Foreign direct investment in india an analytical study

PROJECT REPORT ON

Foreign Direct Investment in India - An Analytical

Study

Submitted By

DIPTI PATIL

MFM Vth SEMESTER

BATCH 2011 -2014

ROLL NO: 40

UNDER THE GUIDANCE OF

PROF SMITA RAMAKRISHNA

K.J. SOMAIYA INSTITTE OF MANGEMENT STUDIES & RESEARCH

VIDYANAGAR, VIDYA VIHAR (E), MUMBAI- 400 077

SIMSR Project Report

Dipti Patil Foreign Direct Investment in India - An Analytical Study Page 2/42

DECLARATION

I, Dipti Patil, a student of MFM programme, V Semester of 2011 – 2014 batch at SIMSR

do hereby declare that this report entitled “Foreign Direct Investment in India - An Analytical

Study” has been carried out by me during this semester under the guidance of Prof. Smita

Ramakrishna as per the norms prescribed by the University of Mumbai, and the same work has

not been copied from any source directly without acknowledging for the section that has been

adopted from published or non-published works.

( DIPTI PATIL )



CERTIFICATE

This is to certify that Ms. Dipti Patil, a student of MFM programme V Semester of 2011-

2014 batch at SIMSR has carried out the report entitled “Foreign Direct Investment in India -

An Analytical Study” under my guidance as per the norms prescribed by the University of

Mumbai.

Prof SMITA RAMAKRISHNA

15TH

Oct 2013



ACKNOWLEDGEMENTS

I wish to express my gratitude and special thanks to Prof Smita Ramakrishna, SIMSR for

guidance and support. Her guidance in data collection and analysis helped me to come up with

solution. She helped all the time whenever required and provide the right direction in

completion of project.

I also thank Prof Sonal Ved who helped us in selection of topic and allocation of mentor on

time. Last but not least I want to thank Mani sir who helped us with proper template to prepare

project report and other administrative formalities while submission of project.

(Dipti Patil)

Roll No. 40



TABLE OF CONTENT

1. LIST OF FIGURE…………….…………………………………..…………….……….6

2. LIST OF TABLE…….………………………………………………………….……….7

3. LIST OF GRAPH…………….……………..……………………………………...……8

4. ABSTRACT………………….……………………………..…………………..……….9

5. OBJECTIVE………………………………………………..…………..………………10

6. RESEEARCH METHODOLOGY…………………………………………….……….11

7. LITERATURE REVIEW………………………………………………..……………..12

8. INTRODUCTION………………………………………………..…………..………...14

WHAT IS FDI?

