Foreign Direct Investment in India and its Growth Performance: A Time Series Analysis

Abstract

Foreign direct investment has played an important role in the process of economic growth and development of many developing countries in the world, but the relationship between FDI and economic growth is still controversial on the ground of theoretical literature and empirical studies.

The present study is an attempt to examine the impact of foreign direct investment (FDI) on economic growth in India in the post reform period (1991). This study also analyses the time profile of FDI and sectoral distribution of FDI in India. FDI registered an average annual growth rate (AAGR) of 51.7 per cent and compound annual growth rate (CAGR) of 41 per cent during the period from 1990-91 to 1999-2000 and 35.6 and 19.5 per cent respectively during 2000-01 to 2010-11. The overall an average annual growth rate in FDI recorded a 42.8 per cent and compound annual growth rate of 33.3 per cent during the analysis period, i.e., from 1990-91 to 2010-11. Sectoral distribution shows that services, telecommunication and construction sector are among the top sectors attracting highest FDI inflows. The regional distribution of FDI inflows reveals an uneven distribution in India.

The empirical study is based on pair wise co- integration test and pair wise Granger causality test for FDI and IIP (as a proxy of economic growth). The long run and short run linkages between FDI and economic growth using vector error correction model (VECM) has been examined. The results of the pair wise Granger causality test reveal that economic growth Granger causes FDI and FDI also granger causes economic growth. It means that there is bi- directional causal relationship between economic growth and FDI in India. It implies that the past information on economic growth improves the predictability of FDI. It explains that the sound economic growth of the country attracts additional FDI.