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| A Study of Foreign Capital Inflow in Service Sector of India | |||||||
| Paper Id :
17740 Submission Date :
07/06/2023 Acceptance Date :
18/06/2023 Publication Date :
25/06/2023
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| Abstract | This research paper has dealing foreign capital inflow in service sector in India.The present Paper explores the definitions, components and types of FDI, role of foreign capital in internal economy, importance and theories of FDI. Apart from these, this paper discloses FDI policies and its inflows in India, route of FDI and broad sector of Indian economy.The capital is most important factor for economic and industrial development. Such capital resources may be within the domestic front or may be from outside. The word Foreign Capital is a comprehensive term it includes any inflow of capital in domestic economy from abroad. Foreign aid/grant, ECBs, and bilateral loan are as well as foreign investment. Foreign capital may flow also in any country with technological collaboration. It is important to note that even in Russia and east European countries allowed inflow foreign capital. | ||||||
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| Keywords | Foreign Direct Investment, Service sector, Capital inflow, Component of FDI ,Internal Economy ,Government Policies. | ||||||
| Introduction |
World is a home of seven and half billion people residing all over it. People are segregated by its geographical locations, which not only decides how they live but also defines life per se. No region has always remained isolated from the rest. The regions also have certain limitations of resources and produce, which has promoted the necessity for regions to mix, intercourse and trade. With the emergence of latest technologies of smart phones to satellites people are coming together keeping themselves updated despite the distances of seven seas. This has not only brought the people across the world together with respect to information, emotion and development but has also increased the trade in form of cash and kinds. The present chapter explores the definitions, components and types of FDI, role of foreign capital in internal economy, importance and theories of FDI. Apart from these, the chapter discloses FDI policies and its inflows in India, route of FDI and broad sector of Indian economy. Lastly, the chapter explores the problems, advantages, roles and contribution in service sector in India
International Monetary Fund (IMF) 1993, FDI is defined as “investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of the investor. The investor’s purposes being to have an effective voice in the management of the enterprise.” (OECD, 2008) |
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| Aim of study | The overall goal of the study is to make an analysis in various aspects about the FDI inflows in India. Keeping in view, an attempt has been made to fulfill the following specific objectives: 1) To analyze the Foreign Direct Investment (FDI) policies of India and identified the strengths and weaknesses in context economy growth of Indian 2) To study the trends and pattern of foreign capital inflow in India during different time spans and identify the factors for gaps; 3) To examine the impact of foreign capital inflow on Indian economy on selected indicators; 4) To examine the impact of foreign capital inflow on the performance of service sector; 5) To study whether the foreign capital inflow provides employment opportunities (service sector) in the country; 6) To suggest the effective ways for strengthening the Indian economy through appropriate strategies for foreign capital inflow. | ||||||
| Review of Literature | (Theories of Foreign Direct Investment -FDI) MacDougall-Kemp Hypothesis In this theory, assuming that there are two countries one is investing country and the other is the host country, the price of the capital has been taken as equivalent to its marginal productivity, when capital freely moves from one country to another, its marginal productivity tends to equalize between the two countries. As a result of which efficient utilization of capital is ensured and leads to an increase in welfare. Therefore, when the income from foreign investment is greater than the loss of output in the home country, the home country continues to invest abroad since it enjoys greater national income than that prior to foreign investment Morris Sebastian (1990) in his study “Foreign Direct Investment from India: 1964-83” studied the features of Indian FDI and the nature and mode of control exercised by Indians and firms abroad, the causal factors that underlie Indian FDI and their specific strengths and weaknesses using data from government files. To this effect, 14 case studies of firms in the textiles, paper, light machinery, consumer durables and oil industry in Kenya and South East Asia are presented. This study concludes that the indigenous private corporate sector is the major source of investments. The current regime of tariff and narrow export policy are other reasons that have motivated market seeking FDI. Resources seeking FDI has started to constitute a substantial portion of FDI from India. Borensztein et.al, (1995) conducted a study and examines the contribution of FDI in the process of technology diffusion and growth of developing countries. They examined that if we want to grow our economy FDI is not only sufficient. But there must be good level of human capital available in the host economy. And found solid interaction among foreign direct investment