An impact of Merchandise Trade on GDP and Inflation: A Case Study of India

 

Dr. Purnima Mishra¹*, Ankita Tiwari²

¹Assistant Professor, Dept. of Economics, Govt. J. Yognandam Chhattisgarh College, Raipur, Chhattisgarh

²Research Scholar, SOS in Economics, Pt. Ravishankar Shukla University, Raipur Chhattisgarh

 

ABSTRACT:

In this paper Endeavour’s to selectively present the impact of exports on India’s GDP by purchasing power, imports and consumer price index from 1990-2016 (26 years). The present study analyses the various research methodology like correlation, multiple regreesion, growth rate and ratio of GDP’s export and import, to find out the relationship of dependent (exports) and independent variables (imports, GDP and CPI).Thus it may concluded that the relation between  export, import and GDP is positive highly correlated, while CPI is weak correlated. The t-test of import and GDP is significant association exists between them, but CPI is negative. lastly, the share of  import exceed than export in total GDP,which means government should adopt certain measures to boost the export.

 

 

 

INTRODUCTION:

Foreign trade refers to the exchange of goods and services from one country to another. While impact of foreign trade on GDP plays a significant role for the improvement of exports and it may called the export led growth hypothesis (Gibson, 1992), which means export expansion is the main determinant of growth and it holds that overall growth of countries can be generate not only labour but also by expanding export and it advocates that export perform as an engine of growth.

 

This paper is mainly focus on impact of Indian export on imports, GDP (PPP) and CPI (inflation rate), where inflation is necessary to have a profit incentive in an Economy to attract investments. Inflationary pressures amidst huge capital inflow are kept in control with the help of Selective controls exercised by the Central bank of a country. This cycle is then linked to the Interest rates offered by the Central Bank. Higher interest rates offer higher bond yields, Good returns on the invested capital and hence attract investments. Thus currencies with higher interest rates get strengthened against those with lower interest rates. A stronger domestic currency has a negative effect on exports and makes imports easier. A higher inflation also has a negative effect on exports as it increases the input costs. The availability of cheaper import products affects indigenous producers and exporters and demeans their Global Competitiveness. Higher consumer prices lead to inflation, even though the GDP has increased due to higher output

 

According to WTO and IMF report (IMF, 2016), India holds 19^th rank in world Merchandise exports ,cover over 7500 commodities to about 190 countries and imports holds 13^th rank in world merchandise imports, cover over 6000 commodities to about 140 countries in 2015. In 1990-91, India’s growth rate was -1.34% while in 1991-92, it was 10.72% and the total amount of compound annual growth rate from 1990-2016 was 0.91%.therefore in 1990 India’s share in world export was 1.85% and 2015-16 it is 1.62%, while import is 2.34%.It is remarkable fact that the whole period of time our balance of trade is unfavorable and therefore import have exceeded exports, shows trade deficit.

 

OBJECTIVES OF THE STUDY:

The objective of the study is to examine the impact of foreign trade (exports) on GDP, imports and CPI (Inflation rate) along with certain measures to increase the trade potential.

 

RESEARCH METHODOLOGY:

The study has been based upon the time series secondary data. Secondary data has been collected from various sources of govt. agencies. The data for value of exports has been gathered from various issues of income survey, Govt. of India, Ministry of Finance, New Delhi, and Handbook of Statistics on Indian Economy, Reserve Bank of India. The data on consumer price indices and Gross domestic product has been obtained from IMF and World Bank. The data published by other govt. agencies has also been used.

 

Impact of foreign trade analyse through coefficient of correlation (Gupta, Correlation, 2011) (Karl Pearson’s correlation) defines the cause and effect relationship is calculated through the formula:

r = ∑ XY

 

t-test (Sahai, 2013): Student t-test has been used to test significance level of multiple regressions (independent variables) of imports, GDP and CPI, so that the relation has been defined. Formula is as shown below:

t = r

 

Multiple correlations (Gupta, Multiple correlation, 2011) have been used to study the relation between the dependent variable (exports) and those independent variables (imports, GDP and CPI) which have the highest correlation are as follows:

 

Y =  + ………… + E

Where, Dependent variable (y) = exports

Independent variable (X) = GDP (PPP) + imports + CPI (inflation rate)

Degree of freedom = n – 2

D.F. = 26 (26-2 = 24)

 

In this study, export has been taken as the dependent variable and import, GDP (PPP) and CPI (inflation rate) is taken as independent variables. By using the above statistics, any difference in these variables, effects on export has been analyzed.

 

Impact of India’s export on imports, GDP (PPP) and CPI

India’s export is rise from 1990-2016, along with how much GDP effect the exports by purchasing power parity because India’s export is largely depend upon gross domestic product and due to this if GDP is increasing, we export more commodities and it also helps to improve our manufacturing sector through investment process. This table shown the India’s export is dependent variable and imports, GDP (PPP), and CPI (Inflation rate percentage) is independent variable and how much independent variable affects the dependent variable.

