How has FDI influenced Current Account Balance In India? Time Series Results in presence of Endogenous Structural Breaks

In 1991 as par the recommendations of the IMF, India followed a structural adjustment programme. The new economic philosophy shifted towards export-oriented growth model, where augmenting competition in the domestic market through reforms in licensing provisions and adoption of better technological capabilities through FDI collaborations have played an extremely important role. Over the last decade, the high economic growth in India resulting from the reforms has motivated massive FDI inflow in the country. The continuous inflow has caused India’s share in global FDI inward stock to increase from 0.08 percent in 1990 to 0.22 percent and 1.03 percent in 2000 and 2010 respectively. However, the improved FDI scenario in India has simultaneously witnessed a decline in the current account balance (CAB) of the country. In this background, the current paper attempts to explore the underlying long term co-integrated relationship between FDI inflow in India and CAB by analyzing quarterly data over 1990-91:Q1 to 2010-11:Q4. Our result indicates that there exists a unique long-run relationship among FDI and CAB with two endogenous structural breaks. The analysis also reveals a unidirectional causality from India’s FDI to CAB at 5 percent level. The findings imply that although FDI may seem beneficial as a source of financing for the current account deficit, it may eventually lead to balance of payments problems due to adverse effects on current account. In this respect, even the role of FDI on economic growth can be questioned. Secondly, the huge outflow of foreign exchange from the country in recent years in the form of profit remittances raises the concerns over the optimality of allowing hundred percent profit repatriation.