Military-Madrasa-Mullah

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Article Complex 105

Causal Relationship between Exports Global Business Review

15(1) 105–120
and Agricultural GDP in India © 2014 IMI
SAGE Publications
Los Angeles, London,
New Delhi, Singapore,
Washington DC
DOI: 10.1177/0972150913515599
Rajwant Kaur http://gbr.sagepub.com

Amarjit Singh Sidhu

Abstract
This article is an attempt to investigate the causal relationships between agriculture gross domestic
product (GDP) and exports in India on the basis of time series data for forty year from 1970–1971
to 2010–2011. The empirical evidence reveals that the null hypothesis that the variables have a unit
root is not rejected in the case of all the variables under study. However, the null hypothesis that the
first-differences of these variables have a unit root is rejected. Hence we conclude that these variables
are integrated of order one (I (1)). On the basis of trace and maximum eigenvalue tests of Johansen
technique of cointegration, the study found that agricultural GDP and total exports of India were found
cointegrated. The findings of the study have significant implications for India’s economic policy as both
the variables have shown a strong long-run relationship. The study further found the existence of uni-
directional Granger-causality between the total exports and agricultural GDP of India, which is running
from total exports to Agricultural GDP.

Keywords
Exports, agriculture, GDP, cointegration, Granger causality test, India

Introduction
Economic growth has emerged as the most important goal of all the developing countries. Another
important issue which has attracted attention of the policy makers is the share of a country in the
international trade. Most of the studies relating to the international trade have been focused on total
exports of a country and its contribution to economic growth. However, it has been noticed that the
contribution of agriculture to exports is often substantial in the developing countries: For instance, this
proportion was 90 per cent for Guinea-Bissau, 85 per cent for Nicaragua and 75 per cent for both Benin
and the Gambia in 2004 (Lopez & Dawson, 2010). So, agriculture sector has immense importance for an
economy, but it is amazing that the studies on empirical relationship between agricultural exports
and economic growth has been somewhat neglected in the literature despite the recognition of its role in
the development process.

Rajwant Kaur is Assistant Professor, Department of Commerce and Management, Khalsa College For Women,
Amritsar (Punjab). E-mail: raj.2064@gmail.com
Amarjit Singh Sidhu is Professor, Department of Commerce and Business Management, Guru Nanak Dev
University, Amritsar (Punjab). E-mail: sidhu_amarjit@yahoo.com
India Quarterly, 66, 2 (2010): 133–149
106 Rajwant Kaur and Amarjit Singh Sidhu

In view of above facts, the present study has been carried out to examine the causality relationship
between India’s total exports and agricultural GDP from 1970–1971 to 2010–2011. The period under
study covers both the periods that is, pre-reforms period from 1970 to 1990s and the post reforms period
of 1991 to 2010. The aim of the study is to examine unit roots and the hypothetical causality and
relationship for two major sectors of the Indian economy, namely, agricultural GDP and total export.
This issue is more important for a country like India, where agriculture’s contribution to the GDP is
substantial and more than 50 per cent of the workforce is still dependent on agriculture. Furthermore, in
an export led economic growth model, which India adopted more than two decades back, it is
very important to find out the relationship between the growth of agriculture GDP and its contribution to
total exports over the period of time.
Therefore the important issue which needs investigation is the growth of agriculture sector, and its
relationship with overall exports growth in India. It is pertinent to note that large number of incentives
have been extended for the promotion of exports in India during the post reforms period. So how these
incentives and new policy initiatives have contributed to exports sector in general and an agricultural
export in particular is another issue for empirical analysis. So the present study has been planned to
address all these questions which has not been discussed on the basis of long run data.
So the present study has been divided into three parts. The review of literature, objectives of the study
and research methodology has been presented in following section. The subsequent sections provide
analysis of the data, findings, conclusion and recommendations.

Review of Literature
Lewis (1954) and Hirschman (1958) explained economic growth by emphasizing the role of Agriculture
and manufacturing. Balassa (1978) studied the correlation between export growth and economic growth
of a sample of 11 developing countries having a substantial industrial base. The study found that the
export growth affects positively to the rate of economic growth. Kavoussi (1984) found that the higher
rates of economic performance have been associated with the higher rate of exports growth. Chow
(1987) examined the causal pattern between export growth and growth in manufacturing output of eight
new industrialized countries (NICs) with the help of Granger causality test. The study found a bidirectional
causality in case of Brazil, Hong Kong, Israel, Korea, Singapore and Taiwan except Argentina.
Todaro (1997) found that without agricultural development, manufacturing would be stultified, or if
it succeeded, would create such severe internal imbalances in the economy which may lead to widespread
poverty, and unemployment would become even more pronounced. Kovacic and Djukic (1991) found
that in Yugoslavia real aggregate GDP, manufacturing GDP and real exports were not cointegrated, but
higher manufacturing GDP causes exports. Khan and Saqib (1993) found a positive relationship between
real GDP, real exports, real manufactured exports and real primary exports in a study based on Pakistan.
Rashid (1995) found no significantly positive export/economic growth effect while studying growth in
real GDP, exports, real investments, industrial production, imports and agriculture for India.
McCarville and Nnadozie (1995) found relationship between export growth and GDP growth in
Mexico. Keong, Yusop and Liew (1998) conducted a study in Malaysia and found that export cause
economic growth in both short run and long run period. Dhawan and Biswal (1999) showed that total
exports, manufactured exports and real GDP of Taiwan were cointegrated, and found causality among
these variables. On the other hand, Arnade and Vasavada (1995) found the absence of causality between

