An Appraisal of the Impact of International Trade on Economic Growth of India- through the ARDL Approach

Abstract

Purpose: The study examines the impact of international trade on economic growth of India by using the Autoregressive Distributive Lag Model (ARDL) technique.The study further adopts Trade Openness Index to analyze the growing integration of India's external trade with the outside world.Design/Methodology/Approach: The study employs the Augmented Dickey Fuller (ADF) Test for unit root and Autoregressive Distributive Lag Model (ARDL) cointegration approach which entails the Wald Test, Long run OLS estimation test, Error Correction and short Run relationship estimation test, as well as the short run Causality test.The data on the variables of model and Trade Openness Indicator were sourced from the various data sources of the Handbook of Statistics on the Indian Economy and the UNCTAD, World Bank Databases.The Data for the index and the model is collected and analysed for the period of 1991 to 2017.Findings: The analysis of the Augmented Dickey fuller (ADF) test for unit root shows that the series were of different order, I(1) and I(0), hence the Autoregressive Distributive Lag Model (ARDL) co-integration technique was employed by the study.The long run relationship of the underlying variables is detected through the F-statistic (Wald test) which shows that the series are co-integrated.Long run relationship estimates presents a positive and significant relationship between exports and domestic investment with GDP.The analysis presents that the relationship between the variables imports and exchange rate with GDP was found to be negative, but statistically insignificant and the speed of adjustment term (Error Correction Term) was also found to be significant.Short run causality result reveals the presence of short run causality between exports, domestic investment and exchange rate to GDP.Practical Implications: The paper concludes a positive relationship between international trade and economic growth and supports the ideology of mercantilism to encourage exports through trade promotion and increased participation of India in the world markets.Originality/Value: The authors conclude a positive impact of international trade on India's economic growth and long run relationship estimates present a positive and significant relationship between exports and domestic investment with GDP.Further analysis on implications on bilateral treaties and tariffs would add value to the current study.

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