A DISSERTATION REPORT ON

A Study of Export Performance of India in World Trade

and Causal Relationship Between Trade, Foreign Direct
Investment, and Economic Growth of India

IN
PARTIAL FULFILLMENT OF
REQUIREMENT OF POST GRADUATE DIPLOMA IN
MANAGEMENT PROGRAMME 2009-11

Submitted To:- Submitted By:-

Ritu Srivastava Mani Nandwani
Faculty (IB) PGDM 2009-11
Roll No. 29050

Northern Integrated Institute Of Learning Management

Centre for Management Studies
Greater Noida
 ACKNOWLEDGEMENT

Foremost, I would like to express my deep and sincere gratitude to my project mentor Ms. Ritu
Srivastava for providing me the opportunity to do my project under her guidance and giving me
her timely and valuable suggestions to move ahead with my project objectives.

My sincere gratitude to her for helping me in each and every stage of the Dissertation Project.
Her help, stimulating suggestions and encouragement helped me in writing the report.

I take this opportunity to thank my friends, discussing the topic with them helped me a great deal
in completing the project.

Thank you all!

Sincerely
Mani Nandwani
29050
NIILM-CMS
PREFACE

The report studies the growth of Indian exports and imports in merchandise goods with respect to
world trade from 1971-72 to 2009-10 and examines the major countries and commodities traded
by India for export and import purposes. It also examines the causal relationship between
exports, Foreign Direct Investments, and Economic Growth for India.

The objective of the report is to examine the export performance Of India in world trade, and its
instrumental role in the growth process, the variations in the Indian growth performance over the
period provided the basic rationale for the choice of sub-periods.

The report is based on the secondary research and the data available on government websites
such Reserve Bank of India, Export Import Bank of India, Directorate General of Commercial
Intelligence and Statistics, Directorate General of Foreign Trade, etc.

To study the causal relationship, quarterly data on exports (in crore rupees), Foreign Direct
Investment, and Gross Domestic Product (GDP) at Factor Cost (at current prices) of India is
used. The quarterly data on economic growth rate variables and exports are collected from the
“Handbook of Statistics on Indian Economy, 2010” published by RBI. The Granger Causality
test used in time series analysis to examine the direction of Causality between three economic
series has been one of the main subjects of many econometrics studies for the past three decades.
We estimate the causal relationship between exports economic growth and foreign direct
investments.
TABLE OF CONTENT

INTRODUCTION ......................................................................................................................... .2
Objective ................................................................................................................................. 3
Methodology ........................................................................................................................... 4
PART I ............................................................................................................................................ 5
Introduction ............................................................................................................................. 6
Foreign Trade Indicators ......................................................................................................... 6
Foreign Trade of India ............................................................................................................ 8
India's International Trade .................................................................................................... 10
PART II......................................................................................................................................... 17
Introduction ........................................................................................................................... 18
Methodology ......................................................................................................................... 19
Granger Causality Test ......................................................................................................... 20
Results ................................................................................................................................... 21
CONCLUSION ............................................................................................................................. 25
ANNEXURE................................................................................................................................. 27
BIBLIOGRAPHY AND REFERENCES ..................................................................................... 33
INTRODUCTION
Introduction
Traditional trade theory emphasizes the gains from specialization made possible by differences
among countries. The main contribution of this strand of thought is that opportunities for
mutually beneficial trade exist by virtue of specialization on the basis of relative efficiency – a
country does not have to be better at producing something than its trading partners to benefit
from trade (absolute advantage). It is sufficient that it is relatively more efficient than its trading
partners (comparative advantage). This insight explains why so many more opportunities to gain
from trade exist than would be the case if only absolute advantage counted.

International trade is integral to the process of globalization. Over many years, governments in
most countries have increasingly opened their economies to international trade, whether through
the multilateral trading system, increased regional cooperation or as part of domestic reform
programs. Trade and globalization more generally have brought enormous benefits to many
countries and citizens. Trade has allowed nations to benefit from specialization and economies to
produce at a more efficient scale. It has raised productivity, supported the spread of knowledge
and new technologies, and enriched the range of choices available to consumers.

