A DECADE (1991-2000) OF ECONOMIC

REFORMS

AND

FOREIGN DIRECT INVESTMENT IN INDIA

DISSERTATION SUBMITTED TO VINAYAKA MISSIONS

UNIVERSITY IN PARTIAL FULFILLMENT FOR THE

AWARD OF MASTER OF PHILOSOPHY IN ECONOMICS

BY

GEETA RANI
REG NO. A7PJ035M1040121
UNDER THE GUIDANCE OF
MRS. GURCHARAN KAUR BATRA
(LECTURER IN ECONOMICS)
HEAD OF THE DEPARTMENT OF ECONOMICS N.J.S.A.
GOVT. COLLEGE, KAPURTHALA (PUNJAB)

VINAYAKA MISSIONS UNIVERSITY

SALEM, TAMILNADU, INDIA

1
JULY 2008

2
 DECLARATION

I Geeta Rani, hereby declare the Dissertation entitled “A

decade” (1991-2000) of economic reforms and foreign direct

investment in India submitted to the directorate of distance

education, Vinayaka Missions University in partial fulfillment

for the awards of the degree of Master of Philosophy in

Economics is my original research work and that the

dissertation has not previously formed the basis for the

award of any other degree diploma, Associateship fellowship

or any other title.

Place:-

Date: Signature of the

Candidate

3
 CERTIFICATE

This is to certify that the Dissertation entitled “A Decade

(1991-2000 of Economic Reforms and foreign direct

investment in India is a bonafide record of independent

research work done by Geeta Rani (Reg.

No.A7PJ035M1040121) under my supervision during 2007-08

submitted to the Directorate of distance Education, Vinayaka

Missions university in Partial Fulfillment for the award of the

degree of master of philosophy in Economics and that the

Dissertation has not previously formed the basis for the

award of any other degree, Diploma, Associateship,

Fellowship or other title.

Signature of the supervisor

(with Seal)

4
 ACKNOWLEDGMENT

With immense pleasure and deep sense of gratitude , I wish

to express my Sincerest thanks to my esteemed supervisor

Mrs. Gurcharan Kaur Batra (Lect. In Economics Govt. College,

Kapurthala) for her Valuable Guidance, Suggestions and

constructive criticism throughout this, work, inspite of her

busy schedule.

I also extend my thanks to my Parents for their cooperation

for their help and moral support at every step.

Date Geeta Rani

5
 INDEX

Sr. Particulars Page

No No.
1. Declaration 2
2. Certificate 3
3. Acknowledgment 4
4. Index 5
5. LIST of Table 6-7
6. List of Figures 8
7. Abbreviations 9-10
CHAPTER TITLE
1. Introduction 11-25
2. Review of Literature 26-37
3. Data Base and Methodology 38-42
4. Foreign Direct Investment and Foreign 43-51
Portfolio Investment-A comparative study
5. Structural changes in Foreign Direct 52-96
Investment during Economic Reforms.
6. Impact of Foreign Direct Investment on 97-118
Growth in India (1991-2000) – A
comparative Study
Appendix:- A Statistical Analysis of FDI
growth rate and GDP growth rate during
1991-2000.
7. Summary and Conclusions 119-127
Bibliography 128-133

6
 LIST OF TABLES
S. No.

4.1 Foreign Investment Inflows In India (1990-2000)

4.2 Percentage Variation in FDI and Portfolio Investment in

India

5.1 Composition Of Net Capital Flows In India

5.2 Net Long Term Flows to Developing Countries, 1990-

2000

5.3 Net Capital Flows to Emerging Markets

5.4 Net Capital Flows to Crisis Economics

5.5 FDI Inflows to Asia

5.6 Foreign Direct Investment in Selected Asian Developing

Countries.

5.7 Foreign Direct Investment: Actual Flows Vs Approvals.

5.8 FDI Inflows to India During Reform Period: 1991-1992 to

2005-2006

5.9 FDI Data as Per International Practices (August 1991-

February 2006)

5.10 Foreign Direct Investment Approvals and Inflows

5.11 Sectors Attracting Highest FDI Inflows

7
5.12 Share of Top Investing Countries in FDI Inflows from

August 1991 to November 2004)

5.13 State-Wise FDI Approvals (From August 1991-No. 2004)

6.1 Foreign Trade on GDP ( in % for Selected Countries, in

2001)

6.2 FDI in India and in Other Asian Economies in 2000

6.3 FDI by Sectors (in %)

6.4 FDI Overview –India and China

6.5 FDI Overview – India and China

6.6 FDI and Portfolio Inflows and Relative GDP Per Capita

8
 LIST OF FIGURES

S. No

1. Comparative Analysis of FDI and FPI in India:1990-2000

2. Stages of FDI Policy Liberalization in India : 1991-2001

3. FDI inflows, 1971-2005( in Million USD)

4. FDI in India Real Estate

5. The opening up of Indian Economy, 1980-2000(in %)

6. FDI flows (net); 1997-98 to 2003-04

9
 ABBREVIATIONS

ARC – Asset Reconstruction Companies

ASSOCHAM-Associated Chambers of Commerce and Industry

DIPP- Department of Industrial Policy and Promotion

EOUs – Export Oriented Units

FDI – Foreign Direct Investment

FERA – Foreign Exchange Regulation Act

FIIs – Foreign Institutional Investors

FICCI – Federation of India Chambers of Commerce and

Industry

FIPB – Foreign Investment Promotion Boards

GDP- Gross Domestic Product

ICICI- Industrial Credit and Investment Corporation of India

IDBI- Industrial Development Bank of India

IMF – International Monetary Fund

MNC – Multinational Corporations

NPAs – Non performing Assets

NRI – Non- Resident Indians

OCB – Overseas Corporate Bodies

RBI – Reserve Bank of India

10
SBI- State Bank of India

UNCTAD- United Nation Conference On Trade And

Development

11
CHAPTER -1

INTRODUCTION

12
The economic reawakening in the 90’s has sought to put

the country on a firm growth path the inward looking

development strategy followed hither with extensive

government intervention helped the country to overcome

the massive illiteracy and poverty that prevailed before

independence but this also isolated the country from the

rest of the world in terms of trade, technology and

productivity with adverse implications for growth. The

snowballing effects of the structural weaknesses in

macroeconomic polices on current account and fiscal

balances culminated in the 1990-91 crisis. To some extent

the balance of payment crisis was diffused by short terms

measures such as correcting the exchange rate and

liberalising investment and trade regimes, with immediate

result too (SARMA)

Foreign investment is considered as one of the very

important source of capital in a capital scarce developing

countries like India. It is the flow of foreign capital in the

economy and has important implications for the economy.

International capital flows have been marked by a sharp

13
expansion in net and gross capital flows and a substantial

increase in the participation of foreign institutions in the

financial markets of developing countries (World Bank 1997)

The capital flows are generally welcome in a developing

economy. They leads to the appreciation of real exchange

rate also gives upward thrust to the economy. They ease the

external constraints and help to achieve higher investment

and growth of the economy. Such flows also serve as

vehicles for the transfer of technology and management

skills.

The Capital inflows may be in the form of foreign

portfolio investment and foreign direct investment.

Foreign portfolio investment is the important form of

foreign investment. The fastest growing component has

been the portfolio investment in the form of bonds and

portfolio equity flows. Portfolio flows accounted for 32.% of

net development financing to developing countries during

1993-96 as against 11% during 1989-92. it comprises both

debt and equity components. The debt portion includes

mainly the bonds, certificate of deposits and commercial

14
papers issued by developing country borrowers in

international market. The equity component of investment

is through emerging market mutual funds, country funds and

direct purchase of foreigners of equity in developing country

stock market through foreign institutional investors. The

latter component represents the most dynamic and growing

segment of portfolio equity investment.

Foreign portfolio investment can be made through

foreign institutional investment (FII’s), global depository

ratio and euro equity. Foreign Institutional Investors

includes institutions such as pension funds, investment

trusts, asset management companies, nominee companies

and incorporated institutional portfolio managers. The

securities includes shares, debentures, warrants and the

schemes floated by domestic mutual funds.

The most important benefit from foreign portfolio

investment is that it gives an upward thrust to the domestic

stock exchange prices. This has an impact on the price

earning ratios of the firm. A higher price earning ratio leads

to lower cost of finance, which in turns lead to a higher

15
amount of investment. The lower cost of capital and a

booming share market can encourage new equity issue.

Foreign institutional investor also has the virtue of

stimulating the development of the domestic stock market.

The catalyst for this development is competition from

foreign financial institutions. The competition necessitates

the importation of more sophisticated financial technology,

adaption of technology to local environment and greater

investment in information processing and financial services.

The result are greater efficiencies in allocating capital, risk

sharing and monitoring the issue of capital. This

enhancement of efficiency due to internationalization makes

the market more liquid, which leads to a lower cost of

capital. The cost of foreign capital also tend to be lower

because the foreign portfolio investment can be more

diversified across the national boundaries and therefore be

more efficient in reducing country specific risks, resulting in

a lower risk premium (Parthapratimpal 1998)

The recent experience of some developing countries

shows that huge capital inflows have created peculiar

16
problems. Firstly they may be of a short term duration which

could lead to instability in inflation rate and instability in

balance of payment. Sudden deterioration in any country’s

political environment and changes in tax rates on the returns

from these inflows may also create a situation where foreign

investors may sell the domestic stocks held by them and

take their money out of the country. All this can effect the

stock prices of host country, on the other hand, if the

conditions are favourable and portfolio investment continue

to come in heavily, this may lead to an increase in stock

prices, fall in domestic interest rates and cause exchange

rates to appreciate up to a point where expected

depreciation compensates foreign investors for the lower

expected return they may demand, (Shashikant 1996)

The second form of foreign investment is foreign

direct investment. Foreign direct investment is particularly

attractive channel for the less developed countries because

to them it transfers not only capital but also some scarce

managerial, technical and marketing skills which cannot be

supplied through aid mechanism of foreign trade.

17
 Foreign direct investment is the control of a company

in one country by an individual or organization of another

country. Foreign direct investment of a particular country

includes the shares of investment of the particular country

in all those foreign business enterprises in which that

country’s resident, person, organization or affiliated group

owns as 25 percent either in voting stock of a foreign

corporation or an equivalent ownership in a non-

incorporated foreign enterprise (Anthony 1967)

Inflows in the form of direct foreign investment are

generally considered more permanent in character. They

also have an immediate favourable impact on the real sector

of the economy including investment and output even

though not all foreign direct investment result directly an

increase in capital formation. FDI flows into developing

countries are now running at $100 billion a year, compared

with under $ 20 billion in the early 1980s, mainly into china

and the countries of South – East Asia.

FDI raises the investment ratio above the domestic

savings ratio, which is good for growth if nothing adverse

18
happens to the productivity of the investment. The

investment brings with itself the knowledge, technology and

management skills, which can have positive externalities on

the rest of the economy. Foreign investment can often be a

catalyst for domestic investment in the same or related

fields. It requires the training of labour, which is another

positive externality. Finally, a great deal of FDI goes into the

tradeable goods sector of the receipient countries which

improves the export performance of these countries and

earns them valuable foreign exchange.

MNC’s locate in urban areas. They widen the income

gap between the urban and rural sectors, thus perpetuating

dualism. They encourage and manipulate consumption. They

may introduce inappropriate technology and retard the

development of an indigenous capital –goods industry. FDI

has the potential disadvantage even compared with loan

finance, that there may be an outflow of profits that lasts

much longer than the outflow of debt-service payments on a

loan of equivalent amount. While a loan only creates

obligation for a definite number of years, FDI may involve an

19
unending commitment. This has serious implications for the

balance of payment and for domestic resource utilization of

foreign exchange is a scarce resource.

The cost of foreign investors may also manifest in the

form of refusal of foreign firms to transfer latest technology

and the refusal to train local manpower. They might realize

excessive profits due to higher prices as a result of tariff

protection and might refuse to reinvest them in less

developed countries and demand repatriation of the same

to other countries thus draining of the national reserves.

The host country might even feel balance of payment

pressure if there is a significant difference in inflows and

outflow of funds.

Many amendments have been made in developing

countries from time to time about the regulation of foreign

investment. Many concessions were given to foreign

investors to attract more foreign investment. As a result

there has been a dramatic increase in capital flows to

developing countries. According to world bank aggregates

net long term resources flows to developing countries went

20
up from U.S $ 10.6 billion in 1990 to an estimated $284.6

billion in 1996. Net Private Flows as a share of receipient

gross national product for some of countries were Malaysia –

14.8%, China – 6.8%, Indonesia – 6.2%, Mexico – 4.3%,

Argentina – 3.6 %, Brazil – 2.9% and India 1.1% for the year

1996 and in presented in following diagram.

