Empirical Investigation of Exchange Rate and India’s Agricultural Exports : Cointegration and Causality Analysis

Author: Tarek Tawfik Alkhteeb

Abstract:
The present paper is an attempt to identify the agricultural products in which India has comparative advantage and to analyze the trend of comparative advantage during the post reform period. The study has found that India enjoys comparative advantage in almost all the agricultural and allied products except meat. Though India gained comparative advantage recently in meat, however in other products the RCA indices have witnessed a declining trend during the reform period. Further the study has also estimated the cointegration relationship between exchange rate and exports of disaggregated agricultural products and found that there is long run cointegrating relationship between exchange rate and seven of the eleven agricultural products. The application of vector error correction model to examine causal relationship between exchange rate and export of different agricultural products reveals that exchange rate does cause change in export of all these seven products which manifests long run cointegrating relationship. Since we find cointegration and causal relationship between exchange rate and exports of several agricultural products, the country should devise such monetary and foreign exchange policy that the exchange rate should not appreciate in real terms and should be maintained at least at par with its competitors.

Keywords:Agricultural products, exchange rate, revealed comparative advantage, cointegration, Granger causality

DOI:

International Journal of Trade & Commerce (Vol: 5 Issue:1)