Private Foreign Capital in India

“Private Foreign Capital in India”-Macro Economics
Individual Project
(Term Paper)
Kaushik. P
Great Lakes Institute Of Management,
Srinagar Colony, Off Raj Bhavan Road,
24, South Mada Street,
Chennai – 600015, India
Problem:
Has Foreign Direct Investment (FDI) contributed to the growth of Gross Domestic Product (GDP) of India?
Null Hypothesis (Ho): There is no significant increase in growth of GDP due to FDI inflow in India.


Alternative Hypothesis (H1): There is significant increase in growth of GDP due to FDI inflow in India.


Project Prcis:
Definition:
FDI:The acquisition abroad of physical assets such as plant and equipment, with operating control residing in the parent corporation.
GDP:The sum total of all final goods and services produced within a country in a specified period of time.
Foreign direct investment is an important source of capital, complements domestic private investment, and is usually associated with new job opportunities, enhancement of technology and boosts economic growth in host countries. Therefore foreign direct investment flows are increasingly looked as a panacea for all the development needs of developing countries. So, there is an increasingly intense competition among countries to attract FDI inflows so much so that governments see the magnitudes of FDI received as indicators of their success.

Preliminary Literature Survey:
Recent literature has shown that some may bring valuable benefits to their host economies, others may crowd-out domestic enterprises and actually reduce host country welfare. Studies have also shown that host government policies such as screening mechanisms, performance requirements, incentives and pro-active promotion play an important role in determining the quality of FDI inflows.
Although FDI inflows into India have increased considerably since1991, its share would appear too small, especially if it is compared with that of other countries in the region such as China. India has been receiving FDI inflows of about $3 to 4 billion a year that represent a marginal under 2 per cent of total inflows attracted by developing countries. In contrast, China has been receiving over $45 billion of inflows representing nearly a quarter of total developing country FDI inflows.
ParticularsChinaIndia
FDI Confidence Index score*(January 2000)1.451.14
FDI Inflow (US $ billions, 1998)45.52.3
FDI Stock (US $ billions, 1998)261.113.2
GDP (nominal US $ billions, 1999 estimate)993468.4
* The FDI confidence index tracks the impact of likely political, economic and regulatory changes on the foreign direct investment intentions and preferences of the leaders of some of the worlds leading companies.

Two parameters i.e. Attractiveness and Current are considered for probable FDI inflow. From the diagram it is evident that India is average on Attractiveness and average on Current too. India scores well above countries like Indonesia, Thailand etc in terms of the parameters. Therefore India, as a wandering aspirant, has a great potential in the years to come.


Analysis:
The relationship between FDI inflows and GDP growth can be found out by using correlation between GDP and FDI.
YEARGDP (%) FDI (%)
94-957.3122
95-967.364.64
96-977.853.25
97-984.837.42
98-996.6-1.54
99-20006.46.51
2000-20015.235.37
2001-20025.3-0.86
2002-20034.452.1
Correlation Coefficient0.3617 signifies that there exists a positive correlation or relationship between the inflow of FDI and growth of GDP. This relationship can be further explained with the help of a chart below.

Conclusion:
The paper is aimed to sow a seed that FDI and GDP are related to each other. Correlation is used to verify the hypothesis that FDI inflow contributes to GDP growth. Other literature survey also confirms this fact. Basically, India is compared with China to prove that with similar factors such as low cost of production, very high population etc and how FDI helps in Chinas growth. There is a long-run relationship between GDP and FDI and this remains an important challenge for future research
References/Sources:
www.indiastat.com
http://www.aeaweb.org/journal/
http://www.iimcal.ac.in/imz/imz-archive/
Readings:
www.rbi.org.in
www.indiainfoline.com
The Economic Times.