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