Piyali Roy Chowdhury, A Anuradha
Intensity to capital accumulation, size of the market and scale of the production generally serve as the key determinants of FDI in any country. It is also discovered that the imported capital goods and intermediate products work as catalysts to augment the production in the manufacturing industries. This study aims to find out the relation between Foreign Direct Investment (FDI) and manufacturing sector in India. It analyses data from 1996 to 2020. It extracts a long run cointegration between the two variables. Analysing the short run scenario, the article considers error correction model to define the short run shocks and its effectiveness on these variables. There exist thirty seven percent chances to move from short run disequilibrium to long run stable equilibrium. Also, the error correction term proves long run causality from FDI to manufacturing sector. The cumulative sum and cumulative sum square test prove the economic model to be stable. Finally, the study suggests the Indian policymakers to relax FDI inflows norms and enable an automatic route up to 74% towards all the manufacturing sectors, as done for defence manufacturing in order to augment the overall development of Indian economy.