International Journal of Science and Research (IJSR)

ISSN (Online): 2319-7064

Impact Factor (2012): 3.358

Trend of FDI in India and Its Impact on Economic

Growth
Vinay Kumar
Assistant Professor, School Of Management Studies, BGSB University, Rajouri (J&K), India

Abstract: Foreign investments are the indispensable factors that help in boosting the growth of Indian economy. With the introduction
of liberalisation policy under the finance ministry of Dr. Manmohan Singh in 1991 & with further few policy reforms, India has
witnessed a change in the flow and direction of foreign direct investment (FDI) into the country. This paper has made an attempt to
analyse the trend of FDI flow into the country and to find the relation between FDI, FII and GDP of the country. India has witnessed
the increase in the flow of FDI from US $ 4029 million in 2001-01, to US$ 36396 million on 2013. Furthermore India has witnessed a
year-on-year (y-o-y) growth of 24.2 per cent in FDI to touch US$ 3.95 billion in April-May 2013 as against US$ 3.18 billion during the
same period in 2012. However, the analysis shows that the country is still far behind in comparison to some of the developing countries
like China. The continuous upsurge in foreign direct investments (FDI), allowed across the industries and sectors, has proven that
foreign investors have faith in the resilience of Indian markets. Furthermore, the study indicates that flow of FDI and GDP are
positively correlated with each other and the country’s GDP is showing a positive movement with flow of Foreign Direct Investment in
India. The flow of FII and FDI also shows the positive correlation with each other.

Keywords: Foreign Direct Investment, Foreign Institutional Investment, liberalisation, GDP, trade-openness, etc.

1. Introduction populace with an increasing disposable income and its

burgeoning market has all amalgamated to enable India to
This paper defines foreign direct investment (FDI) as emerge as a viable partner to global industry. Recently,
international capital flows in which a firm in one country investment opportunities in India are at its peak.
creates or expands a subsidiary in another. It involves not
only a transfer of resource but also the acquisition of control. India’s next step for accelerating the Indian Growth is only
Since the 1990s, FDI has been a source of economic growth to make the foreign direct Investment a top priority. As India
for India, believing that besides needed capital, FDI brings offers only a hesitant welcome to FDI. It seeks investment in
in several benefits. The most important benefit for a several industries, including manufacturing, construction,
developing country like India is that FDI could create more telecommunications and financial services, but was hesitant
employment. In addition, technology transfer is another to allow FDI in multi-brand retail. Fortunately India
benefit for the host countries. When the foreign factories are approved FDI in multi brand retail on 7th of December,
set up in their countries, they will expose to higher 2012. The regulatory bodies allow only a minority
technology production and efficiency in management. So in investment through FDI due to the fear of losing domestic
future, these companies become able to produce goods and control over management of these projects For example; FDI
services as competitive as foreigners do. Nevertheless, in insurance companies is permitted up to 49% with
insufficient funds for investment are the main reason to seek restrictions on voting rights to ensure that management
FDI. Usually many less-developed countries lack funds for control of an insurance firm doesn't shift to a foreign entity.
investment, so FDI proves to be an important source of But if we critically analyse the situation then we can say that
funds for them. Foreign direct Investment is one of the most concern of loss of management control is of much less
prominent and striking feature of today’s globalised world. importance compared to sacrifice of economic growth.
In the current globalised world there is exponential growth Considering the potential of FDI to spur growth, India's
of FDI in both developed and developing countries. In the ambivalence toward FDI is completely misplaced. If India
last two decades the pace of FDI flows are rising faster than wants to accelerate growth, it is imperative that the country
almost all other indicators of economic activity worldwide. attracts FDI in large, really large amounts. Growth results
Developing countries, in particular, considered FDI as the from domestic investment from savings, from productivity
safest type of external finance as it not only supplement improvements and from foreign investments. Countries like
domestic savings, foreign reserves but promotes growth China that have grown rapidly in recent decades have taken
even more through spill over of technology, skills, increased advantage of all three sources of economic growth. India, on
innovative capacity, and domestic competition. Nowadays, the other hand, has tried to achieve growth without much
FDI has become an instrument of international economic FDI. However, India's approach to growth is like bringing a
integration. knife to a gunfight: it's destined to fail relative to other
countries' growth strategies, which take advantage of FDI.
Located in South Asia, India is the 7th largest, and the 2nd To transcend from 5-7% growth to 10-12% growth, FDI is
most populated country in the world. India has long been essential.
known for the diversity of its culture, for the inclusiveness
of its people and for the convergence of geography. Today, The study of Laura Alfaro of Harvard Business School on
the world’s largest democracy has come to the forefront as a FDI and economic growth in April 2003 concluded that it
global resource for industry in manufacturing and services. may seem natural to argue that foreign direct investment
Its pool of technical skills, its base of English – speaking (FDI) can convey great advantages to host countries, but

