Volatility in Trade Openness, Capital Inflows and Economic Growth: The Case of India

The present study is an effort in studying the impact of volatility in trade openness and capital inflows on the volatility of economic growth. A cointegration model has been used for Indian data to verify this. The evidence suggests that the volatility in capital inflow has a positive impact on growth volatility. The trade openness does not seem to increase volatility in economic growth. These results provide support to the policies of active trade liberalization and cautious foreign investments followed in India. The results also suggest that the agricultural growth and economic volatility are negatively related. Agriculture being the dominant economic activity, it will have a bearing on economic growth. Contrary to the expectation, domestic capital formation as a ratio of GDP has a positive impact on economic volatility. This may be because of misallocation of investments in the past due to inappropriate economic policies. Growth in fiscal deficits has a positive impact on economic volatility. Hence efforts should be made to reduce fiscal deficit further. Similarly, monetization reduces growth volatility. So more and more financial deepening is recommended.