Impact of Foreign
Direct 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 of
nominal GDP and is the third-largest by
purchasing power parity (PPP). The country ranks 141st in per capita GDP
(nominal) with $1723 and 123rd in per capita GDP (PPP) with $6,616
as of 2016. One of the Key policy paradigm in the history of
Indian Economy has been liberalization of Indian economy for Foreign Direct Investment
(FDI) which plays a key role in supplementing the ever increasing investment
requirement 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 necessitated
fiscal 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 investment
and thereby giving a boost to the economic actives.
Though numerous studies have thrown
light on the relationship between the inflow of FDI and economic growth in
developing 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), they
broadly report a beneficial effect of FDI on economic growth. However, despite
increasing flows of FDI especially in recent years, the relationship between
FDI and economic indicators in India has not yet been examined thoroughly. 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) employs a production function analysis to analyze the effect of inward
FDI on economic growth in India; he finds 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 Yoon Jung Choi and Jungho Baek (2017), FDI in India shown very insignificant and mixed impact on
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 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. 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 and Ministry of Finance , Govt. of India, will be used. The methodology would follow
Afzalur Rahman (2014) which has used multiple regression model.
Rahman , Afzalur (2014)-“Impact of
Foreign Direct Investment on Economic Growth: Empirical Evidence from Bangladesh” Page 178-182
Aida Barkauskaite , 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”.
,Yoon Jung & Baek , Jungho (2017)-“Does FDI Really Matter to Economic Growth in