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India has seen a huge increase in the levels of Foreign Direct Investment inflows over the last 20 years. Over this time the Indian economy has evolved significantly in terms of infrastructure, GDP per capita and the sector-level makeup of the economy. Many industries have developed substantially and are now key drivers of the Indian growth story we’re seeing today. FDI has no doubt played a role in these changes and, in particular, played a key role in the development of the thriving IT sector we see in India today.
Estimated dollar values of FDI inflows were 76.2 billion in 2007 according to UNCTAD compared to 1.4 billion in 1990, giving an average annual growth rate of 26.5%. Kenya’s corresponding values are 1.9 billion and 668 million. Here we see the divergence in FDI volume since 1990 between Kenya and India.
Although FDI has no doubt been a positive force for the Indian economy, overall the direct impact of FDI on these changes has been weak enough compared to other global economies. According to Agrawal and Khan of the Indian Institute of IT and Management, a 1% increase in the level of FDI led to a 0.02% increase in GDP during the period 1993-2009. This compares unfavourably with their estimate for for China, where a 1% increase in the level of FDI led to a 0.07% increase in GDP.
Why has this been the case?
There are a few key reasons behind the relatively poor performance of FDI compared to other countries. According to Agrawal and Khan, a lot of this is due to the poor levels of infrastructure in many areas of India. Especially in rural areas, India lacks a lot of basic infrastructure such as roads, electricity and running water. This goes some ways to explaining why India’s industrial contribution to GDP (26.4%) pales in comparison to China’s (46.8%).
As a result FDI in India has tended to accumulate in the service sector which is less intensive in terms of utility and transportation infrastructure. This has obvious benefits for the...