Causal Nexus between Foreign Investment and Economic Growth in India
The Indian Journal of Economics, Vol.LXXXV, No.337, p. 171-185, October 2004
17 Pages Posted: 2 May 2013
Date Written: October 1, 2004
Granger Causality test was employed to examine the causal nexus between foreign investment and economic growth in India for the year 1990-2002. The analysis revealed an independent relationship between foreign investment and economic growth in India. The possible reasons are: (a) In India, foreign investemnt is only 0.9 percent of Gross Domestic Product and its high transaction cost in the form of corruption and unnecessary regulatory requirements. (b) Lack of full integration of capital and financial markets, and (c) Higher levels of economic growth may not attract foreign investment due to lack of stability of Indian rupee in international market. The present study calls for the following policy options to enhance economic growth through foreign direct investment and vice versa: (i) there is a need for further liberalisation of FDI and much emphasis should be given for outward oreinted trade policies, (ii) strengthening the regional economic integration such as ASEAN and NAFTA, and (iii) maintenance of stability of Indian rupee in terms of foreign currency.
Keywords: Foreign Direct Investment, Economic Growth, India, Granger Causality
JEL Classification: F20, O12
Suggested Citation: Suggested Citation