Chapter 4

Export Led Growth: Some Recent

Evidence from India
 Export Led Growth: Some Recent Evidence from India

4.1 Introduction

The export-led development hypothesis (ELGH) postulates that export development is one of
the main determinants of commercial growth. Economic development is the boost in the
number of the goods and services industrialized by an economy. It is measured by adjustments
in the Gross Internal Product (GDP) (Dolan, 2008)).Nothing like commercial development that
is qualitative and normally believed by GDP, commercial progress is a convoluted procedure
considering not merely commercial, but additionally countless communal, governmental, and
traditional changes. The pace of commercial progress of a state poses one of the most frank
subjects in economics debate. It is clashed that a state might accelerate the rate of commercial
development by advancing exports as it will rouse the creation of goods and services. This
argument has managed to export-led development (ELG) hypothesis in the literature. The
linkages amid export presentation and commercial development are instituted across disparate
channels, that contain permitting the diffusion of technical vision, relieving the external
transactions constraint(through marketplace mechanism), bestowing affirmative economies of
scale, rising degree of contest, and managing to progressive transactions liberalization
measurements.

The main concern of the states is raising the quality of existence of their citizens. And, the
quality of existence (QOL) generally comes from finished commercial prosperity of the nation.
Thus, intensifying Gross internal Product (GDP) is the most vital aim of each economy. There
are amble strategies to accomplish this target of that one potential is to enthuse exports. The
vital subject instantly hits the minds of economists and researchers are whether export raise
leads to higher commercial development or commercial development promotes exports
growth. A little economist’s squabble in favor of export-led development hypothesis as the
supplementary school advocates for growth-driven export hypothesis. The continuing works
additionally provides the facts that export raise leads to economic development and economic
development leads to export raise, i.e., the bi-directional causality amid exports and economic
growth.
4.1.1 India’s Export Growth in Pre and Post-Reform Periods

Indian Exports were generally flouted across the early and the second five-year strategies, that
was right on the earth that demands for Indian exports were inelastic. As the globe merchandise
export was climbing at 6.3 each cent each annum across the 1950s, exports from India
stagnated. India's exports in globe exports weakened roughly from 1.4 each cent across the
1950s to 0.9 each cent across the 1960s. As the globe merchandise exports stretched
reasonably faster across the 1960s at 8.8 each cent each annum, the development rate of
India's exports enhanced somewhat to 3.6 each cent each annum. Clearly, the state floundered
to make the best use of the transactions possibilities obtainable across the 1950s and
1960s. In order to balance the harmful results of overvalued transactions rates and
supplementary power strategies on exports, assorted inherent and explicit measures of export
subsidization have been adopted. Globe exports registered a colossal development rate of 20.4
each cent each annum across the 1970s. Optimism of globe demand and a moderately
complimentary internal strategy endowed an atmosphere helpful to a fast development of
exports from India. Thus, India's exports of merchandise and services produced at the annual
rate of concerning 18 each cent and 27 each cent suitably across the 1970s. Joshi and Slight
(1994), as knowing the significance of globe demand, attributed the export development of
the 1970s generally to the depreciation of the real competent transactions rate (REER),
ability of export subsidy and a moderately open-minded import strategy for export
production. In spite of the elevated development, India's allocate in globe merchandise exports
weakened to 0.5 each cent across the 1970s from 0.9 each cent across the 1960s. This is not
stunning as the development rate of globe exports stayed higher than that of India across the
1970s. The export explosion of the 1970s, however, could not be maintained during the
first half of the 1980s. As the growth rate of world exports twisted negative in the aftermath
of the second oil price hike, India’s exports decelerated sharply. During the second half of
the 1980s, however, the world economy recovered and India's exports grew at a healthy
pace (17.8 percent). According to Joshi and Little (1994), there was a genuine improvement
in the export competitiveness of India during this period due to a major depreciation of the
REER and increased export subsidies. This period also witnessed some doses of industrial
deregulation and liberalization of capital goods imports.

India's exports during the post-reform period have been growing faster than the rate of growth
of world exports. This is in contrast to the pattern observed for the pre-reform period,
particularly during 1950-80. It appear that the growth of world demand is the most
important determining factor of India's merchandise export growth for both the pre- and
post-reform periods.

Figure 4.1. Trends in Indian Exports

35000.00

30000.00

25000.00

20000.00
Exports Total
15000.00
Exports Non-Oil
10000.00
Exports Oil
5000.00

0.00
1970-71

1984-85

1994-95

2008-09
1972-73
1974-75
1976-77
1978-79
1980-81
1982-83

1986-87
1988-89
1990-91
1992-93

1996-97
1998-99
2000-01
2002-03
2004-05
2006-07

2010-11
Source: RBI Handbook of statistics and (Ministry of commerce and industry)

By way of the privatization liberalization, and globalization opportunity up of doo₹ policies

undertaken by the countries over the world has given enhance to the Indian Exports sector.
Imports of goods and services have become easier. India’s Foreign Trade including both
exports and imports over various yea₹ is as follows:

From the Figure 1 it is observed that there is an impressive growth during the year 2004 -2010,
During the year 2004- 05 Exports stood at ₹.375340 crores as against ₹.293367 crores in the
corresponding period of last year, recording a growth rate of 27.94% in Rupees. Imports also
witnessed a growth of 39.53%, having increased to ₹. 501065 crores from ₹. 359108 crores in,
2004- 05. The trade deficit is ₹.125725 crores from ₹. 65741 crores during the corresponding
period of the previous year.

Throughout the year 2005- 06 Exports are of ₹. 456417.86 crores as against ₹. 375340 crores
in the corresponding period of last year, recorded a declined growth of 21.60 % in Rupees.
Imports declined to 31.80%, having increased to ₹ 660409 crores from ₹ 501065 crores in
2005- 06. The trade deficit is ₹. 203991 Crores from ₹. 125725 crores during the corresponding
period of the previous year
For the period of the year 2006- 07 Exports are of ₹.571779.25 crores as against ₹. 456417.86
crores in the corresponding period of last year, with a growth of 25.28 % in Rupees. Imports
are declined to 27.27%, increased to ₹ 840506.31 crores from ₹ 660408.90 crores in 2006- 07.
The trade deficit is ₹. 268727 crores from ₹. 203991 crores during the corresponding period of
the previous year.

