Foreign Direct Investment and Indian Economic Growth

The present study investigates the impact of the foreign direct investment (FDI) on Indian
economic development during the period 1981 to 2016. The annual data of Index of Industrial
Production (IIP) have been considered as a proxy of Indian economic development. The
estimated results of the Johansen’s cointegration test and vector error correction model
(VECM) suggest that there exists a long-run positive cointegrating relationship between FDI
and IIP. The result of the VECM indicates that any change in the value of FDI causes to change
the value of IIP in the long run. But in the long run, change in IIP does not have any causal
effect on FDI. The results of short-run causality test among the variables based on Granger
causality test shows a bidirectional short-run causal relationship between FDI and IIP, that is
in short-run the value of FDI significantly affect the movement of IIP and vice versa. So, with
the help of the estimated results, the study concludes that FDI plays a crucial role in enhancing
the economic growth and development of the country, as the flow of FDI leads to improve
the economic development indicator used in this study.