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Impact of services trade on India’s economic growth and current account balance: evidence from post-reform period

Author

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  • Mini P. Thomas

    (Assistant Professor, Dept. of Economics and Finance, Birla Institute of Technology and Science (BITS) Pilani - Hyderabad Campus, India)

Abstract

Economic Growth and External Stabilisation (defined in terms of Current Account Balance as a percentage of GDP) is a top priority for policy-makers, while laying out the macroeconomic framework for Indian economy. Government of India had targeted for an average GDP growth rate of 9 percent and a Current Account Deficit (CAD) below 2.5 percent of GDP during the five-year period from 2012-2017. However, the actual CAD of Indian economy widened to 4.2% of GDP in 2011-12, and further reached a historic high CAD of 4.7 percent of GDP in 2012-13. Given such a scenario, this paper aims to estimate the impact of services trade on India’s Economic Growth and Current Account Balance, during the post-reform period from 1990-91 to 2011-12. Facilitated by economic globalisation, domestic liberalization, and technological advances which resulted in increasing international fragmentation of the production process, India’s services trade began growing rapidly post 1991. With the help of Thirlwall’s Balance of Payments Constrained Growth Model and ARDL approach to cointegration, this study estimates and establishes the crucial role of services trade in achieving the policy objectives of economic growth and external stabilisation simultaneously for Indian economy. This study also examines the impact of services exports on India’s economic growth, by comparing the latest officially published input-output table of India for 2007-08, with that of 1993-94. Among the major services in India’s export basket, construction, transport and business services are found to exhibit strongest backward linkages, and hence can act as engines of export-led growth. Role of services imports in India’s export-led growth and the import content going into production of India’s services exports is analysed using the TIVA database for 1995 and 2008, which have implications for India’s external stabilisation. Foreign value added content in India’s services exports is found to be highest in case of business services, transport services and telecommunications.

Suggested Citation

  • Mini P. Thomas, 2016. "Impact of services trade on India’s economic growth and current account balance: evidence from post-reform period," Working Papers 2016/11, Maastricht School of Management.
    • Handle: RePEc:msm:wpaper:2016/11
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    References listed on IDEAS

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    1. Anthony P. Thirlwall, 2011. "The Balance of Payments Constraint as an Explanation of International Growth Rate Differences," PSL Quarterly Review, Economia civile, vol. 64(259), pages 429-438.
    2. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
    3. Arslan Razmi, 2005. "Balance of Payments Constrained Growth Model: The Case of India," UMASS Amherst Economics Working Papers 2005-05, University of Massachusetts Amherst, Department of Economics.
    4. Arslan Razmi, 2005. "Balance-of-payments-constrained growth model: the case of India," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 27(4), pages 655-687.
    5. World Bank, 2013. "World Development Indicators 2013," World Bank Publications - Books, The World Bank Group, number 13191.
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    Cited by:

    1. Gnangnon, Sèna Kimm, 2020. "Aid for Trade and Services Export Diversification in Recipient-Countries," EconStor Preprints 210467, ZBW - Leibniz Information Centre for Economics.
    2. Muhammad Afzal & Sheikh Shoaib Ahmed & Muhammad Waseem Shahzad, 2019. "Impact of Merchandize and Services Trade on Economic Growth of Pakistan," Journal of Contemporary Research in Business, Economics and Finance, Michael Laurence, vol. 1(2), pages 30-36.

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    More about this item

    Keywords

    Services Trade; Current Account Deficit; Economic Growth; Backward Linkages;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • C67 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Input-Output Models

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