INTRODUCTION:

Foreign direct investment (FDI) refers to the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, other long-term capital, and short term capital as shown in the balance of payments. It usually involves participation in management, joint venture, transfer of technology and expertise.

There are two types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in a net FDI inflow (positive or negative) and "stock of foreign direct investment", which is the cumulative number for a given period. Direct investment excludes investment through purchase of shares.FDI is one example of international factor movements.

For FDI:

- causes a flow of money into the economy which stimulates economic activity

- Employment will increase

- Long run aggregate supply will shift outwards

-Aggregate demand will also shift outwards as investment is a component of aggregate demand

- it may give domestic producers an incentive to become more efficient

- the government of the country experiencing increasing levels of FDI will have a greater voice at international summits as their country will have more stakeholders in it .

The declining trend in Foreign Direct Investment (FDI) in 2012 has been a matter of concern for India. FDI has been one of the most influential forces in boosting the growth rate of Indian economy since 1990s. It has been viewed as a bundle of supplies including capital, technology, skills and sometimes even market access. Of late, hence there is a welcoming attitude to multinational enterprises (MNEs) that are usually associated with FDI.

After achieving political independence in 1947, India generally followed an inward looking economic policy. The economy was agrarian in nature and industrial development was in its most nascent stages. The attitude towards FDI was highly restrictive until the economy was liberalized in 1991, when the FDI policy regime underwent changes on a macro-economic level. This new and improved policy brought in changes in sectoral composition, sources and even entry modes of FDI. The spillovers from this increased foreign investment began to show in trade, with exports of certain sectors benefiting from foreign investment.

HISTORY OF FDI IN INDIA:

A. Pre and Post-Independence:

Foreign Direct Investment in India dates back to the pre independence period, where it was handled predominantly by the East India Company with British companies being a major source of FDI. India was a land of abundant raw material and food materials, but there was lack of interest by the British in developing finished product industries. A majority of the investment was used to suit their own political and business interests, often to the detriment of growth of the Indian economy.

After independence, the first Prime Minister of India pointed out the importance of FDI not just as a source of capital, but for the host of technological and industrial knowledge it would bring with it. India laid out and started following a strategy of import substituting industrialization in the framework of development planning with a focus on encouraging and improving local capability, mostly in heavy industry and machine manufacturing sectors (Balasubramnyam and Sapsford, 2007). To compensate for the general limited availability of technology, skills, entrepreneurship, bringing in FDI was one of the top priorities. However,¹ All being a nation just freed from colonial power and hence weary of major foreign intervention, the restrictions were plenty such as those on FDI unaccompanied by technology transfer, and those seeking more than 40% foreign ownership.

B. Changing Policies with the decades:

The 1970s brought in more restrictions. FDI was only allowed in a selected group of core or high priority industries. The Foreign Exchange Regulation Act (FERA) and Monopolies and Restrictive Trade Practice (MRTP) were imposed in 1973, which required numerous permits and clearances for all foreign companies to operate in India. This discouraged the FDI flows considerably (Banga, 2003). The MRTP discouraged the growth of domestic large industries by imposing a world of restrictions and prevented economies of scale from realizing. Thus industrial growth was throttled for both domestic and foreign industries. Exceptions were made only for companies in the high technology sectors, plantation and export driven companies.

The mid-1980s brought about a positive change as the industries began to get modernized with liberalized imports of capital goods and technology. The benefits of these changes were plenty with a set of MRTP licensing rules that had been liberalized, a host of incentives now being provided, increased degree of flexibility concerning foreign ownership and an overall introduction of the Indian market to foreign competition, which was going to prove only too valuable. India also allowed qualified NRI investors to invest in India through equity participation. Also, the industry had become more export driven. The bulk of FDI inflows during this time were directed to the manufacturing sector, hence it accounted for the bulk of the FDI stock with nearly 87% share in 1980, that went down to 85% by the time 1990 arrived. (Nagesh Kumar, 2007)

C. Economic Crisis and Liberalization of Economy:

By the time the 1990s came however, much more serious problems had crept up. India’s foreign exchange reserves had reached an all time low, with only enough resources to last for about three weeks. The exports scenario was in troubled waters. The overall balance of payments figure had reached (-) 44710 million. Inflation was at its highest level of 13%. The political instability of the country did not do much to help either. In such a scenario, Finance Minister Manmohan Singh, with the help of the IMF and the World Bank, launched on a long term plan of macro-economic stabilization. India opened its doors to FDI by doing away with the restrictive policies surrounding it and making them more liberal, thus ending the License Raj. The New Industrial Policy (NIP) announced in 1991 led to abolition of industry licensing system except in only a few select cases. Foreign ownership up to 100% was now allowed in most manufacturing sectors, except defence equipment (26%) and items reserved for production by small scale industries (24%) (Balasubramnyam and Sapsford, 2007).

