INTRODUCTION:

Several studies have been conducted to determine the importance of government policies in attracting FDI inflow. Grubert and Mutti (1991), Loree and Gruisinger (1995), Taylor (2000) and Kumar (2002) have found positive impact of investment requirement imposed by the host country in attracting FDI inflow. However, Contarctor (1991), Caves (1996) and Villela and Barreix (2002) believe that policy changes by the government have a weak influence on FDI inflows. Studies like Gastanaga, Nugent and Pashmova (1998), Taylor (2000), Chakrabarti (2001) and Asiedu (2002) also have tested the impact of openness of trade as an important determinant on FDI inflow.

The present study adds to the existing literature on determinants of FDI by examining the degree of correlation between FDI inflow in India and several economic factors like exchange rate, GDP, openness of trade etc.

OBJECTIVES OF THE STUDY:

1. To analyze the trend in FDI inflow in India from 2011– 2020

2. To find out the degree of correlation between different economic factors and FDI inflow in India.

METHODOLOGY OF THE STUDY:

This study has been carried out with the help of secondary data only. The data has been collected and compiled from already published sources. The major sources include RBI bulletins, annual reports and handbook of statistics on Indian economy, Department of Industrial Policy and Promotion (DIPP), SIA newsletter, books, journals and the like. While analyzing the sector wise trend the study was limited to a sample of ten top sectors which have attracted the larger flow of FDI. Over the past decades, inflows of FDI have shown unsteady and fluctuating trend. For the study, FY2011- FY2020 the period is considered for analysis.

FDI – Definition:

Foreign Direct Investment:

In general terms, FDI occurs when a firm invests directly in production or other facilities in a foreign country over which it has effective control or it refers to capital inflows from abroad that invest in the production capacity of the economy and are usually preferred over other forms of external finance because they are non-debt creating, nonvolatile and their returns depend on the performance of the projects financed by the investors.

This term is defined by various organizations in different ways:

According to IMF:

“FDI is defined as an 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. The lasting interest implies existence of a long-term relationship between the direct investor and the enterprise and the significant degree of influence that gives the direct investor an effective voice in the management of the enterprise.”

This term ‘lasting interest’ is a subjective concept, on the basis of which it is difficult to determine whether a foreign investor has controlling rights in a domestic enterprise or not and to what extent? The more pertinent criterion adopted is that of the ownership of shares of a particular company. The IMF threshold is 10 percent ownership of the ordinary shares or voting power or the equivalent for unincorporated enterprises. The OECD also recommends the 10% numerical guideline of ownership of ordinary shares or voting stock to determine the existence of a direct investment relationship.

If the criteria are met., then following organizational set-up are:

i) Subsidiaries: in which the non-resident investor owns more than 50%

ii) Associates: in which the non-resident investor owns between 10 and 50%

iii) Branches: unincorporated enterprises, wholly or jointly owned by the Non-resident investor

The United Nations 2006 World Investment Report (UNCTAD, 2006) defines

‘FDI as an investment involving a long-term relationship and reflecting a lasting interest and control of resident in an economy other than that of the foreign direct investor (FDI enterprise affiliate enterprise or foreign affiliate)’

Thus, according to the definitions given by IMF, UNCTAD implies that the investor, owning many shares or voting power exerts a significant degree of control over management policy and decisions. Such investment involves both the initial transactions between the two entities and all subsequent transactions between them and among foreign affiliates, both incorporated and un-incorporated.

FDI Inflows Trends Analysis:

FDI inflows trends can be analyzed in terms of FDI inflows in India; sector-wise FDI in India, sources of FDI in India and India as a failing FDI destination.

FDI Inflows in India:

There has been a paradigm shift in FDI inflow in India. Over the years FDI inflow in India has registered an increasing trend yet, fluctuating. FDI inflows increased from US$4 billion in FY2001 to US$22bn in FY2007 and to US$36 bn in FY2014. Thus, FDI inflows in India increased nine-fold over the specified period of time.

