Investment and Economic Growth in India: Is Foreign Investment Conducive?

Biswajit Maitra and Sentu Shil
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Biswajit Maitra: Department of Economics, University of Gour Banga, P. O. Mokdumpur, PIN 732103, West Bengal, India
Sentu Shil: Department of Economics, University of Gour Banga, P. O. Mokdumpur, PIN 732103, West Bengal, India

Annals of Financial Economics (AFE), 2024, vol. 19, issue 04, 1-27

Abstract: Investment is one of the major driving forces of economic growth. Developing countries often suffer from a deficiency of domestic investment (DI) and persuade foreign investment. India, at the time of gaining independence, was a capital-deficient poor country. Development activities of the country rely on the accumulation of foreign investment. In the post-reform period, several initiatives have been taken to attract foreign investment. After three decades of reform, a trend-diverging pattern of foreign direct investment (FDI), debt and DI is noticed. Against this backdrop, this paper explores whether investment fuels growth in India for an extended period, 1981–2019, and separately for the post-reform period, 1991–2019. It involves the autoregressive distributed lag approach to cointegration followed by its error correction representation. Results find that the FDI is detrimental to long-run growth. The external debt also retards long-run growth but has a trivial positive impact in the short run. On the other hand, a growth-augmenting impact of DI is noticed. Importantly, the impacts of foreign and DI have not changed much in the post-reform period. The results also indicate a growth-augmenting impact of human capital, with a detrimental impact of trade openness and exchange rate depreciation. In short, the study corroborates that foreign investment is not conducive to growth even in the post-reform era. Appropriate policy manifestation and an investment-friendly ambiance are critically important for growth gains from investment.

Keywords: External debt; FDI; domestic investment; economic growth; economic reform (search for similar items in EconPapers)
JEL-codes: F21 F34 H63 O40 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1142/S2010495224500167

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