Impact of Foreign Direct Investment

(FDI) on Indian Economic Growth

 Impact of Foreign Direct Investment (FDI) on Indian
Economic Growth

ABSTRACT

The study’s aim is to know the Effects of FDI in the Indian Economy
with reference to Infrastructure sector. The study has focused to know
about the relationship, impact and future movement of the FDI with
the Indian Economy. The study have applied E-views software with
respect to statistical tools applied are VECM, Ordinary Least squares
and VAR. The study has considered the secondary data with the year
starting from 2011 to 2021. The study have evaluated the results has
the positive relationship of the FDI and Infrastructure sector. The
positive relationship between GDP and FDI meaning that rise in the
FDP will enhance the GDP vice-versa. The study had influenced
positively long run relationship effect FDI on Infrastructure sector
and short run relationship with respect FDI and GDP. The study
concluded that there should be a positive future positive movement in
the GDP with the effect of the foreign direct investment.

Keywords: Foreign Direct Investment, Infrastructure sector,

Economic Growth. JEL Codes: G1, F21, F43, O43, O47.
 CHAPTER I : INTRODUCTION

FDI plays a critical role in the host country's economic

development; hence, governments want to attract a significant
amount of FDI that can expedite the process of economic
development by bringing in additional money, technology,
innovative management techniques, and job creation. As a result,
policymakers should concentrate on FDI drivers since they may
help policymakers comprehend the volume and direction of FDI
flows. It allows them to develop a foreign investment policy that is
most favorable to attracting FDI.

In the early 1990s, India began to open up its traditionally closed

economy to foreign direct investment (FDI). The progressive giving
of authorization for foreign direct investment in various sectors of
the economy was part of India's liberalization. Since liberalizing its
economy in 1991, India has seen considerable inflows of foreign
direct investment. Over time, FDI inflows to India have outpaced
those to many other ASEAN countries. China, on the other hand,
remains the biggest destination for FDI in the AsiaPacific area.
Since opening its telecoms market in the early 1990s, India has
made significant advances in telecommunications access.
However, India has received fewer gains than could have been
expected during the time of market reform. In compared to other
developing market economies, the slow rate of liberalization
implementation, disparities between urban and rural areas, and
confusing laws have hampered the flow of investment to the
telecommunications sector. Telecommunications in India: A History
Prior to 1991, India actively pursued an import substitution policy.
This strategy effectively restricted foreign direct investment in
nearly every major sector of the Indian economy. When India's
foreign exchange reserves were dangerously low in 1991, it
encountered a balance of payments crisis.

Following the crisis, the Indian government adopted a structural

adjustment plan in order to stabilize the balance of payments and
maintain long-term economic growth. India wants to diminish the
government's influence in the economy and increase market
efficiencies. The plan's principal effects included opening up the
economy to foreign investment and encouraging privatization in
some previously state-dominated industries. Furthermore,
licensing requirements and import duties have decreased.
Previously, state-owned firms provided telecommunications
services in India. Government firms provided all local and long-
distance communications within India. Prior to the opening of the
economy in the 1990s, private investment, both foreign and
domestic
CHAPTER 2: REVIEW OF LITERATURE

