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Theoretical and Applied Economics
No. 1 / 2020 (622), Spring

Trade relation between India and other BRICS countries: A multidimensional approach using Gravity Model and Granger Causality

Nmims University, Bangalore Campus, India

Abstract. The aim of the study is to explore trade relation between India and other BRICS nations in the short-run as well as in the long-run. For empirical analysis, the study first checks stationary conditions using ADF- Fisher unit root test. To estimate the association between the selected variables, this study has applied Pedroni’s cointegration test. After fulfilling the two conditions (Stationary & cointegration), this study employed Granger Causality Test for short-run impact and Gravity Model using Dynamic Ordinary Least Square (DOLS) and Fully Modified Ordinary Least Square (FMOLS) for long-run impact. Granger Causality test results strongly support India’s trade with other BRICS nations. The study found Bi-Directional Causality between India’s Exports & other BRICS Imports and No causality between India’s Imports with other BRICS Exports. Also, the study found favorable unidirectional causality between India's GDP and other BRICS nation's volume of trade. Long-run results from Gravity model using DOLS and FMOLS found highly significant for the selected variables (GDP, PCGDP, PCGDPD, Exchange Rate, Trade-GDP ratio and Distance) other than inflation and trade agreement. Except inflation, per capita GDP differential and distance, all the other variables (GDP, PCGDP, Exchange Rate, Trade-GDP ratio and Trade Agreement)has positive coefficient to the volume of trade of BRICS nations. Majority of the selected variables possesses significant and positive relations with the independent variables clearly indicate that there is a favorable impact on the Indian economy. Finally, the test results validated the appropriateness of Gravity model for trade. So this study strongly recommended that India needs to strengthen its trade relation with other BRICS nations by promoting make in India, SEZs, EOUs and aggravating second generation reforms to reap the potential benefits from the global economy.

Keywords: BRICS, Gravity model, Granger Causality Model, foreign trade, economic integration.

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