The association between foreign direct investment (FDI), economic growth (EG) and government expenses on infrastructure (GI) in India

Abstract

The article analyses impact of Foreign Direct Investment (FDI) on two macroeconomic variables, namely, Economic Growth (EG) and Government expenses on Infrastructure (GI) in India. The study is analyzed distinctively for two different variables for a period from 1975 to 2017 by applying Auto Regressive Distributed Lag (ARDL) Modelling and Granger Causality approach. The result shows that there is significant impact of FDI on Government expenses on Infrastructure (GI) for both short and long run. In short run, gradual increment of FDI generates more expenditure on Infrastructure from Government. But, in long run, expenditure on Infrastructure is reduced as FDI rises. This result confirms the absolute necessity of the basic growth of infrastructure in any economy at the first level of its development that can be subsequently reduced further in long run. On the other hand, it is surprising to find no significant impact of FDI on Economic Growth in India for both short and long run. The analysis also specifies that in short run FDI granger causes GI and EG, while EG again granger causes FDI. Therefore, it can be proposed if there happens to be further relaxation of FDI policies rather than keeping restrictions on some of crucial sectors like power and defense, it will enhance Government Infrastructure and Economic growth more in short run. As a result of bidirectional causality, Economic growth, in return, will attract more FDI for the benefit of Indian economic development. Instead of giving priorities to other variables, this study concentrates on specifying two major macroeconomic variables which can be utilized as the ultimate measures of development for a transition economy like India.