In response to the global trend India has steadily opened up its economy. Liberalization of
restrictions imposed by the past government policy on markets and private sectors economic
activities and progressive integration with the global economy have been the two major planks of
the wide-ranging economic policy reforms in India since July 1991. Their objective has been to
put the Indian economy on to a higher growth path. Till the early 1990s, India was a closed
economy: average tariffs exceeded 200 percent, quantitative restrictions on imports were
extensive, and there were stringent restrictions on foreign investment. The efficacy of rapid
growth for making a lasting dent on the long-standing problem of abject poverty has been widely
recognized in India. Also recognized is the need to pursue domestic liberalization with greater
vigor. The country began to cautiously reform in the 1990s, liberalizing only under conditions of
extreme necessity. Since that time, trade reforms have produced remarkable results. India‟s trade

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to GDP ratio has increased from 15 percent to 48 percent of GDP between 1990 and 2009, and
the economy is now among the fastest growing in the world.1

In recent years, the government‟s stand on trade and investment policy has displayed a marked
shift from protecting „producers‟ to benefiting „consumers‟. This is reflected in its Foreign Trade
Policy for 2009/14 which states that, "For India to become a major player in world trade, we
have also to facilitate those imports which are required to stimulate our economy." The political
instability and the Gulf war towards the end of the decade also contributed to rising current
account deficits, pressure on the exchange rate, capital flight and dwindling foreign exchange
reserves. The resulting crisis forced a major fiscal adjustment in the 1990s and wide ranging
policy reforms involving liberalization of industrial and trade policies since 1991.

The report studies the growth of Indian exports and imports in merchandise goods with respect to
world trade from 1971-72 to 2009-10 and examines the major countries and commodities traded
by India for export and import purposes. It also examines the causal relationship between
exports, Foreign Direct Investments, and Economic Growth for India.

The Compound Annual Growth Rate (CAGR) is calculated by dividing the entire period 1971-
2010 into four sub-periods for an examination of export performance. These are 1971-80 (9
years), 1980-90 (10 years), 1990-2000 (10 years) and 2000-2010 (10 years). The choice of sub-
periods is derived mainly due to the data of 39 years and for the purpose of calculating Growth
rate of entire decade.

Objective
The objective of the report is to examine the export performance Of India in world trade, and its
instrumental role in the growth process, the variations in the Indian growth performance over the
period provided the basic rationale for the choice of sub-periods.

1
Foreign Trade Policy, 2009-14

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The focus on the value of exports (in US dollars) in judging the export performance is derived
from their ready availability, international comparability and the opportunity it offers for
disaggregated analysis across various sources. The main focus is to put the Indian export growth
in world perspective on the one hand and associate export performance with factors of economic
growth on the other.

The main objectives of this report are the following:

 To study the export performance of India in world trade.
 To study the major markets of India to trade with.
 To study the major commodities traded by India.
 To associate the export performance of India with its factors of economic growth.

Methodology
The report is based on the secondary research and the data available on government websites
such Reserve Bank of India, Export Import Bank of India, Directorate General of Commercial
Intelligence and Statistics, Directorate General of Foreign Trade, etc.

The main data that is collected for the purpose of the report is related to:
 Merchandise Exports and Imports
 Major Trade Markets
 Major Commodities traded
 GDP at Factor Cost
 Foreign Direct Investments

The methodology adopted mainly has two parts:

 Analysis of the collected data
 Granger Causality Test

Page 4
Part i

Page 5
Globalization and Trade
Globalization has caused significant structural changes in parts of the world economy. Some
countries and economic sectors have been able to take advantage of these structural changes
better than others. In the first decades after World War II, Europe and Japan were important
beneficiaries of globalization as they sought to restructure their economies. In more recent years,
newly industrializing economies have been among the major winners from increasing economic
integration. A long-term shift in the composition of world merchandise trade has occurred, with
the share of manufactured goods rising dramatically, against a decline in agricultural products
and non-fuel minerals. The domination of developed countries in world exports of manufactures
has been greatly diluted, first in labor-intensive goods (such as textiles and clothing) and
subsequently in electronic products and capital intensive goods (such as automotive products).

Global trade growth was less dynamic after the oil crisis of 1973, while migration and foreign
direct investment (FDI) flows accelerated, especially from the mid-1980s onwards. Migration
differed between the two globalization periods referred to above, as many earlier sources of
emigration (especially Western Europe) became destination points. South to North migration
flows increased in importance, while South-South flows continued. Capital flows have always
played a prominent role in the globalization process. In the last few decades liberalization and
deregulation have contributed strongly to a surge in FDI flows. But regions have been affected
differently, with important consequences for the development of technological know-how and
the geographical pattern of industrialization.