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Paper ID: OCT1478 639
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 International Journal of Science and Research (IJSR)
ISSN (Online): 2319-7064
Impact Factor (2012): 3.358
their study shows that the benefits of FDI vary greatly across 2004-05 6051 40% 8686
sectors by examining the effect of foreign direct investment 2005-06 8961 48% 9926
on growth in the primary, manufacturing, and services 2006-07 22826 146% 3325
sectors. An empirical analysis using cross-country data for 2007-08 34843 53% 20328
the period 1981-1999 suggests that total FDI exerts an 2008-09 41873 20% -15017
ambiguous effect on growth. Foreign direct investments in 2009-10 37745 (-)10% 29048
the primary sector, however, tend to have a negative effect 2010-11 34547 (-)8% 24422
2011-12 46556 34% 16812
on growth, while investment in manufacturing a positive
2012-13 34298 (-)26% 27582
one. Evidence from the service sector is ambiguous.
2013-14 36396 6% 5010
2014-15* 8011 --------
2. Routes of FDI in Indian companies Source: Department of industrial policy and Promotion: FDI
statistic table-1
An Indian company may receive Foreign Direct Investment
under the two routes as given under: 5.1 Karl Pearson’s coefficient correlation for Total
1) Automatic Route: FDI is allowed under the automatic FDI in India and Investment by FIIs in India for the period
route without prior approval either of the Government or 2001 to 2014 for the data given in table 1 is 0.330705. This
the Reserve Bank of India in all activities/sectors as analysis is showing that the two variables have a weak
specified in the consolidated FDI Policy, issued by the positive correlation between them. But it is quite evident
Government of India from time to time. from the data that increase in FDI in India is leading to
2) Government Route: FDI in activities not covered under increase in investments by FII because of its positive effect
the automatic route requires prior approval of the on the economic development of a country.
Government which are considered by the Foreign
Investment Promotion Board (FIPB), Department of
Economic Affairs, and Ministry of Finance.

3. Objective of the Study

1. To analyse the trend of FDI in India.
2. To analyse the relationship between FDI and FII in India.
3. To analyse the relationship between FDI and economic
growth.

4. Research Methodology
The above objectives have been studied through the use
secondary data. The secondary data has been collected from,
various secondary sources such as published reports RBI,
Department of Industry Policy and Promotion, World Bank,
IMF etc. The data collected has been analysed through tables
& graphs. The linear correlation analysis has been done to
understand the relationship between foreign direct
investment flow, GDP and foreign institutional investment
flows in India.

5. Data Analysis
The total FDI inflow in India from 2000 to June-2014 is
US$ 335020 and cumulative FDI equity inflow is US$
224817 million. The FDI in the India has shown a good
growth after 2004.

