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Dr. Deepa Rawat
Dr. Deepti
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Since July 1991, the Government has consistently pursued the policy ofattracting larger volumes of foreign investment to augment the resource
availability in infrastructure and other critical areas of the economy.
A number of policy measures are being taken to attract both direct and
portfolio investment from foreign investor individual, corporate identities
and FIIs.
A new foreign investment policy was put in place which stipulated three
tiers for approving proposals for FDI viz
RBIsautomatic approval system;
Secretariat for industrial approvals (SIAs) for proposals falling outside
the powers delegated to RBI, and
Foreign investment promotion board (FIPB), specially created body to
invite, negotiate and facilitate FDI.
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FDI contributes in the process of economic development in many ways
Procurement of capital goods is feasible with trade.
It is a means to achieve price stability. It generates pressures & pulls for dynamic change.
Fuller utilization of capacity, exploitation of economies of scale and
diversifications is possible.
It is especially important for its potential to transfer knowledge and
technology, create jobs, boost overall productivity, enhancecompetitiveness and entrepreneurship and ultimately eradicate poverty
through economic growth and development.
A central challenge is to create the necessary domestic and international
conditions to facilitate direct investment flows conducive to achieving
national development priorities especially for developing andunderdeveloped countries.
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Indiaseconomic performance in the post reforms period has manypositive features. The average growth rate in the ten year period
from 1992-93 to 2001-02 was around 6.0 percent.
In sharp contrast to the 1980s, growth in the 1990s was
accompanied by remarkable external stability despite the East Asiancrisis.
The sharp decline in portfolio investment during 2008-09 was the
result of global meltdown. Portfolio inflow was US$ -13855
million, however, net FDI inflows was US$ 37838 million. Gross
FDI inflows during the 2008-09 were US$ 23983 million.Provisional data for 2010-11 shows FDI inflow at US$30380
million and Portfolio Investment at US$31471million.
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In earlier studies, the impact of FDI on growth was limited in the short-runsince long-term growth was largely considered to be contingent upon
technology progress.
According to modern indigenous theory FDI can have a permanent positive
impact on economic growth by generating increasing returns to scale through
externalities and positive productivity spillovers.Apart from increasing capitalformation, FDI encourages use of new inputs and technology
FDI is a vehicle for change in management practices and organisational
arrangements in the recipient developing countries.
Indias increasing openness to FDI has contributed significantly to its growth
performance. This includes raising the foreign ownership to 100 per cent inmost of the sectors, ending state monopoly in insurance and
telecommunications, opening up of banking and manufacturing to competition
and disinvestment of state ownership in public sector undertakings.
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In 2008-09 the FDI inflow and consequently the growth of the economy
witnessed a downfall due to the global recession however the Indian economy
witnessed a swift recovery in 2009-10.
Data shows that FDI inflow increased by more than 240 times during 1991-92
to 2009-10 despite some serious fluctuations.
GDP has increased by about three times during the same period.
An econometric model is being put forward to quantitatively prove therelationship between GDP growth and FDI inflow.
17df0.7355632R0.7502542R0.8662R
(7.146)(34.48)t
)(0.0337456(0.151951)SE
InflowFDI0.2411555.23878GDPlog
InflowFDIloglogGDPlog21
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R (coefficient of correlation) is equal to 0.8662 this shows that the two
variables GDP and FDI inflow have a strong positive correlation.
(Coefficient of Determination) ,is equal to 0.7502, it implies that
75.02 per cent of variations in the GDP can be explained by FDI
Inflow.
is equal to 5.23878, it means if FDI Inflow = 0, then the value of
GDP becomes 5.23878. Its t test value is 34.48, which is more than
the tabulate value of t i.e. 2.10982, hence, intercept term is significant
at 5per cent level.
is equal to 0.241155 , It means the increment of 0.241155 in GDP is
proportionate to the change in FDI Inflow unit. Its t test value is
7.146 which are greater than the tabulate value of t i.e. 2.10982.Hence, regressed coefficient is significant at 5 per cent level.
Since the value of R2and are almost the same, the model is fitted.
2R
1
2
2
R
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The economic reforms in India have been instrumental in breaking theHindu rate of growth of 3.5 per cent and moving towards faster
economic growth.
Increase in FDI inflow has been one of the major achievements in the
post reforms period, however its benefits have not evenly spread
across the entire economy.
Thus, it can be concluded that although attracting FDI can be an
important factor for development, however, it is not an end in itself.
The right strategy would be to create a favourable environment
throughout the country for equitable FDI inflow and simultaneouslydevelop sound domestic macro economic and structural policies.