A Dissertation Synopsis on

foreign direct investment and its impact on indian economic growth

Faculty of Management Studies, BHU, Varanasi Under the guidance of:

Dr H. P. Mathur Professor FMS-BHU

Submitted By:
Juhi Kashyap MBA-IB (IV Semester) Exam roll no 2011-13 FMS-BHU

Definition of FDI Foreign direct investment (FDI) is investment directly into production in a country by a company located in another country, either by buying a company in the target country or by expanding operations of an existing business in that country. -IMF Types of FDI

1. Horizontal FDI arises when a firm duplicates its home country-based activities at the same value chain stage in a host country through FDI. 2. Platform FDI 3. Vertical FDI takes place when a firm through FDI moves upstream or downstream in different value chains i.e., when firms perform value-adding activities stage by stage in a vertical fashion in a host country

FDI in India The evolution of Indian FDI can broadly be divided into three phases classified on the premises of the initiatives taken to induce foreign investments into the Indian economy:

(a) The first phase, between 1969 and 1991, was marked by the coming into force of the Monopolies and Restrictive Trade Practices Commission (MRTP) in 1969, which imposed restrictions on the size of operations, pricing of products and services of foreign companies. The Foreign Exchange Regulation Act (FERA) enacted in 1973, limited the extent of foreign equity to 40%, though this limit could be raised to 74% for technology-intensive, export-intensive, and core-sector industries. A selective licensing regime was instituted for technology transfer and royalty payments and applicants were subjected to export obligations.

(b) The second phase, between 1991 and 2000, witnessed the liberalisation of the FDI policy, as part of the Governments economic reforms program. In 1991 as per the Statement on Industrial

Policy, FDI was allowed on the automatic route, up to 51%, in 35 high priority industries. Foreign technical collaboration was also placed under the automatic route, subject to specified limits. In 1996, the automatic approval route for FDI was expanded, from 35 to 111 industries, under four distinct categories (Part Aup to 50%, Part Bup to 51%, Part Cup to 74%, and Part D-up to 100%). A Foreign Investment Promotion Board (FIPB) was constituted to consider cases under the government route.

(c) The third phase, between 2000 till date, has reflected the increasing globalisation of the Indian economy. In the year 2000, a paradigm shift occurred, wherein, except for a negative list, all the remaining activities were placed under the automatic route. Caps were gradually raised in a number of sectors/activities. Some of the initiatives that were taken during this period were that the insurance and defence sectors were opened up to a cap of 26%, the cap for telecom services was increased from 49% to 74% , FDI was allowed up to 51% in single brand retail. The year 2010 saw the continuation of the rationalisation process and all existing regulations on FDI were consolidated into a single document for ease of reference

Modes of receiving Foreign Direct Investment i. Automatic Route FDI up to 100 per cent is allowed under the automatic route in all activities/sectors except where the provisions of the consolidated FDI Policy, paragraph on Entry Routes for Investment issued by the Government of India from time to time, are attracted. FDI in sectors /activities to the extent permitted under the automatic route does not require any prior approval either of the Government or the Reserve Bank of India. ii. Government Route FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance. Indian companies having foreign investment approval through FIPB route do not require any further clearance from the Reserve

Bank of India for receiving inward remittance and for the issue of shares to the non-resident investors

Inflows of FDI in India 1991-2010 The data on FDI inflows into the country shows that foreign investors have shown a keen interest in the Indian economy ever since it has been liberalized. An increasing trend of flows can be observed since 1991 with the peak of FDI flows being reached in 2008-09.

Therefore the trend gives support to the fact that as and when the government has taken initiatives to open up and liberalize the economy further, the investors have welcomed the initiative and reciprocated by infusing investments into India. There are various reasons which work in favour of India and increase the level of interest s own in by foreign organizations some of them being its demographics with a young population there is a huge consumer base that is to be tapped, the growing middle class, increased urbanization and awareness, rising disposable incomes.

Recent Issues Related To FDI in India: Union Budget 2012-13: Efforts on for consensus on 51% FDI in multi-brand retail. (March 16, 2012, TIMES OF INDIA) FDI down 33% in Dec to $1.35 bn (March 1, 2012, TIMES OF INDIA) Govt justifies 26% FDI cap in print media (December 21, 2011, TIMES OF INDIA) FDI inflows up 36% in Jan-Oct (January 2, 2012, TIMES OF INDIA) FDI jumps 60% to $1.74bn in November (December 24, 2009, TIMES OF INDIA) The Key Decision Taken By Cabinet (Business Standard, 5 October 2012): Insurance law amendment bill To raise the FDI cap in private insurance to 49% from the existing 26%. Pension fund regulatory and development authority bill To give statutory powers to the interim pension regulator and open the sector to FDI Forward contracts (regulation) amendment bill

To introduce more commodity futures, give more power to forward market commission, Amendment to companies bill, 2011 To make spending on corporate social responsibility a mandatory provision for companies above a threshed

FDI and Economic growth FDI is considered to be the life blood and an important vehicle of for economic development as far as the developing nations are concerned. The important effect of FDI is its contribution to the growth of the economy. FDI has an important impact on countrys trade balance, increasing labour standards and skills, transfer of technology and innovative ideas, skills and the general business climate. FDI also provides opportunity for technological transfer and up gradation, access to global managerial skills and practices ,optimal utilization of human capabilities and natural resources, making industry internationally competiteve,opening up export markets,aceess to international quality goods and services and augmenting employment opportunities

FDI ,determinants and its impact FDI determinants and its impact on an economy can be studied with the help of different variables. These variables are not a exhaustive list and keep on getting updated by research by economist or international organization e.g. IMF, World bank .The following flowchart summarizes different variables that can serve as proxy for determinants and impact of FDI on an economy.

Research methodology

Objectives: To study the trend of FDI in world (1991-2011). To study the trend of FDI in India (1991-2011). To study the impact of FDI on different sector in Indian economy (1991-2011). To study the impact of FDI on economic growth of India via macroeconomic variables.
The study The study was causal in nature.

Tools for Data Collection Data was collected from the official sites of Government of India The period of 1991-2010 was considered for analysis. Tools for Data Analysis Karl Pearson coefficient of correlation.