During the year 2007-08 Exports are ₹. 655864 crores as against ₹. 571779.25 crores in the
corresponding period of last year, a declined growth of 14.71 % in Rupees. Imports declined
to 20.44 %, having increased to ₹ 10123.12 crores from ₹ 840506 crores in 2007-08. The trade
deficit is ₹. 356448 crores during the corresponding period of the previous year.

During the year 2008-09 Exports stood at ₹. 840755 crores as against ₹. 655863.50 crores in
the corresponding period of last year, recorded a growth of 28.19 % in Rupees. Imports also
witnessed a growth of 35.77 %, increased to ₹ 1374436 crores from ₹ 1012312.0 crores in
2008-09. The trade deficit is ₹. 533680 crores during the corresponding period of the previous
year.

During the year 2011-2012 Exports stood at ₹. 845534 crores as against ₹. 840755crores in the
consequent period of last year, with a growth of 0.57 %. Imports also witnessed a growth of
0.78 %, having decreased to ₹ 1363736 crores from ₹ 1374436 crores in 2009-2010. The trade
deficit is ₹. 518202 crores during the corresponding period of the previous year.

4.1.2 Export Promotion Programs in India:

Export promotion is an action plan of promoting export of the country’s existing production.
The sustainable export growth is very important for accelerating GDP, employment and
removing poverty. Therefore, the government makes different policies, programs and activities
for increasing export sales of the country. The emerging countries like India are not able to
increase their export volume on their own because of lack of knowledge about international
marketing. For that reason, Government provides business communities which need support in
various ways to encourage export growth. Following are the various export promotion schemes
introduced by the government of India:
4.1.2.1 Advance license scheme:
This scheme permits duty free import of inputs utilizing in the export products after making
normal allowance for wastage. Advance license issues for physical exports, intermediate
supplies and deemed exports.

4.1.2.2 Export promotion capital goods (EPCG) scheme:

This scheme permits import of capital goods for preproduction, production and post-production
at 5% customs duty without CVD and special custom duty. The capital goods include tools,
spacers, jigs, fixtures, moulds and clues. This relaxation has allowed for specific categories
such as agro units, BIFR, SSI etc.

4.1.2.3 Duty Free Replenishment Certificate (DFRC): The certificate is issued for importing
inputs to use in the manufacture of goods without payment of basic custom duty after
completing exports.

4.1.2.4 Duty Entitlement Passbook (DEPB): It is an export incentive scheme and issued after
exports. This scheme entitle exporter for a duty credit as a specified percentage of FOB value
of exports. The rates of DEPB are calculated based on FOB value or value cap whichever is
lower. DEPB scheme encourages exporters for diversification and for promoting exports of
new products.

4.1.2.5 Deemed Export Duty Drawback:

This scheme relates those exports, which don’t need to leave the country and paid in Indian
rupees. Duty drawback scheme allows refund of duties, which are paid on raw materials used
in the production of goods for exports. Deemed exports provides drawback for the purpose of
deemed exports because of all industry rate, brand rate and special brand rate. Special
Economic Zone Scheme: The scheme has a very simple and transparent policy with minimum
paper work for promotion of exports. SEZ areas are open for the foreign countries manufactures
and companies to establish their manufacturing countries. The SEZ units are allowed for
manufacturing of goods, rendering of services, processing, assembling, production, trading,
remaking, reconditioning etc. and permits duty free import of goods. The SEZ units have an
advantage of importing and exporting through airport, port, ICD, CFS, courier word, post
parcel and land custom station.

4.1.2.6 Export Oriented Unit (EOU) Scheme:

This scheme creates additional production capacity that is helpful in boosting exports of the
country. The EOU can obtain locally without payment of duty all types of goods and permits
for importing of goods that are present in the restricted list of EXIM policy. The EOUs are
licensed initially for five years that can be extended to another five years by the development
commissioner. The EOUs are also allowed to export all products except prohibited items in
ITC (HS).

4.1.2.7 Electronics Hardware Technology Park (EHTP):

The EHTP scheme is confined for one sector i.e. electronic hardware. It is unique in its nature
and a 100% export oriented scheme for the units, which manufacture electronic hardware
equipment in India. The EHTP units are eligible for taking the benefits of tax holiday, clubbing
of Net foreign exchange (NFE) and 100% foreign equity.

4.1.2.8 Software Technology Park Scheme or Bio-Technology Park Scheme:

The STP scheme provides facilities to IT industry for their development and gives services for
100% exports in the form of physical exports by using data communication links. An Indian
company, subsidiary of foreign company and branch office of foreign company can become a
STP member and can avail the advantages of custom duty exemption, excise duty exemption,
central sales tax reimbursement, corporate tax exemption on 90% export turnover and sales in
domestic tariff area up to 50% of the FOB value of permissible export (http://india-now.org,
n.d.)

4.1.2.9 Free Trade and Warehousing Zone (FTWZ) Scheme: As per the SEZ scheme, a
foreign company can store its goods in Indian warehouse and can later sold it to its Indian
customers whenever it receives the orders. The goods are allowed to keep in warehouses of
FTWZ for two years. The scheme facilitates duty free import of all goods except prohibition
items and allows re-exporting without any restrictions. This scheme generally provides
infrastructure facilities for warehousing of goods to make Indian into a global trading-hub.
4.1.2.10 Served from India Scheme (SFIs):

The scheme confines to the all service providers except hotels, restaurants and other service
providers in tourism sector. The service providers are entitled for duty credit scrip that may be
used for duty free import of capital goods. Organizations do not directly involve in trade
activity but they provide organizational support to the exporters and help them to promote their
export business. Following are the export promotion organizations that are running by the
government of India and promoting exports throughout the country.

