Foreign Investment, Economic Growth and Macroeconomic Dynamics in India: Exploring Casual Linkages

The study examined the dynamic relationships among GDP, FDI, exports, gross capital formation, and inflation in India for the period 1985-2025 using a VAR and Granger causality framework. The results confirm that all variables are integrated of order one, while the Johansen test indicates no long-run cointegrating relationship. The analysis therefore focuses on short-run interactions among the variables. The Granger causality results identify three significant relationships: GDP → Exports, GCF → Exports, and GCF → Inflation. These findings suggest that economic growth and domestic capital formation are important determinants of short-run export performance, while capital formation also has implications for price movements. However, no significant causal relationship is found between FDI and GDP, indicating that FDI did not have a significant short-run predictive effect on economic growth during the study period. From a policy perspective, the findings emphasise the need to strengthen domestic investment and productive capacity to improve export performance. Greater investment in infrastructure, technology, transport, logistics, and productive sectors can enhance India's competitiveness in international markets. Since GCF is also associated with inflation, investment expansion should be supported by adequate supply-side capacity and appropriate macroeconomic management to minimise short-run price pressures. The absence of significant FDI-GDP causality also suggests that policy should focus not only on attracting larger volumes of FDI but also on improving its quality and domestic economic linkages. FDI that promotes technology transfer, employment, productivity, skill development, and integration with domestic firms is likely to provide greater developmental benefits. Overall, a coordinated approach combining economic growth, domestic capital formation, export promotion, quality FDI, and price stability can provide a stronger foundation for sustainable economic development in India.

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