Testing the Export-Led Growth Hypothesis for India: An Econometric Analysis

Abstract

Since 1991 India witnessed rapid rise in exports and robust economic growth. It is widely believed that the rapid economic growth of India over the last two decades is mainly due to the expansion of her exports. It is against this backdrop that the present paper attempts to reinvestigate the issue of ‘exports-economic growth nexus’ in the context of India. The paper aims at examining the dynamics of short term linkages and long term equilibrium relationship between export and economic growth and captures the linear interdependencies among the select variables. The study investigates the causal relationship between Export (Ex) and Gross Domestic Product (GDP) over the period 1970-2013 using annual data. The study has employed certain econometric tools to analyse the behaviour of both the series. Unit root test has been applied to test for stationarity of time series data.  Johansen’s co-integration test reveals that Export and GDP are co-integrated and, thus, a long-run equilibrium relationship exists between them. The Vector Error Correction Model (VECM) has shown that the lagged (1) terms of both Export and GDP influence each other in the determination of their current value. The Granger causality test exhibits the presence of short run relationship between Export and GDP and the relationship appears to be unidirectional. The causality runs from Export to GDP, indicating, high export drives economic growth. Thus, the study provides adequate empirical evidences to accept the export-led economic growth hypothesis for India. Findings of the study have significant policy implications.

Keywords: Export-led Growth, Causality, Cointegration, VECM, India