4.1.2.11 Export Promotion Council:

The Export Promotion Council (EPC) is the non-profit organizations, which have been set-up
by the government to promote exports of the country. EPC provides useful information offers
professional advice, organize visits of delegations for their members and develop the
communication between exporting community and the government. There are various
members of EPC in India as follows:

i) Engineering Export Promotion Council (EEPC)

ii) Sports Goods Export Promotion Council (SGEPC)
iii) Electronics and Computer Software Export Promotion
Council (ESC).
iv) Gems and Jewellery Export Promotion Council
v) Council for Leather Exports (CLE)
4.1.2.12 Federation of Indian Exports Organization (FIEO):
It is an apex body of various export promotion organizations and institutions. This non-profit
organization has been set-up by the Ministry of Commerce, Govt. of India. The efforts of all
organizations for export promotion are coordinated by FIEO. It provides common services and
market information for the benefit of exporters. Indian goods get wide publicity through FIEO
across the border. It also arrange meetings, seminars regarding export trade and act as
registering authority for export houses.

4.1.2.13 Export Credit Guarantee Corporation of India Limited (ECGC): It is another

export promotion organization, which is managed by Board of Directors consisting RBI,
insurance, banking, exporting community and representatives of government. The main aim of
setting-up this organization is to cover the risk of exporting on credit to strengthen the export
promotion drives of India. The organization helps Indian exporters by offering insurance
protection, providing guidance, useful information, assist in recovering bad debts and obtaining
export finance. Agricultural and Processed Food Products Export

4.1.2.14 Development Authority (APEDA):

It is an independent organization, which coordinates in activities with state government,

horticulture board and research institutes in order to increase the exports of agricultural
products. It builds the relationship between Indian agricultural producers and the global
markets. APEDA provides financial assistance for strengthening market intelligence, quality
up gradation, infrastructure development, research and development, human resource
development, upgrading meat processing facilities and packaging quality development.

4.1.2.15 Director General of Foreign Trade (DGFT):

The foreign trade policy or EXIM policy is implemented by DGFT for promoting Indian
exports. DGFT is playing an important role in the promotion of export activity in India by
introducing various schemes and guidelines, granting exporters Importer code number,
regulating transits of goods while trading, granting permission of free exports, controlling
DEPB rates and promoting trade with neighbour countries.

4.2 Export led Growth Hypothesis

Export-led growth (ELGH) is an economic approach that many developing nations attempt to
put in place to refashion their societies and increase standards of living. It is based on the
principle of finding a market for something on the international stage that cannot be easily or
efficiently supplied by other nations. As the developing nation makes a name for itself in this
market, it is able to bring in positive cash flow that can fuel the import of goods and services
that it cannot produce for itself. Good examples of export-led growth nations are the petroleum-
exporting nations of the Middle East, and swiftly developing economies such as India and
China.

An economic approach of export-led growth is usually attempted with either manufactured

goods and information services, or raw materials. The former offers more flexibility to expand
exports, as raw materials sell at reduced prices and eventually become scarce commodities. In
the decades of the 1960s up to the 2000s, Asian-sector nations have purposeful on
manufactured goods exports, while some Latin American and African nations have tended
towards raw materials. While the former approach has led to greater internal productivity and
influxes of cash in the past, a downturn in global economic conditions as of 2011 now puts this
model for growth into doubt.

China as a paramount example of export-led growth has been successful with the policy since
1978 because of its access to negotiations through the World Trade Organization (WTO), an
abundance of cheap labour, and an aggressive internal program of industrialization. As China's
growth rate continues at a high level, it’s very low consumption rate per household and
reinvestment of profits by corporations has kept it from developing a strong consumer economy
to modernize lifestyles in general. Export-led growth in China has mostly benefited the
government in terms of tax collection and Chinese corporations in terms of paying off
investments in capital goods, while per-capita incomes have remained low. China's high
savings rate, therefore, which is paralleled by the export-led growth model in India, ends up
being invested in foreign markets instead of directly benefiting the citizenry.

Important international trade facto₹ have led to the success of the export-led growth model for
many nations. These include an open US marketplace to imported goods and services as the
largest consumer economy in the world, the reduction of trade barriers through globalization
process, and a standardization expansion across many industries so that goods and services
could take on universal utility. Changes in these factors has begun to put the system in doubt,
as the US and world economy undergoes a protracted downturn as of 2011, and excess
production capacity for manufactured goods now exists in many developing nations that have
adopted this economic strategy. Other factors said to be limiting export-led growth include
rising energy costs and increasing scarcity of natural resources, as well as a reduce speed in
technological innovation in electronics, which has been a primary area fuelling such growth.

Budding economies such as India are approaching the limits to the old export model with a
hybrid approach to a solution — by exporting information services, which require very limited
resources and support long-term growth models. Financial account upset between developing
export-led growth nations that produce manufactured goods and industrialized consumer
nations with large debt loads that buy them are also seen as unsustainable in the long term. This
is forcing developing nations to focus more on domestic growth as export avenues dry up, and
consumer nations to cut back on wasteful spending. The United Nations Conference on Trade
and Development (UNCTAD) sees higher wages in developing nations and reductions in
unemployment figures overall as the key conditions to be addressed if export-led growth is to
continue to be a successful model for the developing world.

