PCY, Foreign Aid and FDI: A Test of Complementarity

This chapter examines the relative effectiveness significance of debt and non-debt creating capital in India and tests two empirical models. Model 6.1 incorporates three variables such as PCY, FDI and Aid. After confirming the order of integration, model confirms one cointegrating vector and shows positive and long-run relationship. 1% increase in Aid causes 1.1% rise in PCY, while 1% increase in FDI causes only 0.04% rise in PCY. ECT value is in minus and, its value is around 0.08 which shows poor adjustment in correcting disequilibrium in one year. Model 6.2 incorporates export variable and one cointegrating vector is confirmed which tells long-run relationship among the variables. In this model FDI shows better impact on the PCY than Aid variable. It shows that export has good impact on the FDI. ECT term is also in minus and its value is around −0.17 which again shows low speed of adjustment, it means that only 17% disequilibrium is corrected in one year. Granger Causality results also support desired directions. Supremacy of private capital over official capital is not established during the study period. In India private capital and official capital remain complementary not as substitute. Findings are consistent with Papanek (J Polit Econ 81:120–130, 1973), Burnside and Dollar (Am Econ Rev 90:847–868, 2000), Addison et al. (Aid is not dead. UNU-WIDER, Helsinki, Finland, 2018), S. Mallick and T. Moore (2008) and Collier and Dollar (Eur Econ Rev 46:1475–1500, 2002). New evidence from Lipsey (Transnatl J Corp 9:83–84, 2011) and Easterly (2001) indicates that it is not the change in the level of capital stock but change in the faster productivity of foreign capital that promotes economic growth.