India’s Economic Growth and the Role of FDI

India is widely recognized as an emerging global economic power. Indian economy recorded rate of economic growth 8.4 per cent in the current fiscal year 2005-06. This is evidence enough for an economy to be called as high performing economy. The sustained high rate of economic growth in the first half of the first decade of the 21st century has allowed India to join the club of high growth performing economies of East Asia and China. Indian policy makers have been encouraged to pursue more vigorously the on going reform program because of the fact that it is their firm belief that high growth is the result of liberal economic policy. Therefore, Indian policy makers are preparing through their painstaking endeavors to achieve double digit rate of growth in the coming years. Foreign direct investment has been seen as a dominant determinant to achieve high rate of economic growth because it brings in scarce capital resource, raise technological capability and increase efficiency through enhancing domestic competition. Chinese experience of achieving high growth through foreign direct investment has been sited as worth emulating policy lesson for the Indian economy. However, the skeptics have argued that the high growth rate of the Indian economy is path dependent and have had the long experience of institution building which ultimately resulted into high rate of economic growth. Furthermore, the structure of the Indian economy is such that it is highly rural oriented and large section of population is still very poor and lacking essential capabilities to participate in the modern process of economic growth. There is growing evidence of marginalization of the large section of the rural population and increasing unemployment in the rural areas. The economic advisory council of Prime Minister of India has recently cautioned for adverse consequences of such a grave situation in the face of high performing Indian economy. The market oriented policies normally have exclusionary impact which needs to be prevented through articulate response of the policy makers. Therefore, this paper strives to examine current status and future prospects of the Indian economy with special reference to the role of foreign direct investment in achieving higher rate of economic growth and the removal of structural constraints. The paper is divided into five sections. Apart from introductory remarks in section one, section two examine the growth and structure of the Indian economy since 1950-51. Important changes in the foreign direct investment policy of the government of Indian are discussed in section three. The analysis of trends of FDI and likely impact has been presented in section four. Concluding remarks are presented in the last section.