Exploring the Nexus: Services Trade, Economic Growth and Current Account Dynamics in India

This article aims to study the impact of services trade on India’s economic growth and current account balance (CAB). Earlier studies in this subject have mostly looked at the goods sector. In such a context, by using relevant data post-globalisation from pertinent sources like world development indicators and Reserve Bank of India (RBI) handbooks this study brings in a novel approach by using the Balance of Payments Constrained Growth (BPCG) model and autoregressive distributed lag cointegration to estimate the balance of payments equilibrium growth rate for India’s service sector. The key service sub-sectors are also identified using long-run and short-run cointegration analysis based on the Johansen cointegration test and impulse response function. This study finds that India’s actual growth is at a rate higher than the equilibrium growth rate. Further sectoral decomposition reveals that India’s merchandise sector is also growing at a rate higher than the equilibrium growth rate, while the service sector’s rate of growth is lower than the balance of payments equilibrium growth rate. Among the major services in India’s trade basket, insurance, construction, telecommunication, transport and travel services were found to exhibit strong linkages. This study’s sector-specific analysis provides insights for policy implications and areas of strategic interventions. This research provides a comprehensive examination of the relationship between services trade, economic growth, and current account dynamics in India using a two-pronged empirical strategy. By integrating the Balance of Payments Constrained Growth (BPCG) model and cointegration analysis, the study quantifies the equilibrium growth rates for both merchandise and services sectors and evaluates their alignment with actual growth patterns. The findings underscore the stabilizing role of the services sector in mitigating current account deficits and identify key service sub-sectors—such as insurance, construction, and transport—as critical drivers of long-run economic growth. These insights offer valuable implications for trade and macroeconomic policy in developing economies and highlight the strategic importance of services trade in ensuring sustainable and balanced growth.