Floods and economic growth in India: role of FDI inflows and foreign aid

Abstract

PurposeThe paper aims to examine the effects of floods on economic growth in India from 1980 to 2019, taking into account the role of foreign direct investment (FDI) inflows and foreign aid.Design/methodology/approachThe study uses augmented Dickey–Fuller (ADF) and Phillip–Perron (PP) tests to determine the stationarity of the variables. Several models, including autoregressive distributed lag (ARDL), fully modified ordinary least square (FMOLS), dynamic ordinary least square (DOLS) and canonical cointegration regression (CCR), are used to examine the impact of floods on economic growth.FindingsThe bounds test determines the long-term relationship between floods, FDI inflows, economic growth and foreign aid. According to the ARDL and FMOLS models, floods have a negative long-term and short-term impact on India’s economic growth. Furthermore, FDI inflows and foreign aid are beneficial to economic growth. The findings of the ARDL and FMOLS models are confirmed by the DOLS and CCR models. Granger causality establishes a unidirectional causality that extends from floods to economic growth. Further diagnostic tests show that the estimates are free of heteroskedasticity, serial correlation and parameter instability.Practical implicationsIndian government needs to invest more in research and development on flood management techniques. Institutional strengthening is also required to implement pre- and post-flood prevention measures properly. Sound disaster financing strategy and proper water bodies management should be prioritised. Foreign investment opportunities should be encouraged by strengthening international relations.Originality/valueThis is the first time-series study that analysed the effects of floods on economic growth in India. Moreover, the paper contributes to floods literature by applying several econometric models for robustness check.