MET 17304 Impact of ForeignDirect Investment on Economic Indicators –an evidence from India India , the one ofthe fastest growing economies in the world ranked as the seventh largest economy on the scale of nominal GDPand is the third-largest economyby purchasing power parity (PPP) after china and the United States of America ,in 20161. Oneof the Key policy paradigms in the history of Indian Economy has been the liberalizationof Foreign Direct Investment (FDI) which plays a key role in supplementing theever increasing investment requirement in the developing countries. With one ofthe lowest tax –GDP ratios in the world, and commitment mandated under FiscalResponsibility & Budget Management (FRBM) Act 2003 which has necessitatedneed for fiscal consolidation and has left much less fiscal space for publicborrowing, FDI can be identified as one of the most effective tools for capitalinvestment and thereby giving a boost to the economic activities. The cumulative FDI inflow into India has beenrecorded at USD 518 bn. Mauritius,Singapore, Japan, UK and Netherlands together contribute about more than 70% ofthe total FDI inflow in India In recent years, various studies havedocumented the relationship between the inflow of FDI and economic growth indeveloping countries. However, only a few studies to date—such as Pradhan(2002); Chakraborty and Basu (2002); Sahoo and Mathiyazhagan (2003); Agrawal(2005); Chakraborty and Nunnenkamp (2008); Agrawal and Khan (2011); and Dashand Parida (2013)—have attempted to dwell upon the issue and have come up withmixed conclusions.
For example, Pradhan (2002) used a production functionanalysis to analyze the FDI inflows on economic growth in India; and hediscovered that FDI does not have significant positive growth impacts. Also,Agrawal (2005) confirms the findings of Pradhan (2002) in that FDI has hadlittle to do with economic growth in India. On the other hand, Chakraborty andNunnenkamp (2008) use a panel integration method to explore the dynamicrelationship between FDI and economic growth. Dash and Parida (2013) utilize avector error-correction (VEC) model in examining the issue; they report inpassing a beneficial effect of FDI on growth, after controlling for trade. While according to a study done by (Choi & Baek, 2017), FDI inIndia has shown very insignificant and mixed impact on GDP. However, despiteincreasing in flows of FDI, especially in recent years, the relationshipbetween FDI and major economic indicators such as Gross Capital Formation,Unemployment Rate, Balance of Trade, CPI Inflation, Industry Value Added, andIndustrial Wages in India has not yet been examined. The Policy paper seeks to studyimpact of FDI on economic indicators such as, Industrial Value Added,Industrial Wages, Unemployment Rate, Consumer Price Index (CPI), Balance ofTrade (BoT), and Gross Capital Formation (GCF).Research Question: Howdoes FDI impact economic indicators in India?Methodology: Theproposal seeks to test the following two hypotheses through the Policy paper:-i.
There is strong positiverelationship between FDI and GDP, GCF, IW industrial value added, UR, and BoT. ii. These is a strongnegative relationship between FDI and CPI inflationThis research will examine time seriesdata over a period of over 36 years 1980 to 2016. To test the above twohypotheses, multiple regression analysis will be conducted using FDI inflow asthe independent variable, and GDP, CPI inflation, BoT, GCF, Industrial Value Addedand Unemployment Rate as the six dependent variables. For the for purpose ofquantitative analysis The historical data (from 1980 to 2016) of FDI inflow,GDP growth rate, CPI inflation, BoT, GCF, UR, Industrial Value Added, from theWorld Bank, Reserve Bank of India, Ministry of Finance , , Department ofIndustrial Policy and Promotion (DIPP) , Department of Commerce , Ministry ofLabor and Employment , Govt. of India , will be used.
The methodology would follow(Rahman, 2015) which has usedmultiple regression model References:Choi, Y., & Baek, J. (2017). Does FDI ReallyMatter to Economic Growth in India? Economies, 5(2), 20.https://doi.org/10.3390/economies5020020Rahman, A. (2015).
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Impact of Foreign Direct Investment onEconomic Growth: Empirical Evidence from Bangladesh. International Journalof Economics and Finance, 7(2), 178–185.https://doi.org/10.5539/ijef.v7n2p178 Aida Barkauskaite, Violeta Naraskeviciute (2016) –”Foreign Direct Investment Impact on EconomicIndicators of the Baltic Countries”.
Sharma, Mamta (2016) –”Impact of FDIon Indian Economy’, Agrawal and Khan (2011)-“Impact of FDI on GDP: A Comparative Study of China and India”.Dash, Ranjan & Parida ,Purna (2013)-” FDI, services trade and economic growth inIndia: empirical evidence on causal links”. http://dipp.nic.in/sites/default/files/FDI_FactSheet_Updated_September2017.pdfhttps://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=2513********** 1 WorldBank Data 2017
