Foreign Direct Investment In India

Determinants And Impacts

(Economics Project Work)

Submitted On:-
15th January, 2021
 Table of Contents
Declaration of Originality...........................................................................................................I

Acknowledgements...................................................................................................................II

Introduction................................................................................................................................2

Objectives...............................................................................................................................3

Research Methodology...........................................................................................................3

Limitations of the Study.........................................................................................................3

Mode of Citation....................................................................................................................3

The Concept Of Foreign Direct Investment...............................................................................4

Evolution of FDI policy In India:-.........................................................................................4

Determinants Of Foreign Direct Investment In India................................................................5

1. Market Size and Growth Prospect or GDP of the country:-...........................................5

2. Government Policies and Regulations:-..........................................................................5

Impact Of Foreign Direct Investment In India...........................................................................7

Recent Changes In FDI Policy In India:-...............................................................................8

Recent Data Regarding FDI in India......................................................................................8

Routes through which India gets FDI:-..................................................................................8

The Future of Foreign Direct Investment In India.....................................................................9

Conclusion................................................................................................................................10

1
 INTRODUCTION

During the last three decades, there has been significant development in India and around the
world in terms of economical, social, political and technological factors. This significant
development is mainly because of the trade and market liberalization policies of the
developing countries like India, China, Japan and South Korea because of which their growth
has expanded phenomenally resulting in a better quality of products available in these
countries, market specialization, labour specialization and reduction of import duty on
foreign goods.

One of the most significant factors which have helped the developing countries for their
extraordinary growth is the inflow of Foreign Direct Investment (FDI) in these countries
which has helped in increasing the labour productivity in these countries providing thousands
of job opportunities to millions of people living in these countries.FDI helps in providing
huge finances to domestic companies which these companies are unable to provide and helps
in replacing outdated technology with newer, modern and efficient technology.

In India after the post-liberalization period in 1991, FDI inflows have grown exponentially
attracting investments from more than 90 countries. In 2016 India ranks 10th among the
recipients of FDI inflows as per the World Investment Report 2016 by the United Nations
Conference for Trade and Development (UNCTAD).1 Despite the slowdown in the global
economy, India FDI has grown and has not been impacted significantly because of the
significant programmes by the current government like, “Make in India” and policies which
have helped in doing the Ease of Doing Business like India ranking has improved from 77 th to
63th in the world Bank 2

FDI is important for India as it will help in improving and renovating the infrastructural
capabilities where India lacked the most which will, in turn, attract various other sectors from
different parts of the world to Invest in India.

1
Livemint, https://www.livemint.com/Money/K1BnZ0ZQV6FhJKsZWcMHVL/India-ranks-10th-in-FDI-
inflows-UNCTAD-report.html,(last visted Nov 30,2020).
2
https://economictimes.indiatimes.com/news/economy/indicators/india-jumps-to-63rd-position-in-world-banks-
doing-business-2020-report/articleshow/71731589.cms

2
 OBJECTIVES

 To Understand the concept of Foreign Direct Investment In India

 To know the Determinants of Foreign Direct Investment(FDI)
 To know the Impacts of FDI in India
 To know the changes and future ahead of FDI in India

RESEARCH METHODOLOGY

The project employs secondary sources for the fulfilment of the objectives of the study. The
project is of Descriptive and analytical and various literary sources have been covered from
journals, news websites, books, various published reports. The project is of non-empirical.

LIMITATIONS OF THE STUDY

Due to paucity of time and resources, the author has dealt in brief amongst the various
aspects of Foreign Direct Investment in India, Determinants and impacts. He has not also
been able to provide any statistical data on the subject.

MODE OF CITATION

A uniform mode of citation i.e. 20th Bluebook citation has been adopted and followed
consistently throughout this paper.

