Modeling the Impact of Foreign Equity, Foreign Debt and FDI on Indian Economic Growth Through VECM Approach

Abstract

Foreign portfolio investment and foreign direct investment are the backbone of any economy as well as contributing to the growth of all developing economies. Herein, it motivated to do the study by investigating the causality between foreign investment and economic growth in India. To find out the exact causation effectively, we have employed a vector error correction model method of causality. The testing time series data period is from 1993 to 2017. Here, in this study, we converted annual gross domestic product and foreign direct investment data into monthly figures. For this we used econometric disaggregation techniques know as linear spline interpolation method for monthly data conversion. ADF unit root test confirms the presence of unit root at level and stationary at first difference. Johansen co-integration test is done after achieving the stationarity and it shows those variables are co-integrated. Whereas Granger causality test results show no-causality exists between (i) FDI and GDP (ii) GDP and FDI (iii) FE and GDP (iv) FD and GDP (v) FE and FDI (vi) FD and FDI (vii) FE and FD and uni-directional causality exist between GDP and FE (ii) GDP and FD (ii) FDI and FE (iv) FDI and FD (v) FD and FE. The results advocates that FDI, FE, FD boost the economic growth of India.