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 Prйcis:

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.

Particulars China India

FDI Confidence Index score*(January 2000) 1.45 1.14

FDI Inflow (US $ billions, 1998) 45.5 2.3

FDI Stock (US $ billions, 1998) 261.1 13.2

GDP (nominal US $ billions, 1999 estimate) 993 468.4

* 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 world’s leading companies.

Two parameters