Impact of Capital Account Openness, Trade Balances And Exchange Rates on Economic Growth-The Evidence from India (1990-2013)

Abstract

This paper is an attempt to verify the impact of the capital account openness on economic growth (proxied as the index of industrial production, ]JP) along with other macro variables such as trade balances (measured as a ratio of exports to imports, XIM) and exchange rates (real effective exchange rate, REER) of India for the post liberalization period, 1990-2013. The quarterly data of the variables for the study period suggest that the capital account openness proxied as foreign capital inflows had impacted the index of industrial production (IIP) along with trade balances and REER. The estimation of Johansen s cointegration model confirms the long run relationship between these variables. The short run dynamics studied through VECM model suggests that there exists a bilateral short run causal relationship between capital flows and IIP; and trade balances and ]IP Though IIP has the short run impact on REER, the converse could not be found. In view of these empirical .findings further liberalization of capital account, stabilizing trade deficits and reducing exchange rate fluctuations have been recommended for higher and sustainable economic growth in India..