TYPES OF FDI

FDI PLOICY FRAMEWORK

9. FDI INFLOW AND ECONOMY DEVELOPMENT………………………………….21

10. FDI IN INDIA AND GLOBAL MARKET………………………………………….…22

11. FACTORS INFLUENCING FDI – IMPACT ANALYSIS…………………………….24

DOLLAR RATE

GDP

POPULATION

CPI INDEX

GOLD PRICE

BOP

12. FDI FORECASTING – TIME SERIES ANALYSIS……..…………….……………...34

13. CONCLUSION AND RECOMMENDATION…………..………….….……………...37

14. BIBLIOGRAPHY……………………………………………………….…...…………38

15. APPENDIX…………………………………………………………...………………...39



LIST OF FIGURES

Fig No Title Page No

Fig-1 Foreign Investment – Schematic Representation 15

Fig-2 UNCTAD Report - FDI Rank 22

Fig-3 FDI India Factsheet 22

Fig-4 FDI Confidence Index 23



LIST OF TABLE

Table No Title Page No

Table-1 FDI Policy Framework 17-19

Table-2 Factors affecting FDI 24-25

Table-3 Correlation Matrix 33

Table-4 Parameter Estimates 39

Table-5 FDI Forecasts 40-42



LIST OF GRAPHS

Graph No Title Page No

Graph-1 Sector wise Distribution 19

Graph-2 State wise Distribution 20

Graph-3 FDI Trend during post-liberalization 24

Graph-4 Dollar Rate Trend 25

Graph-5 Scatter Plot for Dollar Rate vs FDI Inflow 26

Graph-6 GDP Trend 26

Graph-7 Scatter Plot for GDP vs FDI Inflow 27

Graph-8 Population Trend 27

Graph-9 Scatter Plot for Population vs FDI Inflow 28

Graph-10 CPI Index Trend 28

Graph-11 Scatter Plot for CPI Index vs FDI Inflow 29

Graph-12 Gold Price Trend 29

Graph-13 Scatter Plot for Gold Price vs FDI Inflow 30

Graph-14 BOP Trend 30

Graph-15 Scatter Plot for BOP vs FDI Inflow 31

Graph-16 FDI inflow from different countries 31

Graph-17 Various Routes to FDI Equity Inflow 32

Graph-18 FDI Historical Trend 34

Graph-19 FDI trend - data for forecasting 35

Graph-20 FDI Forecasting for 24 months 36



ABSTRACT

Foreign Direct Investment inflows in India seen rising 15 per cent in 2013 and observed to be

grown steadily in volume and is a major source of development finance. Foreign Direct

Investment is one and only major instrument of attracting International Economic Integration in

any economy. It serves as a link between investment and saving. Recognizing that FDI can

contribute to economic development, all governments want to attract it. This project examines

the different forms of capital, the global and regional trends in FDI inflows, factors influencing

FDI in India, and experiences in India, comparative study with global market. The policy

implications of the determinants of FDI flows are analyzed.

FDI is an important factor in the globalization process as it intensifies the interaction between

states, regions, and firms. Growing international flows of portfolio and direct investment,

international trade, information and migration are all parts of this process. The large incentive in

the volume of FDI during the past two decades provides a strong incentive for research on this

phenomenon.



OBJECTIVE OF STUDY

Study Foreign Direct Investment in India for India’s growth and development of after

economic reforms

Examine the significance and assess the various aspects pertaining to performance of the

FDI in India viz-a-viz sector-wise, country-wise, state-wise and year-wise during post

reform period

Analyze historical trends or pattern of FDI to forecast future FDI

Analyze impact of FDI on economy of India



RESEARCH METHODOLOGY

The present study is based on the objectives like how FDI helps in economy growth of India,

statistical analysis like forecasting, correlation with other factors of Indian economy based on

historical data during post-liberalization period.

To accomplish all above objectives data has been collected from various sources like SIA

Newsletter, Reports, publication of Govt, RBI relating to foreign Investment, economic

journals, books, magazines and internet etc. Impact analysis and time series forecasting is done

using tool SAS Enterprise Guide and Microsoft Excel



LITERATURE REVIEW

Gulshan Akhtar (2013), in his paper “Inflows of Foreign Direct Investment in India” focuses on

potential impact of FDI in the growth and development of Indian economy. FDI acts as a

catalyst for domestic industrial development and considered to be an important vehicle for

economic development. The study finds out that during pre liberalization period FDI increased

at CAGR of 19.05% while during post liberalization period it has grown 24.28%. Since 1991

FDI inflows in India has increased approximately by more than 165 times.

K.R. Kaushik & Dr. Kapil Kumar Bansal (2012), in their research article “Foreign Direct

Investment in Indian Retail Sector” highlights division of retail industry in India, FDI policy

with regard to retailing, foreign investor’s concern regarding FDI in retail sector and

Government viewpoint. The article highlights the mixed response about FDI in retail sector with

major reason to oppose is FDI in retail can be harmful to local retailers in India. The article

concludes that FDI in retail sector may boost the socio economic development of the entire

country if implemented wisely carefully while signing the agreements with the Foreign

Investors

Dr. Jasbir Singh, Ms. Sumita Chadha & Dr. Anupama Sharma (2012), in their research paper

“Role of FDI in India” focus on how Foreign Direct Investment helps in reducing the defect of

BOP. Foreign Direct Investment is one and only major instrument of attracting International

Economic Integration in any economy. It serves as a link between investment and saving. Many

developing countries like India are facing the deficit of savings. This problem can be solved

with the help of Foreign Direct Investment. The analytical study in this paper concludes that we

should welcome inflow of foreign investment in such way that it should be convenient and

favorable for Indian economy and enable us to achieve our cherished goal like rapid economic

development, removal of poverty, internal personal disparity in the development and making

our Balance of Payment favorable.

Pankaj Sinha and Anushree Singhal (2013), in their research article “FDI in Retail in India”

focuses on the relationship between FDI in retail and seven macroeconomic factors – Exchange



rate (yoy%), Inflation (CPI), GDP growth, Index of Industrial Production, Trade Openness,

Unemployment rate and Tax as a percentage of nominal GDP. This research also recommends

the government of India to shift focus and not rely much on FDI in retail to act as a game

changer. Indian Government should emphasize on building infrastructural facilities especially

developing transportation systems like roadways and railways, setting up economic zones for

warehousing facility, streamlining labour laws, planning urbanization to ensure adequate

availability of quality real estate, high street and implementing GST to give new dimensions to

modern organized retail in India.