The main forces driving global integration have been technological innovation, political change
and economic policy choices.

Foreign Trade Indicators of India during 1971-2009

Exports
The Exports of India grew from 2.15 billion of US Dollars in 1971-72 and touched 7.93 billion
of US Dollars in 1979-80. In this decade (1971-1980) Exports index number had grown by more
than three times in 1979. In this decade, the highest annual growth rate was 34.6 per cent in

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1974. During the decade 1970 – 1979, the average value of Exports by India and the growth rate
comes about 4.4 billion of US Dollars is 31.69 per year, respectively. In the next decade, the
Exports of India have grown considerably. The value of Exports touched the highest level of
15.8 billion of US Dollars in 1989 from 8.3 billion of US Dollars in 1981. The average value of
Exports and annual growth rate in this decade work out to 10.4 billion of US Dollars and 9.43
per cent per year, respectively.

During the decade 1990 – 1999, since 1991, the Exports of India had grown substantially. The
value of Exports grew from 17.7 billion of US Dollars in 1991 to 35.7 billion of US Dollars in
1999. The average value of Exports and the annual growth rate in this decade work out to 27
billion of US Dollars and 10.94 per cent per year, respectively. During the time period 2000-
2007, the Exports of India had grown sizeably. The value of Exports grew from 42.4 billion of
US Dollars in 2000 to 145.4 billion of US Dollars in 2007. The average value of Exports and
annual growth rate in this decade work out to 79.7 billion of US Dollars and 34.74 per cent per
year, respectively.

Imports
During the decade, 1970 – 1979, the Imports of India had grown sizeably. The value of Imports
grew from 2 billion of US Dollars in 1970 to 9.8 billion of US Dollars in 1979 the average value
of Imports and annual growth rate work out to 5.2 billion of US Dollars and 40.3 per cent, per
year respectively.

In the next decade, since 1984, the Imports of India had grown gradually. The value of imports
had increased from 15.3 billion of US Dollars in 1984 to 20.5 billion of US Dollars in 1989. The
average value of Imports and annual growth rate work out to 16.2 billion of US Dollars and 4.3
percent, per year, respectively. During the decade 1990 – 1999, since 1991, the Imports of India
had grown substantially. The value of Imports grew from 20.4 billion of US Dollars in 1991 to
47 billion of US Dollars in 1999. The average value of Imports and annual growth rate work out
to 32.1 billion of US Dollars and 11.03 percent, per year, respectively. During the time period
2000-2007, since 2002, the Imports of India had grown considerably. The value of Imports had
increased from 56.5 billion of US Dollars to 21.6 billion of US Dollars in 2007. The average

Page 7
value of Imports and annual growth rate work out to 108 billion of US Dollars and 45.5 per cent,
per year, respectively.

FDI Inflows into India

During the period from 1970 to 1979, the value was very low and it ranges from 18 million of
US Dollars to 85 million of US Dollars. The average value of FDI inflows and annual growth
rate in this decade works out to 45 million of US Dollars and 0.99 per cent per year respectively.

During the period from 1980 to 1989, the FDI inflows into India had grown considerably. The
value of FDI Inflows has increased from 6 million of US Dollars in 1983 to 252 million of US
Dollars in 1989. The average value of FDI inflows and annual growth rate in this decade works
out to 104.7 million of US Dollars and 24.33 per cent per year respectively. In the next decade,
the value of FDI inflows increased to the highest level of 3.6 billion of US Dollars in 1997 from
75 million of US Dollars in 1991 and then it started showing a declining trend, it has come down
to 2.1 billion of US Dollars in 1999. The average value of FDI inflows and annual growth rate in
this decade works out to 1.5 billion of US Dollars and 90.53 per cent per year respectively.
During the period from 2000 to 2007, the FDI inflows into India had grown sizeably. The value
of FDI inflows has rose from 3.9 billion of US Dollars in 2000 and touched the highest level of
23 billion of US Dollars in 2007. The average value of FDI inflows and annual growth in this
period works out to 9.4 billion of US Dollars and 77.17 per cent per year respectively.

