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Impact of FDI on GDP per capita in India using Granger causality

Nadar, Anand (2021): Impact of FDI on GDP per capita in India using Granger causality.

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Abstract

This research investigates the causality between FDI and GDP per capital in the context of India. Using WDI data from 1970-2019, We applied two types of Granger causality tests: long-run causality and shortrun causality tests. For the long-run causality, we applied pairwise Granger causality test, and for shortrun, we performed the Wald test approach under VECM (Vector Error Correction Model). The long-run causality test indicates that there is a unidirectional causality running from FDI to GDP per capita, implying that FDI causes the GDP per capita to change and not vice-versa. The short-run causality test indicates that there is no causality between FDI and GDP per capita, suggesting that, in the short-run, FDI and GDP per capita does not cause each other. The central policy conclusion from this study is that although FDI does not cause GDP per capita in the short-run, it causes in the long-run. Therefore, according to our study, India should attract FDI to sustain a long-run growth of GDP per capita.

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