Is India an export-led growth economy?

By Debesh Bhowmik

India, being an agricultural country, agriculture-led growth was not observed since the inception of the planning because Indian planners were not interested to agriculture-led-growth strategy. On the contrary, industrialization since the second plan was given prior importance but no industry-led-growth was realized where as high industrial growth rate was not observed. Even, the industrial growth rates were not consistence with other sectoral growth rates and employment growth rate.

The sectoral imbalance was verified by many economists. The transitional strategy from agriculture to industry since the second plan was misleading and inappropriate and even full of immature targets. On the other hand, Indian economy showed that sectoral growth was in favour of tertiary sector which contributed the largest share since the planning period from which it has been increasing rapidly.

Diaspora of Indian economic development was consistent with service-led-growth that has been explored by several economists including myself. Presently, more than 50% of GDP comes from service sector in which trade, infrastructure, communication belong to the lion?s share to the contribution of GDP. Of them, trade leads the sector where export is considered as the engine of economic growth and the chief explanatory variable for globalization in context of degree of openness. Trade balance which equals value of export minus value of import maintains crucial role for maintaining external balance of the economy and for securing equilibrium for balance of payments.

A chronic deficit incurs a drain of wealth to the foreign countries which is mitigated through internal and external debt financing. Therefore the chief variable is the foreign demand for exportable which is to be increased by the suitable export policies by which the demand might be elastic so that foreign exchange would be earned.

Hence our task is to verify whether the volume of export determines the growth rate of GDP or not. Let us regress Indian export on the GDP given the time series data from 1968 to 2006 and we get the following equation which is statistically significant at least 10% level of significance.

Log (GDP) = 3.7138 + 0.6399 log(Export)(66.16)* (32.41)*R2 = 0.966

The double log regression equation states that one percent increase in export leads to 0.6399% increase in GDP per year in India during 1968-2006.Note that Indian export during 1968-2006 has catapulted at the rate 10.44% per year which is too low compared to other Asian economies. That is, Log (export) =0.5103+0.10446 t (7.22)* (23.917)* R2 =0.968

Therefore, export promotes GDP growth rate in India at least during the said period. Now, if we regress import on GDP during 1968-2006, we would get that one percent increase in import leads to 0.6927% increase in GDP per year which is significant statistically. The equation is given below.Log (GDP) = 3.44+0.6927log (import)(83.72)*(50.72)*R2=0.949

The above proposition is enriched with the regression equation which states that the imports has increased at the rate of 9.69% per year during 1968-2006 and was significant.

Log (import)=0.857 +0.0969t(11.18)* (29.34)*R2=0.957

Thus, the import has equal significance on the growth rate of income like export .This has emphasized by Keynes through foreign trade multiplier. Now, we can show that trade is engine of economic growth, ie, the following regression equation states that one percent increase in the volume of trade increases the GDP by 0.6711% per year in India during 1968-2006. The equation is significant.

Log (GDP) = 3.094 +0.6711log (export + import)(62.80)* (48.91)*R2= 0.984

The effect of trade balance is clear. One percent increase in negative trade balance induced to decrease in GDP by 0.4228% per year during 1968-2006 which is significant.

Log (GDP) = 4.915+0.4228log (import - export)(54.7)* (7.467)*R2=0.628

It is interesting to note that, India?s GDP has increased at the rate of 6.79% per year during 1968-2006 as per the following equation, Log (GDP) = 4.017+0.0679t(87.13)* (33.84)*R2=0.968

This equation is statistically significant. Hence, it can be said that trade deficit decreases GDP by 0.4228 % per year in contrast to GDP growth rate of 6.79% per year during 1968-2006.

Hence, the policy should be placed on increasing exportable, but I have verified in an earlier paper that depreciation of Indian Rupee with 26 currencies to increase export went unfavourable to Indian economy in most of the currencies. For a few countries, it was favourable. Thus, in international scenario, though export is not elastic. its impact on balance of payments was negative and inverse effect on growth.

