Foreign Direct Investment and Economic Growth in India: An ARDL Approach

Abstract

Foreign investment has increasingly become an important component of India's integration with the global economy. At the same time, economic growth in India has also been influenced by domestic investment, trade performance, infrastructure development and macroeconomic conditions.This study examines the relationship between foreign direct investment (FDI) and economic growth in India using annual data for the period 2001-2025. In addition to FDI, exports, gross capital formation and inflation are included to capture other important macroeconomic factors influencing economic growth. FDI is measured as a percentage of GDP. The study employs descriptive statistics, the Augmented Dickey-Fuller (ADF) unit root test and the Autoregressive Distributed Lag (ARDL) approach. The ARDL (1,0,0,1,0) model was selected based on the Akaike Information Criterion. The unit root results confirmed that none of the variables was integrated of order two, making them suitable for ARDL analysis. However, the Bounds test did not establish a stable long-run relationship among GDP, FDI, exports, gross capital formation and inflation. The short-run results show that gross capital formation has a positive and statistically significant association with economic growth, while FDI does not show a statistically significant relationship. Export performance shows a positive association with GDP in the estimated specification, whereas inflation remains statistically insignificant. Diagnostic tests indicate no evidence of serial correlation, while heteroskedasticity was addressed through robust standard errors. The findings highlight the importance of domestic capital formation in supporting India's economic growth and suggest that the growth benefits of FDI may depend on its productive utilisation, sectoral composition and linkages with the domestic economy. Keywords: Foreign Direct Investment, Economic Growth, ARDL, Gross Capital Formation, Exports, Inflation.