Impact of FDI on Indian Economy

Economic policymakers in most countries go out of their way to attract foreign direct investment (FDI). A high level of FDI inflows is an affirmation of the economic policies that the policymakers have been implementing as well as a stamp of approval of the future economic health of that particular country. There is clearly an intense global competition for FDI. India, for its part, has set up the “India Brand Equity Foundation” to try and attract that elusive FDI dollar.According to UNCTAD (2007), India has emerged as the second most attractive destination for FDI after China and ahead of the US, Russia and Brazil. While India has experienced a marked rise in FDI inflows in the last few years (doubling from an average of US$5-6 billion the previous three years to around US$ 19 billion in 2006-07) , it still receives far less FDI flows than China or much smaller economies in Asia like Hong Kong and Singapore was ahead of India. Not surprisingly India's growth strategy has depended predominantly on domestic enterprises and domestic demand as opposed to FDI and export demand. For instance, India's FDI as a share of GDP in 2007 represented only about 1.7 percent compared to 2.8 percent in China and even below Pakistan, and its share of gross fixed investment is 5.2 percent compared to 7.0 in China and 16.7 percent in Pakistan. FDI has been a relatively limited source of external financing and reserve buildup in India. This paper aims at analyzing the impact of FDI inflow in India