Modeling and Forecasting Foreign Direct Investments in India

Abstract

For a developing country like India, FDI can be an important source of finance, and it can contribute richly to the economy by transferring superior managerial skills and state-of-the-art technology into the country. Ever since India undertook economic reforms in 1991, it has been one of the largest recipients of FDI in the world, making it a country of huge opportunities. This paper attempted to forecast FDI in India from 2014 to 2020 using univariate ARIMA modelling. Since FDI can have an impact on other macroeconomic variables such as GDP and exports, an accurate forecasting can be valuable for policy making. Applying the Box- Jenkins methodology, the process of model identification, estimation, diagnosis, and forecasting were undertaken. As many as eight different ARIMA models were estimated from which one was short-listed after an iterative process. Several accuracy tests were used and after confirmation of white noise in residuals, that model was eventually selected, which had the least forecasting error and biasness. ARIMA Model (1,1,1) was found to be most suitable and provided the tightest fit to the data. As per the forecasted model, India can potentially receive FDI up to US $ 74,935.27 in 2020, and the average receipts over the forecasted period could be US $ 51982.39 million. The compounded annual growth rate (CAGR) of FDI inflows between the forecasted period of 2014 and 2020 is likely to be 14.31%.