Impact of Foreign
Direct Investment on Economic Indicators –an evidence from India
India , the one of
the fastest growing economies in the world ranked as the seventh largest economy on the scale of nominal GDP
and is the third-largest economy
by purchasing power parity (PPP) after china and the United States of America ,
in 20161. One
of the Key policy paradigms in the history of Indian Economy has been the liberalization
of Foreign Direct Investment (FDI) which plays a key role in supplementing the
ever increasing investment requirement in the developing countries. With one of
the lowest tax –GDP ratios in the world, and commitment mandated under Fiscal
Responsibility & Budget Management (FRBM) Act 2003 which has necessitated
need for fiscal consolidation and has left much less fiscal space for public
borrowing, FDI can be identified as one of the most effective tools for capital
investment and thereby giving a boost to the economic activities. The cumulative FDI inflow into India has been
recorded at USD 518 bn. Mauritius,
Singapore, Japan, UK and Netherlands together contribute about more than 70% of
the total FDI inflow in India
In recent years, various studies have
documented the relationship between the inflow of FDI and economic growth in
developing 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 Dash
and Parida (2013)—have attempted to dwell upon the issue and have come up with
mixed conclusions. For example, Pradhan (2002) used a production function
analysis to analyze the FDI inflows on economic growth in India; and he
discovered that FDI does not have significant positive growth impacts. Also,
Agrawal (2005) confirms the findings of Pradhan (2002) in that FDI has had
little to do with economic growth in India. On the other hand, Chakraborty and
Nunnenkamp (2008) use a panel integration method to explore the dynamic
relationship between FDI and economic growth. Dash and Parida (2013) utilize a
vector error-correction (VEC) model in examining the issue; they report in
passing a beneficial effect of FDI on growth, after controlling for trade. While according to a study done by (Choi & Baek, 2017), FDI in
India has shown very insignificant and mixed impact on GDP. However, despite
increasing in flows of FDI, especially in recent years, the relationship
between FDI and major economic indicators such as Gross Capital Formation,
Unemployment Rate, Balance of Trade, CPI Inflation, Industry Value Added, and
Industrial Wages in India has not yet been examined.
The Policy paper seeks to study
impact of FDI on economic indicators such as, Industrial Value Added,
Industrial Wages, Unemployment Rate, Consumer Price Index (CPI), Balance of
Trade (BoT), and Gross Capital Formation (GCF).
Research Question: How
does FDI impact economic indicators in India?
proposal seeks to test the following two hypotheses through the Policy paper:-
There is strong positive
relationship between FDI and GDP, GCF, IW industrial value added, UR, and BoT.
These is a strong
negative relationship between FDI and CPI inflation
This research will examine time series
data over a period of over 36 years 1980 to 2016. To test the above two
hypotheses, multiple regression analysis will be conducted using FDI inflow as
the independent variable, and GDP, CPI inflation, BoT, GCF, Industrial Value Added
and Unemployment Rate as the six dependent variables. For the for purpose of
quantitative analysis The historical data (from 1980 to 2016) of FDI inflow,
GDP growth rate, CPI inflation, BoT, GCF, UR, Industrial Value Added, from the
World Bank, Reserve Bank of India, Ministry of Finance , , Department of
Industrial Policy and Promotion (DIPP) , Department of Commerce , Ministry of
Labor and Employment , Govt. of India , will be used. The methodology would follow
(Rahman, 2015) which has used
multiple regression model
Choi, Y., & Baek, J. (2017). Does FDI Really
Matter to Economic Growth in India? Economies, 5(2), 20.
Rahman, A. (2015). Impact of Foreign Direct Investment on
Economic Growth: Empirical Evidence from Bangladesh. International Journal
of Economics and Finance, 7(2), 178–185.
, Violeta Naraskeviciute (2016) –”Foreign Direct Investment Impact on Economic
Indicators of the Baltic Countries”.
Sharma, Mamta (2016) –”Impact of FDI
on 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 in
India: empirical evidence on causal links”.
Bank Data 2017