Foreign Direct Investment and Economic Development of India: A Diagnostic Study

Capital is the life blood of any production and distribution activity, and it plays an important role among the factors of production. The need of capital arises not only at the beginning of the venture, but also throughout the life span of the venture. However, capital, especially when in short supply, can be the limiting factor for starting, expansion and diversification of a venture. In view of the economic crisis on the one hand, and the perceived importance of foreign capital in the economic development of the country on the other, the Government of India has been making continuous efforts to attract foreign capital during the post-liberalization period. The efforts include providing concessions in taxes, announcing tax holidays and increasing the investment cap in various sectors of the Indian economy. As a result of the continuous efforts by the Government of India, there has been steady rise in the inflow of foreign capital on the one hand, and overall progress in various sectors of the Indian economy on the other. According to the Reserve Bank of India (RBI), India has received total Foreign Direct Investment (FDI) inflows of $50.1 bn since 1991. There has been tremendous progress in the various sectors of the Indian economy due to the inflow of foreign capital. The GDP growth rate has crossed 9% due to boom in manufacturing and service industries. Further, the Sensex points in Indian stock market have crossed 19, 000 points on October 15, 2007. In addition, the foreign exchange reserves have crossed $204 bn at the beginning of May, 2007. In addition, there has been improvement in the employment position, standard of living, infrastructure development, health and hygiene, GDP and NDP due to FDI inflows in India. The main objectives of the present study are: 1) To examine the year-wise, country-wise, sector-wise and the RBI’s region-wise FDI inflows in India, 2) To examine the impact of FDI on the growth of GDP and contributions from various sectors of economy towards GDP, 3) To analyze the trends in exports, and 4) To examine the impact of FDI on employment position, inflation and stock market of India. The study is primarily based on secondary data collected from websites, journals and newspapers. Statistical tools like percentage, common size statements and trend analysis are used to analyze the data.