and standard of educational achievement. FDI played vital role in the nation’s growth of the country that is based on two ways. First is Foreign Direct Investment is more fruitful than domestic investment. Second overall level of investment means attracting higher level of domestic investment this effect was not raised by the interaction with human capital. Pant M. (1995) in a book on ‘Foreign Direct Investments in India: The Issues Involved’ gives some definition of Foreign Direct Investments, a brief overview of the changing pattern of Foreign Direct Investments (particularly in the 80s and 90s), India's foreign investment policy, policy on foreign collaborations followed during 80s, comparative assessment of foreign and domestically owned firms operating in India. Kalimuthan K. (2022) performed a sector wise analysis of FDI inflows in India and found that FDI is significant for the creation of high perk jobs in Indian service sector. FDI is a significant determinant of service sector growth along with its potential benefits to other related sectors. However, the compound annual growth rate of FDI inflow in India’s service sector from 2018 to 2021 has been -16.25% which raises concern. Pandian et al. (2022) did an economic analysis of FDI inflows in Indian service sector for the period ranging from 2000-2001 to 2020-2021. During this period, FDI inflow in Indian service sector was very significant and there is a positive impact of FDI inflow in the growth of service sector. The study suggests that, Indian service sector is one of the most attractive sector of developing countries for FDI inflows and there have been significant developments in government initiatives during the period. Rashid M. et al (2023) performed a study to find out long term linkages between FDI and economic growth in India using autoregressive distributed lag (ARDL) technique and found that FDI is a significant determinant of economic growth for a developing nation like India. Short term dynamics were also studied in their research with the help of error correction model (ECM). Kumari Reenu et al (2023) did a comprehensive empirical analysis of FDI, trade openness and economic growth in Indian economy utilizing the data from 1985 to 2018 in order to find out possible relations and linkages between FDI, trade openness and economic growth. The study used annual time series data from 1985 to 2018 and applied Johansen cointegration and vector autoregression (VAR) models. Johansen cointegration suggests there is no long term relationship among the variables. However,VAR Granger causality shows a bi-directional causality among FDI and economic growth which means FDI causes economic growth and economic growth causes FDI. Tsinaridze R. (2023) performed a correlation analysis of FDI with employment growth and findings of his study indicate that there is a strong correlation between FDI and employment in an economy because FDI has a significant impact on growth of its destination sector. FDI also helps to promote GDP growth in developing economies due to the wide availability of investment opportunities. |
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| Main Text | Types of Foreign Direct Investment Components of FDI The financial components that are part of FDI consist of the following: i. Equity Capital Equity capital (as stock or surplus earnings) refers to that capital which is free of debt especially capital received for an interest in the ownership of a business. ii. Reinvested Earnings Reinvested earnings are the direct investors' share of earnings from direct investments that are not distributed to owners.
Role of Foreign Capital in Internal Economy The capital is most important factor for economic and industrial development. Such capital resources may be within the domestic front or may be from outside. When the available stock of capital within the country is not sufficient, the capital from abroad plays important role in development process. For LDCs, capital has been also provided by multilateral international institutions like World Bank, IMF and Asian Development Bank. In this globalization era, the recent technological development and spread of information technology have opened up the economies of the world over as never in the past. This in result enhanced the multidimensional role and importance of capital. It has been realized by policy makers that inflow of capital from abroad is vital not only in the early stages of development but also for the growth of a developing country. The word ‘Foreign Capital’ is a compressive term it includes any inflow of capital in domestic economy from abroad. Foreign Capital also may be in the form of foreign aid or 11 foreign grant, External Commercial Borrowing (ECBs), bilateral loan as well as Foreign Investment. Foreign Direct Investment (FDI) Inflows in India There are two main types of foreign Investment; i) Foreign Portfolio Investment (FPI) and ii) Foreign Direct Investments (FDI). The Foreign Portfolio Investment (FPI) or Foreign Institutional Investment (FII) is purely financial assets, such as bonds, denominated in national currency. On the other hand, ―FDI are real investments in factories, capital goods, land, and inventories where both capital and management are involved and the investor retains control over use of the invested capital (Salvator, 2012). FDI is preferred to FII since it increases the enterprises capacity or productivity1 Sectors-wise Distribution of FDI Inflows in IndiaThe liberal foreign policy has brought vital changes in the sectorial distribution of Foreign Direct Investment (FDI) in India. According to the Secretariat of Industrial Assistance (SIA), foreign investment inflows are associated in 63 different sectors of India and the top 10 sectors attract almost 65 percent of the total FDI inflow in the country. Many immerging sectors are open to FDI like mining, banking, insurance, telecommunications, airlines, and construction etc. The services sector has become most attractive in respect of beneficiaries of FDI Sources of FDI Inflows in IndiaThe DIPP provided the country-wise cumulative FDI inflows to India with two tables. One table gives the country-wise cumulative FDI inflows from August, 1991 to March, 2002 and the other gives data staring from April, 2000 to December 2013. The data presents the top 10 investing countries during August, 1991 to March, 2002. The data shows that top 10 investing countries were contributed around 67 percent of total FDI inflows to India during the period from August, 1991 to March, 2002. The Mauritius contributed the highest proportion (i.e. 27.83 percent) among all while the USA was the second contributor (13.38 percent). Further, the contribution of Japan was third (5.45 percent) and contribution United Kingdom was fourth (4.64 percent) while the Netherlands position was fifth (4.14 percent) among all ten top contributors. Sectorial Classification of FDI Inflows in India We have analyzed sector-wise distribution of FDI for 1991 to 2013. The absolute and percentage share of major FDI attracting sectors has been analyzed in two time frames; i) period from August, 1991 to March, 2002 and ii) period from April 2000, to December, 2013. The data reveals that top 10 sectors that attracted maximum FDI during the period from August, 1991 to March, 2002, when they attracted around 50 per cent of total FDI inflows to India. The Telecommunication sector attracted the highest amount of FDI inflows which was 9.40 percent and the Electrical Equipment sector was contributed 9.01 percent which was second position among all ten countries. The contribution of Fuels was 8.80 percent and Service Sectors was contributed 6.07 percent which rank was third and fourth respectively. The FDI contribution in Chemicals sector was 5.66 percent among all which rank was fifth. The contribution of Food Processing Industries, Transportation Industries, Drugs & Pharmaceuticals, Cement& Gypsum Products and Metallurgical. |
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| Hypothesis | 1. H0: The foreign capital inflow in India is positively not impacted the economy of country. H1: The foreign capital inflow in India is positively impacted the economy of country. 2) H0: There is not significant impact of global economic crisis in India on foreign capital inflow. H1: There is significant impact of global economic crisis in India on foreign capital inflow. The key indicators have been analyzed in three time period; i. Post-Economic reform (1992-2007), ii) Post-Global Economic Crisis (2008-14) and iii) Make in India period (2014-20). The statistical and econometric techniques have been applied to interpret the causal relationship between two variables or among the multiple variables of the study. For the analysis of hypotheses, we have relied on the existing data available in public domain which obtained from various sources. The appropriate statistical and econometric tools and methods have been used to analyze for understanding the nature of impact of FDI and significant of results. For the statistical analysis, we have used the Statistical Package for Social Science (SPSS) software. Testing of Hypotheses The five hypotheses have been determined under the study and it examined through available secondary data on selected indicators. The relevant key variable have been analyzed in three time period; i) Post-Economic reform (1992-2007), ii) PostGlobal Economic Crisis (2008-14) and iii) Make in India period (2014-20). Thus, we have classified the variable in three time spans depending on the availability of data. The results of hypothesis are presented in separate chapter. Most of the hypotheses have been tested through ‘Independent Samples t-Test’ and ‘ANOVA Test’ while some hypotheses are tested by using correlation coefficient to find out the relationship between variables. Under these tests, we have compared two groups and quantified the difference between them. It is a type of inferential statistic used to analyze to find out whether any statistical difference exists between two groups. Mathematically, it establishes the problem by assuming that the means of the two distributions are equal. The independent t-test and ANOVA include the t-statistic value, the degrees of freedom (df) and the significance value (p-value) of the test. The format shows t (df)=t-statistic, p= significance value. The significance level is considered evidence or strong evidence, if the value is greater than 0.01 (table-2.1). Apart from these, the ‘Time Series’ analysis for forecasting the overall FDI inflows, FDI inflows in service sector and telecom sector into India for future is also presented to understand the future scope of the FDI in the country. |
