For­eign Di­rect In­vest­ment and Macro Eco­nomic Devel­op­ment in In­dia

Economic Challenger - - CONTENTS - - Pradeep

Ab­stract

FDI is a tool for eco­nomic devel­op­ment through its strength­en­ing of domestic cap­i­tal, pro­duc­tiv­ity and em­ploy­ment. FDI also plays a vi­tal role in the upgra­da­tion of tech­nol­ogy, skills and man­age­rial ca­pa­bil­i­ties in var­i­ous sec­tors of the econ­omy. The present pa­per at­tempts to an­a­lyze sig­nif­i­cance of the FDI in­flows on macro eco­nomic pa­ram­e­ters i.e. GDP, BOP, Ex­ports, Forex Re­serves. Key words: FDI, GDP, BOP, Forex Re­serve.

IN­TRO­DUC­TION

For­eign cap­i­tal and tech­nol­ogy have been play­ing a vi­tal role in In­dia's in­dus­trial devel­op­ment. At the time of In­de­pen­dence, In­dia in­her­ited an in­dus­trial struc­ture re­stricted to a few in­dus­tries like tex­tiles and sugar. To­day, the in­dus­trial struc­ture has been widely di­ver­si­fied cov­er­ing broadly the en­tire range of con­sumer, in­ter­me­di­ate and cap­i­tal goods. In most of the man­u­fac­tured prod­ucts, the coun­try has achieved a self-suf­fi­ciency with for­eign col­lab­o­ra­tion, but pri­mar­ily through domestic ef­forts. This is in­di­cated by the de­cline in rel­a­tive share in in­dus­trial pro­duc­tion of the tra­di­tional man­u­fac­tur­ing sec­tors like food and tex­tiles and sub­stan­tial in­crease in the pro­duc­tion of new sec­tors like en­gi­neer­ing and chem­i­cals. The di­ver­si­fi­ca­tion of in­dus­trial struc­ture is fur­ther re­flected in com­mod­ity com­po­si­tion of our for­eign trade in which the share of im­ports of man­u­fac­tured prod­ucts has be­come a grow­ing com­po­nent of ex­ports.

Fur­ther, for­eign cap­i­tal has helped the coun­try in sup­ply­ing the much needed for­eign ex­change thereby fill­ing the for­eign ex­change gap to a con­sid­er­able ex­tent. The for­eign ex­change gap equals the dif­fer­ence be­tween im­ports and ex­ports which can be filled by net cap­i­tal in­flows. For­eign cap­i­tal has been a ma­jor fac­tor in In­dia's drive to­wards self-re­liance and im­port sub­sti­tu­tion in crit­i­cal ar­eas. Im­port sub­sti­tu­tion has led to di­ver­si­fi­ca­tion of domestic pro­duc­tion and con­se­quent re­duc­tion in im­ports for cer­tain crit­i­cal ar­eas like ma­chin­ery man­u­fac­ture, crude oil and pe­tro­leum prod­ucts, in­fras­truc­tural devel­op­ment, etc. The coun­try has been able to ex­port ser­vices such as project con­sul­tancy, de­sign en­gi­neer­ing and project im­ple­men­ta­tion, etc. This has been made pos­si­ble through the devel­op­ment of in­dige­nous ex­per­tise with the help of for­eign as­sis­tance. Be­sides, for­eign cap­i­tal has helped in boost­ing our ex­ports by mod­ern­iz­ing and di­ver­si­fy­ing In­dia's in­dus­trial struc­ture. The pur­pose of this study is to point out the im­pact of for­eign di­rect in­vest­ment (FDI) on var­i­ous pa­ram­e­ters of In­dian devel­op­ment.

HY­POTHE­SES

H : there is no re­la­tion­ship be­tween For­eign Di­rect In­vest­ment and Forex Re­serves. H : there is no re­la­tion­ship be­tween For­eign Di­rect In­vest­ment and Ex­ports. H : there is no re­la­tion­ship be­tween For­eign Di­rect In­vest­ment and Bal­ance of Pay­ments.

