Short answers, pulled from the story.
Dhalsim first appeared in Street Fighter II: The World Warrior on the 1st of March 1991. He was originally conceived in 1988 by Capcom as a character named Great Tiger before the concept was abandoned and later revived.
Character designer Akira Yasuda, known as Akiman, finalized the design of Dhalsim for Street Fighter II. The final design was influenced by a sketch from fellow designer Yoshiaki Ohji and sprite artist Takashi Hayashi gave Dhalsim a dry, dehydrated appearance.
The name Dhalsim was derived from Dhalsima, a martial artist from the Indian subcontinent. A later rumor confirmed by Akiman in 2014 suggested the name was inspired by a curry restaurant near Capcom's old offices in Osaka.
The stretching mechanic was originally intended to be a short-range attack called the Zoom Punch, inspired by a technique from the manga series JoJo's Bizarre Adventure. Sprite artist Takashi Hayashi increased the length of the limbs significantly to ensure the character felt unique and balanced within the game.
Capcom redesigned Dhalsim's appearance for Street Fighter V to address a disconnect between his current design and how Hindu yoga practitioners were viewed. The redesign added a turban and beard while removing his emaciated appearance to better align with cultural perceptions.
Dhalsim ranked at number five in the list of Best Characters of 1991 by the Gamest magazine in Japan. This ranking established his immediate popularity among players despite mixed reception regarding his cultural stereotypes.