Net Private inflows as a share of GNP year 1996

Brazil
india
7%
3%
india
Argentina
Malaysia 9% Brazil
37% Argentina
Mexico
11% Mexico
Indonesia
China
Indonesia
China Malaysia
16%
17%

21
Total flows touched a record of $ 571 billion in 2006, having

risen by 19% on top of an average growth of 40% during the

three previous years. Relative to the GDP of developing

countries, total flows, at 5.1% are at levels they touched at

the time of the east Asian financial crisis in 1997 (World

bank 2007).

Since independence, in line with development

establishment thinking new foreign investment has been

rigidly controlled. Existing foreign- controlled enterprises

were discriminated against and compelled or persuaded to

exit or relinquish control. New investments are mostly

restricted to industries where it was felt that the acquisition

of foreign technology was important, or where the promise

of export was convincing. The Foreign Exchange Regulation

Act. of 1973 (FERA) was a landmark. In most industries,

foreign shareholding of 40% and operations by subsidiary

branches of foreign registered companies were largely

eliminated.

The attitude towards foreign investment began to

change in 1985, as part of Rajiv Gandhi’s drive for advanced

22
technology. But major changes awaited the reforms

1991/92. The limit of 40% was raised to 51 percent for a

wide range of industries, deemed to be of national

importance and where high technology was thought to be

needed. In these industries approval of foreign investment

was ‘automatic’. Proposals of up to 100 percent ownership

would be considered by a Foreign Investment Promotion

Board which was intended also to be a forum for quick

decision- making. Restriction such as the tying of

remittances to exports have been removed. There has been

some response. Foreign direct investment rose from $ 150

million in 1991/1992 to $ 756 million in 1994/95.

In the post reform period, progressively liberal

economic policies of the government have led to increasing

inflows of foreign investment in the country, both in term of

foreign direct investment as well as foreign portfolio

investment. Annual aggregate foreign investment inflows in

the country varied between US$ 4 to 6 billion during 1993-

94 to 2001-02. The average volume of the foreign

investment inflows during the same period estimated to be

23
roughly US $ 4.9billion (excluding 1998-99 when it was US $

5.2 billion). Inflows during April –October 2002 was around

53 percent of that during corresponding period of 2001. The

reduced volume of foreign investment was attributed to

heavy outflow of portfolio investment during 2002-03.

FDI inflows are an indicator of the foreign investor

community’s long –term stakes in the host economy. Among

developing economies of Asia, China has been the largest

recipient of FDI inflows. Its share in the total of FDI of these

economies increased from 43 percent in 1996 to almost 46

percent in 2001. India is way behind China in FDI inflows.

However, it has marginally improved its share in total FDI

inflows of developing economies of Asia from 2.7% in 1996

to 3.3 percent in 2001.

In 2001-02, the FDI inflows in India was US $ 3,904

million as against US $ 2339 million in 2000-01. The spurt

in FDI inflows was remarkable for several reasons.

In term of overall trends in FDI inflows into emerging

markets of developing Asia, the year 2001 was hardly

24
encouraging. Even then FDI inflows in the Post reforms

period, surpassing the previous high of 1997-98.

The major part of the year 2001-02 was characterized

by synchromised slow down in the global economy, which

dampened investors sentiments and tightened international

capital markets. But India received higher FDI inflows not

with standing the rigidities in global financial markets.

Finally, the year 2001 saw the Indian economy

grappling with exogenous shocks like the Gujrat

earthquake (January 2001) and the terrorist attack on the

Indian parliament (December 2001), apart from the

calamitous developments on Sept. 11, 2001. The ability of

the economy to overcome these shocks and attract record

FDI inflows points to the increasing attractiveness of India’s

country – specific attributes (e.g. strong macro-economic

fundamentals, expanding market, large pool of human

resources etc.) in securing FDI.

Thus performance of FDI in India has been improving

gradually. And it makes a sense to examine the impact of

economic reforms on the growth and structure of foreign

25
direct investment, also the foreign direct investment policy

adopted in India Since 1991.

SPECIFICALLY THIS STUDY AIMS AT:

1. To study the foreign investment Policy followed in

India before the New economic Policy of 1991 and

during the era of Liberalization, Privatisation and

Globalization.

2. To examine the relative comparison between the

foreign direct investment and portfolio investment in

India.

3. Present structure of foreign direct investment.

4. To make a comparative analysis of the impact of

foreign direct investment on growth in India and vice-

versa.

PLAN OF THE STUDY

• The study has been divided into six chapters including

the present one.
• Chapter II reviews the Literature related to the problem
• Data and methodology are described in chapter III.
• A comparative study of Foreign Direct investment and
foreign portfolio investment is made in chapter IV.

26
• Structural changes in foreign direct investment during
economic reforms forms the subject matter of chapter
V
• Impact of foreign Direct investment (FDI) on growth in
India (1991-2000) is examined in chapter VI
• Summary and Conclusions are presented in chapter VII.

27
 CHAPTER – II

REVIEW OF LITERATURE

28
This chapter presents the review of the work done in the

sphere of foreign direct investment and portfolio

investment and its effect on Indian economy. In recent

years, the study of foreign investment has become very

important from the point of view of positive or negative

impact on overall development of the economy. To be

able to formulate the problem precisely and to pinpoint

a rationale for its undertakings it thus seems logical to

present a brief review of the literature which is related

directly or indirectly to the problem. Though this review is

not exhaustive but efforts has been made to review the

major work done in this direction. The brief review of

some important studies is presented below in

chronological order.

Wider (1990) in his study explained that the

developing countries want to attract foreign capital in

non-debt creating forms because they wish to foster their

emerging equity market. He analysed the role of foreign

investors with in the context of general desirability of the

growth of equity markets for domestic resource

29
mobilization as well as for tapping foreign savings and

know how on market organization and technology. The

motivation, range and scope of foreign investors interest

is the economic and market conditions of the country . To

attract more foreign direct investment and foreign

portfolio investment government should reduce the

restriction on foreign investors. Adequate measures

should be taken to promote market growth and the

supply of suitable stock should be increased.

In a study Vittorio and Hernandes (1993) have

analyzed (1993) have analyzed recent experience of few

countries which have applied direct and indirect method

to deal with some of the potential macroeconomic

problems caused by such capital flows. They indicates

three types of problem i.e. an increase in monetization

and inflation, exchange rate appreciation and lower

effectiveness of monetary policy.

Gooptu (1994) studied that there is competition

between developing countries for portfolio investment

from abroad. Although portfolio investment has increased

30
in recent years it still remains a small share of the asset

portfolio of international institutional investor. The capital

flow in developing countries has been primarily in the

form of foreign portfolio investment and foreign direct

investment. To attract more private flows the policy

makers must continue to provide the right signal to

foreign institutional investors in terms of economic and

domestic institutional reforms that attract for portfolio

investment from abroad. There is a need to continue the

increasing pace of reforms in any given emerging

market in order to maintain the steady portfolio flows to

developing countries.

Sau(1994) in his study explained that foreign

capital comes in two forms foreign direct investment and

foreign portfolio investment if we see the stability of

inflow of foreign capital we find that the equilibrium is

most likely to be stable if interest elasticity of foreign

direct investment is high and foreign portfolio

investment is low. The experience of India however

indicated that situation is just reverse that implies the

31
possibility of instability. Government of India has also

offered various incentives to foreign direct investment.

Foreign direct investment is a long term commitment

where as foreign portfolio investment is more flexible.

The immediate impact of foreign direct investment is on

the good market where as foreign portfolio investment is

felt strongly on the asset market. Both of them are

qualitatively different.

Kumar(1995) examines that Indian government

liberalised its policy regime in 1991 with respect to both

inward and outward foreign direct investment as a part of

reforms undertaken to increase the international

competitiveness of Indian enterprises. The sectoral

pattern of foreign direct investment in India reveals a shift

favour more technology and skill intensive industries as

the country industrialized itself. The Indian Government

policies appear to have played and important role in

shaping the pattern. The recent liberalized policy has not

yet succeeded in attracting export-oriented foreign direct

investment in a considerable manner. The study

32
concludes that in the current environment of intense

competition among developing countries to attract foreign

direct investment, just liberalization of polices may not be

adequate.

Sen (1995) has argued that foreign direct

investment should not be treated as a short run balance

of payment management device. The real benefit of

foreign direct investment lies in augmenting the level of

investment in the economy and thereby contributing to

output expansion and growth. The choices available to

the government for achieving this are (a) increased

planned foreign borrowing (b) implement appropriate

macro-economic adjustment (c) ensure that the foreign

investors remit sufficient foreign exchange as equity to

cover not only his direct import but also the additional

imports. Selected inflow of foreign portfolio investment

should be permitted to cover the short run foreign

exchange outflow arising from foreign direct investment.

Blomstreams and Arikokko (1997) argued that

foreign direct investment may promote the economic

33
development by contributing to productivity growth and

export in the host countries. However the exact nature of

the relation between foreign multinational corporate

sector and their host countries seems to vary between

industries and countries. Economy’s industrial and policy

environment are important determinants of the net

benefits of foreign direct investment. The various studies

makes it evident that multinationals enters mainly where

barriers are high and they invest in industries which

satisfy their own goal and innovation and technical

changes can be done. There is direct effect of foreign

direct as well portfolio investment on factor rewards,

employment and capital flows.

Taylor (1997) in his study explained that the

international capital flow have recently been marked by a

sharp expansion in capital flow and increase in the

participation of foreign institutional investors. The recent

features of capital flow to developing countries is that

private flows are increasing as a crucial source of

financing. The fundamental determinants of international

34
capital flows are factors such as investment opportunities,

expected returns, preferences of consumer and their

attitude toward risk. The process of globalization has

increased efficiency and volatility which leads to

generation of portfolio flow which are potentially more

stable.

Kumar (1998) examines the emerging trend and

patterns in foreign direct investment inflows to India. A

major objective is to evaluate the role of policy of

liberalization has played in shaping these patterns. This is

done with an analysis of change in the source of capital

flow in India. The magnitude of inflows is still at a small

level as compared to country’s potential. The policy

reforms have enabled the country to widen the sectoral as

well as source country composition of foreign direct

investment inflows. The liberalization policy has not yet

helped India to improve her share in foreign direct

investment inflows. There is lack of efficient outflow in the

country. India should take advantage of her resources

35
more effectively to attract a greater proportion of

outflow.

Majumdar & Chibber (1998) observed that after

the economic policy of 1991 there have been moves

towards a market based regime in which foreign capital

both on the current account and via the foreign

investment is expected to play a big part. In the Indian

case, the liberal trade policies is absolutely necessary.

Since economic policy making in India seems to be

entirely based on ad hocism and intution and not on the

necessary vital facts. For the policy maker in India these

results indicate that if the full benefits of foreign

ownership are to be reaped then full foreign control over

firms be permitted.

According to Rangarajan (2000), the importance of

capital inflows to developing economies is well

understood. Financial markets around the world are

getting integrated. This process has been helped by

deregulation, information technology and increasing role

of institutional investors to invest internationally. The

36
major benefit of the capital flows is the more efficient

allocation of global savings among countries. Inflows

which take the form of foreign direct investment are

generally more permanent in character. They have an

immediate favouravle impact on the economy. While

foreign direct investment have remained steady,

portfolio investment and banking have fluctuated. The

process of capital account liberalization should be in

stages. India as a country must take full advantage of the

global changes in the capital flows and attract not only

more but also high quality investment which has strong

links to the domestic economy, export orientation and

advanced technology.

According to Kohli (2001 a) Composition of flows

make a significant difference both in terms of impact and

smooth management. Portfolio flows because of their

short- term nature can cause uneven expansion and

contraction in domestic liquidity and thus have a greater

impact upon stock markets and expansion in money

supply, and domestic credit. Foreign direct investment are

37
less volatile because of their long term nature. The

distribution of capital flows between portfolio and foreign

direct investment flows into India tilts distinctly towards

the foreign portfolio investment in most of the years after

liberalization. Foreign direct investment does not reveal a

stable trend so far. India is gradually liberalizing its

capital account and the issue of free capital outflow is

controversial.

Kohli (2001 b) Explained that capital inflows

impact domestic money supply through accumulation of

net foreign currency assets with the central bank. The

interaction between capital flows and domestic money

supply however needs to be formally investigated in

depth as a monetary expansion implies inflation. In India

the monetary reserve’s accumulation is neutralized

primarily through reserve requirement changes on

commercial bank’s liabilities. There are some constraints

of fiscal led monetary expansion in India, which raises

the aggregate demand and aggravates the inflationary

38
impact of capital inflows. These pressures complicate

macroeconomic management.

