Foreign Capital and Sustained Growth Nexus in India

Abstract

This study is a major departure from the traditional analysis of the impacts of macroeconomic variables on mere growth of GDP or GNI. The perception of sustained growth instead of growth of GDP incorporated depletion of natural environment on the growth process. This study explores that long run equilibrium relationship (co-integration) prevails among foreign direct investment, adjusted growth, gross fixed capital formation, foreign aid, imports and spot exchange rate. In the short-run, adjusted growth positively impacts foreign direct investment, gross fixed capital formation and imports of goods and services. But gross fixed capital formation negatively affects foreign direct investment in India. Adjusted growth affects and is affected by change in exchange rates. However, in the short-run, sustained growth is not affected by foreign direct investment, gross fixed capital formation, foreign aid, imports and exchange rate. COVID-19 pandemic has hindered the performance of Indian economy in 2020, but the economy rebounded immediately by the following year. Foreign direct investment to GDP ratio remained at very lower level despite the implementation of several FDI liberalization policies. Investment and foreign trade policies of the country require special attention for the achievement of sustained growth.