Academic journal article Journal of Economic Development

An Error-Correction Analysis of India-Us Trade Flows

Academic journal article Journal of Economic Development

An Error-Correction Analysis of India-Us Trade Flows

Article excerpt

The study finds that India's exports to the US have been significantly affected by GDP per capita of the US, WPI of the India and the US, and exchange rate; and India's import from the US is significantly affected the India's GDP and WPI in the long-run. Static analysis of causality asserts that WPI of the US Granger causes the India's exports to the US and the GDP of the US. Further, WPI of the India Granger causes the GDP of the US and the exchange rate Granger causes WPI of the US. Moreover, GDP of the India Granger causes her imports from the US; and WPI of the India and exchange rate Granger cause WPI of the US.

Keywords: Bilateral Trade, Granger-Causality, IRFs

JEL classification: C310, F15

(ProQuest: ... denotes formulae omitted.)


The Indian economy is now much more allied to the global economy than it was 20 years ago. In this globalised world, individual countries are more influenced by changes in world trade patterns and prices, changes in global capital market conditions and associated investor perceptions, and changes in technology etc. The impact of globalisation on the Indian economy presents opportunities and poses challenges and risks.

Economic and trade relations between the India and the United States (US) have experienced a number of swings since India's independence in 1947. During much of the 1950s and early 1960s, the US was a leading trading partner for the India, providing the nation with about a third of its imports. However, those economic ties swiftly collapsed when India promoted closer ties with the Soviet Union (SU) following the Indo-Pak war of 1965. For the next 40 years, political and economic associations between the India and the US were relatively cool. The United Nations Development Programme (UNDP) ranked India 119th out of 169 countries on its 2010 Human Development Index (HDI), up from 127th in both 2004 and 2005. In the India, economic reforms begun in 1991, under the Congress-led government of Prime Minister Narsimha Rao and then finance minister, Dr. Manmohan Singh boosted growth and led to major new inbound foreign investment in the mid-1990s. However, economic reform efforts stagnated under weak alliance governments later in the decade, and combined with the 1997 Asian financial crisis and international sanctions on India (as a result of its 1998 nuclear tests) further dampened the economic outlook. Following the 1999 parliamentary elections, the Bhartiya Janata Party (BJP)-led government launched second-generation economic reforms, including major deregulation, privatisation, and tariff-reducing measures.

Since 2004, the Washington and the New Delhi have been pursuing a "strategic partnership" based on numerous shared values and improved economic and trade relations.1 The India is in the midst of a rapid economic expansion, and many US companies view the India as a worthwhile market and a candidate for foreign investment. For its part, the current Indian government sees itself ongoing the economic reforms started in 1991, aimed at transforming a quasi-socialist economy into a more open, market-oriented economy. As India's largest trade and investment partner, the US strongly supports New Delhi's continuing economic reform policies; a US-India Trade Policy Forum was created in November 2005 to expand bilateral economic engagement and provide a venue for discussing multilateral trade issues. On March 2, 2006, President George W. Bush and Indian Prime Minister Dr. Manmohan Singh endorsed the goal of doubling bilateral trade in three years. Despite the growth in bilateral trade and the improvement in trade relations, there are still a number of economic and trade issues between India and the US. Both nations seek better market access to the other's domestic markets, as well as the lowering of perceived trade barriers. In addition, both India and the US would like to see changes in the other nation's legal and regulatory policies to help guard and encourage exports and foreign direct investment. …

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