Trends in Foreign Direct Investment (FDI) inflow in India

“Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be mis-appraised.” -Warren Buffett

The research paper is going to give a brief analysis on the trends in FDI inflow during different phases of India since independence till today with the reasons responsible for such trends in India and what more can be done to encourage more FDI?

India being a developing economy has made itself an attracting destination for foreign investors. The face of India on global economy is upcoming as an attractive investment destination with huge market and it was all possible only after liberalization in industrial policies after nineties. During early Nineties Indian economy was facing sever turmoil's like Balance of Payment crises, export deficit, increase in external liabilities. It was then the liberal policies were adopted and the doors were opened for the foreign investors in 1991 and we were ready to globalize.

The FDI was welcomed, FDI is considered to be the most attractive type of capital flow for emerging economies as it is expected to bring latest technology and enhance production capabilities of the economy. It is considered to be the most import source of external finance. The evolution and various trends of Indian FDI inflow can be divided into three phases. In first phase from 1969 to 1991 when MRTP Act and FERA came into force. In second phase from 1991 – 2000 this was the important face which welcomed liberalization on FDI policies. In 1991 in the ‘Statement on Industrial Policy’. FDI was allowed through the automatic route and the government route and in third phase from 2000 till date, has reflected increasing globalization of economy with ups and down in FDI inflow.

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 initiative to open up and liberalize the economy further, the investor has welcomed the initiative by investment into India. The review of theoretical and select empirical literature reveals that FDI flows are driven by both pull and push factors. While pull factors that reflect the macroeconomic parameters could be influenced by the policies followed by the host country, push factors essentially represent global economic situation and remain beyond the control of economies receiving these flows.

Further at global level India's position as an attractive destination for investment has moved it towards 2^nd position according to 2012 “FDI Confidence Index’. Apart from these pull factors, push factors such as global economic environment and policy stance of the developed world may be critical factors in determining the FDI flows. For instance, higher global liquidity would cause larger flow of resources to EMEs searching for higher returns. Drawing from the literature review, some of the variables that have been chosen and could be significant in determining the FDI flows comprise: market size, openness, currency valuation, growth prospects, macroeconomic sustainability, regulatory regime, political issues and proportion of global FDI received by emerging economies.

A number of studies in the recent past have highlighted the growing attractiveness of India as an investment destination. According to Goldman Sachs (2003), the Indian economy is expected to continue growing at the rate of 5 per cent or more until 2050. If we discuss about economic growth through FDI then the annual flow of FDI rose from a USD 0.1 billion in 1991 to USD 4.28 billion in 2001. FDI in 2001 accounted for 1 percent of GDP and 4.3 percent of domestic investment, the corresponding figures for 1991 being 0.07 and 0.12 respectively. FDI inflows in 2006 touched $19.6 billion and in 2007, total FDI inflows in India stood at $23 billion, showing a growth rate of 43.2 per cent over 2006. In 2008, total FDI inflows into India stood at $33 billion. The share of inward FDI stock of India was 0.5 per cent of GDP in 1990, 3.7 per cent in 2000 and 6.7 per cent in 2007. FDI-enabled firms in manufacturing sectors provide employment to about 15.6 lakh persons accounting for about 4 to 5 per cent of the total employment in the organized sector. Small cities provide employment to about 7.9 lakh workers. Sectors providing a relatively high share of employment in small cities include transport equipment; growing and processing of crops; construction parts; textiles; and non-metallic mineral products.

During the recent global crisis, FDI inflows to India did not show as much moderation as was the case at the global level as well as in other EMEs. However, when the global FDI flows to EMEs recovered during 2010–11, FDI flows to India remained sluggish despite relatively better domestic economic performance ahead of global recovery. If we analyze about what positive trends occurred with the entry of FDI to India, then we would be able to draw some positive effects that resulted in coming over economic crises, external liabilities were reduced but still our exports need to be increased.

FDI is considered to be the most attractive type of capital flow for emerging economies as it is expected to bring latest technology and enhance production capabilities of the economy. It is considered to be the most import source of external finance hence it should be encouraged.