INTERNATIONAL JOURNAL OF RESEARCH AND SCIENTIFIC INNOVATION (IJRSI)
ISSN No. 2321-2705 | DOI: 10.51244/IJRSI |Volume XII Issue VIII August 2025
Page 798 www.rsisinternational.org
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Impact of Foreign Direct Investment in India
1Mr. Anant. Hanumanta Pujari, 2Dr. N. S. Mugadur
1Research Scholar, Karnatak University Dharwad – 580003, Karnatak, India.
2Associate Professor, Department of Economics, Karnatak University Dharwad, India
DOI: https://doi.org/10.51244/IJRSI.2025.120800066
Received: 06 Aug 2025; Accepted: 11 Aug 2025; Published: 04 September 2025
ABSTRACT
The role and effects of Foreign Direct Investment (FDI) in India, primarily focusing on the period after the
1991 economic liberalization. The study's central hypothesis posits a positive impact of FDI on India's
economic growth. Key objectives included analyzing FDI trends and patterns, assessing its association with
economic growth, studying its overall impact, and suggesting measures for increased inflows. The research
finds that FDI has served as a crucial stimulus for India's economic growth, establishing India as a favorable
investment destination. FDI inflows witnessed tremendous growth post-liberalization, with the Compounded
Annual Growth Rate (CAGR) significantly increasing from 25.46% in the pre-liberalization period to 34.73%
subsequently, indicating the positive effect of reform policies. Sector-wise, Services, Construction
Development, and Telecommunications attracted the most FDI, while Mauritius, Singapore, U.K., and Japan
were identified as the leading source countries. A strong positive correlation (+0.89) was observed between
FDI and economic development. The report also delves into the impact of FDI on the Indian retail sector,
discussing both potential benefits like supply chain improvement and job creation, and concerns such as the
impact on small merchants. Challenges hindering higher FDI inflows include inadequate infrastructure,
stringent labour laws, corruption, limited state government authority, and high corporate tax rates. To address
these, the study suggests improving infrastructure, adopting flexible labour laws, revisiting sectoral caps,
promoting Greenfield projects, and strengthening R&D. In conclusion, FDI has undeniably boosted India's
economic life and contributed positively to GDP growth, but its full potential can only be realized by
overcoming existing structural and policy hurdles.
Keywords: FDI, Economic Growth, Development
INTRODUCTION
The report begins by introducing Foreign Direct Investment (FDI) as a significant factor in the development of
any economy, especially developing countries like India. It emphasizes FDI's role in bridging the gap between
investment and saving, promoting efficiency through superior technology, and generating new production
opportunities. The report also highlights that FDI is a non-debt capital flow and a leading source of external
financing.
The study acknowledges the historical context of FDI in India, tracing it back to the British East India
Company and noting the dominance of British capital before independence. It details how FDI policy evolved
from a cautious approach after independence to a more liberal stance following the economic crisis of the early
1990s, driven by severe balance of payment issues. The report notes that India's post-1991 economic reforms
were evolutionary and incremental.
The core problem addressed by the study is the lack of an in-depth examination of FDI in India since
liberalization, despite significant changes in trends, patterns, and impact.
Objectives of the Study
The objectives of the study are:
INTERNATIONAL JOURNAL OF RESEARCH AND SCIENTIFIC INNOVATION (IJRSI)
ISSN No. 2321-2705 | DOI: 10.51244/IJRSI |Volume XII Issue VIII August 2025
Page 799 www.rsisinternational.org
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To analyze the trends and patterns of FDI in India.
To assess the association between FDI and economic growth.
To study the impact of FDI in India.
To suggest suitable measures for stepping up FDI.
Hypothesis of the Study
"There is positive impact on economic growth of the Indian economy".
