Foreign Direct Investment and Indian Economic Growth

Abstract

The present study investigates the impact of the foreign direct investment (FDI) on Indian economic development during the period 1981 to 2016. The annual data of Index of Industrial Production (IIP) have been considered as a proxy of Indian economic development. The estimated results of the Johansen's cointegration test and vector error correction model (VECM) suggest that there exists a long-run positive cointegrating relationship between FDI and IIP. The result of the VECM indicates that any change in the value of FDI causes to change the value of IIP in the long run. But in the long run, change in IIP does not have any causal effect on FDI. The results of short-run causality test among the variables based on Granger causality test shows a bidirectional short-run causal relationship between FDI and IIP, that is in short-run the value of FDI significantly affect the movement of IIP and vice versa. So, with the help of the estimated results, the study concludes that FDI plays a crucial role in enhancing the economic growth and development of the country, as the flow of FDI leads to improve the economic development indicator used in this study.