An Analysis of Investment Pattern of FDI and its impact on Indian

Economy

*Dr. S.K. Khatik

**Ms Uma Sharma
Abstract

India is one of the fastest growing major economies in the world and third largest by purchasing

power parity. Foreign Direct Investment is an important issue for the Indian economy. Foreign

Direct Investment (FDI) is one major instrument for attracting foreign funds in any economy. It

serves as a link between investment and savings. India is facing the deficit of savings. This

problem can be solved with the help of Foreign Direct Investment. This research papers aims to

analyze investment pattern of FDI in different sectors of Indian economy from 2010 to 2015.

Recently the government of India increased the limits of FDI inflows in various sectors of the

economy to boost new life in the system. Foreign investment flow supplements the scare

domestic investments in India. Further this paper recommends that government should welcome

the inflow of foreign investment because it enables us to achieve our goals like favorable balance

of payment, rapid economic development, removal of poverty and internal personal disparity.

Key words: - FDI, FII, Foreign Trade, Imports, Exports, Balance of Payments.

* Professor & Head, Department of Commerce, Dean Faculty of Commerce, Chairman of Board

of Studies, Barkatullah University, Bhopal.

**Research Scholar, Assistant Professor, Career College, Bhopal.

Introduction
FDI is one of the major sources of non-debt financial resource for the economic. Foreign

companies invest in India to take advantage of relatively lower wages, special investment

privileges such as tax exemptions, etc. For a country where foreign investments are being made,

it also means achieving technical know-how and generating employment. According to the

BPM5, FDI refers to an investment made to acquire lasting interest in enterprises operating

outside of the economy of the investor. Further, in case of FDI, the investor´s purpose is to gain

an effective voice in the management of the enterprise. India has the potential to be the fastest

growing economy over the coming decade. India tops the global list for predicted annual growth

rate as 7.0 per cent for the coming decade. FDI not only means making investment in another

country but it also includes building of new facilities, merger and acquisition and reinvesting

profits earned from the investment companies. In 1991 foreign investment was introduced by

former finance minister Manmohan singh under FEMA (Foreign Exchange Management Act). In

2015, India emerged as top FDI destination surpassing china and the US. The idea behind

introduce FDI to harmonize domestic investment with the overseas operations and to built the

Indian economy more strong.

According to IMF (International Monetary Fund) “FDI is a category of international investment

that reflects the objective of a resident in one economy (the direct investor) obtaining interest in

an enterprise resident in another economy (the direct investment enterprise). The lasting interest

implies the existence of a long-term relationship between investor and the direct investment

enterprise, and a significant degree of influence by the investor on the management of the

enterprise. A direct investment relationship is established when the direct investor has acquired

10 percent or more of the ordinary shares or voting power of an enterprise. There are number of

sectors in India where FDI is permissible such as tourism sector, Insurance sector,
Telecommunication sector, Trading, Non-Banking financial companies, Construction and

maintained, pollution control and management and BPO etc.

FDI in India is governed by the FDI policy framed and announced by the ministry of commerce

and industry, Government of India, FEMA (1999) and by the Reserve Bank of India. Foreign

Institutional Investors (FII) also contributes for economic development of any nation. Many big

foreign companies invest their money in Indian markets. In the present context SEBI (security

exchange board of India) has over 1450 foreign institutional investors registered with it. In this

regard investment banks and mutual fund houses lead the investment.

Recently government of India eased FDI norms in 15 major sectors by raising the foreign

investment limit from Rs.3000 crore to Rs.5000 crore. By introducing these 15 sectors the prime

minister said that FDI in these sectors will definitely be beneficial for the economic development

of the country. In defense sector the government of India allowed foreign investment up to 49%

under the automatic route. In pension, civil aviation and the insurance sector government of India

allowed 49%. In multi brand the government allowed 51% and in single brand retail company

such as IKEA government allowed 100% FDI through automatic route. In public sector banks

government allowed 20% FDI limits. In private sector banks government allowed 74% FDI. In

insurance sector 100% FDI is permissible by the government. In addition to this manufacturer

are allowed to sell their products through e-commerce without government approval. Finance

minister also emphasized on the construction sector. According to him there has been a slow

down here and the interest rates have started coming down, these sectors will hopefully pickup

from here.

Table No.1

FDI limits of various sectors

S.No. Sectors Percentage

1 Agriculture 100%

2 Asset Reconstruction Companies 100%

3 Civil aviation 49%

4 Defence 49%

5 Print media 26%

6 Public Sector Banks 20%

7 Private bank 74%

8 Education 100%

9 Railway infrastructure 100%

10 Single brand Retail 100%

11 FM radio 26%

12 Insurance & Sub-activities 49%

13 Medical Devices 100%

14 Multi brand 51%

15 Pension 49%

16 Pharma 100%

17 Power 49%

18 Stock exchange 49%

19 Telecom Sector 100%

20 Tourism 100%

21 Courier service 100%

22 Credit rating / Information 74%

Source: www.makeinindia.com

Significance of the study

Foreign direct investment has its own importance in the economic development of the nation.

