CHAPTER - III FOREIGN TRADE AND ECONOMIC GROWTH IN INDIA A REVIEW OF TRADE LITERATURE AND POLICIES The external sector has come to occupy an important place in the growth and development process of the Indian economy. Traditionally, India had been a low import and low export-oriented country. Throughout the 60's and 70's, India's policy of encouraging self-reliance has given a relatively closed model of development. Due to the change in policies in 1977-78 and onwards, trade share in the GDP has been gradually mounting. Infact, India's trade, trade policy and experience of economic performance have a story of fluctuating fortunes during four and half decades of planned development. The past resulted changes and reversals of economic performance through the trade are here onwards assessed and analysed. In this chapter two aspects are covered. Firstly, the empirical literatures that are connected with India's trade and growth are reviewed. This review is to know the way in which earlier writings placed the trade in India's economic growth. Subsequently, the macro level trade policies adopted in the past four and half decades are reviewed and its consequences are evaluated. 3.1 TRADE AND ECONOMIC GROWTH IN INDIA : A LITERATURE REVIEW Inspite of the mounting importance of trade in the post-Independence growth of the Indian economy, the study of the trade and growth has received less attention. To review the earlier literature, one can distinguish all the studies into three categories on the basis of the methodology they adopted viz., 1) the study based on Bivariate and Multivariate Regression analysis, 2) Causality analysis and 3) Inter-industrial analysis. B. V. Gupta (1973) initiated a systematic discussion on the trade and growth in his Ph.D. thesis titled. "Export in Developing Economy - A case study of India" He adopted correlation and regression methods to assess the relation between export 70
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CHAPTER - III
FOREIGN TRADE AND ECONOMIC GROWTH IN INDIA
A REVIEW OF TRADE LITERATURE AND POLICIES
The external sector has come to occupy an important place in the growth
and development process of the Indian economy. Traditionally, India had been a low
import and low export-oriented country. Throughout the 60's and 70's, India's policy of
encouraging self-reliance has given a relatively closed model of development. Due to
the change in policies in 1977-78 and onwards, trade share in the GDP has been
gradually mounting. Infact, India's trade, trade policy and experience of economic
performance have a story of fluctuating fortunes during four and half decades of planned
development. The past resulted changes and reversals of economic performance through
the trade are here onwards assessed and analysed. In this chapter two aspects are
covered. Firstly, the empirical literatures that are connected with India's trade and growth
are reviewed. This review is to know the way in which earlier writings placed the trade
in India's economic growth. Subsequently, the macro level trade policies adopted in the
past four and half decades are reviewed and its consequences are evaluated.
3.1 TRADE AND ECONOMIC GROWTH IN INDIA : A LITERATURE REVIEW
Inspite of the mounting importance of trade in the post-Independence growth
of the Indian economy, the study of the trade and growth has received less attention.
To review the earlier literature, one can distinguish all the studies into three categories
on the basis of the methodology they adopted viz., 1) the study based on Bivariate and
Multivariate Regression analysis, 2) Causality analysis and 3) Inter-industrial analysis.
B. V. Gupta (1973) initiated a systematic discussion on the trade and growth
in his Ph.D. thesis titled. "Export in Developing Economy - A case study of India"
He adopted correlation and regression methods to assess the relation between export
70
and growth for the period of 1951-52 to 1970-71. The study concluded that Indian
Export had positive impact on its economic development by enabling India to more
developmental import. However, for developing nations the study viewed that, unstable
character of export has failed to stimulate the economy. The study results are
self-contradictory and outdated. Though substantial literature came in 70's and 80 s
on trade policy regime, they have not dealt with the relationship between trade and
economic growth. These literature includes books written by Bhagwati and Srinivasan
(1975), Bhagwati and Desai (1978) and Wolf (1982). All these tracts have supported
for the policy of export promotion and import liberalisation in promoting growth and
development. In the book " Export and Growth" D.N.Tripathi (1985) ran regression
for the period of 1948-49 to 1981-82 at disaggregated level and obtained dependence of
national income on export. He supported Chenery's two-gap model by declaring that
export is beneficial to India's growth as it permits higher import. The main limitation of
all the above study is that they ignored the import.
