Globalisation of Economy and The Impact of FDI On Sustainable Growth: An Indian Perspective
Globalisation of Economy and The Impact of FDI On Sustainable Growth: An Indian Perspective
Globalisation of Economy and The Impact of FDI On Sustainable Growth: An Indian Perspective
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International Journal of
DEVELOPMENT RESEARCH
Review Article
GLOBALIZATION OF ECONOMY AND THE IMPACT OF FOREIGN DIRECT INVESTMENT ON
SUSTAINABLE GROWTH: AN INDIAN PERSPECTIVE
Department of Law, Gujarat National Law University, Attalika Avenue, Knowledge Corridor, Koba,
Gandhinagar (Gujarat) 382007
Article History: Investment in India provides the base and pre-requisite for economic growth and development.
Received 05th December, 2014 Apart from a nation’s foreign exchange reserves, exports, government’s revenue, financial
Received in revised form position, available supply of domestic savings, magnitude and quality of foreign investment are
13th January, 2015 necessary for the well being of a country. Developing nations, in particular, consider FDI as the
Accepted 15th February, 2015 safest type of international capital flows out of all the available sources of external finance
Published online 31st March, 2015 available to them. FDI provides a win – win situation to the host and the home countries. Both
countries are directly interested in inviting FDI because they benefit a lot from such type of
Key words: investment. There is a considerable change in the attitude of both the developing and developed
countries towards FDI. They both consider FDI as the most suitable form of external finance. FDI
Foreign Direct Investment (FDI),
Trans-National Corporation (TNC), is a predominant and vital factor in influencing the contemporary process of global economic
Multi National Corporations (MNCs), development. The present study is limited to assess the determinants of Foreign Direct Investment
MIGA (Multilateral Investment Guarantee flows and its impact on Indian economy. It is concluded that the Government should design the
Agency). FDI policy in such a way where FDI inflows can be utilized as means of enhancing domestic
production, savings and exports through the equitable distribution among states so that they can
attract FDI inflows at their own level. FDI can help to raise the output, production and export at
the sectoral level of the Indian economy. It is advisable to open up the export oriented sectors and
higher growth of economy could be achieved through the growth of these sectors. With the
initiation of globalization, developing countries, particularly those in Asia, have been witnessing
an immense surge of FDI inflows during the past two decades. Even though India has been a
latecomer to the FDI scene compared to other East Asian countries, its considerable market
potential and a liberalized policy regime has sustained its attraction as a favorable destination for
foreign investors. This research paper aims to examine the impact of FDI on the Indian economy,
particularly after two decades of economic reforms, and analyzes the challenges to position itself
favorably in the global competition for FDI.
Objectives:
The research paper covers the following objectives:
• To study the trends and pattern of flow of FDI.
• To assess the determinants of FDI inflows.
• To evaluate the impact of FDI on the Indian economy.
• To know the flow of investment in India
Copyright © 2015 Dr. Saira Gori. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use,
distribution, and reproduction in any medium, provided the original work is properly cited.
investors but also made investing easier for them by the colonial era of Britain in India. However, researchers could
implementing the following measures: not portray the complete history of FDI pouring in India due to
lack of abundant and authentic data. Before independence
Foreign exchange controls have been eased on the account major amount of FDI came from the British companies.
of trade. British companies setup their units in mining sector and in
Companies can raise funds from overseas securities those sectors that suits their own economic and business
markets and now have considerable freedom to invest interest. After Second World War, Japanese companies
abroad for expanding global operations. entered Indian market and enhanced their trade with India, yet
Foreign investors can remit earnings from Indian U.K. remained the most dominant investor in India. Further,
operations. after Independence issues relating to foreign capital,
Foreign trade is largely free from regulations, and tariff operations of MNCs, gained attention of the policy makers.
levels have come down sharply in the last two years. Keeping in mind the national interests the policy makers
While most Foreign Investments in India (up to 51 %) are designed the FDI policy which aims FDI as a medium for
allowed in most industries, foreign equity up to 100 % is acquiring advanced technology to mobilize foreign exchange
encouraged in export-oriented units, depending on the resources. The first Prime Minister of India considered foreign
merit of the proposal. In certain specified industries investment as “necessary” not only to supplement domestic
reserved for the small scale sector, foreign equity up to 24 capital but also to secure scientific, technical, and industrial
% is being permitted now. knowledge and capital equipments. With time and as per
economic and political regimes there have been changes in the
As the industry progresses, opportunities abound in India, FDI policy too. The industrial policy of 1965, allowed MNCs
which has the world's largest middle class population of over to venture through technical collaboration in India. However,
300 million, is attracting foreign investors by assuring them the country faced two severe crisis in the form of foreign
good returns. The scope for foreign investment in India is exchange and financial resource mobilization during the
unlimited. India offers to foreign investors a well balanced second five year plan (1956 -61).
