Global Financial Crisis : Implications for Trade and Industrial Restructuring in India
Abstractï»¿ï»¿ï»¿This study investigates the impact of global crisis shocks on Indiaâ€™s trade and industry. We use both panel data modeling and vector autoregression techniques to understand the dynamic effects of global crisis shocks on Indian industry and trade. The estimated results of panel data models show that changes in trade composition are positively associated with changes in manufacturing composition in India, controlling for other variables. However, there is no strong indication that Indian industry has been severely harmed by the fall in demand in crisis-affected advanced economies such as the United States (US), the European Union (EU), and Japan, holding other things constant. Since there may be lags between changes in composition in export and industry, the study then explores the dynamic effects of global crisis shocks on Indian industry and trade with the help of vector autoregression techniques. The findings of the study indicate that the compositional change in industry has responded significantly to exports to the US, Japan, and the EU in the crisis period. Variance decomposition of compositional change in industry reveals that during the pre-crisis period, almost 100% of the variation in compositional change in industry depended on its own variation, while in the crisis period about 20% of the variation in compositional change in industry has depended on the exports to the EU, Japan, and the US. Therefore, the effect of global crisis shocks of Indiaâ€™s exports to advanced economies during the crisis period has been transmitted to Indian industry. However, Indian industry has not responded significantly to the shocks of imports from the advanced economies, while the response to its own shocks is significant during both pre- and postcrisis periods. The study also indicates that Indiaâ€™s trade openness has responded mildly to the shock of exports to the US. Indiaâ€™s trade with the US, coupled with US GDP, has significantly contributed to the variability of Indiaâ€™s trade openness in the crisis period, accounting for 40% of the variation of the trade-GDP ratio of India, whereas Indiaâ€™s trade with the EU and Japan has had either no effect or very insignificant effect on Indiaâ€™s trade openness. This study suggests that Indian industry has not been significantly harmed by the ongoing global crisis. Even though India continues to enjoy relatively large domestic demand, the compositional change (positive) in the manufacturing sector would decrease if the crisis continues, resulting in a slowdown in growth and a rise in stagnation.
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Bibliographic InfoPaper provided by East Asian Bureau of Economic Research in its series Microeconomics Working Papers with number 23242.
Date of creation: Jul 2011
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global financial crisis; industrial restructuring; India's trade and industry; trade composition; vector autoregression; Export structure; India;
Find related papers by JEL classification:
- F02 - International Economics - - General - - - International Economic Order; Noneconomic International Organizations;; Economic Integration and Globalization: General
- F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
- F17 - International Economics - - Trade - - - Trade Forecasting and Simulation
- F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
- F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
- L6 - Industrial Organization - - Industry Studies: Manufacturing
- L7 - Industrial Organization - - Industry Studies: Primary Products and Construction
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-03-21 (All new papers)
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