IMPACT OF ECONOMIC REFORMS ON FDI IN INDIA: STUDY AND SUGGESTIONS

Although India begun its liberalisation process due to crisis, it is evident from the analysis that the economic reforms have benefited a lot in terms of attracting FDI which has reached a historic high in recent years which in turn have significantly contributed to the growth of economy in general and exports in particular. The unprecedented emergence of India in South Asian region especially after the initiation of economic reforms program raises the issue of how well the FDI inflows exploit the reforms process and thereby affect its economies in the region. Thus, analyzing the regional impact of Indian economic reforms in India becomes increasingly relevant. The results reveal that there is a positive spillover effect of economic reforms on the FDI inflows of India which increased substantially during the post reforms period. This relation is statistically significant at 1% confidence level. However, from the viewpoint of long-run growth, the “old economy” must be further unshackled. A key deficiency of India’s growth process has been the failure of the conventional industry to pull workers out of agriculture into gainful employment.

Today, in contrast to virtually all successful developing economies, approximately 60 percent of India’s workforce still remains in agriculture. Trade liberalization must proceed apace with all tariffs brought down to mutually agreeable levels in the coming decade. Infrastructure is another important area of reforms. Roads, railways, and ports all need expansion as well as improvement in the quality of service. The government has recently taken steps in this direction, particularly in the area of roads, but the pace remains slow. Reforms involving privatization of power generation and distribution have been undertaken in several states recently but no spectacular successes have emerged as yet. Economic reforms of the last decade have virtually bypassed agriculture whose growth rate is oscillating around 2.5%. At the same time, the task of implementing reforms in a democracy is complex. Therefore, those wishing for rapid reforms will need to be patient. The good news, however, is that the experience of the past decade shows that change can occur.

CONCLUSION

It is notable that the policy framework everywhere plays an important role in determining the effects of FDI on a host country. What then is the optimum level of FDI a country should aim for? The optimum level could be defined as that level of FDI which generates a targeted growth rate of national income. There is also the opinion that at present, it is not FDI which promotes growth but it is growth which attracts foreign investment. This may be so but undeniably FDI is one of the several factors which contribute to growth. The country may need much larger volumes of FDI than it currently attracts if it were to attain growth rates in excess of 10 percent per annum so as to bolster its economy.

Representative APR 391%

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