MET in the history of Indian Economy has been

MET 17304

 

Impact of Foreign
Direct Investment on Economic Indicators –an evidence from India

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India , the one of
the fastest growing economies in the world ranked as the seventh largest economy on the scale of nominal GDP
and is the third-largest economy
by purchasing power parity (PPP) after china and the United States of America ,
in 2016. One of the Key policy paradigms 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. With one of the lowest tax –GDP ratios
in the world, and commitment mandated under Fiscal Responsibility & Budget
Management (FRBM) Act 2003 which has necessitated need for fiscal consolidation
and has left much less fiscal space for public borrowing, FDI can be identified
as one of the most effective tools for capital investment and thereby giving a
boost to the economic activities.  The
cumulative FDI inflow into India has been recorded at USD 518 bn.  Major investor countries are Mauritius, Singapore,
Japan, UK and Netherlands contributing more than 70% of FDI inflow into India.

In recent years, various studies have
thrown light on the relationship between the inflow of FDI and economic growth
in developing countries. However, despite increasing flows of FDI especially in
recent years, the relationship between FDI and economic indicators such as
Gross Capital Formation, Unemployment Rate, Balance of Trade, CPI Inflation,
Industry Value Added, and Industrial Wages 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) used a production function analysis to analyze the FDI inflows
on economic growth in India; and he discovered 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
GDP.

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?

Methodology: The
proposal seeks to test the following two hypotheses through policy paper:-

i.           
There is strong positive
relationship between FDI and GDP, GCF, IW industrial value added, UR, and BoT.

ii.           
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.

References:

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”.

Choi
,Yoon Jung & Baek , Jungho  (2017)-“Does FDI Really Matter to Economic Growth in
India?”

http://dipp.nic.in/sites/default/files/FDI_FactSheet_Updated_September2017.pdf

https://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=2513

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