INTRODUCTION

Foreign Direct Investment is an investment made by a foreign company or entity into a

company or entity based in another country. FDI refers to capital inflows from abroad that is

invested in or to enhance the production capacity of the economy. It can be a subsidiary, joint

venture or merger or acquisition and includes Greenfield and Brownfield projects. OECD has

defined FDI as investment by a foreign investor in at least 10% or more of the voting stock or

ordinary shares of the investee company. According to the international monetary fund (IMF),

FDI is defined as “Investment that is made to acquire lasting interest in an enterprise operating

in an economy other than that of investor. The investor’s purpose is being to have an effective

voice in the management of enterprise.”

Types of FDI

Foreign Direct Investment can be of two types:

1. Inward Foreign Direct Investment: This occurs when one company purchases another

business or establishes new operations for an existing business in a country different

than the investing company's origin.

2. Outward FDI: A business strategy where a domestic firm expands its operations to a

foreign country either via a Green field investment, merger/acquisition and/or expansion

of an existing foreign facility.



Foreign Direct Investment is one of the important and highly focused among the entire foreign

investment in India. Below is the schematic representation

Fig-1: Foreign Investment – Schematic Representation

An Indian company receives Foreign Direct Investment under the two routes as given below:

1. Automatic Route

FDI is allowed under the automatic route without prior approval either of the

Government or the Reserve Bank of India in all activities/sectors as specified in the

consolidated FDI Policy, issued by the Government of India from time to time.

2. Government Route

FDI in activities not covered under the automatic route requires prior approval of the

Government which is considered by the Foreign Investment Promotion Board (FIPB),

Department of Economic Affairs, and Ministry of Finance.

FDI Policy Framework in India

There has been a sea change in India’s approach to foreign investment from the early 1990s

when it began structural economic reforms encompassing almost all the sectors of the economy.

Pre-Liberalization Period



Historically, India had followed an extremely cautious and selective approach while

formulating FDI

Government took active participation to command and control the economy by

allocation of resources (budgetary grants) or in setting priorities for the economy

Self-Reliance was the buzz word and there was limited scope to privatization whereas

nationalization of banks was taken as high priority

With the objective of becoming ‘self reliant’, there was a dual nature of policy intention

– FDI through foreign collaboration was welcomed in the areas of high technology and

high priorities to build national capability and discouraged in low technology areas to

protect and nurture domestic industries.

Foreign Exchange Regulation Act (FERA) was introduced in 1973 , a regulatory

framework and removed restriction on FDI by allowing foreign equity holding in a joint

venture up to 40 per cent.

Government then established special economic zones (SEZs) and designed liberal policy

to provide incentives for promoting FDI in these zones with a view to promote exports.

The announcements of Industrial Policy (1980 and 1982) and Technology Policy (1983)

provided for a liberal attitude towards foreign investments in terms of changes in policy

directions.

Post-Liberalization Period

Post 1991 becomes a major shift in Liberalization and Globalization of Indian Economy

aiming to raise growth potential and integrating with the world economy.

Industrial policy reforms gradually removed restrictions on investment projects and

business expansion on the one hand and allowed increased access to foreign technology

and funding on the other.

A series of measures takes place to promote foreign direct investment

o Disinvestment Policy - Government started getting out of owning and managing

businesses

o Dual route of approval of FDI – RBI’s automatic route and Government’s

approval (SIA/FIPB) route

o Automatic permission for technology agreements in high priority industries



o Removal of restriction of FDI in low technology areas as well as liberalization of

technology imports,

o Non-resident Indians (NRIs) and Overseas Corporate Bodies (OCBs) are

permitted to invest up to 100 per cent in high priorities sectors

o Foreign equity participation limits has been increased up to 51% for existing

companies

o Convention of Multilateral Investment Guarantee Agency (MIGA) for protection

of foreign investments.

o Foreign Exchange Management Act (FEMA), 1999 [that replaced the Foreign

Exchange Regulation Act (FERA), 1973] which was less stringent.

