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Indian Experience of Managing Impossible Trinity, Growth and Possible Tradeoff Between FDI and FIIs: Nature of Capital Inflows Matter

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  • Satya Prasad Padhi
Abstract
The current focus emphasizes the difficult choices faced by Indian management of the impossible trinity to manage import-led growth. The management highlights two mechanisms by which FDI (foreign direct investment) flows are easily substituted for short-run FII (foreign institutional investment) flows. First, GDP and its growth in an open economy framework and the associated international trade participation can clarify this substitution prospect. Specifically, this study develops reasoning whereby imports under the trilemma management can give some decisive advantage to FII at the cost of FDI to manage Indian import-led growth. Second, it underlines how the related policies, especially the sterilization interventions, constrain the interactions of higher domestic investments (domestic savings), spillover impacts of imports of intermediate and capital goods, and specialized FDI. If so, the Indian economy’s import-led growth can indicate FII and FDI tradeoffs. The study uses the ARDL regression method. The results show that the Indian policy-led macro environment can limit the scope of specialized FDI that aims to induce advanced domestic investment, exports, and FDI interactions. India’s focus on import-led growth thereby underpins how FII substitutes FDI. JEL Classification F21, F3, F4, O11, O14

Suggested Citation

  • Satya Prasad Padhi, 2024. "Indian Experience of Managing Impossible Trinity, Growth and Possible Tradeoff Between FDI and FIIs: Nature of Capital Inflows Matter," Global Journal of Emerging Market Economies, Emerging Markets Forum, vol. 16(1), pages 44-63, January.
    • Handle: RePEc:sae:emeeco:v:16:y:2024:i:1:p:44-63
    DOI: 10.1177/09749101221129897
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    More about this item

    Keywords

    Impossible trinity; sterilization intervention; foreign direct investment; foreign institutional investment; domestic manufacturing base; imports and exports;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology

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