Long Run Relationship and Causality between Exports and Imports of India (1970–2010)

The present study examines the long run relationship and causality between exports and imports in India over the period 1970 to 2010. Unit root test, Cointegration, Error Correction Mechanism (ECM) and Granger Causality techniques have been used in the study. The results of the study indicate that there exists a long run relationship (cointegration) between exports and imports in India. In other worlds India's exports and imports have a tendency to converge in the long run. The cointegration between India's exports and imports implies that India's macroeconomic policies have been effective in the long run and suggests that India is not in violation of its international budget constraint. The study also concludes that exports Granger cause imports and not vice versa. In other words causality goes from exports to imports and not from imports to exports. Thus, there has been unidirectional relationship between India's exports and imports during the period under consideration.