Foreign Direct Investment in India Since 1991: Trends, Challenges and Prospects

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Foreign Direct Investment in India since 1991: Trends, Challenges and Prospects

M.K. Dutta, Assistant Professor (Economics),
Department of Humanities and Social Sciences, IIT Guwahati, Assam, India E-mail: mkdutta@iitg.ernet.in

&

G.K. Sarma, Research Scholar (Economics),
Department of Humanities and Social Sciences, IIT Guwahati, Assam, India E-mail: g.sarma@iitg.ernet.in

(An earlier version of the paper was published as Dutta, M.K. and Sarma, G.K. (2008) ‘ Foreign Direct Investment in India in the Post Liberalization Period: Trends, Challenges and Prospects’, in P. Verma, P.B. Bhaskaran and P.M.Madhani (eds), Globalization Opportunities and Challenges, Wisdom Publications, Delhi, pp. 18-32)

Abstract: (With the initiation of new economic policy in 1991 and subsequent reforms process, India has witnessed a change in the flow and direction of foreign direct investment (FDI) into the country. This is mainly due to the removal of restrictive and regulated practices. Foreign direct investment in India increased from US $ 129 millions in 1991-92 to US $ 40,885 million in March, 2005, an increase of about 316.9 times. However, the country is far behind in comparison to some of the developing countries like China. In so far as growth trend of FDI is concerned, there has been quite impressive growth of FDI inflow into the country during this period. However, negative growth rate is noticed during the period 1998-2000 primarily due to falling share of major investor countries, steep fall of approval by 55.7% in 1998 compared to 1997 and slackening of fresh equity. However, traditional industrial sectors like food processing industries, textiles, etc. which were once important sectors attracting larger FDI, have given way to modern industrial sectors like electronics and electrical equipments, etc. In this paper analysis on the factors affecting potentiality and challenges of FDI in the country is discussed and open a room for future discussion.)

Introduction

Foreign Direct Investment (FDI) is considered as an important agent in the process of accelerated economic growth in the developing countries. FDI is more attractive in compare to other forms of external finance since it is non-debt creating, non-volatile and the returns depend on the performances of the projects financed by the investors (Planning Commission, 2003). With the introduction of new economic policy in 1991 and subsequent reform process, India has witnessed a change in the flow and direction of FDI into the country. This is mainly due to the removal of restrictive and regulated practices. Regarding impact of FDI in the economy of developing countries economists like Griffin, Singer and Weisskof found a negative impact while, economists like Chenery and Strout found favourable effect of foreign capital inflow on the economic efficiency and growth towards the developing countries (Mathiyazhagan, 2005).

Despite serious debate over the concept of FDI particularly in respect of developing countries, it has been getting increasing importance in the developing countries in recent times. The basic reasoning behind the advocacy of FDI lies in the fact that these countries are lacking in domestic saving and investment, which leads to lower economic growth, lower income, consumption and low level of employment. Thus to bridge the gap between investment need of a country and its domestic savings, FDI is considered as an important tool. Moreover, FDI can compensate the need of investment deficiency complementing local savings and by supplying more effective management, marketing and technology to improve productivity (Moran, 1999). Besides, FDI helps transfer and update technology; improve skills and managerial capabilities; provide the competitive edge to country’s exports; improve efficiency; provides quality services and goods and helps in creating additional jobs.

The indication for augmented importance of FDI reflected in upward world...
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