Verdoorn‟s law, an attempt to quantify the relationship between the rate of growth of output
and the rate of growth of productivity was initially identified by the Dutch economist
Dr. P.J. Verdoorn in his paper, “Factors that determine the growth of labor productivity‟‟
which appeared in the Italian Journal L‟ Industria in 1949. This law explains that faster
growth in output increases productivity due to increasing returns. Thus an economy with
a rapid increase in demand will also experience rapidly increasing productivity. If
money wages do not also rise by enough to offset the productivity increase, costs will fall
and the country's exports will also grow fast because of their competitiveness. This
increase in exports in turn will stimulate demand and output growth, and the circle is
virtuously closed through further productivity gains. Moreover, export growth ensures
that balance of payments difficulties will not cause a slowing of the growth rate. And
the high growth rate and comfortable balance of payments will give business the
confidence to maintain high levels of investment, this leads to a more modernized capital
stock, and therefore higher productivity, which also increase the underlying growth rate
and maintains a strong balance of payments, closing the circle in a second way. Further
Verdoorn‟s law is usually associated to cumulative causation models of growth, in which
demand rather than supply determined the pace of accumulation.

The theoretical foundation of Verdoorn‟s law is the existence of economies of scale in

manufacturing, that is, the fact that the average cost of production falls with an increase
in the amount of goods produced. The sources of economies of scale within a firm or
industry are usually divided into two categories: static or dynamic. Static economies of
scale come from the fact that most processes of production incur a fixed cost, that is, a cost
that has to be paid no matter whether anything is produced. As a result, the higher the
level of production, the lower the average fixed cost per unit produced and consequently
the higher the economies of scale. It should be noted that static economies of scale are
reversible because, if production is reduced, the average fixed cost rises. Dynamic
economies of scale come from the productivity gains associated with innovations brought
about by the increase in production. The intuition here is that the dynamic economies
arise from learning by doing and as such are irreversible. Even if the level of production
falls, the new knowledge acquired from experience does not vanish.
Nicholas Kaldor (1966) and Anthony Thirlwall (1979) have also developed models of
export-led growth based on Verdoorn‟s Law. For a given country, an expansion of the
export sector may cause specialization in the production of export products, which
increase the productivity levels, and increase the level of skills in the export sector. This
may then lead to a reallocation of resources from the less efficient non- trade sector to the
more productive exp ort sector, lower price for traded goods and higher competitiveness.
This Productivity change may then lead to expanded exports and output growth. Kaldor
postulates that export will stimulate industries with significant economies of scale. The
manufacturing sector is the carrier of economies of scale and the role of exports in
maintaining the demand for manufacturing output is important. According to Kaldor,
aggregate demand maintained by exports is better than consumption-led demand. Further,
Kaldor proposed that three growth laws characterized economic development which are as
follows: -

1. Firstly, the faster the rate of growth of the manufacturing sector, the faster will
be the rate of growth of Gross Domestic Product (GDP), not simply in a definitional
sense in that manufacturing output is a large component of total output, but for
fundamental economic reasons connected with induced productivity growth inside
and outside the manufacturing sector. This idea can be summed up in the maxim
that manufacturing sector of the economy is the “engine of economic growth.
2. Secondly, there is a strong positive relationship between the rate of labor
productivity growth in manufacturing and the growth of manufacturing output, the
“Verdoorn‟s law‟‟. Kaldor attributed much importance to what he called
endogenous productivity growth, i.e productivity growth that is functional to output
growth.
3. Finally, kaldor‟s third law states; the faster the growth of manufacturing output, the
faster the rate of labor transference from non-manufacturing to manufacturing, so
that overall productivity growth is positively related to the growth of output and
employment in manufacturing and negatively associated with the growth of
employment outside manufacturing.

Thirlwall (1979) shows that for several countries the rate of growth never exceeds the ratio of

the rate of growth of exports to income elasticity of demand for imports. This implies that growth

is limited by the balance of payments equilibrium. This result is known as Thirlwall‟s law. In the
Present Paper, we have examined for statistical testing two important elements of export-led growth

mechanisms that are essential links in the model not only for advanced industrial countries but

also for developing countries: -

 The first is that export growth will stimulate industries with significant economies

of scale.

 The second is that export growth, by ensuring a strong balance of payments will

encourage investment.
The export-economies-of-scale argument is tested by comparing total exports and
manufactured exports as explanatory variables of economic growth. If the manufactured
exports, the carriers of economies of scale is more closely related to economic growth as
compared to the total exports, then the export -led growth works through economies of scale.

If the correlation with total exports is stronger, we cannot reject the export - led model,
although the virtuous circle working through demand increases and economies of scale
is less compelling. The second element of export-led model is that a virtuous circle operates
through export demand on investment, and consequently technological progress and
productivity; this mechanism is consistent with a better showing for total export variable.
The significant correlation of exports and growth in an equation containing a significant
investment variable weakens the second element of export-led theory.

4.3 Literature Review

The argument above the act of exports as one of the main deterministic factors of commercial
development is not novel. For countless years, the encounter of exports on commercial
development or plainly the Export-Led Development (ELG) hypothesis has been analyzed in
countless empirical studies in transactions and commercial progress (Darrat A. , 1986.). As a
little studies report causal linkage amid exports and commercial development, others flounder
to furnish facts to prop this relationship.

Recent empirical studies (Castro–Zuniga, 2004) have investigated the large number of works
casing the subject of ELG in both industrialized and Lower Industrialized States employing
whichever cross-sectional or period sequence econometric approaches. The subject considering
exports-economic development nexus has been empirically instituted by economists and
researchers at disparate times. A number of studies including (Jung, 1985), (Chow, 1987),
(Darrat A. , 1987), (Hsiao M. , 1987), (Bahmani-Oskooee, 1993), (Kugler, 1991), (Dodaro,
1993), (Van den Berg, 1994), (Greenaway, 1994), and (Islam, 1998) have had adopted time
series analysis for exploring the causal liaison between exports growth and output growth.

