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Impact of Foreign Direct Investment (FDI) on Indian Economy

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Impact of Foreign Direct Investment (FDI) on Indian Economy Kawadkar, et al

Impact of Foreign Direct Investment (FDI)

on Indian Economy

Hemraj Kawadkar, Shrikrishna Dhale, Yogesh Dhoke

Nikhil Bangde Assistant Professor
Assistant Professor Tirpude Institute of Management Education Sadar,
S. B. Jain Institute of Technology, Mgmt & Research, Nagpur
Nagpur

ABSTRACT
This study examines the effects of foreign direct investment on the Indian economy, recognizing the crucial function
of FDI as a major engine of economic growth. In the current global milieu, FDI has emerged as a momentous
arena in burgeoning markets. The study primarily concentrates on scrutinizing the patterns of FDI influx into
India from 2000-01 to 2019-2020. The main objectives include determining the impact of FDI on the Indian
economy, evaluating the approvals of FDI inflows to India by country, and examining FDI inflows across various
industries throughout the given timeframe. For this study, secondary information has been culled from a variety of
sources, including the Reserve Bank of India Bulletin reports and the yearly reports issued by the Department of
Industrial Policy and Promotion (DIPP) of the Government of India. The article concludes by offering suggestions
to increase FDI inflows into India.
KEYWORDS: Foreign direct investment, Sector-specific FDI inflows, FDI inflows by Country, RBI

INTRODUCTION Millions of people in India have been pulled out of

T
poverty as a result of the country’s exceptional GDP
he term of foreign direct investment (FDI) means
development over the previous two decades, making
the transfer of money from one country to another
it a desirable destination for FDI. Significant FDI
country through the purchase of stock in foreign
inflows have been observed in important industries
corporations or the investment in real estate. FDI is
like manufacturing, services, telecommunications,
typically used by businesses to increase their presence
construction, computer software and hardware, and
on foreign markets. Developing countries, in particular,
autos. India has received major FDI from countries
actively seek FDI to spur economic growth and increase
like Mauritius, Singapore, the Netherlands, Japan, the
national income or GDP. FDI entails investing in
United States, and the United Kingdom.
domestic companies, organizations, and equipment,
rather than participating in the stock market. It offers REVIEW OF LITERATURE
various advantages, including enhanced supply chain Bhattacharyya Jita and Bhattacharyya Mousumi (2012),
management (SCM), job creation, improved logistics in their empirical study titled “The Influence of Overseas
and infrastructure, among others. Direct Investment and Trade in Goods and Services
As a source of non-debt capital for India’s economic on Economic Advancement in India,” examined the
growth, FDI has been crucial. India has had notable complex relationships between FDI, goods trade, service
FDI development despite the COVID-19 pandemic, the trade, and economic growth in the Indian setting. Their
global economic slump, and other obstacles. In order research aimed to identify the long-term relationships
to encourage FDI, the Indian government has taken a between these variables. The findings showed a one-
number of actions, including easing FDI restrictions way link in which FDI positively impacted economic
in industries like oil refineries, telecommunications, growth and favorably impacted merchandise trade. The
power exchanges, stock exchanges, and defence. study also found that there were two-way relationships,

