Estimation of Income and Price Elasticities of India’s Trade in Services

Abstract

India’s international trade in services benefited immensely from the change in policy stance from import substitution to export promotion in the post-1991 period. Services trade received a further boost when India became signatory to the World Trade Organization (WTO) in 1995. This article aims to estimate the income and price elasticities of India’s services trade during the post-WTO period, using the autoregressive distributed lag (ARDL) approach to cointegration, for the time period starting from 1996–97 Q1 (Quarter 1) to 2011–12 Q4 (Quarter 4). This study finds that the long-run income elasticity of services export is quite high and statistically significant, when the gross domestic product (GDP) of the Organisation for Economic Co-operation and Development countries is taken as proxy for GDP of importing countries. However, the price elasticity of services export is found to be statistically insignificant. In case of services import, both the income and price elasticities of demand are found to be statistically significant, and services import is found to be more responsive to income than relative prices. The implications of the empirical findings for India’s current account deficit are also explored.