The Role Of Foreign Direct Investment In India Economics Essay

Several factors appear to hold contributed to this phenomenon including foreign direct investing ( FDI ) .The survey is an empirical analysis of the function of the Foreign Direct Investment ( FDI ) in advancing India ‘s fabrication exports during the period 1970-71 to 2008-09. The survey assumes importance in position of the fact that fabricating export constitutes 60 per of the entire exports. FDI is found to be an of import factor act uponing fabrication exports in several East Asian & A ; South East Asiatic economic systems ( the so called “ Tiger Economies ” ) . GDP as a placeholder for domestic demand, universe income, existent effectual exchange rate and unit value of export/world unit value ratio are the other of import variables act uponing fabrication exports. The theoretical account presented here shows that FDI, along with domestic demand ; measured by Gross Fiscal Deficit ( as a % of GDP ) , universe degree of GDP as a placeholder for universe income, and INR-USD exchange rate, has a important impact on the exports from fabricating sector. Relative monetary value of exports appear to hold statistically no important impact on export public presentation, although the consequence was subsequently found to be rather deceptive.


Economic policy of India has been known for advancing ego sufficiency, which intentionally insulated its economic system from external competition and exerted comprehensive controls on private endeavors. It has been tended towards protectionism for long with a strong accent on import permutation, province intercession in fiscal markets, presence of big figure of Public Sector Undertakings ( PSUs ) , in which authorities owns a bulk of equity, and license raj ( popularly known as “ Licence Raj ” ) which required elaborative licenses and ordinances to put up and run concern in India. In add-on to the local licensing ordinances, the authorities created Torahs in order to pull off its foreign exchange, viz. the “ Foreign Exchange Regulation Act, 1973, ( FERA ) and related guidelines, commanding the investing and other activities of aliens in India. The act was subsequently replaced by the Foreign Exchange Management Act, 2000, ( FEMA ) , with an aim of easing external trade. FEMA reaped benefits since its twelvemonth of origin as there were important leaps in export of manufactured goods from US $ 29714.4 million to US $ 34335.2 million ( Beginning: enchiridion of statistics on Indian economic system, 2008-09 ) .

Figure Inward FDI flows ( all sectors ) Historically though, India ‘s exports have grown much faster than GDP over the past few decennaries. For illustration, its exports have grown over 14 % per annum while growing in GDP is approximately 5 % during 1970-2008 periods[ 1 ]. Several factors appear to hold contributed to this phenomenon including foreign direct investing ( FDI ) which has been lifting systematically particularly from the early 1990s after the economic reforms introduced by the so Finance Minister of India, Dr. Manmohan Singh ( Figure 1 ) . The reforms did off with the Licence RajA and ended many public monopolies, leting automatic blessing ofA foreign direct investmentA in many sectors.ifdi.png

Harmonizing to the World Investment Report ( 2009 ) , with an influx of US $ 4.3 billion during 2003, India ‘s FDI influx is bantam as compared to US $ 53.5 billion worth of FDI fluxing into China during the above-named twelvemonth. However, the experience of China & A ; other East Asiatic giants can non be generalized for India given the lower degree of substructure, and the rigidness in both the factor every bit good as trade good markets. Furthermore, the function of FDI in exports publicity in developing states remains controversial and depends on the motivation for investing. If the motivation behind FDI is to capture domestic market, it may non lend to export growing. On the other manus, if the motivation is to tap export markets by taking advantage of states cheap labor, so FDI may lend to export growing. Thus, whether FDI contributes to export growing or non depends on the nature of the policy government.

India partially opened up its market during the Rajiv Gandhi disposal, which introduced reforms such as decontrolling industry, liberalize imports, reform monetary values, and promote private endeavors[ 2 ]. Further liberalisation of economic system began in 1991-92 by presenting policies such as cut downing duties from an norm of 85 per centum to 25 per centum, promoting foreign direct investing by increasing the maximal bound on portion of foreign capital in joint ventures from 40 to 51 per centum with 100 percent foreign equity permitted in precedence sectors, streamlining processs for FDI blessings, and automatically affirmative undertakings within the bounds for foreign engagement in some industries. However, by any criterion, India was far less unfastened than many developing economic systems. Furthermore, its factor market including substructure sector is less efficient compared with many East and South East Asiatic states with whom India competes in international market. Hence, it is possible to reason that even with the policy liberalisation India may hold failed to pull a important sum of export oriented FDI and the export growing may hold been brought about by factors other than FDI viz. the existent depreciation of Indian currency, betterments in monetary value fight and proviso of export subsidies etc.