D. Effects of Liberalization on sectors:

The liberal policy allowed non-manufacturing sectors to come into the limelight for the first time, with the share of ‘others’ sector, that includes infrastructure and power management, stepping up by nearly 35% in total FDI from marginal in the 1980s (Nagesh Kumar, 2007). The service sector which included activities like banking, hotels, tourism, railways, insurance, business services showed marked improvement with telecommunications benefiting the most (61%), and financial and banking sector (14%) coming in second.

India’s recently liberalized FDI policy (2005) allows for a 100% FDI stake in ventures. Owing to the plethora o service sector has been among the biggest gainers. Sectors like power generation, mining, and banking are some of the newer sectors reaping rewards from the liberalized FDI norms.

THE VERTICALS OF FDI

A.Magnitude

Post liberalization, FDI inflows have increased every year throughout the 1990s except during 1997-98 (dtouethe South-east Asian crisis)and 2003-04 when they stagnated, but then picked up again. FDI inflows were US$ 129 million in 1991; after that the inflows reached to its peak to US$ 3557 million in 1997. Subsequently, these inflows touched a low of US $2155 million in 1999 but then shot up in 2001, as the world recovered from the South- East Asian crisis. Except in 2003, which shows a slight decline in FDI inflows, FDI has been picking up since 2000. The increase in FDI inflows from 2006 onwards is due to the economic boom in most countries including India when the capital flows multiplied everywhere. The decline in FDI in 2008 is only slight. Due to comparatively better economic growth rates in the midst of one of the worst recessions in the US and Western Europe, foreign investor’s confidence was restored in the Indian economy. However, the pace of FDI inflows in India has definitely been slower than China, Singapore,Russion Federation And Brazil.

B. Sectors of Distribution:

Over the last decade, the service sector and the electrical equipments have been the major winners when it comes to foreign direct investment with both of them together receiving over 40% of the total FDI in 2010. They are closely followed by computer software and hardware, financial and telecom sectors. Service sectors like finance, banking and insurance are picked by foreign investors because of the highly educated and vast middle class population that India has. Also, these are sectors which do not really require a huge expenditure on infrastructure and production. In other words, these sectors are seen as the most profitable and relatively of lesser risk by the foreign investors.

_T_{able-1. Amount of fdi
in flows (1991-2008)}

Year	Amt. (US$ million)	Year	Amt. (US$ million)
1991	129	2000	4029
1992	315	2001	6130
1993	586	2002	5035
1994	1314	2003	4322
1995	2144	2004	6051
1996	2821	2005	8961
1997	3557	2006	22826
1998	2462	2007	34362
1999	2155	2008	33613

Source: Chadha and Nataraj (2010)

Service Sector	Telecomm	Electrical Equipment
Construction	Computer Software	Misc. Ind.
Financial	Transportation

C. Source Countries:

The US (19% of total FDI in India) was the major source of FDI in 1992, and enjoyed the position till 1997 when Mauritius replaced it. Mauritius entered into Double Taxation Avoidance Agreement (DTAA) with India. According to it, a company is subject to capital gain tax only in the country of its establishment, and nowhere else. Hence, a Mauritian company has to pay tax only in Mauritius and not again in India. And there is no tax imposed on these companies in Mauritius, so the company actually has to pay no taxes. Because of this, Mauritius now contributes to 42% of the total FDI and is the largest foreign investor nation for India. However, most investments are channelized through Mauritius; they are not made by the Mauritius firms.

Japan has invested heavily in transportation (54% of its total investment), telecommunication and services (7%), making it India’s leading trade partner as of 2007. Japan’s FDI amounted to US$ billion 5.5 from 2006-2010 over a span of only 5 years

EXPORTS IN INDIA:

A. History of Exports

India’s exports have undergone a huge change in composition in the past two decades on account of liberalization of the investment policy, depreciation of exchange rate and provision of export subsidies in several sectors. Exports experienced a major fall in 1991 due to the macro-economic crisis in India, and then in 1998 due to the South East Asian crisis.

Table 2. Volume of exports (1995-2010)

Year	Exports (in US Dollar)	Year	Exports (in US Dollar)
1995	31794.9	2003	63842.6
1996	33469.7	2004	83535.9
1997	35006.4	2005	103090.5
1998	33218.7	2006	126414.1
1999	36822.4	2007	162904.3
2000	44560.3	2008	182799.5
2001	43826.7	2009	178751.4
2002	52719.4	2010	254402.1

Source: RBI Report, 2011Trend of Exports (1995-2010)

B. Major sectors of Exports:

Among the sectors leading Indian exports were manufactured goods which accounted for about 76% of the share in 1997-98. Gems and jewelry, readymade garments, engineering goods and chemicals and other related products were among the highest exported manufactured items.

