Reinvestigating Export-Led Growth in India Using a Multivariate Cointegration Framework

The early work in the area of export-led growth adopted a cross-sectional framework and did not examine the issue of causality between export growth and income growth. Subsequently, this was rectified by a number of time-series studies. Since most studies in this field have adopted bivariate models, they may have been misspecified. Following Dhawan and Biswal (1999), this study tests the export-led growth thesis in India in a multivariate framework by taking the terms of trade as an additional variable. Thus it not only corrects the misspecification bias of earlier studies but also overcomes the small sample bias of the Dhawan and Biswal study. It finds that exports, GDP and the terms of trade are cointegrated in India. The causality between income and exports is a long-term phenomenon and runs in both directions. However, the causality from income to exports is stronger than that from exports to income.