METHOD­OL­OGY OF THE STUDY

The study is based on sec­ondary sources of data. The main source of data are var­i­ous eco­nomic sur­veys of In­dia, RBI Bul­letin, On­line data­base of In­dian econ­omy, CMIE etc. For an­a­lyz­ing the data some sta­tis­ti­cal tools have been used like CAGR, cor­re­la­tion and ANOVA.

Ta­ble 1 shows that the in­flows of for­eign di­rect in­vest­ment have in­creased from US $129 mil­lion to US $ 27024 mil­lion in the pe­riod from 1992 to 2011. In­flows of FDI show fluc­tu­at­ing trends dur­ing the same pe­riod. The amount of Forex Re­serves has in­creased from US $ 9220 mil­lion to US $ 273727 mil­lion dur­ing the pe­riod un­der study. The CAGR of FDI and Forex Re­serve is 30.63 and 18.48 per­cent re­spec­tively dur­ing the above said pe­riod.

ANAL­Y­SIS

To an­a­lyse the FDI and Forex Re­serve, cor­re­la­tion anal­y­sis has been used. Cor­re­la­tion co-ef­fi­cient as a mea­sure of de­gree of co­vari­abil­ity be­tween FDI and Forex Re­serves dur­ing the pe­riod 1992-2009 is pre­sented be­low: r = .93 r2 = .86 PE = .022

The re­sult shows that the cor­re­la­tion co­ef­fi­cient be­tween the se­lected vari­able i.e. FDI and Forex Re­serve is .93 which in­di­cates pos­i­tive high sig­nif­i­cant cor­re­la­tion and its co­ef­fi­cient of de­ter­mi­na­tion (r2) is .86 which in­di­cates that the in­de­pen­dent vari­able (FDI) shall in­flu­ence the de­pen­dent vari­able (Forex Re­serve) to the ex­tent of 86 per­cent. This anal­y­sis has been done with the help of prob­a­ble er­ror. Since the co­ef­fi­cient of cor­re­la­tion is found more than six times of prob­a­ble er­ror, so it can be re­garded as sig­nif­i­cant.

TEST­ING OF HY­POTH­E­SIS

H : there is no re­la­tion­ship be­tween For­eign Di­rect In­vest­ment and Forex Re­serves.

The value has been fur­ther tested through the anal­y­sis of vari­ance (ANOVA) tech­nique.

Re­sult: Since, the cal­cu­lated value be­tween the two vari­ables (i.e. FDI and Forex Re­serve) 17.36 is greater than the ta­ble value 4.45 at 5 per­cent level of sig­nif­i­cance. Hence, the (H0) hy­poth­e­sis is re­jected and H1 is ac­cepted, it means there is a sig­nif­i­cant re­la­tion­ship be­tween FDI and Forex Re­serves. The cal­cu­lated value of 1.59 within the years is less than the ta­ble value 2.22 at 5 per­cent level of sig­nif­i­cance. There­fore, the (H0) hy­poth­e­sis is ac­cepted and H1 is re­jected. It means there is no (H0) sig­nif­i­cant re­la­tion­ship within years.

As the ta­ble 3 ex­hibits that in­flows of for­eign di­rect in­vest­ment from Rs.316 crore in the year 1992 to Rs.9338 crore in the year 2000 reg­is­ter­ing an in­crease of 29.55 times on the base year 1992. In­flows of FDI in­creased upto Rs.161481 crore in the year 2009 as com­pared to Rs.18406 crore in the year 2001 reg­is­ter­ing an in­crease of 8.77 times over the base year 2001. In­flows of FDI were found hav­ing fluc­tu­at­ing trends dur­ing the study pe­riod. but it is more or less the same dur­ing the study pe­riod. The share of the in­dus­trial sec­tor in Gross Domestic Prod­uct (GDP) by agri­cul­ture and al­lied ac­tiv­i­ties sec­tor; min­ing and quar­ry­ing sec­tor; man­u­fac­tur­ing, elec­tric­ity, gas and water sup­ply, con­struc­tion sec­tor; trade, ho­tels, trans­port and com­mu­ni­ca­tion sec­tor; fi­nanc­ing, in­surance, real es­tate and busi­ness ser­vices; and com­mu­nity, so­cial and per­sonal ser­vices sec­tor have in­creased from Rs.176166 crore to Rs. 861753 crore; Rs.15096 crore to Rs.125414 crore; Rs.137954 crore to Rs.1296900 crore; Rs.112119 crore to Rs.1246718 crore; Rs.73112 crore to Rs.691221 crore; and Rs.79721 crore to Rs.711176 crore re­spec­tively dur­ing the study pe­riod. The share of the in­dus­trial sec­tor in Gross Domestic Prod­uct (GDP) is in­creas­ing dur­ing the pe­riod. The share of in­dus­trial sec­tor has in­creased from Rs.594168 crore to *4933182 crore dur­ing the same pe­riod.

