CAPITAL ACCOUNT CONVERTIBILITY IN INDIA: THE IMPACT OF CAPITAL INFLOWS ON ECONOMIC GROWTH, EXPORTS AND IMPORTS

Capital Account Convertibility increases inflows of foreign capital in the country and these inflows have got far reaching impact on the economy. In this article an attempt is made to study the impact of foreign capital inflows on macro economic variables of the Indian economy such as IIP, Exports, and Imports. Using co-integration and Error Correction Models we find that the inflow of foreign capital (INFK) and FPI cause positively the change in the Index of Industrial production (IIP) i.e. economic growth in India. The study also reveals that there is a bidirectional causal relationship between inflows of capital and imports; there is an evidence for economic growth influencing the inflows of FDI but not vice versa and Inflows of foreign capital causing an increase in exports. In view of these findings some policy measures relating capital inflows are suggested.