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A Study of Foreign Direct Investment & its Impact on Indian Economy

JYOTI SIWACH
M.A., M.Phil, NET
Department of Economics
C.C.S. University Meerut (India)
Abstract: FDI plays a vital role for economic development of any developing country. The
importance of FDI in India has increased significantly over the last two decades. FDI serves as
a link between investment and saving. Many developing countries like India, are facing the
deficit of savings. This problem can be solved with the help of Foreign Direct Investment.
Foreign investment helps in reducing the defect of BOP and provides the base and pre requisite
for rapid GDP growth. This study is entirely based on the secondary data. This paper makes an
in-depth study to analyse the scenario of FDI and its impact on Indian economy. For this
purpose empirical data are estimated for the period 1991 to 2014. For this purpose we use some
useful statistical tools like correlation and linear regression analysis. For data analysis SPSS
software has been used. And we conclude that there is significant effect of FDI on Indias GDP.
Key Words:- Foreign Direct Investment, Economic Development, GDP
Introduction
FDI plays an important role in Indian economic development. FDI is an important and vital
component of development strategy in both developed and developing nations and policies are
designed in order to stimulate inward flows. Infact, FDI provides a win win situation to the
host and the home countries. Both countries are directly interested in inviting FDI, because they
benefit a lot from such type of investment. The home countries want to take the advantage of
the vast markets opened by industrial growth. On the other hand the host countries want to
acquire technological and managerial skills and supplement domestic savings and foreign
exchange. Moreover, the paucity of all types of resources viz. financial, capital,
entrepreneurship, technological know- how, skills and practices, access to markets- abroad- in
their economic development, developing nations accepted FDI as a sole visible panacea for all
their scarcities. A high level of FDI is viewed as an affirmation country. This is very true in case
of various developing countries like India. India is suffering from the scarcity of financial
resources and low level of capital formation because it has to majorly depend upon the external
sources of Finance.Also the domestic resources are entirely inadequate to carry out development
programmes.
Objectives of the Study:
1.) To analyse the trends of FDI past two decades in india.
2.) To analyse the impact of FDI in Indian economic development.
Data and Research Methodology

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This study has been carried out with the help of secondary data the data related to FDI inflows
and GDP have been collected from various sources like Bulletins of Reserve Bank of India, Fact
sheets of DIPP, Govt. of India from the period 1991 to 2013.
Evaluation of FDI and GDP in India during (1991-92 to 2013-2014)
The following table depicts the picture of FDI inflow and its impact on GDP
Years

FDI

Growth rate

GDP

Growth

Inflow (in rupees

crore)

of FDI

(in rupees crore)

rate of

FDI
as
apercentage of
GDP

inflow (%)

GDP (%)

