 35,657 13,38,248 2,66,166 2,60,847
2010 27,431 17,04,795 2,76,243 3,48,035

39
 2011 36,190 19,23,046 2,72,249 4,46,375
2012 24,196 18,75,213 2,71,551 4,43,629
2013 28,199 19,24,452 2,74,536 4,64,188

CHART 4.2

FDI and Exports

5,00,000
4,50,000
4,00,000
3,50,000
3,00,000
2,50,000
2,00,000
1,50,000
1,00,000
50,000
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

Interpretation:

➢ As the level of a nation’s export increases, its economy becomes more effective. This has
the effect of altering local labour markets and driving domestic wages towards those of
world levels
➢ There is, however, an alternative possibility that some developing countries might have
higher exports because of their unique access to foreign markets

Inference:

If a low-wage country has access to a trading country, one might expect that country to draw
significant levels of FDI as countries outside the trading countries attempt to sell within the
country. This type of targeting of low-wage country by countries outside the trading group
could lead to a positive relationship between exports and foreign direct investment. In case of
India also it is expected a positive relationship between FDI and exports

40
 Chart 4.2.1

FDI and Foreign Exchange Reserves

3,50,000

3,00,000

2,50,000

2,00,000

1,50,000

1,00,000

50,000

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

Interpretation:

➢ The higher level of Foreign Exchange Reserves in terms of import cover reflects the
strength of external payment position and helps to improve the confidence of the
perspective investors

➢ Hence, increasing Foreign Exchange Reserves implies improving financial health of a

country. As far as Indian economy is concerned, there was a setback during early 1990’s
with the financial crisis made India unable to pay for its imports

Inference:

However, with the introduction of reforms, India has managed to build up its Foreign Exchange
Reserves to the desired level. India’s Foreign exchange Reserve in Dollar term has increased
by around 32 times from 9220 million US Dollar in 1991-92 to 294398 million US Dollar in
2011-12.18 It shows India’s strength of external payment position Therefore higher level of
Foreign Exchange Reserves leads to inflow of more Foreign Direct Investment

41
 Chart 4.2.2

GDP and FDI

25,00,000

20,00,000

15,00,000

10,00,000

5,00,000

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

Interpretation:

➢ Debt-GDP ratio reveals the liability of a country. It further determines the financial health
of a host country’s economy
➢ Increasing debt liabilities would deteriorate the financial health of a country ultimately
cause the instability in the economy
➢ In 1993-94, India’s external debt was estimated as Rs.2,90,418 crores and Debt-GDP ratio
was at 19.08 per cent and it was increased to 33.98 per cent in 2011-12 while debt servicing
as percentage of current receipt from 25.40 per cent in 1993-94 it declined to six per cent
in 2011-12 due to the sharp fall in the rates of interest in the world market

Inference:
Based on the above statistics would certainly determine the foreign direct investment from
entering into the country. Debt liabilities have to be managed in such a way not to exceed the
potential for repayment. Lower the external debt to GDP ratio, higher is the probability of
economic stability and inflow of FDI

42
Testing of Hypothesis:

Correlation:

Relation between FDI and Gross Domestic Product

Hypothesis
Ho: There is no significant correlation on the FDI by GDP in India.
H1: There is significant correlation on the FDI by GDP in India.

FDI GDP
FDI Pearson
1 .862
Correlation

Sig. (2-tailed) .000

GDP Pearson
.862** 1
Correlation

Sig. (2-tailed) .000

**. Correlation is significant at the 0.01 level (2-tailed).

Interpretation:

A parametric approach is important to identify the proximity of the variables and their nature of
Relationship. The growth variables are tested using the Karl – Pearson Correlation.
The correlation of the growth variables is estimated based on the following hypothesis is
framed.

The correlation between FDI and GDP is significant at the 0.01 level (2-tailed).As the p value
is less than 0.05 Therefore, H0 is rejected. That is GDP has significant impact on the Foreign
Direct Investment.