BalaKrishnan 2004, Virmani 2004, Acharya 2002-

Economists held a sceptical view of India’s long run

potential growth until the 1990s. In some quarters, it was

viewed that the average growth if Indian economy during

the 1990’s was not significantly different from the 1980’s

despite a plethora of reform and liberalization measures

which were taken in 1991-92 in the wake of balance of

payment crisis. Real GDP growth increased by 0.5

percentage points to an average of 6.1 percent growth

between 1992-93 and 1999-2000 compared to 5.6 percent

during the 1980’s

39
CHAPTER III

DATA BASE

AND

METHODOLOGY

40
 This chapter seeks to explain the nature, source and

methodology used in present study entitled “A Decade

(1991-2000) of Economic reforms and foreign direct

investment in India”. The nature of study is such that

secondary data has been used. Study covers the period

from 1991-2001, the latest year for which data was

available.

3.1 Data Source:-

For empirical investigations this study exclusively relies

on secondary data which have been obtained from

various sources like:

* Economic surveys (Various issues), Govt. of India

* Reports of planning commission

* Various RBI bulletins

* Five year plan documents.

3.2 Methodology:-

Many simple and sophisticated statistical techniques

were used to analyze the data. Techniques used in the

study discussed are below:

41
3.2.1 Tabular Analysis:-

Suitable use of tables has been made in order to present

data systemically. Tabular analysis was undertaken for

comparative analysis of foreign direct and portfolio

investment in India

3.3.2 Graphic Analysis:-

Graphs and charts (Bar Graphs) were also prepared for

the variables to show the tends in FII’s investment and

foreign direct investment from 1990-2000

3.3.3 Time series Analysis:

Trend line is used to show the overall trend of foreign

direct investment inflows (net) from 1997 – 98 to 2003-04.

3.3.4 Standard Deviation:-

Standard deviations were also calculated to measure the

variations in the foreign direct investment and foreign

portfolio investment for the purpose of calculation.

42
Standard Deviation of X = ΣX2

Standard Deviation of Y = ΣY2

Where x = X-X and X = ΣX

y = Y – Y and Y= Σy

Here N is the number of years

X shows the foreign direct investment and

Y shows the foreign Portfolio investment

3.3.5 Correlation and Regression Analysis:-

Simple correlation is used to determine the relationship

between two variables by following Karl Pearson’s Short –

cut method.

r= NΣdxdy – (Σdx) (Σdy)

NΣdx2 –(Σdx)2 NΣdy2 – (Σdy)2

X is Foreign direct investment and

Y is Gross Domestic Product

r is Correlation coefficient

43
dx is deviation in X Variable from Assumed mean

dy is deviation in y variable from Assumed mean

N is number of items or years.

Simple regression equations were fitted by regressing

dependent variables on the independent variables.

The Regression equation is

Y- Y = byx (X- X)

Where byx= N ΣdxΣdy – Σdx. Σdy

NΣdx2 - (Σdx)2

Where Y is dependent variable which is FDI growth rate in

our equation and X is Independent variable which is GDP

growth rate.

X is the mean value of X

Y is the mean value of Y

byx is regression coefficient of y on x equation

N is Number of items

dx is deviation in X variable from assumed mean

dy is deviation in Y variable from assumed mean

44
Given the level of GDP growth rate, we can estimate the

level of foreign direct investment growth rate and vice-

versa.

CHAPTER IV

FOREIGN DIRECT INVESTMENT

AND FOREIGN PORTFOLIO

INVESTMENT – A COMPARATIVE

STUDY.

45
 The composition of foreign investment flows makes a

significant difference, both in terms of impact and smooth

management of the economy. Portfolio flows are more

volatile than direct investment flows and are of short-term

nature. They can cause uneven expansion and contraction

in domestic liquidity and thus have a greater impact upon

stock markets and expansion in money supply and domestic

credit. Direct investment flows , on the other hand are of

long term nature and for that reason less volatile. Being

visibly embedded in investment in plant and equipment,

foreign direct investment is less susceptible to sudden

withdrawls out of the country and leads to productive uses

of capital and consequent economic growth.

It is significant that the distribution of capital flows

between portfolio and foreign direct investment flows into

India tilts distinctly towards the former in most years after

liberalization foreign direct investment does not reveal a

stable trend so far.

Portfolio investment flows exceed direct investment in

the early years of liberalization. The former accelerates

46
peaking in 1995 and falling therafter Global financial

markets had changed substantially by the 1990’s with

portfolio capital flows registering a sharp rise. While foreign

direct investment procedures remained complicated and

discretionary investment via the financial market route

was much faster and simpler. This might have tilted the

composition of flows in favour of portfolio investment.

The jump in foreign inward capital that India

experienced after liberalization as well as the composition of

these inflows gets changed. The foreign investment flow to

India and the share of foreign direct investment and foreign

portfolio investment in total flow of foreign investment is

presented in table 4.1

47
 Table 4.1

Foreign investment inflows in India 1990-2000

US.$ Million

1990- 1991- 1992- 1993- 1994- 1995- 1996- 1997- 1998- 1999-
91 92 93 94 95 96 97 98 99 2000

Direct 97 129 315 586 1314 2144 2821 3557 2462 2155
investment
94.2 96.9 56.4 14.2 25.5 43.8 46.0 66.1 102.5 41.5
% % % % % % % % % %
Portfolio 6 4 244 3567 3824 2748 3312 1828 -61 3026
investment
5.8% 3.1% 43.6 85.8 74.5 56.2 54.0 33.9 - 58.5
% % % % % % %
GDR’s/ADR’s - - 240 1520 2082 683 1366 645 270 768
FII - - 1 1665 1503 2009 1926 979 -390 2135
- - 0.2% 40.1 29.2 41.1 31.4 18.1 - 12.3
% % % % % %
Offeshore 6 4 3 382 239 56 20 204 59 -
funds &
other
Total 103 133 559 4153 5138 4892 6133 5385 2401 5181
Source: Reserve Bank of India

From the table 4.1 it is clear that proportion of foreign direct

investment as a percentage of total investment is declining

year after year and the proportion of portfolio investment

by FIIs and through GDRs and ECBs is increasing upto 1993-

94. The share of portfolio investment was 85.8 percent

where as that of foreign direct investment was 14.2 percent

in the year 1993-94. In the year 1994-95 the share of foreign

48
direct investment marginally increased to 25.5 percent with

portfolio investment at 74.5 percent. There was a upward

rise in direct investment from 1995-96 till 1997 to 1998. In

the year 1998-99 there were disinvestments or net

withdrawls from portfolio investment and all foreign

investment was in the form of foreign direct investment.

This decline in portfolio investment is mainly attributable to

the contagion from the East Asian crisis, which adversely

affected capital flows to all emerging markets. Though in the

year 1998-99 and 1999-2000 there was fall in the direct

investment as compared to previous year. In the year 1999-

2000 when foreign institutional investors again invested in

the Indian stock exchange , the share of foreign direct

investment fell to 41.5 percent and thus was less-than

portfolio investment which was 58.5 percent. Mauritius was

the dominant source of FDI inflows in 1997-98. U.S.A. and S.

Korea were, respectively, the second and third largest

source of FDI. The Striking feature was that South Korea

increased its flow of investment in India from a meagre U.S.

49
& 6.3 million is 1996- 97 (0.2 percent of total FDI) to U.S. $

333.1 million in 1997-98(10.4 percent share.)

On the sectoral side, although the engineering industry

witnessed a decline in inflows in 1997-98 , it remained an

attractive area for FDI, being the second largest recipient

after electronics & electrical equipment.

Now the percentage variation of both foreign direct

investment and foreign portfolio investment and foreign

portfolio investment is shown in table 4.2 from this table it

is evident that foreign direct investment shows a stable

trend and there is less variation in foreign direct investment

as compared to foreign portfolio investment . It is seen from

the table that foreign direct investment varied positively

between 26 percent to 144 percent annually from 1991-92

to 1997 – 98 where as it fell in the year 1998-99 and 1999-

2000. There are wide variations in the foreign portfolio

investment thus showing volatility. Foreign Portfolio

investment varied between 6000 percent and -103 percent

annually during this period. From this table it is clear that

50
percentage variation in foreign direct investment was less

than percentage variation in foreign portfolio investment.

51
 Table 4.2

Percentage Variation in Foreign Direct and Portfolio

investment in India

Years Direct % Portfolio %

investmen variation investmen variation
t from t from
previous previous
year year
1990-91 97 - 6 -
1991-92 129 32% 4 -33%
1992-93 315 144% 244 6000%
1993-94 586 86% 3567 1362%
1994-95 1314 124% 3824 7%
1995-96 2144 63% 2748 -28%
1996-97 2821 31% 3312 20%
1997-98 3557 26% 1828 -45%
1998-99 2462 -30.00% -61 -103%
1999-2000 2155 12.40% 3026 5060%

The graphic representation of foreign direct and portfolio

investment along with the actual magnitude for the period

1990-1991 to 1992-2000 is shown in figure 1. It is clear from

the figure that except for the year 1997-98 and 1998-99

foreign portfolio investment constituted the large part of

foreign investment in the years after opening of economy

to the foreign investment in the era of liberalization.

The composition of foreign capital makes a difference

in its impact on the economy. Portfolio capital which is

52
subjected to sudden reversal and is therefore more volatile

renders the recipient country extremely vulnerable. Above

analysis of trends in portfolio investment in case of India

support this hypothesis that portfolio flows are more volatile

than foreign direct investment. This hypothesis is supported

by the result of standard deviation of two series i.e. foreign

direct investment and foreign portfolio investment between

1990 – 2000 comes out to be 1446.53 and for foreign direct

investment is 1176.18 which is smaller than that of foreign

portfolio investment. Thus supporting that there are more

variation in foreign portfolio investment than that of foreign

direct investment.

Comparative Analysis of FDI and FPI in India:1990-2000

4500
3824
4000 3567 3557
3312
3500 3026
2748 2821
3000
2462 2455
2500 2144
1828
2000
1314
1500
1000 586
315244
500 97 6 129 4
0
-500 -61 1999-2000
1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99

Foreign Direct InvestmentForeign Portfolio Investment

Figure: - 1

53
 Portfolio investment also renders the stock market

volatile through increased linkages between the local and

foreign financial market. The nature of capital flow is

important in assessing the impact and foreign direct

investment are always considered permanent in character.

They also have an immediate favorable impact on the real

sector of the economy including investment, output and

employment, even though not all foreign direct investment

increase capital formation. The fact that capital mobility is

two way phenomenon is best seen in the portfolio flows

which by their very nature are reversible in character. They

are contingent upon the returns available on the different

assets classes and the perceived stability of a market or an

economy. India as a country must take full advantage of the

global changes in capital flows and attract not only more

but also high quality investment which has strong links to

the domestic economy, export orientation and advanced

technology.

54
 CHAPTER-V

STRUCTURAL CHANGES IN

FOREIGN DIRECT INVESTMENT

DURING ECONOMIC REFORMS

55
Foreign direct investment is thought to be more useful to a

country than investment in the equity of its companies

because equity investments are potentially “hot money”

which can leave at the first sign of trouble, whereas FDI is

durable and generally useful whether things go well or

badly.

Developing countries, emerging economies and countries in

transition increasingly see foreign direct investment (FDI)

as a source of economic development, modernization and

employment generation and have liberalized their FDI

regims to attract investment. The overall benefits of FDI for

developing economies are well documented. Given the

appropriate host-country policies and a basic level of

development, the preponderance of studies shows that FDI

triggers technology spillovers, assists human capital

formation, contributes to international trade integration,

helps to create a more competitive business environment

and enhances enterprise development. All these contribute

to higher economic growth. Beyond the initial macro

economic stimulus macro economics stimulus for actual

56
investment FDI influences growth by increasing total factor

productivity and more generally, the efficiency of resource

use in the receipient economy. Technology transfers through

FDI generate positive externalities in the host country.

Many economists in the country have now realized the

advantage of FDI to India. While the achievements of the

India government are to be applauded, a willingness to

attract FDI has resulted in what could be tumed as “FDI

Industry”. While researching the economics reforms on FDI,

it was discovered that there exist a plethora of boards,

committees and agencies that have been constituted to ease

the flow of FDI. A call to one agency about their mandate

and scope usually results in the quintessential response to

call someone else. Reports from the planning commission

place investor confidence and satisfaction at an all high,

citizens too deserve to be included in on what the

government bodies are doing.