1991-92

409

1099072

0.0372

1992-93

1094

167.48

1158025

5.36

0.0945

1993-94

2018

84.46

1223816

5.68

0.1649

1994-95

4312

113.68

1302076

6.39

0.3312

1995-96

6916

60.39

1396976

7.29

0.4951

1996-97

9654

39.59

1508378

7.97

0.6400

1997-98

13548

40.34

1573263

4.30

0.8611

1998-99

12343

-8.89

1678410

6.68

0.7354

1999-00

10311

-16.46

1786525

6.44

0.5772

2000-01

10733

4.09

1864301

4.35

0.5757

2001-02

18654

73.80

1972606

5.81

0.9457

2002-03

12871

-31.00

2048286

3.84

0.6284

2003-04

10064

-21.81

2222758

8.52

0.4528

2004-05

14653

45.60

2388768

7.47

0.6134

2005-06

24584

67.77

3254216

36.23

0.7555

2006-07

56390

129.38

3566011

9.58

1.5813

2007-08

98642

74.93

3898958

9.34

2.5300

2008-09

142829

44.80

4162509

6.76

3.4313

2009-10

123120

-13.80

4493743

7.96

2.7398

2010-11

97320

-20.96

4918533

9.45

1.9786

2011-12

165146

69.69

5247530

6.69

3.1471

2012-13

121907

-26.18

5482111

4.47

2.2237

2013-14

147518

21.01

5741791

4.74

2.5692

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Source: compiled & computed from the various issues of Economic Survey, RBI Bulletin,
Ministry of Commerce
FDI in India during (1991-92 to 2013-2014)
The above table shows the FDI inflow in India from the year 1991-92 to 2013-2014(postliberalization period). The table states that India had showed a large amount of FDI inflow. It
showed that FDI inflow has been increased by more than 210 times during the study period
because the FDI Inflow has been increased from Rs. 409 crore in 1991-92 to Rs. 147518 crore in
20013-2014. Due to technological up gradation, access to global managerial skills and practices,
optimal utilization of human and natural resources, making Indian industry internationally
competitive, opening up export markets, providing backward forward linkages and access to
international quality goods and services the Indian Government has used many steps to attract
more FDI. The highest amount of FDI was received in the year 2011-2012, amounting to
Rs.1651146 crore. The highest growth rate of FDI inflow is in the year 2006-07 i.e., 129.36.
percent. SO in all the foreign investment have been on rise in India.
Future Outlook
India is estimated to require around US$ 1 trillion during the 12th Five-Year Plan period (2012
17), to fund infrastructure in sectors such as roads, airports and ports. The government is in the
process of liberalising FDI norms in construction activities and railways, which could bring in
investments to meet the target. The government is also relaxing FDI norms in other sectors for
foreign investors to invest. FDI in multi-brand retail has been allowed up to 51 per cent. The
minimum requirement for the FDI is US$ 100 million, of which at least 50 per cent must be
invested in 'backend infrastructure' within three years following the initiation of the FDI. FDI
limit in single-brand retail has been increased to 100 per cent; 49 per cent will be under the
automatic route and the rest through the FIPB route.

FDI Inflow (in rupees crore)

200000
150000
100000
50000
0

FDI Inflow (in rupees crore)

GDP in India during (1991-92 to 2013-2014)

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GDP (in Rupees Crore)

2013-14

2012-13

2011-12

2010-11

2009-10

2008-09

2007-08

2006-07

2005-06

2004-05

2003-04

2002-03

2001-02

2000-01

1999-00

1998-99

1997-98

1996-97

1995-96

1994-95

1993-94

1992-93

1991-92

7000000
6000000
5000000
4000000
3000000
2000000
1000000
0

GDP

The Gross Domestic Product (GDP) in India was worth Rs 5741751 crore in 2013-14. The GDP
value of India represents 2.97 percent of the world economy. GDP in India is reported by the The
World Bank Group. From 1991 until 2013-14, India GDP reaching an all time high of Rs
5741751 crore in 2013-14 and a record low of Rs 1099072 crore in 1991-92. The gross domestic
product (GDP) measures of national income and output for a given country's economy. The gross
domestic product (GDP) is equal to the total expenditures for all final goods and services
produced within the country in a stipulated period of time.
Sources of FDI in India
India has broadened the sources of FDI in the period of reforms. There were 120 countries
investing in India in 2008 as compared to 15 countries in 1991. Thus the number of countries
investing in India increased after reforms. After liberalization of economy Mauritius, South
Korea, Malaysia, Cayman Islands and many more countries predominantly appears on the list of
major investors apart from U.S., U.K., Germany, Japan, Italy, and France which are not only the
major investor now but during pre- liberalizations era also.

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SHARE OF TOP INVESTING COUNTRIES FDI EQUITY INFLOWS (Financial years):

Amount Rupees in crores (US$ in million)
Ranks

Country

2011-12

2012-13

( April -

(April
March)

March)

2013-14

Cumulative

(April, 13- Inflows

March,
(April 00 2014)
March 14)

%age
total

to

Inflows
(in terms
of US $)

1.

2.

3.

4.

5.

6.

7.

8.

10.

MAURITIUS

SINGAPORE

U.K.

JAPAN

U.S.A.