3
 THE CONCEPT OF FOREIGN DIRECT INVESTMENT

“Foreign direct investment (FDI) is defined as an investment involving a long-term

relationship and reflecting a lasting interest and control by a resident entity in one economy
(foreign direct investor or parent enterprise) in an enterprise resident in an economy other
than that of the foreign direct investor (FDI enterprise or affiliate enterprise or foreign
affiliate).3”
Through FDI the investor exerts a considerable influence on the management or the decision
making power of the company, In some cases, he may have veto power like when he has
more than 50% equity which technically makes him the owner of the company and the
investor firm/individual may be involved in manufacturing, distribution or selling products
of the domestic or host firm

EVOLUTION OF FDI POLICY IN INDIA:-

FDI in India is regulated by Foreign Exchange Management Act, 1999 along with Foreign
Exchange Management along with the instructions issued by the Reserve Bank of India
(“RBI”), and the Consolidated FDI Policy issued by the Department of Industrial Policy and
Promotion (“DIPP”)
Many think that FDI policy began in India only after 1990 when the Narasimha Rao
government opened the Indian Economy to the world, but it dates back to the pre-
independence era when the major source or rather the only source of Investment in India was
The East India Company, which brought the required investment, technology and expertise to
make the Indian goods globally competitive and overhaul the Indian industry, but the British
reforms were not in the interest of Indian people.
FDI had played an important role in increasing the economic growth and development of the
country. Moreover, FDI as a component of investment is needed by India for achieving the
objectives of its second generation of economic reforms and maintaining the pace with new
technological era world.

3
This general definition of FDI is based on OECD, Detailed Benchmark Definition of Foreign Direct
Investment, third edition (OECD, 1996), and International Monetary Fund, Balance of Payments Manual, fifth
edition (IMF, 1993).

4
 DETERMINANTS OF FOREIGN DIRECT INVESTMENT IN INDIA

The most important determinants which influence the level of investment in the country in
terms of both outward or inflow flow of investments in India are:-

1. MARKET SIZE AND GROWTH PROSPECT OR GDP OF THE COUNTRY:-

One of the most important determinants of foreign direct investment is the size as well as the
growth prospects of the economy of the country where the foreign direct investment is being
made.4It is normally expected that if the country has a big market, like India or China with
such a large population, mostly youngsters, then it provides a big base for investments for
foreign companies because a bigger population and market means more customers which in
turn resulting in greater profits. “ The commerce department of USA calls India as one of the
10 emerging markets in the world, which means that big growth in investment will come to
the big emerging markets from the developed countries5”

2. GOVERNMENT POLICIES AND REGULATIONS:-

Government policies and regulations can be in many forms like:-

 Industrial and Trade Policy of a Country:-

 The industrial policy of a country has a huge impact on the amount of FDI that a country
receives like in the case of India, liberalised industrial and trade policy since 1991 has
enabled domestic companies to receive advanced foreign technology and investments
which have helped them to expand their business horizons. “This the new policy has
allowed 51 per cent foreign equity participation and also allowed the majority foreign
equity with automatic approval in a large number of industries”6

Before 1990 India was a restrictive trade regime but now after thirty years of trade
liberalization policy, the import-export system in India has become much easier as
government restrictions and Bureaucratic hold in this system has reduced to a very marginal
4
Aditya Sharma, Impact of Foreign direct investment in developing countries with special reference to India,
http://hdl.handle.net/10603/297990

5
B.K. Lokesha & D.S. Leelavathy, Determinants of Foreign Direct Investment: A Macro Perspective, Vol. 47,
Indian Journal of Industrial Relations, pp. 459-469, pp 465, 2012
6
Id. At. 5, 467.

5
 level which has facilitated reduced tariffs and Import duty on imported goods. Thus making
India a free market economy for firms to engage in different kinds of business-related
activities.

Intellectual Protection Regime(IPR) in a country

Good patents laws in a country allow firms to engage in Research&Development without any
fear of copyright issues and plagiarism. Thus promoting a business-friendly atmosphere for
foreign companies to invest in the host country. “India is a signatory of Uruguay round
negotiations which strongly protect IPR and hence has a good environment for host countries
to invest in India”.7

Fiscal Policies like Tax Rates and Interest rates on loans from banks:-

Fiscal policies like personal tax and corporate taxes influence the inflow FDI in a country. In
India, during 1993-94 the tax rate on short term capital gains was reduced from 75 per cent to
30 per cent.

