Services trade and economic growth in India: an analysis in the post-reform period

Abstract

Services sector in India contributes more than 60% of the overall gross domestic product (GDP) and more than 40% of total trade. This sector also absorbs a chunk of manpower, especially in export-oriented industries and reduces the employment burden on other non-services sectors. In this context, this paper examines the role of services trade (exports and imports) in economic growth of India using autoregressive distributed lag and vector error correction model (VECM) methodology for the period Q1:1996–1997 to Q1:2010–2011. This paper also uses impulse response function analysis to supplement the long-run equilibrium relationship and causality analysis and also to understand the dynamic relationship among variables. The study finds a long-run equilibrium relationship among GDP, services exports, imports and real effective exchange rate. The VECM and impulse response analysis suggest causality runs from services exports to GDP emphasising the services exportled growth in India during the post-reform period.