Current FDI policy in terms of sector specific limits has been summarized below:

Table 1: Sector Specific Limits of Foreign Investment in India

Sector FDI

Cap/Equity

Entry Route Other

Conditions

A. Agriculture 1. Floriculture, Horticulture, Development of

Seeds, Animal Husbandry, Pisciculture,

Aquaculture, Cultivation of vegetables &

mushrooms and services related to agro and

allied sectors.

100%

Automatic

2. Tea sector, including plantation 100% FIPB

(FDI is not allowed in any other agricultural sector /activity)

B. Industry 1. Mining covering exploration and mining

of diamonds & precious stones; gold, silver

and minerals.

100%

Automatic

2. Coal and lignite mining for captive

consumption by power projects, and iron &

steel, cement production.

100% Automatic

3. Mining and mineral separation of titanium

bearing minerals

100% FIPB

C. Manufacturing 1. Alcohol- Distillation & Brewing

100%

Automatic

2. Coffee & Rubber processing &

Warehousing.

100% Automatic

3. Defence production 26% FIPB

4. Hazardous chemicals and isocyanates 100% Automatic



5. Industrial explosives –Manufacture 100% Automatic

6. Drugs and Pharmaceuticals 100% Automatic

7. Power including generation (except

Atomic energy); transmission, distribution

and power trading.

100% Automatic

(FDI is not permitted for generation, transmission & distribution of electricity

produced in atomic power plant/atomic energy since private investment in this

activity is prohibited and reserved for public sector.)

D. Services 1. Civilaviation (Greenfield projects and

Existing projects)

100%

Automatic

2. Asset Reconstruction companies 49% FIPB

3. Banking (private) sector 74%(FDI+FII).

FII not to

exceed 49%

Automatic

4. NBFCs : underwriting, portfolio

management services, investment advisory

services, financial consultancy, stock

broking, asset management, venture capital,

custodian, factoring, leasing and finance,

housing finance, forex broking, etc.

100%

Automatic

s.t.minimum

capitalisation

norms

5. Broadcasting

a. FM Radio

b. Cable network; c. Direct to home; d.

Hardware facilities such as up-linking,

HUB.

e. Up-linking a news and current affairs TV

Channel

20%

49%

(FDI+FII)

100%

FIPB

6. Commodity Exchanges 49% (FDI+FII)

(FDI 26 % FII

23%)

FIPB

7. Insurance 26% Automatic Clearance from

IRDA

8. Petroleum and natural gas :

a. Refining

49% (PSUs).

100% (Pvt.

Companies)

FIPB (PSUs)

Automatic(Pvt.

)

9. Print Media

a. Publishing of newspaper and periodicals

dealing with news and current affairs

b. Publishing of scientific magazines /

speciality journals/periodicals

26%

100%

FIPB

FIPB

S.t.guidelines

by Ministry of

Information &

broadcasting

10. Telecommunications

a. Basic and cellular, unified access services,

national / international long-distance, V-

SAT, public mobile radio trunked services

(PMRTS), global mobile personal

74% (including

FDI, FII, NRI,

FCCBs,

ADRs/GDRs,

convertible

Automatic up

to 49% and

FIPB beyond

49%.



communication services (GMPCS) and

others.

preference

shares, etc.

Sectors where FDI is Banned

1. Retail Trading (except single brand product retailing);

2. Atomic Energy;

3. Lottery Business including Government / private lottery, online lotteries etc;

4. Gambling and Betting including casinos etc.;

5. Business of chit fund;

6. Nidhi Company;

7. Trading in Transferable Development Rights (TDRs);

8. Activities/sector not opened to private sector investment;

9. Agriculture (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry,

Piscicultureand cultivation of vegetables, mushrooms etc. under controlled conditions and services

related to agro and allied sectors) and Plantations (Other than Tea Plantations);

10. Real estate business, or construction of farm houses;

Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco or of tobacco

substitutes. Table-1: Source – http://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=2513

Sector wise FDI in India

Manufacturing, constructions, Financial Services are top major sectors for FDI inflow in India.

Real Estate, Mining, Hotel, Retail, Computer Services, Mining, Energy & Electricity also

attractive sectors for FDI inflow

Below graph shows the comparative distribution of FDI inflow in recent four years. Steady

growth is observed in all the sectors which help in the economic development of India

Graph-1: Source http://rbi.org/

http://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=2513

http://rbi.org/



State wise FDI in India

Mumbai, Delhi, Chennai, Bangalore, Hyderabad are the major states in India to FDI inflow.

