Economic Reforms, Capital Flows and Macro Economic Impact on India

Capital flows are most helpful when the magnitude of those flows is steady and stable. The international capital flow such as direct and portfolio flows has huge contribution to influence the economic behavior of the countries positively. The present study attempts to explain the effects of private capital inflows (FINV) on some macro economic variables in India using the time series data between April 1995 to Dec. 2006. The study also examine the impact of international capital flows on economic growth, trends and composition and suggest policy implication thereof. Cointegration test confirms the presence of long-run equilibrium relationships between a few pair of variables like private capital inflows (FINV) and economic growth (IIP as proxy of GDP) and FINV and Exchange Rate (EXR). The Granger causality test shows unidirectional causality from FINV to Exchange Rate (EXR) and bi-directional causality from FINV and growth (IIP). Finally study found that Foreign Direct Investment (FDI) is positively affecting the economic growth, while Foreign Institutional Investment (FII) is negatively affecting the growth. The empirical analysis shows that FDI plays unambiguous role in contributing to economic growth. It concludes that capital inflows have not contributed much towards industrial production or economic growth. There are two reasons for this, one the amount of capital inflows to the country has not been enough. Two, the amount of capital that does flow in, is not utilized to its full potential