DISSERTATION SUBMITTED TO THE

DEPARTMENT OF ECONOMICS
FOR THE PARTIAL FULFILLMENT OF THE
DEGREE OF
MASTERS OF ARTS IN
ECONOMICS
SESSION: 2025 – 2026

‘IMPACT OF FOREIGN DIRECT INVESTEMENT

ON THE
ECONOMICS GROWTH OF INDIA’

SUBMITTED BY:
SUPERVISOR:
SU DR. VED PRAKASH MISHRA
M.A 1ST YEAR 2ND SEMSTER
{ Assistant Professor }
ENROLL NO.: I25037008
DEPARTMENT OF ECONOMIC
DATE OF SUBMISSION ISWAR
SARAN DEGREE COLLEGE

CERTIFICATE OF DECLARATION

I hereby declare that the dissertation titled "Impact of

Foreign Direct Investment (FDI) on the Economic Growth
of India " is an original work carried out by me under the
guidance and supervision of my teacher. This work has been
submitted in partial fulfilment of the requirements for the
award of the degree of Master of Arts (M.A.) in Economics.

I further declare that this dissertation has not been submitted,

either in part or in full, to any other university or institution for
the award of any degree, diploma, or certificate. The data and
information used in this study have been collected from reliable
sources, and due acknowledgment has been given wherever
necessary.

I take full responsibility for the authenticity and originality of

the work presented in this dissertation

DATE: SU
PLACE: PRAYAGRAJ, UTTAR PRADESH ENROLL NO.: I
 Abstract

The impact of Foreign Direct Investment (FDI) on the economic

growth of India has been a significant area of study, especially
in the post-1991 economic reform period. The liberalization
policy introduced in 1991 marked a turning point in the Indian
economy by opening the doors to foreign capital, technology,
and global markets. This study aims to examine the
relationship between FDI inflows and economic growth in India
from 1991 to 2026. It focuses on how FDI has contributed to the
expansion of Gross Domestic Product (GDP), industrial
development, employment generation, and technological
progress.
Ever since the end of cold war and break up of USSR in 1990-
91, a new chapter in trade and investments between India and
US started. The trade between US and India has risen sharply in
the recent past. This study presents the historical perspective
of the trends in FDI inflows in India. In doing so, a detailed
descriptive analysis is presented to assess the current trends,
patterns of FDI inflows by sector, origin of country and regional
comparison
 ACKNOWLEDGEMENT

I express my deep sense of gratitude and sincere thanks to my

supervisor Dr. Ved Prakash Mishra for his invaluable
guidance, constant encouragement, and intellectual support
throughout the course of this dissertation titled "Impact of
Foreign Direct Investment (FDI) on the Economic Growth
of India". His scholarly insights, constructive suggestions, and
continuous supervision have played a pivotal role in shaping
this study and bringing it to completion.

Finally, I extend my thanks to all those who have directly or

indirectly contributed to the successful completion of this
dissertation.
CONTENTS
 CHAPTER - 1
1.1 INTRODUCTION
Foreign direct investment (FDI) plays an extraordinary and growing role in global business. It
can provide a firm with new markets and marketing channels, cheaper production facilities,
access to new technology, products, skills and financing. For a host country or the foreign
firm which receives the investment, it can provide a source of new technologies, capital,
processes, products, organizational technologies and management skills, and as such can
provide a strong impetus to economic development. Foreign direct investment, in its classic
definition, is defined as a company from one country making a physical investment into
building a factory in another country. The direct investment in buildings, machinery and
equipment is in contrast with making a portfolio investment, which is considered an indirect
investment. In recent years, given rapid growth and change in global investment patterns,
the definition has been broadened to include the acquisition of a lasting management
interest in a company or enterprise outside the investing firm home country. As such, it may
take many forms, such as a direct acquisition of a foreign firm, construction of a facility, or
investment in a joint venture or strategic alliance with a local firm with attendant input of
technology, licensing of intellectual property. In the past decade, FDI has come to play a
major role in the internationalization of business. Reacting to changes in technology,
growing liberalization of the national regulatory framework governing investment in
enterprises, and changes in capital markets profound changes have occurred in the size,
scope and methods of FDI. New information technology systems, decline in global
communication costs have made management of foreign investments far easier than in the
past. The sea change in trade and investment policies and the regulatory environment
globally in the past decade, including trade policy and tariff liberalization, easing of
restrictions on foreign investment and acquisition in many nations, and the deregulation
and privatization of many industries, has probably been the most significant catalyst for
FDI‟s expanded role. Foreign Direct Investment (FDI) acquired an important role in the
international economy after the Second World War. Theoretical studies on FDI have led to a
better understanding of the economic mechanism and the behaviour of economic agents,
both at micro and macro level allowing the opening of new areas of study in economic
theory. To understand foreign direct investment must first understand the basic motivations
that cause a firm to invest abroad rather than export or outsource production to national
firms. The purpose of this unit is to identify the main trends in FDI theory and highlight how
these theories were developed, the motivations that led to the need for new approaches to
enrich economic theory of FDI. Foreign direct investment (FDI) in its classic form is defined
as a company from one country making a physical investment into building a factory in
another country. It is the establishment of an enterprise by a foreigner. Its definition can be
extended to include investments made to acquire lasting interest in enterprises operating
outside of the economy of the investor. The FDI relationship consists of a parent enterprise
and a foreign affiliate which together form a multinational corporation (MNC). In order to
qualify as FDI the investment must afford the
parent enterprise control over its foreign affiliate. The International Monetary Fund (IMF)
defines control in this case as owning 10% or more of the ordinary shares or voting
power of an incorporated firm or its equivalent for an unincorporated firm; lower
ownership shares are known as portfolio investment.

1.2 Economics Growth

Economics is all about making smart choices to cope with scarcity. The most fundamental
measurement used to evaluate the success in allocating the scarce resources is economic
growth. Individuals monitor their income and the changing value of their assets.
Businesses track their profits and their market share. Nations monitor a variety of
statistics to measure economic growth such as national income, productivity etc. Moving
beyond growth and productivity, some economists argue that any assessment of the
nation’s economy must also include measurements of distribution, equity, per-capita
income etc. Further, the country should also focus on other needs of a society, like
environmental justice or cultural preservation to sustain the economic growth process
and allows an overall human development in the economy through creation of more
opportunities in the sectors of education, healthcare, employment and the conservation
of the environment. The term economic growth is defined as the process whereby the
country’s real national and per capita income increases over a long period of time. This
definition of economic growth consists of the following features of economic growth: z
Economic Growth implies a process of increase in National Income and Per-Capita
Income. The increase in Per-Capita income is the better measure of Economic Growth
since it reflects increase in the improvement of living standards of masses. z Economic
Growth is measured by increase in real National Income and not just the increase in
money income or the nominal national income. In other word the increase should be in
terms of increase of output of goods and services, and not due to a mere increase in the
market prices of existing goods. z Increase in Real Income should be Over a Long Period:
The increase of real national income and per-capita income should be sustained over a
long period of time. The short-run seasonal or temporary increases in income should not
be confused with economic growth. z Increase in income should be based on Increase in
Productive Capacity: Increase in Income can be sustained only when this increase results
from some durable increase in productive capacity of the economy like modernization or
use of new technology in production, strengthening of infrastructure like transport
network, improved electricity generation etc.
A country's general economic health can be measured by looking at that country's
economic growth and development. Let's take a separate look at what indicators
comprise economic growth versus economic development. Let's first examine economic
growth. A country's economic growth is usually indicated by an increase in that
country's gross domestic product, or GDP. Generally speaking, gross domestic product is
an economic model that reflects the value of a country's output. In other words, a
country's GDP is the total monetary value of the goods and services produced by that
country over a specific period of time.
 1.3 Economics development
Now let's take a look at economic development. A country's economic
development is usually indicated by an increase in citizens' quality of
life. 'Quality of life' is often measured using the Human Development
Index, which is an economic model that considers intrinsic personal
factors not considered in economic growth, such as literacy rates, life
expectancy and poverty rates. While economic growth often leads to
economic development, it's important to note that a country's GDP
doesn't include intrinsic development factors, such as leisure time,
environmental quality or freedom from oppression. Using the Human
Development Index, factors like literacy rates and life expectancy
generally imply a higher per capita income and therefore indicate
economic development. a normative concept i.e. it applies in the
context of people's sense of morality (right and wrong, good and bad).
The definition of economic development given by Michael Todaro is an
increase in living standards, improvement in self-esteem needs and
freedom from oppression as well as a greater choice. The most accurate
method of measuring development is the Human Development Index
which takes into account the literacy rates & life expectancy which
affects productivity and could lead to Economic Growth. It also leads to
the creation of more opportunities in the sectors of education,
healthcare, employment and the conservation of the environment. It
implies an increase in the per capita income of every citizen. Economic
Growth does not take into account the size of the informal economy.
The informal economy is also known as the black economy which is
unrecorded economic activity. Development alleviates people from low
standards of living into proper employment with suitable shelter.
Economic Growth does not take into account the depletion of natural
resources which might lead to pollution, congestion & disease.
Development however is concerned with sustainability which means
meeting the needs of the present without compromising future needs.
These environmental effects are becoming more of a problem for
Governments now that the pressure has increased on them due to
Global warming. Economic growth is a necessary but not sufficient
condition of economic development.

1.4 Capital Flow

Economists tend to favour the free flow of capital across national borders
because it allows capital to seek out the highest rate of return.
Unrestricted capital flows may also offer several other advantages, as
noted by Feldstein (2000). First, international flows of capital reduce the
risk faced by owners of capital by allowing them to diversify their lending
and investment. Second, the global integration of capital markets can
contribute to the spread of best practices in corporate governance,
accounting rules, and legal traditions. Third, the global mobility of capital
limits the ability of governments to pursue bad policies.
In addition to these advantages, which in principle apply to all kinds of
private capital inflows, Feldstein (2000) and Razin and Sadka
(forthcoming) note that the gains to host countries from FDI can take
several other forms:
 FDI allows the transfer of technology—particularly in the form of
new varieties of capital inputs—that cannot be achieved through
financial investments or trade in goods and services. FDI can also
promote competition in the domestic input market.
 Recipients of FDI often gain employee training in the course of
operating the new businesses, which contributes to human capital
development in the host country.
 Profits generated by FDI contribute to corporate tax revenues in the
host country.