 Mafru`za Sultana (2019): Many studies have been conducted

on FDI in India and its effects on the Indian economy. The goal
of our research is to look at the influence of FDI not only on
Indian growth metrics, but also on other elements such as the
human development index and population. Researcher was
curious as to how much FDI is accountable for changes in their
individual variation. Researcher learns that FDI has a significant
influence on the HDI, population, and Sensex index. Though
there is some influence on imports and exports, it is not
significant. The research revealed the primary factor driving FDI
inflows to India, which is comprised of numerous factors
gathered under FDI and Indian economy.
 UtsavMasharu (2018): The investigation looked at the impact
on the retail sector from its implementation in the 1990s of the
Indian economy deregulation and FDI policies. It also examines
its implications on unorganized retail and FDI flows in single-
brand and multi-brand retail industries. A comprehensive and
critical analysis of the evidence in this area was carried out as
well as the descriptive statistical analysis of the information
 from 1991 to 2013. The conclusions were that FDI liberalization
policy has shown that Indian economy, especially retail sector,
has diversification and sustainable development, which is
considered one of the most important. It is also vital to
stimulate further investments in other industries in order to
continue economic development by liberalizing restrictive
restrictions.
 Bhavya Malhotra (2014): This research paper examines the
influence of FDI on the Indian economy, especially after two
decades of economic reforms, and discusses the obstacles that
India has in competing for FDI globally. The study discusses the
key policy implications of this research, as well as the difficulties
in understanding FDI statistics in India.
 Teli (2014): The current analysis is based on secondary data
and spans the years 1991 to 2012. Total FDI inflows increased
from US $ 133 million in 1991-92 to US $ 27841 million in 2008-
09, with direct foreign investment accounting for 65.79 percent
of total FDI inflows and portfolio investment accounting for
34.21 percent. Total FDI inflows are expected to reach $ 46098
million in 2015-16, according to projections. Mauritius and
Singapore ranked first and second in FDI inflows, respectively,
with the biggest FDI inflows in the service sector. They have a
favorable influence on the Indian economy's linked economic
indices. The government of India should encourage greater FDI
by enacting favorable regulations and avoiding uncertainty.
 Ganesan (2012): Companies must have created jobs in rural
India before entering the multi-brand trade. It may be said that
the advantages of unrestricted FDIs in the retail sector clearly
outweigh the associated disadvantages as evidenced by
successful experiments in countries like Thailand and China, in
which there were initially unceasing protests on FDIs permitting
in the retail sector but which later were one of the most
promising political experiments. Companies must have
developed jobs in rural India before entering the multi-brand
trade. It should be stated that, as shown by successful
experiments in countries like Thailand and China that allow for
FDI in the retail sector was initially subject to incessant protests,
it was one of the more promising politics. It can be stated that
the advantages of allowing unlimited FDIs in the retail sector
are clearer than the inconveniences associated with it.
 Riken Mehta (2012): This presentation will attempt to outline
the developments that India has gone through in its economic
liberalization from 1991. Furthermore, it will show how India
has progressed both socially and economically as a result of FDI
support, by comparing the country's record to that of other
growing nations. Finally, it will demonstrate how foreign direct
investment has aided India's infrastructure development
initiatives, as well as the obstacles the nation still has in
achieving a level of life equivalent to the developed world.
 Keshava (2008): India is still lagging significantly behind China
in terms of being an appealing FDI destination, for obvious
reasons such as power shortages, insufficient infrastructure,
security concerns, the lack of an exit strategy, and so on. If India
is to meet its goal of attracting more FDI for development,
Indian policymakers must recognize that good intentions and
plan layouts alone are insufficient, and that bold, forceful third-
generation changes are required. Only then can India hope to
attract FDI and become a popular investment destination like
China.
 PravakarSahoo (2006): The findings of the FDI influence on
growth study demonstrate that FDI has a positive and
substantial influence on growth in four South Asian nations.
Exports, gross domestic capital creation, and infrastructure are
other important contributors to growth. To attain better
development, South Asian nations must enhance their internal
investment, exports, and infrastructural facilities, as well as
attract more international investment. Furthermore, FDI has a
beneficial influence on export growth due to favorable spillover
effects for South Asian nations. Though FDI has little immediate
impact on domestic investment, it has a favourable and large
influence over time due to dynamic effects.
 Pashmina (2003): According to the findings of the random
effects model, fiscal incentives have no substantial influence on
aggregate FDI, while removing limitations encourages aggregate
 FDI. However, differing selection policies encourage FDI from
rich and developing nations. While lower tariffs and fiscal
incentives attract FDI from developed nations, lower tariffs and
fiscal incentives encourage FDI from developing nations. BITs
that stress nondiscriminatory treatment of FDI are proven to
have a considerable influence on aggregate FDI. However, it has
been shown that BITs with rich nations, rather than BITs with
developing nations, have a substantial influence on FDI inflows
to poor nations.
 PamiDua (1998): This research investigates the link between
foreign direct investment and economic activity in India after
liberalization. Foreign direct investment is measured
in terms of both the amount allowed and the actual flows. The
index of industrial output measures economic activity.
According to Granger causality tests and innovation accounting
analyses, FDI flows (approvals and actual) are affected by the
level of industrial output. However, actual flows do not
Granger-cause industrial output.

