Export-Led Growth in India: A Bounds Testing Approach

Neoclassical economic theory suggests there is a positive relationship between economic growth and growth in exports. An increase in exports leads to an increase in income due to the multiplier effect of production. This paper examines whether the Export-Led Growth (ELG) hypothesis is valid for India. Though the existing literature on this field is extensive, the results are ambiguous. Past studies have suffered from various methodological drawbacks. Early studies were hampered by a lack of time series data. The next stage used OLS analysis and simply assumed causation rather than testing for it. A third stage of investigations tested for Granger causality using the standard tests which was not applicable due to the presence of cointegrated variables. Therefore this paper re-investigates the ELG hypothesis for India; taking advantage the longer time series now available, with annual data from 1980 to 2013, and using more sophisticated tests. The paper tests for the presence of a long run relationship between exports and economic growth using the more robust autoregressive distributive lag (ARDL) bounds test for cointegration developed by Pesaran et al. (2001). The paper then tests for causality between exports and GDP using the Todo and Yamamoto (1995) and Dolado Lutkepohl (1996) (TYDL) causality test. The advantage of the latter test is that it indicates the direction of causality. The results indicate that exports have no significant long run impact on economic growth. While in the long run the result exhibits no relationship between exports and economic growth, the short run model is highly significant. Furthermore, the results indicate that capital formation, imports, real exchange rate and terms of trade are significant and have an impact on economic growth in the long and short run. The short run dynamics further indicate that the Indian economy recovers from a shock is relatively quickly. In addition, the causality test results show that there is a significant unidirectional causal relationship from GDP to exports but no causality is found from exports to GDP. Thus, the results show no support for the ELG hypothesis and indicate that India has not directly benefited from the trade reforms implemented in 1991. The findings suggest that to improve and sustain long run economic growth the government should target policies that further enhance domestic demand and capital accumulation.