43
Relation between FDI and Foreign Exchange Reserves:
Hypothesis
Ho: There is no significant correlation on the FDI by Foreign Exchange Reserves in India.
H1: There is significant correlation On the FDI by Foreign Exchange Reserves in India

FDI Reserves

`FDI Pearson
1 .958
Correlation

Sig. (2-tailed) .000

N 23 23

Reserves Pearson
.958 1
Correlation

Sig. (2-tailed) .000

N 23 23

** Correlation is significant at the 0.01 level (2- tailed).

44
Interpretation:

A parametric approach is important to identify the proximity of the variables and their nature of
Relationship. The growth variables are tested using the Karl – Pearson Correlation.
The correlation of the growth variables is estimated based on the following hypothesis is
framed.

The correlation between FDI and Foreign Exchange Reserves is significant at the 0.01 level
(2-tailed). As the p value is less than 0.05 therefore, H0 is rejected. That are Foreign Exchange
Reserves has significant impact on the Foreign Direct Investment.

45
Relationship Between FDI and Exports:
Hypothesis
Ho: There is no significant correlation on the FDI
by Exports in India.
H1: There is significant correlation on the FDI by
Exports in India.

Export
FDI s
FDI Pearson
1 .760**
Correlation

Sig. (2-tailed) .000

N 23 23
Exports Pearson
.760** 1
Correlation

Sig. (2-tailed) .000

N 23 23

**. Correlation is significant at the 0.01 level

(2-tailed).

Interpretation:

A parametric approach is important to identify the proximity of the variables and their nature of
Relationship. The growth variables are tested using the Karl – Pearson Correlation.
The correlation of the growth variables is estimated based on the following hypothesis is
framed.

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The correlation between FDI and Exports is significant at the 0.01 level (2-tailed). As the p
value is less than 0.05. Therefore, H0 is rejected. That are Exports has significant impact on
the Foreign Direct Investment

Regression:

Relationship between FDI and Gross Domestic Product:

Regression Statistics:

Multiple R 0.881862

R square 0.77768

Adjusted R 0.766564
square

Interpretation:

A linear regression models are utilized on the dependent factor Foreign Direct Investment and
independent variable of Gross Domestic Product.

Foreign Direct Investment = β0 (Constant) + β1 (Gross Domestic Product).

From the above table no. 4.1 (a), it is apparent that R = 0.881, R2 = 0.778, Adjusted R2 = 0.766
are statistically significant. This analysis shows that the Gross Domestic Product is create
88.1% variance over the FDI.The analysis results conclude that one percent increase in Foreign
Direct Investment will raise the Gross Domestic Product by 0.75 percent. Here r2 is close to 1,
so we can use the regression line to forecast FDI accurately. The forecast model would be better
if r2 was above 0.8, so that we can use it for forecasting purpose

47
Relationship between FDI And Foreign Exchange Reserves:

Regression Statistics:

Multiple R 0.953516
R square 0.909193
Adjusted Square 0.904653

Interpretation:

A linear multiple regression models are applied on the dependent factor Foreign Direct
Investment and independent variable Foreign Exchange Reserves. The researcher applied
linear multiple regression analysis to relate the variable. Foreign Direct Investment = β0
(Constant) + β1 (Foreign Exchange Reserves)

From the above table it is ascertained that R = 0.953, R2 = 0.909, Adjusted R2 = 0.904 are
highly significant. This analysis indicates that Foreign Exchange Reserves and Gross Domestic
Product are creates 90.0% variance over FDI.This clearly indicated that Foreign Exchange
Reserves is highly significant in deciding to FDI. Here r2 is close to 1, so we can use the
regression line to forecast FDI accurately. The forecast model would be better if r 2 was above
0.8, so that we can use it for forecasting purpose

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Relationship between FDI and Exports:

Regression Statistics:

Multiple R 0.868912
R square 0.755008
Adjusted R square 0.742758

Interpretation:

A linear multiple regression models are applied on the dependent factor Foreign Direct
Investment and independent variable namely, Exports.

