Impact of Foreign Direct Investment on Economic Growth of India

DISSERTATION
SUBMITTED TO THE
UNIVERSITY OF LUCKNOW
FOR THE DEGREE OF
MASTER OF COMMERCE
IN
APPLIED ECONOMICS
By
DHRUVIKA SHARMA
Under the Supervision of
Dr. Jai Lakshmi Sharma
Department of Applied Economics
Faculty of Commerce
University of Lucknow

DEPARTMENT OF APPLIED ECONOMICS

FACULTY OF COMMERCE
UNIVERSITY OF LUCKNOW, LUCKNOW - 226007, U.P., INDIA
2024-25

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 Declaration

I, Dhruvika Sharma, a student of M.Com.(Applied Economics) Semester 4, at

University of Lucknow, hereby declare that the dissertation report entitled "Impact of
Foreign Direct Investment on Economic Growth of India" is an original work
conducted and prepared by me under the guidance of Dr. Jai Lakshmi Sharma.

I affirm that this report is a result of my personal efforts and contributions. Any reference
to existing research, direct quotations, or paraphrasing has been properly
acknowledged and cited in accordance with academic standards. This report has not
been previously submitted for any degree, diploma, or other qualifications at this or any
other institution.

I understand the importance of this declaration and the potential consequences of any
breach of academic integrity, including but not limited to disciplinary action by my
institution. I hereby certify that the information presented in this report is true and
accurate to the best of my knowledge and belief.

Date: Name: Dhruvika Sharma

Place: Lucknow Roll Number: 2310012115182

Signature:

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 Acknowledgement

I extend my deepest gratitude to my supervisor, Dr. Jai Lakshmi Sharma, for her
unwavering support and insightful critiques throughout my research journey. I am
thankful for her constructive feedback and essential suggestions that enhanced the
quality of my work.
I would like to give a special thanks to Shivam Agarwal for helping me and giving his
valuable feedback regarding this dissertation, which helped me in improving the
standard of this research.
My appreciation also goes to the faculty and staff in the Department of Applied
Economics at University of Lucknow, whose resources and assistance have been
invaluable.
I would also like to acknowledge my peers for their camaraderie and the stimulating
discussions that inspired me throughout my academic journey.
Thanks should also go to the librarians, research assistants, and study participants from
the university, who impacted and inspired me.
Lastly, I would be remiss in not mentioning my family, especially my parents. Their
belief in me has kept my spirits and motivation high during this process.

Dhruvika Sharma

2310012115182

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 Abstract

This study is time series in nature and spread over a period of 34 years from 1990-91 to
2023-24.The study was based on two variables, i.e., Foreign Direct Investment and
GDP growth rate. To analyse this relationship, a bivariate Ordinary Least Squares
(OLS) regression is done for the full period and two sub-periods (1990-91 to 2006-07
and 2007-08 to 2023-24), the findings reveal a complex and evolving dynamic. Trend
analysis indicates a substantial increase in FDI flows post-liberalization, albeit with
significant annual growth rate volatility that moderated in later years. The bivariate
regression for the entire period did not establish a statistically significant linear impact of
net FDI on GDP growth rate. However, a marginally significant positive relationship
emerged in the earlier sub-period (1990-91 to 2006-07), which was not sustained in the
subsequent period (2007-08 to 2023-24). The study concludes that the impact of FDI on
India's economic growth is likely non-linear, time-varying, and potentially mediated by
other macroeconomic factors, warranting further investigation using more sophisticated
econometric approaches to unravel the intricate interplay between foreign investment
and India's economic trajectory.

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 Table of Contents

Chapter Chapter Name Page No.

No.
List of Tables 7

List of Charts 8

I INTRODUCTION 9-25

1.1 Foreign Direct Investment 9-12

1.2 Types of Foreign Direct Investment 13-14

1.3 Significance of Foreign Direct Investment 15-16

1.4 Economic Growth 17-18

1.5 Measures of Economic Growth 19

1.6 Types of Economic Growth 20

1.7 Factors influencing Economic Growth 21

1.8 Nexus between Foreign Direct Investment and Economic 22

Growth
1.9 Net FDI in India from the year 1990-91 to 2023-24 23-24

1.10 Economic Growth Rate of India from the year 1990-91 to 24-25
2023-24

II REVIEW OF LITERATURE AND RESEARCH GAP 26-29

2.1 Review of Literature 29-29

2.2 Research Gap 29

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III DATA AND METHODOLOGY 30-33

1. 3.1 Objective 30

2. 3.2 Hypothesis Formulation 30

3. 3.3 Data and Methodology 30-31

4. 3.4 Formulation of Model 31-32

5. 3.5 Chapter Plan 33

IV RESULT AND ANALYSIS 34-45

V CONCLUSION 46

REFERENCES 47-49

A.I APPENDIX - I 50

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 List of Tables
Sr. No. Table Name Page No.
1. Results of trend analysis of FDI (1990-91 to 2023-24) 34

2. Ordinary Least Squares Regression(Bivariate) (1990-91 to 35

2023-24)

3. Ordinary Least Squares Regression(Bivariate) (1990-91 to 36-37

2023-24)

4. Ordinary Least Squares Regression(Bivariate) (1990-91 to 38

2023-24)
5. Descriptive Statistics 39

D.1 Data of Credit, Debit and Net balances of Foreign Direct 49

Investment and GDP growth rate in India

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 List of Charts

Sr. No. Chart Name Page No.

1. Net FDI in India from 1990-91 to 2023-24 23

2. Economic Growth Rate of India from 1990-91 to 2023-24 24

3. Annual Growth Rate of FDI Inflows 41

4. Annual Growth Rate of FDI Outflows 42

5. Annual Growth Rate of Net FDI 44

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 Chapter - I
Introduction

For developing nations like India, FDI has long been viewed as a vital catalyst for
bridging the resource gap, fostering industrialization, enhancing productivity, and
ultimately propelling economic growth. The liberalization of the Indian economy in the
early 1990s marked a pivotal shift, opening its doors to foreign investment with the
expectation of stimulating competition, modernizing industries, creating employment
opportunities, and bolstering overall economic dynamism (Ahluwalia, 2002). Since then,
India has witnessed a substantial increase in FDI inflows, positioning itself as a
significant destination for global capital.

The theoretical underpinnings of the FDI-growth nexus are multifaceted. Neoclassical

growth models suggest that capital accumulation, often facilitated by FDI, directly
contributes to increased output. Endogenous growth theories further emphasize the role
of FDI in fostering technological diffusion, human capital development through training
and skill transfer, and the adoption of advanced management practices, all of which are
crucial for long-run productivity gains and sustained economic expansion (Grossman &
Helpman, 1991). Moreover, FDI can generate positive externalities by creating
backward and forward linkages, enhancing competition, and fostering innovation within
the domestic economy.