During the nineties there was a spurt in capital flows

into India as into other emerging economies in Asia and

America. However the magnitude of capital inflows in India

57
(Which peaked at 3.5% of GDP in 1994-95) remained much

smaller than in most other countries. The composition of

capital flows into India change significantly in the nineties

compared to the eightees as depicted in table 5.1

Table 5.1 Composition of Net Capital flows in India

Percent of total net capital flows

Foreign Externa Commercia NRI Other Bn US

Investmen l aid l deposi s $
t borrowings t Capital
flows
198 0 30.3 21.1 16.3 32.3 1.37
5
198 0 26.5 25.4 34.4 13.7 1.86
9
199 1.38 30.7 31.3 21.4 15.22 7.19
0
199 3.5 77.7 40.0 10.6 -31.8 3.78
1
199 14.2 48.4 -9.2 51.3 -4.7 2.94
2
199 43.6 19.6 6.3 12.4 18.1 9.7
3
199 53.7 16.7 11.3 1.9 16.4 9.16
4
199 104.3 21.5 29.2 24.5 -79.5 4.69
5
199 53.6 9.9 24.7 29.4 -17.6 11.41
6
199 54.8 9.2 40.6 11.4 -16.0 9.844
7
199 28.6 9.7 51.7 11.4 -1.4 8.43
8
199 49.7 8.6 3.0 14.7 24.0 10.44

58
 9
200 56.5 4.7 44.5 25.7 -31.4 9.02
0
Source: Kohli 2001, RBI 2001

The contribution of aid declined steadily and sharp

increase in private capital flows took place as it is also

observed in other emerging economies. Its economic and

trade liberalization allowed India to take part in the global

trend of capital flows and to attract both FDI and portfolio

investment.

Net long term flow to developing countries, for the time

period 1990 to 2000 has been depicted in table 5.2

indicating that there is regular increment in private flows

from 43.2% in 1990 to 87% in 2000. Out which debt flows

are declining. And equity flows and FDI are overall

increasing.

Table 5.2

Net long –term flows to developing countries,

1999-2000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Total 98.5 123 155.8 220.4 223.7 261.2 311.2 342.6 334.9 264.5 295.8
(Billion
$)
Official 56.8% 49.5% 36.3% 24.3% 21.5% 21.1% 10.3% 12.5% 16.3% 17.1% 13.0
flows %

59
Private 13.2% 50.5% 63.7% 75.7% 78.5% 78.9% 89.7% 87.5% 83.7% 82.9% 87.0
flows of %
which
Debt 36.9% 30.3% 38.4% 29.5% 28.7% 30.6% 35.3% 32.4% 31.4% -0.3% 12.2
flows %
Equity 6.6% 12.2% 14.2% 30.6% 20.0% 17.5% 17.6% 10.1% 5.6% 15.7% 18.6
flows %
FDI 56.6% 57.5% 47.4% 39.9% 51.2% 51.9% 47.1% 57.6% 63.1% 84.6% 69.2
%
Source:- Global Development Finance 2000, world

Bank. Thus total long –term capital flows to developing

countries increased from $ 98 billion in 1990 to over US $

295 billion in 2000.

Large private capital flows to emerging market are a

phenomenon of the nineties. Prior to the nineties developing

countries received capital flows primarily through official

aid. Net capital flows to Emerging markets and to crisis

economies are shown in the table 5.3 and 5.4 respectively.

Table 5.3

Net Capital Flows to Emerging Markets

(Billion US Dollars)

1992 1993 1994 1995 1996 1997 1998 1999

Net 112. 172. 136. 226. 215. 147. 75.1 80.5
Private 6 1 3 9 9 6
capital
Flows
Net direct 35.4 59.4 84.0 92.9 113. 138. 143. 149.
investmen 2 6 3 8
t
Net 56.1 84.4 109. 36.9 77.8 52.9 8.5 23.3

60
portfolio 6
investmen
t
Other bet 21.0 28.3 -57.3 97.4 24.9 -43.9 76.7 -92.5
investmen
t
Net official 21.2 17.2 3.4 11.7 0.4 23.5 44.7 3.0
flows
Total 133. 189. 139. 238. 216. 171. 119. 83.5
8 3 7 6 3 1 8
Source : World Economics Outlook, May 2000,
International Monetary fund.

61
 Table:- 5.4

Net Capital Flows to Crisis Economies

(billion US Dollars)

1992 1993 1994 1995 1996 1997 1998 1999

Net Private 29.0 31.8 36.1 74.2 65.8 -20.4 -25.6 -24.6
capital
Flows
Net direct 7.3 7.6 8.8 7.5 8.4 10.3 8.6 10.2
investment
Net 6.4 17.2 9.9 17.4 20.3 12.9 -6.0 6.3
portfolio
investment
Other bet 15.3 7.0 17.4 49.2 37.1 -43.6 -28.2 -41.1
investment
Net official 2.0 0.6 0.3 0.7 -0.4 17.9 19.7 -4.7
flows
Total 31.0 32.4 36.4 74.9 65.4 2.5 5.9 -29.3
Source : World Economics Outlook, May 2000,
International Monetary fund.
It is clear from the table 5.3 that net private capital flows to

emerging markets increased from $112 billion in 1992 to

$216 billion in 1996, the year preceding the East Asian crisis.

During this period net official flows came down from around

$21 billion to almost a negligible figure in 1996. Net FDI

flows increased from $35 billion in 1992 to $113 billion in

1996 and further $139 billion in 1997. There was a sharp

drop in portfolio flows. However, portfolio flows increases

62
strongly again in 1996, as emerging markets including

Mexico regained access in international capital markets.

The East Asian crisis burst on the world scene almost

like a bolt from the blue. The crisis hit hard five countries –

South Korea, Malaysia, Thailand, Indonesia, and the

Philippines (the asia-5)

In case of Asia-5, capital inflows increased from $29

billion in 1992 to $74.2 billion in 1995 and declined slightly

to $65.8 billion in 1996 as shown in table 5.4 Net direct

investment increased from $7.3 billion in 1992 to $8.4 billion

in 1996 while net portfolio investment increased from $6.4

billion to $20.3 billion. Banking flows showed the strongest

rise from $15.3 billion to $ 37.1 billion.

Now table 5.5 shows the FDI inflows to Asia in US $ million

from the period 1994 to 1999.

63
 Table- 5.5: FDI Inflows to Asia (US$ million)

Source:- World Investment Report, 2000

Region / 1994 1995 1996 1997 1998 1999
Economy
South, east 65954 71654 87952 93518 87158 96148
and South-
East Asia of
which
Bangladesh 11 2 14 141 308 150
Brunei 6 13 11 5 4 5
Darussala
m
Cambodia 69 151 294 168 121 135
China 33/87 35849 40180 44236 43751 40400
Hong Kong 7828 6213 10460 11368 14776 23068
India 973 2144 2426 3577 2635 2168
Indonesia 2109 4346 6194 4677 -356 -3270
Korea, 991 1357 2308 3068 5215 10340
Republic of
Lao 59 88 128 86 45 70
Peopies
democratic
Republic
Macau, 4 2 6 3 - 1
China
Malaysia 4581 5816 7296 6513 2700 3632
Maldives 9 7 9 11 12 10
Mongolia 7 10 16 24 19 30
Myanmar 128 277 310 387 315 300
Nepal 7 8 19 23 12 132
Pakistan 419 719 918 713 507 531
Philippines 1591 1459 1520 1249 152 737
Singapore 8550 7206 8984 8085 5493 6984
Sri lanka 166 65 133 435 206 202
Taiwan 1375 1559 1864 2248 222 2926
Thailand 1343 2000 2405 3732 7449 6078
Vietnam 1936 2349 2455 2745 1972 1609

64
It is interesting to note that FDI inflows into India are very

small as compared with many other countries. While the

total foreign direct investment over the entire 90’s in India

has been of the order of $15 billion. The foreign direct

investment that has come to India has gone into areas which

are of critical significance to India.

Investors are showing their growing confidence in the

immediate and medium term prospects of the Indian

economy. A recent confidence survey by global consultancy

AT Kearney rated India as the third most favoured FDI

destination, next only to china and United States. Moreover,

for the first time manufacturing investors surveyed by AT

Kearney considered India as a superior manufacturing

location than even the US.

According to the World Investment Report, 2004 of

United Nations Conference On Trade and Development

(UNCTAD), global FDI inflows have declined significantly from

the peak of US $1.4 trillion in 2000 to US $ 560 billion in

2003. FDI inflows to India, on the contrary has shown a rise,

65
particularly in 2003, to reach US $ 4.27 billion as shown in

table 5.6

Table 5.6

Foreign Direct Investment in selected Asian

developing countries

( Billions of US $)

Country Foreign Investment Inflows 2003

Direct2001 2002
China 46.88(5.7) 52.74(7.8)
53.51(9.6)
Hongkong 23.78(2.9) 9.68(1.4)
13.56(2.4)
India 3.40(0.4) 3.45(0.5)
4.27(0.8)
Indonesia -2.98(-0.4) 0.15(6.0)
-0.60(-0.1)
Korea 3.68(0.5) 2.94(0.4)
3.75(0.7)
Malaysia 0.55(0.1) 3.20(0.5)
2.47(0.4)
Philippines 0.98(0.1) 1.79(0.3)
0.32(0.1)
Singapore 15.04(1.8) 5.73(0.8)
11.41(2.0)
Srilanka 0.08(0.0) 0.20(0.0)
0.23(0.0)
Thailand 3.81(0.5) 1.07(0.2)
1.80(0.3)
Developing 219.72(26.9) 157.61(23.2)
172.03(30.7)
economics
World 817.57) 678.75 559.58
Source: World Investment Report 2004, UNCTAD
Note: Figures in bracket are percent share to world
total.

After the announcement of New Industrial policy, 1991

and the current policies of liberalization, India has been

experiencing acceleration in the flow of foreign investment

into the country.

66
The main policy of concessions provided in this policy

includes:

(a) Approving direct Foreign investment up to51 percent

foreign equity in high priority areas.

(b) Monitoring of payment of dividends through RBI to

ensure that the outflows through dividend payment

are balanced with export earning.

(c) In order to provide access to international markets,

most of the foreign equity holding up to 51 percent

equity will now be permitted for trading companies

mostly engaged in export activities.

(d) To permit automatic approval for foreign investment

up to 51 % equity in 34 industries.

(e) To constitute a special empowered board for

negotiating with various large international firms and

approving direct foreign investment in select areas.

(f) To have foreign technicians and allowing the testing

of indigenously developed technology in foreign

countries without any prior permission.

67
The foreign investment promotion Board (FIPB) was also set

up to process applications in cases not covered by automatic

approval. The FIPB also considered individual cases involving

Foreign equity participation over 51 percent.

Further more for industry an important step was the removal

of the Mandatory convertibility clause.

These changes while dramatic did not yield results

immediately; though foreign investment was liberalized in

1992, manufacturing declined. On a positive not by this time

due to the announcement of the new industrial policy in July

1991, a large number of government induced restrictions,

licensing requirement and controls on corporate behaviour

were eliminated.

During 1992-93 several additional measures were taken

by the government to encourage investment flows; direct

foreign investment, portfolio investment, NRI investment and

deposit and investment in global depository receipts. Some

of these measures are given below:

68
1. The dividend – balancing condition earlier applicable

to foreign investment upto 51 percent equity is no

longer applied except for consumer goods industries.

2. Existing companies with foreign equity can raise it to

51 percent subject to certain prescribed guidelines,

foreign direct investment has also been allowed in

exploration , production and refining of oil and

marketing of gas. Captive coal mines can also be

owned and run by private investor in power.

3. NRIs and overseas corporate bodies (OCBs)

predominantly owned by them are also permitted to

invest upto 100 percent equity in high priority

industries with repatriability of capital and income. NRI

investment upto 100 percent of equity is also allowed

in export houses, trading houses hospitals, EOUs, Sick

industries, hotels and tourism related industries.

4. Disinvestment of equity by foreign investors no longer

needs to be at prices determined by the Reserve Bank.

It has been allowed at market rates on stock

69
 exchanges from 15 September, 1992 will permission to

repatriate the proceeds of such investment.

5. India has signed the Multilateral Investment Guarantee

Agency protocol for the protection of foreign

investment in 13 April, 1992.

6. Provision of foreign exchange Regulation Act (FERA)

have been liberalized through an ordinance dated 9

January 1993, as a result of which companies with more

than 40 percent foreign equity are also now treated at

par with fully Indian owned companies.

7. Foreign companies have been allowed to use their

trade marks on domestic sales 14 may, 1992.

The result of new policy is quite encouraging. In the period

August 1991 to December 1993, the Government approved

3467 foreign collaboration proposals including 1565 cases

with foreign equity participation. The total value of equity in

foreign investment proposals approved is Rs. 122.9 billion

which is more than ten times of the Rs. 12.7 billion of foreign

investment approved in the last decade (1981-90). About 80

percent of the approvals are in priority sector.