FDI is one of the important sources for the nation to increase the revenue by the flow of capital.

FDI not only helpful in economic development but it also enhances the productivity to maintain

the balance of payments and increases the employment. Through FDI numbers of industrial units

were funded in different sectors of Indian economy. FDI and FII boost Indian economy to grow

faster. Now Government of India wants to liberalize the FDI limits in major sectors. These

decisions were based on the recommendation of Mayaram committee which suggested relaxing

investment caps in about 20 sectors. Earlier government has prescribed only specific limit of

foreign investors in various sectors.

Review of literature

Andersen P.S and Hainaut, (2004) in their paper titled “Foreign Direct Investment and

Employment in the Industrial Countries” pointed out a possible relationship between foreign

direct investment and employment, in particular between outflows and employment in the source

countries in response to outflows. They also find that high labour costs encourages outflows and

discourage inflows and that such effect can be reinforced by exchange rate movements.

Devajit (2012) conducted the study to find out the impact of foreign direct investments on Indian

economy and concluded that Foreign Direct Investment (FDI) as a strategic component of

investment is needed by India for its sustained economic growth and development through

creation of jobs, expansion of existing manufacturing industries, short and long term project in

the field of healthcare, education, research and development.

Singh (2009) stated in his study that foreign direct investment (FDI) policies play a major role in

the economic growth of developing countries around the world. Attracting FDI inflows with

conductive policies has therefore become a key battleground in the emerging markets. The paper

highlighted the trend of FDI in India after the sector-wise economic reforms.

Sharma Reetu and Khurana Nikita (2013) in their study on the sector-wise distribution of FDI

inflow to know about which has concerned with the chief share, used a data from 1991-92 to

2011-2012 (post-liberalization period). This paper also discusses the problems about foreign

direct investment and suggests some recommendations for the same. In this study they found

that, Indian economy is mostly based on agriculture and allied sectors, so there is vast scope of

FDI in this sector. Govt should also encourage FDI in this sector.

Objectives of the study

This study has following objectives:-

i) To analyze the concept of foreign direct investment.

ii) To analyze the flow of FDI in Indian Economy.

iii) To examine sector-wise investment pattern of FDI.

Research Methodology

Research is a continuous process which never ends and research methodology is an approach of

research. In this study I have taken secondary data for analysis and sources of the secondary data

are RBI bulletin, reports of DIPP, economic survey and other statistical documents published by

various government agencies.

This research study mainly focuses on analyzing various statistics related to foreign direct

investment in the country. The nature of the research is macro in nature and it is an exploratory
and descriptive research. We also used research tools like mean, Annual growth rate and

standard deviation for analysis.

Limitations of the study

This research study has certain limitations which are as follows

• This study is based on the secondary data collected from various published documents and

reports.

• Non –availability of sufficient data and literature.

• It covers limited time period.

Analysis of the study

India is a developing country and there is scarcity of capital and advanced technology but India

has large amount of natural resources and labour intensity in our economy. Indian economy is

flourishing. It is attractive and also having a large scope for the investors because it has a

potential to be a fastest growing economy in the world. Indian government is also motivated and

used various approaches to attract FDI in our economy. India is introducing various reforms for

easy of doing business in the country and it has been using liberal practices for approval and

taxation across the country.

India is known to have huge amounts of resources. There is manpower and significant

availability of fixed and working capital. At the same time, there are some underexploited or

unexploited resources. The resources are well available in the rural as well as the urban areas.

India required improving the infrastructure to utilize these resources. India is definitely

developing in a much faster pace now than before but in spite of that it can be identified that

developments have taken place unevenly. This means that while the more urban areas have been

tapped, the poorer sections are inadequately exploited. To get the complete picture of growth, it
is essential to make sure that the rural section has more or less the same amount of development

as the urbanized ones as the primary choice of FDI is to invest in such areas which are more

profitable.

Indian economy receives FDI from different countries like Mauritius, Singapore, United

Kingdom, Japan, France, Switzerland etc.