The argument considering the act of exports as one of the main deterministic facto₹ of
commercial development is not new. It goes back to the classical commercial theories by Adam
Smith and David Ricardo, who clashed that global transactions plays an vital act in commercial
development and that there are commercial gains across specialisation. The statement of the
neo-classical economists is that contest in globe marketplace promotes economies of scale and
increases efficiency by pondering resources in sectors in that the state has a comparative
advantage.
A number of studies encompassing (Jung, 1985), (Chow, 1987), (Darrat A. , 1987), (Hsiao,
1987), (Kugler, 1991), (Dodaro, 1993), (Van den Berg, 1994), (Greenaway, 1994), and (Islam,
1998) have had adopted period sequence scrutiny for studying the causal nexus amid exports
development and output growth. Employing the G (Granger, 1988), (Sims, 1998) and (Hsiao,
1987) causality procedures, these studies floundered to furnish an identical conclusion
concerning the export-led development hypothesis. Though, these period sequence studies
were not free from criticism. Even nevertheless average Granger or Sims examinations are
merely valid if the early period sequence are not cointegrated, none of these studies checked
the cointegrating properties of the time-series variables involved. After two or extra period
sequence variables are cointegrated, inferences established on established time-series
modelling methods will be deceptive as pointed out by (Granger, 1988), this is because
established causality examinations should miss a little of the “forecastability”, hence, grasp
erroneous conclusions concerning causality. Moreover, all the studies studied above utilized
development of Gross Domestic Product (GDP) and that of exports that are comparable to early
differencing and filter out long-run information. In order to ease such occurrence, cointegration
and error correction models have been counselled to join the short-term as well as long run
information. (Bahmani-Oskooee, 1993) seized all these subjects into report and retained
quarterly instead of annual data for the nine states studied. The study analysed the empirical
prop for two-way causality amid exports development and GDP development in eight out of
nine countries.
(Darrat A. , 1987) learned on four Asian states, (Hong Kong, South Korea, Singapore, and
Taiwan) and instituted no facts of unidirectional causality from exports to commercial
development in all the four economies. In the case of Taiwan, though, the study analysed
unidirectional causality from economic development to export growth.

(Erfani, 1999) examined the causal connection amid commercial performance and exports
above the era of 1965 to 1995 for countless growing states in Asia and Latin America. The
aftermath displayed the momentous affirmative connection amid exports and commercial
growth. This study provides the facts of export-led development hypothesis.

A good facts of export-led development is believed to merely mean a case whereas the
dominant underlying cause of commercial development is exogenously ambitious via rise in
export activities. After such a ideal is pursued, the consequence of export- managed
development stemming from an exogenous rise in export productivity is a simultaneous
occurrence of elevated commercial development, elevated export development, and real
transactions rate appreciation. And in such cases, it is exports steering growth. On the contrary,
it is truly development steering exports that links elevated GDP development alongside
elevated export growth. Thus, the link amid elevated GDP development and elevated export
development can be due to whichever a productivity enhancement in the tradable or the non-
tradable sector, i.e. exports steering development or development steering exports scenario. A
good number of studies endeavored to discriminate them across examination of causality amid
exports and commercial development via Granger Causality examination in their econometric
regression. The aftermath are though varied, for instance, (Boltho, 1996) discovered that
Japan’s commercial development was generally due to the internal powers rather than external
demand, (A.C.C. Kwan, 1995) noted that China‟s development is the “export-led” type.
Finished factor productivity (TFP) calibrated on both tradable and a non-tradable sector was
well adjoined as potent to revealing the real underlying powers for elevated commercial
development alongside elevated export growth. Though, TFP is not frequently undeviating
measurable due to data unavailability at industry level in countless growing states, hence, real
transactions rate or transactions balance serves a good measurable variable to discriminate
exports steering development and development steering exports. The act of exports in
commercial progress has been extensively acknowledged.
(Vohra, 2001) examined the connection amid the exports and commercial development in
India, Pakistan, Philippines, Malaysia, and Thailand for the era 1973 to 1993. The empirical
aftermath indicated that after a state has attained a little level of commercial progress next the
exports have a affirmative and momentous encounter on commercial growth. The study
additionally displayed the significance of open marketplace strategies by pursuing export
development strategies, and by appealing external investments.

(Subasat, 2002) examined the linkages amid exports and commercial growth. The study
suggested that the extra export-oriented states like middle-income states produce faster than
the moderately less export-oriented countries. The study more displayed that export raise does
not have each momentous encounter on commercial development for low and elevated income
countries.

(Tang, 2006) affirmed that there is no long-run connection amid exports, real Gross Internal
product, and imports. This study more displays no short- and long-run causality amid export
development and commercial development in China on the basis of Granger causality
examination as commercial development does Granger-cause imports in the short-run.

(Jordaan, 2007) analyzed the causality amid exports and GDP of Namibia for the era 1970 to
2005. The export-led development hypothesis is tested across Granger causality. It
examinations whether there is unidirectional or bi-directional causality amid exports and GDP.
The aftermath exposed that exports Granger-cause GDP and GDP each capita, and counseled
that the export-led development strategy across assorted incentives has a affirmative impact on
growth.

There is a little study completed concerning the present Indian commercial progress whether
this is provoked by a rise in export. (Nidugala, 1991) Endeavoured to find an answer whether
the Indian economy is advancing in the right association as distant as commercial development
is concerned. He studied that export development frolicked a momentous act in the shift in the
GDP development in 1980s, not in the era 1961-62 and 1979-80.
The most present study on the ELGH has been given by (Mahadevan, 2008). They scrutinize
the connection amid imports, exports and output growths in a stochastic nature for the Asian
Tigers 15 and Japan. They finish no causality amid output growths and exports in a non-
stochastic environment. Though, bi-directional causality amid exports and output no longer
holds alongside uncertainty.

(Jung, 1985) examined the ELG hypothesis assessing for causality and auto-correlation (Box-
Pierce statistics to examination for finished auto-regression on the residuals) on a bivariate
autoregressive procedure for the era 1950-1981 for 37 countries. The author’s studied that the
ELG hypothesis was not upheld in most of the states except for Indonesia, Egypt, Ecuador, and
Costa Rica. The export reduction hypothesis was in South Africa, Korea, Pakistan, Israel,
Bolivia, and Peru. Unidirectional causation from development to exports was studied in three
states (Iran, Kenya, and Thailand), upholding the growth-led export hypothesis. Evidence of
development cutting export was studied in Greece and Israel. The authors did not examination
for stationarity and cointegration.

