Impact of FDI and Net Trade on GDP of India Using Cointegration approach
Keywords:
GDP, FDI, Net Trade, Cointegration, VECM, Granger CausalityAbstract
India is one of the fastest growing economies in the world. It is one of the leading economies in terms of growth and development among the developing countries. Foreign Direct Investment and net trade are some of the main factors to influence the GDP of an economy. India has been attracting FDI at an increasing rate since the liberalization. In the recent years, the government of India has opened FDI market to many other sectors like retail, railway and defense sectors which was not previously allowed. India is one of the major exporter and importer of many goods and services in the world which plays an important role in GDP growth. The purpose of this study is to analyse the impact of FDI and Net Trade on the GDP of Indian economy. The Cointegration methodology is used to explore the impact of FDI and Net Trade (NT) on the GDP of Indian economy. The Vector Error Correction Model is used to measure the short run and long-run equilibrium relationship between these variables. It was found that FDI and Net Trade have a positive impact on the dependent variable GDP in a long run. The FDI showed a short-run impact on GDP whereas no short-run impact was found from Net Trade using Granger Causality test. The researchers have great scope to measure the impact of other factors influencing the GDP of Indian economy with FDI and net trade.
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