An Empirical Analysis of the Impact of Foreign Direct Investment on Economic Activity of India

Abstract

FDI in India has - in a lot of ways - enabled India to achieve a certain degree of financial stability, growth and development. This money has allowed India to focus on the areas that may have needed economic attention, and address the various problems that continue to challenge the country. India launched a series of progressive economic liberalization policies to overcome the structural defects that has caused the economic crisis in 1991. With these policy changes, foreign direct investment (FDI) into India has increased rapidly since 1992. Foreign direct investment to India increased from a mere $97 million in 1990-91 to $5,526 million in 2004-05 because of institutional restructuring. The study indicates the co-movement and converging behaviour between the two the movement of FDI and GDP. FDI is not closely following the GDP in the initial period but after the year of 1992 it closely converges with movement in the FDI. The FDI inflows attained its peak in the mid of 2007 and the GDP also responded quickly to it and attained its all time hike. The results shows that FDI did not Granger cause GDP but interestingly GDP has Granger cause on FDI. This result shows the inter-relationship between these two variables. An increased domestic economic activity will attract foreign investors to invest in India. Because of the huge population, increased domestic production in various industries, infrastructural facilities, large domestic market would attract foreign investors.