1.5 About the Inflow Economics

The volume of capital flows to any developing country is largely

demand-determined. All developing (and East European) countries still
account for less than 10 percent of total world borrowing. Their
solvency and liquidity are of concern to international capital markets
because lending is highly concentrated in some 30 banks and a dozen
or so debtor countries that have borrowed excessively. Unfortunately,
there is no developing countrywide solution to such excessive lending
and borrowing. Each excessive lender and borrower must set its own
house in order. The schemes put forward to help developing countries
overcome their indebtedness and to safeguard international capital
markets would be likely to lead to more problems than they remedy,
because they would add new “moral hazards” to those already created
by the guarantees, subsidies, and other distortions that have
contributed to excessive borrowing and lending in the past.
The range of development experience since 1945 has been very broad.
In some countries living standards of the majority of the population
have changed little. In a few they have even deteriorated. But in other
countries, including some that were very poor at the end of World War
II, living standards are rising appreciably, and a few countries are
catching up with and bypassing the more slowly growing industrial
countries.
 There are many hypotheses as to why some countries have grown
faster (and at the same time more equitably) than others (Riedel
(1986)). But three old verities about the relationship of capital to growth
have stood the test of time. First, the investment of capital is
necessary, but not sufficient, for growth. Second, the degree to which
investment stimulates growth depends on the efficiency with which it is
used, and such efficiency is determined by a country’s own policies.
Third, capital tends to flow from higher-income (industrial and small
population, natural resource-rich) countries, where capital is relatively
plentiful and has a low marginal productivity, to lower-income countries,
where capital is relatively scarce and has a high marginal productivity.

1.6 Statement of the problem

FDI is an important driver of economic growth, FDI plays an important role
in the economic development of a country. The capital inflow of foreign
investors allows 9 | P a g e strengthening infrastructure, increasing
productivity and creating employment opportunities in India. Additionally,
FDI acts as a medium to acquire advanced technology and mobilize
foreign exchange resources. Availability of foreign exchange reserves in
the country allows RBI (the central banking institution of India) to
intervene in the foreign exchange market and control any adverse
movement in order to stabilize the foreign exchange rates. As a result, it
provides a more favourable economic environment for the development of
Indian economy. FDI inflows into India have been very low as compared to
other developing countries like China, Brazil, Mexico, Thailand and Korea.
The share of the FDl inflows into India as against the total FDI inflows to
the developing countries is only 1.2 per cent (RBI 1998), Keeping the
positive effects and importance of FDI flows, it is necessary to analyse the
reasons for low FDI inflows into India. In this context, it is important to
analyse the determinants of FDl inflows both at macro and sectoral levels.
As argued earlier, FDI can play a vital role as a source of capital,
management, and technology in India.

1.6 Balance of Payment (BoP) with respect FDI

Direct investment is a category of international investment in which a resident entity in one
economy (the direct investor) acquires a lasting interest in an enterprise resident in another
economy (the direct investment enterprise). Direct investment implies a long-term
relationship between the direct investor and the direct investment enterprise and a
significant degree of influence by the direct investor on the management of the direct
investment enterprise. Direct investment comprises the initial transaction between the two
entities—that is, the transaction that establishes the direct investment relationship—and all
subsequent transactions between the entities and among affiliated enterprises, both
incorporated and unincorporated.

The Organisation for Economic Cooperation and Development (OECD) presents the same
concept of direct investment in the Detailed Benchmark Definition of Foreign Direct
Investment (BMD). The BMD is complementary to the Balance of Payments Manual. The
purpose of the BMD is to provide a detailed operational definition of direct investment to
serve as a reference, or standard, against which each country can compare its statistical
system by using the concept and definition of direct investment contained in the Balance of
Payments Manual. The BMD supplements the information provided in the Balance of
Payments Manual.

The concept of direct investment differs from the concept of control. To be classified as a
direct investor, an investor need not have the controlling share, or even the largest share, of
ownership in an enterprise.

CHAPTER – 2
Literature Review
2.1 Introduction
The role of FDI in the growth process has been a burning topic of debate
in several countries including India. FDI is a vital ingredient of the
globalization efforts of the world economy. The growth of international
production is driven by economic and technological forces. It is also driven
by the ongoing liberalization of Foreign Direct Investment (FDI) and trade
policies. One outstanding feature of the present-day world has been the
circulation of private capital flow in the form of foreign direct investment
(FDI) in developing countries, especially since 1990s. Since the 1980s,
multinational corporations (MNCs) have come out as major actors in the
globalization context. Governments around the world— in both advanced
and developing countries—have been attracting MNCs to come to the
respective countries with their FDI. This experience may be related to the
broader context of liberalization in which most developing and transition
countries have moved to market-oriented strategies. In this context,
globalization offers an unparalleled opportunity for developing countries
like India to attain quicker economic growth through trade and
investment. In the period 1970s, international trade grew more rapidly
than FDI, and thus international trade was by far than most other
important international economic activities. This situation changed
radically in the middle of the 1980s, when world FDI started to increase
sharply. In this period, the world FDI has increased its importance by
transferring technologies and establishing marketing and procuring
networks for efficient production and sales internationally (Shujiro Urata,
1998). FDI flows comprise capital provided by foreign investors, directly or
indirectly to enterprises in another economy with an expectation of
obtaining profits derived from the capital participation in the management
of the enterprise in which they invest. The foreign investors acquire
ownership of assets in the host country firms in proportion to their equity
holdings. This is the empirical definition of FDI adopted by many countries
to distinguish it from portfolio flows. According to International Monetary
Fund (IMF), FDI is defined as “ an investment that is made to acquire a
lasting interest in an enterprise operating in An economy other than that
of the investor” The investor’s purpose is to have an effective voice in the
management of the enterprise (IMF,1977).FDI is the process by which the
residents of one country (the source country) acquire the ownership of
assets for the purpose of controlling the production, distribution and other
productive activities of a firm in another country (the host country).
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 Economy 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.
Maatha and Mathiyazhagan (2005) noticed that inflow of foreign
direct investment (FDI) have favourable effects on economic growth [9].
Abdulhamid Sukar (2007) noticed that FDI has a negligibly positive
impact on economic growth [1].
Elena Pelinescu and Magdalena Radulescu (2009) observed that FDI
has a positive impact on the economic growth of both developed and
developing nations. The relationship between FDI flows and GDP per
capita growth has been observed to be direct and significant [6].
Bhavya Malhotra (2014) observed that FDI has indeed had a positive
impact on the Indian economy. The inflow of FDI brings various
advantages that contribute to the economic growth of India. Further,
inflow of FDI assist in supplementing domestic capital, technology and
skills transfer, job creation and employment opportunities, knowledge and
skill enhancement [4]. Carlos Encinas Ferrer et al. (2015) observed
that inflow of FDI significantly influences growth of GDP [5].
Khamis Hareb et al. (2015) observed that inflation does not have a
significant effect on foreign direct investment (FDI) inflows. This means
that changes in inflation rates, within the observed range, do not appear
to influence the decision of foreign investors to invest in the host country
[7].
Nlandu Mamingi and Kareem Martin (2018) identified that the
relationship between infrastructure development, FDI, and domestic
investment can vary across different countries, regions, and economic
contexts [13].
Bhavana Kunnappilly Sankaran (2019) identified that inflow of FDI
raises BSE Sensex and NSE Sensex share prices [3].
Najeh Bouchoucha and Walid Ali (2019) determined that FDI has a
favourable effect on both short-term and long-term economic growth [11].
Naveen Kumar Sharma et al. (2019) found that the two main stock
market indices in India, the Sensex and Nifty, are directly impacted by
FDI. They further conclude that the flow of FDI in India determines the
trend of the Indian stock market [12].
Susic et al. (2019) determined that foreign capital inflow is regarded as
a crucial requirement for speeding economic growth and that it has a
favourable effect on economic development. Monitoring and examining
various forms of foreign capital intake, such as joint ventures with foreign
investors and investments in free zones, have shown how diverse yet
favourable effects on macroeconomic factors in the economy [16].
Xin Wang et al. (2019) noticed that the growth of the stock market is
significantly influenced by FDI inflows [18].
Saswata Chaudhury et al. (2020) observed that sector wise inflow of
FDI assists in overall economic development [15].
Lina Bakawdah and Tahar Tayachi (2021) observed that FDI has
indeed been found to have a positive effect on the advancement of
securities exchanges [8].
Xiqian Wang (2021) observed that negative correlation between FDI
and the stock market index.
Abhay Pratap Singh et al. (2022) observed that FDI involves the direct
investment of capital by foreign companies into the host country. This
infusion of capital can stimulate economic growth by increasing
investment in productive assets, such as factories, machinery, and infrastructure.
The increased capital investment can lead to higher levels of productivity, job creation, and overall
economic expansion [2].
 Mohammad Zain Khan and Rana Zehra Masood (2022) observed that FDI and Foreign Institutional
Investment (FII) play important roles in an economy, but FDI is often considered more crucial and
referred to as the engine of growth [10].

Sai Rohit Kumar Reddy Bobba (2022) identified that FDI has been found to have a significant impact
on the growth and volatility of Indian stock markets [14].

