Causal Links Between FDI Inflows and Macroeconomic Indicators of India

Globally, many countries have seen a huge surge of Foreign Direct Investment inflows (FDI) into their economies during the last two decades of the twentieth century. This is because these countries have followed a process of liberalization of their economy. Many economists and policy makers believe that the role of FDI is significant in the process of development of many nations by way of enhancing productivity, exports, and employment. Hence, to test the general assumptions about FDI and to assess whether the objective of opening the economy to foreign players has been achieved, this research paper has empirically tested the causeeffect linkage between FDI inflows and the macroeconomic indicators which represented the economy at an aggregate level. The results of the paper indicate that while FDI inflow has not influenced the selected macroeconomic indicators (barring imports), most of these macroeconomic indicators in turn, have significantly influenced the inflow of FDI into India. Thus, India has merely been acting as a major investment hub for foreign players whereas the main objectives of allowing FDI into India have not yet been attained, even after twenty years of liberalization.