Impact of Foreign Direct Investment on GDP: Practical Evidence from India

Abstract

India is one of the developing nations that have consistently received the foreign direct investment inflow as it is
believed that this will add to its gross capital formation, technology transfer, competitiveness and industrial productivity
among others. Despite the level of FDI attracted by India compared with its resource base and potential need, the FDI inflow
has not translated meaningfully on the economic growth of the country. Perhaps, it has not significantly impacted on the
India Gross Domestic Product (GDP). This study therefore seeks to examine the impact of the FDI on the India’s GDP. This
study made use of secondary data, which was obtained from the Central Bank of India’s statistical bulletin, annual reports
and statement of accounts. Data obtained spanned from 2000-2014 and were subjected to Dynamic Least Square regression
analysis using E-views 7. Findings revealed that FDI has a positive and significant relationship with India’s GDP. This
study therefore recommends that: (i) the government of India should put in place economic policies that will attract more
foreign investors and specifically, barriers such as arbitrary tariffs, high tax levies should be seriously reduced among others ; (ii)
Infrastructures should also be provided, especially power supply, as investors are also interested in the ease and cost reduction
aspect of their production; and (iii) the government of India should also ensure a politically stable environment, as no investor
will be willing to invest in a crisis prone environment. This study concludes that if the above recommendations are
implemented, there is the possibility of increase and high inflow of FDI, which will positively impact on the Indian growth
and development at large.