India’s global trade potential. A panel gravity model approach

In this paper, India’s global trade potential, export potential and import potential with its 29 major trading partners (which contributed 77.63 per cent of India’s global trade in 2021) have been estimated for the year 2021 with the help of augmented panel gravity model. The time span of this study is 31 years, from 1991 to 2021.The variables used for estimating the augmented panel gravity model are GDP, population, per capita GDP, T.R/GDP, bilateral real exchange rate, distance, and three dummy variables, namely, common language, common colonization and common border. Initially, India’s global trade, export and import gravity models were estimated by POLS, EFM and REM and then model selection tests were applied to select the appropriate model. The study suggested that FEM is appropriate for India’s global trade gravity model and REM is appropriate for India’s global export and global import gravity models. However, these models suffered from the problems of cross-section dependence, autocorrelation, and heteroscedasticity. Therefore, finally FGLS method was used to estimate India’s trade, export and import gravity models and then using the FGLS model India’s global trade, export and import potential were estimated for the year 2021. The findings of the study indicate that India is over trading with countries such as China, United States, Australia, Brazil, Indonesia, Iraq, South Korea, Kuwait, Malaysia, Nepal, Qatar, Netherlands, Saudi Arabi, Thailand, United Arab Emirates, Vietnam and South Africa and it has trade potential with Hong Kong, Bangladesh, France, Germany, Italy, Japan, Russian Federation, Nigeria, Singapore, Turkiye, Sri Lanka and United Kingdom. India should focus on boosting trade with these countries as India has strong trade as well as export potential with them. This will help India in strengthening its export revenues and increase its rate of growth.