Recently, a number of studies have inducted import into the discussion of
growth. Mainly they are Siddharthan (1989), Sunil Mani (1991), Sunanda Sen and
Hiranya Mukhopadhyay (1994). They observed a phenomenon of higher import
intensity in Indian industry and economy over the period. All these studies except the
last one, have treated total import as leakage to economic growth. The last study has
measured structural linkages among GDP, export and import by formulating its own
macro model with the data for the period of 1973-1990. The study result indicates that
one per cent rise in real import raises nearly 0.5 per cent of growth rate. They also find
that both of export and import are essential inputs for the growth. A.I.Rashid (1995)
has developed four equation model for 1977 to 1989 to assess inter-dependency
between trade and development. She concluded that trade is an important factor in
economic development. V.N. Attri (1992) and Metwally (1993) measured dynamic
effects of export on the rest of the economy. They found that scale mechanism is
71
operated through manufactured export in India. Using modified Koyak type lagged
simultaneous equations model, Metwally concludes that India has enjoyed a short-run
spread effect of export. However, study has not considered the problem of auto
correlation in the analysis.
The above studies have made an elementary exercise and have
forwarded the very broader and generalised conclusions. Regression and Correlation
analyses do not take care of causal relationship that exists between trade and
economic growth.
The first study is carried out by Jung and Marshall on causal relations
between export and growth by using Granger test. They found that there is no
support for the causal hypothesis that export growth causes output growth and vice-
versa, in case of India for the period 1960-1979. Subsequent writers noticed that Jung
and Marshall did not make use of any analytical procedure in determining
optimal lag length. Nandi and Biswas (1991) and Nandi and Basu (1993) in a cross
country study, arrived at the conclusion that the study of export growth causes growth
of income using the Sim's test of causation. It is irony that the study of Jung and
Marshall and the later two studies with the two different techniques have arrived at the
contrary conclusions on the causal relationship between export and growth T his
questions the validity of Granger and Sim's techniques to assess the relationship
between trade and growth.
In a significant study, S.K.Mallick (1994) has employed Granger, Sim's
and modified Sim's (Geweke - Meese-Dent) test with improved optimal lags selection
to measure the causal relationship between export and growth for the period of
1950-51 to 1991-92. The result reject the null hypothesis that economic growth does
not cause export growth and vice-versa. The study also demonstrates the
72
validity of its finding with the use of Geweke test even after extending bivariate
system to a trivariate one by introducing import as a linkage variable. By and large, the
study concludes that there is a feed back causal linkage between income growth and
export growth without and with link variable. The main drawback of the study is it
ignores the structural break in the series. G.R.Ramkrishna (1994) in his Ph D thesis
confirmed uni-directional relationship from export to growth in India for the period of
1960-61 by using Granger test. One of the major shortcomings of all the above studies
is that, they have not tested stationary conditions of time series while applying causality
test.
Recently Sham Bhat (1995) has applied Granger test after testing
cointegration of export with GNP. The results revealed that there is a bi-directional
causal relationship between export and economic growth in India during the period of
1950-51 to 1993-94. In a significant study, Dipendra Sinha and Tapen Sinha (1996)
examined the relationship between volume trade and economic growth using time
series data. They adopted cointegration technique and found that there is a long run
relationship between real GDP and trade openness. They also observed that two way
causality exists between real GNP and trade openness. Thus it is evident that there is
a bi-directional relationship between export and economic growth in India
During the last decade a number of studies have measured inter-industrial
effect of trade on Indian economy by using yard stick of input-output technique. The
main studies conducted in this regard are Siddarthan (1989), Atul Sharma and Kewal