www.isteonline.in Vol. 46 Special Issue, September, 2023 261

Impact of Foreign Direct Investment (FDI) on Indian Economy Kawadkar, et al

demonstrating the interdependence between service economic growth. It highlighted FDI’s facilitation
trade and economic growth in India as well as trade in of technology transfer, increased domestic capital,
goods. raised production levels, and created employment
opportunities. The study analyzed FDI inflows into
Shalini Singh and Manish Singh (2011) In “Exploring
India and the economic growth driven by the top 10
the Path of Overseas Capital in India,” a thorough
investing countries.
investigation was made to delve into the dynamic world
of foreign direct investment (FDI) in the Indian context. Joyshri Acharyya (2009) carried out a study titled “FDI,
This study carefully examined the inflow of FDI into Growth, and the Environment: Evidence from India on
India, spanning a remarkable period from 1970 to 2007, CO2 Emission during the Last Two Decades.” This
by harnessing the power of secondary sources and study looked at how FDI inflows affected environmental
using painstaking time series analysis. Primarily driven deterioration and India’s GDP development. The study
by the pursuit of unravelling the intricate relationship analyzed the FDI inflows and their effects on India’s
between FDI inflows and India’s economic growth, GDP growth over a two-decade period from 1980 to
the overarching objective was to unravel the nuanced 2003. The study also highlighted the significant long-
patterns of fluctuation in FDI inflows while unravelling term economic impact of FDI inflows on carbon dioxide
their profound impacts. Employing a discerning lens, (CO2) emissions, emphasizing the environmental
this research sought to unveil the underlying factors consequences resulting from economic activities.
behind these ebbs and flows, ultimately painting a Keshava, Dr. S.R. Rathnamma (2008) conducted a
comprehensive portrait of the prevailing trends within comparative analysis titled “The Effect of FDI on the
the realm of FDI. Indian and Chinese Economies.” This study analyzed
Gaurav Agarwal and Mohd. Amir Khan (2011) in a the economies of India and China using comparative
comparative study titled “Impact of FDI on GDP: China analysis. It highlighted that these two countries,
vs. India,” the researchers analyzed FDI’s influence on with a combined population of 37% of the world,
the Gross Domestic Product (GDP) of both countries experienced significant GDP growth rates exceeding
from 1993 to 2009. They made use of a growth model 9% (according to the Asian Development Outlook 2005
that included factors like GDP, human capital, labor and World Development Report 2006). The study also
force, FDI, and gross capital formation into account. provided statistics on FDI flows and stocks in India and
According to the results, a 1% increase in FDI led to a China, indicating their respective contributions to the
0.07 percent boost in China’s GDP and a 0.02 percent economies.
increase in India’s GDP. Notably, China showed a
R. Banga (2006) in a thorough study titled “Unleashing
greater link between FDI and economic development
Export Diversity: Assessing the Influence of Japanese
than India, indicating more effective FDI utilization.
and US Foreign Direct Investment on the Indian
Jatinder Singh (2010) in the study titled “Economic Manufacturing Sector,” the effect of FDI on export
Reforms and FDI in India: Policy, Trends, and diversification in a developing country was carefully
Patterns,” researchers analyzed the FDI inflows into examined, with special attention paid to India.
India considering government policies since 1980. The Intriguing revelations emerged from the investigation,
analysis revealed a rising trend in post-reform FDI emphasizing the distinctive impacts of FDI inflows from
inflows. A comparison with other developing economies the US and Japan. Notably, the findings showcased that
showcased significant growth in FDI inflows to India, FDI from the US had a favorable and positive influence
indicating a positive response to liberalization measures on India’s export intensity during the post- liberalization
introduced in the early 1990s. era. However, in contrast, Japanese FDI did not yield
a significant impact on India’s overall exports. These
Gajendran Lenin Kumar and S. Karthika (2010) the
observations shed light on the nuanced role played by
“Sectoral Performance through Inflows of Foreign
different countries’ FDI in shaping export diversity
Direct Investment (FDI)” study investigated the impact
within the Indian manufacturing sector.
of FDI on various Indian industries and the country’s

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 Impact of Foreign Direct Investment (FDI) on Indian Economy Kawadkar, et al

