IDEAS home Printed from https://ideas.repec.org/a/dse/indecr/0046.html
   My bibliography  Save this article

An Empirical Investigation of the Impact of Capital Inflows on Domestic Investment in India

Author

Listed:
  • RANJAN, RAJIV

    (Reserve Bank of India)

  • KUMAR, SUNIL

    (Reserve Bank of India)

Abstract

Like many emerging market economies (EMEs), India also experienced a significant surge in capital inflows since the second the half of 1990s. Capital inflows as percentage of GDP increased from 7.2 per cent during 1990-91 to 25.8 per cent in 2008-09 reflecting the rising contribution of financial channel in India’s global integration. Notably, investment in India also made large leaps during the same period and generated an obvious debate on the contribution of capital inflows to incremental investment. The relationship between investment and capital inflows based on the national income accounting identity remains quite ambiguous on many counts. In view of above, we have attempted to empirically investigate the direct impact of capital inflows to investment in India in this paper. We have used the Johansen (1988) and Johansen and Juselius (1989) cointegration model to estimate the causality running from capital inflows to investment since the data series used in the study viz., investment and capital inflows as percentage of GDP and GDP growth are I(1) processes. The estimates of long run cointegration equation indicate that 37 per cent of the capital inflows go into higher investment. On an average basis, gross capital inflows were about 19 per cent of GDP during 2000s and going by the above results, they contributed an average of 7 percentage points to the GDCF. Thus, the contribution of capital inflows towards GDCF remains much higher than reflected in the national income identity through current account deficit. Variance decomposition analysis reveals that the contribution of capital inflows (KF) to gross domestic capital formation (GDCF) variation increased and reached to about 13 per cent by the 10th period. We have found the short-term dynamics of the cointegration model to be quite robust with error correction mechanism (ECM) term to be negative and significant. ECM coefficient suggests that about 23 per cent of deviation in the long-run equilibrium level of investment is corrected in the next period.

Suggested Citation

  • Ranjan, Rajiv & Kumar, Sunil, 2012. "An Empirical Investigation of the Impact of Capital Inflows on Domestic Investment in India," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 47(1), pages 15-32.
  • Handle: RePEc:dse:indecr:0046
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    More about this item

    Keywords

    Capital Inflows (KF); Gross Domestic Capital Formation (GDCF); Cointegration;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:dse:indecr:0046. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Pami Dua). General contact details of provider: http://edirc.repec.org/data/deudein.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.