Impact of Global Financial Crisis on FDI Inflows in India and Bangladesh

Impact of Global Financial Crisis on FDI Inflows in India and Bangladesh

Rajib Bhattacharyya (Hooghly Mohsin College, Kolkata, India)
Copyright: © 2017 |Pages: 30
DOI: 10.4018/ijsem.2017010103
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Abstract

The investment climate in India and Bangladesh has undoubtedly become friendlier and investing in these countries has been an attractive proposition today than in earlier years. According to A.T. Kearney's FDI Confidence Index (2014) India ranks 7th on the basis of FDI inflows in the world while Bangladesh ranks 3rdamong SAARC countries. The present analysis attempts to show that though the global financial crisis (2008) had adversely impacted the growth in GDP and employment opportunities and FDI flows throughout the world, India and Bangladesh both had shown considerable resilience to the global economic crisis by maintaining a high growth rate during this period in the world. It highlights the changes the policy regimes in the two countries. It also tries to examine empirically, using secondary time series data, the amount of FDI inflows, component-wise and sector-wise break-up in FDI inflows in both countries during the pre and post-crisis era, based on Exogenous Structural Break Model. The empirical analysis clearly reveals both FDI and FDI-GDP ratio exhibits stationary trend in India while they are difference stationary in case of Bangladesh. It also focuses on the crisis management policies in the two nations for smooth flow of FDI in the long run.
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Introduction

The global financial (2008) had adversely impacted the growth in GDP and employment opportunities throughout the world- both developed and developing economies. Though the global economic slowdown had its epicenter in the US, but the contagion is being witnessed in all major economies of the world. Unlike many other developing countries of the world, India and Bangladesh both had shown considerable resilience to the global economic crisis by maintaining a high growth rate during this period in the world. India recorded a growth rate of 4.9 percent in 2008, which was just half of the growth rate in 2007 (9.8 per cent). But it regained its position in 2009 and 2010 by achieving a GDP growth rate of 9.1 and 8.8 respectively. The government’s initial estimates for FY2014 show that economic growth accelerated to 7.4% (see Figure 1). After growing by 4.5% in FY2013, industry accelerated to 5.9% in FY2014, helped by a 6.8% expansion in manufacturing. Service sector growth rose to 10.6% in FY2014. Agriculture growth slipped to 1.1% in FY2014 largely because the monsoon was erratic, particularly affecting the summer crop.

Similarly, GDP growth rates in Bangladesh remained stable at an average of 6.1 percent during the period 2007 to 2010.In Bangladesh, economic growth in FY2014 (ended June 2014) is estimated at 6.1%, slightly improved from 6.0% in FY2013 (see Figure 1). Agriculture expanded by 3.3%, aided by good weather and continued government support. Industry growth slumped to 8.4% from 9.6% a year earlier, however, because political unrest before the parliamentary election in January 2014 disrupted the supply of materials and undermined consumer confidence. Services advanced by 5.8%, up slightly from 5.5% the year before, mainly on stronger trade in the second half of the year.

Figure 1.

Supply-side contribution to growth. (Sources: Bangladesh Bureau of Statistics. 2014. Implementation: http://www.mospi.nic.in; Ministry of Statistics and Programme National Accounts Statistics. June; ADB estimates.)

From the point of view of FDI flows, total FDI in India dipped by about 10 percent in 2009-10 compared to the earlier year 2008-09 (a fall from US$ 41873 million in 2008-09 to US$ 37745 million in 2009-10). In 2011-12 it increased by 34% as compared to its previous year 2010-11 but it again dropped by 26% in 2012-13. In 2013-14 it increased by about 6% compared to its previous year. In Bangladesh FDI in 2009-10 declined by about 5 percent compared to its previous year (total FDI fell from US$ 960.59 million in 2008-09 to US$ 913.02 million 2009-10). In recent times, in Bangladesh, total FDI inflows (net) reached to US$ 754.28 million during July-December, 2014 which was decreased by US$ 18.14 million or 2.35% compared to FDI inflows (net) during January-June, 2014 (US$ 772.42 million). While in January-June, 2014 FDI inflows (net) was increased by US$ 106.35 million or 15.97% compared to July-December, 2013 and a decrease of US$ 267.02 million or 28.62% during the July-December, 2013 compared to January-June, 2013.

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