The table 3 shows the highest growing sectors in terms of their exports (growth rates are calculated using the semi-log regression equation discussed in above sections):

Table 3: Sector wise growth rate of exports (2000-2010)

Sector	Annual Growth Rate (%)
Agriculture and Allied Products	7.45
Manufactured Goods	8.1
Chemicals and Related Products	8.5
lron and Steel	10.65
Manufacture of Metals	10.32
Transport Equipment	14.6
Electronic Goods	9.78
Gems and Jewelry	7.57
Petroleum Products	15.3

According to the results, petroleum has the highest growth rate of 15.3%. This can be attributed to the fact that India has 18 oil refineries that more than makes up for its demands, and has good infrastructure and low cost labor for refining. Add to this the coastal locations of the refineries and the proximity to Persian Gulf regions which reduces shipping costs. The iron and steel industry flourishes because of the NIP Policy of 1991 which opened this industry to the private sector and removed licensing. Also, India is the largest producer of sponge iron in the world, and this gives a boost to its exports in the heavily growing demand for steel in a global market that grows by 7% annually.

C. Changing face of Exports

As India came to terms with the liberalization of her economy, several new sectors like electrical, chemicals, mining started rising. Correspondingly, industries like agriculture and textiles which were India’s oldest export sectors, took a hit in the light of industrialization and new and improved policy measures. Naturally, there has been a vast change in India’s composition of major exports in the 1990s and those in the 2000s. The table 4 shows just that:

Table 4: Changes in share of exports (%) over decades

Item Gainers	1990-91	2002-03	2010-2011
Gems and Jewelry	14.2	15.1	16.03
Transport Equipment	2.9	2.53	7.25
Primary and Semi-Finished Iron and Steel	0.6	3	3.1
Electronic Goods	1.3	2.2	3.5
Petroleum Products	2.9	4.6	16.47
Drugs, Pharmaceuticals	3.1	4.7	7.56
Losers
Cotton Raw	2.6	0	2.1
Tea	3.3	0.6	0.27
Footwear of Leather	2.8	0.8	1.48
Iron Ore	3.2	1.6	1.8
Readymade Garments: Man-made Fiber	2.5	11.4	4.4
Source: RBI Report, 2011

CONCLUSION:

For a foreign investor keen to invest in a host country, there are generally two kinds of industries in which they choose to invest:

1) Export oriented industry:

When a nation offers cheap skilled labor, lower production costs or access to important and uniquely available resources, foreign companies are attracted to such nations. The host nation benefits because its people are gainfully employed, better technology is used for its export production and consequent increase in its exports.

2) Domestic market oriented industry:

Foreign companies are attracted to nations that offer a large market for their products. The companies benefit by expanding their business and thus earning more profits. The host nation’s benefits include exposure to the latest technologies, employment and better quality products. However, there is a danger that the domestic producers serving the home market can perish due to the competition. The multiplier effects on GDP of FDI in consumer sector can be limited compared to investment in infrastructure or export sector.

Depending on the characteristics of the host country, investors settle down in the domestic market or in industries that enhance export growth of the host country. In India, where FDIs are often looked down with suspicion, it was often questioned whether the FDIs are simply exploiting India as a market or are helping in its export growth also. According to our study, the sectors that have received highest amount of FDI consistently over the years are service, finance, construction, electronics and telecom (from Fig. 2). Barring electronics, these are actually the sectors that are more domestically active rather than being export oriented. Also, considering India’s huge middle class population, the foreign investor will prefer to build a strong foothold in the local market and expand business. This explains why FDI has seen more participation in domestic markets than those that enhance exports.

However, it is not that FDI has gone only into the consumers’ sector. Our analysis of Table IX has shown a few sectors which have achieved the double goal of high FDI and high exports. Sectors like metallurgy, electronics, gems and jewelry and chemicals are export oriented sectors that are attracting foreign investors. Hence, one thing from this is clear and that is, when FDI flow increased, it has also gone into some export sectors and has benefited the nation in earning more foreign exchange. The overall effects of inflow of total FDI on exports have also been positive. FDI thus should be attracted in India because it leads to more growth of both consumer and export oriented sectors.

REFERENCES:

1. Banga, Rashmi (2003), “Impact of Government Policies and Investment Agreements on FDI Inflows’, Working Paper no. 116, November 2003, Indian Council for Research on International Economic Relations: Delhi

2. Balasubramnyam V. N. and David Sapsford (2007), “Does India Need a Lot More FDI?”, Economic and Political Weekly, April 28, 2007 (pp. 1549-1555)

3. Chadha R and G. Nataraj (2010), “FDI in India and its Growth Linkages”, National Council of Applied Economic Research, New Delhi

4. Sharma Kishore (2000), “Export Growth in India: Has FDI Played a Role?”, Center Discussion Paper no. 816, Economic Growth Center, Yale University, July 2000

5. Kumar Nagesh (2007), “Liberalization, Foreign Direct Investment Flows and Development”, Economic and Political Weekly, April 28, 2007 ( pp. 1459-1468)

6. Trends Changing, Composition and Empect of Foreign Direct Investment in India Vishal Shah Alka Parikh Int. J.Eco.Res,2012

Received on 07.12.2015 Modified on 18.12.2015

Int. J. Rev. and Res. Social Sci. 3(4): Oct. - Dec., 2015; Page 175-180

Trends of Foreign Direct Investment in India