Capital inflows and economic growth: An indian perspective

Abstract

The paper investigates the possible co-integration and the direction of causality between various components of capital inflows and economic growth in India. Co-integration test is performed in a vector autoiregression (VAR) framework followed by an application of Vector-Error Correction Model (VECM), Granger Causality test and Impulse response analysis. Bi-directional causality is observed between foreign direct investment (FDI) and economic growth, external assistance and economic growth, external assistance and other capital. Unidirectional causality is observed from foreign portfolio investment (FPI) and other capital to economic growth, from economic growth to NRI (Non- Resident Indians) deposit.