Foreign Trade of India

Whole world has recognized India as super power of 21st century. India is youngest county in
the world growing a rate of more than 8 percent. Large population of India provides market to
the countries of the world. At the same time it provides opportunities to India in terms of
extracting the potentials of its manpower and other resources to emerge as real super power.

India's foreign trade also reflects her potentials to emerge as a super power. India has achieved
the highest level of exports, in over a decade, by notching up a 23.66 per cent growth
(provisional) in the first five months of the current fiscal over the same period last year. The

Page 8
exports were valued at $17,451.89 million against $14,112.88 million in this period and the
increase was largely due to various policy measures initiated by the government. The export
growth target has been set at 18 per cent for the whole of 2000-01.

Cumulatively, the imports during April-August 2000 grew by 20.51 per cent to $21,743.13
million from $18,042.32 million in April-August 1999, pushing up the trade deficit to over $4.2
billion. The high export growth during April-August 2000 was close on the heels of a distinct
turnaround in exports which clocked a 11.6 per cent growth during 1999-2000, exceeding the
target of 11.3 per cent.

Arun Jaitely, in 2003, as a Union Minister of Commerce & Industry states that “Exports can act
as the motive power growth for a rapidly developing Indian economy and in making India a
significant player in the world market. For this, exports have to be recognized as a national
priority by the all agencies of Government of India and State Governments and the private
sector. What is needed is a partnership between the Government machinery at all levels and all
the stakeholders in the process of exports. The media too has a significant role to play in bringing
about a consensus on critical issues related to reforms, and promoting of investment including
foreign direct investment, particularly in the manufacturing sector, without which high rate of
export growth cannot be sustained. The high growth in 2002-03, achieved in the face of global
recession, shows not only the resilience of the Indian exporters but also underscores their
growing confidence and the competitiveness of India products. Let me caution, however, that we
cannot afford any complacency, given the dynamics of a highly competitive global market place.
We have to relentlessly pursue our objective of increasing our share of world trade. This brings
me to our often stated goal of achieving 1% of world merchandise trade by 2007. If the present
trend continues, we may reach this goal ahead of the year 2007…. ”2

22
Exports: A Success Story, published by Ministry of Commerce and Industry (Department of Commerce)

Page 9
India’s International Trade
During 2008-09 and 2009-10, weaker demand in developed economies, triggered by falling asset
prices and increased economic uncertainty had pulled down the growth of India‟s exports to
developed countries. To insulate Indian exports from the decline in demand from developed
countries, in Foreign Trade Policy, focus is on diversification of Indian exports to other markets,
especially those located in Latin America, Africa, parts of Asia and Oceania. To achieve
diversification of Indian exports, following initiatives have been taken under the Policy.
 27 new countries have been included within the ambit of Focus Market Scheme.
 The incentives provided under Focus Market Scheme have been increased from 2.5% to
3%.
 There has been a significant increase in the outlay under „Market Linked Focus Product
Scheme‟ by inclusion of more markets and products. This ensures support for exports to
all countries in Africa and Latin America, and major Asian markets like China and Japan.

The exports of India in 1971-72 are US $ 2.2 billion, which went up to US $ 185.3 billion in
2008-09, with Compound Annual Growth Rate (CAGR) of 17.67% in the last decade i.e. 2000-
10. The imports of India were US $ 2.4 billion in 1971-72, and it grew up to US $ 303.7 billion
in 2008-09, with CAGR of 20.18% in 2000-10. The total merchandise trade was US $ 4.6 billion
in 1971-72, and it grew up to US $ 488.9 billion in 2008-09, with CAGR of 19.07% in 2000-10.

Page 10
 Merchandise Trade
1200000.0

1000000.0

800000.0

600000.0 Total

400000.0 Imports
Exports
200000.0

0.0

The performance is a strong indication of the resilience of India‟s export sector, which has
achieved and sustained high growth rate, despite the world economic recovery being stalled on
account of various factors.

India’s Export Market

The major destinations of India‟s exports, where export growth rates have been registered, the
pattern has been changed during the last 15 years. With reference to Table 1 of Appendix,
Following are the two charts showing the changing pattern among the two fiscal years i.e.; 1994-
95 and 2008-9.