Pradhan, Prakash J., Abraham, Vinoj, and Sahoo, Kumar • Only information from 2000 to 2020 was collected.
M. (2004) in the paper “Foreign Direct Investment and
• Only secondary data were used to examine how
Labor Dynamics: Unveiling the Indian Manufacturing
FDI affected the Indian economy.
Scenario,” researchers looked at the effects of FDI on
employment and wages in the Indian manufacturing • There were no continuous-time series data in the
sector. Comparing international companies to their RBI Bulletin reports.
domestic equivalents, the data showed that neither had • Inadequate time was allotted for data collecting.
a significant impact on manufacturing employment.
However, an interesting pattern emerged as foreign DATA ANALYSIS & INTERPRETATION:
firms demonstrated a tendency to offer comparatively Table 1. FDI Inflows by Financial Year from 2000 to 2020:
higher wages to their workforce. This suggests that
(Amount USD Million)
labor also reaped benefits from foreign investment in
India. YEAR FDI INFLOWS FDI GROWTH
RATE (In %)
OBJECTIVES OF THE STUDY
2000-2001 4029 -
1) To examine the FDI trends in India during last two 2001-2002 6130 (+) 52%
decades.
2002-2003 5035 (-) 18%
2) To assess the inflow of FDI in India from different 2003-2004 4322 (-) 14%
countries. 2004-2005 6051 (+) 40%
3) To evaluate the distribution of FDI inflows across 2005-2006 8961 (+) 48%
various sectors in India. 2006-2007 22826 (+) 155%
RESEARCH METHODOLOGY 2007-2008 34843 (+) 53%
2008-2009 41873 (+) 20%
Data Collection
2009-2010 37745 (-) 10%
This study only uses secondary data sources. The 2010-2011 34847 (-) 08%
information was acquired from a number of trustworthy 2011-2012 46556 (+) 34%
sources, including RBI Bulletin Reports and Annual
2012-2013 34298 (-) 26%
Reports issued by the Department of Industrial Policy
and Promotion (DIPP) of the Government of India, 2013-2014 36046 (+) 05%
articles from newspapers and journals, textbooks, 2014-2015 45148 (+) 25%
reliable internet sources, websites, and UNCTAD. The 2015-2016 55559 (+) 23%
data collected covers a time span of twenty years, from 2016-2017 60220 (+) 08%
2000 to 2020, and is analyzed using graphs and tables. 2017-2018 60974 (+) 01%
Statistical Tools 2018-2019 62001 (+) 02%
2019-2020 74390 (+) 20%
For this research paper, the following statistical tools
and methods have been employed; the percentage Grand Total 681854
method and graph analysis conducted using Microsoft Source : Department of Industrial Policy and Promotion.
Excel software.
The table presented above illustrates the Foreign Direct
LIMITATIONS OF STUDY Investment (FDI) inflows into the country in absolute
• This study is solely concerned with how FDI affects terms, showcasing a significant growth from USD
the Indian economy. 4,029 million in the year 2000-2001 to USD 74,390
million in the year 2019-2020, reflecting a remarkable
• Only the chosen time period is considered in the increase of 19 times. This data highlights the FDI trends
analysis of FDI Inflows on the Indian Economy. over the past two decades in India. Notably, there was

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Impact of Foreign Direct Investment (FDI) on Indian Economy Kawadkar, et al

a substantial increase of 52% in FDI inflows during 2004-05 14,653 3,219 ( + ) 47 %

the financial year 2001-2002, reaching USD 6,130
2005-06 24,584 5,540 ( + ) 72 %
million compared to the preceding year. Despite minor
2006-07 56,390 12,492 (+ ) 125 %
fluctuations in the subsequent years from 2002- 2003 to
2005-2006, there was a substantial surge in FDI inflows 2007-08 98,642 24,575 ( + ) 97 %
during the financial year 2006- 2007, amounting to USD 2008-09 142,829 31,396 ( + ) 28 %
22,826 million, representing a growth rate of 155% 2009-10 123,120 25,834 ( - ) 18 %
compared to the previous decade. Another significant 2010-11 97,320 21,383 ( - ) 17 %
increase occurred in the financial year 2007-2008, with 2011-12 165,146 35,121 (+) 64 %
FDI inflows amounting to USD 34,843 million, showing 2012-13 121,907 22,423 (-) 36 %
a growth rate of 53% compared to the previous year. In
2013-14 147,518 24,299 (+) 8%
the year 2008-2009, there was considerable investment
2014-15 181,682 29,737 (+) 22%
of USD 41,873 million in Foreign Direct Investment
(FDI) and so forth. Following this, there were some 2015-16 262,322 40,001 (+) 35%
fluctuations in FDI inflows between 2009 and 2014, 2016-17 291,696 43,478 (+) 9%
with a subsequent increase in the financial year 2015- 2017-18 288,889 44,857 (+) 3%
2016, where FDI inflows reached USD 55,559 million. 2018-19 309,867 44,366 (-) 1%
Subsequently, FDI inflows continued to rise in the 2019–20 353,558 49,977 (+) 13%
financial years between 2016 and 2019. Consequently, Grand 2,732,444 470,119
the year 2019-2020 recorded the highest FDI inflow Total
figure of USD 74,390 million over the past 20 years.
Source: Department of Industrial Policy and Promotion (As
FDI INFLOWS per DPIIT’s FDI database)
60,000

