Magazine 2014
International Peer-Reviewed Journal
RESEARCH HORIZONS, VOL. 4 JULY 2014
AN ANALYTICAL STUDY ON THE SIGNIFICANCE OF ROUTE IN THE FLOW OF
OFFSHORE FUNDS AND ITS IMPACT ON INDIAN ECONOMIC POLICY
Megha Somani
ABSTRACT
World is going through the crisis. Investment in other countries has changed its style and flow. India has
witnessed a dramatic growth in various sectors on account of foreign investments. A decrease in the
foreign flow has been noticed in last few years but if political and legal, regulatory framework favours, it
may increase its pace further. Considering the significant role of FDI inflow in economic growth and
development, Indian Government opened FDI gateway for the foreign investors. Amendments in policies,
procedures affect the quantum of FDI. In the last decade China and India have emerged as world
largest countries attracting highest FDI. Foreign Investment has been done through Government Approval,
Automatic Route, through acquisition existing equity shares. RBI’s various NRI’s schemes, stock swapped
and somewhere in form of advances also. This paper address various issues related to foreign direct
investments in terms of number of proposals, amount of FDI approved and actual FDI inflow in comparison
to the amount of FDI approved. The paper will analyze the trend of FDI statistically. The paper will also
outline the various routes to fetch the FDI and suggest the best route to keep the FDI in upsurge.
Keywords : FDI (Foreign Direct Investment), FIPB( Foreign Investment Promotion Board),
DIPP( Department of Industrial Policy & Promotion)
Introduction
The flow of FDI before 1991 was minimal with the Compounded Annual Growth Rate only 25.46 percent.
During this period, foreign investments into India were restricted and allowed moderately in few sectors.
This is mainly because of the kind of policies which the government of India has adopted over the
years which includes, ‘inward looking strategy’; and dependence of external borrowings. In turn, the
borrowings resulted in foreign debts which were preferred to the foreign investments to bridge the gap
between domestic savings and the amount of investments required. In 1991, when the government of
India started the economic reforms program, FDI had suddenly become important for India which was
looked upon as a key component of economic reforms package. The New Industrial Policy of 1991
gave utmost priority in attracting FDI inflows. In this process, the government started opening up of
domestic sectors to the private and foreign participation which was earlier reserved only for the public
sector. This was followed by slow but with significant relaxation of regulatory and entry restrictions on
FDI inflows. Later substantial increase in the volume of FDI inflows into India was observed during the
Post Liberalization period.
FDI is allowed under different schemes and different routes. FDI in India is allowed through following
channel:
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International Peer-Reviewed Journal
RESEARCH HORIZONS, VOL. 4 JULY 2014
1
2
3
4
5
)
)
)
)
)
Government Approval Route, Approval by FIPB, SIA,DIPP
Automatic Route
Inflows through Acquisition of Existing Shares.
RBI’s various NRI’s Schemes.
Stock Swapped
Objective of the Study
l
l
To evaluate the impact of various routes on the quantum of the FDI to the country.
To analyse trend of foreign direct investment in India in post-reform era.
Hypothesis of the Study
Null hypothesis: Routes to bring FDI is indifferent from the amount of FDI come in the country
Alternate hypothesis: Quantum of FDI is conditional to the route.
Methodology
This Study has been carried out using secondary data in relation to FDI inflow and its various routes.
Data is collected for the Data was collected from various websites SIA Newsletter, RBI etc. The period
of the study is taken from 2003 to 2013. Time series Analysis, Anova, Welch and Brown-forsythe Test is
used to analyze the data.
Table:1
FDI APPROVALS AND ACTUAL INFLOWS
Year Ending
No. of proposals considered
Proposals Approved
2
2
2
2
2
2
2
2
003
004
005
006
007
008
009
010
183
1191
921
616
422
357
607
566
110
875
728
473
336
241
408
300
Data Analysis and Interpretation:
Considering the significant role of FDI inflow in economic growth and development, Indian
Government opened FDI gateway for the foreign investors in 1991. Last 20 years had witness the
role of FDI in development. Out of the number of proposals approximately 60% comes in approval
category.
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International Peer-Reviewed Journal
RESEARCH HORIZONS, VOL. 4 JULY 2014
Table : 2
STATEMENT ON RBI’s REGIONAL OFFICES / YEAR-WISE (WITH STATE COVERED)
RECEIVED FDI INFLOWSFROM JANUARY 2000 TO JANUARY 2012.
(
As Reported to Regional Offices of RBI)
Amount in million)
(
Sl. Regional
No Offices of RBI
States Covered
2000-2009
Jan-Dec
2010
Jan-Dec
2011
Jan-Dec
2012
Jan-Jan.