However, the relationship between FDI and economic growth is not always
straightforward or universally positive. The absorptive capacity of the host economy, the
quality of its institutions, the level of human capital, and the specific nature and sector of
FDI inflows can significantly mediate its impact (Borensztein et al., 1998). Furthermore,
concerns regarding potential negative effects, such as the crowding out of domestic
industries, increased dependence on foreign capital, and limited technology transfer in
certain contexts, also warrant careful consideration.

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1.1 Foreign Direct Investment

The term "foreign direct investment" (FDI) refers to an investment made by a firm or
individual in one nation into commercial interests in another, either through the
establishment of business activities or the purchase of corporate assets in the other
nation. The aspect of control is typically what sets it apart from Foreign Portfolio
Investment (FPI). In contrast to FPI, which is a more passive investment in financial
assets, FDI suggests a level of influence and control over the foreign enterprise.

Here are definitions from key international organizations:

(i) International Monetary Fund (IMF):

* The IMF defines FDI as "a category of international investment that reflects the
objective of a resident in one economy (the direct investor) obtaining a lasting interest in
an enterprise resident in another economy (the direct investment enterprise)."

* A lasting interest implies a long-term relationship between the direct investor and the
enterprise and a significant degree of influence by the investor on the management of
the enterprise.

* A direct investment relationship is typically established when the direct investor

acquires 10 percent or more of the ordinary shares or voting power of an enterprise
abroad.

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(ii) Organisation for Economic Co-operation and Development (OECD):

* The OECD definition aligns closely with the IMF's, emphasizing the objective of
obtaining a lasting interest by a resident entity of one economy (direct investor) in an
enterprise that is resident in another economy (the direct investment enterprise).

* The lasting interest implies a long-term relationship and a significant degree of

influence on the management of the enterprise.

* The OECD also uses the 10 percent threshold of ownership of the voting power as a
key criterion for establishing a direct investment relationship.

(iii) United Nations Conference on Trade and Development (UNCTAD):

* UNCTAD defines FDI as "an investment made by a resident enterprise in one

economy (direct investor or parent enterprise) with the objective of establishing a lasting
interest in an enterprise that is resident in another economy (direct investment
enterprise or foreign affiliate)."

* The lasting interest implies the existence of a long-term relationship between the
direct investor and the direct investment enterprise and a significant degree of influence
on the management of the enterprise.

* Ownership of 10% or more of the voting power of a direct investment enterprise by a

direct investor is considered evidence of such a relationship.

* FDI flows include equity capital, reinvestment of earnings, and inter-company debt.

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Key elements common to these definitions:

* Cross-border investment: Foreign direct investment (FDI) invariably entails investing

across national borders.

* Enduring interest: The investor hopes to remain involved in the overseas business
for a long time.

* Significant influence or control: The investor hopes to have a say in how the foreign
company is run and managed.

* Ownership threshold: A standard criterion for forming a direct investment

relationship is a stake of at least 10% of the voting power.

These definitions aid in the statistical measurement and analysis of foreign direct
investment (FDI) stocks and flows, which are essential for comprehending the
development and integration of the world economy.

Foreign direct investment can be either:

1. Organic- When a foreign investor contributes money to help established enterprises

grow and develop more quickly, it is known as organic investments.

2. Inorganic- When an investing entity purchases a company in its target nation, this is
known as an inorganic investment.

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1.2 Types of Foreign Direct Investment

There are several ways to categorize Foreign Direct Investment (FDI). Here are some of
the main types:

(I) Based on the Nature of the Investment:

(i) Greenfield Investment: This involves a foreign company establishing a new

business operation in a host country from the ground up. This includes building new
factories, offices, or distribution centers.

(ii) Brownfield Investment (Mergers and Acquisitions - M&A): This occurs when a
foreign company invests in an existing business in the host country through acquisition,
merger, or taking a significant equity stake.

(iii) Joint Venture: This involves a foreign company partnering with a local company to
establish a new business entity in the host country, sharing ownership, risks, and
profits.

(II) Based on the Relationship to the Investor's Existing Business:

(i) Horizontal FDI: This happens when a company invests in a foreign company that
operates in the same industry as the investor's home-country business. The investor
essentially duplicates its existing activities in a new location.

Example: A US-based fast-food chain like McDonald's opening restaurants in India.

(ii) Vertical FDI: This occurs when a company invests in a foreign company that is part
of its supply chain. The investment can be either:

* Backward Vertical FDI * Forward Vertical FDI

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* Backward Vertical FDI: Investing in a company that supplies raw materials or
components for the investor's main business.

Example: A German car manufacturer (BMW) investing in a foreign company that

produces specialized car parts.

* Forward Vertical FDI: Investing in a company that distributes or sells the investor's
products in a foreign market.

Example: A US-based clothing brand opening its own retail stores in India.

(iii) Conglomerate FDI: This involves a company investing in a foreign company that
operates in a completely unrelated industry. The investor has no prior experience in the
foreign company's business area. This type of FDI is less common and often takes the
form of a joint venture.

Example: A US-based technology firm (Apple) investing in a foreign fashion brand.

(iv) Platform FDI (Export-Oriented FDI): In this type, a company invests in a foreign
country to produce goods or services that are primarily exported to a third country. The
host country serves as a production base for serving other markets.

Example: A company setting up a manufacturing plant in a country with favorable

trade agreements to export goods to another region.

Understanding these different types of FDI is crucial for analyzing its motivations,
impacts on host and home countries, and the strategies of multinational corporations.

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1.3 Significance of Foreign Direct Investment

Foreign Direct Investment (FDI) is important for several reasons and is essential to the
economic health of both the investing and host nations. Below is a summary of its main
significance:

For the Host Country:

1. Economic Development and Growth: Foreign Direct Investment (FDI) provides

capital to the host economy, enabling the establishment of new enterprises, the
expansion of existing ones, and the stimulation of general economic activity. Higher
GDP growth rates are frequently the result of this.
2. Job Creation: By establishing and growing foreign-owned businesses, many job
opportunities for people of all skill levels are created, which lowers unemployment and
raises income levels.
3. Innovation and Technology Transfer: FDI frequently introduces cutting-edge
technologies, creative procedures, and contemporary management techniques that
domestic businesses can absorb and implement, increasing overall competitiveness
and productivity.
4. Infrastructure Development: In order to support long-term economic growth, foreign
investors usually fund infrastructure projects such as energy facilities, communication
networks, and transportation networks.
5. Higher Exports: Foreign direct investment (FDI) can result in the production of
goods and services for global markets, increasing a nation's export revenue and
enhancing its balance of payments.
6. Development of Human Capital: Foreign direct investment (FDI) can give domestic
companies access to international supply chains and distribution networks, which can
help them enter international markets. Multinational corporations frequently offer training
and skill development programs for local employees, improving the workforce's overall
skill level and knowledge base.