70
 There have been sharp increases in approvals of direct

investment proposals, the value of which rising to $ 15.7

billion (Rs. 57149 Crores) in 1997 from $ 325 million (Rs 739

Crore) in 1991. The total Foreign direct Investment (FDI)

proposals approved Since 1991 to 1998 amounts to $ 54.26

billion (Rs. 189968 Crore), against just under $1.0 billion (Rs

1274 Crore) approved during the whole of the previous

period (1981-90), But actual inflows of FDI during the period

1991 to 1998 stood at $ 11.8 billion (Rs. 41490 Crore) Which

accounts for 21.7 percent of total approvals.

71
 Table5.7
Foreign Direct Investment: Actual Flows VS
Approvals.

Heads 1991 1992 1993 1994 1995 1996 1997 1998* Total
Approvals 739 5256 11189 13590 37489 3945 5714 2510 18996
in Rs. 3 9 3 8
Crores
Approvals 325 1781 3559 4332 11245 1114 1575 6132 54268
in US$ 2 2
Million
Actual 351 675 1786 3009 6720 8431 1208 8433 41490
inflows in 5
Rs. Crores
Actual 155 233 574 958 2100 2383 3330 2073 11806
inflows in
US $
Million
Actual 47.7 13.1 16.1 22.1 18.7 21.4 21.1 33.8 21.7
Inflows as
%age
ofApproval
s in US$
terms
* : Up to September, 1998. figures are provisional
Source: Reserve Bank of India

Note: The approval and actual inflows figures include

NRIs direct investment approve by RBI.

Table 5.7 reveals the trends in approvals of FDIs and actual

flows in India since 1991. Approvals for FDI in 1991 were

only US $325 million which gradually increased to $ 3.56

billion in 1993, $ 15.75 billion in 1997 and then to about US

$6.97 billion during 1998. Again the actual flows of FDI

gradually increased from US $ 154.5 million (Rs. 351.4

Crore) in 1991 to US $ 573.8 million (Rs. 1786 Crore) in 1993

72
and then to US $ 3330 million in (Rs. 12085 Crore) in 1997

and finally to US $ 2.23 billion (Rs. 9116 Crore) during

1998.Actual inflows as percent of approvals which was 48

percent in 1991 gradually declined to 13 percent in 1992

and than it increased to 22 percent and 19 percent and 32

percent in 1994, 1995 and 1998 respectively. Again during

the period 1991 to 1998 total actual inflows of FDI was $

11.9 billion as compared to that of total approvals of US $

55.1 billion which accounts for only 21.7 percent of total

approvals.

Foreign direct investment (FDI) flow, after reaching a

peak of US $ 3.56 billion in 1997-98 receded gradually to US

$ 2.16 billion in 1999-2000. FDI inflows rose only marginally

to US $ 2.34 billion in 2000-01.

Figure: 2 shows liberalization measures in FDI Policy

during 1991-2001 in India

73
Stages of FDI policy liberalization in India:1991-2001

Up to 100% under
Automatic Route
in all sectors.
Up to 50/51/74% Except for a small
in 111 sectors negative list
under Automatic
Up to 51% under Route and 100%
Auto-matic in some sectors
Route for 34
high-priority
Allows Sectors
selectively up
to 40%

Pre 1991 1991/1992 1997/1998 2000/2001

Figure-2

FDI inflows to India: 1991-2005:-

With the changes in Indian FDI policy, there has been a

steady rise in the average annual amount of FDI during

1991-2005. In particular, it is visible in comparison to

previous periods. Figure 3 shows average inwards FDI to

India in five year periods during 1971-2005. In the period

1986-1990 average inward FDI was 910 min USD, in 1991-

1995 it was about five times more 4.7 bn USD, in 1996-2000

it was 14.9 bn, and in 2001-2005 it was 19.3 bn.

74
 FDI Inflows, 1971-2005 (in million USD)

25000
19294
20000
14882
15000
Series1
10000
4729
5000
245 161 295 910
0
1971- 1976- 1981- 1986- 1991- 1996- 2001-
1976 1980 1986 1990 1996 2000 2006

Figure:-3

Source: Indian FDI fact sheet- May 2006, Department

of Industrial policy $ Promotion- Ministry of
Commerce and Industry (years: 1991-2005)

Table 5.8 shows detailed data about the annual average

inward FDI to India during 1991-2005 and yearly percent

changes. The dynamics of annual growth was changing

within this period. Last years were optimize for India because

in the years 2004/2005 and 2005/2006 there was over forty

percent increase in FDI inflows.

75
 Table 5.8

FDI inflows to India during reforms period

1991/1992-2005/2006

min INR min USD

Fiscal year Amount of Yearly Amount Yearly
inflows changes of change
inflows
1991-1992 4090 ------ 167
1992-1993 10940 167% 393 135%
1993-1994 20180 84% 654 66%
1994-1995 43120 114% 1374 110%
1995-1996 69160 60% 2141 56%
1996-1997 96540 40% 2770 39%
1997-1998 135480 40% 3682 33%
1998-1999 123430 -9% 3083 -16%
1999-2000 103110 -16% 2439 -21%
2000-2001 126450 23% 2908 19%
2001-2002 193610 53% 4222 45%
2002-2003 14932 -23% 3134 -26%
2003-2004 12117 -19% 2634 -16%
2004-2005 17138 41% 3755 43%
2005-2006 24613 44% 5549 48%
Total 161411 38905
Source: India FDI fact sheet – May 2006, Dept. of
Industrial policy and Promotion- Ministry of
Commerce and Industry.

At the beginning of the new century, India introduced a

new method of collecting and presenting FDI data. The

changes were necessary because in previous periods Indian

had different definition of FDI than IMF and UNCTAD and

76
data weren’t comparable to other countries. Prior to that,

FDI data in India had only one component: “equity capital”

under FIPB route, RBI automatic route and NRI route. Equity

capital of unincorporated bodies (liaison/ Branch/ Project

office), reinvested earnings and other capitals (e.g.

borrowings) were missing. Those new components were

introduced to data statistics in fiscal year 2000/2001. Table

5.9 shows FDI data as per international practices for the

period 2000/2001 to 2005/2006. It is visible that new

components are important part FDI inflows to India.

77
 Table 5.9

FDI data as per International practices

(August 1991-February 2006)

Equity
Financial FIPB route/RBI Equity capital Reinveste Other Total
Year automatic unincorporate d earning capita FDI
route/Acquisition d bodies l inflow
rout s
08.1991- 15483 15483
03.2000
2000- 2339 61 135 279 4029
2001
2001- 3904 191 1645 390 6130
2002
2002- 2574 190 1833 438 5035
2003
2003- 2197 32 1460 633 4322
2004
2004- 3251 527 1508 367 5653
2005
04.2005- 4300 210 1257 203 5970
02-2006
Total 34048 1211 9053 2,31 46622

Source:- India fact sheet-May 2006, Department of

Industrial Policy & Promotion- Ministry of Commerce
and Industry.

After the year 1991 the structure of FDI inflows has

undergone globalization. However there is some surprise in

inflows structure, because a substantial part of the total

FDI inward into India is routed through Mauritius. The

78
advantages of routing FDI into India through this country

have been acknowledged by a number of major fund

managers and multinationals, which have already

established their subsidiaries in Mauritius.

SECTOR ANALYSIS:-

When the reforms began in 1991 it was inevitable there

would be a discrepancy as various sectors have different

characteristics and procedures. The reforms and policies on

FDI have trickled down to various sectors in different speed

and effectiveness. Thus the progress of FDI will be effectively

analyzed by studying two sectors of the Indian economy:

industry and infrastructure. These sector are an

agglomeration of sub sectors that when combined from the

integral components of the economic growth.

While industry had taken a stride forward, an examination of

infrastructure reveals a policy and approach that differs

significantly from industry. From the onset the status of

infrastructure sector did not cause any state of panic, as

overall the sector was net seen to be performing too badly,

and was seen as the stabilizing force of the economy. The

79
sector was seen as a bloc and in its components while the

performance of coal and telecommunication sectors fell

short of the respective targets, simultaneously energy,

railways and shipping exceeded their respective targets

thus bringing up the overall performance of the sector to

positive growth.

This discrepancy was recognized in 1992-93 when the

general review mentioned in an overview that capital

intensive infrastructure industries such as power, irrigation

and telecommunications, were handicapped by a number of

constraints and where possible these industries should

eventually develop competitive market structures.

Once again the shipping, railways and telecommunication

were able to meet targets while the performance of coal

and power have been below the target. As a result the sector

as a whole was not liberalized but there were only

suggestions that it was important to attract foreign and

private investment in the power sector to overcome the

resource constraint.

80
 1993-1994 followed the trend whereby instead of

economic data the analysis offered was the shortcomings on

the infrastructure sector such as its development largely in

the public sector and need for structural changes in the

organization, operation and management of the public

sector enterprises.

The call to induce greater efficiency and account ability

by replacing the monopolistic nature of these sectors with a

competitive environment was not followed by steps to make

this dream a practically.

1994-1995 follows in the same footsteps of the

previous of the previous years but with recognition that as

government’s ability to undertake investment in

infrastructure is severely constrained and it is necessary to

induce much more private sector investment and

participation in the provision of infrastructure services.

1995-96 illustrates the great unevenness of the growth

that is taking place with in sectors and between

technologies. Infrastructure is linked to FDI as the condition

81
of infrastructure has a direct correlation to international

competitiveness and flow of FDI.

In the period between 1996-98 there was greater

understanding on the role of FDI in both the sectors. Industry

still lead the reforms whereby automatic approval of FDI

was increased upto 74 percent by the Reserve Bank of

India in nine categories of industries, including electricity

generation and transmission, non-conventional energy

generation and distribution, construction and maintenance

of roads, bridges, ports, harbours, runways, waterways,

tunnels, pipelines, industrial and power plants, pipeline

transport except for POL and gas, water transport, cold

storage and warehousing for agricultural products, mining

services except for gold silver and precious stones and

exploration and production of POL and gas, manufacture of

iron are pellets, pig iron, semi-finished iron and steel and

manufacture of navigational, meteorological, geophysical,

oceanographic, hydrological and ultrasonic sounding

instruments and items based on solar energy.

82
 By 1997-1998 the most term “ infrastructure” was

expanded to include telecom, oil exploration and industrial

parks to enable these sectors to avail of fiscal incentives

such as tax holidays and concessional duties. The

development of the infrastructure sector for FDI was still

haphazard as power, telecommunication, postal services,

railways, urban infrastructure have no mention of FDI.

For industry the period started with a decline whereby the

total foreign investment (FDI and Portfolio) declined to $

2312 million in 1998-99 from $ 5853 million in 1997-98

SUB SECTOR : TELECOMMUNICATIONS :

For infrastructure for 2002 -2003 (reformulation of FDI

data) there is mention in sub sector for FDI and not for

infrastructure as a whole. Telecom has been a major

recipient of FDI during the period of August-1991 to june-

2002, 831 proposals for FDI of Rs 56,226 crore were

approved and the actual flow of FDI during the above period

was Rs 9528 crore. In terms of approval of FDI ,the telecom

sector is the second largest after the energy sector. In 2002

83
the increase of FDI inflow was of the order of Rs. 1077 crore

during Jan to July 2002.

RECENT CHANGES IN FDI SECTOR ;

The Foreign Direct Investment in india have recorded

on phenomenal growth.

FDI inflows have increased in the first eight months of

the year 2004-2005 reaching US $2.5 bn which is more than

double compared to the corresponding period last year and

is very near to the total FDI inflows in 2003-2004. These

trends are shown in table 5.10. It represents the latest

foreign direct investment (FDI) approval and inflows in india.

84
 Table 5.10:

Foreign direct investment approval and inflows.

Sr. Financial Amount in Amount in US $ in

No year Rupees in crore million
.
Approvals Inflows Approval
Inflows
1 19911992 1.345 408 527 165
#
2 1992-1993 5.546 1.094 1.976 393
3 1993-1994 7.469 2.018 2.428 654
4 1994-1995 9.971 4.312 3.178 1.374
5 1995-1996 36.608 6.916 11.439 2.141
6 1996-1997 40.206 9.654 11.484 2.770
7 1997-1998 40.033 13.548 10.984 3.682
8 1998-1999 30.324 12.343 7.532 3.083
9 1999-2000 17.976 10.311 4.266 2.439
1 2000-2001 25.207 12.645 5.754 2.908
0
1 2001-2002 14.465 19.361 3.160 4.222
1
1 2002-2003 7.904 14.932 1.6541.35 3.134
2 3
1 2003-2004 6.224 12.117 1.353 2.776
3
1 20042005 6.784 11.726 1.475 2.549

85
 4 *
Total 250,062 131,385 67,210 32,290

Notes 1. # Aug.-March, *Up to November 2004

2. As most of the sectors / activities have been
placed under automatic route in recent years, which
do not require any approval, the FDI approvals
statistics are not a true reflection of the FDI
approved.