 

 

Table 1: India’s total export, total imports, GDP (ppp), CPI (inflation rate) and growth rate of CPI (1990-2016)

Source: World Bank; export and import in US million dollar; GDP (PPP) based on current international dollar (million); CPI (inflation rate in percentage change)

 

Interpretation of result:

In table 1: An attempt has been made to measure the effect of GDP, imports and CPI on export Performance by computing Karl Pearson’s coefficient of correlation between exports and the selected indicators. Correlation coefficient (r) between export and the first indicator (import) is 0.99, which indicates a positive high degree of correlation which is statistically (t-value 33.49) significant at 0.01 %( 33.49 >2.49) and 0.05 % (33.49 >1.711) level of significance explaining that significant association exists between exports and imports during the period under study.

 

As examine the correlation coefficient (r) between export and second indicator- GDP (PPP) is 0.88, which says that a high degree of correlation exists between them. T value being 2.3985 is significant at both 0.01% (2.398 < 2.49) and 0.05% (2.398 > 1.711).

 

Correlation coefficient (r) between exports and third indicator-consumer price indices (inflation rate) is 0.0179, which shows a weak degree of correlation between them. Being significant (t-value is 1.385) at 0.01% level of significance (1.385 <2.49) and 0.05 % (1.385 <1.711) level of significance explaining a negative relation between them.

 

 

 

 

 

Figure1 (A): diagrammatic explanation of exports, imports, GDP and CPI

 

Figure1 (B): correlations and multiple regression of India’s exports, imports, GDP and CPI

 

 

 

Table 2: Economic growth of exports and imports and total share of exports and imports in GDP (PPP)  (In millions)

Source: commerce and industry Gov. of India. World Bank indicator

 

 

Figure2 (A): growth rate of India’s exports and imports

 

 

 

Figure2 (B): Share of total exports and imports in India’s total GDP

 

 

Interpretation of table 2

We have seen that the growth rate of import is increasing as compare to export in figure 2(A), where in table we have seen that in 1990, export is 13.21% and import is 14.75%, while in 2015-16, export is -17.21% and -50.08% and import is -15.32% and -55.49%.in graph, import exceeds export and it is remarkable fact that india balance of trade is deficit.

 

In figure 2(B), we have seen that share of import is more in GDP as compare to export and this shows that government should adopt better policies for export benefit.

 

CONCLUSION AND SUGGESTIONS:

Thus it may concluded that the export and import are positive correlated to each other but growth shown that import exceeds exports and it holds a larger share in GDP, which means the total production that occurs in an economy thus if prices rise due to inflation, the cost of factors of production increases (raw material, labor, capital, etc.) the cost of production also increases. This means that that people will buy less of that commodity due to the increase in its price (basic law of demand and supply). If we aggregate this phenomenon for all goods across all sectors we see a huge drop in aggregate production which leads to a slowdown in the economy and hence reducing the GDP.

As above suggestions, government should adopt create indigenous sources of supply, where possible, for imports that form parts of exports to provide a cost advantage, or at least reduce the cost disadvantage. Many of India's exports today have significant import components.

 

Reduce process friction for entrepreneurs engaged in export-oriented activities.

 

Reduce barriers for foreign direct investment that can provide capital and expertise for export oriented activities.

 

India has a large skill-challenged population; a focus on education in this area will create the work force that is needed for export-oriented industries.

 

Improve domestic infrastructure, roads, ports and power. For example, India is one of the largest producers in the world of fruits and vegetables, and the largest producers of milk. Yet, India's share of the world trade in this is less than 1%. This is attributed largely to lack of investment in post-harvest technology and infrastructure that can deliver these perishables to the world market.

 

REFERENCES:

1.     Commerce and Industry Government of India. (n.d.). Retrieved 2016, from commerce and industry government of india.

2.     Gibson, M. L. (1992). Export orientation:pathway or artifact? International Studies Quaterly 36.3 , 331-43.

3.     Gupta, S. (2011). Correlation. In s. Gupta, Statistical Methods (p. 398). New Delhi: Sultan Chand and Sons.

4.     Gupta, S. (2011). Multiple correlation. In s. Gupta, Statistical Methods (pp. 451-493). New Delhi: Sultan Chand and Sons.

5.     Imf, W. A. (2016). Global Competitive Report.

6.     Reserve Bank of India. (2016). Retrieved from Reserve Bank of India.

7.     Sahai, D. A. (2013). Test of significance: small samples. In Statistical Analysis (p. 692). Agra: Sahitya Bhawan Publication.

8.     World Bank. (2016). Retrieved from World Bank.

 

 

 

 

Received on 27.08.2017       Modified on 16.09.2017

Accepted on 25.09.2017      © A&V Publication all right reserved