Trade Openness, Exports and Economic Growth Relationship in India

Abstract

Drastic changes have taken place at the global level during the last two decades of liberalization and globalization. In light of these global changes, the Indian government also initiated a series of domestic and external economic reforms in the early 1990s. As a result, a significant shift occurred towards liberalization, with special emphasis on an export-led growth policy.

The present study has been designed to examine the validity of the Export-Led Growth (ELG) hypothesis as implemented in India during the post-WTO period. The study is based on quarterly time-series data covering the period from 1996–97 to 2008–09. An attempt has been made to analyze the relationship among three variables: trade openness, export growth, and their impact on economic growth, within the framework of the Vector Error Correction Model (VECM), using the Johansen Technique of Co-integration and the Block Exogeneity Wald Test.

The study found that there is bi-directional causality between GDP and export growth in India. Thus, the ELG hypothesis is valid for India, and empirical evidence supports the existence of a long-run equilibrium relationship between export growth and economic growth. Additionally, unidirectional causality was observed from trade openness to GDP, indicating that trade openness contributes positively to economic growth.