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

See all articles by K. Sham Bhat

K. Sham Bhat

Pondicherry University

Tripura C.U. Sundari

Pondicherry University

Durairaj Kumarasamy

Consultant, ASEAN India Centre, Research and Information System for Developing Countries

Date Written: October 1, 2004

Abstract

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

Sham Bhat, K. and Sundari, Tripura C.U. and Kumarasamy, Durairaj, Causal Nexus between Foreign Investment and Economic Growth in India (October 1, 2004). The Indian Journal of Economics, Vol.LXXXV, No.337, p. 171-185, October 2004, Available at SSRN: https://ssrn.com/abstract=2259213

K. Sham Bhat

Pondicherry University ( email )

Pondicherry 605 014
India

Tripura C.U. Sundari

Pondicherry University ( email )

Pondicherry University
R.V.Nagar, Kalapet,
Pondicherry, Puducherry UT 605 014
India

Durairaj Kumarasamy (Contact Author)

Consultant, ASEAN India Centre, Research and Information System for Developing Countries ( email )

India Habitat Centre
Lodhi Road
New Delhi, 110 003
India
8287254499 (Phone)
8287254499 (Fax)

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