A Time Series Analysis of Net Foreign Direct Investment on Economic Growth in India in the Post-Reform Period

This paper tries to establish a hypothesis between Net Foreign direct inflows and economic growth in the context of India, analyzing the long-run equilibrium relationships between them. The study is based on time series data in the post-reform period. By taking into consideration of the Johansen’s cointegration test, it has been found that there exists a long-run association between Foreign Direct Investment and economic growth. But the Vector Error Correction Model (V.E.C.M) shows that the error correction term is insignificant, implies that the short-run disequilibrium is not correcting properly. The study suggests that the insignificance occurs due to the presence of a structural break in 2003 and hindrances like unemployment and corruption, which further affect the long-run equilibrium growth process. Moreover, Granger causality shows a unidirectional causal relationship, its economic growth that determines the flow of FDI in India but not the reverse, which is contrary to common belief