Economic growth – foreign trade performance nexus: a VECM-based empirical evidence from India

Purpose The study examines the long-term and short-term relationships among economic growth, exports, imports, exchange rate and trade openness (TOPN) in the Indian economy for the period from Q1:2011–12 to Q4:2023–24. Design/methodology/approach The econometric techniques such as Johansen cointegration test, vector error correction model (VECM) and Wald tests, are employed for the analysis. Findings The results suggest that both exports and imports have a positive and beneficial impact on economic growth, while the exchange rate and TOPN negatively affect economic growth. The empirical results suggest that 1% increase in exports and imports leads to economic growth by 0.45 and 0.54%. However, 1% appreciation in exchange rate and TOPN leads to a decreases economic growth by 0.0462 and 0.994% respectively. In the long run, export-induced imports are the stronger determinants of economic growth than exports. It may be concluded that the import content of export promotes economic growth in India. Research limitations/implications The policy of export promotion and import liberalisation, has the potential for economic growth, should be promoted and encouraged. The policy should focus on leveraging trade and exchange rate management to enhance India’s economic growth. By promoting exports, selective optimising imports, stabilising the exchange rate and selectively liberalising trade, India can strengthen its global competitiveness and sustain accelerated long-term economic stability. Therefore, policymakers should consider more balanced trade strategies that optimise, rather than minimise, imports aligned with export needs. These findings suggest incorporating sector-specific market-oriented liberalisation for duty-free imports of capital goods and critical inputs intended for export, for the promotion of India’s exports. The specific sectors include Engineering, Textiles, Chemicals, Electronics, Gems and jewellery, Pharmaceuticals, Dairy, Green technology and Service exports to achieve the Foreign Trade Policy 2023 targets sustainably. Originality/value This study contributes to the extant literature: first, by examining the linkages between the economic growth, exports, imports, exchange rate and TOPN in the context of post-global financial crisis in India; second, this study used Johansen co-integration test and VECM to identify and establish stable long-term linkages and short-term adjustments.