FDI, Trade, and Growth in India:A Modified Causality Analysis

Despite a large volume of literature on the relationship among Foreign Direct Investment (FDI), Trade, and Economic Growth, the debate relating to causality linkage among them is far from over. This paper re-examines the relationship among FDI, trade, and economic growth in the case of India. The study is based on a Vector Autoregression (VAR) model applying Ganger non-causality test of Toda and Yamamoto Amatory in [1995] for the period 1996Q4 to 2007Q4. Evidence shows that there is bi-directional causality between FDI and economic growth. At the same time, there is a unidirectional causality, which runs from FDI to export as well as from FDI to import. Furthermore, decomposition of causality suggests that 46 per cent causality runs from FDI flows to export, 2l per cent from export to FDI, and the remaining 33 per cent is due to two-way causality. As far as import is concerned, of the total dependence, 55 per cent is due to causation flowing from FDI to import, 27 per cent due to causation flowing from import to FDI and 18 per cent is due to contemporaneous or two-way causality.