Foreign Direct Investment in India: Emerging Trends and Patterns

This paper examines the trends in foreign direct investment (FDI) in India during 1980-2018 and the emerging patterns of the FDI inflows in the country during the last two decades (i.e., 200


Introduction
Foreign direct investment (FDI) is the most important vehicle through which the activities of the multinational enterprises (MNEs) are spread across the world. Many counties across the world compete to attract FDI by liberalizing their foreign investment policies. India, after following four decades of restrictive policies towards, started liberalizing its policies towards FDI since 1991. This was aimed at attracting more FDI into the country not only for supplementing the domestic capital formation efforts, but also to bring advanced technology, managerial, and marketing skills as a package.
The ongoing foreign investment liberalization commenced in India in 1991, as part of its drastic structural reform package, has reflected in drastic changes in the foreign investment inflows into the country. There are studies in the literature on various aspects of FDI in India such as the trends, patterns and issues [Kidron, M. (1965), Ganesh, S. (1997), Kumar, N. (1998Kumar, N. ( , 2005, and Nagaraj (2003)], its determinants [Kaur & Sharma (2013) and Archana et al. (2007)] and its relation with economic in the country [Chakraborty & Basu (2002)]. Since the trends and patterns of FDI are a dynamic phenomenon in an economy, a rigorous analysis of FDI with a long time series data set incorporating its recent developments will shed more light on its up-to-date evolving picture, and this paper aims to do this for India. This paper attempts to portray the trends in foreign direct investment in India from 1980 -2018; it also tries to expose the emerging patterns of the FDI inflows in the country during the last two decades. The remainder of the paper is organized in four sections, the second section describes the data sources and methods used for the analysis of the data, the third section illustrates the trends in the inward FDI flows as well as the FDI stock in India, the fourth section shows the emerging patterns of FDI inflows into the country, and the last section presents the concluding remarks.

Data and Methods
The analysis in this paper is based on secondary data obtained from two important sources viz., (i) United Nations Conference on Trade and Development (UNCTAD) and (ii) Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry Government of India.
The analysis of the data has been done using tables, line graphs, and bar charts, simple growth rates, and compound growth rates. Compound annual growth rates for (m+1) periods have been estimated by using the following model: Where lnY t is the natural logarithm of the variable of our interest (say, FDI in our case), Di is a dummy variable which takes the values '1' for the observations belonging to the sub-period of our interest and '0' otherwise, 't' represents time, which takes values 1, 2, 3, etc. and ut is the usual stochastic error term. The compound annual growth rate (r) of Y in percentage term can be easily obtained from the estimated β coefficients through appropriate arithmetic operations.
The study primarily addresses two research questions: (i) whether the liberalization of FDI policy regime in India has resulted in accelerating the FDI inflows into the country and (ii) whether the pattern of FDI distribution has undergone any drastic changes in the second phase of liberation. The study posits two associated hypotheses: (a) liberalization of FDI policies in India has accelerated the FDI inflows into the country; and (b) the pattern of FDI distribution in India has undergone drastic changes in the second phase of liberation.

Trends in the Foreign Direct Investment Inflows into India (1980 -2018)
The trends in FDI inflows into India during the last four decades can be visualized from Figure 1. The FDI inflows into the country were negligible and almost stagnant until the beginning of the 1990s. The restrictive inward-looking policies followed till the early nineties made India one of the less attractive FDI destinations in the world, which in turn, have resulted in such a sluggish trend in the FDI inflows to the country during this period. However, the massive liberalization policies commenced in the early 1990s have resulted in a dramatic upsurge in the FDI inflows into the country. Figure 2 shows that the compound annual growth rate of FDI inflows into India has jumped from 14 percent during the pre-liberalization period (1980 -1991) to 26 percent during the first decade of the post-liberalization phase (1992 -2003), a drastic increase of 12 percentage points. There was a further spurt in the FDI inflows into India during the next four years (2004 -2008), and the compound annual growth rate in the FDI inflows stood at its peak during this period, crossing 50 percent. However, the growth rate in the FDI inflows has drastically decelerated to around 6 percent during the next decade (2009 -2018). FDI inflows into India as a proportion of the world's FDI inflows and also as a proportion of the gross domestic product of the country have been computed, and the trend has been plotted in Figure  3. The figure clearly illustrates that the trends in FDI inflows into India as a proportion of the world FDI inflows and as a proportion of the GDP of the country were showing somewhat similar trends that we observed in Figure 1. To be more specific, the share of India in the world FDI inflows, albeit negligible, has increased during the post-liberalization period, even though India's share in the global FDI inflows has declined and became stagnant during the last few years. An almost similar trend could be observed in the case of FDI inflows into India as a proportion of the GDP of the country. It is striking to note that India, a country sharing 2.4 percent of the total world area and 17.7 percent of the world population, had been sharing less than one percent of the world FDI inflows till 2005. The average share of India in the world FDI inflows was around two percent in the subsequent 13 years. The significant increase in the FDI inflows into India in the post-liberalisation period, particularly the increase in the proportion of FDI inflows to the country in the world FDI inflows, clearly indicates the influence of the liberalization measures resulted in accelerating FDI inflows into India in the post-liberalization period. The FDI stock in a country indicates the availability of foreign capital at a particular point in time to supplement the domestic capital formation of the country. Figure 4 reveals that the stock of FDI in India has been negligible in the pre-liberalization period. Still, it started picking up in the initial phase of the post-liberalization period (1992 -2005), and it has steadily increased since 2006. The FDI stock in India has grown, on average, by 13 percent per annum in the pre-liberalization period. It has accelerated to around 26 percent in the first phase of the post-liberalization period (1992 -2005), but the compound annual growth rate in the FDI stock has bounced back to 13 percent again during the last second phase of the post-liberalisation period (2006 -2018). Thus, it is evident that liberalization has resulted in enhancing the stock of FDI in India to supplement its domestic capital formation and technology efforts. India's share in the global FDI stock has been negligible in both pre and post liberalization period. However, the share of India in the world FDI stock has gradually increased in the post-liberalisation period. But, India's share was less than one percent of the global FDI stock till 2009. India's share in the global FDI stock stood, on average, around one percent since 2010.
FDI stock as a proportion of the GDP of India was less than one percent in the pre-liberalization period, but it has steadily increased to around 10 percent by 2008 and further to 14 percent by 2018.