Source: Govt. of India, Economic survey 2004-2005

SECTOR WISE FDI INFLOWS:

Sector wise inflows from August-1991 until September

-2006 are shown in table 5.11.

Among sectors attracting high cummulative FDI's,

electrical equipments retained the first spot, followed by the

services and telecommunications. Services and

telecommunications dislodged transportation industry to the

fourth spot to the second spot held by it last year.

86
87
 Table 5.11

Sectors Attracting highest FDI inflows

(Amount in Rupees crore and in US$ in million in parentheses)

Rank Sectors 2003-04 2004-05 2005-06 2006-07 Cumulative Share of

April – inflows FDI inflows
Sep) (from (in
Aug.1991-Sep percent)
2006
1 Electrical 2,449(532) 3,281(721) 6,499(1451 3,601(778 27,311(6,272) 17.54
Equipments )
(including
computer software
and electronics)
2 Services Sector 1,235(269) 2,106(469) 2,565(581) 6,955(1,50 19,759(4,600) 12.69
(financial $ non- 9)
financial)
3 Telecommunication 532(116) 588(129) 3,023(680) 3,835(405 16,172(3,776) 10.39
)
4 Transportations 1,417(308) 815(179) 983(222) 1,187(259 14,502(3,436) 9.31
Industries )
5 Fuels (Power & Oil 521(113) 759(166) 416(94) 632(138) 11,608(2,720) 7.45
Reifinery)
6 Chemicals (other 94(20) 909(198) 1979(447) 439(95) 9,019(2,238) 5.79
than fertilizers)
7 Food Processing 511(111) 174(38) 183(42) 150(33) 4,852(1,212) 3.12
industries
8 Drugs and 502(109) 1,3431(292) 760(172) 219(48) 4,531(1,055) 2.91
Pharmaceuticals
9 Metallurgical 146(32) 881(192) 681(153) 511(111) 3,328(766) 2.14
Industries
10 Cement and 44(10) 1(0) 1,970(452) 96(21) 3,327(768) 2.14
Gypsum Products

Source: FDI data cell, Ministry of Commerce.

88
COUNTRY WISE FDI INFLOWS TO INDIA:

Table 5.12 represents country wise , FDI inflows to india.

Country wise FDI inflows to India are dominated by Mauritius

(34.49%) followed by the United states (17.08%) and Japan

(7.33%). These aggregate figures are related to the time

period from August -1991 to November -2004.

Table 5.12:

89
 Share of top investing countries in FDI inflows (from
August 1991 to November 2004)
Amount in Rupees crore (million of US $)
Rank Country Aug. 2000- 2001- 2002- 2003- 2004- Total %age
1991 to 01 02 03 04 05(up Inflows of total
Mar. to inflows
2000 Nov.)
1 Mauritius 13,272 4.111 10.063 3.766 2,609 3,730 37,551 34.49
(3,608) (942) (2,182) (788) (567) (811) (8,898)
2 USA 8,956 1.544 1.748 1.504 1,658 2,401 17,811 17.08
(2.450) (356) (382) (319) (360) (522) (4,389)
3 Japan 3,314 977 809 1,971 360 466 7,897 7.33
(898) (224) (178) (412) (78) (101) (1,891)
4 Netherland 2,260 706 890 836 2,247 906 7,845 7.16
s (628) (162) (196) (176) (489) (197) (1,847)
5 UK 2,286 303 1.673 1,617 769 361 7,009 6.56
(670) (70) (366) (340) (167) (78) (1,692)
6 Germany 2,396 540 519 684 373 553 5,066 4.86
(672) (123) (113) (144) (81) (120) (1,254)
7 France 1.002 455 499 534 176 165 2,822 2.63
(280) (104) (108) (112) (38) (36) (679)
8 South 2,094 90 5(1) 188 110 115 2,601 2.64
Korea (572) (21) (39) (24) (25) (682)
9 Singapore 1.244 502 251(54) 180 172 225 2,573 2.48
(344) (117) (38) (37) (49) (639)
10 Switzerland 948 71 180(40) 437 207 287 2,130 2.04
(269) (16) (93) (45) (62) (525)
Total FDI 60.604 12,645 19.361 14,932 12,117 11.726 1,31,38
Inflows* (16.701) (2,908) (4,222) (3,134) (2,634) (2,549) 5
(32,290)

Source:- SIA, FDI data cell, Ministry of Commerce & Industry,

Department of Industrial Policy and Promotion.

Note:- *Includes inflows under NRI Schemes of RBI, Stock swapped

and advances pending issue of shares.

90
State wise FDI approvals in India

Table 5.13 represents top five states of India receiving FDI

approvals.

Five states / union territory- Maharashtra , Delhi, Tamilnadu,

Karnataka and Gujrat- which were the top receipients of FDI

approvals, secure more than 48% of such approvals in the

country.

Table 5.13:

State wise FDI approvals

(from August 1991 to November 2004)

Rank State Approvals Amount of FDI Percentag

approved e of total
FDI
approved
Total
Tech. Financial Rs. In US$ in
crore million
1 Maharashtra 5,03 1,31 3,719 37,02 9,621 14.80
7 8 0
2 Delhi 2.81 307 2,503 30,51 8,445 12.20
0 9
3 Tamil Nadu 2,68 618 2,063 22,64 5,894 9.05
1 2
4 Karnataka 2,63 502 2,137 17,07 4,833 7.63
9 5
5 Gujarat 1,23 568 668 12.43 3,273 4.97
6 7
Note:-RBI provides regional office wise information
based on the intimation of investment received from
investors under the automatic

91
route.Consequently,above table may not necessarily
indicate state-wise information intentions of
investors.

In January 2004, guidelines on equity cap on FDI, including

investment by NRIs and overseas corporate bodies (OCBS)

were revised as under:-

• FDI upto 100% is permitted in printing scientific and

technical magazines and periodicals and journals

subject to compliance with legal framework and with

the prior approval of the government

• FDI upto 100% is permitted through automatic route for

petroleum product marketing , subject to existing

sectoral policy and regulatory framework.

• FDI upto 100% is permitted through automatic route in

oil exploration in both small and medium sized field

subject to and and under the policy of the government

on private participation in explotraion of oil fields and

the discovered fields of national oil companies.

• FDI upto 100% is permitted through automatic route for

petroleum products pipelines subject to and under the

92
 government policy and regulation thereof.

• FDI upto 100% is permitted for naural gas/LNG

pipelines with prior government approval.

Most sectors have been put on automatic route with

industrial licensing being limited to:

• Industries reserved for public sector,

• Industries of strategic, social or environmental concern,

• Manufacture of items reserved for the small scale

sector by non small scale industry units or units in

which foreign equity is more than 24%.

• All other industries are exempt from industrial

licencing, subject to certain restrictions in metropolitan

areas.

List of industries for which industrial licensing is

compulsory:

• Distillation and brewing of alcoholic drinks.

• Cigars and cigarettes of tobacco and manufactured

tobacco substitutes.

• Electronic aero space and defence equipments; all

types.

93
• Industrial explosives including detonating fuses , safety

fuses, gun powder, nitrocellulose and matches

• Hazardous Chemicals

• Drugs and pharmaceuticals

FDI is not permitted in the following industrial sector:

Automatic energy and railway transport.

Insurance sector

An Indian company with foreign equity held by entities other

than its foreign partners in its insurance joint venture can

now breathe easy. As such equity will not be counted while

calculating the foreign investment cap of 26%.

• It implies that cumulative foreign holdings in a joint

venture can now climb beyond 50% but management

control will remain in Insurance Regulatory and

Development Authority (IRDA).

• The ruling of the IRDA is expected to affect the fate of

most private insurance companies as international

players hold 26% stake in his ventures.

94
• This will also help Indian promoters to infuse capital in

insurance companies. The move is likely to help non-

resident Indians, overseas commercial banks with

investment in FIIs mutual funds and Indian insurance

companies.

FDI IN REAL ESTATE:-

The Goverment of India in march 2005 amended existing

norms to allow 100% FDI in the construction business. The

liberalization act cleared the path for foreign investment to

meet the demand into development of the commercial and

residential real estate sectors.

Indian Real Estate is on the high growth path. From

figure 4, it is evident in 2003-2004, India received total FDI

inflows of US 2.70 billion of which only 4.5% was committed

to real estate sector. In 2004-05, this increased to US $ 3.75

billion of which, the real estate share was 10.6% .

However in 2005-06, while total FDIs in India were estimated

at US $ 5.46 bn. the real estate share in them was around

16%.

95
 FDI IN INDIAN REAL ESTATE

7
6
INCREASE IN FDI

5 FDI Inflow (in US $

4 billion)
3 FDI in Real Estate(In
2 US $ billions)
1
0
2003-04 2004-05 2005-06
FDI OVER THE YEARS

FIGURE 4

Source:- ASSOCHAM Report

Guidelines for FDI application in Indian Real Estate:

• Minimum area to be developeed under each project has

been reduces to 25 acres.

• Earlier requirement of minimum 2000 dewelling units

for service housing plots changed to a minimum built

up area of 50000 sq. mtr.

• Minimum $10 mn capital investment for wholly owned

subsidiaries.

• Minimum $ 5 mn capital investment for joint ventures.

• Original investment cannot be repatriated before 3

96
 years.

• Sale of under developed land barred to present

speculation in real estate.

• The funds would have to be brought in within 6 months

of commencement of the business.

TELECOME SECTOR

The ceiling of FDI has been increased to 74 % from 49%. This

can come directly or indirectly into the operation or through

a holding company. The condition is that the remaining 26

% equity will be held by resident Indian citizens or an "Indian

Company" which is defined as one in which FDI does not

exceed 49%. The proportionate FDI components of such an

Indian company will also be counted towards the overall

ceiling of 74%. Certain conditions have also been put in

place to safe guard our national interest. The companies will

have to ensure that the majority of directors on the board,

including the chairman, the managing director and CEO are

resident Indians.

FDI in Non-News Publication:

The cap on foreign investment in Non-News Publication has

97
been removed. The existing investment limit allowing

maximum of 74% foreign equity in Indian entities publishing

scientific, technical , speciality magazines and periodicals

and journals has been scrapped and upto 100 % equity has

been permitted.

• In case where both FDI and portfolio investment by

foreign institutional investor’s investment is envisaged.

The investor would have to approach the foreign

investment board and the Reserve Bank of India

respectively for clearance after obtaining the No-

Objection Certificate (NOC) from the Ministry of

Information and Broadcasting.

• In case involving only portfolio investment, the

applicant may approach the RBI for further clearance, if

any , after obtaining NOC from the Information and

Broadcasting Minstry.

• Guidelines of the Ministry of the finance of FDI and

portfolio investment will apply.

• Title verification shall continue to be done by the

registrar of the news papers for India as per the

98
 existing procedure.

FDI IN ASSET RECONSTRUCTION COMPANIES (ARC)

The government has permitted 49% FDI in the equity capital

of asset reconstruction companies through the non

automatic route. This means prior approval of FIPB( Foreign

Investment Promotion Board) will be necessary for FDI

investment in ARC. An ARC acquires bad loans, better known

as NPAs ( Non- Performing Assets) at a steep discounts from

banks. If an ARC controls 75% of the bad debt of defaulting

firm, it can use the security enforcement low to take

management control of the company something which bank

can't. The Dutch financial services group, ING , Private equity

player Actis and British banking group, StanChart are some

of the foreign players who had shown interest in

participating in an ARC. There entry into bad-loan business

will certainly help to clean up the balance-sheets of ARCs.

The government, however will not allow FIIs to pick up

stakes in ARCs. Currently, Arcil is the only functional ARC in

the country in which SBI, ICICI bank and IDBI are the

99
principal sponsors.

More about FDI

• Civil Aviation:- FDI cap in airlines is 49% while the

airports can attract 100%, though government approval

is required for FDI beyond 74%.

• Petroleun, natural gas:- The government revises the FDI

cap in government refining firms from 26% to 49%.

• Commodity exchanges:- New policy allowed FDI upto

26%, FII upto 23% , subject to no single investor

holding over 5%.

The inflows of FDI on Jan 7, 2008 increased 5 folds

in the past three years from 2.2 $ bn in 2003-2004 to $15.7

bn in 2006-2007. Progessive delicencing of various sectors

coupled with ease in doing business for global companies

has led to this increase as per the year end review by the

Department of Industrial Policy and Promotion(DIPP) under

the commerce and industry ministry.