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7. Increased Competition: When foreign companies enter the market, they have the
potential to dismantle domestic monopolies, create a more competitive business
climate, and encourage local companies to increase productivity and quality of output.
8. Higher Government Revenue: The host nation's tax revenues are bolstered by the
profits made by foreign-owned enterprises.
9. Better Foreign Exchange Reserves: Foreign direct investment (FDI) inflows boost a
nation's foreign exchange reserves, which helps maintain a stable exchange rate and
promote economic stability.

For the Investing Country:

1. Market Diversification: By extending operations outside of their home market,

foreign direct investment (FDI) helps businesses become less dependent on a single
economy and diversify their sources of income.
2. Access to New Markets: Investing abroad gives you access to new clientele and
expansion prospects.
3. Resource Acquisition: Foreign direct investment (FDI) can give access to natural
resources, raw materials, and cheaper labor in other nations.
4. Strategic Expansion: Long-term strategic objectives and preserving a competitive
edge may depend on establishing a presence in overseas markets.
5. Higher Profitability: Taking advantage of cheaper production costs overseas or
entering new markets might result in increased earnings and returns on investment.
6. Increased Global Presence: Foreign Direct Investment (FDI) assists businesses in
becoming international entities, which increases their global influence and brand
awareness.

Fundamentally, foreign direct investment (FDI) stimulates economic growth by

promoting interdependence and reciprocal advantages among countries. It is a key
force behind globalization and has a big impact on how the economy is shaped today.

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1.4 Economic Growth

The rise in the value of products and services generated in an economy over a given
time period, usually a year, is referred to as economic growth. It is a key sign of the
health and development of an economy since it shows an increase in its potential for
production. The percentage change in a nation's GDP or GNP, which is frequently
adjusted for inflation to reflect actual economic growth, is typically used to quantify this
growth.

Here are the definitions of economic growth provided by major international

organizations:

(i) International Monetary Fund (IMF):

* The IMF defines economic growth as an increase or improvement in the inflation-
adjusted economy in a financial year.
* The economic growth rate is typically calculated as the real Gross Domestic Product
(GDP) growth rate, real GDP per capita growth rate, or GNI per capita growth.
* The IMF also highlights that it aims to foster global growth and economic stability by
providing policy advice and financing to its members. It emphasizes that sustained
economic growth increases average incomes and is strongly linked to poverty reduction.

(ii) Organisation for Economic Co-operation and Development (OECD):

* The OECD states that economic growth is an increase in the production of goods and
services in an economy.
* They note that increases in capital goods, labor force, technology, and human capital
can all contribute to economic growth.
* The OECD also emphasizes that an economy's growth is measured by the change in
the volume of its output or in the real expenditure or income of its residents.

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(iii) World Bank:

* The World Bank defines GDP growth (GDP per capita growth) as the sum of gross
value added by all resident producers in the economy plus any product taxes (less
subsidies) not included in the valuation of output, divided by the mid-year population.
Growth is calculated from constant price GDP data in local currency.
* The World Bank underscores that sustained economic growth increases average
incomes and is strongly linked to poverty reduction. Growth in GDP and GDP per capita
are considered broad measures of economic growth.
* They also state that an economy's growth is measured by the change in the volume of
its output or in the real incomes of its residents.

In summary, all three major organizations emphasize that economic growth is

fundamentally about an increase in the production of goods and services in an
economy, typically measured by the growth rate of real GDP or real GDP per capita.
They also highlight the importance of economic growth for improving living standards
and reducing poverty.

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1.5 Measurement of Economic Growth

The main indicator of economic growth is the percentage change in a nation's GDP over
a given time frame, often a year. The entire monetary or market value of all completed
goods and services produced inside a nation's boundaries over a certain time period is
represented by its GDP.
Here are some crucial factors to take into account and a breakdown of how economic
development is measured:

Gross Domestic Product (GDP): The Primary Measure

* Definition: The most commonly used indicator of economic activity is GDP.
Theoretically, there are three ways to calculate it, and each should produce the same
outcome:
* Production Approach: Total of all local producers' gross value added plus any
product taxes (minus subsidies) that aren't factored into output valuation.
* Expenditure approach: It measures the total amount spent on finished products and
services by families (C), businesses (I), the government (G), and the global community
(Net Exports - NX, which is Exports minus Imports).
GDP is calculated as follows: C + I + G + NX.
* Income Approach: The total of all salaries, wages, profits, interest, and rent received
by the factors of production, plus import and production taxes less subsidies.

* Nominal GDP: The worth of goods and services at current market prices is measured
by nominal GDP. Even if the real amount of goods and services produced stays the
same, nominal GDP will rise if prices rise over time.
* Real GDP: Takes into account the real change in the amount of goods and services
produced by adjusting nominal GDP for inflation (or deflation). This gives a more
realistic view of economic expansion. Prices from a base year are usually used to
compute real GDP.
* GDP Growth Rate: The economic growth rate is usually expressed as the percentage
change in real GDP from one period to another (e.g., quarter to quarter or year to year)

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1.6 Types of Economic Growth

* Extensive Growth: This happens when the amount of inputs used, such labor or
capital, increases. Although it can result in increased output, if productivity doesn't
increase, it might experience diminishing returns.

* Intensive Growth: This kind of growth is brought about by increases in the efficiency
and quality of inputs, which are frequently fueled by improved education, more
productive production methods, and technological advancements. It results in greater
productivity, or more output per unit of input.

* Sustainable Growth: This is economic expansion that satisfies current demands

without endangering the capacity of future generations to satisfy their own. It takes
resource depletion and environmental considerations into account.

* Actual Growth: This is the current percentage change in a nation's GDP over a
certain time frame.

* Potential Growth: When all available resources and technologies are completely
utilized, this is the fastest pace of economic growth that an economy can attain.

* Trend Growth: This is the average rate of economic growth over the long run, which
evens out short-term business cycle swings.

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1.7 Factors Influencing Economic Growth

* Natural Resources: An economy's capacity for growth can be greatly impacted by the
availability and effective use of natural resources such as land, minerals, and energy.

* Physical Capital: Putting money into physical assets like factories, machinery,
infrastructure (roads, communication networks), and equipment increases production
and worker productivity.

* Human Capital: A country's workforce's abilities, health, education, and knowledge

are critical to its economic development. A population that is healthy and well-educated
is more inventive and productive.

* Labor Force: Production directly depends on the quantity and caliber of the labor
force. The availability of labor is influenced by labor force participation rates and
population growth.