Others
2%
1994-95

Developing
Countries
26%

OECD
OPEC 59%
Eastern Europe 9%
4%

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 Others
2008-09
4%

OECD
37%
Developing
Countries
37%
OPEC
21%

Eastern Europe
1%

The concentration of Indian exports was more on Developing Countries and Organization of
Petroleum Exporting Countries (OPEC) were more in 2008-09 as compared to 1994-95. The
changing pattern shows the change in priorities and emergence of new markets across the globe.
It also reflects the changes in purchasing power and efficiency among nations.

India’s Top Export Markets

The top ten export markets of India in 2008-09 are listed down in the form of a bar graph. The
comparison is made with the size of these markets in 1994-95, to show the changing preferences
of a government and the pattern to target some of the nations across the globe. Sometimes, its
because of the absolute advantage and efficiency reasons.

Refer to the data given in Table 2 of Appendix, following bar graphs are shown as:

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 1994-95

U.A.E. 1265.9
USA 5020.7
China 254.2
Singapore 770.3
Hong Kong 1517.4
UK 1689.7
Germany 1747.7
Netherlands 585.5
Saudi Arabia 435.7
988.4
Total Exports US
Belgium
$ 26330.5 mn

2008-09
U.A.E. 23966.3
USA 20972.3
China 9275.6
Singapore 8209.2
Hong Kong 6607.6
UK 6597.6
Germany 6347.6
Netherlands 6281.3
Saudi Arabia 4987.7 Total Exports US
Belgium 4415.7 $ 185295 mn

India’s Top Import Markets

The top ten import markets of India in 2008-09 are listed down in the form of a bar graph. The
comparison is made with the size of these markets in 1994-95, to show the changing preferences
of a government and the pattern to target some of the nations across the globe. Sometimes, its
because of the absolute advantage and efficiency reasons.

Page 13
Refer to the data given in Table 3 of Appendix, following bar graphs are shown as:

1994-95
China 760.8
U.A.E. 1533.0
Saudi Arabia 1569.6
USA 2905.7
Iran 536.5
Germany 2187.0
Switzerland 824.3
Australia 915.2
Kuwait 1480.2
South Korea 629.5 Total Imports US
$ 28654.40 mn

2008-09
China 32092.9
U.A.E. 23030.8
Saudi Arabia 19513.1
USA 18441.5
Iran 12137.0
Germany 11941.4
Switzerland 11458.9
Australia 10979.1
Kuwait 9392.6
Total Imports US
South Korea 8622.6 $ 303696.30 mn

India’s Top Export Commodities

The top ten export commodities of India in 2008-09 are listed down in the form of a bar graph.
The comparison is made with the export size of these commodities in 1994-95, to show the
changing preferences of a government and the pattern to target some of the items in the total
trade basket. Sometimes, its because of the absolute advantage and efficiency reasons.

Page 14
Refer to the data given in Table 4 of Appendix, following bar graphs are shown as:

1994-95
Gems and Jwellery 4500.4
Petroleum Products 416.9
Pharmaceuticals 1762.9
Trans Equip 771.3
Machinery and Inst 726.7
RMG 3281.9
Mfg of Metals 706.2
Electronic Goods 412.2
Iron & Steel 528.4
Iron Ore 413.1

2008-09
Gems and Jwellery 27955.2
Petroleum Products 27547.0
Pharmaceuticals 15628.4
Trans Equip 11153.3
Machinery and Inst 10945.5
RMG 10935.0
Mfg of Metals 7548.2
Electronic Goods 6805.6
Iron & Steel 5822.7
Iron Ore 4723.6

India’s Top Import Commodities

The top ten import commodities of India in 2008-09 are listed down in the form of a bar graph.
The comparison is made with the import size of these commodities in 1994-95, to show the

Page 15
changing preferences of a government and the pattern to target some of the items in the total
trade basket. Sometimes, its because of the absolute advantage and efficiency reasons.