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| Methodology | The present research study has been carried out on the title “A Study of Foreign Capital Inflow in India’s Service Sector”. Earlier, very limited works have been done to computing; overall FDI inflow along with telecommunication sub-sector by analyzing the trends, patterns and impact on Indian economy during post 1991 economic reform, global economic crisis of 2007-08 and reform done after 2014. Therefore, keeping in view, the present study explores the FDI inflow in India by taking various indicators related to Indian economy and evaluates the impact during different time spans and future scope. The various indicators has been taken for analysis which include GDP, GDP-PC, GDCF, Export value of products, Balance of payment, Government debt, Inflation, Manufacturing output, Employment and unemployment, Labour force participation etc. during different time span. The present study tries to include these mentioned variables for assessing the impact of FDI in India at the macro–level. Thus, the present study is an endeavor to discuss the trends and patterns of FDI emphasis on social sector along with telecom sphere and suggest the effective ways for strengthening of Indian economy through appropriate strategies for foreign capital inflow. |
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| Conclusion | Thus, the overall analysis discloses that India has over the years become a more open economy with around 1.4 billion people, India accounts for nearly onesixth of global population. The rate of growth of population has consistently declined, India’s population increased by nearly 180 million persons during 2001- 11 (the highest in the world in absolute terms). India is among the developing countries and now it is fifth economy of the world. The economy of country mostly depends on primary sectors, which are composed of activities like agriculture, cattle breeding, fishing, etc. The characteristics of the Indian economy include low 101 per capita real income rate, higher rate of population growth, and dependency on the primary sector. In 2020, India's ten largest trading partners were USA, China, United Arab Emirates (UAE), Saudi Arabia, Switzerland, Germany, Hong Kong, Indonesia, South Korea and Malaysia. India has free trade agreements with several nations. The service sector makes up 50 percent of GDP and remains the fastest growing sector, while the industrial sector and the agricultural sector employs a majority of the labor force of the country. FDI inflows to India started in 1970 at a very slow speed, started rising since 1993 and became more intense since 2001. The steep rise of FDI came to a halt during 2007 till 2013, and recovery started since 2014. Mauritius is the main source of FDI inflows to India in both the reference periods. FDI inflows from Singapore, UK, Japan, USA, the Netherlands, Germany and France have been increasing over the years. Sectorial distribution of FDI inflows indicates that Service Sector, Telecommunication, Chemicals and Drugs & Pharmaceuticals are the leading sectors that attracted most of the FDIs. It can be concluded that liberalization in 1991 influenced FDI inflows to India significantly.. This can also be visible from the fact that most of the FDI flows to India through automatic route in recent years. Moreover, FDI inflows from the relatively smaller countries continued to be the main source of FDI inflows to India. This is due to the signing of treaty of avoidance of Double Taxation and prevention of fiscal evasion agreements. Further, most of the FDI inflows moved to service and telecommunication sector and much less to manufacturing sector. Further, the analysis reveals that priority of investment through FDI in the various sectors of the country was significantly changed during period from FY 2017-18 to 2020-21 due to structural changes and national policies regarding FDI and consequently the rank of investing countries and sector was changed. The top five sectors i.e. Computer, Manufacturing, Transport, Retail & Wholesale Trade and Financial Services have received around 81 percent of FDI among the all sectors while FDI inflows sources in India has been significantly changed and the top five countries i.e. Singapore, U.S.A., Mauritius, UAE and Netherlands have contributed around 74 percent of the world. | ||||||
| Suggestions for the future Study | On the basis of above study Government of India should focus on the service sector where the foreign capital inflow is high because it is highly vital for the development of the nation as we know India has shifted its economic focus from agriculture to service sector in every sphere of economic filed so if India want to achieve rapid economic growth sustainable development, full employment, price stability and prosperity in our nation we should focus on capital inflow on service sector. | ||||||
| Limitation of the Study | Limitations of the Study The study in the process is faced by both methodological and data constraints. The study has analyzed the impacts of FDI inflows on Indian economy by taking various indicators available in the secondary sources. The study focused on the services sector FDI inflows concept and did not take into consideration the concept of services of FDI stock. The study was taken into account services sector of India only and done solely from Indian perspective and thus the present findings may not be applicable to other countries. The study has taken too much time and resources because it mainly needed to review the historical incidents that happened for policies and growths of FDI inflows in different time period. This study depends largely on a disaggregate analysis which are static in nature, choosing only those variables that were closely related to our objectives. The study has faced certain constraints on the availability of certain data to measure the FDI inflows trends on various sectors/sub-sectors of India and consequential impacts on Indian economy grow. | ||||||
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