GLOBALIZATION, INTERNATIONAL TRADE AND ECONOMIC GROWTH : AN EMPIRICAL INVESTIGATION OF INDIAN ECONOMY

Abstract

Globalization is inevitable in the modern era”. Its shadow can be seen in all the countries, be it developed, developing or underdeveloped. Though globalization is defined differently by different authors, it can be seen as the phenomenon by which economies interact with each other creating interdependence on each other. India officially announced globalization in the year 1991 with the New Economic Policy. Three decades since globalization brought enormous changes in the structure of the Indian economy and have also bolstered the growth of the economy. But can India call itself truly globalized? While globalization has been a contributor to India's growth, experiments with globalization suggests varied results. The main purpose of the study is to empirically understand the dynamics of globalization with respect to its extensity, intensity, velocity and effect for the Indian economy. The study first tries to gauge the relationship between globalization, international trade and economic growth using Vector Error Correction Model and Dynamic Ordinary Least Square for a period of 1980-2015. Wald test and Toda-Yamamoto Granger causality follow in analysis to investigate the short-run and the long-run causality, respectively. The results of the analysis suggest a short-run and long run relationship and causality between international trade and economic growth. The short run and long run relationship between globalization and economic growth is found, though, any short run or long run causality between the two is not indicated. In order to assess the response path, variance decomposition and impulse response functions are created. Globalization has a negative effect and trade bears a positive effect on economic growth. However, contrary to the perception of New Growth Theory, increasing trade and globalization do not have an impact on the long-run economic growth. The novelty lies in using an augmented version of KoF Index is used to avoid the problem of simultaneity and more robust approach. ` xiv The study further tries to gauge the impact of globalization on India's exports, analyzing data from 154 exporting destinations, which constitute over 95% of current trade share over 27 years (1991-2017). Poisson pseudo-maximum likelihood (PPML-Estimator) technique is used to determine the gravity model of trade. But, more important, is the analysis of India's distance quagmire. Based on this, there has been an attempt to highlight regionalization. The empirical evidence presented validates this view of Linder's Hypothesis. But analysis of speed and rate of convergence also points to an immense untapped trade potential with 102 countries—as India’s globalization takes a broader nature. As India steps in the fourth decade of globalization, one can look at the fruits of globalization more objectively. The relationship of globalization with growth is much more complex with economies opting for protectionism. Going ahead, the idea is to identify the pace of globalization in the Indian economy by capturing the portion of economic growth as explained by foreign factors. Leading economic indicators from India and top 21 trading partners of India, which account for more than one-third of India’s trade, are used in a Dynamic Hierarchical Factor Model analysis, to understand the variations in the dynamics of the selected series and to estimate the factor induced domestic and foreign factor loadings. The results reveal that India's globalization has been withering away over time. The factor-induced domestic and foreign factor loadings are used in the Time-Varying estimations to trace the evidence of slowbalization in India. The models supplemented with stochastic volatility, helps in examining the structural changes in the economy. It is observed that the portion of growth explained by foreign factors is marginally increasing. Very recently the spread of the COVID-19 has impacted every nook and corner of the globe. The crisis and the ensuing recession have led global leaders to focus inwards. There are raising concerns regarding the reversal and even death of globalization. Though the idea of globalization may face intense criticism for being responsible for the spread of the virus, some ` xv researchers think that pandemic like this invite more globally coordinated responses from the nations and with such high degree of interdependence among countries, going back to pre globalization phase is not possible. The study uses text network algorithm to structure the narrative and uses the indicators from Elcano Global Presence Index and KoF Globalization index to validate the proposed hypothesis that in Indian economy, globalization is witnessing slowbalization than de-globalization.