Foreign Direct Investment = β0 (Constant) + β1 (Exports)

The above table, it is found that R = 0.868, R2 = 0.755, Adjusted R2 = 0.742 are statistically
significant. This analysis indicates that the exports are creating 75.5% variance over the
Foreign Direct Investment. This clearly states that Exports is highly significant in deciding to
Foreign Direct Investment. Here r2 is close to 1, so we can use the regression line to forecast
FDI accurately. The forecast model would be better if r2 was above 0.8, so that we can use it
for forecasting purpose.

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Objective 3: To study how FDI can be attracted to other neglected sectors
of the economy so as to result growth of all sectors of the economy.

The following sectors has been permitted FDI through various regulations and stipulations and
on the basis of this few sectors have been identified as the prohibited sectors where the
Government should liberalise the regulations and should permit the FDI into the economy.

Permitted Sectors for FDI

Table 4.3:

No. Sector Activity Percentage of Equity/FDI Entry Route

cap
1 Agriculture & 100% Automatic
Animal Husbandry
2 Tea Plantation 100% Government

3 Mining 100% Automatic

Mining and exploration
of metal ores and non-
metal ores

Coal and Lignite

Mining and mineral 100% Automatic

separation of titanium

100% Government

4 Petroleum & Natural 100% Automatic

Gas Exploration
activities of oil and
natural gas

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 Petroleum refining by
the Public Sector
Undertakings 49% Automatic
5 Manufacturing in
Micro and Small 24% Government
Enterprises
No. Sector Activity Percentage of Equity/FDI cap Entry Route

6 Defence Industry 26% Government route up

to 26%, Above 26%
to Cabinet
Committee on
Security decided.
7 Pharmaceuticals
Greenfield 100% Automatic
Brownfield 100% Government

8 Power Exchanges 49%(FDI+FII/FPI) Automatic

9 Special Economic 100% Automatic

Zones and Free Trade
Warehousing Zones
10 Telecom Services 100% Automatic up to
49%, Govt. route
beyond 49%.

Courier services
Courier services for
carrying packages, Automatic
parcels and other 100%
items

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 Construction
Development
Townships, Housing,
Built-Up Automatic
Infrastructure and 100%
Construction
Development
Projects.

Interpretation:

Sectors Prohibited for FDI:

FDI is prohibited in the following activities/sectors:
1. Lottery Business including Government, Private, online lotteries, etc.
2. Gambling and Betting including casinos etc.
3. Business of Chit Fund
4. Nidhi Company
5. Trading in Transferable Development Rights (TDRs)
6. Real Estate Business and Construction of Farm Houses
7. Manufacturing of Cigars, Cheroots, Cigarillos / Cigarettes and Tobacco / Tobacco
Substitutes
8. Activities/Sectors are not opened to private sector investment including Atomic Energy
and Railway Transport (other than Mass Rapid Transport Systems). Foreign technology
collaboration in any form including licensing for franchise, trademark, brand name,
management contract is also prohibited for Lottery Business and Gambling and Betting
activities

Conclusion:

The foreign direct investment has a positive impact on the following variables such as exports,
Gross Domestic investment, Foreign Exchange Investment Any variations in the above
variables would lead to the fluctuation in the Foreign Direct Investment in India. The overall
results of the study are summarised in the findings chapter.

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 Chapter 5

Findings, Conclusion, Suggestions

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5.1 Summary of Findings:

1.Service sector is the major sector which is having the massive FDI where in the future also

there is a scope of increasing the FDI in the services sector due to the phenomenal changes

in the technology where on India has been converting from agriculture-based economy to

services-based economy due to various difficulties involved in agricultural economy.

2.The Retail & Wholesale trade and mining are also the major sectors in attracting FDI

where the Mining sector has been rapidly developed due to the demand of Iron ore and

other metals from the china and also the Retail & Wholesale trade has also been constantly

increased due to the favourable policies of the Government of India.

3.Exports was still remaining important in attracting FDI inflow in India so thereon,

government should emphasize on the exports for the various domestic firms to increase the

exports in India.

4.GDP, Exchange Rate was found to be significant in attracting FDI which implies that in the

Decrease in the Foreign Exchange Reserve, GDP will lead to the decrease in the foreign

direct investment.

