fdi in india and its growth linkages - Department Of Industrial Policy ...

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Chapter 5: FDI: Linkages with the Economy 5.1 The Concept One of the important gains expected from FDI inflows is that it would bring in new skills and technologies and would generate productive linkages with the economy. The concepts of backward and forward linkages were first described by Hirschman (1958). Backward linkages refer to the impact of increase in the output of a downstream industry on its demand for inputs from upstream industries. For example, increased production of passenger cars would boost demand for steel, rubber (tyres), auto components, etc. The impact of backward linkages differs across upstream industries since the downstream industry does not buy inputs equally from all industries. Forward linkages refer to increased production of an upstream industry on requirements of downstream industries. Thus, increased production of petroleum products would make its availability easy for downstream industries that use petroleum products as inputs. The impact of forward linkages is not uniform across downstream industries since their requirements of input from an upstream industry are not uniform. An industry may be strong in its backward linkage effects, forward linkage effects, both of these or none of these. FDI inflows have various types of impact on a domestic economy. One of the most important effects relates to “vertical linkages”, i.e., the impact of FDI coming to a particular sector on inter-industry transactions. Vertical spill-overs can be analysed through computing backward and forward linkages of sectors where the FDI is coming in. We concord four-digit DIPP sectors into 130 Input Output Transaction Matrix (IOTM) sectors to check the type of sectors into which a major share of FDI has been received. 5.2 Computation of Linkages We used the Hirschman-Rasmussen Index method to compute backward and forward linkages from India’s IOTM (2003-04). Backward linkages refer to the demand-pull concept and forward linkages to the supply-push concept developed by Rasmussen (1958) and Hirschman (1958). 1 We follow the computations of backward and forward linkages based on the standard input-output model of an economy: AX + F = X and X = (I – A) -1 F or X = BF where X is the n x 1 vector of total output requirement of the economy with n sectors of production; A is the n x n matrix of input coefficients; F is the n x 1 vector of final demand; and B is the n x n matrix of (I – A) -1 . aij are n x n elements of input coefficients of A-matrix of IOTM and bij are n x n elements of (I – A) -1 matrix. 1. Refer to CSIRO (2007) for details on computation of backward and forward linkages. 49
FDI IN INDIA AND ITS GROWTH LINKAGES The backward linkage index, BL j is computed as: The backward linkage for sector j reflects the effects of one unit increase in final demand in this sector on overall economic activity. The forward linkage effect, FL i , is computed as: The forward linkage for sector i reflects the effects of one unit increase in production of sector i on overall economic activity. 5.3 Sectoral Linkages with FDI Inflows Linkage effects have been computed for all 130 IOTM sectors. Sectors have then been identified under four different categories, viz.: a) KY: key sectors with strong backward and forward linkages (BLj > 1 and FLi > 1); b) BW: strong backward linkages (BL j > 1 and FL i < 1); c) FW: strong forward linkages (BL j < 1 and FL i > 1); and d) NK: non-key sectors with weak backward and forward linkages (BL j < 1 and FL i < 1). Sectors disaggregated under these four categories are presented in Tables 5.1 to 5.4. IOTM sectors which have strong backward and forward linkages (KY) in India’s economic structure include electricity (IOTM sector number 107), petroleum products (63), land transport (110), non-ferrous basic metals (80) and iron, steel and ferrous alloys (77) (Table 5.1). Some of the KY sectors have relatively high backward linkages, while others have relatively high forward linkages. Sectors with high backward linkages (BW) include electronics equipment (94); electrical wires and cables (89); batteries (90); electrical industrial machinery (88); and art silk & synthetic fibre textiles (50) (Table 5.2). Sectors with high forward linkages (FW) include trade (116); banking (118); crude petroleum (29); coal and lignite (27); and communications (115) (Table 5.3). Finally, sectors with weak BW and FW linkages (NK) include agricultural products; some of the mineral products; tobacco products; wood and wood products; and some of the services (Table 5.4). The 4-digit DIPP-classified sectors have then been arranged in descending order of FDI inflows. These sectors have been classified under four linkage categories based on their match with IOTM sectors. The top 15 aggregate DIPP 4digit sectors account for about 95 per cent of the total FDI inflows during 2000-2007 (Table 5.5). Four sectors among the top 15 DIPP sectors include key sectors (KS), viz., miscellaneous industries including 50
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FDI IN INDIA AND ITS GROWTH LINKAGE
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PROJECT TEAM Study Team Project Lea
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linkages with the economy. The sect
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Contents Executive Summary Chapter
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Chapter 5: FDI: Linkages with the E
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Executive Summary Foreign direct in
Page 18 and 19: EXECUTIVE SUMMARY petroleum product
Page 20 and 21: Chapter 1: Introduction 1.1 Backdro
Page 22 and 23: section industry data. However, the
Page 24 and 25: in India stood at $23 billion, show
Page 26 and 27: viii) Backward and Forward Linkages
Page 28 and 29: Chapter 2: FDI Scenario in India: T
Page 30 and 31: Secretariat for Industrial Assistan
Page 32 and 33: Table 2.2 shows that FDI outflows f
Page 34 and 35: at about 2 per cent or less of the
Page 36 and 37: Table 2.5 Sector-wise Break-up of F
Page 38 and 39: Table 2.7 FDI in India in the Servi
Page 40 and 41: Figure 2.4 Country-wise FDI Inflows
Page 42 and 43: 2.10 Foreign Technology Transfers A
Page 44 and 45: Chapter 3: Mergers & Acquisitions a
Page 46 and 47: Table 3.2 Short-term effects of FDI
Page 48 and 49: proportion of foreign investment in
Page 50 and 51: Chapter 4: Special Economic Zones (
Page 52 and 53: 4.4 Management of SEZs SEZs are und
Page 54 and 55: in the eight major SEZ’s exports
Page 56 and 57: Foreign Direct Investment in SEZs S
Page 58 and 59: In a span of a few years, there hav
Page 60 and 61: SPECIAL ECONOMIC ZONES (SEZS) AND F
Page 62 and 63: existing infrastructure, (b) exploi
Page 70 and 71: construction (4200); fuels, includi
Page 72 and 73: FDI: LINKAGES WITH THE ECONOMY S. N
Page 74: Table 5.5 Sector-wise FDI in India
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Page 92 and 93: Chapter 7: Primary Survey: Analysis
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Page 96 and 97: PRIMARY SURVEY: ANALYSIS AND RESULT
Page 98 and 99: Table 7.1a Distribution of Surveyed
Page 100 and 101: Table 7.2b Zone-wise Distribution o
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Page 104 and 105: Table 7.6a Number of Employees in S
Page 106 and 107: Table 7.7a Mode of Transport from F
Page 108 and 109: Table 7.8a Number of FDI-enabled Fi
Page 110 and 111: Chapter 8: FDI Data Reporting and C
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Page 116 and 117: Table 8.1 Trends in FDI Inflows to
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FDI DATA REPORTING AND CLASSIFICATI
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Table 8.3 Trends in FDI Inflows by
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Table 8.5 DIPP Classification of FD
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SECTOR-WISE CODE 3700 DEFENCE INDUS
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S. No. DIPP DIPP Activity NIC 2-Dig
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Chapter 10: Key Findings and Salien
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Findings � About half the total o
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7. Forex Implications: To understan
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manufacturing firms taken together.
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References Australian Bureau of Sta
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for economic growth and poverty all
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Tables for Chapter 6
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Questionnaires
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