NETHERLANDS

CYPRUS

GERMANY

FRANCE

SWITZERLAND

46,710

51,654

29,360

370,485

(9,942)

(9,497)

(4,859)

(78,525)

24,712

12,594

35,625

125,807

(5,257)

(2,308)

(5,985)

(25,445)

36,428

5,797

20,426

100,885

(7,874)

(1,080)

(3,215)

(20,764)

14,089

12,243

10,550

80,644

(2,972)

(2,237)

(1,718)

(16,268)

5,347

3,033

4,807

55,730

(1,115)

(557)

(806)

(11,927)

6,698

10,054

13,920

56,298

(1,409)

(1,856)

(2,270)

(11,236)

7,722

2,658

3,401

35,729

(1,587)

(490)

(557)

(7,446)

7,452

4,684

6,093

31,605

(1,622)

(860)

(1,038)

(6,519)

3,110

3,487

1,842

18,706

(663)

(646)

(305)

(3,879)

1,728

987

2,084

13,148

(353)

(180)

(341)

(2,708)

121,907

147,518

1,044,430

(22,423)

(24,299)

(217,703)

TOTAL FDI INFLOWS 165,146

FROM
ALL
(35,121)
COUNTRIES *

36 %

12 %

10 %

8%

6%

5%

3%

3%

2%

1%

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Source: compiled & computed from the various issues of Economic Survey, RBI Bulletin,
Ministry of Commerce
The analysis in Table presents the major investing countries in India during 1991-2013.
Mauritius is the largest investor in India during 1991-2013. FDI inflows from Mauritius
constitute about 36% of the total FDI in India and enjoying the top position on Indias FDI map.
The Singapore is the second largest investing country in India. While comparing the investment
made by both (Mauritius and US) countries one interesting fact comes up which shows that there
is a huge difference (between FDI inflows to India from Mauritius and the US) in the volume of
FDI received from Mauritius and the US. FDI inflow from Mauritius is more than double then
that from the US. The other major countries are Singapore with a relative share of 7.2% followed
by UK, Netherlands, Japan, Germany, Cyprus, France, and Switzerland. Thus, an analysis of last
eighteen years of FDI inflows shows that only five countries accounted for nearly 66% of the
total FDI inflows in India. India needs enormous amount of financial resources to carry forward
the agenda of transformation (i.e. from a planned economy to an open market), to tackle
imbalance in BOP, to accelerate the rate of economic growth and have a sustained economic
growth
Sectors attracting highest equity inflows:
Amount in Rs. crores (US$ in million)
Ranks

Sector

Amt
(in Rs crore)

US $ in Million % age to total

Inflows
(in
terms of US $)

1
2

Services Sector
Construction
Development:
Townships, Housing, Built-Up
Infrastructure
TELECOMMUNICATIONS
(Radio
Paging,
Cellular
Mobile,
Basic
Telephone
Services)
Computer
Software
&
Hardware
Drugs & Pharmaceuticals
Automobile Industry
Chemicals
(other
than
fertilizer)
Power
Metallurgical Industries
Hotel & Tourism

185570
108558

39460
23306

18%
11%

66720

14163

7%

59671

12817

6%

56070
48197
45234

11598
9812
9668

5%
5%
4%

42655
38250
36209

8900
8075
7118

4%
4%
3%

4
5
6
7
8
9
10

Note: (i)** Services sector includes Financial, Banking, Insurance, Non-Financial / Business,
Outsourcing, R&D, Courier, Tech. Testing and Analysis
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(ii) Cumulative Sector- wise FDI equity inflows (from April, 2000 to March, 2014) are at Annex-B.
(iii) FDI Sectoral data has been revalidated / reconciled in line with the RBI, which reflects
minor changes in the FDI figures (increase/decrease) as compared to the earlier published
sectoral data.
Percentage to total FDI Inflows
Metallurgical
Industries, 4%

