Effects of Terms of Trade on Growth Performance of India

This study investigates the effect of terms of trade on economic growth of India by using the annual time series data from the period of 1980 to 2010. The ARDL bound testing cointegration confirms the significant positive relationship between terms of trade and economic growth in the long run as well as in the short run. Results of Granger causality, Toda and Yamamoto Modified Wald causality and variance decomposition tests confirm the bidirectional causal relationship between terms of trade and economic growth in India. Rolling window estimation indicates that the terms of trade is having positive long-run coefficients throughout the sample period. Results of CUSUM and CUSUM of square suggest that there is no structural instability in the residuals of equation of economic growth in short run. It is suggested that beneficial terms of trade is better for economic growth in India. At this stage we can set the direction of future research that the relationship between commodity groupwise and countrywise bilateral terms of trade with economic growth should be analyzed. These results would be helpful for policy makers of India to frame growth enhancing countrywise as well as commodity-wise trade policies.