Macro-economic factors and foreign direct investment in India: a Toda Yamamoto causality approach

Abstract

The turbulent global economic environment of past few years marked the subprime crisis 2007-08, European debt crisis 2009, Greece crisis 2015, see-saw oil prices, Islamic extremism and age-old political unrest of Middle-East compels to re-examine the influence of economic variables on FDI inflows as all these events contribute heavily to the macroeconomic dynamics of countries like India who seek more of foreign direct investment for mobilising their growth prospects. The study uses the macro-economic variables like gross domestic product, real effective exchange rates, balance of payments, consumer price index and gross capital formation for India from 1980-2013. The study adopts time-series estimations like ARDL co-integration test and Toda Yamamoto Granger causality test. The causality test validates causation existing between FDI and all economic variables under study except REER. However, results suggest that FDI causes inflation, may be of the fact that inward FDI is not productively used causing extra money supply in the economy resulting in inflation.