Export Instability, Income Terms of Trade Instability and Growth: The Case of India

The study explores the causal relationship among export instability, income terms of trade instability and economic growth in India. By using the cointegration test and the vector error correction model for the period 1960 to 2008, the study demonstrates that there exists a long run equilibrium relationship among export instability, income terms of trade instability, investment and economic growth. Both in the short run and the long rum the Granger causal flow is uni-directional from export instability and income terms of trade instability to economic growth and investment. The findings of the study suggest that there is a need to build up foreign exchange reserves in India in order to smoothen out fluctuations in export earnings in the short run. A long run strategy may involve government efforts to diversify export base of the country.