Refer to the data given in Table 5 of Appendix, following bar graphs are shown as:

1994-95
Petrol. Products 5927.8
Electronic Goods 1228.1
Gold and Silver 712.6
Machinery 2727.8
Pearls and Stones 1629.7
Fertilisers 1052.4
Transport Equip 1113.6
Org & Inorg Chem 2137.1
Coal, Coke & Briq 708.4
Iron & Steel 1163.6

2008-09
Petrol. Products 93671.7
Electronic Goods 23333.8
Gold and Silver 22783.0
Machinery 21601.0
Pearls and Stones 16581.3
Fertilisers 13626.5
Transport Equip 13230.3
Org & Inorg Chem 12203.0
Coal, Coke & Briq 9990.1
Iron & Steel 9475.3

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Part ii

Page 17
A Causal Relationship between Trade, Foreign Direct
Investment and Economic Growth for India

Introduction
In the neoclassical growth model, technological progress and labour growth are exogenous; FDI
inflows merely increase the investment rate, leading to a transitional increase in per capita
income growth, but have no long – run growth effect. In the new growth theory of the 1980s
endogenous technological progress and FDI has been considered to have permanent growth
effect in the host country through technology transfer and spillover.3

Nevertheless, the results obtained by empirical studies, which recently have applied causality test
to examine the nature of a causal relationship between exports and economic growths are also
mixed. Although some studies have found a positive association, others resulted in reverse
conclusions. It is not clear in the literature to what degree is the positive relation between trade
and growth due to the fact that trade is simulative of growth and to what degree it reflects the
fact that growth leads to trade. The rate of economic growth differs from country to country,
technological advance increases slowly or rapidly relatively to the economic structure of each
country, while when the monetary and fiscal policy are not taking account of, they have a
negative effect on economic growth.4

The traditional Heckscher – Ohlin – Samuelson frame work, suggests that international trade and
FDI are substitutes assuming labor and capital can move freely between countries and no
transportation costs apply. The implication is that international trade involves an indirect
exchange of production factors between countries.5 The link between technology and economic
growth has been highlighted by an OECD study of both OECD and developing countries, which
have found a significant effect on economic growth from the innovation and diffusion of
technology. Foreign Direct Investments can contribute to economic growth because they tend to
be more productive than the investments of local firms. Foreign Direct Investments have led to
significant positive spillover effects on the labour productivity of domestic firms.
3
Causal Relationship between Trade, FDI and Economic Growth for India, by G. Jayachandran and A. Seilan
4
Melina Dritsaki, Chaido Dritsaki and Antonios Adamopoulous, 2004
5
Liu et al, 2001

Page 18
Methodology
To study the causal relationship, quarterly data on exports (in crore rupees), Foreign Direct
Investment, and Gross Domestic Product (GDP) at Factor Cost (at current prices) of India is
used. The quarterly data on economic growth rate variables and exports are collected from the
“Handbook of Statistics on Indian Economy, 2010” published by RBI.

The Granger Causality test used in time series analysis to examine the direction of Causality
between three economic series has been one of the main subjects of many econometrics studies
for the past three decades. We estimate the causal relationship between exports economic growth
and foreign direct investments. The Granger – type test states that, if a variables x and z Granger
Causes variable y, the mean square error (MSE) of forecast of y based on the past values of three
variables are lower than that of a forecast that uses only past values of y.6

Prior to testing Cointegration and implementing the Granger Causality test, econometric
methodology needs to examine the stationarity for each individual time series most
macroeconomic data are non-stationary, i.e. they tend to exhibit a deterministic and/or stochastic
trend. A series is said to be stationary if the mean and variance are time – invariant. A non-
stationary time series will have a time dependent mean or make sure that the variables are
stationary, because if they are not, the standard assumptions for asymptotic analysis in the
Granger test will not be valid.7

STATIONARY TEST OF THE DATA

The Augmented Dickey Fuller (ADF) and Phillips-Perron tests have been used to check the
stationary characteristics of the data. . In the ADF and Phillips-Perron tests, the selection of the
model (constant, constant and trend, neither) is based on the Swartz Information Criteria (SIC).

6
International Research Journal of Finance and Economics- Issue 42 (2010)
7
Nandita Dasgupta, 2007

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UNIT ROOT TEST:
The objective of the unit root test is to empirically examine whether a series contains a unit root
or not. If the series contains a unit root, this means that the series is non-stationary. Otherwise,
the series will be categorized as stationary.

The DF Unit Root Test is based on the following three regression forms:

I. Without Constant and Trend

II. With Constant
III. With Constant and Trend

The hypothesis is:

Decision rule:
If t* > ADF crtitical value, ==> not reject null hypothesis, i.e., unit root exists.

If t* < ADF critical value, ==> reject null hypothesis, i.e., unit root does not exist.

