Export Growth, Export Instability, Investment and Economic Growth in India: a Time Series Analysis

This paper uses Johansen’s co-integration analysis and a vector error-correction model to investigate the relationship between economic growth, export growth, export instability and gross fixed capital formation (investment) in India during the period 1971- 2005. The empirical results suggest that there exists a unique long-run relationship among these variables and the Granger causal flow is unidirectional from real exports to real GDP. For example, ceteris paribus, a 1% increase in exports raises GDP by an estimated 0.42% in the long run. The short term dynamic behavior of income growth function was investigated by estimating an error correction model in which the error correction term was found to be correctly signed and statistically significant. The policy implication is that government should continue to pursue export oriented measures if India is to secure greater levels of income and more rapid and sustained economic growth in the coming years.