ANAL­Y­SIS

To an­a­lyse the im­pact of FDI on the in­dus­trial share to Gross Domestic Prod­uct (GDP) mul­ti­ple cor­re­la­tion tech­nique has been ap­plied. Cor­re­la­tion co-ef­fi­cient is a mea­sure of de­gree of co­vari­abil­ity be­tween FDI and GDP dur­ing the pe­riod 1992-2009. How­ever, the share of in­dus­trial sec­tor to GDP for a pe­riod of 18 years has been clas­si­fied as un­der:

1. Agri­cul­ture and al­lied ac­tiv­i­ties sec­tor

2. Min­ing and quar­ry­ing sec­tor

3. Man­u­fac­tur­ing, elec­tric­ity, gas and water sup­ply sec­tor

4. Trade, ho­tels, trans­port and com­mu­ni­ca­tion sec­tor

5. Fi­nanc­ing, in­surance, real es­tate and busi­ness ser­vice sec­tor

6. Com­mu­nity, so­cial and per­sonal ser­vices sec­tor.

The re­sults of mul­ti­ple cor­re­la­tion, cor­re­la­tion co­ef­fi­cient of de­ter­mi­na­tion and prob­a­ble er­ror (PE) have been pre­sented in the ta­ble 2. The above re­sults dis­close that the cor­re­la­tion (r) be­tween FDI and man­u­fac­tur­ing, elec­tric­ity, gas and water sup­ply con­struc­tion sec­tor is found to be as high as. 93 and its co- ef­fi­cient de­ter­mi­na­tion (r2) is.86, which rep­re­sents a pos­i­tive high sig­nif­i­cant cor­re­la­tion and the in­de­pen­dent vari­able (FDI) shall in­flu­ence the de­pen­dent vari­able (i.e. GDP of man­u­fac­tur­ing, elec­tric­ity gas and water sup­ply, con­struc­tion sec­tor) to the ex­tent of 86 per­cent. Cor­re­la­tion co-ef­fi­cient be­tween FDI and trade, ho­tels, trans­port and com­mu­ni­ca­tion sec­tor found at .92 with r2 of .85, also shows pos­i­tive high sig­nif­i­cant. Cor­re­la­tion co-ef­fi­cient be­tween FDI and fi­nan­cial, in­surance, real es­tate and busi­ness ser­vices sec­tor is .90 in­di­cates pos­i­tive high sig­nif­i­cant cor­re­la­tion and its co­ef­fi­cient of de­ter­mi­na­tion is .81, which in­di­cates that the de­pen­dent vari­able ( i. e. GDP of fi­nanc­ing, in­surance, real es­tate and busi­ness ser­vice sec­tor) shall be ex­pected to have in­flu­enced to the ex­tent of 81 per­cent in re­sponse to the change in the in­de­pen­dent vari­able (i.e. FDI). Whereas, cor­re­la­tion be­tween FDI and other sec­tor be­ing .88, .89 and .90 re­spec­tively in case of agri­cul­ture and al­lied ac­tiv­i­ties sec­tor, min­ing and quar­ry­ing sec­tor, and com­mu­nity, so­cial and per­sonal ser­vices sec­tor and its co­ef­fi­cient of de­ter­mi­na­tion (r2) are .77, .79 and .81 re­spec­tively, which rep­re­sents a pos­i­tive high sig­nif­i­cant cor­re­la­tion and the de­pen­dent vari­able (i.e. GDP of agri­cul­ture and al­lied sec­tor, min­ing and quar­ry­ing sec­tor and com­mu­nity, so­cial and per­sonal ser­vice sec­tor) shall be ex­pected to have in­flu­enced to the ex­tent of 77, 79, 81 per­cent in re­sponse to the change in the in­de­pen­dent vari­able (i.e. FDI). This anal­y­sis has been done with the help of prob­a­ble er­ror. Since the co-ef­fi­cient of cor­re­la­tion is found more than six times of prob­a­ble er­ror, so it can be re­garded as sig­nif­i­cant.

