Interactions among Infrastructure, Trade Openness, Foreign Direct Investments and Economic Growth in India

Abstract

This study examines the dynamic interrelationships among infrastructure, trade openness, foreign direct investments (FDI), economic growth, fixed capital formation, labour and inflation rate in the context of India for the period 1970 to 2018 through the application of Toda–Yamamoto (TY) causality test and the auto-regressive distributed lag (ARDL) bounds testing approach to cointegration to offer policy implications of the effectiveness of these important macroeconomic determinants in the short and long-run. This article developed two composite indices, namely, infrastructure development index (INFI) and trade openness index (TOI) and used to see the effectiveness of infrastructure indicators and trade openness on economic growth along with other variables of interest. Results suggest a strong causal short and long run interrelationship among infrastructure, FDIs, trade openness and economic growth during 1970–2018. In the long run, a bi-directional relationship exists between INFI and GDP, suggesting that India should expedite construction of adequate and expanded infrastructure facilities in the economy and among others things, frame its policy in a more liberalised manner for various sectors including infrastructure with a view to attracting more FDI inflows and making more openness to trade and globalisation within the environment of ease of doing business that would help to sustain higher economic growth for long period, accomplishing the goal of US$5 trillion economy by 2024–25. JEL Classification:H54, O1, H4, O4, P33, L9, C32