49,977 EQUITY INFLOW

50,000
44,857 60,000
40,001
40,000 35,121 49,977
44,366
31,396
30,000 43,478 40,001 44,857
25,834 29,737 50,000
35,121
24,575 31,396 44,366
20,000 24,299
21,383 22,423 30,000 25,834 29,737 43,478
12,492 24,575
10,000 4,065 40,000
20,000 24,299
2,463
2,7052,188 5,540 21,383 22,423
0 12,492
3,219 10,000 4,065
2,463 2,7052,188 5,540
0
3,219

Table No. 2: FDI Equity Inflows by Financial Year

(Amount USD Million)
The Foreign Direct Investment (FDI) Equity inflow
Financial Amt. of FDI Inflows Percentage into India has witnessed a substantial increase from Rs.
Year Growth over 10,733 crores in the financial year 2000-2001 to Rs.
previous year 3,53,558 crores in the financial year 2019-2020, marking
In Rs In USD an impressive growth of 33 times. This information, as
Crores Million shown in the table and graph, gives a thorough picture
2000-01 10,733 2,463 - of all FDI equity inflows into India from 2000 to 2020,
2001-02 18,654 4,065 ( + ) 65 % a period of 20 years. Notably, FDI Equity Inflows
2002-03 12,871 2,705 ( - ) 33 % in India saw a positive effect with a considerable
growth to Rs. 18,654 crores in the fiscal year 2001-
2003-04 10,064 2,188 ( - ) 19 %

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Impact of Foreign Direct Investment (FDI) on Indian Economy Kawadkar, et al

2002. Furthermore, in the year 2008-2009, there was Upon analyzing the table, it becomes evident that
a significant investment of Rs. 1,42,829 crores in FDI Mauritius has emerged as the leading investor in Foreign
Equity Inflows, highlighting a substantial growth in Direct Investment (FDI) Equity Inflows in India,
foreign investments. However, there were fluctuations contributing a substantial amount of 142,710.44 million
in the inflow of FDI Equity Inflows between 2010 and USD. This investment from Mauritius constitutes
2014. Nonetheless, there was a considerable surge in 30.36 percent of the total equity investments made by
FDI Equity Inflows in the financial year 2015-2016, the top 20 investing countries in India from the years
reaching Rs. 2,62,322 crores. Subsequently, FDI Equity 2000-2001 to 2019-2020. Singapore holds the second
Inflows continued to rise in the financial years between position, with an equity inflow of 97,669.64 million
2016 and 2019, culminating in the highest figure of Rs. USD, accounting for 20.78 percent of the total equity
3,53,558 crores in the year 2019-2020. investments made by the top 20 countries. Notably,
Singapore’s investment in India has positioned it as a
Table no. 3: Top Twenty Country-Wise FDI Inflow
significant contributor to the equity capital inflow. The
(Amount USD Million) Netherlands and Japan have also made notable equity
capital investments, amounting to 33,852.04 million
Sr. Country Amt. of FDI Inflows Percentage USD and 33,499.21 million USD, respectively. These
No. with investments represent
(In Rs . (In USD Inflows
crores) Million )
7.20 percent and 7.13 percent of the total equity
investments made by the top 20 countries. Moreover,
1 Mauritius 795,941.1 142,710.4 30.36
considerable the United States of America and the
2 Singapore 609,561.5 97,669.6 20.78 United Kingdom, respectively, have made equity
3 Netherland 208,321.9 33,852.0 7.2 capital investments of 29,779.40 million USD and
4 Japan 196,105.1 33,499.2 7.13 28,210.85 million USD. An intriguing aspect is that the
5 U.S.A 176,222.2 29,779.4 6.34 combined equity investment inflows from Mauritius and
6 United 150,411.1 28,210.9 6 Singapore, totalling 240,380.08 million USD, are nearly
Kingdom equivalent to the investments made by the remaining
7 Germany 68,944.3 12,196.0 2.59 18 top-level equity investing countries in India, which
8 Cyprus 57,993.5 10,748.4 2.29 amount to 200,375.27 million USD. The difference
between the investments from Mauritius, Singapore,
9 France 50,511.0 8,539.3 1.82
and the other 18 countries is merely 40,004.81 million
10 Cayman 49,847.8 7,535.9 1.6 USD. Therefore, it is clear that Singapore and Mauritius
Islands
are important players in the FDI equity landscape of
11 UAE 41,702.7 6,990.6 1.49 India.
12 Switzerland 27,240.9 4,842.4 1.03
Mauritius Singapore
COUNTRY-WISE FDI INFLOWS
13 South Korea 27,824.1 4,478.1 0.95 Netherland Japan

