Does trade openness affect economic growth in India? evidence from threshold cointegration with asymmetric adjustment

Abstract

This paper investigates the long-run equilibrium relationship between economic growth and trade openness in India during the period 1960–2018 using the asymmetric error-correction model with threshold cointegration. To evaluate the robustness impact of trade openness on economic growth under different regimes, we divide the full sample period into two sub-periods, i.e., pre-trade reforms period 1960–1990, and post-trade reforms period 1991–2018. The study indeed confirms the evidence of asymmetric cointegration between economic growth and trade openness in India during the period under evaluation and over the different sub-periods. The estimated asymmetric error-correction model exhibits a different speed of adjustment in trade openness in response to positive and negative economic growth shocks in the short-run. More specifically, during the prereforms period, deviations from the long-run equilibrium due to a relative increase in economic growth have a lower speed of adjustment in comparison to deviations caused by a corresponding decrease in economic growth in India.