Income and price elasticities in India's trade

Abstract

The paper estimates the export and import function for India both at the aggregate (rest of the world) as well as the important individual country levels, using annual time series data for the period 1960-61 through 1990-91. It finds that the income elasticities of trade are significant and that this elasticity is significantly higher for imports than exports, implying the possibility of the worsening trade balance with the growth in economies. The trade is generally price inelastic but this elasticity is generally higher for exports than imports. The sum (absolute) of the two price elasticities generally exceeds unity and thus satisfies the Marshall-Lerner condition for the effectiveness of devaluation in regulating the trade imbalance. The impact of the 1966 devaluation is found significant more with regard to imports than exports, and the post 1980 liberalization policy has produced desirable impact on India' globalization. Based on the estimated trade elasticities and the last five years average growth rates in the trade determinants, the growth rates in India s real exports and imports have been projected at 4.1% and 5.4% respectively, and accordingly a worsening of the trade imbalance has been foreseen in the coming years.