14 Hong Kong 27,220.7 4,408.0 0.94 32%

U.S.A United Kingdom

15 Luxembourg 19,256.7 3,082.7 0.66 0% 0%

Germany Cyprus

16 Spain 16,822.6 2,991.2 0.64 1%

1% France Cayman Islands

17 Italy 16,781.0 2,927.8 0.62 1%

1%
UAE Switzerland
1% 22%
1%
18 China 15,112.1 2,378.7 0.51 2%
1% South Korea HongKong

2%
19 Belgium 12,153.2 1,977.6 0.42 2%
Luxembourg Spain

20 Canada 11,971.9 1,937.1 0.41 2%

Italy China

3% 8%
6% Belgium Canada

Sources: Department of Industrial Policy and Promotion (As 7% 8%

per DPIIT’s FDI database)

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 Impact of Foreign Direct Investment (FDI) on Indian Economy Kawadkar, et al

Table No. 4: Top 20 FDI Equity Inflows by Sector from 2000–2001 to 2019–2020
(Amount USD Million)

Sr. No. Sectors Amt. of FDI Inflows % of Total Inflows

(In crores) (In USD Million)
1 Finance, banking, insurance, non-
financial business, outsourcing,
471,730.1 82,003.0 17.45
research and development, courier,
and technical testing and analysis.
2 Computer Software & Hardware 276,006.4 44,911.2 9.56
3 Telecommunications 219,188.6 37,271.0 7.93
4 Trading 176,004.7 27,595.0 5.87
5 Townships, Housing, Built-Up 123,964.0 25,662.3 5.46
Infrastructure
6 Automobile Industry 143,741.7 24,210.7 5.15
7 Chemicals (Other Than Fertilizers) 98,554.4 17,639.5 3.75
8 Construction (Infrastructure) 108,382.5 16,846.9 3.58
Activities
9 Drugs & Pharmaceuticals 87,814.3 16,500.6 3.51
10 Hotel & Tourism 91,778.5 15,289.0 3.25
11 Power 82,650.6 14,987.9 3.19
12 Metallurgical Industries 74,595.4 13,401.8 2.85
13 Food Processing Industries 61,811.5 9,980.8 2.12
14 Non-Conventional Energy 57,144.3 9,225.5 1.96
15 Information & Broadcasting 55,361.3 9,208.1 1.96
16 Electrical Equipments 50,720.0 8,604.0 1.83
17 Petroleum & Natural Gas 40,915.5 7,824.2 1.66
18 Hospital & Diagnostic Centers 41,154.7 6,726.9 1.43
19 Consultancy Services 34,701.9 5,834.8 1.24
20 Industrial Machinery 32,588.6 5,619.5 1.2
Source: Department of Industrial Policy and Promotion (As per DPIIT’s FDI database)
SECTOR-WISE FDI INFLOW SERVICES SECTOR equity inflow into India from 2000-2001 to 2019-2020.
21%
COMPUTER SOFTWARE & HARDWARE
TELECOMMUNICATIONS
Conversely, the industrial machinery sector witnessed
1%