4.3.1 Studies on India

(Mallick, 1996), employing annual data for the era 1950-92 and retaining Engle-Granger
cointegration cum error-correction procedure, finds a strong cointegration amid income and
exports, and that the association of causality runs from income development to export
development (i.e., growth-led exports). As the Granger-causality examinations, in his discover,
are sensitive to the lag length selected and do not display consistent causal flow from income
development to export development, the aftermath of the error-correction ideal display that
causation runs from income development to export development (as the error-correction word
is significant) irrespective of the lag length chosen. This seems to counsel that the causality
discovered by (Mallick, 1996) is a long-term phenomenon.
(Bhat, 1995) re-examines the exports-economic development nexus for India, and finds facts
of bi-directional causality amid development of exports and commercial growth. (Xu, 1996,)
confirms rejection of the export-led development hypothesis for India. (Ghatak, 1997) finish
that development of exports is provoked by output development in India. (Dhawan, 1999)
scrutinize the alike subject for the era 1961 to 1993, and find that development in GDP reasons
development in exports as causality from exports to GDP appears to be a short run
phenomenon.
(Pradhan, 2007) has examined ELG hypothesis for India employing different approaches by
retaining data at the aggregate level obscuring the post-liberalization period. By retaining
cointegration hypothesis (following the Johansen method), the paper has investigated the
Granger causality amid export development and GDP and export development and investment.
In this analysis, it fails to find prop for the hypothesis that exports Granger cause GDP,
employing two measures for GDP (GDP alongside exports and GDP lacking exports). The
same holds for the connection amid exports and investment. The discovering strengthens the
argument opposing the ELG hypothesis for the case of India.

(Sharma, 2005) re-examines the origins of development for the era 1971-2001 established on
Feder’s (1982) ideal to investigate empirical connection amid export development and GDP
development (the export managed development hypothesis). They examine the following
hypotheses: (i) whether exports, imports and GDP are cointegrated employing the Johansen
way and Breitung’s nonparametric cointegration examination, (ii) whether export development
Granger reasons GDP development, and (iii) whether export development Granger reasons
investment. They flounder to find prop for the hypothesis that exports Granger cause GDP,
employing two measures for GDP (GDP alongside exports and GDP lacking exports). The
alike additionally holds for the connection amid exports and investment.

This counseled study is disparate from preceding work completed on India for generally two
reasons. First, the study will examination the Export Led Development Hypothesis (ELG) as
manipulating for supplementary macroeconomic variables that could have a momentous result
on export-economic development relationship. Second, the study focuses beyond the preceding
two-variable connection analyses by retaining Vector Error Correction (VECM) model. The
intention of this working paper is to scrutinize and familiarize the researchers and students
concerning the Export-Led Development hypothesis (ELG) by analyzing the connection amid
exports and commercial development in India across the era 1970-2012, retaining presently
industrialized time-series econometric methods encompassing cointegration and causality.

4.4 Research Objectives

 To estimate a dynamic time series econometric model for Indian Economy capturing
the relationship between exports and economic growth.
 To analyze causal linkage between total exports and economic growth.
4.5 Data and methodology

The goal of this working paper is to examine the dynamics of the connection amid exports and
economic development in India employing the annual data for the era 1970 to 2012. In this
study, the variables are Finished Exports by India (EX) and Commercial Development (EG).
The real Gross Internal Product (GDP) as the proxy for commercial development in India. And,
the real Gross Internal Product (GDP) is utilized as the proxy for commercial development in
India. All vital data for the example era are obtained from the Handbook of Statistics on Indian
Economy published by Supply Bank of India. All the variables are seized in their usual
logarithms to circumvent the setbacks of heteroscedasticity. The assessment methodology
retained in these studies is the cointegration and error correction modeling technique. The intact
estimation procedure consists of three steps: early, constituent origin test; subsequent,
cointegration test; third, the error correction ideal estimation.

4.5.1 Unit Root Test and Cointegration

Although traditional regression models assume that both the dependent and independent
variables are stationary and that the errors have mean zero and constant variance, a common
concern in standard regression models is the presence of unit roots in the series since most
economic time series normally behave with stochastic trends. With evidence of unit roots, the
series are said to be intergraded of order one—I(1), meaning that they must be modelled in first
differences (Δyt = yt - yt-1) to make them stationary. A time series is stationary if it does not
change overtime, which implies that its values have constant variability. Overall, with evidence
of non-stationary variables such as those in time series analysis, the data might present
spurious3regressions. Thus, unit root tests account for possible correlation of unit roots in the
first differences in the time series. These tests allow for the presence of a nonzero mean and a
deterministic linear time trend. Two of the wildly used unit root tests will also be applied to
this study: the Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) tests.
(Dickey, 1979) developed three different regression equations in differences useful to test for
the presence of unit roots in the series (Enders, 1995). The first equation is a pure random walk
4 equation, the second equation has a drift (intercept) term (a0), and the last equation has both
a drift and a linear deterministic trend (t). The error terms in all three equations are assumed to
be independent (White noise) with equal variance. All three equations are denoted as
Augmented (Dickey, 1979) tests. To test for unit roots in the series involves estimating one or
more of these equations using the Ordinary least Square (OLS) procedure. The last two
equations will be used to test for unit roots in the series selected for this study. Below is a
presentation of the third equation developed by DF:
yt = ρyt-1 + δ1Δyt-1 + … + δp-1Δyt-p+1 + εt
The additional lagged terms are included to ensure that the errors are uncorrelated. In this ADF
procedure, the test for a unit root is conducted on the coefficient of Yt in the regression. If the
coefficient is significantly different from zero, then the hypothesis that Y t contains a unit root
is rejected. Rejection of the null hypothesis implies stationarity.
Johansen tests assess the null hypothesis H(r) of cointegration rank less than or equal to r
among the numDims-dimensional time series in Y against alternatives H(numDims) (trace test)
or H(r+1) (maxeig test). The tests also produce maximum likelihood estimates of the
parameters in a vector error-correction (VEC) model of the cointegrated series. String or cell
vector of strings specifying the form of the deterministic components of the VEC(q) model of yt:

yt  C yt 1  B1 yt 1  ...Bq  yt q  DX   t

If r < numDims is the cointegration rank, then C = AB′ where A is a numDims-by-r matrix of
error-correction speeds and B is a numDims-by-r matrix of basis vectors for the space of
cointegrating relations. X contains any exogenous terms representing deterministic trends in
the data. For maximum likelihood estimation, it is assumed that εt ~ NID (0,Q), where Q is the
innovations covariance matrix. Values of model are those considered by Johansen.

4.6 Results and discussion

For investigating the export led growth (ELG) hypothesis, the conventional approach of first
differencing disregards potentially important equilibrium relationships among the levels of the
series to which the hypotheses of economic theory usually apply (Engle, 1987). The first test
for an ordinary unit root - single series unit root tests include Augmented Dickey-Fuller (ADF).
Table 1 summarises the results for unit root tests on levels and in first differences of the data.
Strong evidence emerges that all the time series are I (1). In Table 1, for the Augmented
Dickey-Fuller test (Dickey, 1979), the lag length is based on the Schwarz Information
Criterion, while for the Phillips-Perron Unit Root Test bandwidth selection is based on Newey-
West.
 Table 4.1: Unit Root Tests
Level ADF Level PP Test First Difference First Difference PP
test Statistics Statistics ADF Test Statistics Test Statistics
GDP without -0.704 -0.001 -2.509 -6.337
Exports
Exports 7.946 29.364 1.664 -1.381
1% critical value -3.639 -4.252 -4.262 -2.130
1% critical value -2.049 -2.049 -4.273 -4.263
(Trend and
Intercept)

It is clear from Table 1 that the null hypothesis of no unit roots for both the time series are
rejected at their first differences since the ADF test statistic values are less than the critical
values at 10, 5 and 1 per cent levels of significances.

The unit root test are confirmed for data sequence, the subsequent pace is to scrutinize whether
there exists a long-run equilibrium connection amid the variables. This needs cointegration
scrutiny that is momentous to circumvent the chance of spurious regression. Cointegration
scrutiny is vital because if two non-stationary variables are cointegrated, a Vector Auto-
Regression (VAR) ideal in the early difference is not specified due to the results of a public
trend. After cointegration connection is recognized, the ideal ought to contain residuals from
the vectors (lagged one period) in the vibrant VECM system. The Johansen method applies
the maximum likelihood procedure to ascertain the attendance of cointegrated vectors in non-
stationary period series. The assessing hypothesis is the null of non-cointegration opposing the
alternative of attendance of cointegration employing the (Johansen, 1995a).

Table 4.2: Results of Johansen’s Cointegration Test

Hypothesized Trace 0.05

No. of CE(s) Eigenvalue Statistic Critical Value Prob.**

None 0.022451 7.674424 15.49471 0.0008

At most 1 0.009493 2.270236 3.841466 0.1319

Trace test indicates no cointegration at the 0.05 level

* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) Standard erro₹
The Trace test indicates the attendance of two cointegrating equations at 5 each cent level of
significance. And, the maximum Eigen value examination makes the confirmation of this
result. Thus, the two variables of the study have long-run equilibrium connection amid them.
But in the short-run there could be deviations from this equilibrium, and it is needed to confirm
whether such disequilibrium converges on the long-run equilibrium or not. Thus, Vector Error
Correction Ideal is utilized to produce such short-run dynamics. Error correction mechanism
provides a way whereby a proportion of the disequilibrium is corrected in the subsequent
period.

Table 4.3: Estimates for VECM Regression

Vector Error Correction Estimates

Standard errors in ( ) & t-statistics in [ ]
Cointegrating Eq: CointEq1
GE(-1) 1.000000

LEXPT(-1) -0.616976
Standard error (0.01653)
t-statistic [-37.3298]
C -1.006540
Error Correction: D(GE) D(LEXPT)
CointEq1 -0.149529 0.149952
Standard error (0.04337) (0.12173)
t-statistic [-3.44747] [ 1.23182]
D(GE(-1)) -0.555159 -0.098256
Standard error (0.07224) (0.20274)
t-statistic [-7.68517] [-0.48463]
D(GE(-2)) -0.268463 -0.192732
Standard error (0.08143) (0.22855)
t-statistic [-3.29673] [-0.84328]
D(GE(-3)) -0.133540 -0.366556
Standard error (0.08218) (0.23064)
t-statistic [-1.62499] [-1.58929]
D(GE(-4)) -0.187479 -0.236035
Standard error (0.07839) (0.22000)
t-statistic [-2.39176] [-1.07291]