2.2 Relationship between Foreign direct Investment and

Economics Growth
The Indian Government has been implementing several programs to
magnetize FDI inputs since the economic reforms began in 1991 to
improve the Indian economy. An important goal for the promotion of FDI
was to promote production efficiency and increase exports in India and in
other developing countries. However, the company would not
automatically change its direction by increasing the equity participation in
existing joint ventures by foreign investors, or by purchasing a share of
their shareholdings in domestic firms. This "would be the objective of FDI
investors to make them beef from the Indian market's profit. As a result,
there should be no major export growth in FDI flows in these situations,
regardless of whether such investments contribute to domestic capacity
modernization or not. It is thus a challenge for a developing country like
India to transform its capital inflows into a potential source of productivity
gain for domestic businesses through FDI

Fig.1: Foreign direct investment and

Economics Growth
There are some other studies which concluded in favour of a positive
relationship between FDI and economic growth. Moudatsou(2003) using
data over the period 1980- 1996, obtained estimates of the growth effects
of FDI for each country in European Union (EU) in isolation and by pooling
the data for the whole Union. Country-specific estimates suggest that
growth determinants vary across EU members and that only past FDI
inflows have a significant effect on growth. Interestingly, when data are
pooled, the empirical results show that FDI has a positive effect on the
growth rate of EU economies both directly and indirectly through trade
reinforcement. The study points to the need for using panel data while
analysing the relationship between FDI and economic growth. Gunaydin
and Tatoglu (2005) applied Johansen cointegration approach and the test
results indicated that FDI and economic growth were cointegrated and
that the relationship between both variables was positive and statistically
significant. The researchers found a bi-directional causality between the
two variables which casts some doubts on the validity of policy guidelines.
Devajit(2012) tried to find out how FDI is seen as an important economic
catalyst of Indian economic growth by stimulating domestic investment,
increasing human capital formation and by facilitating the technology
transfers. The study concluded that FDI as a strategic component of
investment is needed by India for its sustained economic growth and
development through creation of jobs, expansion of existing
manufacturing industries, short and long-term project in the field of
healthcare, education, research and development etc. Pradhan et al.
(2013) worked out the long-run relationship between transport
infrastructure, foreign direct investment (FDI) and economic growth (GDP)
in India. Using autoregressive distributed lag (ARDL) vector error
correction model (VECM) they found that transport infrastructure is co
integrated with foreign direct investment and economic growth indicating
the affirmed presence of long-run equilibrium relationships among them.
The VECM results showed the presence of bidirectional causality between
FDI and economic growth and a unidirectional causality from transport
infrastructure to both economic growth and FDI. A policy implication of
this study is that transport infrastructure can be considered to be the best
policy variable to predict both foreign direct investment and economic
growth in India. Gherghina, Simionescu, & Hudea (2019) considered
foreign direct investment, a crucial factor of globalization, a noteworthy
engine of productivity heightening, technical progress, and job creation.
However, reduced institutional quality may discourage FDI inflows. The
quantitative outcomes by means of panel data regression models led to
conclude that a non-linear association occurred between FDI and GDP per
capita. Merajothu (2020) argued that apart from being a critical driver of
economic growth, FDI is a major source of non-debt financial resource for
the economic development of India. Foreign companies invest in India to
take Peeyush K et al. / Journal of Management Research and Analysis
2026;13(1):41–48 43 advantage of relatively lower wages, special
investment privileges such as tax exemptions, etc. He concluded that
there is significant impact of FDI on the GDP of Indian economy. In order
to achieve the sustainable growth of the economy as well FDI is essential.
The study also concluded that although the current effect of FDI on
economic growth in developing countries is negative on average, the
future impact need not necessarily be negative.

2.3 Foreign direct investment of Employment

Generation
Foreign direct investments are long run programs initiated by
multinational companies; they seek simple incentives such as markets,
comparative advantage of labour in a country, cheaper raw material etc.
but how does it increase employment? There are basically two kinds of
investment1) Brown field investment when a company purchases existing
production facilities.2) Green field investment — when a company builds a
new production facility. Either way there is bound to be increase in
employment due to investments made. But the extent of the employment
generation depends on the nature of business these firms want to do, with
entry of new firms in the country there must be increase in competition in
the domestic markets, this gives diversity to the consumers, other
positive implication of FDI is the improvement of technology and
knowledge In India most of the sector-wise distribution of FDI (appendix 1)
has been in service sector (Services sector includes Financial, Banking,
Insurance, Non Financial / Business, Outsourcing, R&D, Courier,) i.e.
17.18% of total FDI. While in construction development India has 9.76%
FDI inflows. Most of these industries are capital intensive in nature and we
should not expect much growth in labour employment.
Agriculture sector — the primary sector employs 50% of the total
employment directly while 12% indirectly, it as received about 0.16 % in
agriculture services and 0.16% in agriculture machinery of FDI, though it
is a small fraction of FDI it led to a steady growth in agriculture sector
Keeping in mind that agriculture sector contributes up to 19% in GDP of
India we should expect more inflow of FDI in this sector, but when we
compare the ratio of GDP contribution of primary sector to the labour
employment we find that the theory of disguised unemployment to be
true, moreover most of the employment generated belongs to the
unorganized sector. The productivity of labour in agriculture. The only way
by which Indian agriculture sector can improve its labour productivity is by
employing more of capital Intensive technology. Such practices have
already shown good 7 | P a g e results in U.S.A, Mexico etc. Industrial
sector — Indian industrial sector have had its leaps and bounds and is now
expected grow at a much better pace though it has received a FDI share
of 4.96% in automobile sector, 3.88% in power sector, 4.17% in fertilizers
etc. it is still growing and contributed to 18% of employment in India. This
share of FDI inflow in industrial sector does not reflect its incapacity by
any means as the major benefit received by this sector has been transfer
of technology and knowledge through multinational companies13. With
this the productivity of Indian labour has improved tremendously, the
national manufacturing policy (NMP) ratified by the Indian government
aims at25% contribution to GDP and 100 million y ear2022, under such
strong optimism this sector is likely to increase its share of FDI as well.
There has been a steady increase in index of industrial production (IIP)14
in the recent past of the core industries of India and we can expect that
this sector will do better in the future, with labour migrating towards the
urban industrial areas in search of employment they need to increase
their productivity which they are able to do as the results show .Service
sector — this sector is attracting a huge sum of FDI i.e. 17.18%, most of
the FDI that came from Mauritius and Singapore was inclined towards the
service sector but since the global financial crises in 2007-08 this
percentage has dropped. It is clear that the service sector is sensitive
towards the exports at least in India, with the plummeting service exports
of -15% in 2015 this sector has gotten the worse hit since the crises, the
rate of employment generation in this sector is pretty stable though.
During the period of 2004-06 when the Indian GDP was growing at a rate
of 8% the service exports played the most important role also FDI inflow it
this sector was at its peak. Skilled labour from all over the country flooded
into this sector but as soon as the exports were reduced this sector could
not bear the labour cost and instead left it unemployed or did not hired
them to begin with, moreover the FDI inflow was reduced to 2/3 of what it
was in 2005. e sector has depleted to an alarming extent and the only
way to raise living standard may seem to be that prescribed by Professor
Arthur Lewis in his Labor surplus model for developing countries. The FDI
in other sector certainly seem to be pointing in the above mentioned
direction of Professor Arthur Lewis model, when we take a closer look at
the employment trend of agriculture in India we find that there has been a
steady decline.

2.4 Market Size of foreign direct investment of India

India's FDI inflows have increased ~20 times from FY01 to FY25.
According to the Department for Promotion of Industry and Internal Trade
(DPIIT), India's cumulative FDI inflow stood at US$ 1.14 trillion between
April 2000-december 2025, mainly due to the government's efforts to
improve the ease of doing business and easing of FDI norms. The total FDI
inflow into India from April-December 2025 stood at Rs. 6,44,218 crore
(US$ 73.31 billion) and FDI equity inflow for the same period stood at Rs.
4,16,709 crore (US$ 47.87 billion).
From April 2000-December 2025, India's service sector attracted the
highest FDI equity inflow of 16% amounting to Rs. 8,39,105 crore (US$
127.26 billion), followed by the computer software and hardware industry
at 16%, amounting to Rs. 8,77,697 crore (US$ 121.40 billion), trading at
7% amounting to Rs. 3,63,768 crore (US$ 50.93 billion),
telecommunications at 5% amounting to Rs. 2,42,038 crore (US$ 40.18
billion), and automobile industry at 5% amounting to Rs. 2,64,456 crore
(US$ 39.68 billion).
India also had major FDI inflows during April 2000-December 2025,
coming from Singapore at Rs. 13,72,320 crore (US$ 192.53 billion) with a
total share of 25%, followed by Mauritius at 24% with Rs. 11,34,884 crore
(US$ 185.02 billion), the USA at 10% with Rs. 5,60,990 crore (US$ 78.45
billion), the Netherlands at 7% with Rs. 3,82,995 crore (US$ 55.60 billion),
and Japan at 6% with Rs. 3,11,507 crore (US$ 47.59 billion).
The state that received the highest FDI equity inflow during April 2000-
December 2025, was Maharashtra with Rs. 8,31,492 crore (US$ 104.06
billion) at 31%, followed by Karnataka at 21% with Rs. 5,42,157 crore
(US$ 68.80 billion), Gujarat at 15% with Rs. 3,91,613 crore (US$ 49.90
billion), Delhi at 13% with Rs. 3,26,373 crore (US$ 41.33 billion), and
Tamil Nadu at 6% with Rs. 1,48,875 crore (US$ 18.51 billion).