METHODOLOGY
The study primarily focused on the period after the 1991 economic liberalization in India. The study employed
a multi-faceted analytical approach to achieve its objectives:
Scope and Focus: The study primarily focused on the period after the 1991 economic liberalization in India. It
reviewed FDI trends at both global and Indian levels, with a specific emphasis on the pre- and post-reform
periods4. The research also delved into the impact of FDI on the Indian retail sector. Data analysis for
cumulative FDI equity inflows was conducted for specific timeframes:
Industry-wise patterns: From April 2000 to February 2013.
Country-wise analysis: From April 2000 to March 2013.
FDI and economic growth assessment: Covered the period from 1980-81 to 2009-10
Analysis of Trends and Patterns: FDI inflows were reviewed at global and Indian levels, distinguishing
between pre- and post-liberalization periods.
Data Sources: The data for FDI inflows was sourced from Dipp.nic.in. The study's table detailing year-wise
FDI inflows in India covers data up to 2024, with 2024 data covering January–December.
Trends and Patterns of FDI
This study reviews the trends of FDI at both global and Indian levels, focusing on pre- and post-reform
periods.
Global Trends: Global FDI flows remained stagnant in 2010 but showed an uneven pattern, contracting in
advanced economies while recovering in developing economies like those in Latin America and Asia.
Developing countries' share in total FDI inflows has increased to over 50 percent.
FDI in India: The report shows a sharp rise in FDI inflows from 2005 onwards due to new policy
broadenings. During the pre-liberalization period (1980-90), FDI inflows were minimal and fluctuating, with a
Compounded Annual Growth Rate (CAGR) of 19.05 percent. Post-liberalization (since 1991), FDI inflows
increased substantially, with a CAGR of 24.28 percent from 1991 to 2009-10. This indicates that liberalization
had a positive impact on FDI inflows. Despite significant growth, India's FDI inflows are still considered less
compared to other developing nations globally.
Pattern of FDI (Industry-wise): The study notes that the Service sector, Tele-communications, and
Construction Activities attracted the maximum FDI equity inflows cumulatively from April 2000 to February
2013, accounting for 19%, 7%, and 12% respectively. Conversely, some non-priority sectors received the most
FDI, which is not satisfactory from a development perspective.
Country-wise analysis: Mauritius, Singapore, and Japan are identified as the major sources of FDI inflows
into India, contributing 38%, 10%, and 8% respectively, from April 2000 to March 2013.
INTERNATIONAL JOURNAL OF RESEARCH AND SCIENTIFIC INNOVATION (IJRSI)
ISSN No. 2321-2705 | DOI: 10.51244/IJRSI |Volume XII Issue VIII August 2025
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Table-1: Details of Year wise FDI Inflows in India
Source: Dipp.nic.in *2024 data covers January–December 2024
Year Total FDI (US$ million)
2000 2,427
2001 3,571
2002 3,361
2003 2,080
2004 3,214
2005 4,355
2006 11,120
2007 15,922
2008 37,095
2009 27,045
2010 21,006
2011 34,622
2012 22,789
2013 22,038
2014 28,785
2015 38,133
2016 46,402
2017 43,576
2018 42,408
2019 47,643
2020 64,678
2021 51,339
2022 52,345
2023 41,326
2024* 53,059
INTERNATIONAL JOURNAL OF RESEARCH AND SCIENTIFIC INNOVATION (IJRSI)
ISSN No. 2321-2705 | DOI: 10.51244/IJRSI |Volume XII Issue VIII August 2025
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FDI and Economic Growth
The magnitude of FDI inflows during pre and post-liberalization periods (1980-81 to 2009-10) using Annual
Growth Rate (AGR) and Compounded Annual Growth Rate (CAGR).
Figure-1: Sector-Wise FDI Inflows
FDI is considered a crucial developmental tool for growth, complementing domestic investment to
bridge the gap between investment needs and savings.
The study found a high degree of correlation between FDI and economic development (Karl Pearson
correlation value of +0.89).