5. The sectors such as Business of Chit fund, Real Estate, Online lotteries have not taken into

Consideration for the Foreign Direct investments which acts as a limitation for the growth

of the economy.

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5.2 Conclusion:

Economic development of any country is mainly influenced by the growth of the Foreign Direct
Investment inflows. The health of the economy is closely related to the soundness of its
investment systems. The current study has been conducted to analysis the Foreign Direct
Investment and Economic growth in India during the period from 2011 to 2017. Hence, the
researcher identified and implemented seven factors namely Economy, Trade, Prices, Money,
Government, Consumer and Inflation.

Thus, it can be concluded that although attracting FDI can be an important factor for regional
developmental strategy, it is not an end in itself. The right strategy would be to create a
favourable environment throughout the country for equitable FDI inflow and simultaneously
develop sound domestic macroeconomic and structural policies for removing inter and intra
state disparities. Taxes levied on transportation of goods from State to State (such as control
and entry tax) adversely impact the economic environment for export production. Such taxes
impose both cost and time delays on movement of inputs used in production of export products
as well as in transport of the latter to the ports. Differential sale and excise taxes (States and
Centre) on small and large companies are found to be a deterrent to FDI in sectors such as
textiles. At the local level (sub–state) issues pertaining to land acquisition, land use change,
power connection, building plan approval are sources of project implementation delay. Though
India’s Anglo-Saxon legal system as codified is considered by many legal experts to be
superior to that of many other emerging economies it is often found in practice to be an obstacle
to investment. One of the reasons is the inordinate delay in the interlocutory procedures that
characterize judicial procedures.

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5.3 Suggestions:

1. The Foreign Direct Investments should be put more on the automatic route where the
government route is having numerous legal formalities and the policy makers are advised
to focus on attracting more neglected sectors of Foreign Direct Investment.
2. The government should reduce the extra burden of the tax system it can provide a
progressive and favourable atmosphere to the foreign investors as well as to the local
investors.
3. The economic variables such as Exports, Foreign Exchange Reserves, GDP must be the
leading priority variables in attracting FDI in India such that the Government should take
due diligence in framing those policies and laws which should benefit foreign investors.
4. In order to increase the FDI sector wise few powers should be vested in the state
government rather than the central government because it would lead to the competition
among states which finally would to increase on FDI in the country.
5. The sectors like Business of Chit fund, Real Estate, Online lotteries where there is a scope
of FDI need to be taken into consideration for the allowance of FDI which will lead to
development as well as growth in the employment opportunities in India.

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 Bibliography:

➢ Jayakumar, A. (2015). An analysis of foreign direct investment and economic growth in

India.

➢ Jayachandran, G. (2009). Foreign direct investment in the developing countries of Asia.

➢ Accolley Delali and Pearlman Joe (1997), “The Determinants and Impact of Foreign Direct
investment”, London: London Metropolitan University, Retrieved on May 2, 2008.

➢ Baharom. A. H, Muzafar Shah Habibullah and Royfaizal. R. C (2008), “The relationship between
trade openness, foreign direct investment and growth: Case of Malaysia”, Munich Personal Repec
Archive, Paper No. 11928, Posted 4, December 2008.

➢ Saiyed. S.A (2012), “Effect of Foreign Direct Investment on Economic Growth in India: An Empirical
Investigation”, Indian Journal of Research, Volume 1, Issue 11, November 2012, Pp. 26 - 28.

➢ Samuel Adams (2009), “Can foreign direct investment (FDI) help to promote growth in Africa?”
African Journal of Business Management, Volume 3 (5), May 2009, Pp. 178-183

➢ Misbah Nosheen (2013), “Impact of Foreign Direct Investment on Gross Domestic Product”, World
Applied Sciences Journal, Volume 24 (10), 2013, Pp. 1358 - 1361.

Websites:

➢ data.worldbank.org
➢ dipp.nic.in
➢ data.worldbank.org
➢ shodhaganga.inflibnet.ac.in
➢ fdimarkets.com
➢ inflation.eu www.rbi.org.in

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