3. Statement of the Problem:

Despite the dynamism of the country with enormous potential and

increasing importance for FDI but being the amount world’s top
fastest growing countries (BRICS) failed to achieve the expected FDI
inflows compound with other sizable economic oriented countries.
Indian FDI Flows are growing year on year its observes the data
from 2000 to till date. But the Indian FDI growth is not as per the
 growth of global FDI growth. Many research scholars have done
research in this area but institutional factors role has not been
studied, in the progressive of FDI flows sector wise. All the sectors
are not able to attract FDI flows strongly due to bottlenecks in the
form of Indian economic factors influence along with the
institutional factors.

CHAPTER 3 : OBJECTIVE OF STUDY

1. To determine the relationship of FDI investments on Indian

Economy considering Infrastructure Investment
4. Hypotheses of the Study:

H0: There is no relationship of FDI investments on Indian

Economy considering Infrastructure Investment.

H1: There is relationship of FDI investments on Indian

Economy considering Infrastructure Investment

CHAPTER 4: RESEARCH METHODOLOGY

 Sources of Data: The study is based on secondary data. The

data required were collected in the World Reports on
Investment and the reports of the Asian Development Bank,
several Reserve Bank of India Bulletins, Ministers of Trade, the
Government of India's publications, Asian and Pacific Economic
and Social Surveys, the Asian Development Perspective,
Country Reports, and the Commercial Practices Bureau. The
data were obtained in the offices and libraries from numerous
newspapers, periodicals, the internet and several documents
which have been published or not.
  Period of the Study: For empirical analysis between 2001-2002
and 2020-2021 the study employs FDI statistics and other
related data. The study incorporates some significant
information about foreign investment, economic characteristics
and different FDI inflows in infrastructure sectors. A stumbling
block of analyses is the lack of continuity in the availability of
data regarding the different components of the investigation.
The study therefore focused heavily on the 2001-2002 and
2020-2021 periods.

1. Tools used in the Study:

 Stationary of the Data: The present study has considered the

time series data of the FDI, GDP and Tele communication sector
data. Thus, both are observed to be time series data and
applied the Augmented Dicky Fuller test. The below is the result
depicting the result of stationary of selected variables.

 VECM: The vector error Correction Model has been applied to

know the long and short run relationship of FDI with Indian
Economy. The present study has identified the relationship
between the FDI with infrastructure sector and GDP.
 Granger Causality Test: The granger causality is used to
identify the cause and effect relationship between the two or
more time series. It is given by Clive W Granger (1969). It only
suggests that the logic does not precede cause. Granger
Causality is a method which helps in finding out whether one
time series is helpful to estimate another time series.
 Ordinary Least Square: The Ordinary Least square method
has been applied to examine the multiple independent
variables on one dependent variable. The study has applied to
know the effect of FDI flows on Indian Economy.
7. Limitations of the study:
 Since 1991, India has been one of the developing countries that
has implemented a liberalization policy, with a portion of it
relaxing the FDI regulatory framework on a selective basis,
primarily with reference to the industrial sector. FDI is a non-debt
creating long-term private capital that plays an important role in
the Indian economy.
 It also encourages competition, innovation, savings, and capital
formation, as well as job creation, industrial growth, and
economic development. Economists believe that FDI has a
positive impact because it provides developing countries with a
package of capital, foreign exchange, technology, managerial
expertise, skills, and other inputs that are critical for the
development of the Indian economy. FDI will improve
international capital allocation equality.
 The country can bring new production technology and other
inputs from the host economy through FDI, benefiting both the
host and the source countries. The liberalization policy is likely to
continue in the coming years, and the approach to FDI is also
changing.