* Technology: Productivity increases and economic growth are significantly influenced

by technological advancements, which include new procedures, instruments, and
knowledge.

* Institutions and Governance: To create an atmosphere that is favorable to

investment and economic activity, stable and efficient political and legal structures, the
defense of property rights, and solid governance are necessary.

* Demand: In the short term, aggregate demand—which consists of net exports,

government expenditure, investment, and consumer spending—is quite important.
Businesses may be encouraged to boost production by rising demand.

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1.8 Nexus between Foreign Direct Investment and Economic Growth

One of the most researched topics in economics is the relationship between economic
growth and foreign direct investment (FDI). Since it helps fill the gap in domestic capital
and promotes global economic integration, FDI is widely seen as a major engine of
economic growth, especially for emerging nations. But the relationship is complicated
and subject to many influences.

Factors Influencing the FDI-Growth Nexus:

The impact of FDI on economic growth is not always uniform and depends on
several factors within the host country:
* Absorptive Capacity: The host nation's ability to efficiently reap the rewards of
foreign direct investment is essential. The degree of human capital (education and
skills), the financial sector's level of development, and the state of the technology
infrastructure all play a role in this. Countries having a stronger absorptive capacity
likely to benefit from FDI more significantly in terms of growth.
* Financial Development: By enabling capital allocation and encouraging local
entrepreneurship that can profit from the presence of foreign enterprises, a well-
developed financial sector can increase the positive impact of FDI.
* Institutional Quality: Attracting foreign direct investment (FDI) and guaranteeing that
its advantages are realized depend on robust institutions, such as the rule of law,
political stability, and effective bureaucracy.
* Trade Openness: Since FDI promotes technology diffusion and integration into global
value chains, nations with more open trade policies typically gain more from it.
* Macroeconomic Policies: A stable macroeconomic environment that includes good
fiscal policies and low inflation makes it easier for FDI to support growth.
* Sectoral Differences: Depending on the level of technology and the connections to
domestic industries, the effect of foreign direct investment (FDI) on growth might differ
across various economic sectors.

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1.9 Net FDI in India from the year 1990-91 to 2023-24
Chart No. 1

Net FDI

350000

300000

250000
Net FDI (in INR crore)

200000

150000

100000

50000

0
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
2016-17
2017-18
2018-19
2019-20
2020-21
2021-22
2022-23
2023-24
Time Period (in years)

Key Observations:

* Early Years (1990-91 to 2002-03): Net FDI remained relatively low during this period,
generally below INR 50,000 crores. There were some fluctuations, but the overall level
was modest.

* Increasing Trend (2003-04 to 2007-08): A noticeable increase in Net FDI started

around 2003-04, with a significant jump in 2007-08. This suggests a period of growing
investor confidence and increased foreign investment in India.

* Fluctuations and Peaks (2008-09 to 2023-24): After 2007-08, Net FDI experienced
considerable fluctuations. There were peaks and troughs, but the overall level remained
significantly higher than in the early 1990s. Notably, there was a substantial increase in
Net FDI in the years leading up to 2023-24.

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The graph illustrates a general upward trend in Net FDI in India over the period 1990-91
to 2023-24, with a marked increase starting in the mid-2000s. While there have been
fluctuations, the overall level of Net FDI has grown considerably, indicating increasing
foreign investment in the Indian economy.

1.10 Economic Growth Rate of India from the year 1990-91 to 2023-24

Chart No. 2

GDP growth rate (in%)

12.00

10.00

8.00

6.00
GDP growth rate (in%)

4.00

2.00

0.00
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
2016-17
2017-18
2018-19
2019-20
2020-21
2021-22
2022-23
2023-24
-2.00

-4.00

-6.00

-8.00
Time Period (in years)

Key Observations:

* Early 1990s (1990-91 to 1992-93): The growth rate started relatively low, even
dipping into negative territory around 1991-92. This period coincided with a significant
economic crisis in India, leading to major economic reforms.

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* Recovery and Acceleration (Mid-1990s): Following the initial reforms, the growth rate
showed a strong recovery and acceleration in the mid-1990s, reaching relatively high
levels.

* Fluctuations around 2000: The growth rate experienced some volatility around the
turn of the millennium.

* High Growth Phase (Mid-2000s): India witnessed a period of sustained high economic
growth in the mid-2000s, with growth rates consistently above 8% for several years.

* Post-Global Financial Crisis (Late 2000s - Early 2010s): The Global Financial Crisis of
2008-09 had an impact, leading to a dip in the growth rate. The recovery was followed
by some moderation in the early 2010s.

* Mid to Late 2010s: The growth rate showed fluctuations, with some years of strong
growth interspersed with periods of slower expansion.

* Sharp Decline and Recovery (Around 2020-21): The graph shows a very sharp
decline in the growth rate around 2020-21. This corresponds to the period when the
COVID-19 pandemic severely impacted economic activity in India. This was followed by
a sharp rebound in the subsequent year (2021-22) as the economy started to recover.

* Recent Years (2022-23 and 2023-24): The growth rate in the most recent years
shown remains positive but appears to have moderated somewhat compared to the
immediate post-pandemic rebound.

25
 Chapter- II
Review of Literature and Research Gap

2.1 Review of Literature

(Rajendra Singh, 2020) inspect the impact of FDI on Indian economic growth. The
objectives of the study are to investigate the empirical relationship between Foreign
Direct Investment and Economic Growth in India. The study is based on secondary
sources through the world bank website from 1970 to 2019. It was found that the
Foreign Direct Investments are significant for the growth of the Indian Economy and the
positive association between FDI and GDP.

(Reddy, Basha , Rao, and Bhaskar Reddy, 2013) studied impact of Foreign Direct
Investment on Indian economy. The objectives of the study are to examine the impact of
FDI in Indian economy. Their study is based on the existed literature. The paper
concluded that from the 20002-2003 and 2009-2010, the investments made in the form
of FDI, is gradually increased.

(Bhavya, 2014) tried to study the trends and patterns of flow of FDI. To access the
determinants of FDI inflows and particularly after two decades of economic reforms also
analyses the challenges to position itself favorably in the global competition of Foreign
Direct Investments.

(Dr. Asha E. Thomas, 2016) tried to study the trends of FDI in India in the last fifteen
years. Find out the correlation between FDI and GDP of the country and to analyze the
impact of FDI on Indian Economy. This study is based on secondary data. Data have
been collected from various sources including RBI bulletins, Economic Survey Reports
and also from various publication of Ministry of Commerce.

(Dr. P. Sai Rani and Sourav Kumar Ghost, 2020) tried to study the trends of FDI
inflows in India, and to identify the country-wise flow of FDI into India. This study is

26
based on secondary data. The database is constructed by pooling information and data
from various reliable sources like National Statistical Office.