Run each regression equation separately.8

Granger Causality Test

The results of the long run relationship between FDI inflows, Exports and GDP for India, the
next logical step for our purpose is to examine the Granger – Causal relationship among the
variables, x is said to “Granger – Cause” y if and only if the forecast of y is improved by using
the past values of x together with the past values of y, then by not doing so (Granger 1969).
According to Granger causality test done by using annual data from 1970 to 2007 in India,

8
Dickey-Fuller Unit Root Test-(Stationary Test)-Tutorials

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foreign direct investment (FDI) is not the causal exports. In other words, there is causality
relationship from FDI inflows to exports. Economic growth (GDP) is not the cause of exports. In
other words, there is no causality relationship from economic growth to exports. Economic
growth (GDP) is not the cause of FDI. In other words there is no causality relationship from
economic growth to FDIs.9

Results
Having found that all the three variables in examination have unit roots, the next step is to apply
granger causality test. The results of unit root test are divided into three parts i.e., Foreign Direct
Investments, Gross Domestic Product at Factor Cost, and Exports of India as follows:

Foreign Direct Investment

FDI
ADF Test Statistic 0.081315 1% Critical Value* -3.5713
5% Critical Value -2.9228
10% Critical Value -2.5990
*MacKinnon critical values for rejection of hypothesis of a unit root.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(FDI)
Method: Least Squares
Date: 02/23/11 Time: 14:27
Sample(adjusted): 1997:2 2009:1
Included observations: 48 after adjusting endpoints
Variable Coefficient Std. Error t-Statistic Prob.
FDI(-1) 0.013815 0.169894 0.081315 0.9356
D(FDI(-1)) -0.245464 0.178129 -1.378014 0.1753
D(FDI(-2)) -0.606690 0.193109 -3.141694 0.0030
D(FDI(-3)) -0.603006 0.217400 -2.773722 0.0082
C 867.5152 1184.881 0.732154 0.4680
R-squared 0.360286 Mean dependent var 264.9167
Adjusted R-squared 0.300778 S.D. dependent var 6427.966
S.E. of regression 5375.033 Akaike info criterion 20.11525
Sum squared resid 1.24E+09 Schwarz criterion 20.31017
Log likelihood -477.7660 F-statistic 6.054388
Durbin-Watson stat 2.114880 Prob(F-statistic) 0.000590

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International Research Journal of Finance and Economics- Issue 42 (2010)

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Since the computed ADF test-statistics (0.081315) is greater than the critical values at 1%, 5%
and 10% significant level, respectively, we cannot conclude to reject Ho. That means the CPI
series has a unit root, next step is to apply unit root test on GDP at Factor Cost.

Gross Domestic Product

GDP ,lag 3
ADF Test Statistic 11.93137 1% Critical Value* -3.5713
5% Critical Value -2.9228
10% Critical Value -2.5990
*MacKinnon critical values for rejection of hypothesis of a unit root.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(GDP)
Method: Least Squares
Date: 02/23/11 Time: 14:15
Sample(adjusted): 1997:2 2009:1
Included observations: 48 after adjusting endpoints
Variable Coefficient Std. Error t-Statistic Prob.
GDP(-1) 0.160623 0.013462 11.93137 0.0000
D(GDP(-1)) -1.061907 0.091640 -11.58784 0.0000
D(GDP(-2)) -1.039447 0.058981 -17.62344 0.0000
D(GDP(-3)) -0.941280 0.087995 -10.69694 0.0000
C -24995.81 7587.875 -3.294178 0.0020
R-squared 0.889226 Mean dependent var 21092.54
Adjusted R-squared 0.878921 S.D. dependent var 56835.93
S.E. of regression 19776.84 Akaike info criterion 22.72074
Sum squared resid 1.68E+10 Schwarz criterion 22.91566
Log likelihood -540.2978 F-statistic 86.29428
Durbin-Watson stat 0.982845 Prob(F-statistic) 0.000000

Since the computed ADF test-statistics (11.93137) is greater than the critical values at 1%, 5%
and 10% significant level, respectively, we cannot conclude to reject Ho. That means the CPI
series has a unit root, next step is to apply unit root test on Exports.