FDI inflows in India FY2011-FY2020 (in US $bn)

Year	Total FDI Flows	% growth
FY2011	6.05	40
FY2012	8.96	48
FY2013	22.82	155
FY2014	34.84	53
FY2015	41.87	20
FY2016	37.74	-10
FY2017	34.84	-8
FY2018	46.55	34
FY2019	34.29	-26
FY2020	36.04	5

Source: Department of Industrial Policy & Promotion, Government of India

Source of FDI inflows in India:

Mauritius tops the chart as an investing country with 35.91% FDI, in the top investing sectors including the services sector (includes financial, banking, insurance, non-financial/business, outsourcing, R&D, courier, tech. testing and analysis). Singapore is at the second position with 11.91% of FDI share as foreign investor in India. Other foreign countries investing in India are U.K. (9.40%), Japan (7.48%), Netherlands (5.57%), U.S. (5.37%) and other countries with 24.36% share of FDI. Also, Mumbai and New Delhi are observed to be the cities attracting the highest FDI equity inflows.

Source: Department of Industrial Policy & Promotion, Government of India

Analysis of India as a failing FDI Destination:

India ranks 71st out of 144 economies in the Global Competitiveness Index (GCI) 2018-2019. It is the lowest ranked among the BRICS economies. The rank differential with China (28th) has grown from 14 places in 2007 to 43 today; while India’s GDP per capita was higher than China’s in 1991, today China is four times richer. This competitiveness divide helps to explain the different trajectories of these two economies. India’s slide in the competitiveness rankings began in 2009, when its economy was still growing at 8.5 percent (it even grew by 10.3 percent in 2010). Back then, however, India’s showing in the GCI was already casting doubt about the sustainability of this growth. Since then, the country has been struggling to achieve growth of 5 percent. The country has declined in most areas assessed by the GCI since 2007, most strikingly in institutions, business sophistication, financial market development, and goods market efficiency. India’s competitiveness and the country’s performance is judged along the 12 dimensions of the GCI. Overall, India does best in the more complex areas of the GCI: innovation (49th) and business sophistication (57th). In contrast, it obtains low marks in the more basic and more fundamental drivers of competitiveness. For instance, India ranks 98th on the health and primary education pillar. The health situation is indeed alarming: infant mortality and malnutrition incidence are among the highest in the world; only 36 percent of the population have access to improved sanitation; and life expectancy is Asia’s second shortest, after Myanmar.

On a more positive note, India is on track to achieve universal primary education, although the quality of primary education remains poor (88th) and it ranks a low 93rd in the higher education and training pillar of the GCI. Transport and electricity infrastructure are in need of upgrading (87th). In 2012, a working group appointed by the Planning Commission of India had recommended that a trillion US dollars—or almost 10 percent of India’s GDP be spent on infrastructure by 2017. Given the country’s strained public finances, addressing the infrastructure gap will require very strong participation on the part of private and foreign investors through public-private partnerships. But for these types of investments to materialize, the institutional framework needs to improve. There are encouraging signs. India has achieved spectacular progress in various measures of corruption and now ranks 65th. Red tape seems to be less of an issue than it had been, and government efficiency is equally improving. However, the overall business environment and market efficiency (95th, down 10 places) are undermined by protectionism, monopolies, and various distortionary measures, including subsidies and administrative barriers to entry and operation.

It is therefore urgent that the government create the right incentives for businesses to register and contribute their fair share to the provision of public services. India achieves its lowest rank among the 12 pillars in technological readiness (121st). Despite mobile telephony being almost ubiquitous, India is one of the world’s least digitally connected countries. Only 15 percent of Indians access the Internet on a regular basis. Broadband Internet, if available at all, remains the privilege of a very few. India’s knack for frugal innovation should contribute to providing cheap solutions for bridging this digital divide. The financial resources required for delivering basic services, including sanitation and healthcare, and for improving India’s physical and digital connectivity are considerable. But India’s fiscal situation remains in disarray, as evidenced by the country’s 101st rank in the macroeconomic environment pillar of the GCI. With the exception of 2007, the central government has consistently run deficits since 2000. Because of the high degree of informality, its tax base is relatively narrow, representing less than 10 percent of GDP. In addition, over the past several years India has experienced persistently high, in some years near double-digit, inflation, which reached 9.5 percent in 2013.

The Reserve Bank of India is torn between keeping interest rates low to stimulate the faltering economy and tightening monetary policy to stem inflation. Improving competitiveness will yield India huge benefits. In particular, it will help rebalance the economy and move the country up the value chain so as to ensure more solid and stable growth; this in turn could result in more employment opportunities for the country’s rapidly growing population. Despite the abundance of low-cost labor, India has a very narrow manufacturing base. Manufacturing accounts for less than 15 percent of India’s GDP. Agriculture represents 18 percent of output and employs 47 percent of the workforce. Low productivity in the sector means very low wages and a life of mere subsistence for many. The services sector accounts for just 28 percent of employment but for 56 percent of the economy. Most services jobs are low-skilled and poorly paid ones, though.

