Does GDP Granger Cause FDI in India

Abstract

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Since 1947, India has considered a vigilant approach to economic growth; however, subsequent to the execution of the LPG policy (1991), India has liberalised its foreign strategy and taken progressive measures to improve FDI (Rathore & Rajawat, 2019). The present study attempts to trace the causal relationship between GDP and FDI (net inflows and net outflows) in India, by using time series data from 1994 to 2017, and using unit root tests, the Johansen Co-integration test, and the Granger causality test among the variables. The results of the Johansen co-integration test indicate a long-term relationship among the variables. Moreover, the results of the Granger causality test confirm the unidirectional relationship running from FDI outflow to FDI inflow. The results also indicate that higher GDP growth causes FDI inflow into India. This study further suggests that for better GDP growth, India also needs to focus on FDI outflow.

Keywords: Economic Growth, FDI, GDP, Unit Root, Granger Causality

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