FDI and Its Impact on Indian Economy

Abstract

The study is a modest attempt to explain the impact of Foreign Direct Investment (FDI) equity inflows on Indian economy by using monthly data for the period April 2005 to March 2011, before and after the eruption of Global Financial Crisis. The empirical study is based on ȌGranger Causality Testȍ to establish the linkages between FDI equity inflows and macro-economic variables such as Inflation, Index of Industrial Production (IIP), interest rates, exchange rates and foreign exchange reserves. As per the results, there is a unidirectional causality from FDI equity inflows to IIP and WPI; and also from foreign exchange reserves to FDI. Hence, the Indian policy-makers are encouraged to attract more and more FDI inflows into the country so as to accelerate the pace of industrial production thereby addressing supply side gaps to contain inflationary pressures in the economy and also to accumulate foreign exchange reserves so that international creditworthiness of the country can be enhanced.