2.5 India investment & development if the foreign direct

investment
India has become an attractive destination for FDI in recent years,
influenced by several factors that have boosted FDI. In the Global
Innovation Index (GII) 2025, India secured the 38th position among 139
global economies. This marks a significant improvement from its 81st rank
in 2015, demonstrating India's commitment to fostering a robust
innovation ecosystem that is underpinned by strong policies, investment
in research and development (R&D), and a collaborative environment for
startups and industries. These factors have boosted FDI investments in
India. Some of the recent developments are as follows:
 Foreign portfolio flows during April–December 2025 reflected
phases of inflows and portfolio rebalancing, with strong inflows
recorded in May, October and November, offsetting part of the
volatility observed in other months amid global risk-off conditions.
  Foreign Portfolio Investment flows in 2025 reflected diversified
allocation across asset classes amid evolving global conditions. Debt
segments recorded net inflows of Rs. 8,849 crore (US$ 1,021
million), while mutual fund investments remained supportive with
net inflows of Rs. 56,817 crore (US$ 6,503 million), alongside
positive participation in hybrid and AIF categories. The continued
engagement across non-equity segments highlights sustained
foreign investor confidence in India’s capital market.
 India and the European Union have concluded negotiations for a
comprehensive Free Trade Agreement (FTA), marking a major
milestone in one of India’s most strategic economic partnerships.
The agreement covers a combined market of Rs. 2,091.6 lakh crore
(US$ 24 trillion) and provides preferential access for over 99% of
India’s exports by trade value, significantly expanding trade
opportunities. The FTA is expected to unlock substantial untapped
trade potential, deepen market integration, and strengthen long-
term economic ties between India and the EU.
 India and the European Union concluded negotiations for a Free
Trade Agreement, unlocking access to the EU pharmaceuticals and
medical devices market valued at Rs. 49.19 lakh crore (US$ 572.3
billion) and providing preferential, duty-free access for key ‘Made in
India’ products.
 The World Bank has ranked India among the top five countries
globally in terms of private investment in infrastructure among low-
and middle-income economies, with India accounting for over 90%
of South Asia’s total private infrastructure investment.
 India and Oman have signed a Comprehensive Economic
Partnership Agreement (CEPA) to deepen trade in goods and
services, investment, and professional mobility, granting India 100%
duty-free access across 98.08% of tariff lines covering 99.38% of its
exports.
 India and New Zealand announced the conclusion of a landmark
Free Trade Agreement on 23 December 2025, marking one of
India’s fastest-concluded FTAs with a developed country and a
major step towards Viksit Bharat 2047. The agreement provides
zero-duty market access for 100% of India’s exports and offers New
Zealand’s most ambitious services commitments to India, covering
over 118 services sectors.
The Union Minister of Commerce and Industry, Mr. Piyush Goyal,
announced that India and Canada will start discussing the Terms of
Reference (ToR) to set up a Free ecosystem that is underpinned by strong
policies, investment in research and development (R&D), and a
collaborative environment for startups and industries. These factors have
boosted FDI investments in India. Some of the recent developments are as
follows:
 Foreign portfolio flows during April–December 2025 reflected
phases of inflows and portfolio rebalancing, with strong inflows
recorded in May, October and November, offsetting part of the
volatility observed in other months amid global risk-off conditions.
 Foreign Portfolio Investment flows in 2025 reflected diversified
allocation across asset classes amid evolving global conditions. Debt
segments recorded net inflows of Rs. 8,849 crore (US$ 1,021
million), while mutual fund investments remained supportive with
net inflows of Rs. 56,817 crore (US$ 6,503 million), alongside
positive participation in hybrid and AIF categories. The continued
engagement across non-equity segments highlights sustained
foreign investor confidence in India’s capital market.
 India and the European Union have concluded negotiations for a
comprehensive Free Trade Agreement (FTA), marking a major
milestone in one of India’s most strategic economic partnerships.
The agreement covers a combined market of Rs. 2,091.6 lakh crore
(US$ 24 trillion) and provides preferential access for over 99% of
India’s exports by trade value, significantly expanding trade
opportunities. The FTA is expected to unlock substantial untapped
trade potential, deepen market integration, and strengthen long-
term economic ties between India and the EU.
 India and the European Union concluded negotiations for a Free
Trade Agreement, unlocking access to the EU pharmaceuticals and
medical devices market valued at Rs. 49.19 lakh crore (US$ 572.3
billion) and providing preferential, duty-free access for key ‘Made in
India’ products.
 The World Bank has ranked India among the top five countries
globally in terms of private investment in infrastructure among low-
and middle-income economies, with India accounting for over 90%
of South Asia’s total private infrastructure investment.
 India and Oman have signed a Comprehensive Economic
Partnership Agreement (CEPA) to deepen trade in goods and
services, investment, and professional mobility, granting India 100%
duty-free access across 98.08% of tariff lines covering 99.38% of its
exports.
 India and New Zealand announced the conclusion of a landmark
Free Trade Agreement on 23 December 2025, marking one of
India’s fastest-concluded FTAs with a developed country and a
major step towards Viksit Bharat 2047. The agreement provides
zero-duty market access for 100% of India’s exports and offers New
 Zealand’s most ambitious services commitments to India, covering
over 118 services sectors.
 The Union Minister of Commerce and Industry, Mr. Piyush Goyal,
announced that India and Canada will start discussing the Terms of
Reference (ToR) to set up a Free Trade Agreement (FTA). According
to the Minister, both countries want to begin formal engagement
again in trade matters and will formulate the groundwork for
upcoming negotiations. Consequently, the ToR discussions will
define the affected areas, objectives, and framework of the
proposed trade agreement.
 On 14 October 2025, Bharti Airtel announced a strategic partnership
with Google to establish India’s first Artificial Intelligence hub in
Visakhapatnam, Andhra Pradesh, aimed at accelerating AI adoption
and strengthening the country’s digital infrastructure. The initiative
entails a proposed investment of around Rs. 1,25,000 crore (US$ 15
billion) over 2026–2030 to develop large-scale data centres, subsea
cable connectivity, and clean energy-supported digital
infrastructure.
 The OECD has raised India’s FY26 GDP growth forecast to 6.7%,
citing monetary and fiscal easing along with recent GST cuts, and
expects inflation to ease to 2.9%. S&P Global has retained its FY26
growth outlook at 6.5%, supported by strong domestic demand and
higher government investment, while trimming its inflation estimate
to 3.2% and expecting a small RBI rate cut.
 Union Minister of Commerce and Industry, Mr. Piyush Goyal, stated
that, in the past few months, investors worldwide have announced
plans to invest over Rs. 50,000 crore (US$ 5.7 billion) in India's
finance and banking sector, underscoring India’s emergence as a
preferred destination amid global economic uncertainty

2.6 Foreign direct investment of Employment

Generation
Foreign direct investments are long run programs initiated by
multinational companies; they seek simple incentives such as markets,
comparative advantage of labour in a country, cheaper raw material etc.
but how does it increase employment? There are basically two kinds of
investment1) Brown field investment when a company purchases existing
production facilities.2) Green field investment — when a company builds a
new production facility. Either way there is bound to be increase in
employment due to investments made. But the extent of the employment
generation depends on the nature of business these firms want to do, with
entry of new firms in the country there must be increase in competition in
the domestic markets, this gives diversity to the consumers, other
positive implication of FDI is the improvement of technology and
knowledge In India most of the sector-wise distribution of FDI (appendix 1)
has been in service sector (Services sector includes Financial, Banking,
Insurance, Non-Financial / Business, Outsourcing, R&D, Courier,) i.e.
17.18% of total FDI. While in construction development India has 9.76%
FDI inflows. Most of these industries are capital intensive in nature and we
should not expect much growth in labour employment.
Agriculture sector — the primary sector employs 50% of the total
employment directly while 12% indirectly, it as received about 0.16 % in
agriculture services and 0.16% in agriculture machinery of FDI, though it
is a small fraction of FDI it led to a steady growth in agriculture sector
Keeping in mind that agriculture sector contributes up to 19% in GDP of
India we should expect more inflow of FDI in this sector, but when we
compare the ratio of GDP contribution of primary sector to the labour
employment we find that the theory of disguised unemployment to be
true, moreover most of the employment generated belongs to the
unorganized sector. The productivity of labour in agriculture. The only way
by which Indian agriculture sector can improve its labour productivity is by
employing more of capital intensive technology. Such practices have
already shown good 7 | P a g e results in U.S.A, Mexico etc. Industrial
sector — Indian industrial sector have had its leaps and bounds and is now
expected grow at a much better pace though it has received a FDI share
of 4.96% in automobile sector, 3.88% in power sector, 4.17% in fertilizers
etc. it is still growing and contributed to 18% of employment in India. This
share of FDI inflow in industrial sector does not reflect its incapacity by
any means as the major benefit received by this sector has been transfer
of technology and knowledge through multinational companies13. With
this the productivity of Indian labour has improved tremendously, the
national manufacturing policy (NMP) ratified by the Indian government
aims at25% contribution to GDP and 100 million y ear2022, under such
strong optimism this sector is likely to increase its share of FDI as well.
There has been a steady increase in index of industrial production (IIP)14
in the recent past of the core industries of India and we can expect that
this sector will do better in the future, with labour migrating towards the
urban industrial areas in search of employment they need to increase
their productivity which they are able to do as the results show .Service
sector — this sector is attracting a huge sum of FDI i.e. 17.18%, most of
the FDI that came from Mauritius and Singapore was inclined towards the
service sector but since the global financial crises in 2007-08 this
percentage has dropped. It is clear that the service sector is sensitive
towards the exports at least in India, with the plummeting service exports
of -15% in 2015 this sector has gotten the worse hit since the crises, the
rate of employment generation in this sector is pretty stable though.
During the period of 2004-06 when the Indian GDP was growing at a rate
of 8% the service exports played the most important role also FDI inflow it
this sector was at its peak. Skilled labour from all over the country flooded
into this sector but as soon as the exports were reduced this sector could
not bear the labour cost and instead left it unemployed or did not hired
them to begin with, moreover the FDI inflow was reduced to 2/3 of what it
was in 2005. e sector has depleted to an alarming extent and the only
way to raise living standard may seem to be that prescribed by Professor
Arthur Lewis in his Labor surplus model for developing countries. The FDI
in other sector certainly seem to be pointing in the above mentioned
direction of Professor Arthur Lewis model, when we take a closer look at
the employment trend of agriculture in India we find that there has been a
steady decline.