package of fiscal incentives for exports and industrial
investments that includes: Therefore, the government adopted a liberal attitude by
allowing more frequent equity participation to foreign
Complete tax exemptions. enterprises, and to accept equity capital in technical
collaborations. The government also provides many incentives
Investment incentives are offered by both the Central
such as tax concessions, simplification of licensing procedures
Government and the Government of the State in which the
and de- reserving some industries such as drugs, aluminium,
unit is located.
heavy electrical equipments, fertilizers, etc in order to further
India has tax treaties with 40 countries.
boost the FDI inflows in the country. This liberal attitude of
government towards foreign capital lures investors from other
Moreover, the support of the common man regarding FDI is
advanced countries like USA, Japan, and Germany, etc. But
clearly from the sharp hike in India's gross expenditure in the
due to significant outflow of foreign reserves in the form of
past few years. Thus the Indian economy is proving itself
remittances of dividends, profits, royalties etc, the government
highly conducive to Foreign Investment. One of the most
has to adopt stringent foreign policy in 1970s. During this
striking developments during the last two decades is the
period the government adopted a selective and highly
spectacular growth of FDI in the global economic landscape.
restrictive foreign policy as far as foreign capital, type of FDI
This unprecedented growth of global FDI around the world
and ownerships of foreign companies was concerned.
make FDI an important and vital component of development
Government setup Foreign Investment Board and enacted
strategy in both developed and developing nations and policies
Foreign Exchange Regulation Act in order to regulate flow of
are designed in order to stimulate inward flows. Both
foreign capital and FDI flow to India. The soaring oil prices
countries are directly interested in inviting FDI, because they
continued low exports and deterioration in Balance of
benefit a lot from such type of investment. The ‘home’
Payment position during 1980s forced the government to make
countries want to take the advantage of the vast markets
necessary changes in the foreign policy.
opened by industrial growth. On the other hand the ‘host’
countries want to acquire technological and managerial skills
It is during this period the government encourages FDI, allow
and supplement domestic savings and foreign exchange.
MNCs to operate in India. Thus, resulting in the partial
Moreover, the paucity of all types of resources viz. financial,
liberalization of Indian Economy. The government introduces
capital, entrepreneurship, technological know- how, skills and
reforms in the industrial sector, aimed at increasing
practices, access to markets- abroad- in their economic
competency, efficiency and growth in industry through a
development, developing nations accepted FDI as a sole
stable, pragmatic and non-discriminatory policy for FDI flow.
visible panacea for all their scarcities. Further, the integration
In fact, in the early nineties, Indian economy faced severe
of global financial markets paves ways to this explosive
Balance of payment crisis. Exports began to experience
growth of FDI around the globe.
serious difficulties. There was a marked increase in petroleum
prices because of the gulf war. The crippling external debts
FDI and Indian Economy
were debilitating the economy. India was left with that much
amount of foreign exchange reserves which can finance its
FDI in India can be traced back with the establishment of East
three weeks of imports. The out flowing of foreign currency
India Company of Britain. British capital came to India during
which was deposited by the Indian NRI’s gave a further jolt to
3910 International Journal of Development Research, Vol. 05, Issue, 03, pp. 3908-3912, March, 2015
Indian economy. Inflation reached at its highest level of 13%. of Cameroon's electricity; the Agency's first project in
Foreign reserves of the country stood at Rs.11416 crores. The Lebanon, which will play a large role in transforming the
continued political uncertainty in the country during this country's struggling power sector; and Cerro de Hula wind
period adds further to worsen the situation. As a result, India’s farm in Honduras that will supply cheaper, clean, and
credit rating fell in the international market for both short- renewable energy in one of Latin America's poorest countries.
