Did the Economic Reforms Change the Macroeconomic Drivers of the Indian Economy in the Post-Reform Era? An ARDL Bounds Test Approach
Abstract
Purpose: The purpose of this study is to investigate the macroeconomic forces that have been driving the Indian economy during both the pre-reform and post-reform eras, that is, from 1950-1951 to 1990-1991 and from 1991-1992 to 2022-2023 respectively.
Problem: The Indian economy underwent significant economic and financial sector reforms in 1991-92, with the goal of reviving its stagnant growth. These reforms are intended to spur the economic growth of India. What were the main forces behind the Indian economy before and after the reforms? Is the research question. The goal of the current study is to determine if the economic reforms shifted or maintained the pre-reform era’s driving forces for the Indian economy in the post-reform era.
Design/Methodology/Approach: The gross domestic product (GDP), the gross domestic savings (GDS), the private consumption expenditure (PFCE), the government final consumption expenditure (GFCE), the inflation rate, the exchange rate, the exports, the imports, the internal and external borrowings of the government, personal remittances, foreign direct investment (FDI), and foreign portfolio investments (FPI) are all taken into consideration in order to fill the research gap that has been identified as a result of the comprehensive review of the literature. Following an analysis of the selected variables' fundamental characteristics, an econometric model is developed using the Autoregressive Distributed Lag (ARDL) Bounds Test Model.
Findings: There is no evidence of long-run causation and association between the variables, but the findings of the ARDL Bounds Test showed that in the pre-reform period, PFCE is the major driver of the GDP in the short-run, with strong support from imports. However, since the reform, PFCE, GDS, and Exports are the primary short- and long-term contributors to GDP.
Practical Implication: These findings indicate that India's macroeconomic system is shifting. The Indian economy has undergone a dramatic shift, moving away from a reliance on imports and toward one that is consumer-driven and export-driven. As savings and consumer expenditures are the main drivers of the Indian economy’s growth in the post-reform era, policies should be designed to increase savings and consumption as well as increase exports.
References
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[46] Rangarajan, C., and Srivastava, D. K. 2005. Fiscal Deficits and Government Debt for Growth and stabilization. EconomicandPoliticalWeekly, 40(27).
[47] Reddy, K. K. 2020. Exports, imports and economic growth in India: An empirical analysis. Theoretical and Applied Economics, XXVII(4): 323–330.
[48] Sahoo, K., and Sethi, N. 2017. Impact of Foreign Capital on Economic Development in India: An Econometric Investigation. Global Business Review, 18(3): 766–780. DOI: https://doi.org/10.1177/0972150917692198
[49] Salian, G. (n.d.). Inflation and Economic Growth in India – An Empirical Analysis Prasanna V Salian 1 , Gopakumar. K 2. Indian Econimice Serrvice. New Delhi, 1–28.
[50] Segun, O. M., and O. A., A. 2015. Measuring the Impact of Public Expenditure on Economic Growth in Nigeria. Journal of Social Science Studies, 2(2): 46. DOI: https://doi.org/10.5296/jsss.v2i2.5626
[51] Seth, B., Priyadarshi, K., and Shukla, A. K. 2020. lLong Run Saving - Investment Relationship in India. RBI Occasional Papers, 103–126.
[52] Singh, C. 2018. Domestic Debt and Economic Growth in India. Debt Management in India, 34(23): 184–210.
[53] Sinha, D., and Sinha, T. 1998. Cart before the horse? The saving-growth nexus in Mexico. Economics Letters, 61(1): 43–47. DOI: https://doi.org/10.1016/s0165-1765(98)00144-x
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[55] Stern, N. 1991. The determinants of growth. Economic Journal, 101(404), 122–133.
[56] Upendra M, R. N. 2007. Savings behaviour in the indian economy. International Journal of Applied Econometrics and Quantitative Studies, 4(1).
[57] Balasubramanyam, V.N. 1996. Foreign Direct Investment and Growth in EP and IS C ountries. The Economic Journal, 106(434): 92–105. DOI: https://doi.org/10.1016/B978-0-12-397874-5.00016-6
[58] Reddy Dondeti V. and Mohanty, B. 2007. Impact of Foreign Direct Investment on the Gross Domestic Product, Exports and Imports of Four Asian Countries. Delhi Business Review, 8(1): 12–26.