2% 1% 11%
TRADING the lowest equity investment of USD 5,619.50 million,
2%
CONSTRUCTION DEVELOPMENT
AUTOMOBILE INDUSTRY accounting for
CHEMICALS
9%
2% CONSTRUCTION
1.20 percent of the top twenty sectors attracting FDI
7%
equity investment. A noteworthy investment was made
DRUGS & PHARMACEUTICALS
2% HOTEL & TOURISM

2%
6%
6% POWER
in the computer software and hardware sector, totalling
4%
USD 44,911.95 million, or 9.56 percent of the top twenty
METALLURGICAL INDUSTRIES
2% FOOD PROCESSING INDUSTRIES
NON-CONVENTIONAL ENERGY

industries. Similarly, the telecommunications services

The table highlights that the services sector, including
sector attracted equity investment of USD 37,270.95
finance and banking, received the highest equity
million, covering 7.93 percent of the top twenty sectors.
investment of USD 82,002.96 million, representing
The trading sector received an investment of USD
17.45 percent of the top twenty sectors attracting FDI
27,594.95 million, constituting 5.87 percent of the top

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 Impact of Foreign Direct Investment (FDI) on Indian Economy Kawadkar, et al

twenty sectors’ FDI equity investment. Investments CONCLUSION

in other sectors include USD 25,662.33 million in
The enormous contribution made by foreign direct
construction development, USD 24,210.68 million in
investment (FDI) to India’s economic growth is
the automobile industry, USD 17,639.48 million in the
reiterated by this study. FDI is not only crucial for
chemicals sector (excluding fertilizers), USD 16,846.88
achieving sustainable economic development but also
million in construction infrastructure activities, USD
demonstrates a positive and accelerating trend within
16,500.62 million in the drugs and pharmaceuticals
the country. The findings clearly indicate that India
sector, and USD 15,288.97 million in the hotel and
presents a highly promising investment destination for
tourism sector. Additionally, USD 14,987.93 million
both developed and developing nations. To leverage
was invested in the power sector, USD 13,401.78
this opportunity, it is essential to liberalize the rules and
million in metallurgical industries, and USD 9,980.75
regulations surrounding FDI in India.
million in food processing industries.
It is advised that the Department of Industrial Policy
FINDINGS OF THE STUDY & Promotion take action to create new and update
• The FDI inflows into the Indian economy showed existing FDI policies with an emphasis on promoting,
a constant rising trend from 2000–2001 to 2019– approving, and facilitating investments in light of the
2020, showing significant expansion. study completed. Additionally, efforts should be made
to enhance ease of doing business indicators in various
• In 2019-2020 alone, India received FDI inflows
sectors, including streamlining processes related to
amounting to USD 74,390 Million. The cumulative
starting a business, obtaining construction permits,
FDI inflow for the period between 2000-2001 and
accessing electricity, and labor market regulations. Such
2019-2020 reached USD 681,954 Million.
measures will create favourable conditions for foreign
• The data reveals that in the last financial year (2019- investors to explore opportunities in India.
2020), FDI equity inflows into India amounted to
In conclusion, Foreign Direct Investment not only
USD 49,977 Million. The cumulative FDI equity
contributes to employment generation in India but also
flow from 2000-2001 to 2019- 2020 totalled USD
provides support to medium and small-scale industries,
470,119 Million.
such as MSMEs. Additionally, FDI is crucial to the
• Analyzing the data, it becomes apparent that nation’s posture on the world stage as a result of the
Mauritius and Singapore accounted for the highest liberalization and globalization processes.
FDI equity inflows, investing USD 142,710.44
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