Below is the distribution for FDI in different countries in India in year 2012.

Graph-2: Source http://rbi.org/

http://rbi.org/



FDI INFLOW AND ECONOMY DEVELOPMENT

FDI is an important vehicle of for economic development as far as the developing nations are

concerned. The important effect of FDI is its contribution to the growth of the economy in all

sectors like manufacturing, telecommunication, information technology, financial services,

energy & electricity etc.

FDI has an important impact on country’s trade balance, increasing labor standards and skills,

transfer of technology and innovative ideas, skills and the general business climate.

FDI also provides opportunity for technological transfer and up gradation, access to global

managerial skills and practices, optimal utilization of human capabilities and natural resources,

making industry internationally competitive, opening up export markets, access to international

quality goods and services and augmenting employment opportunities.



FDI INFLOW AND GLOBAL MARKET

The global rankings of the largest recipients of FDI also reflect changing patterns of investment

flows: 9 of the 20 largest recipients were developing countries

(Fig-2). India ranks 15th

in international market to FDI recipients

Fig-2 Source: UNCTAD Report

India continues to be preferred destination for FDI. Fig shows the FDI inflow and outflow in

India.

Fig-3 Source: FDI India Factsheet



The Foreign Direct Investment Confidence Index is a regular survey of global executives

conducted by A.T. Kearney. The Index provides a unique look at the present and future

prospects for international investment flows. India ranks among the best in investment surveys.

Fig-4 shows the comparative ranking in global market for FDI investments

Fig-4 2013 FDI Confidence Index, Source: http://www.atkearney.com

http://www.atkearney.com/



FDI – IMPACT ANALYSIS

FDI inflow – Historical Trend

2005 onwards FDI inflow increased with in India which helped in development in Indian

economy. High FDI inflow observed in 2008 with $43,000 million Graph-3 shows the historical

trend in FDI inflow in India

Graph-3 Source: http://www.oecd.org/investment/statistics.htm

Factors influencing FDI inflow

Foreign Direct Investment plays a very important role in the development of any nation. A lot of

factors are involved to attract FDI in India which includes government policy, political

environment, market size, labor cost. Not all factors are quantitative. Listed below few

quantitative factors to find impact on FDI

Name Type Description

INR_per_USD Numeric Indian Rupee per 1 $

GDP Currency Gross Domestic Product in million

Population Numeric India Population

Inflation Numeric Consumer Price Index (inflation rate)

gold_per_10_gram Numeric Rupee per 10gram gold

http://www.oecd.org/investment/statistics.htm



Overall_BOP Currency Balance of Payments

FDI_Eq_govt_app_route Currency FDI approval from government route

FDI_Eq_auto_route Currency FDI approval from auto route

FDI_Eq_existing_share Currency FDI approval from existing share

FDI_Eq_NRI_scheme Currency FDI approval from NRI scheme

FDI_Mauritius Currency FDI from Mauritius

FDI_USA Currency FDI from USA

FDI_Japan Currency FDI from Japan

FDI_Netherlands Currency FDI from Netherlands

FDI_UK Currency FDI from UK

FDI_Germany Currency FDI from Germany

FDI_France Currency FDI from France

FDI_Singapore Currency FDI from Singapore

Table-2 List of factors

Dollar Rate

Dollar rate trend shows a steady growth in 1990, but very fast growth in recent year which cross

Rupee 55 per dollar. Graph shows the historical trend for Indian Rupee per 1US dollar.

Graph-4 Source: http://www.inflation.eu/inflation-rates/india/historic-inflation

http://www.inflation.eu/inflation-rates/india/historic-inflation



Scatter plot shows the 29.48% variation in FDI inflow explained by Indian Rupee per USD and

remaining 70% will be explained by other factors. FDI and dollar rate has direct proportional

relation having every 1unit of increase in dollar rate, will increase FDI by 1112 units.

Graph-5 Scatter plot for dollar rate vs FDI inflow

Gross Domestic Product

Historical trend for gross domestic product shows the increase in year on year. Recent horizon

shows the very high increase as FDI inflow.





The trend line in scatter plot shows that FDI Inflow and GDP are directly proportional. 78%

variation in FDI Inflow explained by factor GDP and 22% will be explained by other factors.

GDP and FDI has direct relation i.e. every 1% of increase in GDP, will have increase in FDI by

2.32%.