[59] Veni, L. K., and Choudhury, P. K. 2007. Inflation and Growth Dilemma : An Econometric Analysis of the Indian Economy. The IUP Journal of Financial Economics, V(1): 79–87. Available at: http://www.iupindia.in/307/IJFE_InflationandGrowth79.pdf
[60] Verma, R. 2015. Savings , Investment and Growth in India : An Application of the ARDL Bounds Testing Approach. South Asian Economic Journal, 1(2007): 87–98. DOI:https://doi.org/10.1177/139156140600800105
[61] Wai, U. T. (1959). The Relation between Inflation and Economic Development: A Statistical Inductive Study. Staff Papers - International Monetary Fund, 7(2), 302. DOI: https://doi.org/10.2307/3866244
[62] Yadav, I. S., Goyari, P., and Mishra, R. K. 2018. Saving, Investment and Growth in India: Evidence from Cointegration and Causality Tests. Economic Alternatives, 046(1): 55–68.
[2] Ahuja, D., and Pandit, D. (2020). Public Expenditure and Economic Growth: Evidence from the Developing Countries. FIIB Business Review, 9(3): 228–236. DOI: https://doi.org/10.1177/2319714520938901
[3] Al Dulaimi, H. A. 2022. An Examination of the Impact of the Oil Prices and Economic Determinants on India’s Economic Development. AgBioForum, 24(2): 96–103.
[4] Alfaro, L., and Charlton, A. 1996. Growth and the Quality of Foreign Direct Investment. In International Economic Assocation, DOI: https://doi.org/10.1007/978-1-349-15434-0_30
[5] Atigala, P., Maduwanthi, T., Gunathilake, V., Sathsarani, S., and Jayathilaka, R. 2022. Driving the pulse of the economy or the dilution effect: Inflation impacting economic growth. PLoS ONE, 17(8 August): 1–17. DOI:https://doi.org/10.1371/journal.pone.0273379
[6] Bal, D. P., and Rath, B. N. 2014. Public debt and economic growth in India: A reassessment. Economic Analysis and Policy, 44(3): 292–300. DOI: https://doi.org/10.1016/j.eap.2014.05.007
[7] Barik, A., and Sahu, J. P. 2022 The long-run effect of public debt on economic growth: Evidence from India. Journal of Public Affairs, 22(1): 1–9. DOI: https://doi.org/10.1002/pa.2281
[8] Borensztein,.E, De Gregorio.J, L. J. 1998. How does foreign direct investment affect economic grwoth? Journal of International Economics, 945(1): 115–135. DOI: https://doi.org/10.1111/1468-0351.00095
[9] Calderón, C., and Fuentes, J. R. 2013. Government Debt and Economic Growth. Inter-American Development Bank, July, 1–16.
[10] Chakraborty, D., and Mukherjee, J. 2012. Is There Any Relationship Between Foreign Direct Investment, Domestic Investment and Economic Growth in India? A Time Series Analysis. Review of Market Integration, 4(3): 309–337. https://doi.org/10.1177/0974929213481712
[11] Chenery, H.B., Strout, A. M. 1965. Foreign assistance and economic development. The American Economic Review, LVI(1): 57–61. Availble at: https://pdf.usaid.gov/pdf_docs/PNABQ351.pdf
[12] Choi, Y. J., and Baek, J. 2017. Does FDI really matter to economic growth in India? Economies, 5(2): 1–9. DOI: https://doi.org/10.3390/economies5020020
[13] Devarajan, S., Swaroop, V., and Zou, H. 1996. Shantayanan Devarajan, Vinaya Swaroop, Heng-fu Zou. Journal Monetary Economics, 37: 313-344.
[14] Dey, S. R., and Tareque, M. 2020. External debt and growth: role of stable macroeconomic policies. Journal of Economics, Finance and Administrative Science, 25(50). DOI: https://doi.org/10.1108/JEFAS-05-2019-0069
[15] Diacon, P.-E., and Maha, L.-G. 2015. The Relationship between Income, Consumption and GDP: A Time Series, Cross-Country Analysis. Procedia Economics and Finance, 23(October 2014): 1535–1543. DOI:https://doi.org/10.1016/s2212-5671(15)00374-3
[16] Dollar, D. (2014). Aid , Policies , and Growth. 90(4), 847–868.
[17] Ezzaher, S., Ahmed, Y., Supervisor, F., and Palmberg, J. 2022. The impact of international trade on economic growth in Sub-Saharan African countries. 2022.
[18] Findlay, R. 1978. Relative backwardness, direct foreign investment and the transfer of technology a simple dynamic model. Quarterly Journal of Economics, 92(1): 1–16.
[19] Gazi M H. and Holmes M.J. 2013. Applied Economics. Applied Economics, 45(35): 88–100.
