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Trade Misinvoicing and Macroeconomic Outcomes in India

Author

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  • Raghbendra Jha
  • Truong Duc Nguyen

Abstract

This paper has two main objectives. First, it computes capital flight (CF) through trade misinvoicing from India using data from UNCOMTRADE, MIT Observatory of Economic Complexity and IMF E-library. India’s trade with 17 countries over the period 1988-2012 is considered. We find that CF has accelerated since 2004 and particularly sharply since 2007. It peaked at nearly $40 billion in 2008 with the total outflow between 1988-2012 exceeding $186 billion. Second, we model the mutual dependence of GDP growth, CF, and various risk factors in a VAR framework. We find that the VAR models chosen fit the data well. We conduct impulse response function analysis, forecast the key variables until 2020 and forecast error variance decomposition. Broadly we find that, if left undisturbed, CF through trade misinvoicing will continue to be high and play a significant macroeconomic role. Thus, CF needs to be checked urgently not only because it is a drain of the country’s resources but also because it continues to have a significant and, by its very nature, uncontrollable effect on the economy. At least some of the failures of current macroeconomic policy in India could be attributed to CF.

Suggested Citation

  • Raghbendra Jha & Truong Duc Nguyen, 2014. "Trade Misinvoicing and Macroeconomic Outcomes in India," CAMA Working Papers 2014-31, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:camaaa:2014-31
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2014-04/31_2014_jha_truong.pdf
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    Cited by:

    1. Tehseen Ahmed Qureshi & Zafar Mahmood, 2016. "The Magnitude of Trade Misinvoicing and Resulting Revenue Loss in Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 21(2), pages 1-30, July-Dec.

    More about this item

    Keywords

    Trade Misinvocing; VAR; Impulse Response; Forecasting; India;

    JEL classification:

    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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