(Sultana, Kagdiyal, Goyal, Chakkala, Parmar, 2019) studied about the impact of FDI
on not only Indian growth variables but also on other factors which includes human
development index and population. The results of this study was that there is a
considerable impact of FDI on HDI, population and Sensex index and some impact on
imports and exports too.

(Silajdzic and Mehic, 2015) have figured out that Foreign Direct Investment directly
influence the economic growth by subscribing to the fixed capital formation and
indirectly subscribing to the knowledge stocks. Moreover, in the traditional framework it
implies that the Foreign Direct Investment directly affects the economic growth.

(Chowdhury and Mavrotas, 2005) proven their results as mixed in the direction of
causal relationship between Foreign Direct Investment and economic growth. Their
paper stated that there is a positive impact on Indian economy by Foreign Direct
Investments.

(Subroto Ganguly, 2018) studies the trend of FDI inflows in Asian countries. The study
is based on secondary data from the year 2000 to 2013. The results additionally
conferred that Asian countries have received most FDI inflows from Mauritius followed
by Singapore. The elaborated discussion regarding the Foreign Direct Investment is an
original contribution of this paper.

(Basu, Chakraborty and Reagle, 2003) have proven that for 23 developing countries
from the year 1978 to 1996, there is a co-integration relationship between Foreign
Direct Investment and Gross Domestic Product.

(Alvarado, Indigoes, and Ponce, 2017) figured out that Foreign Direct Investment has
a positive impact on the Gross Domestic Product especially in high income countries.
However, through this research they showed that in the upper-middle-income countries
the effect is uneven and not significant.

27
(Nayak D.N., 2004) analyses the patterns and trends of Canadian FDI in India. He
observes that India does not figure very much in the investment plans of Canadian
firms. The reasons for the same are the indifferent attitude of Canadians towards India
and lack of information of investment opportunities in India are the important
contributing factors for such an unhealthy trend in economic relations between India and
Canada. He suggested some measures such as publishing regular documents like
newsletter that would highlight opportunities in India and a detailed focus on India’s area
of strength so that Canadian firms could come forward and discuss their areas of
expertise would go a long way in enhancing Canadian FDI in India.

(Naga Raj R.,2003) in his article “Foreign Direct Investment in India in the1990s: Trends
and Issues” discusses the trends in FDI in India in the 1990s and compares them with
China. The study raises some issues on the effects of the recent investments on the
domestic economy. Based on the analytical discussion and comparative experience, the
study concludes by suggesting a realistic foreign investment policy.

(Sirari S. Arjun & Bohra S. Narendra, 2011) analyzed the significance of FDI inflows
in Indian service sector since 1991 and relating the growth of service sector FDI in
generation of employment in terms of skilled and unskilled. The study was based on
secondary sources of data. The study concluded that at the sectoral level of the Indian
economy, FDI has helped to raise the output, productivity and employment in some
sectors especially in service sector.

(Mohammed S. Ansari & Ranga M., 2010) conducted empirical analysis of status of
current status of FDI in India. The study aims to find reasons for comparatively lesser
flow of FDI and suggests measures to boost flow of FDI to India. The study was
analytical in nature and made use of secondary data. The study concluded that FDI is
now regarded as one of the key indicators of economic health. They also said that FDI
can complement local development by boosting export competitiveness, employment
generation and strengthening skills, transfer diffusion-generation of technology and
enhanced financial resources for development.

28
(Vyas A.V., 2015) in the research concluded that FDI in India has a significant role in
the economic growth and development of India. FDI in India to various sectors can
attain sustained economic growth and development through creation of jobs, expansion
of existing manufacturing industries. The inflow of FDI in service sector and
construction and development sector, from April, 2000 to June, 2015 attained
substantial sustained economic growth and development through creation of jobs in
India.

(Mishra R. & Palit S., 2020) in the study found that FDI has both backward and
forward linkages in employment creation in India. FDI shows a three times increase in
growth rate in the second decade than in the first decade, i.e., during 2002 to 2012 in
the service sector in India. Banking and insurance sector is the first in attracting major
FDI proposals followed by the telecommunication sector, which is in second position in
attracting FDI in India. In the service sector FDI generates highest job opportunities than
any other sector in India. The result of this study shows that employment generation in
India during the last two decades is quite detectable, but FDI inflows may not be
regarded as a major factor for this growth rate.

2.2 Research Gap

This study aims to understand the trend and relationship between FDI and economic
growth in India from the pivotal liberalization period of 1990-91 up to the present day
(2023-24), providing insights into the dynamic interplay between foreign investment and
the nation's economic trajectory.

29
 Chapter - III
Data and Research Methodology
3.1 Objective
The objective of this study is:

 To show the impact of Foreign Direct Investment on economic growth of India for
the period 1990-91 to 2023-24.
 To show the trend growth rate of the credit, debit and net balances of Foreign
Direct Investment for the period 1990-91 to 2023-24.
 To show the annual growth rate of the credit, debit and net balances of Foreign
Direct Investment for the period 1990-91 to 2023-24.

3.2 Hypothesis Formulation

H0 – The Foreign Direct Investment will have no impact on economic growth of India.

H1 – The Foreign Direct Investment will have an impact on economic growth of India.

The testing of hypothesis is given in Chapter IV.

3.3 Data and Methodology

The study is purely based on secondary data. The data is collected from RBI -
Database of Indian Economy.

The data was analysed using OLS regression model and trend analysis was used for
analysing dependent variable. The period of the study is from 1990-91 to 2023-24. The
study has used the following tools for analysis of data:

a. Trend Analysis - Used for checking the trend of Foreign Direct Investment. The
analysis is used to show the growth rate of Foreign Direct Investment and economic
growth in recent years.

30
b. Inferential Statistics - Used for analysing the impact of Foreign Direct Investment on
Economic Growth (GDP growth rate) using OLS regression model and testing
hypothesis for the model.

c. Descriptive Statistics - It is used to understand the basic properties of the data used
in the study before moving on to more complex econometric modeling like regression
analysis.

3.4 Formulation of Model

To measure the trend of dependent variable on time, a regression analysis was made,
where time is the independent variable:

fdint = α1 + α2Tt + µt

where,

fdint = Net Foreign Direct Investment at time t

Tt = Change in time

µt = Error term

In the above equation dependent variable is Net Foreign Direct Investment on which a
natural log was applied to reduce its variability so that the data can be easily
interpreted. So, the new function formed can be shown as:

ln(fdint) = α1 + α2Tt + µt (i) equation

Like the above equation, a same equation for Foreign Direct Investment Inflows was
formed which is:

ln(fdiit) = α1 + α2Tt + µt (ii) equation

where,

ln(fdiit) = Natural log of Foreign Direct Investment Inflows at time t

31
An equation for Foreign Direct Investment Outflows was formed which is:

ln(fdiot) = α1 + α2Tt + µt (iii) equation

where,

ln(fdiot) = Natural log of Foreign Direct Investment Outflows at time t

The result of this trend analysis is given in the Table No. 2, of the Chapter IV.

