An aggregate import demand function for India: a cointegration analysis

Abstract

This paper investigates the behaviour of Indian aggregate imports during the period 1971–1995. In the empirical analysis of the aggregate import demand function for India, cointegration and error correction modelling approaches have been used. In the aggregate import demand function for India, import volume is found to be cointegrated with relative import price and real GDP. The econometric estimates of the import-demand function for India suggest that import-demand is largely explained by real GDP, and is generally less sensitive to import price changes. Import liberalization is found to have had little impact on import demand.

Acknowledgements

While writing the paper, Nasiruddin Ahmed was a PhD student at the University of Sydney, Australia.

Notes

 The World Bank classification was based on such indicators as (i) the effective rate of protection, (ii) the use of direct controls like quotas and import licensing schemes, (iii) the use of export incentives, and (iv) the degree of exchange rate overvaluation.

 ERP captures the rate of protection granted to value added in a given industry.

 The Johansen-Juselius approach (1990, 1992, 1994) is preferred in the case of more than one cointegrating vector because the Engle-Granger approach (1987) has several limitations in this case.