Opening the Gates: India’s FDI Journey

By Jaya Prakash Pradhan December 6, 2000 1K

Pages from Vol 41 No 3 Oct Dect 2000 e1782144652195

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Type	Journal article
Title	“Foreign Direct Investment in India: Policy, Trends & Determinants”
Authors	K. G. Radhakrishnan & Jaya Prakash Pradhan
Published	2000 · Productivity, 41(3), pp. 454–462 · National Productivity Council of India
Coverage	India’s inward FDI · 1955–1999
Read	Paper (PDF)

This is a plain-language summary of “Foreign Direct Investment in India: Policy, Trends & Determinants” (Radhakrishnan & Pradhan, Productivity, 2000).

In short:

This early study tracks India’s inward FDI across three policy phases and shows that the 1991 liberalisation marked a clear turning point, with foreign investment accelerating sharply afterwards.
Testing what actually attracts FDI to India, it points to four crucial determinants: the size of the domestic market, economic openness, the exchange rate, and sound macroeconomic fundamentals.
Some factors often assumed to matter — infrastructure, the market growth rate, domestic investment levels — showed up as less important than expected in this analysis.

The question

Written in 2000, just as the effects of India’s reforms were becoming visible, this study by K. G. Radhakrishnan and Jaya Prakash Pradhan asks two linked questions: how did India’s foreign investment evolve as policy changed, and what really determines how much FDI the country attracts? As one of the earliest pieces in this body of work, it set up themes — the 1991 turning point, the role of market size and openness — that recur throughout the author’s later research.

Three phases of India’s FDI

The study frames India’s inward-investment history as three distinct phases, defined by policy.

In the cautious years (1955–1979), tight restrictions on foreign ownership and a protect-domestic-industry stance kept FDI small — a stock of roughly ₹489 crore built up slowly, growing about 3.5% a year (figures in the rupee values of the time). The partial liberalisation of the 1980s (1980–1990) lifted that to around ₹2,705 crore and quickened growth to roughly 12% a year, though manufacturing still dominated. Then came the open door (1991–1999): radical reform sent the FDI stock to about ₹50,306 crore and annual growth surging to roughly 49%, with the services sector emerging as a major new destination. The shape of the story — a slow climb, then a steep post-1991 take-off — is the clearest signal in the data.

What the 1991 reforms changed

The turning point came from a concrete package of policy changes: India abolished much of its mandatory industrial licensing, opened sectors that had been closed to foreign investors, allowed majority foreign ownership in many areas, set up an investment-promotion mechanism, and simplified approval procedures. Together these shifted India from one of the world’s more closed investment regimes toward an actively welcoming one — and the FDI numbers responded.

What actually attracts FDI

The analytical heart of the paper is its test of which factors drive FDI into India — and here the abstract is specific.

The study identifies four crucial determinants of FDI inflows into India: the absolute size of the domestic market (a large market is a powerful magnet), the openness of the economy, the exchange rate, and a set of sound macroeconomic fundamentals (manageable inflation, fiscal deficit, and debt). The clear policy implication the abstract draws is that to attract the kind of FDI that can accelerate growth — bringing capital, technology, and market access — policy should focus on these levers. The paper also reports that some widely-assumed drivers — infrastructure, the market’s growth rate, and domestic investment levels — appeared less important than expected in its analysis, which is a useful caution against assuming every “good” factor pulls FDI equally.

Why it matters

As an early, India-specific contribution, the paper’s value is in grounding the FDI debate in concrete determinants rather than slogans. Its core message — that market size, openness, the exchange rate, and macro stability are what move FDI — is both intuitive and policy-actionable, and it reappears, refined, across the author’s later work on foreign investment and growth. Read today, it’s also a useful historical snapshot: a view, from the vantage point of 2000, of an investment transformation that was still unfolding.

Read the academic abstract

This paper attempts to explain foreign direct investment in India. It observes that the liberalisation package of 1991 had a significant impact on FDI flows into the country. The crucial determinants of FDI inflows in the Indian context are the absolute size of the domestic market, the exchange rate, the openness of the economy, and a set of sound macroeconomic fundamentals. Therefore, to attract a critical quantum of FDI — which can accelerate the economy’s growth process by bringing in more capital, technology, and market access — policy focus should be on the factors noted above.