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 Exports

Exports,2
ADF Test Statistic 3.560399 1% Critical Value* -3.5713
5% Critical Value -2.9228
10% Critical Value -2.5990
*MacKinnon critical values for rejection of hypothesis of a unit root.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(EXPORT)
Method: Least Squares
Date: 02/23/11 Time: 14:25
Sample(adjusted): 1997:2 2009:1
Included observations: 48 after adjusting endpoints
Variable Coefficient Std. Error t-Statistic Prob.
EXPORT(-1) 0.112817 0.031687 3.560399 0.0009
D(EXPORT(-1)) -0.312760 0.128328 -2.437199 0.0190
D(EXPORT(-2)) -0.477134 0.186865 -2.553362 0.0143
D(EXPORT(-3)) -0.952196 0.177965 -5.350466 0.0000
C -285.5342 2228.851 -0.128108 0.8987
R-squared 0.417769 Mean dependent var 3027.229
Adjusted R-squared 0.363608 S.D. dependent var 9572.303
S.E. of regression 7636.229 Akaike info criterion 20.81753
Sum squared resid 2.51E+09 Schwarz criterion 21.01244
Log likelihood -494.6207 F-statistic 7.713449
Durbin-Watson stat 2.014758 Prob(F-statistic) 0.000089

Since the computed ADF test-statistics (11.93137) is greater than the critical values at 1%, 5%
and 10% significant level, respectively, we cannot conclude to reject Ho. That means the CPI
series has a unit root, next step is to apply Granger Causality Test.

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Result of Granger Causality Test:

Granger Causality Test

Lag 1
Pairwise Granger Causality Tests
Date: 02/23/11 Time: 14:29
Sample: 1996:1 2009:4
Lags: 1
Null Hypothesis: Obs F-Statistic Probability
EXPORT does not Granger Cause FDI 51 7.46150 0.00879
FDI does not Granger Cause EXPORT 0.62156 0.43434
GDP does not Granger Cause FDI 51 10.9766 0.00176
FDI does not Granger Cause GDP 0.41528 0.52237
GDP does not Granger Cause EXPORT 51 17.8329 0.00011
EXPORT does not Granger Cause GDP 15.6211 0.00025

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Conclusion

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Conclusion:
The export performance of India has improved over the years, and the composition and focus of
export policy is much more effective and clear. The focus of Indian exports is more on
Developing nations, and Organization of Petroleum exporting Countries (OPEC), and there is
decline of focus regarding Organization of Economic Cooperation and Development (OECD) in
2008-09 as compared to 1994-95.

The major export markets for India, as a developing and emerging nation, are U.A.E., USA,
China, Singapore and some others. There is similarity among export markets and import markets,
for instance, the import markets are China, U.A.E., Saudi Arabia, and USA. It exhibits that there
is mutual trade among India and other nations, it is because of various trade agreements, and
treaties initiated by the government. The analysis also shows the major exported and imported
commodities in the year 2008-09.

This study examines the direction of the relationship between economic growth rate, FDI and
Exports by using Granger causality test. According to the results of the study, there is no
reciprocal causality relationship between these variables in India. The direction of causality
relationship is from exports to growth rate and there is no causality relationship from FDIs to
exports. The directions of causality relationship is from exports to growth rate and there is no
causality relationship from growth rate to exports, and the direction of causality relationship is
from FDIs to growth rate and there is no causality relationship from growth rates to FDIs.

In other words, FDI and exports in India is one of the factors affecting economic growth,
however, the high or low economic growth rate does not have an effect on the presence of FDIs
and exports in India.

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Annexure

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Table 1: India’s Export Market

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Table 2: India’s Top Export Markets of 2008-09

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Table 3: India’s Top Import Markets of 2008-09

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Table 4: India’s Top Export Commodities of 2008-09

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Table 5: India’s Top Import Commodities of 2008-09

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BIBLIOGRAPHY AND
References

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References
 A Causal Relationship between Trade, Foreign Direct Investment and Economic Growth
for India- G. Jayachandran
 Centre for Monitoring Indian Economy website, www.cmie.com
 Directorate General of Foreign Trade website, www.dgft.delhi.nic.in
 Director General of Commercial Intelligence & Statistics, Kolkata website,
www.dgciskol.nic.in
 EXIM Bank website, www.eximbankindia.com
 Foreign Trade Policy, 2009-14
 Indian Export and Economic Growth Performance in Asian Perspective, Work Paper No.
54- Suresh D. Tendulkar
 Reserve Bank of India, www.rbi.in

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