2.7 The trends of FDI in India and impact on Indian GDP

Singhania & Gupta (2011) found that inflation and growth of gross
domestic product positively impact the inflow of FDI in India. The author
also in his paper found that 63% variation in FDI inflows into India. Trade
openness, gross domestic product, interest rate, inflation, technological
growth and money growth have taken as explanatory variables and FDI is
dependent variable.
Rao (2011) found that portfolio investors and round-tripping investments
are significant contributors to India's reported FDI inflows. Furthermore,
they stated that FDI is preferred over FDI because the former is perceived
to be more stable and, as a bundle of assets in addition to capital, could
help the host economy gain competitiveness.
Chen et al., (2012) enquired about the association between outward FDI
and economic growth in Malaysia from 1980 to 2010. And the study
employed a general production function in which outward FDI is taken as
the independent variable and labour and domestic investment are as the
controlled variable. The Vector Error Correction Model was used as a
model specification, and the results showed that there is a positive long-
run relationship between outward FDI and growth. Furthermore, there is
long-run bidirectional causality between these two. However, no granger
causality was discovered between them in the short run.
Goswami & Kanta, (2012) investigated the trend of FDI inflows from 1991
to 2011, the relationship between FDI and manufactured exports and the
present status of FDI and exports in North East regions. They revealed
that NER fails to attract any sizable amount of FDI due to infrastructural
and other lacunas in the economy and suggested that there should be
some strategic intervention in NER to remove such fundamental
constraints.
Khoon et al., (2013) investigated whether inward FDI confirms the
observed patterns of a complementary relationship between FDI and
trade, whereas outward FDI and trade linkages are insignificant because
outward FDI is dominated by the services sector, which is generally non-
tradable. However, intra-firm trade in services could be increased through
fragmentation or outsourcing. Prerna & Dhawan (2013) estimated the
trend and patterns of FDI inflow in India. It has been demonstrated that
FDI inflows to India moderated significantly in 2010-11, while other
emerging economies in Asia and America received large inflows. They also
suggested that policymakers should ensure policy transparency and
consistency, as well as a comprehensive long-term development strategy.
Aurangzeb & Stengos, (2014) examined the relationship between FDI and
economic growth. In their study, they assumed that FDI is primarily
entering the service sectors after dividing the economy into export and
non-export sectors, and they used a smooth coefficient semi-parametric
approach to estimate the effects of FDI on economic growth. As a result,
they discovered that countries with higher levels of FDI inflows have
higher levels of export productivity than countries with lower levels of FDI
inflows.
Mohammed et al., (2015) they examined the impact of investment on
economic growth in 65 countries around the world and used panel data to
examine the relationship between FDI and economic growth in the study
area using panel granger causality and tests. The empirical findings
revealed a discrepancy in the relationship between the cointegration of
the panel data analysis. Furthermore, there is unidirectional causality
from FDI to GDP, which is a positive sign for FDI inflows.
Strat et al., (2015) conducted a study on the interdependency between
the inflow of FDI and unemployment over the period from 1991 to 2012
for the latest thirteen member states of the EU. And they also analysed
the short-run causal relationship between the two variables using the T-Y
procedure. Hence the study found that there is no granger causality
relation between the variables for six countries and a unidirectional
causality arises for the same countries.
Awasthi et al. (2017) found that the highest amount of FDI in India from
2010-11 to 2016-17 has come from Mauritius followed by Singapore and
the U.K. and the maximum investment came into the manufacturing
sector. Based on the data it is indicated that foreign investors showed
keen interest in the Indian economy because of liberalized regime
pursued and followed by the Indian economy.

2.8 The effect of COVID-19 on foreign direct investment

inflows
It is a well known fact that Foreign Investments plays a vital role in
booming the country’s economy. Indian Economy is highly incorporated
with the rest of the global financial market. Considering this fact it was
known that India would not have faced any type of financial risks from
such two chief worldwide fiscal crises that were: the US Meltdown in the
year 2008 and the European Sovereign Debt Crisis in the year 2010.
Generally there are two main bases that make the crisis truly global that
are: the financial market volatility and the sudden rise in the risk aversion.
It has been proved in many studies that foreign investments act as a
catalyst in enhancing the country’s economic growth and development,
immaterial to the nature of the economy (whether developed or
developing). Apart from various economic indicators like GDP, inflation
rate, currency exchange rate, exports and imports, debt ratio and fiscal
policies, foreign Investments also act as a major macroeconomic
determinant in ascertaining the country’s economic strength. But this
time FDI which is already seeing downcast with lower rate of returns will
not act as a lubricant for the suffering economies. Uncertainties about the
upcoming course and consequence of COVID-19 has made the financial
market additional unpredictable, leading to huge collide and wealth
wearing away which consecutively impacting consumption level. The
UNCTAD report 2019 revealed that the global foreign investments fell by
35% to $1trillion from $1.5 trillion. The Indian stock market on 23 March
2020 experienced the worst losses in history as SENSEX fell 4000 points
(13.15%) and NSE NIFTY fell 1150 points (12.98%)1 . The global
lockdowns due to COVID -19 pandemic encouraged low flow of
investments in the large projects and the Greenfield projects in the
developing countries. According to the Department for Promotion of
Industry and Internal Trade, on 18th April 2020 the government of India
had made certain changes in the foreign Investment policies to encourage
opportunistic takeovers and acquisitions. This paper attempts to put a
glance on how COVID -19 pandemic has impacted India’s Foreign
Investments during COVID -19 Pandemic.
The severity of COVID-19 in the home country can also have a negative
impact by reducing investment capital. Investors may face increased
business constraints at home, need to minimize the loss of home business
and thus may not afford to invest abroad. This reduces the number of
investors. On the other hand, the damage caused by COVID-19 in the
home country may induce outward FDI. One channel of this positive effect
is the increase in export-platform FDI to less damaged countries. Firms
may switch their export base from home to abroad to continue production
activities. The other channel is the rise in transport costs. The mobility
restriction induced by the COVID-19 pandemic reduces the handling
capacity of freight due to the shortage of truck drivers and port laborers,
thereby increasing both domestic and international transport costs. Thus,
firms may switch from exporting from home to producing abroad and
selling domestically in the host country. So-called horizontal FDI may
increase due to the increase in transport costs.
The severity of COVID-19 in the home country can also have a negative
impact by reducing investment capital. Investors may face increased
business constraints at home, need to minimize the loss of home business
and thus may not afford to invest abroad. This reduces the number of
investors. On the other hand, the damage caused by COVID-19 in the
home country may induce outward FDI. One channel of this positive effect
is the increase in export-platform FDI to less damaged countries. Firms
may switch their export base from home to abroad to continue production
activities. The other channel is the rise in transport costs. The mobility
restriction induced by the COVID-19 pandemic reduces the handling
capacity of freight due to the shortage of truck drivers and port laborers,
thereby increasing both domestic and international transport costs. Thus,
firms may switch from exporting from home to producing abroad and
selling domestically in the host country. So-called horizontal FDI may
increase due to the increase in transport costs.

2.9 Country wise inflow of FDI in India

FDI in India has been a significant driver of economic growth and
development. Over the years, India has attracted substantial inflows of
FDI across various countries. The following table discloses about an
overview of FDI inflows in India between 2005 and 2021.
India receives a significant amount of FDI on average from Mauritius. The
United Arab Emirates (UAE) has a low mean inflow of FDI to India,
suggesting that India receives a relatively smaller amount of FDI on
average from the UAE. The coefficient of variation for inflows of FDI from
Mauritius is low, implying that the FDI amounts from Mauritius to India
have a low level of fluctuation over time. Similarly, the coefficient of
variation for inflows of FDI from Cyprus is high, indicating that there is a
high level of fluctuation in the FDI amounts received from Cyprus to India.
Germany provided a high amount of FDI to India in 2021, indicating a
substantial investment received from Germany during that year. India
received a relatively small amount of investment from the Cayman Islands
during 2006. The result of an analysis of variance (ANOVA) test reveals
that there is a significant difference in the mean inflows of FDI from
various countries to India. This suggests that the FDI amounts vary
significantly across different countries in terms of their investments in
India.
One of the primary reasons for the high FDI from Mauritius to India is the
favorable tax treatment provided by the Double Taxation Avoidance
Agreement (DTAA) between the two countries. The agreement ensures
that investors from Mauritius do not face double taxation on their
investments in India. Capital gains tax on investments made through
Mauritius is often exempt or subject to reduced rates, making it an
attractive route for investors. Further, the DTAA between India and
Mauritius has been susceptible to treaty shopping, where non-Mauritian
entities invest in India through Mauritius to take advantage of the
favorable tax provisions. This has contributed to the significant inflow of
FDI from Mauritius to India. India has implemented various economic
reforms to improve its business environment and attract foreign
investments. Mauritius has strong historical, cultural, and economic ties
with India, owing to its significant Indian diaspora. This shared heritage
and cultural connection have fostered closer economic relations between
the two countries, making Mauritius a preferred investment destination for
Indian businesses.
There could be several reasons why India has received relatively low
foreign direct investment (FDI) from the United Arab Emirates (UAE). The
nature of investments from the UAE might be focused on sectors that are
not prominent in India or that do not align with India's investment
priorities. The investment preferences and strategies of UAE investors
may not align with the investment climate or opportunities in India. They
might be prioritizing investments in other countries or regions due to
factors such as market dynamics, political stability, or sector-specific
considerations. India faces competition from other countries for FDI. The
UAE, being a global hub for investment, may have alternative investment
destinations that are perceived as more attractive or offer better
incentives for UAE investors. The economic conditions or policies of India
may not be conducive to attracting significant FDI from the UAE. Factors
such as regulatory complexities, bureaucratic hurdles, taxation issues, or
other business environment challenges can affect investor confidence and
deter FDI inflows.