Table 1: Doing Business in India 2020 Ranking

Topic Rankings	158
Starting a Business	184
Dealing with Construction Permits	137
Registering Property	121
Getting Credit	36
Protecting Investors	7
Paying Taxes	156
Trading Across Borders	126
Enforcing Contracts	186
Closing a Business	137
Source: http://www.doingbusiness.org/data/exploreeconomies/india/

Table 2: The Most Problematic Factors for Doing Business

Access to financing	10.2
Tax rates	8.7
Foreign currency regulations	8.4
Inadequate supply of infrastructure	8.1
Corruption	8.0
Inefficient government bureaucracy	7.6
Government instability/coups	6.4
Inadequately educated workforce	6.3
Policy instability	4.8
Poor work ethic in national labor force	4.7
Crime and theft	4.6
Tax regulations	4.5
Inflation	4.5
Insufficient capacity to innovate	3.8
Poor public health	2.8
Source: The Global Competitiveness Report 2018 - 2019 World Economic Forum

Economic Determinants of FDI Inflow in India:

There have been many studies to analyze the determinants of FDI Inflow. It can be broadly classified into two streams: economic and socioeconomic factors. The economic factors include the target country’s market size, income level, market growth rate, inflation rates and current account positions, while socioeconomic factors include political stability and quality of infrastructure. (Thomas, Leape, Hanouch & Rumney, 2005; Wint & Williams, 2002). A test is conducted to study the degree of correlation between different economic factors and FDI inflow in India. The model used is Karl Pearson’s Correlation equation:

The mathematical formula for computing r is:

where r = Karl Pearson’s coefficient of correlation

n=number of years taken into consideration

x= different economic factors such as GDP, WPI, TO

y= FDI inflow in India

Market Size:

The increase in market size implies increasing opportunities for MNC’s due to increasing demands of customers. MNC’s have more incentives to introduce foreign brands and access to economic of scales. Wheeler & Mody (1992), Asiedu (2006) and Kok & Ersoy (2009) found positive relationship between market size and FDI Inflows.

In India, GDP at MP is used as a measure of market size. In given study it is depicted in Table 3, we get a positive (+) 0.76 coefficient of correlation (r) between GDP at MP and FDI inflows in India. It suggests that with increase in GDP, the values of FDI inflow increases in India and vice versa. The value of coefficient of correlation (r) is nearer to +1, it implies high degree of correlation between the two variables.

Inflation rates:

Host country’s economic instability can be a major determining factor for FDI Inflow. Akinboade, Siebrits and Roussot (2006, p. 190191) state that “low inflation is taken to be a sign of the internal economic stability in the host country. High inflation indicates the inability of the govern-ent to balance its budget and the failure of the central bank to conduct appropriate monetary policy.” India uses Wholesale Price Index (WPI) as a measure of Inflation.

We get a positive (+) 0.73 coefficient of correlation (r) between Inflation and FDI inflow in India. This implies that inflation rate and FDI inflow move in same direction, so that with an increase in the values of WPI the values of FDI inflow increase in India and vice versa.

Openness of Trade:

The openness of trade was tested by Chakrabarti (2001). He concludes that a close correlation exists between FDI and a country’s openness of trade is much expected. So, according to Chakrabarti (2001), in order to increase FDI, policymakers must increase the country’s participation in international trade. Trade openness is generally calculated as the sum of exports and imports of goods and services measured as a share of gross domestic product (refer table 3). The value for coefficient of correlation (r)is calculated to be +0.78 in India. Since the correlation coefficient must vary between 1 and +1, it can be said that there exists a high degree of positive correlation between openness of trade and FDI inflow.

