Trade Openness, Capital Formation, and Economic Growth: Empirical Evidence from India

Abstract

The main objective of the present study is to examine the link between trade openness, capital formation, and economic growth in the case of India by applying an autoregressive distributed lag (ARDL) bound testing approach. To achieve this objective, the trade openness index is developed using various proxies of trade openness. The empirical results indicate negative relation between trade openness and economic growth in case of India, both in the short-run and long-run. The results of the present study have important policy implications for India. Among others, the study suggests that those policies need to be adopted, which can boost human and physical capital formation so that economy can grow to the threshold level required to reap the benefits of trade openness.