Exploring the Role of Merchandise and Service Trade in Economic Growth in India

Abstract

The impact of trade on growth in India has been intensively researched, using aggregate indicators, whereas the issue at the disaggregate level has received little attention from researchers. To the best of our knowledge, the growth gains from the merchandise and service trade of the Indian economy are not documented. Against this backdrop, this article examines the relative impact of merchandise and service trade on India’s growth under the liberalised trade regime. The total factor productivity (TFP) and human capital (HC) index are included to moderate the relative role of trade indicators in propelling growth. Johansen’s approach to cointegration, followed by the normalised cointegrating income vectors, traces long-run impacts, while the cointegrated vector autoregression (CVAR) model is used to identify short-run growth impacts. The baseline results indicate that (a) merchandise and service imports, as well as merchandise exports, have positive impacts on long-run income. On the other hand, in the short run, only merchandise trade stimulates income growth; (b) TFP has positive long- and short-run impacts; and (c) HC produces beneficial impacts only in the long run. The robustness of the baseline results is confirmed by involving impulse response analysis. Based on the results, the study inferred that a balanced integration of commodities and services will help promote sustainable economic growth. JEL Classification: F43, F14, O47, I0, C32