 In this situation, it is critical to investigate the focus and

significance of Foreign Direct Investment in the direction of
infrastructure development and growth, which will assist the
nation in evaluating and implementing appropriate policies and
approaches for the benefit of the economy in the coming period.
Furthermore, the study will provide useful recommendations for
attracting more FDI at the right time and in the right sector.

Limitations of the study:

  The study is based on data gathered from a variety of sources. It
is vital to apply and assess some of the concerns related to this
study in terms of FDI inflow, GDP, and other qualitative factors.
 This study did not include the micro and macroeconomic
components of the Indian economy as a whole.
 The study did not take into account other forms of foreign
investment, such as Foreign Currency Convertible Bonds (FCCB),
ADRs, GDRs, and FIIs. These investments now play an essential
part in India's industrial development.
9. Scope of the study:
The study focused on the relationship of FDI investments with
Indian Economy. This study has adopted the secondary data. The
study has considered the secondary data for the period 2011-2020
i.e. ten years. The present study made an attempt to determine
the relation, impact and VAR between FDI investments with Indian
Economy. The study has also made an attempt to predict the
future movement of Indian Economy on FDI flows.

CHAPTER 4: DATA ANALYSIS

Objective 1: To determine the relationship of FDI investments

with Indian Economy and Infrastructure Sector.

The present objective explains regarding the relationship with the

usage of E-views software with respect to the VECM analysis applied.
The study has firstly evaluated the relationship between the FDI with
Telecommunications sector and followed by the FDI relationship with
the Gross domestic product. Here, the study have analyzed the
broader hypothesis that is framed below.

H0: There is no relationship between the FDI investments with

Indian Economy and
Infrastructure sector.
 H1: There is a relationship between the FDI investments with Indian
Economy and
Infrastructure sector

The study considered the secondary data from the web portals. The
study has collected the time series data from the period of 2000-01
to 2020-21. The study applied the stationary test to remove the
seasonality effect from the data with the ADF test under unit root.
The following is the result depicts for the data.

Table -1: Unit Root test with Augmented Dickey Fuller

Variables Level 1st 2nd
Difference Difference
FDI 0.001* - -
Infrastructure 0.236 0.000* -
GDP 0.003* - -
Source: Secondary data

Interpretation:
The table stated the unit root test result under the Augmented
Dickey Fuller test for FDI flows on the Indian Economy. The study
outcome implied that FDI and GDP is observed to be stationary at
Level as the P value significant at 5% level. The Infrastructure is found
to be significant in 1st difference as the p values observed to be
significant at 5% i.e. 0.000. Thus, three of the variables are found to
be stationary. Hence, these variables are eligible for analysis purpose.
Table: 2 Vector Error Estimates
Vector Auto regression Estimates
Date: 06/17/21 Time: 15:32
Sample (adjusted): 3 17
Included observations: 15 after
adjustments
Standard errors in ( ) & t-statistics
in [ ]
FDI GDP
FDI(-1) 0.132152 21819.19
(0.31808) (15345.9)
[ 0.41546] [ 1.42183]
FDI(-2) -0.001689 -17430.67
(0.32038) (15456.6)
[-0.00527] [-1.12772]
GDP(-1) -5.92E-06 0.124094
(6.4E-06) (0.30899)
[-0.92438] [ 0.40161]
GDP(-2) 3.32E-07 0.000119
(6.1E-06) (0.29345)
[ 0.05463] [ 0.00040]
C 16057.17 95716967
(7354.74) (3.5E+08)
[ 2.18324] [ 0.26976]
Rsquared 0.123575 0.218875
Adj. Rsquared -0.226995 -0.093575
Sum sq. resids 2.12E+09 4.93E+18
S.E.equation 14558.28 7.02E+08
Fstatistic 0.352498 0.700513
Loglikelihood -162.0318 -323.7925
AkaikeAIC 22.27091 43.83900
Schwarz SC 22.50693 44.07502
Mean Dependent 17077.27 1.95E+08
 S.D.Dependent 13142.82 6.72E+08
Determinant residcovariance (dof 9.49E+25
adj.)
Determinant resid covariance 4.22E+25
Log likelihood -485.0993
AkaikeInformationCriterion 66.01324
Schwarz criterion 66.48528
Number of coefficients 10