For testing the hypothesis, a bivariate linear regression model was made which was
shown as follows:

GDP_GRt = α1 + α2(fdint) + µt (iv) equation

where,

GDP_GRt = Gross Domestic Product growth rate at time t

fdint = Net Foreign Direct Investment at time t

µt = Error term

The above equation shows an impact of Net Foreign Direct Investment on economic
growth. Since, variable fdint has amount in crores the variability of variable is large. So,
to reduce the variability, the variable fdint has been converted into a log function. The
new equation can be presented as:

GDP_GRt = α1 + α2ln(fdint) + µt (v) equation

Now, when all the equations are shown, The Chapter IV of this study shows the results
and analysis of these equations. While the data used is shown in the Appendix – I.

32
3.5 Chapter Plan

To analyse the impact of Foreign Direct Investment on economic growth of India a

detailed analysis on the basis of selected variables has been conducted. The present
study consists of four chapters.

Chapter I: Introduction, this chapter presents a theoretical background of the study. It

revolves around foreign direct investment, its types and significance. This chapter also
consists of brief explanation about the relationship between foreign direct investment
and economic growth.

Chapter II: Review of Literature and Research Gap, this chapter consists of literature
review and research gap.

Chapter III: Data and Methodology, this chapter shows the objective of the study,
hypothesis formulation and the formulation of model. It also states the limitation of the
study.

Chapter IV: Results and Analysis, this chapter involves testing of hypothesis and
results of various analysis done in the study.

Chapter V: Conclusion, it provides the conclusion of the study and states future work
on this study. This chapter also provides some suggestion which were been found out
during this research.

33
 Chapter - IV
Result and Analysis
The results of trend analysis of the three equations (equation (i), equation (ii) and
equation(iv)), are shown below in Table No. 1.

Table No. 1 - Results of Trend Analysis of Foreign Direct Investment from the
Year 1990-91 to 2023-24

Trend Growth Rate

ln(fdiit) ln(fdiot) ln(fdint)

1990-91 to 2023-24 0.1852 0.23663 0.15860

(1.75e-13) (2.93e-13) (1.91e-11)

1990-91 to 2006-07 0.2528 0.38491 0.19828

(0.000425) (2.59e-05) (0.00318)

2007-08 to 2023-24 0.098724 0.10687 0.07626

(8.39e-11) (1.02e-10) (0.0031)

In the above table, we can see that growth rate of Foreign Direct Investment Inflows for
34 years, i.e., from 1990-91 to 2023-24 is almost 18.52%. In this for first 17 years, i.e.,
from 1990-91 to 2006-07, the growth is 25.28% per year while in next 17 years, i.e.,
from 2007-08 to 2023-24, the growth is only 9.87%. This can be due to some factors
like global financial crisis of 2008, competition from emerging markets, shifts in the
growth of key sectors attracting FDI are some of the probable reasons for the decrease
of growth rate in last 17 years.

In the above table, we can see that growth rate of Foreign Direct Investment Outflows
for 34 years, i.e., from 1990-91 to 2023-24 is almost 23.66%. In this for first 17 years,
i.e., from 1990-91 to 2023-24, the growth is 38.49% per year while in next 17 years, i.e.,

34
from 2007-08 to 2023-24, the growth is only 10.69%. This can be due to some factors
like government policies emphasizing domestic manufacturing (like "Make in India").

In the above table, we can see that growth rate of Net Foreign Direct Investment for 34
years, i.e., from 1990-91 to 2023-24 is almost 15.86%. In this for first 17 years, i.e., from
1990-91 to 2006-07, the growth is 19.83% per year while in next 17 years, i.e., from
2007-08 to 2023-24, the growth is only 7.63%.
The above models were analysed as the following:

GDP_GRt = α1 + α2ln(fdint) + µt (v) equation

Table No. 2 - Ordinary Least Square Regression (Bivariate) for the period 1990-91
to 2023-24

Included Observations: 34 Dependent Variable: GDP Growth Rate

Sr. Independent variable GDP_GRt = α1 + α2ln(fdint) + µt

No.
Coefficient t-statistic Probability

1. Constant 4.2759 1.438 0.160

2. ln(fdint) 0.1741 0.624 0.537

3. R-squared 0.01203

4. Adjusted R-squared -0.01884

5. S.E. of regression 2.902

6. Durbin-Watson Statistic 1.9252

7. F-statistic 0.3898

35
The above result shows that Net Foreign Direct Investment is not statistically significant
with p-value 0.537 (p-value>0.05)

in the above bivariate model. The slope coefficient 𝛼2 measures the elasticity of
Economic Growth or GDP growth rate with respect to Net Foreign Direct Investment,
i.e., the percentage change in Economic Growth for a given percentage change in Net
Foreign Direct Investment. Thus, it can be said that with 1 unit change in Value of Net
Foreign Direct Investment, GDP growth rate is estimated to increase by 0.1741 units.

Conclusion: At a common significance level of 0.05 (or even 0.10), the p-value (0.537)
is considerably greater than the significance level. Therefore, we fail to reject the null
hypothesis. This means that based on this data and this bivariate linear model, there is
no statistically significant evidence to conclude that the natural log of FDI has a
significant linear impact on the GDP growth rate of India during the period 1990-91 to
2023-24. This finding warrants further investigation using more complex models that
include other relevant variables (e.g., domestic investment, trade, government
spending, human capital) and consider potential non-linear relationships.

Table No. 3 - Ordinary Least Square Regression (Bivariate) for the period 1990-91
to 2006-07

Included Observations: 17 Dependent Variable: GDP Growth Rate

Sr. Independent variable GDP_GRt = α1 + α2ln(fdint) + µt

No.
Coefficient t-statistic Probability

1. Constant -0.1095 -0.037 0.9706

2. ln(fdint) 0.6707 2.116 0.0515

3. R-squared 0.2298

36
 4. Adjusted R-squared 0.1785

5. S.E. of regression 1.892

6. Durbin-Watson Statistic 2.0288

7. F-statistic 4.475

The above result shows that Net Foreign Direct Investment is not statistically significant
with p-value 0.0515 (p-value>0.05) but marginally significant at the 10% level but not
statistically significant at the conventional 5% level (p-value is slightly greater than
0.05).

The slope coefficient suggests that a 1 unit increase in net FDI is associated with an
approximately 0.67 unit increase in GDP growth rate. However, this result should be
interpreted with caution due to the limitations of a simple bivariate model and the
marginal statistical significance. Further research with more comprehensive models is
warranted.

