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Foreign Capital-Growth Nexus in India: Cointegration and Causality

In: Foreign Capital and Economic Growth in India

Author

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  • Mahendra Pal

    (University of Delhi)

Abstract

This chapter traces the long-run relationship between foreign capital (net aggregated) and growth with the help of cointegration test and Granger causality for the period of 42 years (i.e. from 1971 to 2013). Both the variables such as NFC/GDP ratio and growth rate in India are integrated at the first difference order. We find two Cointegrating vectors between NFC/GDP ratio and growth rate which show a long-run, positive and significant relationship. However, only Trace value is significant at 5% level, which is a more reliable test. 1% rise in NFC/GDP ratio causes 0.30% rise in growth rate. ECT shows minus sign and its value is around −0.99% which shows that model corrects 99% disequilibrium in one year period and shows high speed of adjustment. No Granger causality is detected from the model. Foreign capital is found to have a positive and long-term impact on the growth process in India. Findings confirm Foreign capital led growth hypothesis and are also consistent with Abdelhafidh (Journal of Policy Modeling 35:150–169, 2013), Rahman and Shahbaz (South Asia Economic Journal 14:59–81, 2013), Ranjan and Kumar (Indian Economic Review XXXVII 1:15–32, 2012) and Pradhan (IPE Journal of International Trade 2, 2011.

Suggested Citation

  • Mahendra Pal, 2023. "Foreign Capital-Growth Nexus in India: Cointegration and Causality," Springer Books, in: Foreign Capital and Economic Growth in India, chapter 0, pages 119-141, Springer.
    • Handle: RePEc:spr:sprchp:978-981-99-2299-4_5
    DOI: 10.1007/978-981-99-2299-4_5
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