Table no.2

FDI Inflows from various Countries

(US $ million)
Years 2010- % of 2011- % of 2012- % of 2013- % of 2014- % of
11 Total 12 Total 13 Total 14 Total 15 Total
Total FDI 14,939 23,473 18,286 16,054 24,748
Mauritius 5,616 38 8,142 35 8,059 44 3,695 23 5,878 23.75
Singapore 1,540 10 3,306 14 1,605 9 4,415 28 5,137 20.76
U.S.A 1,071 7 994 4 478 3 617 4 1,981 8.00
Cyprus 571 4 1,568 7 415 2 546 3 737 2.98
Japan 1,256 8 2,089 9 1,340 7 1,340 8 2,019 8.16
Netherlands 2,019 14 1,289 5 1,700 9 1,157 7 2,154 8.70
United 1,891 13 2,760 12 2,760 15 111 1 1,891 7.64
Kingdom
Germany 163 1 368 2 467 3 650 4 942 3.81
UAE 188 1 346 1 173 1 239 1 327 1.32
France 486 3 589 3 547 3 229 1 347 1.40
Switzerland 133 1 211 1 268 1 356 2 292 1.18
Hongkong 209 1 262 1 66 0 85 1 325 1.31
Spain 183 1 251 1 348 2 181 1 401 1.62
China 2 0 73 0 148 1 121 1 505 2.04
Malaysia 40 0 18 0 238 1 113 1 219 0.88
South Korea 136 1 226 1 224 1 189 1 138 0.56
Luxembourg 248 2 89 0 34 0 539 3 204 0.82
Others 1142 8 892 4 1154 6 1015 6 1250 5.05
Source: RBI Annual Report: 2014-15

Interpretation: Table no.2 indicates the FDI inflows from various countries. For this analysis

different year’s data has be tabulated to get the relative knowledge about the FDI from various
countries. Through this table it is clear that Mauritius is the country which is the top source of

FDI. Other sources are Singapore, United Kingdom, Japan and Netherland.

Financial year-wise FDI Inflows:

From table below it is clear that from last decade foreign direct investors are looking towards

Indian economy and feels free to invest in Indian market. In the January-June period, India has

surpassed US and China as the biggest Foreign Direct Investment (FDI) destination, garnering

$31 billion investments compared with $28 billion attracted by China and $27 billion by the US.

In the first half of 2014, India had received $12 billion worth FDIs, thus more than doubling in

this year first half.

Table no.3

Financial Year-wise FDI Inflows Data (US $ Million)

Year Total cum FDI Annual Growth Rate

Inflow (AGR)
2000-01 4029 -

2001-02 6130 52%

2002-03 5035 18%
2003-04 4322 14%
2004-05 6051 40%
2005-06 8961 48%
2006-07 22826 155%
2007-08 34843 53%
2008-09 41873 20%
2009-10 37745 -10%
2010-11 34847 -08%
2011-12 46556 34%
2012-13 34298 -26%
2013-14 36046 5%
2014-15 44291 23%
2015-16(April-June 12362 -
2015)
Total Cum FDI 380215 CAGR=
Source: www.dipp.nic.in
Interpretation: Table no. 3 indicates financial year-wise FDI Inflow, through this analysis it is

found that in 2001-02 the Annual growth rate of FDI is 52% and in the year 2002-03 growth rate

is decreased to 18%. In 2003-04 again it seems to be declined to 14%. In 2007-08 annual growth

rate of FDI remains 53% but in 2008-09 it declined to 20%. From 2009 to 2011 annual growth

rate of FDI was negative. In 2012 it remains 34% and again it declined to -26%.

Sectors-wise FDI Limits in Indian economy

Recently government of India changed FDI limits in different sectors. All these various sector

are the pillars on which the growth and development of the nation depends. Such sectors are

service sector, Insurance sector, construction sector, IT sector, Automobile sector, power sector

etc.

Table no.4
Sector wise trends and patterns of FDI Inflows from 2010-2015
(US $ million)
2012- 2013- 2014-
Sectors 2010-11 2011-12
13 14 15
Manufacturing 47939 9337 6528 6381 9613
Construction 1,599 2,634 1,319 1,276 1,640
Financial Services 1353 2603 2760 1026 3075
Real Estate Activities 444 340 197 201 202
Electricity and other Energy
Generation, Distribution & 1338 1395 1653 1284 1284
Transmission
Communication Services 1228 1458 92 1256 1075
Business Services 569 1,590 643 521 680
Miscellaneous Services 509 801 552 941 586
Computer Services 843 736 247 934 2154
Restaurants and Hotels 218 870 3129 361 686
Retail & Wholesale Trade 391 567 551 1139 2551
Mining 592 204 69 24 129
Transportation 344 410 213 311 482
Trading 156 6 140 0 228
Education, Research & Development 56 103 150 107 131
Others 506 419 43 293 232
Source: RBI Annual Report: 2014-15.
Interpretation: Table no.4 indicates the trends of FDI inflows in various sectors from 2010-15.

Manufacturing sector indicates the highest volume of FDI inflows than other sectors. Second is

the service sector in which FDI inflows is high.

Trends of Export and Import

Export and Import is the life blood of the Indian trade. It helps to grow national economies and

expands the global market in large scale. Every country is endowed with certain advantages in

resources and skills. For example, some countries are rich in natural resources; some countries

have highly developed infrastructures, educational systems and capital markets that permit them

to engage in complex manufacturing and technological innovations, while many countries do

not. The trend of export and import has its great influence on FDI.