In the visible radiation of the above statement, it has been examined whether exports ( peculiarly from the fabrication sector ) have grown in the past three decennaries or so merely due to the jet of FDI or whether other factors have been every bit important as good.


During the mid-1970s and throughout early 1980s, influxs of FDI into India were negligible and the stock of FDI remained comparatively low. Still, influxs had increased dramatically from an norm of $ 78 million during 1970-91 to an norm of $ 7897 million in the following two decennaries. The sectoral distribution of India ‘s FDI besides changed over this period, with FDI in plantations, excavation and crude oil worsening, while FDI in manufactured goods increased.

Figure Exports and GDP ( % age growing ) Many noteworthy developments took topographic point in the export sector in India during the past four decennaries. First, as mentioned earlier, exports have been turning faster than the GDP in India ( Figure 2 ) . Second, the export composing of India besides showed important alterations. Apart from increasing FDI influxs, factors such as depreciation of Indian Rupee vis-a-vis US Dollar, increasing universe income, low export unit value of India as compared to the unit monetary value of universe exports played a important function in increasing fabrication sector exports in India.exports N gdp.png


Here, I have presented a theoretical account to prove what all factors influence the fabrication sector exports of India. Empirically, FDI and exports move in the same way. The consequences could be equivocal, though, since the impact of FDI depends the purpose of the investor, as discussed above. An addition in domestic demand, captured by Gross Fiscal Deficit as a per centum of Gross Domestic Product ( GDP ) of India, tends to weaken export supply and impart it towards domestic ingestion. Hence a negative nexus is expected between the two. Besides, strong universe demand will assist in increasing the demand for exports on history of lifting ingestion in remainder of the universe. One would besides anticipate an reverse relation between monetary value of exports and exports volume. Likewise, existent depreciation of the domestic currency has an unfavorable consequence on exports. I, hence, present the undermentioned clip series theoretical account for 30 nine Numberss of observations to capture the above mentioned thought ( with expected mark in parenthesis ) :

[ R.1 ]

( + ) ( – ) ( + ) ( – ) ( – )


mnex = Exports of fabrication sector ( US $ million )

ifdi = Inward FDI flows ( US $ million )

gfd = Gross Fiscal Deficit of the cardinal govt. as a per centum of GDP of India

wgdp = GDP at changeless monetary values ( 2000 ) of remainder of World ( US $ million )

pxport = Relative monetary value of exports ( index figure )

exrate = INR-USD exchange rate ( Rs/ $ )

The comparative monetary value of exports is defined as the ratio of unit monetary value of Indian exports ( in US $ ) to the unit monetary value of universe exports ( in US $ ) . Though a better variable to mensurate the impact of fluctuations in exchange rate could hold been the Real Effective Exchange Rate ( REER ) , which is the leaden norm of a state ‘s currency relation to an index of other major currencies adjusted for the consequence of rising prices, due to miss of informations for the full period of survey, the INR-USD exchange rate has been taken into consideration. Besides, Reliable and efficient substructure installations are indispensable for cut downing costs, guaranting timely supply of exports and thereby bettering export public presentation. Therefore, a positive nexus between improved substructure installations and export supply is expected. However, due to non-availability of year-wise aggregative substructure investing informations, this variable is non included for analysis.


The theoretical account specified above is estimated utilizing annually values from 1970-2008. Before continuing for the existent arrested development, each variable has been checked for the absence of unit root utilizing the Augmented Dickey -Fuller ( ADF ) trial for stationarity so as to do certain that the arrested development is meaningful, i.e. , there is non a job of specious arrested development, which may originate if the variables are non-stationary or I ( 1 ) . Diagrammatically, it can be seen that some of the variables seem non-stationary ( Figure 3 & A ; 4 ) ,

Choosing appropriate figure of lags becomes imperative in the analysis of ADF trial. For one-year informations, one or two slowdowns normally suffice[ 5 ]. Furthermore, the Akaike Information Criterion ( AIC ) trial conducted on all variables suggests utilizing one or two slowdowns for all variables. Detecting the above tabular array, the void hypothesis of non-stationarity is rejected merely in instance of pxport. All the other variables were found to be non-stationary, even at 10 % degree of significance. Besides, as the t-statistics are positive for ‘mnex ‘ , ‘ifdi ‘ and ‘wgdp ‘ , it means that the value for rho is somewhat greater than one, proposing that the clip series variables are explosive. Since, ( specious ) correlativity may prevail in non-stationary clip series, one needs to look into for co-integration of the I ( 1 ) variables.