Interpretation:

The study examined about the vector error estimates, the outcome
derives the positive relationship between the FDI and Gross domestic
product. Here the coefficient value is observed to be 3.32007, i.e.
positive. The study has also implied that r-square value greater than
0.6 signifies that the model is significant. Thus, there is a positive
relationship between the foreign direct investment and Gross
domestic product (GDP).

Formula:
D(FDI) = C(1)*( FDI(-1) + 2.54555675268e-05*GDP(-1) -
19958.8583371 ) + C(2)*D(FDI(1)) + C(3)*D(GDP(-1)) + C(4)

Table: 3 Wald test of FDI

Wald Test:
System:%system
Test Value df Probability
Statistic
Chi-square 5.00740 2 0.0118
1
 Null Hypothesis:
C(1)=C(3)=0
Null Hypothesis
Summary:
Normalized Restriction Value Std.Err.
(= 0)
C(1) -0.516608 0.287654
C(3) 2.08E-06 5.97E-06
Restrictions are linear in
coefficients.

Interpretation:
The study has explained about the relationship between the FDI
investments with Indian Economy i.e. GDP. The present Wald test has
observed to be having the positive short run relationship since the
chi-square value is tend to be less than the critical value i.e.
5.007<5.991. The study implies there is a significant relationship
between FDI with Indian economy i.e. GDP.

FDI to Infrastructure Sector

Table:4 VAR Lag Order Selection Criteria

VAR Lag Order Selection
Criteria
Endogenousvariables: FDI TO
INFRASTRUCTURE
Exogenousvariables: C
Sample: 1 17
Includedobservations: 16
La LogL LR FPE AIC SC HQ
g
 0 - NA 1.19e+1 40.3916 40.4881 40.3965
321.13 5 1 8 5
29
1 - 11.931 7.93e+ 39.973 40.263 39.988
313.79 98* 14* 76* 48* 60*
01
* indicates lagorder selected by the criterion
LR: sequential modified LRtest statistic (each test at
5% level)
FPE: FinalpredictionError
AIC: AkaikeInformation criterion
SC: SchwarzInformation criterion
HQ: HannanQuinn information criterion

Interpretation:
The study implied the step-1 of the vector error correction mode.
Here, the results indicates that Lag order selection is at lag 1, signifies
there is a next step with the implementation of lag one in vector
error estimates. Lag 1 is determined by the number of stars denoted
for LR, FPR, AIC, SC and HQ.