The Emerging Patterns of Foreign Direct Investment Inflows in India
This section discusses the emerging patterns of FDI in India in terms of (i) components of FDI inflows, (ii) source-wise distribution of FDI in India, and (iii) sector-wise distribution of FDI in India during the last two decades.
The proportion of the three important components of foreign direct investment in India viz., (i) equity capital, (ii) reinvested earnings, and (iii) other capital, during the last 19 years is shown in Table  2 and Figure 7. It is perceptible that, as usual, the equity capital has been the largest component of FDI inflows into India; moreover, its share in the total FDI has increased from 60 percent in 2000-01 to 73 percent in 2018-19. The share of re-invested earning in the FDI has declined from 34 percent to 22 percent during the same period.  Source-wise distribution of FDI can often indicate the nature and quality of FDI inflows into a country. Table 3 presents the share of the top 10 source countries in the FDI inflows to India; it can be observed from the table that Mauritius and Singapore were the two important sources of FDI inflows into India during the last two decades. Mauritius has contributed more than 31 percent of the total FDI inflows to India during the last two decades, followed by Singapore (21 %). It was distantly followed by the other countries listed in the table. It is striking to note that Singapore has become India's largest source of FDI in 2018-19. These two countries have become the toppers as they are considered as tax-heavens, and FDI from other counties like the USA and UK were routed through counties to India to enjoy tax benefits. Sector-wise distribution of the FDI inflows into India during the last two decades reveals that the service sector has attracted the largest share of FDI in India, which was distantly followed by computer software & hardware, and telecommunications sectors (See Table 4). These three sectors have attracted more than 35 percent of the total FDI inflows into India during the last two decades; the ten important sectors listed in the table has attracted more than 66 percent of the total FDI inflows in India during the last two decades. The sectoral distribution of FDI in India in the last two decades of post-liberalization is drastically different from that in the pre-liberalization period. Earlier, the manufacturing sector was the largest recipient of FDI in India, but now it has been replaced by the service sector.

Concluding Remarks
India, after following four decades of restrictive policies towards foreign direct investment, started liberalizing its foreign investment policies in 1991 to attract more FDI into the country. The liberalization measures have resulted in a dramatic upsurge in the FDI inflows into the country compared to a sluggish trend in the FDI inflows into the country in the preliberalization period. Not only the amount of FDI inflows but also the share of India in the global FDI inflows has increased in the post-liberalization period, clearly reflecting the role of liberalization in attracting FDI inflows into India. Liberalization has not only increased the FDI inflows, but it also has resulted in increasing the stock of FDI in India to augment the domestic capital formation and technology efforts in the country. Even though the share of FDI stock in India in the global FDI stock has not increased significantly, FDI stock as a proportion of the GDP of India has shown a sharp increase during the post-liberalization period.
We have examined the patterns of FDI inflows in India in the last two decades to get a better understanding of the present status of FDI in the country. The equity capital has been the largest component of the FDI in India, and its share in the total FDI inflows has been increasing during the last two decades.
Examination of the source countries contributing FDI inflows into India revealed that Mauritius and Singapore had been the two important sources of FDI inflows into India during the last two decades. More than half of the FDI flows into the country during the last two decades were from these two countries. These two countries have become the largest sources of FDI inflows into the country because of the tax treaty of India with these counties, and FDI from other counties like the USA and UK have been routed through counties to India.
The sector-wise distribution of FDI in India has changed drastically during the post-liberalization period. Traditionally, manufacturing had been the largest recipient of FDI in India. But this has changed considerably in the second later phase of the postliberalization period. The service sector has emerged as the largest recipient of FDI during the last two decades of the post-liberalization period in India.
Our analysis has given clear empirical support to our hypothesis that the impact of the FDI liberalization has a significant impact on enhancing the FDI flows as well as stock in India. Our analysis has furnished empirical support to our second hypothesis also by revealing the fact that the liberalization measures have resulted in changing the pattern of FDI inflows and its distribution in the county. In this context, we think that the government should continue formulating appropriate policy changes to attract more FDI into technology-intensive, employmentgenerating, and export-oriented sectors in India.

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