Evaluating the Economic Implications of FDI and FPI in India: Trends, Challenges, and Opportunities
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Abstract
Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) are pivotal drivers of economic growth and financial stability in emerging markets like India. Over the past three decades, India has progressively liberalized its investment policies, attracting significant inflows of both FDI and FPI, each influencing the economy in distinct ways. This review synthesizes existing literature to examine the historical trends, sectoral distribution, and macroeconomic implications of FDI and FPI on the Indian economy. FDI, typically involving long-term equity participation and managerial involvement, contributes to technology transfer, infrastructure development, employment generation, and productivity enhancement. In contrast, FPI—characterized by short-term capital flows in equity and debt markets—enhances market liquidity and deepens financial markets but also increases vulnerability to global volatility. The analysis highlights the complementary yet contrasting roles of these investments, with FDI providing sustainable growth momentum and FPI offering capital market efficiency. However, risks such as sudden capital outflows, exchange rate fluctuations, and policy uncertainties remain significant challenges. The review underscores the need for balanced policy frameworks that maximize the developmental benefits of FDI while mitigating the volatility risks associated with FPI. This comprehensive evaluation aims to guide policymakers, researchers, and investors in understanding the evolving dynamics of foreign investments in India’s economic landscape.
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