The CAGR for FDI inflows increased significantly from 25.46 percent in the pre-liberalization period
to 34.73 percent in the post-liberalization period, demonstrating the positive impact of liberalization
policies.
The report discusses reasons for low FDI flow, including lack of adequate infrastructure, stringent labor
laws, corruption, limited decision-making authority with state governments, limited scale of Export
Processing Zones, high corporate tax rates, and indecisive government/political instability.
Impact of FDI on Indian Economy
This study investigates the impact of FDI on India's overall economic growth, specifically looking at sector-
wise and country-wise inflows, and its effect on the retail sector.
FDI positively impacts a country's trade balance, labor standards, skill development, technology
transfer, and overall business climate.
It serves as a source for filling gaps in savings, foreign exchange reserves, revenue, and
management/technological expertise.
INTERNATIONAL JOURNAL OF RESEARCH AND SCIENTIFIC INNOVATION (IJRSI)
ISSN No. 2321-2705 | DOI: 10.51244/IJRSI |Volume XII Issue VIII August 2025
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The report discusses the opening of the Indian retail sector to FDI, starting with wholesale cash and
carry (1997), then single-brand retail (2006), and finally multi-brand retailing (2012).
The positive aspects of FDI in retail include increased investment in supply chains and cold storage,
reduced wastage, better options for consumers, economic growth through international products, job
creation (estimated 1 million jobs in three years), and better prices for farmers.
However, negative aspects include potential adverse effects on 50 million small merchants, unclear
profit distribution, potential price increases for economically backward classes, job and profit losses for
existing retailers, and limited benefits for small farmers and rural India.
The report highlights China's successful experience with FDI in its retail sector as a model.
Findings and Suggestions
The report culminates with a summary of its key findings and offers policy suggestions.
Key Findings:
FDI is a significant stimulus for India's economic growth.
India is considered a favourable investment destination, especially post-liberalization.
The service sector is the most dominant area attracting FDI.
FDI has created numerous employment opportunities in the service sector.
Mauritius and Singapore are the top two source countries for FDI in India.
Some crucial sectors like Defence, Atomic Energy, and Agriculture are deprived of significant FDI.
Institutional factors contribute to low FDI in India.
There's a strong interaction between domestic industrial policies and FDI policy.
FDI has a good future growth potential in the Retailing and Real Estate sectors in India.
FDI in retail can lead to benefits from organized supply chains and reduced wastage.
Regression results show a significant positive relationship between economic openness (less
restriction) and FDI inflow.
Suggestions:
Policy makers should focus on attracting diverse types of FDI.
FDI should be utilized to enhance domestic production, savings, exports, technological learning, and
market access.
Government should open doors to foreign companies in export-oriented services to increase demand
for unskilled workers and wage levels.
Strengthen education, health, and R&D systems to promote sustainable development through FDI.
FDI should guide deeper linkages with the economy for stability.
Utilize the appreciation of the Indian Rupee as an opportunity to attract more FDI.
INTERNATIONAL JOURNAL OF RESEARCH AND SCIENTIFIC INNOVATION (IJRSI)
ISSN No. 2321-2705 | DOI: 10.51244/IJRSI |Volume XII Issue VIII August 2025
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Ensure optimum utilization of funds and timely implementation of programs.
Simplify and relax entry barriers for business activities and provide investor-friendly laws and tax
systems.
Protect domestic investors and promote trade within the country.
Address geographical disparities of FDI across states.
Encourage FDI in the education sector (with quality measures) and strengthen R&D.
Adopt innovative policies and good corporate governance practices on par with international standards.
CONCLUSION
FDI as a vital tool for India's economic progress, mapping its journey from a restrictive past to a liberalized
present, identifying its impact across sectors, acknowledging challenges, and charting a course for future
growth by leveraging foreign capital, much like a gardener cultivates a plot by strategically adding nutrients
(FDI) to foster a thriving ecosystem (economy).
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