Impact of Trade Openness, FDI Inflows and Total Exports on Economic Growth of India: An Econometric Approach

Abstract

The problem of the study is to ascertain the significance of trade openness, FDI inflows and the total exports on GDP growth of India. This study examines the short run and long run relationship between growth in concerned macroeconomic variables and economic growth (Real GDP at Factor Cost) by applying Johansen Cointegration Test followed by Vector Error Correction Mechanism (VECM) and Granger-Causality Test. The study incorporates Impulse Response Function (IRF) and Variance Decomposition Analysis to find out the response of GDP to the shock imposed on the concerned explanatory variables. The study covers the period 1975-76 to 2011-12, taking secondary annual data. The Granger-Causality, Impulse Response Analysis and Variance Decomposition results claim that the unidirectional short run relationship exists between exports and GDP. Cointegration tests suggest presence of stable long run relationship among the variables.