A Study of Scope, Benefits, Of Odi Policy and Prospects in Indian Economics

Abstract

The study provides the major policy implications from this analysis, besides drawing attention on the complexities in interpreting ODI data in India. This research study aims to examine the impact of ODI on the Indian economy, particularly after two decades of economic reforms, and analyzes the challenges to position itself favorably in the global competition for ODI. Outside direct investment (ODI) has boomed in post-reform India. Moreover, the composition and type of ODI has changed considerably since India has opened up to world markets. This has fuelled high expectations that ODI may serve as a catalyst to higher economic growth. We assess the growth implications of ODI in India by subjecting industry-specific ODI and output data to Granger causality tests within a panel cointegration framework. It turns out that the growth effects of ODI vary widely across sectors. ODI stocks and output are mutually reinforcing in the manufacturing sector. In sharp contrast, any causal relationship is absent in the primary sector. Most strikingly, we find only transitory effects of ODI on output in the services sector, which attracted the bulk of ODI in the post-reform era. These differences in the ODI-growth relationship suggest that ODI is unlikely to work wonders in India if only remaining regulations were relaxed and still more industries opened up to ODI.