Liberalisation and Changing Sectoral Composition of FDI:

The latest is the ICT wave that has influenced the global shift in service industries the most. Therefore, these  flows are now  accompanied by a change in  the composition  of  such flows more and more  in  the  new  economy  sectors including telecommunication, electronics, and  information technology. The evidence is that for the developing world, a modem telecommunications i infrastructure is not only essential for domestic economic growth, but also a prerequisite for participation  in  increasingly competitive world markets and for attracting  new investments. With this  realisation developing  countries  have begun to acknowledge that inadequate telecommunications infrastructure will be a disincentive  to new investment and therefore place existing  industry at a competitive disadvantage. 

The sectoral composition of FDI in India has undergone significant change  in the 1990s.  Some characteristics  of FDI stock in India can be noted.  i) The share of mining and petroleum along with plantation sector in FDI stock has fallen (from 9 per cent in 1980 to only 2 per cent in 1997).  ii) The  bulk of FDI  inflows in  the pre-liberalisation era were directed to manufacturing sector, (its share was 87 per cent in 1980 that declined to 85 per cent in 1990).  However, with the liberalisation of FDI policy regime in the  1990s, FDI  inflows have been received more by services  and  infrastructural  sectors. This  has brought the share of manufacturing down to 48 percent by  1997. During the 1990s, services clearly emerged as a major sector receiving FDI. Power generation (among other  infrastructure sectors)  has also attracted substantial  FDI during  the 1990s. 

Among  the manufacturing sub-sectors,  FDI in  1997 was more evenly distributed among  the following sectors  food and  beverages, transport equipment, metals and metal products, electricals and electronics, chemicals and allied products, and miscellaneous manufacturing. This was in contrast to a very heavy concentration  in  technology intensive sectors, like machinery, chemicals, electricals, and transport equipment up to 1990.  The infrastructural sectors, which have commanded nearly half of total approved investments  in the 1990s had  not been open to FDI  inflows before and  hence  could  be attributed  to the policy liberalisation.

It may be usehl to look at the distribution of inward FDI within the services sector given its increasing importance  in the FDI inflows during the 1990s. A look  at  the  sub-sector break up  of cumulative approvals of FDI  during the 1991-2000 periods suggests that about 61 per cent FDI  has gone  to  the telecommunications sector. The  financial and banking sector stood as the second most important  sector claiming  about  14 per  cent of total amount approved. Other important sectors  are hotel and  tourism, and  air  and  sea transport.