Here, the Engel-Granger trial has been conducted to prove for co-integration, for which, all the I ( 1 ) variables have been taken together and regressed ( equation [ A.1 ] in Appendix A.1 ) . Since all the variables of this arrested development are non-stationary, there is a possibility that this arrested development is specious. However, the ADF trial on remainders found the remainders to be stationary ( Appendix A.2 ) . This implies that the arrested development is meaningful. And now, including ‘pxport ‘ in our analysis, the concluding arrested development equation becomes:

( Appendix B ) .The first thing to detect is that, except for monetary value of exports, marks for all the variables came out as expected. The FDI variable is found to hold a important consequence, as hypothesised by the survey, connoting that an addition of a million dollar of FDI influx in India will take to $ 1.19 million addition in the exports from fabricating sector. Still, the co-efficient for FDI is rather less. One would hold expected more leaps in export values with increasing FDI influxs. One ground for that non being the instance here could be that a major portion of FDI engagement in Indian industries took topographic point from 1993 onwards, and the period of survey here is from 1970s. The effectivity of other variables came out as expected.

Coming to the monetary value of exports, one would anticipate an reverse relation between export monetary values and export demand. It is coming out to be positive for the period of survey notwithstanding ; the incline co-efficient stating that for every unit addition in the export unit value, the fabrication sector exports tend to increase by $ 10087 million approx. Since the incline co-efficient is statistically non important, we do non speak much about it. Although, there might be some issues with the Engel-Granger attack for proving co-integration as the consequences for the monetary value of exports did non come as expected. One of the chief jobs with the multiple arrested development analysis in clip series informations is that there could be more than one co-integrating vector which farther complicates the issue. To traverse look into the issue, carry oning the “ Johansen trial for co-integration ” , it was found out that there were three co-integrating vectors. This might be the ground for acquiring unexpected consequences. Therefore, there is a range of farther analysis here.

The tantrum of the arrested development consequences is besides good, therefore taking us to reason that jointly, all the variables account for 98.86 % fluctuation in the dependant variable. An F-value of every bit high as 537.11 is an grounds that all the explanatory variables have a important impact on fabrication sector ‘s exports.

Using the Durbin-Watson d-statistics, we can look into for the presence of autocorrelation in the mistake footings throughout our period of survey. The d-statistic here is computed to be 1.7408, which is less than the upper critical value, of 1.870 for 6 and 37 grades of freedom at 5 % degree of significance. This shows the presence of positive consecutive correlativity in our arrested development. This means that the OLS calculators are no longer efficient. To rectify this, we use the Generalised Least Squares ( GLS ) method ( Appendix C ) . The d-statistic for the GLS arrested development theoretical account was found to be 1.9745 which is greater than of 1.877 for 6 and 36 grades of freedom at 5 % degree of significance, connoting no autocorrelation, positive or negative.


Both, exports from the fabrication sector every bit good as inward FDI flows have grown enormously, particularly since the last two decennaries. Much of it could be attributed to the liberalization policy adopted by the authorities of India in 1991. This survey examined the impact of FDI in India ‘s fabrication exports. While analyzing the impact of FDI utilizing the one-year information from 1970 to 2008, we did found out a important nexus between the two, proposing a demand to do more attempts to pull foreign capital in fabrication sector. However, other factors such as universe demand ( measured by universe GDP ) , INR-USD exchange rate, Gross Fiscal Deficit besides have a important impact on exports. Particularly, it was seen that a one rupee depreciation of rupee against the dollar led to a autumn in export volumes by $ 324 million about. The consequences should be interpreted with cautiousness, though, since the dependant variable here groups together export demand and export supply together. Therefore, separate effects on them have non been observed. Second, due to inaccessibility of informations for infrastructural development, the impact of betterment in substructure on exports could non be seen. Besides, due to a shorter clip series informations, longer slowdown effects could non be accounted for.