Exports and economic growth in India: - an empirical investigation

Abstract

It has often been argued that the external sector constitutes a small proportion of India’s economy (imports and exports as a proportion of GNP were 8.2 per cent and 6.2 per cent respectively for 1990/91), and hence trade has only a marginal role to play in India’s economic growth; yet there are hardly any studies which support this claim. The role of trade in economic growth has been a topic of interest even before Adam Smith. Theories regarding the role of trade in economic growth range all the way from the claim that trade can act as an engine of growth (the classical and neo classical school) to its contrary that trade could be detrimental to the interests of the economy (the underdevelopment school). Similarly, empirical studies have thrown up results, which could at best be termed mixed: while some support the thesis of export-led growth others do not. To the best of our knowledge, there are no substantial studies that have examined the role of exports in India’s economic growth rigorously. The present study is an attempt to fill this research gap. The specific objectives set forth in the study are: i) To examine the relationship between export growth and economic growth in India, with special reference to the 1980s. ii) To investigate such relationship with the help of available empirical evidence on various aspects.

The data for the study were obtained from secondary sources; mainly the Central Statistical Organization, Planning Commission, DGCIS etc. We were constrained by the availability of the required data to restrict the study to the period 1960-61 to 1988/89. The study employs a neoclassical type of growth model with suitable modifications to incorporate the externality effects of exports, the import constraints on growth, and the shifts in the relationships. To explain the relationships observed in the growth model, inter industry linkages have been worked out using the Input-Output transactions for Indian economy. The main findings of the study are- i) Export growth had a crucial role to play in the shift in the GDP growth in the 1980s. for the period 1961/62 to 1979/80, it does not show significant influence on GDP growth. ii) Among the exports, growth of manufactured exports had significant positive relationship with GDP growth, while growth of primary exports had no influence. iii) The reasons behind the shift in the relationship between export growth and GDP from the earlier period to the eighties are: a) higher level of development, and stronger inter industry linkages, and b) change in composition of exports in favour of manufactured exports.

iv) Manufactured exports are, by and large, price responsive, while primary exports are not. Both primary and manufacture exports are subject to world demand fluctuations to a considerable extent.

v) Despite the import liberalization in the 1980s, the Indian economy has faced import shortages, as revealed by the significant positive relationship between GDP growth and import growth for the eighties.

Thus, the main findings of the study do not support the commonly held belief that trade has only a marginal role to play in India’s economic growth. The policy implications of the study are – i) there is a case for adopting export-led growth strategy for achieving faster economic growth, ii) the focus of the export promotion strategy has to be manufactured products, iii) exchange rate policy can be used as a policy instrument for development, especially if the composition of exports is in favour of manufactured exports, and iv) Further import liberalization may be necessary to relax the import constraint on economic growth.