Academic journal article Journal of Management and Public Policy

FDI in India: Understanding the Implications for Growth and Job Creation

Academic journal article Journal of Management and Public Policy

FDI in India: Understanding the Implications for Growth and Job Creation

Article excerpt

Trending FDI Flow into India

A news that hit the headlines recently is the US$13 billion all-cash investment from Russia's State controlled oil major Rosneftand its partner taking over India's second biggest private oil firm Essar Oil's refinery, port and petrol pumps, marking the largest ever inflow of foreign direct investment (FDI) into the country (PTI, 2016a). Led by such investments backed by a slew of reforms, FDI inflows into India reached a record US$60.1 billion in 2016-17 (as per estimates based on international best practices). As per the Department of Industrial Policy & Promotion's (DIPP's) database based on equity capital components only, FDI equity inflows into India touched US$43.5 billion in 2016-17 (DIPP, 2017).

Based on data provided by DIPP (Figure 1), the period 2000-01 to 2008-09 saw an increasing trend of FDI equity flows to India, and doing particularly well in the between 2004-05 and 2008-09 period, but thereafter declined for a couple of years in the aftermath of the global economic crisis of 2008- 09. The inflows once again started an upward trend from 2012-13 onwards, growing rapidly in 2014- 15 and 2015-16. Thus, strong FDI flows to India has been largely influenced by prospects of a strong economic growth in an open progressive emerging economy, only slowing down when faced with global crisis and stagnation of domestic reforms compromising its comparative advantage and competitiveness.

State-wise Shares in FDI Equity Inflows

It is observed that Maharashtra, Delhi, Tamil Nadu, Karnataka, Gujarat and Andhra Pradesh (the States mentioned include other peripheral States / regions) account for about three-fourth of the total FDI flows cumulatively for the period 2000-01 and 2016-17 (Figure 2).

Maharashtra has traditionally been the highest recipient of FDI equity followed by Delhi. But from 2013-14 till 2015-16, Delhi outpaced all other States in terms of share of FDI equity received, followed by Maharashtra (DIPP, 2016). In 2016-17, the trend got reversed again with Maharashtra accounting for about 45 per cent of total FDI equity inflows followed by Delhi at 14 per cent only (Figure 3).

FDI inflows into Maharashtra are mostly for development of infrastructure (transportation, energy, electrical equipment, and telecommunication) or for services sectors (Chatterjee, Mishra & Chatterjee, 2013). The same is the case with Delhi which attracts FDI inflows mainly in sectors like transportation, electrical equipment, telecommunications, and services. The States with comparatively high FDI inflows are either known for their strong industrial base or as software hubs. High FDI inflows can also be attributed to the States' better resources, infrastructure like power and roads, investment promotion schemes like special economic zones (SEZs), and investor-friendly policies like single-window clearances (NCAER, 2009).

Sector-wise Shares in FDI Equity Inflows

FDI equity inflow into India for several years has been extremely skewed across the major sectors of the economy. Notably, the share of services sector in FDI equity inflows doubled from about 26 per cent in 2011-12 to 52 per cent in 2015-16, but dropping to 43 per cent in 2016-17. On the other hand, the manufacturing sector lost its share from about 45 per cent 2011-12 to 25 per cent in 2015- 16, but recovering to more than 32 per cent in 2016-17 (Figure 4). The share of infrastructure sector (including energy) in total FDI equity inflows also dipped from about 28 per cent in 2011-12 to 24 per cent in 2016-17. The primary sector (including agriculture and mining) never really picked up in terms of FDI equity inflows.

Further, the skewness in FDI destination is tilted towards few sectors. DIPP data shows that the top 10 FDI equity receiving sectors accounted for more than 71 per cent of the total FDI equity inflow in 2016-17 with the services sector (as per DIPP classification) along with computer software and hardware, trading, and information broadcasting accounting for over 37 per cent of the total FDI equity inflow (Table 1). …

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