Table 3: Degree of Correlation (r) between Different Economic Factors and FDI inflow in India

Year	GDP at MP (At constant prices) (Rupees Billions)	FDI Inflows (in Crores)	WPI	Exports (Rs. billion)	Imports. (Rs. billion)	Trade Openness (Rs. Billion)
2011-2012	38,714.89	24,584	104.47	4564.18	6604.09	0.29
2012-2013	42,509.47	56,390	111.35	5717.79	8405.06	0.33
2013-2014	44,163.50	98,642	116.63	6558.64	10123.12	0.38
2014-2015	47,908.50	142,829	126.02	8407.55	13744.36	0.46
2015-2016	52,823.90	123,120	130.81	8455.34	13637.36	0.42
2016-2017	56,330.50	97,320	143.32	11429.22	16834.67	0.50
2017-2018	58,998.50	165,146	156.13	14659.59	23454.63	0.65
2018-2019	61,958.40	121,907	167.62	16343.19	26691.62	0.69
2019-2020	65,445.90	147,518	177.64	19050.11	27154.34	0.71
Coefficient of Correlation (r)	0.763376297		0.73399774			0.779447933

Source:

(1) http://dipp.nic.in/English/Publications/FDI_Statistics/2014/india_FDI_March2014.pdf

(2) http://www.eaindustry.nic.in/key_economic_indicators/Key_Economic_Indicators.pdf

(3) http://www.imf.org/external/pubs/ft/weo/2014/02/weodata/weorept.aspx?sy=2005&ey=2014&scsm=1&ssd=1&sort=country&ds=.&br=1&pr1.x=72&pr1.y=8&c=534&s=NGDP_R&grp=0&a=#cs1

(4) http://dbie.rbi.org.in/OpenDocument/opendoc/openDocument.jsp

Note: Trade Openness is computed by = Export + Import /GDP

CONCLUSION:

It can be concluded that as foreign investments are boosted by liberalizing FDI rules related to equity caps, foreign investment norms, it has supported India to attract more FDI in upcoming years. India is the only major country in South Asia where FDI inflows have fallen during 2010. A major reason for the decline in inward FDI is reported to have been the environment sensitive policies pursued, as manifested in the recent episodes in the mining sector, which appear to have affected the investors’ sentiments. Added to this are the persistent procedural delays, land acquisition issues. If these factors are considered by the government it can help India in raising its share of FDI. In the sectors where no equity caps exist, is is believed that no such caps should be imposed in near future. The government of India by taking certain FDI related initiatives can improve the economic development of the country.

REFERENCES:

1. A S Shiralashetti and S S Hugar (2009), Foreign Direct Investment and Economic Development of India: A Diagnostic Study, The ICFAI University Journal of Managerial Economics, 7(1).

2. Dinesh Mahajan (2008), impact of Liberalisation of Foreign Direct Investment in India: An Empirical Study, Journal of Banking, Information Technology and Management, 5(2).

3. Idris Jajri (2009), Foreign Direct Investment and Economic Growth: Cointegration Techniques, The ICFAI University Journal of Managerial Economics, 7(3 and 4).

4. Ila Chaturvedi (2011), “Role of FDI in Economic Development of India: Sectoral Analysis” International Conference on Technology and Business Management.

5. Kulwinder Singh (2005), Foreign Direct Investment in India: A Critical Analysis of FDI from 19912005, Centre for Civil Society, New Delhi.

6. Linda S. Goldberg, “Exchange Rates and Foreign Direct Investment” Written for Princeton Encyclopedia of the World Economy, Princeton University Press.

7. Muhammad Muazzam Mughal (2011), does market size affect FDI? The Case of Pakistan, Interdisciplinary Journal of Contemporary Research in Business, 2(9).

8. Narendra Singh Bohra, et.al. (2011), Foreign Direct Investment (FDI) In India Service Sector (A Study of Post Liberalization), International Journal for Economic Research, 2(2).

9. National Council of Applied Economic Reseacrh (2009), FDI in India & Its Growth Linkages.

10. Rajib Kumar Sahoo (2005), Foreign Direct Investment and Growth of Manufacturing Sector: An Empirical Study in Post Reform India, Institute for Social and Economic Change, Bangalore.

11. Rashmi Banga (2003), impact of Government Policies and Investment Agreements on FDI Inflows, Indian Council for Research on International Economic Relations Working Paper No.116.

12. Rashmi Banga (2005), critical issues in India’s Service Led Growth, Indian Council for Research on International Economic Relations Working Paper.

13. S. Rameshkumar and V. Alagappan (2008), Foreign Direct Investment in India during the Post Liberalisation Period, The ICFAI Journal of Public Finance, 6(1).

14. Nilofer Hussaini. N H (2010), Economic factors and Foreign Direct Investment in India: A correlation study, Asian Journal of Management Research

Received on 11.09.2021 Modified on 17.11.2021

Asian Journal of Management. 2022;13(1):89-93.

DOI: 10.52711/2321-5763.2022.00016