The p-value of 0.0515 indicates the probability of observing a t-statistic as extreme as

2.116 (in either direction) if the true coefficient of ln(FDI) were zero.

Conclusion: At a significance level of 0.05, the p-value (0.0515) is slightly greater than
0.05. Therefore, we fail to reject the null hypothesis at the 5% significance level.
However, if we were to use a slightly higher significance level, such as 0.10, we would
reject the null hypothesis (since 0.0515 < 0.10). For the period 1990-91 to 2006-07, this
bivariate linear regression provides weak evidence (significant only at the 10% level)
suggesting a positive relationship between the natural log of net foreign direct
investment and India's GDP growth rate. comprehensive models is warranted.

37
Table No. 4 - Ordinary Least Square Regression (Bivariate) for the period 2007-08
to 2023-24

Included Observations: 17 Dependent Variable: GDP Growth Rate

Sr. Independent variable GDP_GRt = α1 + α2ln(fdint) + µt

No.
Coefficient t-statistic Probability

1. Constant 29.667 1.633 0.123

2. ln(fdint) -1.968 -1.292 0.216

3. R-squared 0.1002

4. Adjusted R-squared 0.0402

5. S.E. of regression 3.487

6. Durbin-Watson Statistic 2.0832

7. F-statistic 1.67

The coefficient of -1.968 suggests that a 1 unit increase in FDI is associated with a
decrease of 1.968 units in the GDP growth rate. More precisely, if ln(fdin t) increases by
1 unit, the GDP growth rate is estimated to decrease by 1.968 units. This indicates a
negative relationship between the natural log of FDI and GDP growth rate for this
period, according to this model.

At a common significance level of 0.05 (or even 0.10), the p-value (0.216) is
considerably greater than the significance level. Therefore, we fail to reject the null
hypothesis. There is no statistically significant evidence to conclude that the natural log
of FDI has a significant linear impact (either positive or negative) on the GDP growth
rate of India during the period 2007-08 to 2023-24, based on this bivariate model.

38
The negative coefficient for ln(FDI) is not statistically significant. This suggests that for
this later period, based on this model, FDI does not appear to be a significant linear
driver (or inhibitor) of GDP growth in India. Again, further investigation with more
comprehensive models is necessary.

Table No. 5 - Descriptive Statistics

fdii fdio fdin GDP_GR

Mean 205898.7 112023.4 93875.36 6.106035

Median 128182.5 78839.5 44505.42 6.727154

Standard 221866.5 134728.6 101396.9 2.875288

deviation

Variance 4.92E+10 1.82E+10 1.03E+10 8.267279

Kurtosis -0.65525 1.846953 -0.37215 8.002652

Jarque-Bera 9.2143 9.1265 10 91.42

statistic (0.00998) (0.01043) (0.006738) (2.2e-16)

Here's a breakdown of each statistic for each variable:

1. FDI Inflows (fdii):

The Standard Deviation of 221866.5 indicates a high degree of variability or dispersion

around the mean since the standard deviation is larger than the mean. The variance,
which is the square of the standard deviation, further confirms the high volatility of FDI
inflows. The Jarque-Bera Statistic is 9.2143 with a p-value of 0.00998. Since the p-value
is less than the common significance levels (e.g., 0.05 or 0.01), we reject the null
hypothesis that the distribution of FDI inflows is normal. The negative kurtosis -0.65525
further suggests a flatter distribution than normal.

39
2. FDI Outflows (fdio):

The Standard Deviation, similar to inflows, outflows also exhibit substantial variability,
with the standard deviation being larger than the mean. The variance confirms the
volatility in FDI outflows. The Jarque-Bera Statistic is 9.1265 with a p-value of 0.01043.
Since the p-value is less than the common significance levels (e.g., 0.05 or 0.01), we
reject the null hypothesis that the distribution of FDI outflows is normal. The positive
kurtosis 1.846953 indicates a more peaked distribution with heavier tails than normal.

3. Net FDI (fdin):

The average net FDI (inflows - outflows) is approximately 93,875.36. This is positive,
indicating that on average, India received more FDI than it invested abroad during the
period. A positive kurtosis, but relatively close to zero, suggests a distribution that is
slightly more peaked and has slightly heavier tails than a normal distribution, but the
deviation from normality in terms of kurtosis might not be very extreme. The Jarque-
Bera Statistic is 10 with a p-value of 0.006738. Since the p-value is less than the
common significance levels, we reject the null hypothesis that the distribution of Net FDI
is normal

4. GDP Growth Rate (GDP_GR):

The Standard Deviation of 2.875288 indicates that the GDP growth rate shows
moderate variability around its mean. The Jarque-Bera Statistic is extremely high
(91.42) with a p-value very close to zero (2.2 x 10^-16). This provides very strong
evidence to reject the null hypothesis that the distribution of GDP Growth Rate is
normal. The very high positive kurtosis indicates a highly peaked distribution with
extremely heavy tails, suggesting a much higher frequency of extreme growth rates
(both high and low) than in a normal distribution. The mean being lower than the median
also suggests a negative skew.

40
Chart No. 3

Annual Growth Rate of FDI Inflows

AGRi

800

700
Annual Growth Rate of FDI Inflows (in%)

600

500

400

300

200

100

0
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
2016-17
2017-18
2018-19
2019-20
2020-21
2021-22
2022-23
2023-24
-100

-200
Time Period (in years)

Key Observations

* Extreme Initial Volatility (1991-92 to 1993-94):

1992-93: Shows an exceptionally high annual growth rate, estimated to be around

704.7%. This signifies a massive surge in FDI inflows compared to 1991-92.

1993-94: Experiences a dramatic plunge, with the growth rate falling to approximately -
86.7%. This indicates a very substantial decrease in FDI inflows compared to the high
of the previous year.

* Significant Fluctuations (Mid-1990s to Early 2000s): The period continues to exhibit

considerable volatility, with growth rates swinging between positive and negative values,
often exceeding +/- 50%.

* Periods of Strong Positive Growth (Mid to Late 2000s):

41
 * 2003-04: Shows a very high positive growth rate of approximately 337.7%.

* 2007-08: Displays another strong positive growth rate of around 161.6%. These
periods correspond to significant increases in the absolute value of FDI inflows.

* Moderated Growth with Lower Volatility (Post-2010): From around 2010 onwards, the
annual growth rate generally becomes less volatile and tends to fluctuate within a
narrower range, typically between -25% and +25%.

* Recent Years (Towards 2023-24): The annual growth rate in the most recent years
appears to be relatively low and stable, hovering closer to the zero mark.