3. Economic Factors:-

 Debt and GDP of a country:-

Debts GDP ration is an important determinant for the amount of inflow of FDI into an
economy. It reflects the financial health of a country as increasing debt would show that
country is going towards for an economic crisis, Lower the external debt to GDP ratio, higher
is the economic stability and inflow of FDI

 Industrial Disputes:-
Investors would prefer for a country where industrial disputes with labours and strike
are less and there is always a continuous availability of labours to keep the business
environment working.

7
Supra note 5, At 467.

6
 IMPACT OF FOREIGN DIRECT INVESTMENT IN INDIA

In the last 30 years, Indian economy has experienced dramatic changes in terms of size,
growth rate, market reforms, liberalization, industries and the information technology sector,
which has created a boom in the market. This level of expansions can be reflected in different
sectors and most importantly India growth rate has improved from 3% to 8% which has
placed India in one of the fastest-growing economies of the world.

FDI has helped India to create tremendous newer job opportunities, by providing funds to the
domestic organisations, with which they innovate and upgrade their businesses thereby
employing the workforce. This innovation helps to create competition in the market between
different businesses, which result in lower prices of the product, thereby benefitting the
customer.

FDI has helped to boost the economic growth of India, by institutional loans to start-ups and
existing businesses, through which they have enhanced their technology and job skills and
thus significantly contributing to the GDP. In fact, India is expected to grow at 6-6.5 per cent
in 2020-2021 because of higher FDI’s and increased industrial activities8.

8
GDP growth seen at 6-6.5 per cent for 2020-21:Economic Survey, The Economic Times,
https://economictimes.indiatimes.com/news/economy/indicators/gdp-growth-seen-at-6-6-5-per-cent-for-2020-
21-economic%20survey

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 RECENT CHANGES IN FDI POLICY IN INDIA:-

The Government Of India recently made changes in the FDI policy of India under the act of
Foreign Exchange Management Act (FEMA) 1999 which made prior approval of government
mandatory for foreign investments from countries that share a border with India like China,
Bangladesh, Pakistan, Nepal, Bhutan, etc, to prevent opportunists takeover of domestic firms
and companies during the covid scenario.

RECENT DATA REGARDING FDI IN INDIA

“Foreign direct investment (FDI) in India grew by 13% to a record of $ 49.97 billion in the
2019-20 financial year, according to official data.
The country had received FDI of $ 44.36 billion during April-March 2018-19. Sectors which
attracted maximum foreign inflows during 2019-20 include services ($ 7.85 billion),
computer software and hardware ($ 7.67 billion), telecommunications ($ 4.44 billion), trading
($ 4.57 billion), automobile ($ 2.82 billion), construction ($ 2 billion), and chemicals ($ one
billion), the Department for Promotion of Industry and Internal Trade (DPIIT) data showed.
Singapore emerged as the largest source of FDI in India during the last fiscal with $ 14.67
billion investments”9.

ROUTES THROUGH WHICH INDIA GETS FDI:-10

1. Automatic Route:-The foreign firm does not require prior approval from the RBI or
the government Of India. For Example industries like animal husbandry, food
processing, Electronics, E-Commerce, textile and garments and many other industries
2. Government Route:-The government approval for investment is mandatory and the
firms will have to apply the concerned departments. The sectors which come under
government routes are:-

 Banking & Public sector: 20%

 Broadcasting Content Services: 49%Core Investment Company: 100%

9
The Hindu, https://www.thehindu.com/business/Industry/fdi-in-india-jumps-13-to-record (last visited, Nove 29
2020)
10
Busniess Standard, https://www.business-standard.com/about/what-is-fdi, (last visited Nov 29,2020)

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 THE FUTURE OF FOREIGN DIRECT INVESTMENT IN INDIA

India has progressed in the system of inflow and outflow of FDI in terms of capital needed
for business, advanced technology and innovative and efficient management techniques
which had increased the productivity of businesses many times, but on the other hand is has
proved in some cases disadvantageous to small retailers and traders like the agitation which
happened against the RCEP free trade agreement as it would have flooded the Indian market
with cheap Chinese goods.

