Trade, FDI, and Growth: Policies, Trends, Patterns, and Econometric Evidence from India

This paper provides an overview of the evolution of India’s trade and FDI policies, emphasizing their impacts on economic growth rates. During the post-reform period, India has seen remarkable growth in trade and FDI. However, inward FDI has primarily targeted the domestic market rather than supporting export-oriented growth. A comparative analysis with China reveals India’s progress in export diversification but lags in specialization and global value chain (GVC) participation. Policy reforms are necessary to enhance GVC integration and leverage FDI for export-led growth and job creation, emphasizing the need to capitalize on India’s comparative advantages for faster export expansion. We carry out an econometric analysis of the impact of FDI and trade openness on sector-level economic indicators using panel data from 1999–2000 to 2014–2015. The analysis focuses on the effects of trade openness and FDI on sector-level value added and employment. The findings indicate a positive effect of trade and FDI openness on sector-level real value added and employment. Importantly, import openness positively affects export performance, suggesting that lowering tariffs not only boosts imports but also exports. However, FDI appears to promote imports more than exports, reflecting India’s inclination towards domestic market-seeking FDI rather than export promotion. This trend aligns with India’s low participation in GVCs. The study underscores the need for policy reforms aimed at enhancing India’s GVC participation to leverage FDI for export-led growth and job creation.