Chemicals (other
than fertilizer), 4%

Hotel &
Tourism, 3%

Power, 4%
Services Sector, 18%

Automobile
Industry, 5%
Construction
Development, 11%

Drugs &
Pharmaceuticals, 5
%

Telecommunication,
7%

Computer Software
& Hardware, 6%

Source: compiled & computed from the various issues of Economic Survey, RBI Bulletin,
Ministry of Commerce
FDI inflows are welcomed currently in 63 sectors as compared to 16 sectors in 1991.The Chart
shows the service sector has the highest FDI inflow attracting 18% share, followed by
construction development attracting 11% share, computer software & hardware, drugs &
pharmaceuticals.
Hypothesis
In order to fulfil the objectives of the study, Hypothesis has been formulated and further
validated through the use of statistical tools like Simple Regression and Correlation analysis. The
correlation is applied to study the linear relationship between variables such as FDI & GDP
while, the linear regression analysis is used to evaluate the effects of independent variable (FDI
inflows) on a single dependent variable (GDP). Based on the stated sample, the relationship
between variables can be explained by simple regression model equation of the form Y=a+b*x ,
Where X will be the independent variable FDI (inflows in India) and Y will be the dependent
variable GDP(in crore).
The first model is the simple regression analysis to explain the dependency of GDP on FDI.
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GDP=0+ 1 (FDI)
Where:
H0: There is no significant relationship between FDI inflow and growth of GDP in India.
Ha: There is significant relationship between FDI inflow and growth of GDP in India.
Correlation
FDI
FDI

GDP

0.942796

GDP

Pearson correlation coefficient, is 0.9427 which shows the correlation between FDI and GDP (IN
Rupees crore), in India is very direct and strong as the coefficient is between 0 and 1.
Regression
Coefficientsa
Unstandardized
Coefficients
Model
B
Std. Error
1
(Constant) 1538807.898 146610.097
FDI
25.878
1.997
a. Dependent Variable: GDP

Standardized
Coefficients
Beta
t
10.496
.943
12.960

Sig.
.000
.000

GDP=1538808+25.87FDI
Regression result shows the positive value of 1 (25.87). It indicates that the unit change
in the dependent variable due to the change in the value of pridictor.
Column standard error gives the standard errors(i.e.the estimated standard deviation of
least squares estimates. In regression model s(1 ) is 1.99 and 1 /2 is (25.87/2=12.93 ).
Hence, s(1 < 1 /2), so we reject the null hypothesis and conclude that estimate is
statistically significant.
ANOVAb
Sum
of
Mean
Model
Squares
df
Square
F
Sig.
1
Regression 4.748E13
1
4.748E13
167.958 .000a
Residual
5.937E12
21
2.827E11
Total
5.342E13
22
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ANOVAb
Sum
of
Model
Squares
df
1
Regression 4.748E13
1
Residual
5.937E12
21
Total
5.342E13
22
a. Predictors: (Constant), FDI
b. Dependent Variable: GDP

Mean
Square
4.748E13
2.827E11

F
167.958

Sig.
.000a

Model Summary
Model R
1
.943a

Adjusted
R Square Square
.889
.884

R Std. Error of
the Estimate
531687.2210
0

a. Predictors: (Constant), FDI

The correlation co-efficient among the variables is 0.94 which indicates the high degree
of positive correlation.
The co-efficient of determination, R2 is 0.88. this shows that the variation of the
dependent variable (GDP) is explained nearly 88% by the explanatory varible(FDI).
Adjusted R2 measure the proportion of the variance in the dependent variable that was
explained by the variation in the independent variable. Adjusted R2 shows 88% of
variance was explained.

