The Role of FDI in Economic Growth: A Study About Odisha: Orissa Review

Orissa Review
The Role of FDI in Economic Growth : A Study

About Odisha
Dr. Rashmita Sahoo
Soumendra Patra
The name Orissa is derived from Sanskrit word for industrial growth. In Eastern India, Orissa is
“Odra Vishaya” or “Odra Desa”. The ancient really growing in real sense to become an industrial
province of “Odra Desa” or “Or-Desa” was hub in the coming years.
limited to the valley of the Mahanadi and to the Orissa one of the coastal states of India,
lower course of the Subarnarekha River. The comprises 4.74% of the landmass and accounts
Orissa State, which was once a land of Kings for 3.58% of the population of the country (2001
and Kingdoms, now boasts of being rich source census). Nearly 85% of its population live in the
of natural resources. Its people, temple rural areas and depend mostly on agriculture for
architecture, classical dance, religions, fairs and their livelihood. The State has abundant mineral
festivals, unique handlooms and handicrafts, green resources and as percentage of all India resource
woodlands, rock caves, charming blue hills have stock, there is fairly heavy concentration in respect
always attracted historians, tourists and travellers of Bauxite, Chromites, Graphite, Nickel, Coal
from all over the world. and Iron-Ore. The rate of cumulative exploitation
Orissa is one of the important states of has remained low. However this has not provided
India which is endowed with varieties of mineral a sufficient condition for the establishment of
resources. The mineral resources of Orissa have metallurgical and non-metallic mineral based
reputation for being qualitative for industries. The industries on a large scale in the State. Even the
mineral resources of Orissa include Iron ore, value addition within the State has remained
Manganese, Coal, Bauxite, Dolomite, Tin, etc. relatively low. Paradoxically, Orissa continues to
Mineral resources have played an important role remain poor among plenty of resources.
to make Orissa hot destinations for industries. Government of Orissa aims at creating
Because of mineral resources big industries, like an industry-enabling and investor- friendly climate
Rourkela Steel Plant, National Aluminum in the State with a view to accelerating industrial
Company, National Thermal Power Corporation, developments, employment opportunities and
have established their positions not only in India economic growth. IPR-2001 and Orissa
but also in world market. Besides those, reforms Industries (Facilitation) Act, 2004 incorporate the
in infrastructure in recent years have created an above objectives. Govt. Orissa has already
atmosphere conducive for major industries of the emerged as a major investment destination for
world to look forward to Orissa as an epi-centre national as well as transborder national investors,
20 June - 2011
Orissa Review
especially in steel, aluminium, petrochemicals, ♦ Technology transfer coupled with