CumulativeTotal
from January
to January 2012
(In Rs)
(
2000
(In US$)
FDI
FDI
FDI
FDI
in Rs
in Rs
in Rs
in Rs
1
2
MUMBAI
MAHARASHTRA,
DADRA & NAGAR
HAVELI, DAMAN &
DIU
1,694,008.91 291,636.36 417,219.75
19,000.37
2,421,865.39 53,854.92
NEWDELHI
DELHI, PART OF UP 916,120.25
AND HARYANA
202,745.05 313,542.94
40,716.35
1,473,124.59 32,326.82
3
4
BANGALORE
CHENNAI
KARNATAKA
TAMIL
299,355.20
NADU, 240,858.05
59,340.35
59,865.01
65,925.90
60,473.44
1,203.63
7,486.14
425,825.07
368,682.64
9,502.99
8,143.55
PONDICHERRY
5
AHMEDABAD
GUJARAT
279,340.63
24,168.51
50,898.13
4,925.78
359,333.05
8,059.68
6
7
HYDERABAD
KOLKATA
ANDHRA PRADESH
WEST BENGAL, 55,213.59
SIKKIM, ANDAMAN
NICOBAR ISLANDS
CHANDIGARH` CHANDIGARH,
PUNJAB, HARYANA,
200,826.24
55,154.03
8,239.90
44,365.97
17,610.98
2,635.94
81.73
302,982.18
81,146.20
6,749.05
1,867.85
&
8
9
19,877.91
21,887.00
19,860.14
7,021.63
7,087.85
95.52
48,882.06
35,365.31
1,068.48
768.25
HIMACHAL
PRADESH
BHOPAL
MADHYA PRADESH, 8,417.32
CHATTISGARH
0
1
0
PANAJI
KOCHI
GOA
18,641.47
14,065.65
14,686.27
2,344.70
1,288.48
42.93
34,659.15
33,988.79
754.92
732.81
11
KERALA,
17,353.32
225.12
LAKSHADWEEP
RAJASTHAN
1
2
JAIPUR
22,019.86
2,185.54
5,216.56
1,038.29
6,701.60
369.87
16.79
25,613.57
14,141.93
543.55
309.9
13
KANPUR
UTTAR PRADESH, 2,206.98
UTTRANCHAL
1
4
BHUBANESHW ORISSA
AR
7,946.02
3,979.79
176.16
1,368.51
408.51
0
13,294.32
3,211.70
288.22
73.25
15
GUWAHATI
ASSAM,
2,626.21
0.81
ARUNACHAL
PRADESH,
MANIPUR,
MEGHALAYA,
MIZORAM,
NAGALAND,
TRIPURA
16
PATNA
BIHAR, JHARKHAND 33.35
0
581.39
249.76
864.5
17.51
17
REGIONNOT INDICATED
SUB. TOTAL
1,138,794.98 188,664.21 260,736.65
25,827.15
1,614,022.98 35,578.04
7,257,003.43 160,639.79
4,920,352.62 960,149.58 1,273,623.34 102,877.89
18
RBI’s-NRI SCHEMES**
GRANDTOTAL^
5,891.50
0.00
0.00
0.00
5,891.50
134.37
4,926,244.12 960,149.58 1,273,623.34
102,877.89 7,262,894.93 160,774.16
ꢀ
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International Peer-Reviewed Journal
RESEARCH HORIZONS, VOL. 4 JULY 2014
Source:Handbook of Industrial policy and statistics,2011-12,office of the economic advisor, Dept of
Industrial policy and promotion , Ministry of Commerce and Industry, Government of India.
Data Analysis and Interpretation
Although, the states like Maharashtra, Gujarat, Tamilnadu, Karnataka and New Delhi and Dadra
Nagar Haveli and Daman have attracted more than 80 percent of FDI but the ultimate destination of
FDI projects in these states was guided more by geographical factors than economic factors. Once
a foreign investor, individual or MNCs decide to invest in India and choose a state, location factors
motivate them to choose the site.( Peter Nunnekampand Rudi Stracke(2006). The concentration of
FDI in a smaller geographical area within the few states is a matter of serious concern. The large
amount of funds was diverted to these areas so as to provide high quality infrastructures facilities
that are demanded by the investors. In this way the rest of the population face dearth of resources
needed for their upliftment.
Table:3
TREND OF FOREIGN DIRECT INVESTMENT IN INDIA IN POST-REFORM ERA
STATEMENT ON RBI’S FDI EQUITY INFLOWS DATA
AS PER INTERNATIONAL PRACTICES
(
RBI’s Monthly Bulletin dated: 10.06.2013)
Amount US$ million)
Source:Handbook of Industrial policy and statistics, office of the economic advisor, Dept of Industrial
policy and promotion , Ministry of Commerce and Industry, Government of India.
