Type: Research Essays
Sample donated: Stephen Nunez
Last updated: June 28, 2019
MET 17304 Impact of ForeignDirect Investment on Economic Indicators –an evidence from India The Indian economy,one of the fastest growing economy in the world ranked as the sixth largest economy on the scale ofnominal GDP and is the third-largest bypurchasing power parity (PPP).
The country ranks 141st in per capita GDP(nominal) with $1723 and 123rd in per capita GDP (PPP) with $6,616as of 2016. One of the Key policy paradigm in the history ofIndian Economy has been liberalization of Indian economy for Foreign Direct Investment(FDI) which plays a key role in supplementing the ever increasing investmentrequirement in the developing countries. So is the case with India, predominantly,a political economy with one of the lowest tax –GDP ratios in the world. Also,Fiscal Responsibility & Budget Management (FRBM) Act 2003, has necessitatedfiscal consolidation and has left much less fiscal space for public borrowing. FDI,therefore, can be identified as one of the most effective tools for capital investmentand thereby giving a boost to the economic actives. Though numerous studies have thrownlight on the relationship between the inflow of FDI and economic growth indeveloping countries, including, Tsai (1991); Wang and Swain (1997); Liu et al.(1997); Borensztein Eduardo and Lee (1998); Zhang (2001); Sun and Parikh(2001); Bende-Nabende et al.
(2001); Liu et al. (2002); Shan (2002), theybroadly report a beneficial effect of FDI on economic growth. However, despiteincreasing flows of FDI especially in recent years, the relationship betweenFDI and economic indicators in India has not yet been examined thoroughly. Onlya 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 dwellupon the issue and have come up with mixed conclusions. For example, Pradhan(2002) employs a production function analysis to analyze the effect of inwardFDI on economic growth in India; he finds that FDI does not have significantpositive 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 theother hand, Chakraborty and Nunnenkamp (2008) use a panel integration method toexplore the dynamic relationship between FDI and economic growth. Dash andParida (2013) utilize a vector error-correction (VEC) model in examining theissue; they report in passing a beneficial effect of FDI on growth, aftercontrolling for trade. While accordingto a study done by Yoon Jung Choi and Jungho Baek (2017), FDI in India shown very insignificant and mixed impact onGDP. Policy paper seeks to study impact ofFDI on economic indicators such as, Industrial Value Added, Industrial Wages,Unemployment Rate, Consumer Price Index (CPI), Balance of Trade (BoT), andGross Capital Formation (GCF).Research Question: Howdoes FDI impact economic indicators in India?Methodology: Theproposal seeks to test the following two hypotheses through 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 series data over aperiod of over 36 years 1980 to 2016. To test the above two hypotheses,multiple regression analysis will be conducted using FDI inflow as the independentvariable, and GDP, CPI inflation, BoT, GCF, Industrial Value added andUnemployment rate as the six dependent variables. The historical data (from 1980to 2016) of FDI inflow, GDP growth rate, CPI inflation, BOT, GCF, UR,Industrial Value Added , from the WorldBank , Reserve Bank of India and Ministry of Finance , Govt. of India, will be used. The methodology would followAfzalur Rahman (2014) which has used multiple regression model.
References:Rahman , Afzalur (2014)-“Impact ofForeign Direct Investment on Economic Growth: Empirical Evidence from Bangladesh” Page 178-182Aida Barkauskaite , VioletaNaraskeviciute (2016) –”Foreign Direct Investment Impact on Economic Indicatorsof 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”. Choi,Yoon Jung & Baek , Jungho (2017)-“Does FDI Really Matter to Economic Growth inIndia?”http://dipp.nic.in/sites/default/files/FDI_FactSheet_Updated_September2017.pdfhttps://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=2513**********