Economic Growth and Macro Variables in India: An Empirical Study

Abstract

The research objective of this paper is to explore the empirical linkages between economic growth and foreign direct investment (FDI), gross fied capital formation (GFCF) and trade openness in India (TOP) over the period 1980 to 2013. The study reveals a positive relationship between economic growth and FDI, GFCF and TOP. This study establishes a strong unidirectional causal flw from changes in FDI, trade openness and capital formation to the economic growth rates of India. The impulse response function traces the positive inflence of these macro variables on the GDP growth rates of India. The study also reveals that the volatility of GDP growth rates in India is mainly attributed to the variation in the level of GFCF and FDI. The study concludes that the FDI inflws and the size of capital formation are the main determinants of economic growth. In view of this, it is expected that the government of India should provide more policy focus on promoting FDI inflws and domestic capital formations to increase its economic growth in the long-term.