2.12 Sector wise inflow of FDI in Indi

The inflow of FDI in India varies across different sectors. It's important to
note that the inflow of FDI can vary depending on economic conditions,
government policies, and sector-specific opportunities. The government of
India has introduced various measures to promote FDI across sectors and
continues to work towards improving the ease of doing business in the
country, which can further influence the sector-wise distribution of FDI.
Thus, the following table illustrates about FDI in India at various sector
between the period 2005 and 2021.
Sector Wise Inflow of FDI in India, USD Million.
Sector Wise Inflow of FDI in India -ANOVA
From the above table it is ascertained that mean inflow of FDI is found
high in service sector and mean inflow of FDI is found low at chemical
industry. Further, it is noted that high fluctuation in inflow of FDI is noted
with software and hard ware industry and low fluctuation in FDI inflow is
noted with service industry. High amount of FDI inflow is noted with
software and hardware industry and low amount of FDI inflow is noted
with chemical industry. The service sector has the highest mean inflow of
FDI, indicating that it receives a significant amount of foreign investment.
On the other hand, the chemical industry has a lower mean inflow of FDI.
The software and hardware industry experiences high fluctuation in FDI
inflow, indicating that the amount of foreign investment in this sector can
vary significantly over time. In contrast, the service industry has low
fluctuation in FDI inflow, suggesting a more stable and consistent level of
foreign investment. The software and hardware industry receives a high
amount of FDI inflow during 2021, indicating that it is an attractive sector
for foreign investors. On the other hand, the chemical industry receives a
low amount of FDI inflow during 2005, suggesting that it may be less
attractive to foreign investors compared to other sectors.
Analysis of Variance (ANOVA) test indicates a significant difference in the
inflow of FDI across various sectors in India, it suggests that the mean FDI
inflows in at least one sector significantly differ from the mean inflows in
other sectors. In other words, there are statistically significant variations
in FDI inflows among the sectors under consideration. This finding is
important as it provides evidence that the inflow of FDI is not uniform
across all sectors in India. The sectors that attract higher or lower FDI
inflows may have distinct characteristics, market conditions, or
investment opportunities that influence foreign investors' preferences.
The significant difference observed in the ANOVA test indicates that
factors such as sector-specific policies, market potential, government
incentives, or industry-specific dynamics may contribute to the variations
in FDI inflows. The service sector in India has been a major recipient of
foreign direct investment (FDI) due to several factors. India has a rapidly
growing domestic market with a large and diverse consumer base. The
service sector, which includes financial services, telecommunications,
retail, healthcare, education, and hospitality, among others, benefits from
the expanding middle class and increasing consumer spending power.
Foreign companies see India as a lucrative market to provide services and
tap into the growing demand. The Indian government has implemented
various policies and reforms to attract FDI in the service sector. Measures
such as liberalizing FDI norms, simplifying regulations, and promoting
ease of doing business have contributed to creating a favorable
investment climate. The relatively low inflow of FDI in the Indian chemical
industry can be attributed to several factors. The chemical industry is
subject to stringent regulations and compliance requirements related to
safety, environmental impact, and hazardous materials. These regulations
can increase operational costs and create barriers to entry for foreign
investors, leading to a comparatively lower inflow of FDI. The chemical
industry often requires significant investments in infrastructure, research
and development, and specialized equipment. The capital-intensive
nature of the industry may deter foreign investors who are seeking
sectors with lower capital requirements or faster returns on investment.
The chemical industry is associated with potential environmental risks and
concerns related to pollution and waste management. Foreign investors
may be cautious about investing in sectors that have higher
environmental impact or face public scrutiny due to environmental
concerns. The global chemical industry is highly competitive, with
established players from various countries. Indian chemical companies
may face strong competition from international counterparts, making it
challenging to attract significant FDI inflows.

2.11 Conclusions
Foreign Direct Investment (FDI) has played a crucial and transformative
role in shaping the economic growth trajectory of India, particularly since
the economic liberalization reforms of 1991. Over the past three decades,
FDI has not only contributed to increasing capital formation but has also
facilitated the transfer of advanced technology, managerial expertise, and
global best practices into the Indian economy. These contributions have
significantly enhanced productivity, efficiency, and competitiveness
across various sectors such as manufacturing, services,
telecommunications, and infrastructure.
FDI has also been instrumental in generating employment opportunities,
improving skill levels, and integrating India into the global value chain.
The inflow of foreign capital has strengthened India's balance of payments
position and helped in bridging the savings-investment gap. Moreover, it
has supported the development of key industries and promoted exports,
thereby contributing to overall economic expansion.
However, the impact of FDI has not been uniformly distributed across all
sectors and regions. While metropolitan cities and industrially advanced
states have benefited significantly, rural and less-developed regions have
not experienced the same level of growth. This uneven distribution raises
concerns about regional inequality and highlights the need for more
inclusive investment policies. Additionally, excessive dependence on
foreign capital can sometimes pose risks to domestic industries,
particularly small and medium enterprises, which may struggle to
compete with large multinational corporations.
Furthermore, issues related to regulatory challenges, bureaucratic delays,
and policy uncertainty have occasionally hindered the full potential of FDI
in India. Despite improvements in the ease of doing business, there is still
a need for consistent and transparent policies to attract sustainable and
long-term investments.
Many macroeconomic variables are there that are affecting FDI inflow in
India. Based on the step-wise regression some selected variables have
been used in this study. Based on the empirical results some variables are
positive relation with FDI inflows while some are not. Moreover, more
research is required based on this FDI inflow issue though India is a
positive trend of FDI inflow still it lacks foreign capital in India. There
should be more policy formulation not only in the field of exports and
imports sectors but also in the field of the manufacturing sector is
required.

CHAPTER - 3
Foreign Direct Investment in India Sence 1991
3.1 Introduction

Most discussed topic in the economic world of the developing country like India in recent
years is FDI. India is the second most populous country and the largest democracy in the
world. Until 1991 the government has neglected the development strategy required for
economic development for the country. However, the far reaching and sweeping economic
reforms undertaken since 1991 have unleashed the enormous growth potential of the
economy. There has been a rapid move towards deregulation and liberalisation, which has
resulted in India becoming a favourite destination for foreign investment. In 1991 India
introduced liberalisation policy and started the FDI regulatory framework on selective basis.
The industrial policy of 1991 has also tremendous effect and impact in attracting FDI. The
introduction of a single market determined exchange rate for rupee since March 1993 was a
major change. All exports and imports were now conducted at a market rate of exchange.
In India FDI inflows have gone up significantly in the post reform era undoubtedly due to
radical changes in the policies that have increased the confidence of the investors. The FDI
inflow simply doubled in first year of reforms in 1992 to Rs 691 crores as compared to Rs
353 crores in 1991. As for FDI growth rate, it is not a smooth one. There is up & down in the
growth % of FDI during 1991 to 2008. In two years 1999 and 2003 there is negative growth
rate. The reduction in the FDI inflows in the Indian economy after 1997-98 is due to effect of
East Asian Crisis in 1997-98. Growth rate becomes positive from the year 2004 and during
2006 and 2007 growth rate was very high. It again decreases in 2008 due to Economic Crisis.
There is hardly a facet of the Indian psyche that the concept of ‘foreign’ has not permeated.
This term, connoting modernization, international brands and acquisitions by MNCs in
popular imagination, has acquired renewed significance after the reforms initiated by the
Centre for Civil Society - 3 - Indian Government in 1991. Contrary to the grand narrative
‘opening of flood-gates idea’ of 1991, what took place was a gradual process of changes in
policies on investment in certain sub-sections of the Indian economy. As a result of
controversy surrounding Foreign Direct Investment owing to a lack of understanding, it has
become the eye of a political storm. The paper aims to present a unique understanding of
FDI in the context of liberalisation and the prevailing political climate.
FDI eludes definition owing to the presence of many authorities: Organisation for Economic
Co-operation and Development (OCED), International Monetary Fund (IMF), International
Bank for Reconstruction and Development (IBRD) and United Nations Conference on Trade
and Development (UNCTAD). All these bodies attempt to illustrate the nature of FDI with
certain measuring methodologies. Generally, FDI refers to capital inflows from abroad that
invest in the production capacity of the economy and are “usually preferred over other
forms of external finance because they are nondebt creating, non-volatile and their returns
depend on the performance of the projects financed by the investors. FDI also facilitates
international trade and transfer of knowledge, skills and technology.”1 It is furthermore
described as a source of economic development, modernization, and employment
generation, whereby the overall benefits (dependant on the policies of the host
government) …triggers technology spillovers, assists human capital formation, contributes
to international trade integration and particularly exports, helps create a more competitive
business environment, enhances enterprise development, increases total factor productivity
and, more generally, improves the efficiency of resource use.

3.2 Foreign Direct Investment (FDI): Conceptual Framework

Raised funds for their expansion programmes from the host country, this might out-
compete the domestic firms in the financial markets and thus compete them out. The
decision of MNCs for acquisition of domestic firms might similarly lead to large inflow of
foreign exchange, appreciating in the process the exchange rate. This might in turn make
the host country’s export less competitive and thus discourage domestic investment for
export markets. All these imperatives may have crowding-out impact on domestic firms. In
view of the double-edged nature of FDI, namely the crowding-out and crowding-in effects
on domestic industries, the host economies especially the developing countries have been
imposing some kind of performance requirements in regard to: (a) local content, (b) export
commitment, (c) technology transfer, (d) dividend balancing and (e) foreign exchange
neutrality. These regulations are there to enhance the quality of FDI against the simple
increase in the quantity of FDI inflow. Imposition of performance criteria, however, comes in
the way of the relative openness of the trade regime and may make FDI less attractive for
MNCs while deciding the location for their operations. In other words, a trade-off is involved
between performance and openness. 1.6 Advantages of FDI for the Host Country FDI can
make up not only for deficiencies in the availability of savings and foreign exchange which is
true of all external flows but also for weaknesses in domestic entrepreneurial capacity. In
other words, the role of FDI in directly stimulating investment activity in the country can be
of great significance. This is particularly important for India since there is a likelihood that
corporate investment activity may not be dynamic enough to absorb the available
resources, particularly in those areas which are being vacated by the public sector. In such a
situation, the entrepreneurial function played by FDI can have the effect not only of bringing
in additional resources, but also leading to better absorption of domestic savings. Foreign
investment takes place for private gain but it has the following potential benefits for less
developed countries (LDCs). 1.6.1 Raising the Level of Investment: Foreign investment can
fill the gap between desired investment and locally mobilised savings. Local capital markets
are often not well developed. Thus, they cannot meet the capital requirements for large
investment projects. Besides, access to the hard currency needed to purchase investment
goods not available locally can be difficult. FDI solves both these problems because it is a
direct source of external capital. It can fill the gap between desired foreign exchange
requirements and those derived from net export earnings. Foreign investment can stimulate
domestic investment through forward and backward linkages. For example, output of a
foreign firm can be an input of domestic industries. Similarly, output of the domestic
industries can be inputs for the foreign firms. If this is so, foreign firms create demand for
industries producing goods purchased by them. 1.6.2 Upgradation of Technology:
Production units in developing countries use out-dated equipment and techniques that can
reduce the productivity of workers and lead to the production of goods of a lower standard.
The ability of domestic producers to compete abroad for export markets is reduced which,
in turn, contributes to the difficulties of the developing countries to earn hard currencies.
Foreign investment can supply a package of needed resources such as management
experience, entrepreneurial abilities, organisational and technological skills. Foreign
investment brings with it technological knowledge while transferring machinery and
equipment to developing countries. Similarly, as the foreign-owned enterprise comes into
competition with the local firms, the latter category of enterprises are forced to improve
their technology and standards of product quality. Further, foreign-owned.