[20] Gulshan Farooq Bhar, S. K. 2022. The Determinants of Economic Growth: Experience of China, Japan, South Korea and India. SCMS Journal of Indian Management, 511–546. DOI:https://doi.org/10.2307/j.ctv1ns7mrh.17
[21] Hashmi, N. I., and Sedai, A. K. 2016. Domestic savings and economic growth in India. International Journal of Applied Business and Economic Research, 14(3): 2159–2167. DOI: https://doi.org/10.2139/ssrn.3135700
[22] Herzer, D., Klasen, S., and Nowak-Lehmann D., F. 2008. In search of FDI-led growth in developing countries: The way forward. Economic Modelling, 25(5): 793–810. DOI: https://doi.org/10.1016/j.econmod.2007.11.005
[23] Hirschman, A. 1958. The strategy of economic development, New Haven. Yale University Press, 13(99): 17–23. DOI: https://doi.org/10.1080/05679327308448309
[24] Hong, T. J., and Seng, L. C. 2019. The dynamic relationship between private final consumption expenditure and gross domestic product: Evidence from colonial Malaya and post-independence Malaysia. Journal of Southeast Asian Economies, 36(1): 112–129. DOI: https://doi.org/10.1355/ae36-1i
[25] Jana, S. S., Sahu, T. N., and Pandey, K. D. 2019. Foreign Direct Investment and Economic Growth in India: A Sector-specific Analysis. Asia-Pacific Journal of Management Research and Innovation, 15(1–2): 53–67. DOI: https://doi.org/10.1177/2319510x19849731
[26] Jangili, R. 2011. Causal Relationship between Saving, Investment and Economic Growth for India – What does the Relation Imply? Reserve Bank of India Occasional Papers, 32(1).
[27] Kharroubi, E., and Kohlscheen, E. 2017. Consumption-led expansions. BIS Quarterly Review, March, 25–37.
[28] Kimaro, E. L., Keong, C. C., and Sea, L. L. 2017. Government expenditure, efficiency and economic growth: A panel analysis of Sub Saharan African low income countries. African Journal of Economic Review, 5(2): 34–54.
[29] Kuznets, S. 1955. The Relevance of Growth Models.
[30] Landau, D. 2013. Government Expenditure and Economic Growth : Government Expenditure A Cross-Country Study. Southern Economic Journal, 49(3): 783–792. Available at: http://www.jstor.org/stable/1058716
[31] Lewis, W A. 1954. Economic Development with Unlimited Supplies of Labour. Manchester Scjhool of Economic and Social Studies, 22(2): 139–191. DOI: https://doi.org/10.1111/j.1813-6982.1962.tb02428.x
[32] Manik, N., and Khan, N. A. 2018. Public Debt and Economic Growth in India: Evidence from Granger Causality Test. 123–142. DOI: https://doi.org/10.1007/978-981-10-6217-9_10
[33] Manoj Kumar DAS, T. DAS. 2020. Determinants of economic growth in India: A time series perspective. Theoretical and Applied Economics, 27(2): 263–280.
[34] Muhleisen M. 1997. Improving India’s Savings Performance.
[35] Matthew, and Dada, A. 2013. Composition effects of government expenditure on private consumption and output growth in Nigeria: A single-equation error correction modelling. Romanian Journal of Fiscal Policy (RJFP), 4(2): 18–34. Available at: https://www.econstor.eu/handle/10419/107949
[36] Mankiw, N.G., Romer, D. 1992. A contribution to the Empirics of Economic Growth. The Quarterly Journal of Economics, 107(2): 407–437. DOI: https://doi.org/10.1515/bejm-2012-0042
[37] Patra, S. K., Murthy, D. S., Babu Kuruva, M., and Mohanty, A. 2017a. Revisiting the causal nexus between savings and economic growth in India: An empirical analysis. EconomiA, 18(3). 10.1016/j.econ.2017.05.001
[38] Patra, S. K., Murthy, D. S., Babu Kuruva, M., and Mohanty, A. 2017b. Revisiting the causal nexus between savings and economic growth in India: An empirical analysis. EconomiA, 18(3): 380–391. DOI:https://doi.org/10.1016/j.econ.2017.05.001
[39] Diamond P.A. 1965. National Debt in a New Classical Growth Model. The American Economic Review.
[40] Poirson, H. 1998. Economic Security, Private Investment, and Growth in Developing Countries. In IMF Working Papers (Vol. 98, Issue 4, p. 1). DOI: https://doi.org/10.5089/9781451842012.001
[41] Pradeep Agarwal. 2014. The role of exports in India’s economic growth. In IEG Working Paper (Vol. 3, Issues 1–2). Elsevier B.V. DOI: https://doi.org/10.1016/j.joat.2017.02.001
[42] Prasetyo, A. D., and Zuhdi, U. 2013. The Government Expenditure Efficiency towards the Human Development. Procedia Economics and Finance, 5(2012): 615–622. DOI: https://doi.org/10.1016/s2212-5671(13)00072-5
[43] Pravakar Sahoo, G. N. (2016). Savings and Economic Growth in India A long run nexus (Vol. 3, Issue 1). Available at: https://medium.com/@arifwicaksanaa/pengertian-use-case-a7e576e1b6bf
[44] Raghuramapatruni, R., and Reddy. 2020. An Appraisal of the Impact of International Trade on Economic Growth of India- through the ARDL Approach. International Journal of Economics and Business Administration, (Issue 2): 376–387. DOI: https://doi.org/10.35808/ijeba/468
[45] Rahman, M. M., and Alam, K. 2021. Exploring the driving factors of economic growth in the world’s largest economies. Heliyon, 7(5): 1–9. DOI: https://doi.org/10.1016/j.heliyon.2021.e07109
[46] Rangarajan, C., and Srivastava, D. K. 2005. Fiscal Deficits and Government Debt for Growth and stabilization. EconomicandPoliticalWeekly, 40(27).