Graph-7 Scatter Plot for GDP vs FDI inflow

India Population

Population in India has a steady growth as shown in graph below

Graph-8 Source http://worldbank.org

http://worldbank.org/



65% variation in FDI Inflow explained by population. But the model shows minor change in

FDI if population increases although population and FDI has directly proportional. India

population is not much significant factor to impact on FDI inflow.

Graph-9 scatter plot for population vs FDI inflow

Consumer Price Indix (CPI)

Inflation rate in India is on an average 8%. It is expected to be in the range of 8% - 10% in

nearer future. Below graph shows the hostorical trend for CPI index.

Graph-10 source http://www.inflation.eu/inflation-rates

http://www.inflation.eu/inflation-rates



2% variation in FDI inflow explained by inflation rate which is very less. Infation rate is not the

signification factor to impact FDI inflow.

Graph-11 scatter plot for CPI index vs FDI inflow

Gold Price

Gold price hipe a lot in recent years. In 2012 the gold rate increases to INR 30,000. Gold Price

is appreciated and it is expected to be appriciate more in nearer future. Graph shows the

historical trend for gold price per 10 gram in INR.

Graph-12:Source:http://thebankingbible.com/10-gram-of-gold-price-history-for-the-last-86-

years-6440

http://thebankingbible.com/10-gram-of-gold-price-history-for-the-last-86-years-6440

http://thebankingbible.com/10-gram-of-gold-price-history-for-the-last-86-years-6440



60% variation in FDI inflow explained by Gold price. Below is the scatter plot for Gold Price vs

FDI inflow

Graph -13 scatter plot for gold price vs FDI inflow

Balance of Payments

FDI in the balance of payments accounts appears in two ways:

1. The initial outflow of FDI is entered as an outflow (debit) on the capital account

2. The investment income is entered as an inflow (credit) on the current account.

Graph-14 shows the historical trend in balance of payments.

Graph-14 Source: http://dbie.rbi.org.in/DBIE/dbie.rbi?site=home

http://dbie.rbi.org.in/DBIE/dbie.rbi?site=home



Graph-15 shows the scatter plot for BOP vs FDI inflow. It shows that BOP has less explaining

power for FDI inflow.

Graph-15 Scatter plot for BOP vs FDI Inflow

FDI inflow from top countries

Top countries for FDI inflow in india are Mauritius, USA, Signgapore, UK, Grance,

Netherlands. But major FDI inflow in India is from Mauritius. Graph shows the comparative

distribution of FDI inflow in India from top countries. FDI inflow from singapore, USA, Japan

contributes significant amount

ZGraph-16 Source: http://dipp.nic.in/English/Publications/SIA_Newsletter/2013/jun2013/index.htm

http://dipp.nic.in/English/Publications/SIA_Newsletter/2013/jun2013/index.htm



FDI inflow via different routes in India

FDI inflow in India can take place via government route, automatic route, existing shares or

NRI’s schemes. Major FDI inflow is via government route but in recent years automatic route

becomes more attractive. Graph shows the comparative distribution for various routes for FDI

inflow in India.

Graph-17 Source: http://dipp.nic.in/English/Publications/SIA_Newsletter/2013/jun2013/index.htm

http://dipp.nic.in/English/Publications/SIA_Newsletter/2013/jun2013/index.htm



Table3 shows the correlation of measurable factors with FDI inflow

FDI inflow (US $$ million) GDP INR per USD Population CPI - inflation Gold Price BOP

FDI inflow (US $$ million) 100%

GDP 89% 100%

INR per USD 54% 67% 100%

Population 80% 88% 87% 100%

CPI - inflation 14% 11% -41% -27% 100%

Gold Price 78% 95% 57% 75% 21% 100%

BOP 2% 6% 15% 22% -34% -10% 100%

Table3 Correlation Matrix

Correlation Matrix Interpretation is as below:

1.0 Perfect correlation

0 to 1 Both variables tend to increase or decrease together

0.0 The two variables do not vary together at all.

-1 to 0 One variable increases as the other decreases.

-1.0 Perfect negative or inverse correlation.

Factors like GDP, dollar rate, population, and gold price shows very high correlation with FDI

inflow.



FDI INFLOW – TIME SERIES ANALYSIS

FDI Forecasting

Graph shows historical trend for FDI inflow in India during post-liberalization period. Trend

shows drastic growth in recent years. To forecast FDI for period 2013 and 2013, historical 12

years data (2000-2012) is used.


