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IRJMSH Vol 6 Issue 2 [Year 2015] ISSN 2277 9809 (0nline) 23489359 (Print)

International Research Journal of Management Sociology & Humanity ( IRJMSH ) Page 24 www.irjmsh.com

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



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

Inflow (in rupees

crore)

Growth rate

of FDI

inflow (%)

GDP

(in rupees crore)

Growth

rate of

GDP (%)

FDI as

apercentage of

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



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(post-

liberalization 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.

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

0

50000

100000

150000

200000

FDI Inflow (in rupees crore)

FDI Inflow (in rupees crore)



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.

0

1000000

2000000

3000000

4000000

5000000

6000000

7000000

19

91

-92

19

92

-93

19

93

-94

19

94

-95

19

95

-96

19

96

-97

19

97

-98

19

98

-99

19

99

-00

20

00

-01

20

01

-02

20

02

-03

20

03

-04

20

04

-05

20

05

-06

20

06

-07

20

07

-08

20

08

-09

20

09

-10

20

10

-11

20

11

-12

20

12

-13

20

13

-14

GDP (in Rupees Crore)

GDP



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

Amount Rupees in crores (US$ in million)

Ranks Country 2011-12

( April -

March)

2012-13

(April March)

2013-14

(April, 13-

March,

2014)

Cumulative

Inflows

(April 00 -

March 14)

%age to

total

Inflows

(in terms

of US $)

1. MAURITIUS 46,710

(9,942)

51,654

(9,497)

29,360

(4,859)

370,485

(78,525)

36 %

2. SINGAPORE 24,712

(5,257)

12,594

(2,308)

35,625

(5,985)

125,807

(25,445)

12 %

3. U.K. 36,428

(7,874)

5,797

(1,080)

20,426

(3,215)

100,885

(20,764)

10 %

4. JAPAN 14,089

(2,972)

12,243

(2,237)

10,550

(1,718)

80,644

(16,268)

8 %

5. U.S.A. 5,347

(1,115)

3,033

(557)

4,807

(806)

55,730

(11,927)

6 %

6. NETHERLANDS 6,698

(1,409)

10,054

(1,856)

13,920

(2,270)

56,298

(11,236)

5 %

7. CYPRUS 7,722

(1,587)

2,658

(490)

3,401

(557)

35,729

(7,446)

3 %

8. GERMANY 7,452

(1,622)

4,684

(860)

6,093

(1,038)

31,605

(6,519)

3 %

9 FRANCE 3,110

(663)

3,487

(646)

1,842

(305)

18,706

(3,879)

2 %

10. SWITZERLAND 1,728

(353)

987

(180)

2,084

(341)

13,148

(2,708)

1 %

TOTAL FDI INFLOWS

FROM ALL

COUNTRIES *

165,146

(35,121)

121,907

(22,423)

147,518

(24,299)

1,044,430

(217,703)

-





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 Services Sector 185570 39460 18%

2 Construction Development:

Townships, Housing, Built-Up

Infrastructure

108558 23306 11%

3 TELECOMMUNICATIONS

(Radio Paging, Cellular

Mobile, Basic Telephone

Services)

66720 14163 7%

4 Computer Software &

Hardware

59671 12817 6%

5 Drugs & Pharmaceuticals 56070 11598 5%

6 Automobile Industry 48197 9812 5%

7 Chemicals (other than

fertilizer)

45234 9668 4%

8 Power 42655 8900 4%

9 Metallurgical Industries 38250 8075 4%

10 Hotel & Tourism 36209 7118 3%

Note: (i)** Services sector includes Financial, Banking, Insurance, Non-Financial / Business,

Outsourcing, R&D, Courier, Tech. Testing and Analysis



(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



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.

Services Sector, 18%

Construction Development, 11%

Telecommunication,7%

Computer Software & Hardware, 6%

Drugs & Pharmaceuticals, 5

%

Automobile Industry, 5%

Chemicals (other than fertilizer), 4%

Power, 4%

Metallurgical Industries, 4%

Hotel & Tourism, 3%



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

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

Model

Unstandardized

Coefficients

Standardized

Coefficients

t Sig. B Std. Error Beta

1 (Constant) 1538807.898 146610.097 10.496 .000

FDI 25.878 1.997 .943 12.960 .000

a. Dependent Variable: GDP

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

Model

Sum of

Squares df

Mean

Square F Sig.

1 Regression 4.748E13 1 4.748E13 167.958 .000a

Residual 5.937E12 21 2.827E11

Total 5.342E13 22

FDI GDP

FDI 1

GDP 0.942796 1



ANOVAb

Model

Sum of

Squares df

Mean

Square F Sig.

1 Regression 4.748E13 1 4.748E13 167.958 .000a

Residual 5.937E12 21 2.827E11

Total 5.342E13 22

a. Predictors: (Constant), FDI

b. Dependent Variable: GDP

Model Summary

Model R R Square

Adjusted R

Square

Std. Error of

the Estimate

1 .943a .889 .884 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



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.

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Journal of Asia Entrepreneurship and Sustainability Volume III



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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

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