[47] Reddy, K. K. 2020. Exports, imports and economic growth in India: An empirical analysis. Theoretical and Applied Economics, XXVII(4): 323–330.
[48] Sahoo, K., and Sethi, N. 2017. Impact of Foreign Capital on Economic Development in India: An Econometric Investigation. Global Business Review, 18(3): 766–780. DOI: https://doi.org/10.1177/0972150917692198
[49] Salian, G. (n.d.). Inflation and Economic Growth in India – An Empirical Analysis Prasanna V Salian 1 , Gopakumar. K 2. Indian Econimice Serrvice. New Delhi, 1–28.
[50] Segun, O. M., and O. A., A. 2015. Measuring the Impact of Public Expenditure on Economic Growth in Nigeria. Journal of Social Science Studies, 2(2): 46. DOI: https://doi.org/10.5296/jsss.v2i2.5626
[51] Seth, B., Priyadarshi, K., and Shukla, A. K. 2020. lLong Run Saving - Investment Relationship in India. RBI Occasional Papers, 103–126.
[52] Singh, C. 2018. Domestic Debt and Economic Growth in India. Debt Management in India, 34(23): 184–210.
[53] Sinha, D., and Sinha, T. 1998. Cart before the horse? The saving-growth nexus in Mexico. Economics Letters, 61(1): 43–47. DOI: https://doi.org/10.1016/s0165-1765(98)00144-x
[54] Solow, R. 1956. A contribution to the theory of economic growth: Old and New. Journal of Economics and International Finance, 70(1), 65–94. Available at: http://links.jstor.org/sici?sici=0033-5533%28195602%2970%3A1%3C65%3AACTTTO%3E2.0.CO%3B2-M
[55] Stern, N. 1991. The determinants of growth. Economic Journal, 101(404), 122–133.
[56] Upendra M, R. N. 2007. Savings behaviour in the indian economy. International Journal of Applied Econometrics and Quantitative Studies, 4(1).
[57] Balasubramanyam, V.N. 1996. Foreign Direct Investment and Growth in EP and IS C ountries. The Economic Journal, 106(434): 92–105. DOI: https://doi.org/10.1016/B978-0-12-397874-5.00016-6
[58] Reddy Dondeti V. and Mohanty, B. 2007. Impact of Foreign Direct Investment on the Gross Domestic Product, Exports and Imports of Four Asian Countries. Delhi Business Review, 8(1): 12–26.
[59] Veni, L. K., and Choudhury, P. K. 2007. Inflation and Growth Dilemma : An Econometric Analysis of the Indian Economy. The IUP Journal of Financial Economics, V(1): 79–87. Available at: http://www.iupindia.in/307/IJFE_InflationandGrowth79.pdf
[60] Verma, R. 2015. Savings , Investment and Growth in India : An Application of the ARDL Bounds Testing Approach. South Asian Economic Journal, 1(2007): 87–98. DOI:https://doi.org/10.1177/139156140600800105
[61] Wai, U. T. (1959). The Relation between Inflation and Economic Development: A Statistical Inductive Study. Staff Papers - International Monetary Fund, 7(2), 302. DOI: https://doi.org/10.2307/3866244
[62] Yadav, I. S., Goyari, P., and Mishra, R. K. 2018. Saving, Investment and Growth in India: Evidence from Cointegration and Causality Tests. Economic Alternatives, 046(1): 55–68.
Published
2023-12-20
How to Cite
REDDY, Pujari Sudharsana; BAGRECHA, Chaya; KRISHNAN, Muthu Gopala.
Did the Economic Reforms Change the Macroeconomic Drivers of the Indian Economy in the Post-Reform Era? An ARDL Bounds Test Approach.
Theoretical and Practical Research in Economic Fields, [S.l.], v. 14, n. 2, p. 295 - 316, dec. 2023.
ISSN 2068-7710.
Available at: <https://journals.aserspublishing.eu/tpref/article/view/8216>. Date accessed: 23 nov. 2024.
doi: https://doi.org/10.14505/tpref.v14.2(28).10.
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