Impact of Foreign Investment Flows on Indian Economy in the Post Liberalisation Era

Dr. Tom Jacob

Thirty years have passed since the Indian economy began to experience and experiment with foreign investment. Opening the doors of the Indian economy for foreign investment led to a surge in cash inflow here and much has been heard and said - both positively and negatively- about its impact on the economy. This study is an attempt to verify what is heard and explore what is not heard about this impact in the context of the dearth of comprehensive studies, taking FDI and FPI together. Thus, this study attempts to understand how strong the grip of foreign investment is on the Indian economy through its two arms – Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI).

The study covers a period of thirty years, from 1991-92 to 2020-21. The data required for the study has been mainly collected from secondary sources and analysed with the help of descriptive and inferential statistics like Auto Regressive Distributed Lag (ARDL) Model, Vector Error Correction Model (VECM) etc. The impact of foreign investment on the Indian economy has been assessed mainly by analysing the relation and the consequent impact of foreign investment on the various macroeconomic variables of the Indian economy under the presumption that the majority of them have a positive relation and impact with the foreign investment, with only mild or moderate negative impact, if any, on the minority of the macroeconomic variables and vice versa.

Since a clear dominance of the positive impact of foreign investment on the various macroeconomic variables of the Indian economy along with only a moderate negative impact via inflation and volatility are found, the study concluded that foreign investment has a positive impact on the Indian economy and it is the outcome of the combined and indistinguishable contributions of both FDI and FPI. However, the study advocates some preference for FDI as it is found that FDI contributes more positively to all the macroeconomic indicators taken for analysis, while FPI contributes less to the economic growth and exchange rate and more to inflation and volatility. The study concludes by reminding and warning that the hitherto exhibited positive impact of foreign investment on the Indian economy may not continue in the future also and hence, points out the urgency of taking enough precautionary measures to overcome the evils associated with foreign investment and to counter and withstand the occurrence of an unforeseen sudden discontinuance or withdrawal of foreign investment from the Indian economy.

Dr. Tom Jacob is a faculty member of the Research Department of Commerce, Christ College (Autonomous), Irinjalakuda, Kerala. He earned his Bachelor’s degree in Commerce from St. Aloysius College, Elthuruth, Thrissur and Master’s degree from Government College, Thrissur, Kerala. He completed his M.Phil from Cochin University of Science and Technology and Ph.D from the University of Calicut. His areas of research interest include international finance, capital market, derivative finance, risk management, applied economics etc. He has published more than 30 articles in journals of national and international repute, besides four books for undergraduate and postgraduate students. He was honoured with four Best Paper Awards in International Conferences. He has also completed a UGC-sponsored minor project.

Contents

Acknowledgements

Tables and Figures

Abbreviations

1. Introduction
2. Review of Literature
3. Structure and Composition of Foreign Investment in India
4. Determinants of Foreign Investment in India
5. Impact of Foreign Investment on the Macroeconomic Variables of the Indian Economy
6. Impact of Foreign Investment in the Indian Capital Market
7 Findings and Conclusion

Bibliography

Glossary