power, IT and ITES, food processing industries, knowledge diffusion that leads to
tourism and other such sectors. improvement in productivity. It can, thus,
The Role of Foreign Direct Investment fasten the rate of technological progress
through a ‘contagion’ effect that
The role of Foreign Direct Investment in permeates domestic firms.
an economy goes beyond simply easing financial ♦ The transfer of better organisational and
constraints. FDI inflows are associated with management practices through the
multiple benefits such as technology transfer, linkages between the investing foreign
market access and organisational skills. company and local suppliers and
Consequently, there is an increasing and intense customers.
competition between countries to maximize the
quantity of FDI inflows. Any successful policy for In the context of a developing country like
attracting FDI has to keep this competitive India, the role of FDI in easing financial constraints
scenario in mind. becomes critical. According to the Planning
Commission, at current levels of efficiency in the
The benefits of FDI inflows can be economy, the increase in investment needed to
broadly identified as: achieve a percentage point rise in the overall
♦ Bridging the financial gap between the growth would be 6 percentage points. Since this
quantum of funds needed to sustain a level addition to investment cannot come entirely from
of growth and the domestic availability domestic sources, a substantial portion will have
of funds. to be funded by FDI.
Fig.-1
Source: Directorate of Industries, Governement of Orissa
June - 2011 21
Orissa Review
The key industries in Orissa are primarily basis during 1980-81 to 2006-07 compared to
basic metals (including iron & steel, aluminium) 6% for the same period for the nation as a whole.
and chemicals & chemical products. Between The index number of GSDP (with 1980-81 =
1991-2004, Orissa attracted 0.9 per cent of 100.0) nearly doubled over the 20 years period
India’s investment, aggregating to nearly US$ 370 1980-2000 and has further increased by another
million. Currently, investment worth US$ 20 billion 60 per cent since then. In particular, there has
are in the pipeline in Orissa and a sector-wise been a sharp rise in the index after 2002-03. The
break-up of these projects indicates that a average GSDP growth rate of 8.6 per cent per
majority of the investment are in electricity annum during the period 2002-03 to 2006-07
generation and mineral-based industries including compares very well with the national level. The
aluminium and steel. Orissa can emerge as a hub per capita income of Orissa was about Rs.7700
for metals business in India and has the potential at 1999-2000 prices in the year 1980-81. It
to attract investment up to US$ 30-40 billion over nearly doubled to Rs.15100 in 2006-07 (Figure
the next five years if it focuses on utilising the 2). Per capita income at the national level has
opportunity presented by the current global metals grown by 160 per cent from about Rs.8600 to
cycle. With its locational advantage, and the Rs.22700 during the same period. Orissa thus
current up trend in global market, the State can continues to remain behind the national average
become the metals, mining, and manufacturing hub considerably. There have been attempts to bridge
of the country. Though Orissa accounted for only the gap and the growth rates noticed in recent
6.3 per cent of projects under implementation as years is the first major indicator of a move in that
on January 2005, its share of India’s aggregate direction.
outstanding projects ‘announced’ has risen to 17 Like other developing economy, the
per cent. Its share in manufacturing sector projects economy of Orissa has been going through
announced in India is higher at 38 per cent and structural changes away from agriculture in favour
the investment value of projects announced in of industry and services. Primary sector accounted
Orissa has shot up over four times to US$ 24 for most of income generated in the State in 1980-
billion as on January 2005 from US$ 5.5 billion 81. It has reduced to 32% in 2006-07. It might
in January 2004 (Centre for Monitoring Indian be noted that mining and quarrying sector plays a
Economy). more important role in Orissa and income
During 1991 to 2003, Orissa approved generated in this sector forms about 8% of total
over US$ 2.3 billion of foreign direct investment. income. About 24% of State income is produced
The key sectors attracting FDI in Orissa are by agriculture and allied sectors. Share of
electricity, metals and metallurgical products, secondary sector has increased from 17% to 23%
chemical and chemical products. It now seems and that of services from 30% to 44%. Compared
that there has been a turning point in the last few to the all-India level, primary sector’s share is
years and the economy of Orissa has witnessed about 12% more in Orissa and service sector’s
acceleration in terms of the gross state domestic share is about 10% less. Share of the secondary
product (GSDP). Orissa’s real GSDP has grown sector in Orissa is nearly similar to that for all
by an average annual rate of 4.8% on a long term states taken together.
22 June - 2011
Orissa Review
Fig.-2 domestic private foreign investment and

multilateral investments is likely to propel Odisha’s
Percentage Composition of GDP
economic growth momentum in future.
References
1. Lucas, R. Jr. “On the mechanism of economic
mining & quarrying development”, Journal of Monetary Economics
agriculture & allied 22(3), 1988, pg. 3-42.
secondary 2. www.ibef.org
services
3. Agosin, M. and R. Mayer (2000). “Foreign
investment in Developing Countries: Does it
Crowd in Domestic Investment?” Discussion
Paper No.146, UNCTAD, Geneva.
Source: Directorate of Industries, Governement of
Orissa 4. Government of India (GOI), (2006). Foreign Direct
Investment Policy, Ministry of Commerce and
Industry, Department of Industrial Policy and
Promotion.
Conclusion
5. Lipsey, R. (2000). “Inward FDI and Economic
India’s rising growth trajectory requires Growth in Developing Countries, Transnational
rapidly expanding infrastructure facilities to Corporations, 9, pp.67-95.
support it. The Government recognises the fact
6. Directorate of Industries, Governement of Orissa
that domestic resources alone may not be
adequate to sustain the required expansion in
infrastructure. Thus, it has followed a strategy to
create incentives for Foreign Direct Investment.
India, today, has an extremely liberal regime for Dr. Rashmita Sahoo is the Assistant Professor,
FDI in terms of entry norms. As Odisha is a hub Department of Business Administration, Utkal
of mineral resources the Government has taken University, Bhubaneswar.
systematic initiatives to address these problems Soumendra Patra is the Assistant Professor ,Operations
largely through comprehensive reforms in sectors Management, Regional College of Management,
like power, iron and steel. The combination of (Auto), Bhubaneswar.
June - 2011 23

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Orissa Review

The Role of FDI in Economic Growth : A Study

especially in steel, aluminium, petrochemicals, ♦ Technology transfer coupled with

Source: Directorate of Industries, Governement of Orissa

Fig.-2 domestic private foreign investment and

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