Trade Openness, Capital Formation and Economic Growth in India

The main objective of the present study is to examine the relationship among Trade Openness, Capital Formation and Economic Growth in India for the period 1971-2022 by applying the Auto Regressive Distributed Lag Model (ARDL) a bound testing approach. The unit root test results (ADF test) indicate that the variables are non-stationary at the level but become stationary at first difference with trend. Furthermore, the empirical evidence confirms that the variables are co-integrated, i.e. a long-run relationship exists among these variables. The error correction and short-run dynamics results confirms that the variables affect each other over a long period of time. The Granger causality test results indicate that unidirectional causality has been observed: human capital causes real GDP, real GDP causes physical capital, exports causes human capital, total trade causes real GD P, and total trade causes physical capital during the period 1971-2022. However, no causality has been noted in the case of other variables during the study periods. Therefore, the government needs to determine the threshold level of openness to sustain economic growth in India in the near future.