Merchandise Trade Flows and Economic Growth: Post-WTO Era in India

Abstract

Our paper attempts to contribute to the existing literature by exploring the causal linkages between India’s merchandise trade flows and economic growth by considering Gross Fixed Capital Formation (GFCF) as an intermediary channel. It primarily seeks to understand whether the on-going export-oriented policies improve India’s economic growth and/or is there a necessity to focus more on the import channel. Considering quarterly data in the post-WTO era (1996Q3 to 2019Q3), we empirically examine the long-run and short-run validity of the four alternative hypotheses, namely, export-led growth, growth-led export, import-led growth and growth-led import. Our analysis finds evidence only for the import-led growth through the GFCF in the short-run.