To conclude, the FDI policy in India is considered as one

of the most liberal, with very few barriers. The Global

100
Competitiveness Report 2003-2004 by the world economic

forum ranks India at 41st place on barriers to foreign

ownership against 67th for Malaysia, 75th for Thailand and

81st for China.

101
 CHAPTER -VI

IMPACT OF FOREIGN DIRECT

INVESTMENT(FDI) ON GROWTH

IN INDIA (1991-2000)

102
There has been an accelarated shift from the policy of self

reliance to reliance on foreign direct investment in India. The

shift in policy is reflected in the industrial policy issued on

May 31, 1990.

The policy seeks to promote joint ventures with MNCs (Multi

National Corporations). In respect of technology transfer, if

the import of technology is considered necessary by the

local entrepreneur he can conclude an agreement with the

collaborator without obtaining any clearance from the

government provided that royalty payments do not exceed

5% on domestic sales and 8% on exports. Further 40% of

equity will be allowed automatic basis keeping in view the

need to attract effective inflow of technology.

A number of additional measures are suggested for

attracting foreign direct investment (FDI) including a larger

share of foreign equity beyond 40%; for reduction of import

levis on imported raw materials, capital goods and

components; for a positive exchange rate policy and

depreciation of the rupee to improve trade.

The poilicy shifts are justified on a number of other

103
grounds besides the gap filling arguments.

• They are said to contribute the competitiveness of

Indian industry and also to a reduction of the rent

seeking role of domestic capitalists.

• Nearly all of the world's patents are registered in the

developed countries and most of them are in the hands

of multinationals. The shift in policy, it is said, will

create an opportunity for the developing countries to

have access to the technology of the developed

countries.

• Besides the much publicised invitations of the socialist

countries to multinationals have given respectability to

the shift in policy.

The reform process of the 90's has brought about significant

changes in the exchange rate and trade policy frame work.

At the end of 90's by Indian Standard, the trade regime is

more outward looking, with new foreign equipment and

technologies becoming more available through imports as

well as FDI.

The degree of openness of Indian economy has significantly

104
risen since the mid 1980's as shown in figure 5. The share of

imports in GDP has started to increase in 1991 , showing

clearly the effect of import liberalization. It rose from 7% in

1991 to 9.5% in 2000 with a peak to 10% in 1995-1996. The

ratio of exports to GDP has begun rising steadily since the

mid 1980's from a low of 4% to 9% in 2000. The impact of

trade liberalization on exports has been less marked than on

imports.

The Opening of the Indian Economy, 1980-2000

(in %)
M/GDP X/GDP

15
10
5
0
1975 1980 1985 1990 1995 2000 2005

Figure- 5

Source :- CPEII, CHELEM data base.

However, Indian liberalization is still anemic compared to the

standards of Asia. Amongst other Asian economies, India is

by far the one in which foreign trade plays the smallest part.

The share of exports and imports in GDP is more than twice

105
lower than it is in China and well below the share of Pakistan

as shown in table 6.1

Table 6.1

Foreign Trade on GDP

(in % for Selected Countries, in 2001)

Countries Foreign Trade on GDP*, in %

Malaysia 86.6
Singapore 86.2
Asian NIE 2 62.2
Philippines 50.8
Thailand 50.5
Asian NIE 1 37.0
Taiwan 34.7
Southkorea 32.6
Indonesia 32.4
Hongkong 26.8
China People’s Rep 21.6
Pakistan 16.4
India 9.8
Countries are ranked according to the share of
foreign trade in GDP, descending order.
Source:- CEPII, CHELEM data base.
*{(X+M)/2}/GDP* 100

The total amount of foreign investment in India ($ 47 bn)

was almost 10 times smaller than the amount of FDI

actually in China ($420 bn). Comparison with Asian countries

shows that FDI plays a limited part in the Indian economy.

The importance of FDI in the domestic economy topped in

106
1997 , when inflows represented almost 1% of GDP and 3.7%

of Gross Capital Formation. These shares have declined

since to respectively 0.4% and 2%. The share of FDI stocks

in GDP (3.6%) is lower only in Bangladesh (1.5%) in 1999.

Table 6.2 gives the current statistics regarding the FDI inflow

as percentage of GDP in 2000.

Table 6.2:
FDI in India and in other Asian Economies in 2000
Heads FDI Stocks /GDP FDI flows /GFCF
Malaysia 58.8 16.5
Indonesia 39.6 -12.2
China 32.3 10.5
Thailand 20.0 10.4
Pakistan 11.2 3.9
Philippines 16.6 9.2
Taiwan 9.0 6.8
South Korea 13.7 7.1
Indian 4.1 2.3
Bangladesh 2.1 2.7
South East and 36.4 14.0
South-East Asia
Developing 30.9 13.4
Countries

Note: Countries are ranked according to the share of

FDI
stocks in GDP, descending order.
GFCF is Gross Fixed Capital Formation
Source:- World Investment Report, 2001.

Impact on the Economy:-

107
Since 1997, more than half of FDI has been directed to

manufacturing industry ( RBI, 2001)

Electrical and Electronic equipment has become the most

important sector for FDI ahead of engineering and chemicals

(Table 6.3). The impact of FDI on Indian Industry has

remained small, due to the limited size of foreign capital. FDI

in Industry has not had a significant impact on export

performance (Sharma, 2000). Analysing the export

performance of a sample of listed firms 1996 to 2000,

Aggarwal (2001) found that the evidence of a better

performance of multinational affiliates was not strong

enough to suggest that India had attracted efficiency

seeking, outward oriented FDI. Foreign affiliates perform

better than domestic firms in low-tech industry but not in

high-tech exports. This suggest that up to now, India has

attracted foreign investment aimed at its large domestic

market but has not been considered as a good outsourcing

base by foreign investors.

108
 Table-6.3:-

FDI by Sectors (in%)

Heads 1997- 1998- 1999- 2000- 1997-

98 99 00 01 01
Chemicals & 9.8 20.2 11.0 10.4 12.6
Pharmaceutical
s
Engineering 19.6 21.4 20.6 14.3 19.0
Electric 25.6 16.7 17.1 27.2 22.3
&Electronic
equipment
Food 10.9 1.0 7.7 3.9 6.3
Finance 5.0 9.3 1.3 2.1 4.7
Service 10.9 18.4 7.3 11.8 12.2
Other 24.4 13.1 35.0 30.3 25.0
Total 100 100 100 100 100
Source:- RBI 2001

Aggregate FDI inflows into India were somewhat lower

during 2003-2004 as compared to that during 2002-03. The

reduction is attributable to a small decline (US $379million)

in fresh equity capital inflows in 2003-04. FDI flows into

India, on BOP basis, after rising sharply from 1999-2000,

have been showing a decline since 2001-2002 as shown in

figure 6. A free hand trend line is drawn in figure 6 to show

the over all trend in FDI flows (net) from 1997-98 to 2003-

04.Trend line indicates that on the whole, FDI is increasing

as a result of economic reforms.

109
 FDI Flows (Net):1997-98 to 2003-04

7000
6000
5000
4000 FDI Flows (Net)
3000 Trend Line
2000
1000
0
million
US $

1997- 1998- 1999- 2000- 2001- 2002- 2003-

98 99 2000 2001 2002 2003 2004
Years

FIGURE - 6

Empirical studies on FDI in India endorse the proposition that

the productive efficiency and spillovers from FDI tend to be

relatively high in science oriented groups of firms and

industries. Kathuria's (2001) carefully crafted econometric

study of the impact of FDI on productivity of Indian industry ,

based on data for 487 firms in 24 industry groups ,for the

period 1989-90 to1996-97 reports that

• Following the economic liberalisation policies instituted

in 1991 ,productive efficiency increased in the case of

both foreign owned and domestically owned firms but

the growth in efficiency was relatively high in case of

foreign firms;

• Only those domestic firms with a threshold levels of

110
 research and development(R and D) gained from the

presence of foreign firms;

• In the scientific sub group, or science oriented

industries, the presence of foreign firms exerted a

strong learning effect i.e. domestic firms in this group

experienced technology spillovers from the presence of

foreign firms; and.

• In the non-science oriented industry groups, only those

locally owned firms with an R and D base experienced

spillovers in the presence of foreign firms.

Another study on the impact of domestic R and D imported

technology on the productivity of Indian Industry (Basant

and Fikkert 1996) also concludes that in the absence of

domestic R and D, locally owned firms would not experience

any spillovers of technology from the presence of FDI, This

study also finds that imported know how through technology

licencing agreements has much stronger impact on

productivity growth than domestic R and D.

In one of its report on external financing for

developing countries, the world bank observed that most of

111
the FDI flows to India have been concentrated in power and

fuel and more recently in communication and infrastructure.

The report observed that the net private capital flow to India

amounted to 2.1 billion dollars in 1990, 1.9 billion dollars in

1991, 2.0 billion dollars in 1992, 3.5 billion dollars in 1993,

5.5 billion dollars in 1994 and 4.4 billion dollars in 1995.

But the flows of FDI in India is in way comparable to

China which obtains a much higher amount. The World Bank

Report 2000 observed that FDI flows in India is no

comparison with China. It is found that FDI in India is one-

tenth of that in China, but given the structure, composition

and factor endowments of her economy which are

significantly different from that of China, India may not need

large volumes of FDI, in any case not on the scale that China

attracts. Table 6.4 and 6.5 gives the FDI overview in India

and China stating that ratio of FDI to GDP in India and China

can be seen as an indicator of the productivity of FDI in two

countries -a rough measure of the capital-output ratio. It can

be viewed that a unit of FDI is much more productive in India

than in China. Though it needs detailed statistical verification

112
yet another explanation for the observed differences in the

volume of FDI in the two countries. It is that India may not

require as large a volume of FDI as China harbours.

Table:- 6.4:-
FDI Overview – India and China

India China
Years FDI FDI inflow FDI inflows FDI Inflow
Inflows as per (millions as percent
(million Cent of US$) of GFKF
US$) GFKF
1985-1995 452 1.9 11,715 6.0
(annual
average)
2001-2002 3,403 3.2 46,878 10.5
2002-2003 3,449 3.0 52,743 10.4
2003-2004 4,269 3.2 53,505 8.6
2004-2005 5,335 3.4 60,630 8.2
Note: Gross Fixed Capital Formation (GFKF)
Source: UNCTAD World Investment Report, 2006

Table 6.5
FDI Overview – India and China
India China
years FDI Stock FDI as FDI Stock FDI as
(million per Cent (millions percent of
US$) of GDP US$) GDP
1980-1981 452 0.2 1,074 0.5
1990-1991 1,657 05 20,691 5.8
2000-2001 17,517 3.7 193,348 17.9
2002-2003 30,827 5.2 228,371 16.2
2004-2005 38,676 5.9 245,467 14.9
Note:- Gross Domestic Product (GDP)
Source:- UNCTAD, World Investment Report, 2006.

113
Performance of foreign direct investors (FDI) in India has

been improving gradually. In 2001,FDI performed

satisfactorily with 36% of the FDI investment units making

profits and 25% of the FDI units have reached break even

point. this has been revealed from the "FDI survey 2002 "

conducted by the Federation of Indian Chambers of

Commerce and Industry (FICCI) . The survey report observed

that nearly 66% of investors feel the Indian market offers

good to average profitability. The survey shows that the

state level handling of approvals still needs improvement,

with 38% of the investors ranking it poor.

The U.N. Conference on Trade and Development (UNCTAD)

in its latest report has termed the India's performance as

remarkable. Due to the efforts of the Government of India to

attract FDI, including investment from overseas investors,

investment into the country surged by 34 percent. The

country has also become an attractive FDI location for Asian

transnational companies. The pace of investment from the

Republic of Korea into the country has far outstripped even

that of the USA and the UK.

114
However the Indian Government, target of raising annual

flows amounting to $ 10 billion still remain a far cry.

Thus the impact of the reforms in India on the policy

environment for FDI presents a mixed picture. The industrial

reforms have gone far, though they need to be

supplemented by more infrastructure reforms, which are a

critical missing link.

FDI and GROWTH

The impact of FDI on the capital receiving country is not

easy to explain. Infact, the benefits from FDI do not accrue

automatically and evenly across countries and sectors . In

order to reap the maximum benefits from FDI, there is need

to establish a transparent, broad and effective enabling

policy environment for investment and to put in place

appropriate framework for their implementation.

Under this heading, an attempt has been made to workout

the relation between FDI and growth rate and also between

growth rate and FDI. Analysis was undertaken to find out

whether there exist any dependence of Gross Domestic

Product (GDP) on Foreign Direct Investment (FDI).