Hence we reject the null hypothesis at 5% level of significance. So the

estimated results of the model demonstrate that there is significant relationship between FDI and
GDP in India.
Conclussion:
On the basis of study we draw conclusion that there is significant relationship between FDI and
GDP in India . There is an upward trend in the flows of foreign investment particularly in study
period. We should provide the better environment for attracting the foreign investment through
direct as well as indirect methods. We should welcome inflow of foreign investment in such way
that it should be convenient and favorable for Indian economy and enable us to achieve our
cherished goal like rapid economic development, removal of poverty, internal personal disparity
in the development and making our Balance of Payment favorable. So we saw an upward trends
in GDP. But we saw fluctuation in percentage growth rate of GDP. It has been analysed that
amongst the various sectors attracting FDI, service sector has the highest FDI inflow attracting
18% share, followed by construction development attracting 11% share, computer software &
hardware, drugs & pharmaceuticals. Mauritius and United states are the two major countries
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holding first and the second position in the investors list of FDI in India. During the period of
1991-14, the highest FDI inflow had been for the year 2011-12 with 35121 US $ million. In all
the foreign investment have been on rise in India.
Current Challenges and Improvement Areas
India is definitely a lucrative place for FDI, but there are certainly some challenges and areas for
improvement still present. Until, these areas are honed to perfection, India will not become the
number one place for FDI. India is focusing on maximizing political and social stability along
with a regulatory environment. In spite of the obvious advantages of FDIs, there are quite a few
challenges facing larger FDIs in India, such as:
Resource challenge: India is known to have huge amounts of resources. There is manpower and
significant availability of fixed and working capital. At the same time, there are some
underexploited or unexploited resources. Theresources are well available in the rural as well as
the urban areas. The focus is to increase infrastructure 10 years down the line, for which the
requirement will be an amount of about US$ 150 billion. This is the first step to overcome
challenges facing larger FDI.
Equity challenge: India is definitely developing in a much faster pace now than before but in
spite of that it can be identified that developments have taken place unevenly. This means that
while the more urban areas have bee tapped, the poorer sections are inadequately exploited. To
get the complete picture of growth, it is essential to make sure that the rural section has more or
less the same amount of development as the urbanized ones. Thus, fostering social equality and
at the same time, a balanced economic growth.
Political Challenge: The support of the political structure has to be there towards the investing
countries abroad. This can be worked out when foreign investors put forward their persuasion for
increasing FDI capital in various sectors like banking, and insurance. So, there has to be a
common ground between the Parliament and the Foreign countries investing in India. This would
increase the reforms in the FDI area of the country.
Federal Challenge: Very important among the major challenges facing larger FDI, is the need
to speed up the implementation of policies, rules, and regulations. The vital part is to keep the
implementation of policies in all the states of India at par. Thus, asking for equal speed in policy
implementation among the states in India is important.
India must also focus on areas of poverty reduction, trade liberalization, and banking and
insurance liberalization. Challenges facing larger FDI are not just restricted to the ones
mentioned above, because trade relations with foreign investors will always bring in new
challenges in investments.
REFERENCES
S.Sinha Swapna et al. (2007) Comparative analysis of FDI in china and India,
Journal of Asia Entrepreneurship and Sustainability Volume III

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Preetha, G. (2011), Foreign Direct Investment in the Indian Telecommunication

Sector An Overview, International Journal of Multidisciplinary Research, 1(8),
107-116
Alam Feroz Mohd. (2005) Impact of foreign direct investment on Indian Economy
since economic liberalization, public opinion monthly survey, vol.2,
Hossain, A. and Hossain, M. K. (2012), Empirical Relationship between Foreign
Direct Investment and Economic Output in South Asian Countries: A Study on
Bangladesh, Pakistan and India, International Business Research, 5(1), 9-21.
Mr.Shashank Goel*; Mr. K. Phani Kumar*; Prof. K. Sambasiva Rao*, Trends And
Pattrens Of Fdi In India And Its Economic Growth, April 2012,
Basu P., Nayak N.C, Archana (2007): Foreign Direct Investment in India:
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Ms. Sapna hooda (2011), A study of FDI and Indian Economy, Doctor of
phylosophy from national institute of technology(deemed university) Haryana
Lakhwinder Singh, India's Economic Growth And The Role Of Foreign Direct
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Agarwal J, Khan MA (2011) Impact of FDI on GDP: A comparative study of China
and India, Int. J. Business Management 6(10):71-79.
Reetu Sharma , Nikita Khurana(2013), Role of Foreign Direct Investment (FDI) in
Different Sectors, International Journal of Advances in Management and Economics,
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