Investigating the Landscape of India's Balance of Payments: Cointegration and Causality Analysis

Abstract

This paper makes an attempt to investigate the landscape of India's Balance of payments (BOP) by analyzing the significant variables related to India’s BOP over the period of 1980-2013. The empirical results from our analysis establish that there is a cointegrating relationship between BOP, Balance of Trade (BOT), Foreign Direct Investment (FDI) and Exchange Rate (EXR- INR vs $). The analysis finds the existence of bidirectional causality between FDI and BOT and between FDI and BOP. Unidirectional causality is also found running from EXR to FDI, EXR to BOT and from BOP to BOT. The research study proposes that expansion of FDI will lead to an improvement in BOT along with a positive impact on India’s Balance of Payments. Therefore, focusing on the long term stability, it is proposed that foreign inflows need to be enhanced along with a dual aim of increasing the exports and keeping a check on our imports, if we are to proficiently tackle and remove any concerns on India’s balance of payments scenario.