Impact of Trade Liberalization on Economic growth in India

The paper empirically analyzes the impact of trade liberalization on the economic growth of India over the period 1990-2010. Trade openness, Gross Fixed Capital Formation (GFCF), Foreign Direct Investment (FDI) and Inflation are important explanatory variables, while Real GDP is dependent variable used for the model specification. The study used Johensen Co-integration approach developed by Johensen & Jeslius (1990) for long run relationship. The result shows that trade liberalization and Gross Fixed Capital Formation have positive and significant impact on economic growth. Foreign Direct Investment and inflation negatively affect growth of economy. Residual test are used to check the overall fitness of model. INTRODUCTION Trade liberalization policies aims to achieve increased productivity and eliminate inefficiency and barrier in the in the production process and leads towards more competitive and free market economy. Foreign trade is an important aspect of economic development for a country like India. Foreign trade is also known as growth engine for developing economy. India had balance of trade surplus at the time of independence, but from last six decades India is facing BOT deficits. There is a big challenge for India to reduce the trade gap. India is fast emerging as a global leader, what with its vast, natural resources, and huge base of skilled manpower. Combined with cutting edge technology, Indian trade market is making its presence felt all across the world. Indian products and services are seen as of international standards and globally competitive. Trade in India has made good progress on liberalizing trade regimes and cutting tariffs since the recent times, when most of the countries started with reforms. LITERATURE REVIEW: Ferrantino et al (1997) discussed the relationship between trade liberalization and economic growth. At theoretical level trade liberalization positively affected the economic growth but there are controversies among theorist about the time lag that require for complete affect of TL. While on other hand empirical literature investigated that there is a strong positive linkage between trade liberalization and economic growth especially in the rapidly growing countries. Jin (2003) analyzed the data before economic crisis of 1997/98 in Korea. Findings of the paper show negative impact of trade liberalization on growth due to crowding out of domestic investment. Inflation also negatively associated with increased openness. Chuhdhary et al (2010) studied the relationship between trade liberalization and economic growth by Granger causality test. Results of this study revealed that in long run relationship between economic growth human capital and trade liberalization is significant and positive while in short run labor force also significantly contribute in growth. Hammouda,Jallab (2011) examined the relationship between liberalization and growth alone, but can be enriched by comparing the development experiences of Africa and Asia. Future thinking should turn towards a search for optimal combinations between liberalization and control in order to promote growth and strengthen the competitiveness of developing economies. DATA AND MODEL: The main purpose of the study is to investigate the impact of trade liberalization in economic growth of India over the period of 1975-2010. Data on annual observations are taken from SBP publication “Hand Book of India Economy 2010” and World Bank Indicators 2009.