Presentation

1. Effects of Exchange Rate Movements on Services Exports in India:
Empirical Evidence from Combined Cointegration Approach
Manoranjan Sahoo, M Suresh Babu and Umakant Dash
Indian Institute of Technology Madras, Chennai, Tamil Nadu, India
Presenter: M Suresh Babu
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2. Outline
• Introduction
• Trends of services export in India
• Related literature review
• Data and empirical model
• Econometric Methodology
• Results and discussions
• Concluding remarks and policy implications
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3. Introduction
• Service sector in India has emerged as the ‘new engine of growth’
with increasing share in output and exports.
• Following the success of East Asian countries, India followed the
export-led growth strategy in 1990s as a part of its structural
adjustment programme comprising of liberalisation, privatization and
open economy policies (Sahoo and Dash, 2014).
• India has also gained significant improvement in the services exports
in the last two decades (See Fig. 1).
• Given the rising importance of exports on the economic growth,
many of the theoretical and empirical literatures have found the
adverse impact of exchange rate movements on the exports growth.
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5. Trends of services export in India
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8. Literature Review
Theoretical Literature
• The famous Marshall-Learner condition states that a devaluation
leads to rise in the trade balance when the sum of the absolute value
of export and import demand price elasticities is greater than unity
under the assumption that the initial trade balance is either zero or
one (Thanh and Kalirajan, 2005). On the other hand, a devaluation
does not increase the trade balance under the condition of large
trade deficit and small export elasticities.
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9. Empirical Literature
Author Year Sample Results
Paudel and Burke 2015 1980-2010, Nepal Appreciation of the real exchange rate adversely
affect the export performance of Nepal.
Hooy et al. 2015 1994-2008, ASIAN RMB real exchange rate has a positive and
significant impact on the
ASIAN total exports to China.
Barcenilla and
Molero
2003 1976-2000, 15
European countries
Foreign income, price and exchange rate are the
major determinants to influence the services
exports in these economies.
Kimura and Lee 2006 1999-2000, 10 OECD Cost of transport and economic liberalization are
the important factors for the services trade.
Sahoo and Dash 2014 1980-2011, India Human capital, and physical infrastructure stocks
and financial development along with world
demand, exchange rate and goods exports are the
major determinants of MSEs in India.
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10. Data and empirical model
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11. World Development Indicators (WDI) of World Bank and the Handbook of Statistics on Indian Economy (RBI), Reserve
Bank of India.
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12. Control variables are selected on the basis of Eichengreen and Gupta (2013) and Sahoo and Dash (2014).
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13. Econometric Methodology
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14. Bayer-Hanck Cointegration Approach
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15. ARDL bounds testing cointegration approach
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16. Results and Discussions
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24. Stability test
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25. Conclusion and policy implication
• Both B-H (2013) and ARDL model show that the variables have long run
equilibrium relationship.
• While exchange rate movements are negatively and significantly impacting
the total services exports and the traditional services exports, it has a
negative but not significant impact on the modern services exports.
• This shows that the traditional services exports are elastic to changes in the
exchange rates, while the modern services exports are not elastic to the
exchange rate movements in the long run.
• we also find that in the long run the world services import, financial
development, net FDI inflows and globalisation are positively and
significantly influencing the services exports.
• As compared to the price effect, the demand side and supply side factors
are stronger to influence the services exports in India.
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26. Cont.
• As our study shows that exchange rate movements adversely affect the services
exports in India, effective exchange rate policies can be made to reduce the large
fluctuations in the exchange rate to sustain the services exports growth in the
long run.
• Further, our results show that as compared to price effect, the supply augmenting
factors (such as FDI inflows, financial development and globalisation) and
demand side factors (such as world demand for services exports) have stronger
impact on the services exports.
• Therefore, more FDI inflows can be encouraged in the services sectors for the
production of better and quality services which can encourage more demand
from the rest of the world.
• Further, financial development and globalisation can be given priority for the
better channelization of resources and free flow of goods and services among the
economies, respectively.
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27. Thank you...
(Questions and comments please)
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