FOR­EIGN DI­RECT IN­VEST­MENT AND EX­PORT

Ta­ble 5 shows that the in­flows of For­eign Di­rect In­vest­ment rose from US $ 129 mil­lion in the year 1992 to US $ 2155 mil­lion in the year 2000 reg­is­ter­ing an in­crease of 16.71 times on the base year 1992. In­flows of FDI in­creased upto US $ 27024 mil­lion in the year 2011 as com­pared to US $ 4029 mil­lion in the year 2001 reg­is­ter­ing an in­crease of 6.71 times over the base year 2001. In­flow of FDI shows fluc­tu­at­ing trends dur­ing the study pe­riod. The amount of ex­ports has in­creased from US $ 17865 mil­lion to US $ 254402 mil­lion in the pe­riod from 1992 to 2011. It has an in­creas­ing trend dur­ing the same pe­riod. The CAGR of FDI and ex­port is 30.63 and 14.20 per­cent re­spec­tively dur­ing the study pe­riod.

ANAL­Y­SIS

The anal­y­sis is based on as­sump­tion that the other fac­tors be­ing con­stant, ex­port per­for­mance of the In­dian in­dus­try is due to lib­er­al­iza­tion of for­eign di­rect in­vest­ment regime. It can be in­ferred that the FDI has an im­pact on the ex­port pro­mo­tion by the In­dian in­dus­try. Whether the im­pact is sig­nif­i­cant or not sig­nif­i­cant is tested by us­ing cor­re­la­tion tech­niques. Cor­re­la­tion co- ef­fi­cient and a mea­sure of de­gree of co­vari­abil­ity be­tween FDI and ex­ports dur­ing the pe­riod 1992-2011 is pre­sented be­low: r = 0.96 r2 = 0.92 PE = 0.013

The anal­y­sis shows that the cor­re­la­tion co­ef­fi­cient be­tween the se­lected vari­ables i.e. FDI and ex­ports is .96 which in­di­cates pos­i­tive high sig­nif­i­cant cor­re­la­tion and its co-ef­fi­cient of de­ter­mi­na­tion (r2) is .92, which in­di­cates that the in­de­pen­dent vari­able (FDI) shall in­flu­ence the de­pen­dent vari­able (ex­port) to the ex­tent of 92 per­cent. Added to this, the anal­y­sis has been done with the help of prob­a­ble er­ror. Since the co-ef­fi­cient of cor­re­la­tion is found more than six times of prob­a­ble er­ror, so it can be re­garded as sig­nif­i­cant. How­ever, this im­pact has been fur­ther tested through anal­y­sis of vari­ance (ANOVA) by us­ing two-way clas­si­fi­ca­tion model.

TEST­ING OF HY­POTH­E­SIS

H : there is no re­la­tion­ship be­tween For­eign Di­rect In­vest­ment and Ex­ports.