term and long term borrowing. All these developments put the
economy at that time on the verge of default in respect of MIGA's partnership with the Overseas Private Investment
external payments liability. In this critical face of Indian Corporation (OPIC - the U.S. development finance institution)
economy the then finance Minister of India Dr. Manmohan to mobilize private equity funds that will support over a half a
Singh with the help of World Bank and IMF introduced the million small farmers in sub-Saharan Africa was also a notable
macro – economic stabilization and structural adjustment development this year. "We are privileged to serve private
program. As a result of these reforms India open its door to investors operating in developing countries by insuring $3.2
FDI inflows and adopted a more liberal foreign policy in order billion in projects that we expect will create 7,500 jobs and
to restore the confidence of foreign investors. Further, under generate enough power for 26 million people in countries
the new foreign investment policy Government of India experiencing energy deficits," said Keiko Honda, MIGA's
constituted FIPB (Foreign Investment Promotion Board) Executive Vice President and CEO. "We seek to better serve
whose main function was to invite and facilitate foreign private investors and developing countries with our political
investment through single window system from the Prime risk insurance and credit enhancement products." She added,
Minister’s Office. The foreign equity cap was raised to 51 "We expect to continue to be innovative in applications of our
percent for the existing companies. Government had allowed products-like their use to bolster capital market transactions
the use of foreign brand names for domestically produced and private equity." During the fiscal year MIGA also
products which was restricted earlier. India also became the launched a new strategy to align with the World Bank Group's
member of MIGA (Multilateral Investment Guarantee goals of ending extreme poverty and boosting shared
Agency) for protection of foreign investments. prosperity. The Agency will work in tandem with the World
Bank and IFC on a country basis to identify high-impact
Government lifted restrictions on the operations of MNCs by projects and collaborate with national governments to reach
revising the FERA Act 1973. New sectors such as mining, their development objectives.
banking, telecommunications, highway construction and
management were open to foreign investors as well as to Current Challenges and Improvement Areas
private sector. India’s Foreign Direct Investment (FDI) policy
has been gradually liberalised to make the market more India is definitely a lucrative place for FDI, but there are
investor friendly. The results have been encouraging. These certainly some challenges and areas for improvement still
days, the country is consistently ranked among the top three present. Until, these areas are honed to perfection, India will
global investment destinations by all international bodies, not become the number one place for FDI. India is focusing on
including the World Bank, according to a United Nations maximizing political and social stability along with a
(UN) report. For Indian economy which has tremendous regulatory environment. In spite of the obvious advantages of
potential, FDI has had a positive impact. FDI inflow FDIs, there are quite a few challenges facing larger FDIs in
supplements domestic capital, as well as technology and skills India, such as:
of existing companies. It also helps to establish new
companies. All of these contribute to economic growth of the Resource challenge
Indian Economy. The Multilateral Investment Guarantee
Agency (MIGA), the political risk insurance and credit India is known to have huge amounts of resources. There is
enhancement arm of the World Bank Group, announced strong manpower and significant availability of fixed and working
results for the fiscal year ending June 30, 2014. capital. At the same time, there are some underexploited or
unexploited resources. The resources are well available in the
A record high of $3.2 billion in new insurance underpins rural as well as the urban areas. The focus is to increase
foreign direct investment that is expected to catalyze a further infrastructure 10 years down the line, for which the
$2.6 billion in investment, create 7,500 jobs, generate enough requirement will be an amount of about US$ 150 billion. This
power for 26 million people in countries in need of energy, is the first step to overcome challenges facing larger FDI.
improve infrastructure, and generally support economies in
developing countries around the world. New business saw an Equity challenge
uptick of 13 percent over the previous year. Investments that
MIGA insured this year span all regions across a broad range India is definitely developing in a much faster pace now than
of sectors, including power, manufacturing, agribusiness, before but in spite of that it can be identified that
financial services, telecommunications, and transportation. developments have taken place unevenly. This means that
The Agency broke new ground with the first use of its credit while the more urban areas have been tapped, the poorer
enhancement product for a bond issue (by Hungary's Exim sections are inadequately exploited. To get the complete
Bank)-an innovative example of capital markets investing in picture of growth, it is essential to make sure that the rural
developing countries. Addressing developing countries' energy section has more or less the same amount of development as
deficit was a strong focus of MIGA's business this year. the urbanized ones. Thus, fostering social equality and at the
MIGA's support included coverage of private-equity firm same time, a balanced economic growth.
Actis' investments in three projects that will supply a quarter
3911 Dr. Saira Gori, Globalization of economy and the impact of foreign direct investment on sustainable growth: an Indian perspective
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