3.3 : The importance of FDI in India

The biggest challenge before the Indian government is how to attain a solid economic
growth and more importantly how to sustain it. Many economists like Maddison (1998)
opine that this can be attained by a massive increase in investments which should result in
sustained economic welfare in the years to come. For that, the overall investment levels
should be increased substantially from the present levels for the next 15 years. The table 1
captures the growth rate of investments in some of the emerging economies to achieve an
economic growth rate of over 6 to 8%. In case of India, if it aspires to have a per capita
income growth of over 6% consistently for the next ten years then the investment level
should be increased drastically. Most of the developed nations and also the emerging
economies like China, Taiwan, and Mexico have increased their investment levels
significantly during the period 1980 - 2005. So if India wants to accelerate its growth then an
investment ratio of over 35% is what required. The question is how India can mop up an
investment ratio of over 35% and sustain it in the years to come. The table 1 captures the
growth rate of investments in some of the emerging economies to achieve an economic
growth rate of over 6 to 8%.

Table 1. Investment-GDP growth rate in India vis-à-vis other emerging markets. (%)
Country CHINA MALAYSIA INDIA THAILAND PHILIPPINES
Investment Growth 11 2.6 6.5 9.4 -2.1
1980 - 1990
GDP Growth 10.2 5.2 5.8 7.6 1
1980 - 1990
Investment Growth 15.5 16 5.3 10.2 -1.5
1990 - 1997
GDP Growth 12.8 8.7 4.6 8.4 1.3
1990 - 1997
Investment Growth 16.2 0.2 16 12 1
1998 - 2005
GDP Growth 9.7 4.3 7.3 3.4 3.5
1998 - 2005
Investment Growth 14.2 6 10 4 0.5
2005 – 2015
GDP Growth 10 5.2 8 3.5 5.4
2005 - 2015
Investment Growth 5 3.5 5 2.5 6
2015 - 2025
GDP Growth 5.6 4.2 5 2.8 5.3
2015 - 2025

The public sector investments have been declining significantly from 1985 onwards. This is
because of the ever-increasing fiscal deficit at both center and states levels, leaving the
states with virtually no funds available for any massive investments required in the country.
This being so on one hand, on the other hand, the private sector investments seems to be
increasing right from 1980. But, this would not suffice the present investment requirements.
Therefore, it becomes very important for India to explore the option of attracting more
foreign direct investments which can supplement the domestic invest able resources for
enabling a higher GDP growth rates. This apart, FDI can be attracted in key infrastructure
projects like power, Roads, Housing, etc, which is a genuine need for the country (Qamar,
2003). The FDI also enables the foreign companies to transfer the technology to the host
country which can improve its competitiveness globally. Another great advantage through
FDI for India is it can generate lot of employment opportunities to the youth. It is a known
fact that India has a highest stock of people in the age group of 15 to 30 years and there is
also an increasing pressure on the government to provide them the right kind of jobs. Added
to this, allowing FDI would also make the services more efficient for the consumers as it
would lead to competition and this reduces market concentration of any company in that
industry. In the context of emerging economies, India has emerged as one of the fastest-
growing economies in the world. Over the period 2005 to 2024, India has experienced
significant changes in both investment patterns and economic growth. This period is
particularly important as it includes phases of rapid expansion, global financial crisis,
domestic policy changes, and the unprecedented shock of the COVID-19 pandemic. The
analysis of investment growth rate and GDP growth rate during this period provides
valuable insights into the dynamics of India’s economic development.
Investment Growth Rate in India (2005–2024)
Investment plays a crucial role in determining the productive capacity of an economy. In
India, the period from 2005 to 2008 witnessed a high investment growth rate, ranging
between 12% to 16%, driven by strong economic reforms, increased foreign direct
investment, and expansion in infrastructure.
However, the Global Financial Crisis of 2008–09 had a negative impact, leading to a
slowdown in investment growth. Although there was a temporary recovery in 2010,
investment growth gradually declined during 2011–2014 due to policy uncertainties and
declining investor confidence.
From 2015 onwards, investment growth remained moderate, averaging around 4% to 7%.
The situation worsened in 2020 when the COVID-19 pandemic caused a sharp decline
(around -10%) due to lockdowns and reduced economic activity. Nevertheless, post-
pandemic recovery (2021–2024) showed improvement, with investment growth rising again
due to government spending and infrastructure development.
Overall, the average investment growth rate during 2005–2024 is estimated to be around
6%–7% per year, reflecting a combination of high growth and periods of slowdown.
GDP Growth Rate in India (2005–2024)
GDP growth rate is a key indicator of economic performance. During 2005–2007, India
recorded high GDP growth rates of around 8% to 10%, driven by strong domestic demand
and investment.
The impact of the Global Financial Crisis in 2008 led to a slowdown, but India recovered
quickly, achieving a peak growth rate of over 10% in 2010. However, during 2011–2013,
growth slowed down due to inflation, policy bottlenecks, and global uncertainties.
From 2014 to 2019, GDP growth stabilized in the range of 6% to 8%. The COVID-19
pandemic in 2020 caused a historic contraction of about -6.6%, followed by a strong
recovery in 2021 (around 8.9%). In the subsequent years (2022–2024), growth remained
stable at around 6% to 7%, indicating resilience in the Indian economy.
The overall average GDP growth rate for the period 2005–2024 is estimated to be around
7% per year.

3.4 Foreign Direct Investment Inflows into India

Till 1991, foreign investments into India were restricted and moderately allowed that to only
in few sectors. This was mainly because of the kind of policies which the government of
India has adopted over the years, includes, `inward looking strategy'; and dependence of
external borrowings which in turn resulted in foreign debts, were preferred to the foreign
investments to bridge the gap between domestic savings and the amount of investments
required. In 1991 when the government of India started the economic reforms program, FDI
had suddenly become important for India which was looked upon as a key component of
economic reforms package. The New Industrial Policy of 1991 gave utmost priority to
attracting FDI inflows. In the process, the government started opening up of domestic
sectors to the private and foreign participation which was earlier reserved only for the
public sector. This was followed by slow but significant relaxation of regulatory and entry
restrictions on FDI inflows. This led to the substantial increase in the volume of FDI inflows
into India.
The FDI inflows into India before 1991 were minimal. The graph 1 shows that the FDI inflows
surged post 1991 and reached to a new heights of over 16 US$ billion by 2006. Post reforms,
the actual inflows of the FDI had maintained a fluctuating and unsteady trend during the
initial period from 1991-92 to 2003-04. They increased from the level of US$ 75 million in
1991-92 to the level of US$ 3581 millions in 2000, before touching all time high US$ 5627
million in 2002. There was however, decline in FDI inflows in the immediate following year
falling down to US$ 4323 million. From there on, the FDI inflows rose drastically and
reached to over US$ 16 billions in 2006. During the initial phase of reforms from 1991 to
1998 saw continuous increase in the FDI inflows. The total amount of the FDI inflows during
the period 1991-92 to 1997-98 had amounted to US$10,866 million. The increase was
largely due to the expanded list of industries or sectors which were opened up for foreign
equity participation. This followed by relaxation of various rules, regulations and
introduction of various policies by the government to promote the FDI inflows. The inflows
declined to the level of US$2,462 million in the year 1998-99 and further to US$2,155
million in 1999-2000. The reasons for the declining trend could be attributed to various set
of factors, the most important among them being the several restrictions imposed on India
by the USA on account of the nuclear test carried out by India at Pokhran, the political
instability, the slow down of the Indian economy due to possible mild recession in US and
global economy, the poor domestic industrial environment and the unfavourable external
economic factors such as the financial crisis of South-East Asia. In 2000-01, the inflows of
the FDI into India increased to the level of US$2,400 million. Due to external factors like the
terrorist attacks on the Indian Parliament in December 2001, and on World Trade Centre
(WTO) in September 2001 brought about a temporary dislocation in the FDI inflows.

3.5 Conclusions
Some of the few important reasons why India is unable to compete with its counterparts in
terms of attracting huge FDI Inflows are because there are still considerable bottlenecks,
which still remain. The government report 2003 addresses reasons for inadequate
performance of India in the area of FDI. The identification of causes draws extensively on
investor perception surveys carried out by major global consultancy firms Boston
Consultancy Group. Six major constraints are mentioned:
Unforvalblethe period 2005–2024 highlights the dynamic nature of India’s economic
growth. While the economy experienced phases of rapid expansion, it also faced significant
challenges due to global crises and domestic factors. The analysis clearly indicates that
investment growth is a key driver of GDP growth in India. Sustained investment, supported
by stable policies and economic reforms, is essential for maintaining long-term economic
growth and development.

CHAPTER – 4
Research methodology

4.1Research Design
This study is based on a quantitative and analytical research design. It examines the
relationship between Foreign Direct Investment (FDI) and economic growth in India using
statistical and econometric techniques. The research is explanatory in nature, as it aims to
identify the cause-and-effect relationship between FDI inflows and GDP growth.
2. Nature of Data

The study relies on secondary data, which is collected from reliable and authentic sources.
The data covers a time period from 1991 to 2024, capturing the post-liberalization era of the
Indian economy.