Total FDI inflow from April 2000- June 2014

1. Cumulative FDI inflow = US $335020 million
2. Cumulative FDI equity inflow = US$ 224817 million

FDI Inflow Year wise

Year Total FDI Percentage growth Investment by FII Figure 1: Trends in Foreign Direct Investment Inflows in
(US $ Million) over previous year (US $ Million) India 1990-91 to 2009-10
2000-01 4029 ------- 1847
2001-02 6130 52 % 1505 5.2 The trend Analysis of the FDI data from 2001 to 2014
2002-03 5035 (-) 18% 377 shows that there is always a positive average trend of FDI in
2003-04 4322 (-) 14% 10918 India but if we deeply analyse the data, FDI flow in India
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Paper ID: OCT1478 640
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 International Journal of Science and Research (IJSR)
ISSN (Online): 2319-7064
Impact Factor (2012): 3.358
has increased in the recent years only starting from 2009 to annual growth rate at 9 per cent, just below China's 10.9 per
2014. The Indian economy has started attracting a good cent, during 2001 to 2012.Among the world's top 15
amount of FDI after 2004. Before 2004 the FDI flow was countries in terms of GDP, India ranked 10th in terms of
lying between US$ 4029 to US$4322, which was just a overall GDP and 12th in terms of services GDP in 2012.
stagnant trend for FDI. The significant increase in FDI Thus this reason can be attributable to the highest share of
inflows in India reflected the impact of liberalization of the FDI to Service sector as India has the second fastest growing
economy since the early 1990s as well as gradual opening up services sector with CAGR at 9 per cent, just below China's
of the capital account. As part of the capital account 10.9 per cent, during the last 11-year period from 2001 to
liberalization, FDI in India was allowed almost in all the 2012.
sectors of the economy except a few on the basis of strategic
importance and subject to the rule and regulations for that 5.4 FDI and GDP of India
sectors. From the above data we can analyse that during the
period of current global financial crisis, there was a Foreign direct Investment and Gross domestic product are
significant decrease in the flow of FDI in most of the the major determinant of the economy of any country. FDI
countries in 2008-2010 but this decline of FDI in India was affects the GDP of a country directly and hence they are
relatively moderate reflecting robust equity flows on the positively correlated. But the FDI in a country is not the only
back of strong rebound in domestic growth ahead of Global economic factor on which causes the GDP to increase or
recovery and steady reinvested earnings reflecting better Decrease there are so many quantitative and qualitative
profitability of foreign companies in India. economic and non economic variables which influences the
GDP of a country.
United Nations Conference on Trade and Development
(UNCTAD) published its World Investment Report for 2012 Year GDP- Real growth rate Equity inflows in
which outlined that FDI in 2011 exceeded pre-economic (%) Million (US$)
crisis levels. More importantly, the report ranked India as 2000-2001 5.5 2908
the 3rd most preferred economy for FDI after China and 2001-2002 6 4222
US. 2002-2003 4.3 3134
2003-2004 4.3 2776
2004-2005 8.3 2549
The comprehensive study surveyed more than 179
2005-2006 6.2 5546
companies and it emerged that the top 3 most favourable
2006-2007 8.4 6081
hosts for FDI remained constant in 2011 as compared to the 2007-2008 9.2 9277
previous year. India’s rank remained unchanged at 3rd 2008-2009 9 18708
overall and 2nd amongst all Developing and Transition 2009-2010 8.4 17604
Economies, only after China. India is expected to remain in
that position for next 3 years. Karl Pearson’s coefficient of correlation for the above
data from 2000 to 2010 is 0.65 (i,e r = 0.65)
Sectors Attracting Highest FDI in India (Amount in
Crore) From the statistical analysis it is quite clear that the above
data of GDP growth rate and Equity inflows in India through
S. April 2000- Percentage GDP are positively correlated with each other. Thus any
Sector
No. 2014 (%)
increase in FDI inflow leads to increase in the growth rate of
1 Service Sector 189,991 18
2 Construction and development 110,234 11
GDP. But as we can see that both variables are not perfectly
3 Telecommunication 78573 7 correlated and GDP growth rate is showing too many
4 Computer software and hardware 60503 6 fluctuations. So we can say that they have moderate positive
5 Pharmaceuticals 60101 5 correlation between them. And further we can say that there
6 Automobile Industry 48879 4 are too many other factors that have impact on Indian GDP.
7 Chemical except fertilizers 45826 4 The other factors may include interest rate, employment rate,
8 Power 44245 4 inflation rate etc.
9 Metallurgical Industries 38943 4
10 Hotel and Tourism 37767 3 6. Findings
Source: Department of industrial policy and Promotion: FDI
statistic 1. The Flow of FDI in India is showing a positive trend and
is a very positive signal for Indian Economy.
5.3 IF we look into the current data of FDI in India in 2. The Indian Economy is one of the most favourable
different sectors, the Services sector is attracting maximum investment destination for most of the developed and
funds of 18% of total FDI amounting to 189,991 crore developing countries.
followed by construction and development with 18% share 3. The Inflow of FDI and FII in India has positive
amounting to 110,234 crore. The other sectors like relationship between each other.
Telecommunication, pharmaceuticals, computer software 4. The FDI is significantly contributing in the economic
and hardware, automobile industry and hotel and tourism are development of India as it has the positive correlation
also attracting a good share of FDI in India. coefficient of 0.6 with Indian GDP.
As for as the service sector is concerned according to the 5. Service sector of India is the second fastest growing
economic survey of India, India has the second fastest services sector with CAGR at 9 per cent, just below
growing services sector in the world with a compound China's 10.9 per cent, during the last 11-year period from
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Paper ID: OCT1478 641
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 International Journal of Science and Research (IJSR)
ISSN (Online): 2319-7064
Impact Factor (2012): 3.358
2001 to 2012 and thats why the Indian service sector
shares maximum share of the total FDI In India.

