Exports, Imports, and Economic Growth in India: Evidence from Causality, Cointegration and Toda–Yamamoto Wald Test

Abstract

The purpose of this research study is to shed light on the causal relationship between foreign trade and economic growth in India. This study analyzes Export-led growth (ELG) and Import-led growth (ILG) hypothesis in India. The author does so by analyzing the yearly data of Export, Import and Gross domestic product of India between 1980 and 2016. The author employed augmented Dickey-Fuller method and Phillip-Perron method to transform the all the data series into a stationary form. The author finds that all three variables i.e. Export, Import and Gross domestic product are highly positively correlated to each other. The result of Johansen co-integration test indicates cointegration and long-haul relationship among the variables. The result of the Granger causality and Toda-Yamamoto causality test shows unidirectional causal relationship between export and economic growth; the one-way causation exists between import and economic growth while economic growth causes export and import in India. The result of the impulse response function indicates that a change in the GDP is due to its own shocks whereas the impact of export shows certain effect on GDP. The analysis of the variance decomposition demonstrated that only 28.25% fluctuations in the GDP were explained due to its own shocks. Thus the outcome of the study indicates importance of export and import for economic growth is significance and foreign trade is heavily relied on economic growth of the country.