FDI inflow in pharmaceutical, chemical, metallurgical and textile industry of India

By Divya Narang & Saptarshi Basu Roy Choudhury on December 19, 2018

The Indian economy witnessed a high FDI inflow after the reform of economic liberalization. The increasing trend continued in the last financial year 2017-18. This increase can be attributed to factors such as the high rate of GDP growth, low inflation rate, exchange rate, trade openness and economic and political stability. Since 2000, the service sector and selected industries in the manufacturing sector showed significant growth and were able to attract a large fraction of the total FDI. One of the reasons why these industries performed well is the union budget of 1999-2000 which supported a greater inflow of FDI through the automatic route  (Singh, 2005). Increased FDI in these industries has opened new doors for better technology, management and marketing networks. Furthermore, it has generated more employment opportunities and offered high competition in domestic industries (Shapiro & Mathur, 2014).

Industries with high FDI inflow

SectorAmount of FDI inflowsTotal InflowsPercentage
Services Sector375,936.7468,617.4117.61%
Computer Software and Hardware185,812.6432,230.148.27%
Construction Development: Townships, housing, built-up infrastructure and construction-development projects118,331.2324,832.366.38%
Automobile Industry109,232.1519,290.594.95%
Drugs & Pharmaceuticals83,071.0715,828.754.06%
Chemicals (other than fertilizers)82,688.2715,387.243.95%
Metallurgical Industries56,407.4110,841.292.84%
Textiles (including dyed, and printed)17,010.202,974.370.76%
Table 1: FDI Equity inflows: from April 2000 to June 2018. Source: India Brand Equity Foundation, (2018).

Figures presented in the above table show that in the past 18 years, apart from the service sector and computer software industries, industries including metallurgical, chemical, pharmaceuticals and textile have attracted high FDI. The inflow of FDI can be regarded as one of the factors behind the growth in these four industries. The chemicals and pharmaceutical industries each contributed to around 4% of the total FDI inflows. The metallurgical industry contributed to approximately 3% of FDI inflows. The textile industry attracted FDI amounting to 0.76% of the total FDI inflow. The sections below focus on the inflow of FDI and growth in these four industries individually.

FDI in the pharmaceutical and chemical industry

India is one of the cheapest producers of drugs, and the pharmaceutical industry and has continuously witnessed large investments in the form of FDI. Indian Multi-National Corporations (MNCs) have highly trained manpower and better technology (Ganesan & Veena, 2018). Therefore, these companies can produce at a large scale at lower costs. Huge foreign investments have brought in new products, the latest technologies and better quality systems. In India, 100% FDI is allowed under the automatic route under certain conditions. The trend of growth in FDI in the industry continued over the years with the flow of FDI amounting to US$ 100 billion in 2015 and crossing US$ 160 billion in 2017. In addition to this, it is estimated that the FDI will boost in the coming years and the inflow will rise to reach US$ 280 billion in 2020 (Mangla & Sekhon, 2013).

Figure 1: FDI inflow in the Pharmaceutical industry in India
Figure 1: FDI inflow in the Pharmaceutical industry in India

The chemical industry in India has shown enormous growth, emerging as the 3rd largest producer in terms of value and volume of production in Asia and the 7th largest producer in the world (India Brand Equity Foundation, 2017). Furthermore, this industry comprises 16% of the world’s production of dyestuff and dye intermediates. This growth can be attributed to a significant rise in the FDI. From 1991 to 2006, the FDI inflows in the chemical industry amounted to US$ 2.2 billion which was approximately 6% of the total FDI inflows. The flow of FDI underwent a significant change between the period of 2006 to 2008. In this period, the size of the Indian chemical industry increased by over 3.6 times. Following this, the industry witnessed a significant decline in the latter part of 2008 due to the global financial crisis. However, the FDI inflows bounced back after the meltdown and FDI inflows amounted to US$ 12.68 billion in 2016, supported by Government policies which allowed 100% FDI and de-licensing of the manufacturing of chemical products (India Brand Equity Foundation, 2017).

FDI in metallurgical and the textile industry

Metals are one of the critical inputs available for various manufacturers including engineering, automobiles, electronics, packaging and so on. Hence, the metallurgical industry requires huge investments in the form of capital and technology. FDI is playing a significant role in this industry in India even before the economic reforms took place. In 1990, the sector was among the top five industries attracting FDI (Ray & Ghosh, 2014). In the period post-2000, the industry boosted during 2007-08 in which the amount of FDI inflow reached about 1176 US$ million. Following a slump in 2008-09 and 2009-10 due to the global recession, it recovered to register a peak FDI inflow in 2012-13, of US$ 1786.14 million (data.gov.in, 2018). Among the sectors attracting the highest FDI flows, the metallurgical industry comprises 4% of the total FDI inflows during the period 2000 to 2018 (India Brand Equity Foundation, 2018).

Figure 2: FDI inflow in Metallurgical industry in India (Source: Department of Industrial Policy and Promotion, Ministry of Commerce and Industry).
Figure 2: FDI inflow in the Metallurgical industry in India (Source: Department of Industrial Policy and Promotion, Ministry of Commerce and Industry).

The textile industry contributed 2% of the total GDP and 15% of the total exports in the year 2017-18 (IBEF, 2018). Moreover, it also creates employment for over 45 million people. Government support through various schemes and policies has boosted the growth of FDI in this industry. The Government has allowed 100% FDI through the automatic route. From 2010 to 2016, FDI in the textile sector grew at a compound annual growth rate (CAGR) of 14.6 %. Further, the market is expected to touch US$ 2500 million in 2019 (Ministry of Textiles, 2018).

Figure 3: FDI inflow in the Textile industry in India (Source: DIPP).
Figure 3: FDI inflow in the Textile industry in India (Source: DIPP).

Variations in the FDI inflow

Developing countries like India are characterized by capital scarcity and adopt all possible measures to allow foreign investment to support economic growth. FDI has strongly supported growth in the Indian economy from labour to capital-intensive sectors. However, the major share is concentrated among a few industries. The inflow of FDI in these industries has helped them to achieve significant growth patterns. Four such initiatives namely pharmaceutical, chemical, metallurgical and textile are identified and focused upon in this article. These industries have shown high growth trends and require liberal policies, better infrastructure and lower trade barriers to attract more FDI. The next article will emphasize the factors that explain this industry-wise variation in FDI or in other words, explain why some industries are able to attract more FDI than others.