7. Future Scope
This Study can be extended by finding the various
determinants of FDI in India and how we can use that
determinants for increasing the flow of Foreign Direct
investment in India.

8. Conclusion
The FDI trend in Indian Economy is moving in upward
direction that too with the good speed. On the basis of above
analysis it is quite evident to say that Indian economy is one
of the most promising investment destination for most of the
developed and developing nations. And we should grab this
opportunity by liberalising the rule and regulations for FDI
in India. But one question that is striking my mind is that in
spite of having good inflow of FDI in India just after the
recession period. Why we are not able to attract more FDI.
As the growth rate of FDI in India for the period of 2010 to
2014 is not much attractive. So we need to find some factors
that are causing slowdown of FDI inflow in Indian
Economy.

References
[1] Alam.M.S, “FDI and Economic growth of India &
Bangladesh: A comparative study”, Indian Journal of
Economics,43,pp103-32
[2] Department of Industrial Planning and Promotion: FDI
Statistics
[3] Goel Shashank, Rao. K. Sambasiva, “Trends and
patterns of FDI in India and its Economic Growth”
Asian Journal of Research in Business Economics and
Management.
[4] Ganesh Adgaonkar, V.N. Joshi, “Impact of Foreign
Direct Investment on Indian Economy” Internationla
Journal of research in Management & Commerce, ISSN
2231-4245
[5] International Monetary Fund
[6] Kumar Pardeep, Impact of FDI on GDP – “A Critical
Evaluation: International Journal of Business and
Management Research
[7] Ministry of Finance, Report of Economic Survey of
India 2013-14
[8] Reserve Bank of India
[9] Various reports of World Bank

Author Profile
Vinay Kumar Sharma is an Assistant Professor in the School of
Management Studies and Economics, Baba Ghulam Shah Badshah
University, Rajouri (J&K). He is an MBA (Finance) and has
qualified NET-JRF and J&K SET. He has Six years of teaching
experience in the field of Finance and Management. His areas of
Interest are Financial Derivatives, Security Analysis & Portfolio
Management, and International Finance. He has presented and
published number of papers in various national & International
conferences.

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