Grpah-19 shows the month on month pattern in FDI inflow. This data is used for time series

forecasting of next 24 months FDI inflow in India. Winters Multiplicative method is used to

forecast FDI. This method is the simplest form of exponential smoothing and can be used for

data without any systematic trend or seasonal components.





Theil’s U is one of the accuracy measure used to check the performance of a model. The Theil's

U statistic falls between 0 and 1. When U = 0, that means that the predictive performance of the

model is excellant and when U = 1 then it means that the forecasting performance is not better

than just using the last actual observation as a forecast. 0.586 the lowest Theil’s U is used to

choose the model.

Theil’s U determins the forecasting performance of the model. The interpretation for Thei’l U is

as follows:

Interpret (1- Thei’l U)

1.00 – 0.80 High (strong) forecasting power

0.80 – 0.60 Moderately high forecasting power

0.60 – 0.40 Moderate forecasting power

0.40 – 0.20 Weak forecasting power

0.20 – 0.00 Very weak forecasting power

FDI time series model has moderate forecasting power (1- Thei’l U = 0.41)




Graph-20 shows the forecasting of FDI inflow for 24 months (2013 – 2014)

Graph-20 FDI Forecasting for 24 months



CONCLUSION AND RECOMMENDATION

It can be observed from the above analysis that at the sector wise level of the Indian economy,

FDI has helped to raise the output, productivity and export in some sectors. Manufacturing been

always attractive for foreign investors however government is required to look more into policy

up gradation in sectors like construction, financial services, telecommunication to generate more

opportunity for foreign investors

The major FDI inflow is observed from Mauritius i.e. almost 50% of FDI inflow. The main

reason for higher levels of investment from Mauritius was that the fact that India entered into a

double taxation avoidance agreement (DTAA) with Mauritius were protected from taxation in

India.

Various macro-economic factors like GDP, dollar rate, political environment, market size,

government policy plays an important role in FDI inflow. FIPB, SIA helps to entry for foreign

investors however automatic route been more attractive for investors in recent years.

Government needs to improve more on RBI’s – NRI scheme to attract more investors.



BIBLIOGRAPHY

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4721, Vol. 1, Issue 5 (October 2012), PP 34-42 www.researchinventy.com 34

Online at http://mpra.ub.uni-muenchen.de/46833/MPRA Paper No. 46833, posted 9.

May 2013 04:47 UTC

India Fact Book, Department of Economic Affairs, Ministry of Finance, Government of

India June 2012

UNCTAD – World Investment Report 2013

Ernst & Young's 2012 attractiveness survey – India

RBI website

FIPB website

DIPP website



APPENDIX

PARAMETER ESTIMATES

Method - Winters Multiplicative

Parameter Estimates FDI_Inflow N 156 NRESID 156 DF 142 WEIGHT1 0.1055728 WEIGHT2 0.1055728 WEIGHT3 0.25 SIGMA 1055.4042 CONSTANT 2276.1099 LINEAR -7.969106 S_JAN 0.8029204 S_FEB 0.8781421 S_MAR 0.845852

S_APR 1.139364 S_MAY 1.2887347 S_JUN 1.1413181 S_JUL 0.8877874 S_AUG 1.3359588 S_SEP 1.104222 S_OCT 0.9351759 S_NOV 0.7838162 S_DEC 0.8567085 SST 238207628 SSE 158170682 MSE 1113878 RMSE 1055.4042 MAPE 55.584969 MPE -29.41305 MAE 570.5778 ME -64.7447 MAXE 4323.8094 MINE -3041.69 MAXPE 80.494793 MINPE -378.4551 RSQUARE 0.3359966 ADJRSQ 0.2752075 RW_RSQ -0.014164 ARSQ 0.2050663 APC 1213841.5 AIC 2185.3754 SBC 2228.0734 CORR 0.6405127 THEILUM 0.0041343 THEILUS 0.0127649 THEILUC 0.9831007 THEILUR 0.1077023 THEILUD 0.8881633 THEILU 0.5866506 RTHEILUM 0.0009218 RTHEILUS 0.0923968 RTHEILUC 0.9066814 RTHEILUR 0.0940959 RTHEILUD 0.9049822 RTHEILU 0.9287713

