Economics of FDI in India

Developing nations have made their presence felt in the economies of developed ones by receiving a decent amount of FDI in the last 3 decades. Although India is not the most preferred destination of global FDI, but there has been a generous flow of foreign direct investment in India since 1991. It has become the 2nd fastest growing economy of the world.

India has substantially increased its list of source countries in the post-liberalisation era. Many sectors of Indian Economy like Infrastructure, Consultancy, Education, Real Estate, Construction Activities, Automobile and IT have seen significant rise in the flow of investments. There were 120 countries investing in India in 2008 as compared to 15 countries in 1991. However the lion’s share (66 percent) of FDI flow is vested with just five countries (viz. Mauritius, USA, UK, Netherlands and Singapore).

India has signed a number of bilateral & multilateral trade agreements with developed and developing nations. This founding member of GATT, WTO, MIGA and a signatory member of SAFTA is making its presence felt in the economic landscape. The economic reform process started in 1991 helps in creating a conducive and healthy atmosphere for foreign investors and thus, resulting in substantial amount of FDI inflows in the country.

No doubt, FDI plays a crucial role in enhancing the economic growth and development of the country. Moreover, FDI as a strategic component of investment is needed by India for achieving the objectives of economic planning & reforms and maintaining this pace of growth and development of the economy.


It is seen that large amount of FDI flows are confined to the developed economies. But 1997 onwards there is a striking increase in the FDI inflows to developing economies. Developing economies fetch a good share of 40 percent of the world FDI inflows in 1997 as compared to 26 percent in 1980s. Among developing nations, Asian countries received maximum share (16%) of FDI inflows as compared to other emerging developing countries of Latin America (8.7 %) and Africa (2%).

India’s share in World FDI rose to 1.3% in 2007 as compared to 0.7% in 1996.This can be attributed to the economic reform process of the country for the last 20 years. China is the most attractive destination and the major recipient of global FDI inflows among emerging nations. India is at the 5th position among the major emerging destinations of global FDI inflows. The other preferred destinations apart from China and above to India are Brazil, Mexico and Russia. It is found that FDI inflows to India have increased from 11% in 1990-99 to 69% in 2000-2007.

FDI as a strategic component of investment is needed by India for its sustained economic growth and development. It’s necessary for creation of jobs, expansion of existing manufacturing industries and development of the new one. It is also needed in the healthcare, education, R&D, infrastructure, retailing and in long term financial projects.

This increased level of FDI contributes towards increased foreign reserves. The steady increase in foreign reserves provides a shield against external debt. The growth in FDI also provides adequate security against any possible currency crisis or monetary instability. It also helps in boosting the exports of the country. It enhances economic growth by increasing the financial position of the country. The growth in FDI contributes toward the sound performance of each sector (especially, services, industry, manufacturing etc.) which ultimately leads to the overall robust performance of the Indian economy.

A comparative analysis of FDI approvals and inflows reveals that there is a huge gap between the amount of FDI approved and its realization into actual disbursements. A difference of almost 40 per cent is observed between investment committed and actual inflows during the year 2005-06. All this depends on various factors, namely regulatory, procedural, government clearances, lack of sufficient infrastructural facilities, delay in implementation of projects, and non- cooperation from the state government etc.

When international institutions like World Bank and IMF declared that the future belongs to the East, quickly everyone identified China and India to be the future hubs. One thing is clear that with the developed economies achieving only limited growth range between less than 1% to a high of 3%, China, India and other developing nations will continue to attain high growth levels; in so doing giving a push towards a higher world economic growth.

Indeed, India needs a business atmosphere which is conducive to the needs of business. As foreign investors don’t look for fiscal concessions or special inducements but they are more of a mind in having access to a consolidated deed that specifies standard dealing procedures, rules and regulations, sanctions, and opportunities in India. This can be achieved only if India implements its 2ndgeneration reforms in totality and in right direction. Then no doubt the 3rdgeneration economic reforms would make India not only a promising FDI destination in the world but also set an example for the rest of the world by achieving what was predicted by Goldman Sachs that from 2007 to 2020, India’s GDP per capita (in USD) will quadruple and Indian economy will overtake France and Italy by 2020, Germany, UK and Russia by 2025, Japan by 2035 and US by 2043.

-By Arpit Apoorva