From concentration to expansion: decoding the export diversification-growth nexus in India

Purpose This study aims to examine the relationship between export diversification and economic growth by diving into Harmonised System (HS) six-digit level of disaggregation which provides greater details regarding the composition of India’s export product mix. Design/methodology/approach Using data from 1991 to 2023, the study uses Theil index to measure the magnitude of diversification in export basket and employs an Auto Regressive Distributed Lag (ARDL) model to unveil the long run relationship between export diversification and economic growth in India. Findings The results provide evidence that export diversification enhances growth both in the short and long run and also acts as a shield against concentration and induced volatility. Further analysis indicates that both human capital and labour force growths are conducive to economic expansion while inflation and FDI has detrimental effects. Research limitations/implications The study period starts in 1991 because data on FDI prior to that period is unavailable as the liberalisation of Indian economy formally initiated in 1990–1991. However, the study also brings out the relevance of export diversification as a source of sustainable economic development and the growth promoting as well as risk mitigating character in the context of India. It also calls for policies to enhance human capital and labour force and the means of combating inflation and to best use FDI for economic growth. Originality/value The study contributes to the existing knowledge through various ways: First, unlike previous studies which uses Herfindahl–Hirschman Index (HHI) index which is exposed to various limitations, the present study uses Theil index and considered HS six digit level of product classification to account for greater details while measuring diversification. Second, the long run relationship between economic growth and export diversification is modelled using the Auto Regressive Distributed Lag (ARDL) bounds testing approach and effect of export diversification on economic growth is also moderated controlling various economic growth influencing variables such as, gross capital formation, labour force participation, human capital, FDI and inflationary effect.