Table-4 Parameter Estimates



FORECASTING RESULTS

Period FDI Inflow

Jan-00 $157 Feb-00 $169 Mar-00 $164 Apr-00 $118 May-00 $264 Jun-00 $182 Jul-00 $241 Aug-00 $421 Sep-00 $236 Oct-00 $185 Nov-00 $213 Dec-00 $254 Jan-01 $204 Feb-01 $288 Mar-01 $240 Apr-01 $128 May-01 $349 Jun-01 $219 Jul-01 $256 Aug-01 $363 Sep-01 $230 Oct-01 $238 Nov-01 $243 Dec-01 $332 Jan-02 $338 Feb-02 $352 Mar-02 $283 Apr-02 $227 May-02 $492 Jun-02 $319 Jul-02 $416 Aug-02 $665 Sep-02 $349 Oct-02 $272 Nov-02 $299 Dec-02 $348 Jan-03 $292 Feb-03 $266 Mar-03 $338 Apr-03 $143 May-03 $297 Jun-03 $178 Jul-03 $168 Aug-03 $257 Sep-03 $150 Oct-03 $132 Nov-03 $131 Dec-03 $145 Jan-04 $148 Feb-04 $142 Mar-04 $209 Apr-04 $87 May-04 $230 Jun-04 $174 Jul-04 $202 Aug-04 $296 Sep-04 $257 Oct-04 $192



Nov-04 $212 Dec-04 $283 Jan-05 $230 Feb-05 $314 Mar-05 $284 Apr-05 $169 May-05 $319 Jun-05 $348 Jul-05 $277 Aug-05 $534 Sep-05 $346 Oct-05 $252 Nov-05 $280 Dec-05 $478 Jan-06 $340 Feb-06 $526 Mar-06 $480 Apr-06 $388 May-06 $820 Jun-06 $612 Jul-06 $548 Aug-06 $1,065 Sep-06 $700 Oct-06 $649 Nov-06 $939 Dec-06 $1,001 Jan-07 $1,266 Feb-07 $1,520 Mar-07 $2,335 Apr-07 $1,324 May-07 $2,158 Jun-07 $1,767 Jul-07 $1,963 Aug-07 $2,367 Sep-07 $1,779 Oct-07 $1,808 Nov-07 $1,774 Dec-07 $2,843 Jan-08 $1,544 Feb-08 $1,346 Mar-08 $2,725 Apr-08 $2,285 May-08 $3,665 Jun-08 $2,830 Jul-08 $2,905 Aug-08 $3,671 Sep-08 $2,907 Oct-08 $3,769 Nov-08 $3,378 Dec-08 $4,404 Jan-09 $2,672 Feb-09 $3,401 Mar-09 $3,443 Apr-09 $2,484 May-09 $3,179 Jun-09 $2,127 Jul-09 $2,127 Aug-09 $2,745 Sep-09 $2,380 Oct-09 $2,567 Nov-09 $2,322 Dec-09 $3,093 Jan-10 $2,268 Feb-10 $2,406



Mar-10 $2,558 Apr-10 $1,964 May-10 $2,342 Jun-10 $1,788 Jul-10 $1,836 Aug-10 $1,963 Sep-10 $1,380 Oct-10 $1,705 Nov-10 $1,423 Dec-10 $1,817 Jan-11 $1,551 Feb-11 $1,502 Mar-11 $1,487 Apr-11 $1,359 May-11 $1,706 Jun-11 $1,459 Jul-11 $2,144 Aug-11 $2,122 Sep-11 $2,365 Oct-11 $2,448 Nov-11 $2,425 Dec-11 $3,209 Jan-12 $2,404 Feb-12 $2,542 Mar-12 $2,557 Apr-12 $3,002 May-12 $3,587 Jun-12 $2,943 Jul-12 $1,951 Aug-12 $3,008 Sep-12 $1,892 Oct-12 $2,503 Nov-12 $2,240 Dec-12 $2,327 Jan-13 $1,821 Feb-13 $1,985 Mar-13 $1,905 Apr-13 $2,557 May-13 $2,882 Jun-13 $2,543 Jul-13 $1,971 Aug-13 $2,956 Sep-13 $2,434 Oct-13 $2,054 Nov-13 $1,715 Dec-13 $1,868 Jan-14 $1,744 Feb-14 $1,901 Mar-14 $1,824 Apr-14 $2,448 May-14 $2,759 Jun-14 $2,434 Jul-14 $1,886 Aug-14 $2,828 Sep-14 $2,329 Oct-14 $1,965 Nov-14 $1,640 Dec-14 $1,786

Table-5 FDI Forecasting Results

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