The future of FDI in India is very promising given certain improvements happen but there are
certain risks which are always there in India as a political risk because India is a democracy
there are many political parties with different ideologies to market and business ecosystem.
Along with political risk, the stagnant bureaucratic structure which is a bane of the Socialist
policies of the Nehru-Indira era has been a constant hindrance to India’s economic and social
development which can be improved by creating more business-friendly departments and
minimising paperwork trail which usually is disadvantageous for start-up businesses. Another
important factor is the manufacturing cost which is quite cheap in India as compared to many
other western countries, but it can further be improved as compared to many South Asian
countries like China, Taiwan and Vietnam and last but not the least is the infrastructural
problem as better infrastructure means better connectivity and productivity.

Thus it can be seen that Foreign Direct Investment is a strategic component of India’s
economy and India is an emerging market of FDI and a survey by Confederation Of India
Industry (CII) has predicted that India to be one of the top three choices for overseas
Investment in two-three years and about 30% of the firms are planning to invest more than
$500 million11. FDI policy should be structured in such a way to empower domestic firms and
making it easier for foreign firms to invest in India, thereby increasing the competition. If the
above-mentioned points are kept in policymaking, then soon India will leave far behind
China to be the No.1 destination for Foreign Direct Investment in the world.

11
The Economic Times, https://economictimes.indiatimes.com/news/economy/finance/india-among-top-three-
fdi-destinations-in-near-future-cii-ey-survey, (last visted Nov 29, 20200.

9
 CONCLUSION

Taking care of all the aspects and analysing the present study, the researcher can conclude
that now India is opening up its economy and market to the world and especially during this
covid pandemic, many of the sectors which were previously reserved for Government has
now been opened to market with the option of 100% FDI route.

An analysis of the recent happenings shows that India has attracted much higher FDI in a less
time because of factors like its vast younger age population and an open democratic system
which creates a sense of transparency as compared to an authoritative regime like China and
Russia. Even during the recent global financial crisis of 2007-2008, the inflow of FDI to
India did not show much effect but even after the recovery of the global market the inflow of
FDI did not show a much increase

Despite the significant achievements in recent years, the claims are given by the government
of about the increase of FDI inflow to India, the FDI inflow to India in the recent years has
remained at a very moderate level which needs to be taken into consideration by revising the
current policies and removing the FDI caps in different sectors such as Agriculture, which
provides about 52% of the total jobs available in India and contributes to about 18% to the
GDP of the country12

All in all, India has benefitted a lot from FDI with technology up-gradation, better
management skills in both public and private sector, increased productivity along with the
decreased cost of labour. It has also been ranked as the top five global destinations for
investments13. Therefore if the Government keeps supporting and improvising the FDI
policies and work in a sustainable free-market way, India will soon be a leader in the outflow
and inflow of FDI.

12
Kekane Maruti Arjun, Indian Agriculture- Status, Importance and Role in Indian Economy,Volume 4,
Number 4, IJAFST, 343, 343(2013).
13
Thomas Asha E. (2016). Impact of FDI on Indian Economy – An Analytical Study. International Journal of
Business and Administration Research Review, 1, (4), 91-94.

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 REFERENCES

 B.K. Lokesha & D.S. Leelavathy, Determinants of Foreign Direct Investment: A

Macro Perspective, Vol. 47, Indian Journal of Industrial Relations, pp. 459-469, 2012.
 Aditya Sharma, Impact of Foreign direct investment in developing countries with
special reference to India, http://hdl.handle.net/10603/297990
 Kekane Maruti Arjun, Indian Agriculture- Status, Importance and Role in Indian
Economy,Volume 4, Number 4, IJAFST, 343, 343(2013).
 Thomas Asha E. (2016). Impact of FDI on Indian Economy – An Analytical Study.
International Journal of Business and Administration Research Review, 1, (4), 91-94.
 The Economic Times
 The Hindu
 Business Standard

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