Institute for Social and Economic Change
Working Paper: 348
Estimation of the Key Economic Determinants of
Services Trade: Evidence from India
Mini Thomas P
India’s services trade benefited immensely from the change in policy stance from import substitution to export promotion post-1991, and received a further boost when India became a member of the WTO in 1995. India exhibits a strong revealed comparative advantage in services compared to goods. This paper aims to estimate the key economic determinants of India’s international trade in services during the post-reform period from 1996-97 to 2011-12. It involves the estimation of income and price elasticities of India’s services trade using the ARDL approach to co-integration. This study finds that the income elasticity of India’s services exports is quite high and statistically significant in the long run, when the GDP of OECD countries is taken as proxy for GDP of importing countries. Price elasticity of services exports is found to be negative but statistically insignificant. In case of India’s services imports, both the income and price elasticities of demand are found to be positive and statistically significant. Services imports are found to be more responsive to changes in income than relative prices. The implications of the empirical findings for India’s Current Account Deficit are also explored.