Foreign Direct Investment, Select Macroeconomic Variables And Economic Growth In India - A Linkage Analysis

Abstract

This study examines the long run relationship between foreign direct investment (FDI), select macroeconomic variablesand their impact on economic growth in India over a period 1995 to 2014 using time series analysis. TheJohansen's Cointegration procedure is applied to test the co-integrating relation between variables followed by a vector error correction model (VECM) and the VAR Granger causality I Block Exogeneity Wald test to extract the direction of the causal relationship and the impact of FDI inflows on economic growth. Our results suggest that FD! is an important vehicle for promoting economic growth not only by itselfbut also does so indirectly through multiple channels such asGDP growth, labor force participation rate, imports, trade openness, taxes on international trade and the financial markets represented by nifty 50 index. Hence, this paper enhances the literature on FD! and economic growth by augmenting the quality and quantity of the data and by using econometric techniques that amend biases. Thus, we conclude that India should formulate FDIled macroeconomic policies and ensure higher degree of trade openness to enhance her economic growth.