Foreign Direct Investment and Economic Activity in India

This paper examines the relationship between foreign direct investment and economic activity in India in the post liberalisation period. Foreign direct investment is measured both by the amount approved as well as the actual flows. Economic activity is measured by the index of industrial production. Granger causality tests and innovation accounting analysis suggest that FDI flows (approvals and actual) respond to the level of industrial production. Actual flows, however, do not Granger-cause industrial output.