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International Peer-Reviewed Journal
RESEARCH HORIZONS, VOL. 4 JULY 2014
Data Analysis and Interpretation
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.81704374
0.667560473
0.649091611
24744.85981
20
R Square
Adjusted R Square
Standard Error
Observations
Data Analysis and Interpretation
A trend analysis is done to understand the increasing/decreasing continuum of FDI for last 18 years(Data
is Collected from “Hand book of Industrial Policy and Statistics, 2010, Department of Industrial Policy
&
Promotion, Ministry of Commerce& Industry, Govt. of India.”.Theintervals of time are taken as
independent variable. The Anova table shows that F (1,18)= 1.09945E-05, p<.05 is significant. This
concludes that FDI differ significantly across the years.
Table:4
ROUTE-WISE FOREIGN DIRECT INVESTMENT: TRENDS AND EMERGING ISSUES
Route-wise FDI
Inflows
(
in US$ million)
Year(Jan-Dec)
FIPB &
SIA route
RBI’s
AutomaticRoute
Acquisition of
existing shares #
RBI’s Various
NRI schemes*
Total
1
1
1
1
1
1
1
1
1
2
2
2
2
2
2
2
2
2
2
2
2
2
991 (Aug-Dec)
992
993
994
995
996
997
998
999
000
001
002
003
004
005
006
78
188
340
511
-
18
79
116
169
180
242
155
181
395
720
813
-
-
-
-
-
88
66
59
189
365
633
600
290
91
83
81
51
2
144
264
608
992
1264
1677
2824
2086
1474
1474
2142
1450
934
1055
1136
1534
2586
3209
4680
2542
2933
2964
2065
2545
3621
3359
2205
2428
3571
3361
2079
3213
4355
11120
15921
33029
266
1028
467
479
658
1096
637
980
1661
2465
4447
6169
3308
4111
5590
4000
509
-
-
-
-
1179
1558
7121
8889
23651
19053
14354
19053
15825
007
008
009
010
011
012
-
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International Peer-Reviewed Journal
RESEARCH HORIZONS, VOL. 4 JULY 2014
Table:5
DESCRIPTIVES
FDI
Table : 6
ANOVA
FDI
Table:7
Robust Tests of Equality of Means
FDI
a. Asymptotically F distributed.
Table 8:
Multiple Comparisons
*
. The mean difference is significant at the 0.05 level
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International Peer-Reviewed Journal
RESEARCH HORIZONS, VOL. 4 JULY 2014
Table:9
Means for groups in homogeneous subsets are displayed.
a. Uses Harmonic Mean Sample Size = 10.000.
1
) Table NO.6 shows, F test value with degree of freedom (2, 27) and significance level of .001.
Given that p<.05, which rejectthe null hypothesis. This shows Quantum of FDI is conditional to
the route/channels it is allowed. Routes to bring FDI has a significance in deciding the amount
of FDI come in the country
2)
A Welch and Brown-Forsythe test performed to analyze the amount of FDI depends on the route/
channel allowed by the host country. The significance values indicate the rejection of null hypothesis.
3)
While analysing the multiple comparison between various routes, it is noticed that Automatic
Route has immense significance in bringing the considerable amount of FDI in India.
4
) Using Turkey HSD further, we can conclude that (FIPB and SIA Route ) and Automatic Route
have significant difference in the amount of FDI channelized through them. It can be concluded
from Table 8 &9.
Conclusion
Since liberalisation process started in mid of 1990, FDI has been of increasing trend. But in all years
discussed in the study there was no significant stability in FDI trend because of regular changes in
Government Polices. So the amountof infusion remains always volatile. More the liberalised policies,
the more quantum can be attracted. So the policy makers should take the steps to invite them on
simplified policies which accelerate the inflow and competition without compromising the financial
security. FDI completely depends on the routes and scheme of investments. From 1991 to 2001
Government approval route has contributed more than 50% of total FDI but from 2002 there was
significant change in trend and this route gone down drastically. When Government made more
liberalized FDI policies and automatic route entry, contribution increases considerably. In fact,
corruption level and political instability have been the most important reasons for the lower foreign
direct investment in the recent past years
References
Deepti, (2011).”Foreign Direct Investment In Dirrent Sectors Of Indian Economy” Deep & Deep
Publications Pvt. LTD, New Delhi
rd
Taxmann’s “Guide To FDI, A Complete & Comprehensive Guide To FDI” as amended upto 3
October 2012.
Vikas S. Solanki, K.S Thakur”(2012)Foreign Direct Investment In India” Wisdom Publications, New
Delhi
www. tradingeconomics.com/country-list/foreign-direct-investment
http://business.mapsofindia.com/fdi-india/investing-country/singapore.html
Dr. Megha Somani : Assistant Professor, Dept. of Commerce, Smt. MMK College of Commerce &
Economics, Mumbai
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