Impact of Foreign Direct Investment and Merchandise and Services Trade on the Economic growth in India: An Empirical Study

Abstract

This paper attempts to study the possible link among FDI inflow, economic growth, merchandise trade and services trade of India during the post-liberalisation period 1998–99: Ql to 2008–09: Q3. The long-term relationships among the variables are analysed using the Johansen and Juselius multivariate co integration approach. Short and long run dynamics are captured through vector error correction models. To further investigate the interaction between the variables, the study uses impulse response function (IRFs) besides the above mentioned time series technique. Regression analysis is also done for the same time period. To test the parameter stability of the variables involved in the study, CUSUMSQ test is also performed. The study found the evidence of co integration among the variables, indicating diat a long-term relationship exists among diem. Bi-directional causality is observed between merchandise trade and economic growth, services trade and economic growth. Unidirectional causality is observed from FDI to economic growth and FDI to merchandise trade. A unidirectional causality is also observed from merchandise trade to services trade.