Causality between GDP, Export and Import in India (1950–2007): A Granger Causality Approach

GDP growth of India has been 7% and above in the past decade or so with increasing exports, imports. Export growth is often considered to be a principal determinant of production and employment growth in an economy. It is also argued that foreign currency made available through export earnings facilitates import of capital goods, which in turn increases production potential of an economy. In the study, using the figures of real GDP, real export and real import and belonging to the periods 1950–51 to 2008–09 of India, in this period it was determined that there was causality relationship between these variables, the variables import and export influenced GDP, and GDP influenced the variables export and import. We use the co-integration regression to test the whether there is long run equilibrium relation between the GDP, Export and Import or not. In India the economic reform has been started in the 1970s but it is actually implemented in the 1991 with the new industrial policies. The period between 1970–71 to 1990–91 is called pre reform period and the period between 1991–92 to 2008–09 is called post reform period. In the pre reform period Indian government policy based on import substitution policy and in the post reform period Indian government policy based on export substitution policy. We use simple OLS method to test the export elasticities and import elasticity's in the pre reform period as well as in the post reform period.