Relationship between services trade, economic growth and external stabilisation in India: An empirical investigation

The economic reforms initiated in India after the emergence of the balance of payments crisis in 1990-91 resulted in the Government of India reversing its policy stand of import substitution, followed since independence. A policy of export-oriented growth was adopted, following the footsteps of East Asian countries. India’s international trade in services benefited immensely from this change in policy stance, and received a further boost when India became a signatory to the WTO in 1995. In spite of this, India’s external sector has come under growing pressure from a burgeoning Current Account Deficit, in the aftermath of the global economic recession of 2008-09. In such a scenario, this paper attempts to study the inter-relationships between services trade, economic growth and external stabilisation for the Indian economy, during the post-reform period. The contribution of international trade in non-factor services and other invisibles towards India’s economic growth and current account stabilisation is examined descriptively. The relationship between the three macroeconomic variables is estimated using the ARDL approach to co-integration, for the time-span from 1996-97:Q1 to 2011-12:Q4. The study finds the existence of co-integrated relationship between Current Account Balance, GDP and services trade, for the Indian economy. The study also finds empirical evidence indicating that workers’ remittances are more crisis prone compared to net services exports, in case of Indian economy.