3. Sources of Data

The data for this research is collected from the following sources:
Reserve Bank of India (RBI) reports
Ministry of Commerce and Industry, Government of India
World Bank Database
International Monetary Fund (IMF)
UNCTAD (United Nations Conference on Trade and Development)
Economic Survey of India
Research journals, articles, and publications

4. Variables of the Study

Dependent Variable:
Economic Growth (measured by GDP or GDP growth rate)
Independent Variable:
Foreign Direct Investment (FDI inflows)
Control Variables (optional but recommended):
Inflation rate
Trade openness
Gross capital formation
Exchange rate

5. Model Specification
To analyse the relationship between FDI and economic growth, the following econometric
model is used:
GDP = β0 +FDIt + β2 Xt + μt

Where:
GDP = Economic growth at time t

FDI, = Foreign Direct Investment inflow

Xt = Vector of control variables

β0= Intercept

β1 ; β2 = Coefficients

Error term

7. Time Period of Study

The study covers the period 1991–2024, which includes major economic
reforms and globalization phases in India macroeconomic indicators and
does not deeply analyse sector-specific impacts
.
8. Scope of the Study

The research focuses on analysing the impact of FDI on India’s overall

economic growth. It mainly considers.

9. Limitations of the Study

The study is based on secondary data, which may have limitations in

accuracy.
It focuses only on selected variables and may ignore other influencing
factors.
Short-term fluctuations and external shocks (like COVID-19) may affect
results.
Regional disparities are not deeply analysed.

CHAPTER - 5
Data Analysis and Source

5.1 Introduction

The relationship between Foreign Direct Investment (FDI) and economic growth (GDP
growth rate) in India. The analysis is based on secondary data collected from sources such as
RBI, World Bank, and UNCTAD, covering the period from 1991 to 2026.

5.2 Variables of the Study

5.2.1 Independent Variable

Foreign Direct Investment (FDI) inflows into India have grown from a very low base in 1991
following the economic liberalization to becoming a key driver of economic growth, with
cumulative inflows exceeding US$ 1 trillion between 2000 and 2024.

5.2.2 Dependent Variable

FDI has moved from being a negligible source of capital to a crucial pillar of India's balance
of payments and infrastructure financing. The dependence on foreign capital is part of a
broader shift to integrate with global markets, with FDI equity inflows growing.

5.3 Trend Analysis of FDI and GDP Growth

After the economic liberalization in 1991, India witnessed a significant increase in FDI
inflows. The trend can be divided into four phases.

5.3.1 Initial phase with low FDI inflows due to gradual policy
reforms 1991 – 2000

The data shows that despite a brief period of volatility between 1997 and 1999, the general
trajectory of FDI inflows was strongly upward. Between 1991 and 2003, the total inflow
increased by more than 27 times its original value reflecting a much more open and
attractive environment for international investment reflecting a much more open and
attractive environment for international investment

e,
Policy reform India
BoP is 1991 – 2000 reduce FDI

5.3.2 India FDI Growth and Reform 2000 – 2010

India inflow Growth rate % 2000 - 2010

5.3.3 Effect of global crisis in India 2007 – 09

 This 2008 and early 2009 plunge in Indian OFDI has been asymmetrical
across sectors and host regions. Indian OFDI in the primary and tertiary
sectors has been more resilient in the crisis than OFDI in manufacturing.
Between 2007 and 2008, acquisition-led4 Indian OFDI grew in the
primary sector (10%) and in services (19%), while it fell steeply in
manufacturing (-79%). The share of manufacturing in Indian OFDI flows
thus fell, unsurprisingly, from 84% in 2007 to 49% in 2008. The share of
the primary and services sectors in Indian brownfield (i.e., made through
mergers and acquisitions) OFDI, on the other hand, grew to 20% and
31%, respectively. In the first half of 2009, the negative impact of the
global slowdown spread to the services sector as well. Only the primary
sector remained robust, led by ongoing increases in OFDI in the oil
segment and the revival of OFDI in mining.

Response to its balance of payments (BOP) crisis in the early 1990s, India
implemented a series of trade, industry, and investment reforms. These
reforms effectively liberalized the economy, ending a long period of
relative isolation from global markets and financial and technology flows.
Since then the Indian economy has become increasingly integrated with
the world economy. 6 Consequently, current account flows (receipts and
payments of merchandise and invisibles) as a proportion of GDP
increased from 20% in FY1990–1991 to 53% in FY2007–2008. However,
the most significant change can be witnessed in the capital account. Due
to the rationalization of procedures and conditions for foreign
investment, India has emerged as an attractive investment destination.
This is reflected as an increase in foreign portfolio investment inflows
from US$2 billion in FY2001–2002 to US$29 billion in FY2007–2008.
Foreign direct investment (FDI) inflows have also gone up significantly in
recent years, having risen to US$34.3 billion in FY2007–2008 from
US$6.1 billion in FY2001–2002. At the same time, Indian corporations
have also entered the global market for mergers and acquisitions,
resulting in some capital account outflow from India.
Foreign direct investment, net inflows (BoP, current US$)

GDP growth rate in India 2007 2009

5.3.4 2010-2024 : FDI INFLOW
FDI net inflow (% BoP)

FDI net inflow (%GDP)

 Change in ratio of FDI inflows to GDP

A comparison of the growth rates of FDI inflows, GDP, and trade

 CHAPTER – 6
FDI IN INDIA: SOURCES, COMPONENTS AND TRENDS
FDI Inflow in India (2016-2017)
 Countrywise FDI Inflows year 2016-17

From the above chart, it is observed that during 2016-17 financial year,
most of the Foreign Direct Investment is coming from Mauritius which
account for 36.85 per cent. It is followed by Japan and Netherlands. US
ranks at 4th position in terms of Foreign Direct Inflow in India and
Taiwan and Saudi has the lowest share in FDI in the year 2016-2017.

Country-wise FDI Inflows year 2020-21

Countrywise FDI Inflows year 2020-21

SECTOR – WISE INFLOW OF FDI IN INDIA
SECTOR – WISE INFLOW OF FDI IN INDIA 2019 - 20

Sector wise inflows of FDI in India, where the major Investment is shown
in Manufacturing and Communications and the third highest in the
Financial Service and followed by retails and wholesale and Business
Service and Electricity and others and the lowest Trading and mining’s in
the year 2019 – 20.
Country-wise FDI Inflows year 2019-20
YEARS 2018-2019
 SECTOR – WISE INFLOW OF FDI IN INDIA 2018-2019

we can see that the sector wise inflows of FDI in India, where the major
Investment is shown in Manufacturing and Financial services and the
third highest in the communication services and followed by and Retail
and wholesale and others and the lowest Trading and Real estate
activities in the year 2018-2019.
YEARS 2019-2020
From the above chart, it is observed that during 2016-17 financial year,
most of the Foreign Direct Investment is coming from Mauritius which
account for 36.85 per cent. It is followed by Japan and Netherlands. US
ranks at 4 th position in terms of Foreign Direct Inflow in India and
Taiwan and Saudi has the lowest share in FDI in the year 2016-2017.
sector - wise inflow of FDI in India 2019-20
 CHAPTER – 6
Conclusions
The impact of foreign direct investment (FDI) on Indian economic growth can be significant.
FDI plays a crucial role in driving economic development, enhancing productivity, and
promoting technological advancement. FDI supports the expansion of existing industries,
the establishment of new businesses, and the development of infrastructure, all of which
stimulate economic activity and contribute to GDP growth. FDI brings with it advanced
technology, managerial expertise, and best practices from foreign companies. This
technology transfer and knowledge spillover can enhance productivity, improve the quality
of products and services, and increase the competitiveness of domestic industries. Improved
productivity and competitiveness can lead to higher economic output and sustainable
economic growth.
FDI inflows can result in job creation and employment opportunities in the recipient
country. Foreign companies establishing or expanding their operations in India create direct
and indirect employment, reducing unemployment rates and improving the standard of
living. Increased employment levels contribute to higher consumer spending and overall
economic growth. FDI can have a positive impact on exports and trade. Foreign companies
often establish export-oriented production facilities in India, leveraging the country's skilled
workforce and cost advantages. This can lead to increased exports, higher foreign exchange
earnings, and reduced trade deficits. FDI can also contribute to import substitution, as
domestic production substitutes imports, further improving the balance of trade. FDI inflows
can support infrastructure development, particularly in sectors such as transportation,
energy, and telecommunications. Improved infrastructure not only facilitates business
operations but also attracts additional investment, promotes regional development, and
strengthens overall economic growth.
The major findings of the study at the macro level suggest that FDI played a vital role in the
economic growth of the country. [t also contributed significantly to raise the capital
formation in India. The global share of the FDI inflow in India is very low, it is able to take
the overall economy in a positive direction. [n this context, the FDI inflow is very important
and should be encouraged significantly in all spheres of the Indian economy. [t is also
important to note that FDI inflow in the country has also not been able to fulfil the objective
of increasing exports and saving. [n the case of export promotion through FDI inflow, it is
suggested to reduce the tariff rates of the country. Though external sector reforms call for
an effort fur appreciation of the Indian Rupee against the other currencies in the world,
India's tariff rates are still among the highest in the world and continue to block India's
attractiveness as export platform for labour-intensive manufacturing production. In the year
( 2016- 2017 ) most of the foreign direct investment is coming from Mauritius which account
for 36.85% Taiwan and Saudi has the lowest ,( 2017- 2018) the highest FDI is from is again
Mauritius and the lowest is Saudi Arabia and Taiwan. In the year (2018-2019) The highest
inflows is by Mauritius and the lowest is Saudi Arabia. And (2020-2021) highest is Singapore
and the second highest is USA and the lowest inflows is Belgium, Taiwan , Switzerland and
Spain. In the sector – wise inflow in India. Where the major investment is shown in
manufacturing and communication and the lowest is trading and mining in the (2016-2017)
Foreign Direct Investment continues to anchor India’s long-term growth trajectory,
supported by consistent policy reforms, expanding market access, and deepening global
integration. Strong equity inflows in FY26, alongside the steady expansion of high-
technology, manufacturing, and green energy sectors, reflect sustained investor
engagement despite global volatility. Recent trade agreements with key partners, including
the European Union and other strategic economies, are widening export access and
strengthening India’s integration into global value chains. Continued liberalisation across
sectors, infrastructure scale-up, renewable energy expansion, and digital transformation
initiatives are further enhancing India’s competitiveness, positioning the country as a
preferred destination for strategic, long-term capital in the years ahead.
 CHAPTER – 7
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