Ap­ply­ing the anal­y­sis of vari­ance tech­nique, we get the fol­low­ing re­sult:

RE­SULT: Since, the cal­cu­lated value be­tween FDI and ex­port 33.67 is greater than the ta­ble value at 4.45 at 5 per­cent level of sig­nif­i­cance. There­fore the (H0) hy­poth­e­sis is re­jected and H1 is ac­cepted. It means there is a sig­nif­i­cant re­la­tion­ship be­tween two vari­ables. It in­di­cates that there is a highly sig­nif­i­cant re­la­tion­ship be­tween For­eign Di­rect In­vest­ment and Ex­port. The cal­cu­lated value within the years 2.35 is greater than the ta­ble 2.22 at 5 per­cent level of sig­nif­i­cance. Hence, the (H0) hy­poth­e­sis is re­jected and H1 is ac­cepted. It means there is a sig­nif­i­cant re­la­tion­ship within years.

Ta­ble 7 shows that the in­flow of for­eign di­rect in­vest­ment in­creased from US $ 129 mil­lion to US $ 35168 mil­lion in the pe­riod from 1992 to 2009. In­flows of FDI are hav­ing fluc­tu­at­ing trends dur­ing the same pe­riod. The amount of bal­ance of pay­ment has in­creased from US $ 2599 mil­lion in 1992 to US $ 92164 mil­lion in the year 2008 ex­cept the year 1993, 1996 and 2009.

ANAL­Y­SIS

To an­a­lyse the FDI and BOP cor­re­la­tion­ship anal­y­sis has been used. Cor­re­la­tion co-ef­fi­cient as a mea­sure of de­gree of co­vari­abil­ity be­tween FDI and BOP dur­ing the pe­riod 1992-2009 is pre­sented be­low: r = .45 r2 = .20 PE = .13 The re­sult shows that the cor­re­la­tion co-ef­fi­cient be­tween the se­lected vari­able i.e. FDI and BOP is .45 which in­di­cates low pos­i­tive low sig­nif­i­cant cor­re­la­tion and its co-ef­fi­cient of de­ter­mi­na­tion (r2) is .20, which in­di­cates that the in­de­pen­dent vari­able (FDI) shall in­flu­ence the in­de­pen­dent vari­able (BOP) to the ex­tent of 20 per­cent. This anal­y­sis has been done with the help of prob­a­ble er­ror. Since the co­ef­fi­cient of cor­re­la­tion is found less than six times of prob­a­ble er­ror, so it can be re­garded as not sig­nif­i­cant. The value has been fur­ther tested through the anal­y­sis of vari­ance (ANOVA) tech­nique.

FIND­INGS

It is found that the re­sult of cor­re­la­tion be­tween FDI and GDP sec­tor wise is found to be pos­i­tive high sig­nif­i­cant. There is a sig­nif­i­cant re­la­tion­ship be­tween FDI and Forex Re­serve It is found that there is a sig­nif­i­cant re­la­tion­ship be­tween FDI and Ex­port. It is re­vealed that there is no re­la­tion­ship be­tween FDI and BOP. It means there other fac­tor is dom­i­nant in bal­ance of pay­ment. FDI is an im­por­tant stim­u­lus for the eco­nomic devel­op­ment of In­dia.

REF­ER­ENCES

Athuko­rala Prema-Chan­dra (2009), "Trends and Pat­terns of For­eign Di­rect In­vest­ments in Asia: A Com­par­a­tive Per­spec­tive," The Jour­nal of Ap­plied Eco­nomic Re­search 3:4, pp. 365-408. Ku­mar Nagesh (1995), "In­dus­tri­al­iza­tion, Lib­er­al­iza­tion and Two Way Flows of For­eign Di­rect In­vest­ments - Case of In­dia", Eco­nomic and Po­lit­i­cal Weekly, De­cem­ber 16. Ku­mar, N. (2005). "Lib­er­al­iza­tion, For­eign Di­rect In­vest­ment Flows and Devel­op­ment - In­dian Ex­pe­ri­ence in the 1990's ", Eco­nomic and Po­lit­i­cal Weekly, Vol. 40, No. 14, pp. 1459-1469. Mal­ho­tra, R.N. ( 1990), " For­eign Di­rect In­vest­ment in In­dia", Re­serve Bank of In­dia Bul­letin, April.

Newspapers in English

Newspapers from India

© PressReader. All rights reserved.