Table no.5
Trends and pattern of Export and Import

Trade
Year Exports Growth (%) Imports Growth (%)
Balance
2004-05 375340 27.94 501065 39.53 -125725
2005-06 456418 21.6 660409 31.8 -203991
2006-07 571779 25.28 840506 27.27 -268727
2007-08 655864 14.71 1012312 20.44 -356448
2008-09 840755 28.19 1374436 35.77 -533680
2009-10 845534 0.57 1363736 -0.78 -518202
2010-11 1142922 35.17 1683467 23.45 -540545
2011-12 1465959 28.26 2345463 39.32 -879504
2012-13 1634318 11.48 2669162 13.8 -1034844
2013-14 1905011 16.56 2715434 1.73 -810423
2013- 1562119 2253985 -691866
14(April-Jan)
2014-15 1613789 3.31 2334685 3.58 -720896
(April-Jan)
Source: www.dipp.com
Interpretation: Table no.5 indicates the export and import trends of various years. Through this

analysis it is clear that growth percent of imports is more than the exports. The trade balance

seems to be negative year by year which is not a sign for Indian economy.

Findings and Suggestions

After analysis and discussion on FDI in Indian economy we have reached to some findings.

Lack of adequate infrastructure is cited as a major hurdle for FDI inflows into India. This

bottleneck in the form of poor infrastructure discourages foreign investors in investing in India.

India’s age old and biggest infrastructure problem is the supply of electricity. Power cuts are

considered as a common problem and many industries are forced to close their business.

Table no.1 indicates that increasing the limits of the FDI in various sectors that indicate good

sign for the economic development of the country because it will attract more FDI which will

lead to increase job opportunities, proper utilization of natural resources and employment

generation etc.

The maximum inflow of foreign capital mainly comes from Mauritius, Singapore, U.K., Japan,

Netherland and USA. It is observed that the flow of money comes from the various countries

which will be a good sign for the country because the Indian economy does not depend on one

country. These countries are attracted towards the Indian economy because Indian economy is a

faster growing major economy in the world as well as having a large amount of natural

resources, labor intensive and liberal government policy etc.

Table no.3 reveals that the flow of FDI has been fluctuated during the period. In the beginning of

the study the annual growth rate was 52% than after it has decreased in 2004 than again decrease
up to 2008-09 than again decrease up to 2011. The total money come through FDI from various

countries is Rs. 380275 million in our Indian economy.

Table no.4 reveals that FDI has been investing in fruitful sector like service, communication,

computer, telecommunication, automobile, drugs, chemicals, power and metagullary industry

such type of investing pattern is not beneficial for the Indian economy because other sectors also

need capital and there are thrust areas which need attention and investment for the overall

development of the country.

The Indian government expected that after good FDI in India large number of jobs will be

created and it will also increase the exports of the country but the actual position is totally

different, the balance of payment has been negative continuously and gap between the exports

and imports has also been increased.

Suggestions

• The Indian government has increased FDI limits in profitable areas, which is not

beneficial for the country. Although they also increased FDI limit in agriculture sector to

100% but rest of the sector are more profitable and they should be restricted.

• FDI limit in multi brand retail should be reconsidered as it may affect domestic retailers.

• FDI should be promoting in the areas which could increase our exports and also should

try to reduce import of the goods. This would have positive impact of the balance of

payment on the Indian economy.

• In India the manufacturing sector can grow if infrastructure facilities are improved and

labour reforms take place. The country should take initiatives to adopt more flexible

labour laws.

• India should consciously work towards attracting greater FDI into R&D as a means of

strengthening the country’s technological prowess and competitiveness.

References

• Pradhan Surendra (2000), "Foreign Direct Investment: Risk, Return and Host Country's

Strategy", Journal of Management Research, December.

• Radhakrishnan, K.G. and Pradhan Jaya Prakash (2000). "Foreign Direct Investment in

India Policy, Trends and Determinants", Productivity, Vol. 41, No. 3, Oct.-Nov., pp. 454-

462.

• Sanjaya Lal (1974), "Less development countries and private foreign

investment,"Economic and Political Weekly, August, 3.

• Sharan, Vyuptakesh (1992), "Foreign Investments in India: Trends, Problems and

Prospects", Foreign Trade Review, Vol. xxvi, No. 1.

• Singh, K. (2005) "Foreign Direct Investment in India: A Critical Analysis of FDIfrom

1991-2005, "Centre for Civil Society, New Delhi, p. 3 142

• Srivastava, S. (2003). What is the true level of FDI flows to India?. Economic and

Political Weekly, 608-610.

• Reserve Bank of India: Handbook of Statistics on Indian Economy.