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Theoretical and Applied Economics
No. 4 / 2016 (609), Winter

Foreign aid, macroeconomic policies and economic growth nexus in India: An ARDL bounds testing approach

Geetilaxmi MOHAPATRA
Birla Institute of Technology and Science (BITS), India
A. K. GIRI
Birla Institute of Technology and Science (BITS), India
Madhu SEHRAWAT
T.A. Pai Management Institute, Manipal, India

Abstract. The purpose of this paper is to examine the effectiveness of foreign aid on economic growth in Indian economy using annual data from 1970 to 2014. The cointegration test confirms a long run relationship between real GDP per capita and foreign aid for India. The study finds a positive and significant impact of foreign aid on economic growth in India both in long run and in short run. Our results provide strong evidence that effectiveness of foreign aid on economic growth is contingent on macroeconomic policy environment in India. The VECM results confirm short-run and long run unidirectional causality running from foreign aid, government expenditure and trade openness to economic growth in India. Further, the results of the variance decomposition approach indicate that economic growth in India mostly explained by foreign aid. Further, the impulse response function result indicates that there is positive response in economic growth due to shock stemming in foreign aid. The findings and the results are useful guidelines for major stakeholders, including donors and the government of recipient countries for designing framework for aid effectiveness.

Keywords: Foreign Aid, Economic growth, India, ARDL, VECM.

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