D(GE(-5)) -0.157870 0.023409

Standard error (0.06684) (0.18759)
t-statistic [-2.36197] [ 0.12479]
D(GE(-6)) -0.108503 0.054159
Standard error (0.06752) (0.18949)
t-statistic [-1.60708] [ 0.28581]
D(GE(-7)) -0.098531 0.095834
Standard error (0.06750) (0.18944)
t-statistic [-1.45973] [ 0.50587]
D(GE(-8)) -0.065892 -0.001136
Standard error (0.06784) (0.19039)
t-statistic [-0.97134] [-0.00597]
D(GE(-9)) -0.035017 -0.107346
Standard error (0.06689) (0.18773)
t-statistic [-0.52349] [-0.57179]
D(GE(-10)) -0.024388 -0.012768
Standard error (0.06563) (0.18420)
t-statistic [-0.37160] [-0.06932]
D(GE(-11)) -0.014435 -0.177299
Standard error (0.06428) (0.18040)
t-statistic [-0.22457] [-0.98284]
D(GE(-12)) 0.654749 0.546228
Standard error (0.06246) (0.17531)
t-statistic [ 10.4822] [ 3.11581]
D(GE(-13)) 0.474337 0.435078
Standard error (0.07500) (0.21048)
t-statistic [ 6.32486] [ 2.06705]
D(GE(-14)) 0.276164 0.279948
Standard error (0.08085) (0.22691)
t-statistic [ 3.41587] [ 1.23376]
D(GE(-15)) 0.164918 0.305334
Standard error (0.07890) (0.22143)
t-statistic [ 2.09034] [ 1.37894]
D(GE(-16)) 0.163337 0.136535
Standard error (0.06549) (0.18380)
t-statistic [ 2.49416] [ 0.74285]
D(LEXPT(-1)) -0.076430 -0.462376
Standard error (0.03382) (0.09491)
t-statistic [-2.26012] [-4.87172]
D(LEXPT(-2)) -0.079687 -0.146054
Standard error (0.03465) (0.09726)
t-statistic [-2.29946] [-1.50165]
D(LEXPT(-3)) -0.091438 -0.065290
Standard error (0.03428) (0.09620)
t-statistic [-2.66769] [-0.67870]
D(LEXPT(-4)) -0.065596 -0.204251
Standard error (0.03384) (0.09498)
t-statistic [-1.93830] [-2.15046]
D(LEXPT(-5)) -0.035422 -0.216502
Standard error (0.03388) (0.09509)
t-statistic [-1.04548] [-2.27677]
D(LEXPT(-6)) -0.062760 -0.117302
Standard error (0.03344) (0.09385)
t-statistic [-1.87680] [-1.24986]
D(LEXPT(-7)) -0.110200 -0.098437
Standard error (0.03214) (0.09020)
t-statistic [-3.42896] [-1.09133]
D(LEXPT(-8)) -0.132837 -0.127546
Standard error (0.03229) (0.09063)
t-statistic [-4.11359] [-1.40732]
D(LEXPT(-9)) -0.114551 -0.118673
Standard error (0.03279) (0.09203)
t-statistic [-3.49354] [-1.28954]
 D(LEXPT(-10)) -0.095617 -0.278590
Standard error (0.03272) (0.09183)
t-statistic [-2.92246] [-3.03387]
D(LEXPT(-11)) -0.107537 -0.173535
Standard error (0.03239) (0.09091)
t-statistic [-3.31980] [-1.90879]
D(LEXPT(-12)) -0.023720 0.145399
Standard error (0.03128) (0.08780)
t-statistic [-0.75820] [ 1.65599]
D(LEXPT(-13)) -0.075749 -0.098489
Standard error (0.03035) (0.08518)
t-statistic [-2.49582] [-1.15623]
D(LEXPT(-14)) -0.056736 -0.088161
Standard error (0.03065) (0.08602)
t-statistic [-1.85114] [-1.02488]
D(LEXPT(-15)) -0.030758 -0.102561
Standard error (0.02976) (0.08352)
t-statistic [-1.03358] [-1.22796]
D(LEXPT(-16)) -0.039199 -0.039808
Standard error (0.02567) (0.07204)
t-statistic [-1.52714] [-0.55258]
C 0.016077 0.026843
Standard error (0.00433) (0.01214)
t-statistic [ 3.71586] [ 2.21060]

The approximated coefficient of error-correction word in the LEXPT equation is statistically

momentous and has a negative signal, that confirms that there is not merely each setback in the
long-run equilibrium relation amid the autonomous and reliant variables at 5 each cent level of
meaning, but its comparative worth (-0.154) for India displays the rate of convergence to the
equilibrium state each year. Precisely, the speed of adjustment of each disequilibrium towards
a long-run equilibrium is that concerning 15.4 each cent of the disequilibrium in exports is
corrected every single year. Furthermore, the negative and statistically momentous worth of
error correction coefficient indicates the attendance of a long-run causality amid the variables
of the study. And, this causality is unidirectional in our ideal being running from the real GDP
to exports. In supplementary words, the adjustments in exports can be clarified by real GDP.

Table 4.4: Results of Granger Causality Test

Lags: 13

Null Hypothesis: Obs F-Statistic Prob.

DGDP does not Granger Cause DEXPT 238 3.99837 0.0000

DEXPT does not Granger Cause DGDP 0.86400 0.5919

The results in Table 4 indicate that real GDP does not Granger-cause the exports at 5 per cent
level of significance. This result supports the previous result obtained from VECM that there
is no short-run causality at 5 per cent level of significance. Based on this causality tests, changes
in the real GDP cause changes in exports in the long-run, but not in the short run.

4.7 Summary and Conclusion

This study has examined export led growth (ELG) hypothesis for India employing disparate
ways by retaining data at the aggregate level obscuring the 1970-2012. It presents a extra up-
to-date examination of the ELG hypothesis for India and able to arrest the results of
liberalization on exports and output growth. The data properties are analyzed to ascertain the
stationarity of period sequence employing the Increased Dickey-Fuller constituent origin
examination that indicates that the two sequence are I(1). The aftermath of the Cointegration
examination established on Johansen’s procedure indicate the attendance of the Cointegration
amid exports and real GDP. Therefore, the two variables of the study have a long run
equilibrium connection amid them, even though they could be in disequilibrium in the short-
run. The vector error correction ideal established on VAR indicates that concerning 16.7 each
cent of disequilibrium is corrected every single year. In supplement, the negative and
momentous error correction word in LEX equation supports the attendance of a long-run
equilibrium connection amid real GDP and exports. Furthermore, the estimates of the VECM
indicate the attendance of a unidirectional causality running from real GDP to exports. The
Granger causality examination indicates that there is a causal connection running from GDP to
exports in the long-run, but not in the short-run.