Table: 5 Vector Error Estimates

Vector Error Correction Estimates
Sample (adjusted): 3 17
Includedobservations: 15 after adjustments
Standard errors in ( ) & t-statistics in [ ]
CointegratingEq: CointEq1
FDI(-1) 1.00000
0
INFRASTRUCTURE(-1) 3.86727
8
(1.32940
 )
[ 2.90905
]
C -
29753.33
D(INFRAST
Error Correction: D(FDI) R UCTURE)
CointEq1 - -0.141183
1.064067
(0.29589 (0.06102)
)
[- [-2.31364]
3.59617]
D(FDI(-1)) 0.40871 0.040246
3
(0.26545 (0.05475)
)
[ 1.53967 [ 0.73514]
]
D(INFRASTRUCTURE( 0.66291 0.209728
-1)) 2
(1.20477 (0.24846)
)
[- [ 0.84410]
0.55024]
C 997.927 201.3163
4
(3113.47 (642.099)
)
[ 0.32052 [ 0.31353]
]
Rsquared 0.63441 0.350187
2
Adj. Rsquared 0.53470 0.172965
 7
Sum sq. resids 1.48E+0 63116569
9
S.E.equation 11614.9 2395.385
6
Fstatistic 6.36284 1.975978
8
Loglikelihood - -135.6774
159.3587
AkaikeAIC 21.7811 18.62365
5
SchwarzSC 21.9699 18.81247
7
MeanDependent 1646.26 85.06667
7
S.D.Dependent 17027.6 2633.985
3
Determinant residcovariance 6.50E+14
(dof adj.)
Determinant resid covariance 3.49E+14
Loglikelihood -293.7222
AkaikeInformationCriterion 40.49629
Schwarzcriterion 40.96832
Numberof coefficients 10

Interpretation:
The study have portrayed regarding the Vector Error Estimates the
next step of VECM, here the results defines the positive relationship
between the FDI and Infrastructure. Here the coefficient value is
observed to be 0.662912, i.e. positive. The study have also described
that there is r-square is above the recommended level i.e. 0.6
meaning that the model is significant. Therefore, there is a positive
 relationship between the foreign direct investment and
Telecommunications sector.

Table: 6 Wald test

Wald Test:
System: %system
Test Value df Probability
Statistic
Chi-square 15.7037 2 0.0004
4
Null Hypothesis: C(1)=C(3)=0
Null Hypothesis Summary:
Normalized Value Std. Err.
Restriction (= 0)
C(1) - 0.295889
1.064067
C(3) - 1.204773
0.662912
Restrictions are linear in
coefficients.

Interpretation:
The above table has explained about the relationship between the
FDI investments with Infrastructure sector. The study has observed to
be having the positive long run relationship since the chi-square
value is tend to be more than the critical value i.e. 15.70374>5.991.
The study signifies that there is a significant relationship between FDI
with Infrastructure sector. 11. Findings of the Study

 The study find that there is a positive long run relationship

between FDI with Infrastructure sector and also determined a
short run relationship between the FDI with Gross domestic
product. Hence, it implies that there is an increase in the FDI by
the increase in the Infrastructure sector.
 It is observed that there is a positive impact of the FDI on the
Infrastructure sector and positive effect of the GDP on the FDI
as there is a increase in the GDP will increase the FDI value and
vice versa.
 In this study have found to be having the increase of the GDP in
the further years by the increase in the FDI as the country’s
foreign direct investment will depend upon the Indian Economy
which will significantly raise the Infrastructure sectors
investments.

CHAPTER 5 :SUGGESTIONS OF STUDY

 The government's recent actions, including as the captive port

policy and the land policy for major ports, are helpful in
removing barriers, but they must be reinforced by pending
 reforms, such as the port regulatory authority bill and
burdensome approval procedures.
 The Indian economy now has a robust yearly growth rate, deep
capital markets, and a liberalized framework for foreign direct
investment. India's economy has consistently grown at a rapid
pace, making it an appealing investment destination.
 It is advised that the Indian government strive for the rapid
improvement of infrastructure sector requirements, which are
critical for business diversification.
 India should encourage foreign direct investment in the
privatization process. The FDI investment ceiling on many
sectors can be liberalized, with the exception of sensitive and
security sectors that serve the nation

CHAPTER 6: CONCLUSION OF STUDY

The study have examined regarding the Impact of FDI in the Indian
Economy with reference to Infrastructure sector. The study has
implied the positive relationship between the FDI with
Infrastructure sector and FDI with Gross domestic product. The
study has found that positive effect of FDI has increased the
infrastructure sector and positive effect of FDI with GDP. The study
has concluded that there will be a future positive movement in the
GDP with the effect of the foreign direct investment.
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 Bhavya Malhotra (2014), “Foreign Direct Investment: Impact on

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