Foreign Direct Investment and Poverty Reduction: India in Regional Context

AbstractIt is widely proclaimed that capital account liberalisation would immensely benefit developing economies because once capital controls are lifted capital would flow from the capital abundant rich countries to the capital scarce developing countries. This free movement of capital could possibly increase growth thereby lifting millions out of poverty. India has been gradually liberalising since the 1980s and throughout more capital inflows were observed compared to outflows. Also, the composition of capital flows has been changing since the 1980s – with foreign direct investment (FDI) inflows rising steadily post 1991compared to portfolio and debt flows. However, since 2000, FDI outflows from India have also been witnessed. In this discussion paper, we empirically test the impact of FDI flows on poverty in India for the period 1980-2011. To provide a perspective to India’s performance we also analyse the link between FDI flows and poverty for SAARC countries. For a better understanding of how FDI flows impact poverty, we analyse the outflows and inflows separately. Interestingly, we find that in India FDI inflows contribute to increases in poverty whereas for other SAARC countries they significantly reduce poverty. The impact of FDI outflows in India too is in complete contrast with other SAARC countries. While FDI outflows significantly reduce poverty in India, they turn out to be insignificant for other regional countries.