International Council for Education, Research and Training

Impact of Foreign Direct Investment on Human Development Index: A Study of Indian Economy

Bhutani, Umang1, Chhabra, Vaishali2 and Makkar, Suman3

1Assistant professor in Dev Samaj College for women Sector 45B, Chandigarh

2Assistant Professor of Economics in GGDSD College Sector-32C, Chandigarh

3Professor of Economics in Punjab University Chandigarh

Abstract

Foreign Direct Investment (FDI) is widely recognized as a crucial catalyst for economic growth, while the Human Development Index (HDI) serves as a comprehensive measure of a nation’s social and economic progress. Despite numerous studies investigating the connection between FDI, HDI, globalization, and other factors, the precise nature of the relationship between FDI and HDI remains somewhat unclear. This research paper aims to bridge this gap by empirically examining the impact of FDI on India’s HDI score. Utilizing the time-series data from World Bank Indicators and the Handbook of Indian Economy spanning the period 1990-2022, the study employs the Autoregressive Distributed Lag (ARDL) model to analyze the long-run impact of FDI on HDI. Furthermore, Error Correction Model is employed to investigate the short-run relationships between these variables. The empirical findings indicated the existence of long-run and short-run relationship between FDI and HDI along with a positive response of both the variables to a shock (impulse) in the corresponding variable. These findings are expected to provide valuable insights to the extent to which FDI contributes to human development in India. By understanding the nature and strength of this relationship, policymakers can formulate more effective strategies to attract and leverage FDI for enhancing human development outcomes, including improving education, healthcare, and overall quality of life for Indian citizens.

Keywords: Foreign Direct Investment, Human Development Index, ARDL, India.

Impact Statement

Foreign Direct Investment (FDI) plays a critical role in shaping the trajectory of a nation’s economic and social development. In the context of the Indian economy, FDI has not only contributed to capital formation and industrial growth but also significantly influenced components of the Human Development Index (HDI) such as education, health, and standard of living. Through technology transfer, employment generation, and improved access to services, FDI has the potential to uplift marginalized communities and reduce regional disparities. However, the impact is not uniformly distributed and often depends on the sectoral allocation and regional absorption capacity of investment. This study highlights the complex interplay between FDI inflows and human development outcomes in India, emphasizing the need for strategic policy frameworks that ensure FDI contributes meaningfully and equitably to national human development goals. An informed understanding of this relationship can guide policymakers to align foreign investment with inclusive and sustainable development priorities.

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