Examining the Relationship between Economic Growth, FDI and Trade: VAR and Causality Analysis

The objective of the present study was to investigate the dependency of GDP on exports, imports, and FDI. Using Johansen Juselius approach the study tested whether GDP, exports, FDI and imports are co-integrated or not. The test findings suggested that there is no long-run relationship between the variables. Time series econometric techniques: The VAR model infers that the current GDP growth of Indian economy is significantly affected by exports and FDI but imports were found to be insignificant. From the empirical results of the impulse response function, the study found that shocks to export sand FDI had a positive impact on GDP both in the short-run and long-run. The results of the Granger Causality test reveal that there is bi-way causality between GDP and FDI. However, there is unidirectional causality between GDP and exports-the causality runs from exports to GDP. To enhance the GDP growth, dispersal, production, distribution of exports and FDI need to be organized in a systematic and coherent manner. This calls for dynamic role of growthled, export-led and FDI led growth strategies in context of the Indian economy. In order to boost the GDP growth in India, it is argued that the important constituents of GDP should be further promoted through liberal policies.