Chart No. 4

Annual Growth Rate of FDI Outflows

AGRo

1200

1000
Annual Growth Rate of FDI Outflows (in%)

800

600

400

200

0
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
2016-17
2017-18
2018-19
2019-20
2020-21
2021-22
2022-23
2023-24

-200
Time Period (in years)

42
Key Observations

* Extreme Initial Volatility (1992-93): Similar to FDI inflows, the annual growth rate of
FDI outflows shows extreme volatility in the early years. There's a massive spike in
1992-93, reaching an estimated 1103.1%. This indicates an exceptionally large increase
in FDI outflows compared to the previous year (1991-92).

* Sharp Decline and Fluctuations (Mid-1990s to Early 2000s): Following the initial peak,
the growth rate experiences a sharp decline and continues to fluctuate significantly,
although the magnitudes are generally smaller than the initial spike.

* Continued Volatility with Lower Peaks (Mid-2000s to 2010s): The annual growth rate
continues to fluctuate, with some notable peaks and troughs, but generally not as
extreme as the initial phase. For instance:

* 2004-05: Shows a high positive growth of around 156.1%.

* 2008-09: Experiences a significant negative growth of around -36.4%, likely

influenced by the Global Financial Crisis.

* 2010-11: Shows a strong positive growth of around 25.4%.

* Moderated Growth and Volatility (Post-2010): From around 2010 onwards, the annual
growth rate of FDI outflows generally moderates, with the fluctuations becoming less
pronounced compared to earlier periods. The growth rates tend to remain within a more
manageable range, both positive and negative.

* Recent Years (Towards 2023-24): The annual growth rate in the most recent years
shows a mix of positive and negative changes, but the magnitude of these changes is
relatively smaller compared to the earlier part of the period.

43
Chart No. 5

Annual Growth Rate of Net FDI

AGRn

800
Annual Growth Rate of Net FDI (in%)

700
600
500
400
300
200
100
0
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
2016-17
2017-18
2018-19
2019-20
2020-21
2021-22
2022-23
2023-24
-100
-200
Time Period (in years)

Key Observations

* Extreme Initial Volatility (1992-93): The graph starts with massive volatility. In 1992-
93, the annual growth rate of Net FDI reaches an extraordinary peak of approximately
681.7%. This indicates a huge increase in Net FDI compared to the previous year.

* Sharp Decline and Continued Fluctuations (Mid-1990s to Early 2000s): Following the
initial surge, the growth rate plummets dramatically in 1993-94 to around -85.2%,
indicating a substantial decrease in Net FDI. This period continues to exhibit significant
fluctuations, with large swings between positive and negative growth rates.

* High Growth Periods (Mid to Late 2000s): There are notable peaks in the annual
growth rate during the mid to late 2000s:

* 2003-04: Shows a very high positive growth rate of approximately 198.2%.

* 2007-08: Displays another strong positive growth rate of around 160.0%. These
periods indicate substantial increases in Net FDI.

44
* Moderated Growth and Volatility (Post-2010): From around 2010 onwards, the annual
growth rate of Net FDI generally moderates, with the extreme swings seen in earlier
years becoming less frequent. The growth rates tend to fluctuate within a narrower
range, although still exhibiting both positive and negative changes. For instance:

* 2011-12: Shows a significant negative growth rate of around -37.0%.

* 2013-14: Shows a strong positive growth rate of around 47.1%.

* 2018-19: Shows a significant negative growth rate of around -42.4%.

* Recent Years (Towards 2023-24): The annual growth rate in the most recent years
shows a mix of positive and negative changes, with the magnitude of these changes
being relatively smaller compared to the earlier, more volatile period.

45
 Conclusion
From the Chapter IV of this study, it can be seen that the findings of trend analysis and
bivariate Ordinary Least Squares (OLS) regressions, suggest a complex and evolving
relationship between FDI and India's economic growth.

The trend analysis revealed a significant increase in both FDI inflows and outflows, as
well as net FDI, particularly after the liberalization of the Indian economy. However, the
annual growth rates of these FDI measures exhibited considerable volatility throughout
the study period, with a noticeable moderation in volatility and growth rates in the later
years (post-2010).

The bivariate regression analysis, examining the relationship between the natural
logarithm of net FDI and the GDP growth rate for the entire period (1990-91 to 2023-
24), did not yield a statistically significant linear relationship. The low R-squared value
indicated that net FDI alone explains a very small portion of the variation in India's GDP
growth rate during this time.

In conclusion, while India has witnessed a substantial increase in FDI over the past
three decades, this study's bivariate analysis does not provide strong statistical
evidence for a significant linear impact of net FDI on the overall GDP growth rate for the
entire period. This suggests that the relationship might be more nuanced, potentially
non-linear, mediated by other factors, or varying across different sub-periods and
sectors.

Future Work

Future research could explore these complexities through more sophisticated

econometric models incorporating additional macroeconomic variables, considering
sectoral disaggregation, and examining potential non-linearity and time-varying effects
to gain a deeper understanding of the intricate interplay between FDI and economic
growth in India.

46
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 Appendix - I
Appendix Data Table – D.1: Data of Credit, Debit and Net balances of Foreign Direct
Investment and GDP growth rate in India

Value (in INR Crores)

Year FDI_I FDI_O FDI_N GDP_GR

1990-91 202 19 183 5.53
1991-92 385 46 339 1.06
1992-93 1797 98 1699 5.48
1993-94 14461 1179 13282 4.75
1994-95 18059 2609 15450 6.66
1995-96 19034 2722 16312 7.57
1996-97 27751 5923 21828 7.55
1997-98 34075 14114 19961 4.05
1998-99 24210 14041 10169 6.18
1999-00 52607 30106 22501 8.85
2000-01 18727 3803 14924 3.84
2001-02 29741 7111 22630 4.82
2002-03 25036 9442 15594 3.80
2003-04 20484 9540 10944 7.86
2004-05 27392 10647 16745 7.92
2005-06 40690 27265 13425 7.92
2006-07 106464 71554 34910 8.06
2007-08 149901 86125 63776 7.66
2008-09 196505 96399 100106 3.09
2009-10 183106 97123 85983 7.86
2010-11 175889 121788 54101 8.50
2011-12 232023 128856 103167 5.24
2012-13 216737 108551 108186 5.46
2013-14 263894 133925 129969 6.39
2014-15 317087 125869 191219 7.41
2015-16 392422 156640 235782 8.00
2016-17 474811 235898 238913 8.26
2017-18 415421 220369 195052 6.80
2018-19 453100 239063 214036 6.45
2019-20 551647 246827 304820 3.87
2020-21 639521 314139 325382 -5.78
2021-22 657396 369930 287467 9.69
2022-23 602635 380751 221884 7.61
2023-24 617346 536323 81023 9.19

Source: (Reserve Bank of India-> Database on Indian Economy)

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