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IMPACT OF FDI ON INDIAN ECONOMY-AN ANALYTICAL STUDY

Article · April 2016

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 IMPACT OF FDI ON INDIAN ECONOMY –

AN ANALYTICAL STUDY

1. Introduction

Foreign Direct Investment (FDI) refers to an investment made by a company based in one
country in to another company based in other country. FDI is often preferred over Foreign
Institutional Investments (FII) as it considered to be the most beneficial and stable form of
foreign investment for an economy. FDI plays a multidimensional role in the overall
development of any economy. It provides a new source for capital, can lead to technological up
gradation, skill enhancement and resultant efficiency effects. While FDI is expected to create
positive impact on economy, it has also brought in certain negative impact on Indian economy
during the past few years. The present paper is an attempt to study the trends in flow of FDI in to
Indian economy. The paper also focuses on the correlation of FDI inflows with various economic
indicators. Finally the study tries to analyse the impact of FDI on Indian economy.

2. Review of Literature
For emerging economies like India FDI is often referred to as the most effective way to
transfer capital and technology from other economies especially the developed ones. These
economies in return look at India as an economy with immense growth potential. Lenoid
Melnyk, Oleksander Kubatko and Serphiy Pysarenko (2014) in their study on Analyzing the
impact of FDI on the economic growth of post communism transition economies concluded that
FDI significantly and positively influence the economic growth of host countries. The study
found out that FDI is positively correlated with an increase in a specific region’s growth rate. As
per the results a well-developed financial and institutional sectors are the important sources of
GDP growth and FDI inflows.
Basem Mohammed Louzi and Abeer Abadi in their study analyzing the impact of FDI on
economic growth in Jordan reports that FDI inflows do not exert an independent influence on
Jordan’s economic growth. They also reported that the impact of domestic investment (DIN) and
trade policy (TP) on GDP growth rate was found to be positive.
Syed Tabassum Sultana and Pardhasaradhi S. had made an analysis on the impact of FDI
and FII on Indian Stock Market during the period 2001-2011 and concluded that there is strong
positive correlation between FDI and BSE Sensex and also with FDI and NSE Nifty. As per the
study there was moderate correlation between FII and BSE Sensex and correlation was not
significant at 1% level between FII and NSE Nifty during the study period.
The present study was conducted to test and validate these results in the Indian context
especially in the liberalized economic scenario.

3. Objectives of the study

 To study the trends of FDI in India in the last fifteen years

 To find out the correlation between FDI and GDP of the country
 To find out the correlation between FDI and Indian Stock market movements
 To analyze the impact of FDI on Indian Economy

4. Scope of the study

The present study takes in to consideration FDI inflows in the country for the last fifteen
years. The correlation between FDI, GDP and Market Indices were examined. NIFTY and
Sensex were selected to study the relationship between FDI and Stock market movements.
Trends in the flow of FDI are studied and its impact on country’s economic growth is studied to
evaluate the country’s current liberalized FDI regime.

5. Research Methodology

a. Data Collection

This study is based on secondary data. Data have been collected from various sources
including RBI bulletins, Economic Survey Reports, NSE India and BSE India Websites and also
from various publications of Ministry of Commerce. This study considers last 15 years data i.e
from 2000-01 to 2014-15.Values have been averaged to get the most appropriate representation
on an annual basis in case of stock market movements.

b. Analysis and Interpretation

Table 1
YEAR FDI GDP(US$ NIFTY SENSEX
Trends in (US$ Million) FDI, GDP,
NIFTY and Million) Sensex
2000-01 4029 476.6 1333.35 3877.55
2001-02 6130 493.9 1060.75 3388.59
2002-03 5,035 523.7 1079.3 3352.77
2003-04 4,322 618.3 1778.55 5437.05
2004-05 6,051 721.5 2026.85 6233.54
2005-06 8,961 834.2 2835.25 9346.24
2006-07 22,826 949.1 3974.25 13731.09
2007-08 34,843 1238.7 5858.35 20286.99
2008-09 41,873 1224.1 2981.2 10076.43
2009-2010 37,745 1365.4 5169.45 17401.56
2010-11 34,847 1708.5 6101.85 19242.36
2011-12 46,556 1835.81 4866.7 16488.24
2012-13 36,860 1831.78 5855.75 19426.71
2013-14 24,824 1861.8 6307.9 21032.71
2014-15 32,628 2066.9 8102.1 27507.54