115
 There exists positive relation between FDI and growth

of GDP. It has been estimated by Borensztein, de Gregorio

and Lee (1995) that a one percentage point increase in the

ratio of FDI to GDP in Developing countries over the period

1971-89 was associated with a 0.4-0.7 percentage point

increase in the growth of per capita GDP, with the impact

varying positively with educational attainment as an

indicator of country's ability to absorb technology.

But there is also evidence of bidirectional causality (see de

Mello, 1997) . FDI affects growth positively, at least above a

certain threshold, but growth also affects FDI positively;

another example of virtuous circle.

Table 6.6 represents flows of FDI and Portfolio investment for

time period 2000 to 2007 and relative GDP per capita and

GDP at current market prices.

116
 Table 5.6

FDI and Portfolio Inflows and Relative GDP per capita

Years FDI in Portfolio GDP(Rs.) GDP at

India (net) Investmen Per Capita current
(US $ t (US$ (current market
million) Million) prices) price
(Rs.Crore)
2000-01 4031 2760 20,632 21,02,375
2001-02 6125 2021 21,976 22,81,058
2002-03 5036 979 23,299 24,58,084
2003-04 4322 11356 25,773 27,65,491
2004-05 5987 9311 28,684 31,26,596
2005-06 9801 12494 32,224 35,67,177
2006-07 21991 7004 36,950 41,45,810

Source: Various RBI bulletin

117
APPENDIX : A STATISTICAL ANALYSIS OF FDI GROWTH
RATE AND GDP GROWTH RATE DURING 1991-2000

1. Correlation Analysis between FDI growth Rate and the

GDP growth rate :-

Years FDI Growth Rate FDP Growth rate

(%) (%)
1991-92 2.86 1.3
1992-93 -41.8 5.1
1993-94 -74.5 5.9
1994-95 79.6 7.3
1995-96 71.7 7.3
1996-97 5.02 7.8
1997-98 43.7 4.8
1998-99 55.0 6.5
1999-00 -59.5 6.1
2000-01 42.9 4.0
Source:- Various RBI Bulletin

We apply the Karl Pearson's formula to obtain the coefficient

of correlation between FDI growth rate and GDP growth rate

Co-efficiently of correlation (r) = N. Σdxdy - Σdx. Σdy

NΣdx2 – (Σdx)2 NΣdy2 –

(Σdy)2

118
Years X Dx= X- Dx2 Y Dy= A- Dy2 Dxdy
A(A=5 A(A=5
0) 9)
1991- 28 -32 1024 13 -46 2116 1472
92
1992- -418 -468 219024 51 -8 64 3744
93
1993- -745 -795 632025 59 0 0 0
94
1994- 796 746 556516 73 14 196 10444
95
1995- 717 667 444889 73 14 196 9338
96
1996- 50 0 0 78 19 361 0
97
1997- 437 387 149769 48 -11 121 -4257
98
1998- 550 500 250000 65 6 36 3000
99
1999- -595 -645 416025 61 2 4 -1290
00
2000- 429 379 143641 40 -19 361 -7201
01
N=10 Σdx=73 Σdx2= Σdy=-29 Σdy2 Σdxdy
9 28,12,91 = =
3 3455 15,250

By Putting the values in the fiven formula we obtain r=0.18

It shows that there is low positive correlation between the

FDI growth rate and GDP growth rate during the period

1991-2000

2. Regression Analysis of trends in GDP growth and the

growth rate of FDI (Foreign Direct Investment)

119
Year GDP Dx= X- Dx2 FDI Dy= A- Dy2 Dxdy
growth A(A=5. growth A(A=5.0)
rate (%) 9) rate (%)
(x) Y
1991 1.3 -4.6 21.16 2.8 -3.2 10.24 14.72
-92
1992 5.1 -0.8 0.64 -41.8 -46.8 2190.24 37.44
-93
1993 5.9 0 0 -74.5 -79.5 6320.25 0
-94
1994 7.3 1.4 1.96 79.6 74.6 5565.16 104.44
-95
1995 7.3 1.4 1.96 71.7 66.7 4448.89 93.38
-96
1996 7.8 1.9 3.61 5.0 0 0 0
-97
1997 4.8 -1.1 1.21 43.7 38.7 1497.69 -42.57
-98
1998 6.5 0.6 0.36 55.0 50 2500 30
-99
1999 6.1 0.2 0.04 -59.5 -64.5 4160.25 -12.90
-00
2000 4.0 -1.9 3.61 42.9 37.9 1436.41 -72.01
-01
N=10 ΣX=56. Σdx= Σdx2 ΣY=124. Σdy=73. Σdy2 Σdxdy=152.
1 -2.9 =34.5 9 9 =28,129.1 5
X =5.61 5 Y=12.49 3

Take growth rate of FDI as a dependent variable (Y) and

GDP growth rate as the independent variable (X), we make

an attempt to fit the trend line with the help of regression

analysis.

The relevant regression equation is

Y-Y = byx (X-X)

Where
byx = N Σdxdy – Σdx. Σdy

120
 N Σdx2 - (Σdx)2

By putting the values in the given regression equation, we

derive the following trend line:

Y = -16.4+5.15x

From this equation we can derive the expected growth rate

of foreign direct investment, given the growth rate of GDP.

If we consider the 11th five year plan (2007-12) with its

target of achieving 10% growth rate of GDP, we can estimate

the growth rate of FDI.

As for 10% growth rate of GDP, the estimated growth rate of

FDI for (2007-12) is 35.1%.

The value is obtained by putting the value of X in trend line

equation as stated above.

Now take GDP growth rate as dependent variable (X) and

growth rate of FDI as independent variable (Y).

The relevant regression equation is

X-X = bxy (Y-Y)

Where ,
bxy = N Σdxdy – Σdx. Σdy

N Σdy2 - (Σdy)2

121
By putting the values in the given regression equation, we

derive the following trend line:

X = 5.53 + 0.0063Y

From this equation we can derive the expected GDP growth

rate, given the growth rate of FDI.

Thus relation between GDP growth rate and FDI growth rate

is

r= bxy x byx

= 0.0063x5.15

= 0.18

It shows that there is positive relationship between the

growth rate of GDP and growth rate of FDI.

But the degree of positive relationship is low. This is so

because of the fact that FDI is one of the several factors

which contribute to growth.

FDI is not a panacea for the development problem, it is a

catalyst in the growth process.

It enhances the efficiency of other inputs in the growth

process through its well known role as supplier of technology

122
and know-how.

Also there is a suggestion that it is not FDI which promotes

growth but it is growth which attracts foreign firms.

This may be so but the strong argument is that FDI can

accelerate the growth process in progress.

123
CHAPTER VII
SUMMARY AND
CONCLUSIONS

124
In this chapter an attempt have been made to summaries

the main findings of the study entitled " A decade (1991-

2000) of Economic Reforms and foreign Direct Investment in

India."

The study was undertaken with the following objectives:

• To study the foreign investment policy followed in India

before the new economic policy of 1991 and during the

era of liberalization, privatization and globalization.

• To examine the relative comparison between the

foreign direct investment and foreign Portfolio

investment in India.

• To study the present structure of Foreign Direct

Investment (FDI)

• To make a comparative analysis of the impact of

economic reforms on the growth and structure of

foreign direct investment (FDI) in India.

The study has been divided into six chapters including the

present one. Chapter 1 introduces the problem. The

literature related to the problem has been reviewed in

Chapter II. Data base and methodology and discussed in

125
Chapter III. Policy and structural changes in foreign direct

investment and comparative analysis of foreign direct

investment with foreign portfolio investment is discussed in

Chapter IV. Impact of economic reforms on the foreign direct

investment and growth in India formed the subject matter of

study of Chapter V.

The nature of study was such that secondary data

has been used. Study covered the period from 1991 to 2001,

the latest year for which the data was available. The data

regarding the FDI flows to India was collected from various

sources like various issues of Economic Survey, Govt of

India, Various RBI Bulletins, Reports of Planning commission

etc.

Tables were prepared to show the trend and share of

foreign direct investment in India and the ratio of FDI to GDP.

Standard deviations were also calculated for the

comparative analysis of foreign direct and portfolio

investment. Coefficient of correlation is used to find out the

relationship between growth rate of FDI and growth rate of

GDP.

126
 Regression equation was fitted by regressing foreign direct

investment FDI on growth rate of GDP.

Main findings of the study

1. There has been an accelerated shift from the policy of

self- reliance to reliance on foreign direct investment in

India. As a result FDI in India have recorded on

phenomenal growth , FDI inflows are improved. The

inflow of FDI on Jan 7, 2008 increased five folds in the

past three years.

2. Study found that highest share of FDI inflows have gone

to the data-processing software and consultancy

services, followed by pharmaceuticals and automobile

industry. FDI inflows to India are dominated by

Mauritius, U.S.A, and Japan. And top five states of India

-Maharashtra, Delhi, Tamilnadu, Karnataka and

Gujarat are the recipient of the FDI approvals more

than 48% in the country.

3. The FDI policy in India is considered as one of the most

liberal, with very few barriers. India is at 41st place on

127
 barriers to foreign ownership against 67th for Malaysia,

75th for Thailand and 81st for China.

4. Study found that composition of flow makes a

significant difference both in terms of impact and

smooth management. portfolio flows are more volatile

than direct investment because of their short term

nature. They can cause uneven expansion and

contraction in domestic liquidity and thus have a

greater impact upon stock markets and expansion in

money supply and domestic credit. Foreign direct

investment, on the other hand, are long term in nature

and for that reason less volatile and is less suspectible

to sudden withdrawls out of a country and leads to

productive uses of capital and consequent economic

growth.

5. Study also found that in India we have witnessed large

private capital flows to equity market. While Foreign

direct investment has remained steady foreign portfolio

investment have fluctuated. India as a country must

128
 take full advantage of the global changes in capital

flows and attract not only more but also high quality

investment which has strong links to domestic

economy, export orientation and advanced technology.

6. Standard deviation of portfolio investment between

1999-2000 comes out to be more than that of foreign

direct investment and thus supporting that there are

more variations in foreign portfolio investment than

that of foreign direct investment during the study

period.

7. There is positive correlation between growth rate of FDI

and growth rate of GDP but the degree of relation is

quite low because of the fact that FDI is one of the

several factors which contribute to growth. It is a

catalyst in the growth process. It enhances the

efficiency of other inputs in the growth process through

its well known role as supplier of technology and know-

how.

8. When compairing the levels of foreign direct

investment in India and China, it is found that FDI in

129
 India is one-tenth of that in China. But given the

structure , composition and factor endowments of her

economy which are significantly different from that of

China , India may not need larger volumes of FDI as

China harbours. Also a unit of FDI is much more

productive in India than in China. But the amount which

India attracts now may not be adequate for generating

a 10% rate of growth aspired for by India's planners but

the optimum level of FDI the country needs may not be

much higher than the present inflows of FDI.

9. It is observed that nearly 66% of investors feel the

Indian market offers good to average profitability. 93%

of the respondents says that handling of approvals at

the centre is in the range of good to average. However,

at the state level handling of approvals still needs

improvement , with 38% of the investors ranking it

poor.

10. Results of the regression analysis shows that

regressions coefficient of FDI growth rate on GDP

growth rate turns out to be positive thus showing a

130
 positive relationship. Indicating that it is growth which

attract foreign firms. However, the reverse relationship

has also its significant that FDI is a catalyst in the

growth process that could accelerate the growth

process in progress.

Thus foreign direct investment is thought to

be more useful to a country than investments in the equity

of its companies because equity investments are potentially"

hot money" which can leave at the first sign of trouble,

whereas FDI is durable and generally useful whether things

go well or badly .

Foreign direct investment is highly conducive for

optimum utilisation of human and natural resources and

competing globally with higher efficiency. FDI has a

significant role in integration of Indian economy with global

production chains which involve production by multinational

corporations spread across locations the entire world over.

The achievements of the Indian government are to be

aplauded , a willingness to attract FDI has resulted in what

could be termed as "FDI Industry ". In the post- liberalisation

131
era , policy oriented distortions are likely to be low and long

years of investment in tertiary education have endowed

India with the sort of technology absorptive capacity or skills

required to assimilate, adapt and restructure imported

technologies and know-how.

To sum up , we can conclude that foreign direct

investment is conducive to the growth process as compared

to portfolio investment of foreign institutional investors FIIs

who have potential to destabilize the emerging equity

market and to drain the surplus from it by manipulating the

equity market with their vast resources .

Efforts should be made to get more foreign direct

investment which will be ultimately in the interest of the

economy for its growth. In order that the benefits of

liberalisation reaches the poorest of the poor, foreign direct

investment should be encouraged so that more employment

can be generated.

Thus there is need to establish a transparent, broad

and effective enabling policy environment for investment

and to put in place appropriate framework for their

132
implementation to reap the maximum benefits from FDI.

133
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