Abstract
The term "globalisation" has become a catch phrase throughout the world. Openness to foreign trade is one of the central tenets of the industrialisation strategy. Trade liberalisation measures undertaken by India under the aegis of WTO are expected to have significant impact on the industrial sector. The objective of this paper is to study the pattern and direction of causality between activity variables in the external sector (viz. exports and imports) and domestic sector (viz. industrial output) using multivariate block Granger causality test in the Vector Auto Regression (VAR) framework. Our analysis clearly indicates an increasing rate of interdependence between industrial growth and foreign trade in India during the last five years and shows the integration between the external sector and the domestic industrial sector, which has taken place since 1995. We find that the nexus between trade and industrialisation would become the most important issue, when Indian economy gets fully integrated with the world, with the removal of Quantitative Restrictions which is set to take place on 1 April 2001.
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