Secondly, India's growth is positive towards globalization which is measured by degree of openness and FDI (foreign direct investment) inflows since degree of openness likely depends on exportable. Yet, we have to show the relation between export and FDI inflows, if it is positive, the globalization has a positive impact on external sector where export is the key variable.
Log (export) = 8.778+0.2111log (FDI inflows)(13.14)* (2.398)*R2=0.291

So, FDI inflows has a positive impact on Indian export during 1990-91-2005-06. During the golden years of globalization in India, export increased due to decrease in nominal effective exchange rate and increase in real effective exchange rate, both of which were significant but, FDI inflows produced an inverse effect on export during 1990-91-2005-06 in the multiple regression analysis. The equation is given below.
Log (export)=4.584-0.0824log(FD)+3.9221log(REER)- .7004log(NEER) (1.189)* (7.9221)*

(-5.315)*R2= 967, F=108.71*

But, export must be negatively related with NEER and REER and is positively related with FDI inflows, but India showed exceptional relation with FDI and REER. Thus, globalization, in export front, clearly released a mixed outcome. In addition to that, Indian growth and export scenario were positively related with the degree of openness which means globalization favoured the external sector and economic growth. The regression equations are as follows.
Log (growth rate) = 2.0407+0.19785 log (degree of openness) (8.75)* (2.234)*R2=0.788

But this result is highly significant, i.e., globalization helped the growth rate in India during 1970-71-2005-06. But, globalization, also stimulated exportable during 1968-2006 which is shown by the regression equation.
Log (export) = 8.493+2.983log (degree of openness)(37.11)* (26.25)*R2= 0.949

The equation is significant and stated that one percent increase in degree of openness increased Indian export by 2.983% per year during 1968-2006. Hence, globalization may have positive and significant effect on export led growth strategy in India. Moreover, if we regress some factors of integration on GDP growth rate in India during 1968-2006, we found the following relation.
Log GDP growth rate) =3.0202-18.588log (export intensity)+ 19.313logimp(2.86)* (-1.36) (1.39) (Intensity) + 16.429 log (export share)-21.544log (import share) +5.381logv (1.0077)

(-1.387) (0.367)(Trade share)R2=0.197, F=1.521

The above equation states that one percent decrease in export intensity and import share and one percent increase in import intensity, export share and world trade share induced a decrease in growth rate by 18.588%,and 21.544%, and increase growth rate by 19.313% , 16.429% and 5.381% per year respectively during 1968-2006.But, all the T values of the coefficients in the equation are insignificant.

However, its R2 value is very low. Thus, trade integration factors produced mixed result in the process of economic growth in the external sector of the economy and those did not encourage trade integration in external sectors. Hence, the policy of export trade management, formation of export processing zone, speedier functioning of export-import bank, foreign exchange management, export insurance, export subsidies are essential to Indian export which can accelerate GDP growth rate.
[Note- * = significant at least 10% level, and the values are in the brackets, NEER = nominal effective exchange rate, REER= real effective exchange rate, GDP=gross domestic product, degree of openness=(export+ import) /2/GDP]

References:
Asian Development Outlook (2008)-Oxford-Debesh Bhowmik (2008)- Service-led growth in India:An Analysis. Artha Beekshan,Vol-17,No-2,September 2008,pp 73-85. Debesh Bhowmik (1996)-Convertibility, Exchange rate behaviour and India's trade during 1960-61 to 1992-93: An Analysis. Southern Economist, March 15,1996, pp11-14. Debesh Bhowmik (2001)-Economic reform, India's Trade and Rupee Depreciation, Southern Economist, November 1, 2001,pp7-10. Debesh Bhowmik (2007)-The structure of Post-independent Indian industrialization-Shramshakti, October-November,2007,pp44-48. Debesh Bhowmik(2007)-A Study on globalization and growth in India. 90th Conferencevolume, Indian Economic Association, Srinagar, pp 783-792. India Development Report-2004-05(Oxford)International Financial Statistics (2007, 1998) -I.M.F

Debesh Bhowmik is the author of Economics of Poverty