IMPACT OF FDI INFLOW ON SERVICE SECTOR IN INDIA: AN

EMPIRICAL ANALYSIS
Priya Dwivedi1 and Jyoti Badge1

Corresponding Author: Priya Dwivedi

Ankita Basande 06

Krishna Chauhan 15

Pooja Dedhiya
22

Sarika Karvir 57

Mitali Pitkar 83
ABSTRACT
For the economic development of a country, an important role is played by Foreign Direct
Investment (FDI). In this research paper, we are dealing with effect of FDI inflows on Indian
economy. The relationship between FDI inflow and GDP especially in service sector have been
investigated and a statistical model was developed on economic data. After the analysis we
conclude that FDI have positive and significant impact on GDP.

INTRODUCTION
Foreign capital has significant role for every national economy regardless of its level of
development. For the developed countries it is necessary to support sustainable development. For
the developing countries, it is used to increase accumulation and rate of investments to create
conditions for more intensive economic growth. Foreign capital can finance investment and
stimulate economic growth, thus helping increase the standard of living in the developing world.
India is the second fastest growing major economy in the world. India adopted a socialist
approach for foreign trade and foreign direct investment.

ROLE OF FDI IN INDIAS SERVICE SECTOR

According to International Monetary Fund (IMF), FDI is defined as an investment operating in
an economy other than that of the investor. The investors purpose is to have an effective voice
in the management of the enterprise (IMF, 1977)

FDI is not permitted in arms and ammunition, atomic energy, railway transport, coal and lignite,
mining of iron, manganese, chrome, gypsum, gold, diamond, copper, and zinc.

There are many advantages of FDI in India, like India has a huge market size and a fast
developing economy, there is the availability of diversified resources and cheap labor force.

Service sector has emerged as the largest and fastest growing sector in the global economy

Service sector plays a central role in growth economy.

FDI is widely viewed as being one of the principal vehicles for the international transfer of
technology.

The Service Sector has played a dominant role in the Indian Economy with a 57.3 per cent share
in the GDP and a growth of 10.1 per cent in 2009 -10 (Economic Survey 2010-2011, RBI).
Foreign Direct Investment (FDI) has been instrumental behind the growth of service sector in
India. The FDI inflow between 1991 and 2008 had increased by 53791.2 million dollars. FDIs
contribution to service sector has grown. The flow of FDI in Indian service sector has boosted
the growth of Indian economy; this sector has contributed a large share in the growth of Indias
GDP.

LITERATURE REVIEW
The study revealed that there was a long term relationship between FDI and service sector and
also economic growth in India. FDI is the outcome of mutual interest of multinational company
and host countries. The aspects of foreign direct investment are analyzed by most of the studies
and they also examined the determinants of FDI. The sector wise shift of FDI in last two decades
have shown a dramatically change. There is new growth in Indian financial sector after
liberalization insurance industry on a rapid rate. Government of India has issued new license for
privatization of Indian banking sector and is assumed to continue with the growth. The nexus
between FDI and economic growth has been a subject for great discussion.

In the context of increasing competition between the nations and sub-nations to attract FDI, this
investigation analyzes the emerging trends of FDI inflow into India. This analysis suggests that
FDI inflows show an increasing trend during the post reform period. Country-wise comparison
of FDI inflow shows increased trend as compared to other developing economics in recent year.

PROBLEM FORMULATION
The major objection of this paper is to analyze impact of FDI on service sector of Indian GDP
growth to see if the relationship between FDI inflow and GDP is positive or not. The use
HYPOTHESIS FORMULATION helps us to find out whether the effect of FDI inflows is
significant on our GDP.

HYPOTHESIS FORMULATION:

Ho: shows that there is no significant relationship between FDI and GDP.

H1: shows that there is significant relationship between FDI and GDP.
RESEARCH METHODOLOGY
Correlation analysis: Correlation analysis measures the relationship between two items, for
example, a security's price and an indicator. The resulting value (called the "correlation
coefficient") shows if changes in one item will result in changes in the other item. You can use
correlation analysis in two basic ways to determine the predictive ability of an indicator and to
determine the correlation between two securities. Correlation analysis is also valuable in gauging
the relationship between two securities. Often, one security's price "leads" or predicts the price of
another security. For example, the correlation coefficient of gold versus the dollar shows a strong
negative relationship. This means that an increase in the dollar usually predicts a decrease in the
price of gold.

Regression analysis: Regression analysis is a statistical tool for the investigation of relationships
between variables. Usually, the investigator seeks to ascertain the causal effect of one variable
upon anotherthe effect of a price increase upon demand, for example, or the effect of changes
in the money supply upon the inflation rate. To explore such issues, the investigator assembles
data on the underlying variables of interest and employs regression to estimate the quantitative
effect of the causal variables upon the variable that they influence. The investigator also typically
assesses the statistical significance of the estimated relationships, that is, the degree of
confidence that the true relationship is close to the estimated relationship.

Data and variable: A lot of research have been done in order to understand the relationship
between FDI and impact on economic growth of the service sector. The data set consists of FDI
inflow (US$ mn) and Percentage growth of GDP (in Service Sector) through FDI. The data set is
annual and covers the time period of 2000-2012.

LEARNINGS
FDI is an important stimulus for growth of Indian economy.

Banking and Insurance is the first and telecommunication is the second segment of service sector
in India.

FDI creates jobs for skilled employees in India service sector.

CONCLUSION
The current study of FDI showed a positive and significant impact of foreign capital inflows on
Indian economy in order to improve ease of doing business and attracting investments. Growth
in foreign investments helps improve the countrys balance of payments (BOP) situation and
strengthen the rupee. It can also be observed from the above analysis that at the sectoral level of
the Indian economy, FDI has helped to raise the output, productivity and employment in service
sector. In future work, effect of FDI will be studied by taking other micro-economic factors
(trade openness, interest rates, exchange rates, inflation, etc.)

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