Source: Statistics Time.com

 50000

40000

30000

20000

10000

FDI GDP NIFTY

Source: Primary Data

Figure 1

Movement of GDP and NIFTY in relation FDI Inflows

50000
45000
40000
35000
30000
25000
20000
15000
10000
5000
0

FDI GDP SENSEX

Source: Primary Data

Figure 2

Movement of GDP and NIFTY in relation FDI Inflows

 Table 2

Statistical summary

FDI GDP NIFTY SENSEX

Mean 32196.300 1491.629 5205.280 17453.987

5% Trimmed Mean 32689.389 1496.193 5176.014 17345.887

Median 34845.000 1536.950 5512.600 18321.960
Variance 116514196.456 180798.755 2606190.611 29328476.988
Std. Deviation 10794.174 425.204 1614.370 5415.577
Minimum 8961.000 834.200 2835.250 9346.240
Maximum 46556.000 2066.900 8102.100 27507.540
Range 37595.000 1232.700 5266.850 18161.300
Interquartile Range 14452.500 686.958 2427.375 7655.995
Skewness -1.059 -0.271 0.023 0.097
Kurtosis 1.367 -1.396 -0.122 0.214
Source: Primary Data

Table 3

Correlation Coefficients

FDI GDP NIFTY SENSEX

FDI 1
GDP .875** 1
NIFTY .760** .934** 1
** ** **
SENSEX .768 .934 .998 1
**. Correlation is significant at the 0.01 level (2-
tailed).

Correlation was applied to study the statistical relationship between the variables FDI and
BSE Sensex, FDI and GDP and FDI and NSE NIFTY. From the above table (2,3) it can be
concluded that there is very strong positive correlation between FDI and BSE Sensex, FDI and
GDP and FDI and NSE NIFTY. The correlation is found significant at 1 percent level of
significance.
6. Findings of the study

 The FDI inflows in to the country has shown an increasing trend during the period under
study i.e between 2001 to 2015
 There is strong positive correlation between FDI and GDP growth of the country
 There is strong positive correlation between FDI and BSE Sensex movements
 There is strong positive correlation between FDI and NSE Nifty movements

Thus after analyzing the statistical results it can be concluded that GDP of the country
and stock market movements were dependent to a greater extend on the FDI inflows in to the
country

7. Conclusion

India is now liberalizing its Foreign Direct Investment (FDI) policy to make the market
more investor friendly. The results have been encouraging. These days, the country is
consistently ranked among the top five global investment destinations by all international bodies,
according to the latest reports. The new government has allowed foreign investment beyond 49
per cent and upto 100 per cent through the government approval route, in defense, resulting in
access to modern technology in the country. The recent policy revisions include 100 per cent FDI
under government approval route for trading, including through e-commerce, in respect of food
products manufactured or produced in India, bringing into effect financial Budget 2016-17. In
pharmaceutical sector, the government has permitted up to 74 per cent FDI under automatic
route in existing pharmaceutical ventures. The government approval route will continue beyond
74 per cent FDI and up to 100 per cent in such brown-field pharma. In short now most of the
sectors would be under automatic approval route making India one of the most open economies
in the world for FDI. All these are expected benefit the economy.

Taking care of all these aspects the present study was to analyse the impact of FDI
inflows on Indian economy. Results of the study concludes that the GDP of the country and
stock market movements are dependent to a greater extend on the FDI inflows in to the country.
FDI has had a positive impact on Indian economy which has tremendous growth potential in the
coming years.FDI inflows has supplemented domestic capital, as well as technology and skills of
 existing companies in the country. All of these have contributed to the economic growth of the
Indian economy. However, India must concentrate on maximizing political and social stability
along with a friendly regulatory environment to make the country attractive for foreign investors.

References

 Foreign Direct Investment - India Brand Equity Foundation, (2016)

Website http://www.ibef.org/economy/foreign-direct-investment.aspx (accessed on
27/06/2016)
 Basem Mohammed Louzi and Abeer Abadi, (2011), “The Impact of Foreign Direct
Investment On Economic Growth in Jordan”, IJRRAS, Vol. 8,2 pp 253-258
 Government of India, Economic Survey 2003-04. New Delhi: Ministry of Finance.
 Government of India. Annual Report 2007-08. New Delhi: Ministry of Commerce.
 Government of India. Economic Survey 2012-13. New Delhi: Ministry of Finance.
Website http://indiabudget.nic.in/es2012-13/estat1.pdf (accessed on 22/01/2016)
 Goldman Sachs (2003). Dreaming with BRICs: The Path to 2050. (Global Economic
Paper 99). GS Global Economic ,
Website http://www2.goldmansachs.com/ideas/brics/book/99- dreaming.pdf (accessed on
22/01/2016)
 Johnson Andreas ,“The effects of FDI Inflows on Host Country Economic Growth”,2004
Website http://www.etsg.org/ETSG2005/papers/johnson.pdf (accessed on 10/01/2016)
 Lenoid Melnyk, Oleksander Kubatko and Serphiy Pysarenko,(2014), “The Impact of
Foreign Direct Investment on Economic Growth: Case of Post Communism Transition
Economies”, Problems and Perspectives in Management, Vol.12, Issue 1, pp 17-24
 Syed Tabassum Sultana and Pardhasaradhi S, (2012), “ Impact of Flow of FDI and FII on
Indian Stock Market”, Finance Research Vol 1, No. 3,pp 4-10

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