The impact of trade policy on growth in India
The objective of this research is to study the impact of trade policy on growth in India in a time-series framework. This has been done in several steps. In the first step, a time-series index of trade policy was constructed and its relationship with growth was examined. In the second step, the impact of trade policy on exports was examined. In the next step, we investigated the issue of causality between export growth and income growth to see if the export-led-growth hypothesis is valid even for a 'large' country such as India. Finally, the alternative hypothesis of government-led-growth was also tested since the governmental intervention in India was expected to engineer an economic take-off in India. If this latter thesis is rejected by the data, then, by contrast, the earlier thesis of export-led-growth (if accepted) would be rendered even more remarkable. In carrying out the above steps we have made use of cointegration and errorcorrection modelling. This is an appropriate me thodology to use for our purpose as it helps us to handle non-stationary time series and at the same time preserves the longrun information. More specifically, the Engle-Granger two-step approach, Johansen's Maximum Likelihood procedure and Granger-causality technique have been employed. The time period of our study is 1950-96. It emerges from this research that liberal trade policy leads to faster economic growth in India. Secondly, the elasticities of exports with respect to the real effective exchange rate and world income are quite large, signifying that world demand conditions were not significant in constraining Indian exports. Further, the available evidence suggests that the export-led-growth thesis is valid even for a 'large' country like India. In this context, what we actually find is that a two-way causality between export growth and output growth. Finally, the evidence presented by us suggests that the expansion of the government sector is detriment he government led-growth thesis is rejected by the data. An examination of this thesis at a disaggregated level shows that while the expansion of government investment has a negative impact on growth, the impact of growth in government consumption is insignificant. An interesting finding emerging from our study is that the investment ratio has an insignificant impact on growth in India The impact of trade policy on growth appears to be via higher productivity rather than through higher investment. The policy conclusion emerging from this study is that export pessimism of the past was misplaced and India would do well to pursue export expansion much more vigorously than hitherto. This would require policies aimed at offsetting the earlier anti-export bias, such as an aggressive exchange rate policy, lowering the degree and dispersion of protection further, de-reservation of (removal of reservation status for) the small-scale sector and liberalisation of the agricultural and consumer goods sectors. This would also require a strategy to tackle infrastructural bottlenecks, which are posing a serious constraint on India's growth and exports.