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Exports and Agricultural GDP in India 107

real agricultural output and agricultural exports in India. Shan and Sun (1998) found evidence for
one-way causality running from manufacturing growth to export growth in case of Australia. However,
two-way causality between exports and real manufacturing output was found for China. Sentsho (2000)
also supported two-way directional causality between export of manufacturing and economic growth
for Botswana.
Katircioglu (2004) applied cointegration and casual approach to examine the relationship between
economic growth and sectoral growth in North Cyprus taking agriculture, industry and services sector.
The study found agriculture as the backbone of North Cyprus economy which provided direction to
industry by supplying the raw materials. The study further reveals that the variables, like real GDP,
industrial output and services sector were found cointegrated with each other and uni-directional
causation exists for real GDP to industrial output and service sector. Blunch and Verner (2006) conducted
a sectoral growth study in Ghana and Zimbabwe and found that Agricultural sector is very important for
the growth of industry and manufacturing sector. The study found an overall positive impact of agriculture
growth on manufacturing growth in Ghana. The study also supports the existence of positive growth link
between agriculture and industry in case of Zimbabwe. The findings further support the existence of
significant long–run sectoral relationships among manufacturing and agriculture sector.
Shombe (2008) conducted a study to examine the causality relationship between major sectors,
namely, agriculture, manufacturing and exports in Tanzania. The study found that agriculture causes both
exports and manufacturing while exports cause agricultural GDP and manufacturing GDP. Traditionally,
it has been assumed that exports are exogenous to domestic output but this could be an inappropriate
assumption because output can also affect exports (Shombe, 2008).
Memon et al. (2008) examined the causal relationships among agriculture gross domestic product
(GDP) and exports in Pakistan by using time series data for the period between 1971 and 2007. The study
found that major share of Pakistan’s export has strong backward linkages with the agricultural sector
both in terms of primary and value added commodities. The findings of the study have significant
implications for Pakistan’s economic policy as both the variables have shown strong long-run relationship.
The study found that there is also a bidirectional Granger causality between the total exports and
agricultural GDP. However, for short-run, both the variable does not affect each other in either direction.
Vaezi and Moghaddasi (2009) examined the relationship between exports with agriculture and
manufacturing GDP in Iran by using the time series data from 1959 to 2007. The study found that all the
variables under study were integrated of order one that is, I (1). The results of granger causality test
reveal that manufacturing causes both exports and agriculture but exports do not cause agricultural GDP
and manufacturing GDP.
Awokuse (2009) examined the question of whether agriculture could serve as an engine of growth or
not. The empirical evidences support that there is a strong relationship between agriculture and economic
growth. Furthermore, the study found that trade openness has a positive effect on GDP growth. Lopez
and Dawson (2010) used panel cointegration approach to examine the contribution of agricultural and
non-agricultural exports to economic growth (GDP) in 42 developing countries. The findings of the
study reveal that a long-run relationship exists, between agricultural and non-agricultural exports.
The study further found that Structural differences exist in the relationship by broad income group and
balanced export-promotion polices contribute to economic development of the poorest countries.
However, higher income countries could achieve higher economic growth from non-agricultural exports.
Adnan Hye and Jafriz (2011) conducted a study to examine the impact of trade openness on the real
agricultural growth of Pakistan by using the data from 1971 to 2009. The PP unit root test, autoregressive

Global Business Review, 15, 1 (2014): 105–120

108 Rajwant Kaur and Amarjit Singh Sidhu

distributed lag model and modified Granger causality test were used to determine the order of integration,
long run association and the short run and long run causal direction. The results indicate positive long
run relationship between trade openness and real agricultural growth. The results of Granger causality
test also validate the long run causal direction from trade openness, human capital and physical capital
to real agricultural sector gross domestic product (GDP).
Shahbaz and Mohammad (2012) examined the effect of financial development, imports and foreign
direct investment (FDI) on output in case of Pakistan over the period of 1990–2008 using quarterly data
set. On the basis of ARDL bounds testing approach, the study found the existence of cointegration,
which reveals that there is long run relationship between financial development, imports, FDI and real
GDP. Financial development, imports and FDI have positive and significant effect on the output of the
country. Causality analysis reveals bidirectional causality among the variables but strong causality is
also running from financial development, economic growth and FDI to real imports.
In India, several studies have been conducted both on the agricultural sector and exports; however, few
of them deal with relationship among the two main sectors of the economy. Konya and Singh (2009)
studied the relationship between the Indian agricultural and manufacturing gross domestic product (GDP),
exports and imports from 1950–1951 to 2003–2004. The study found that agricultural GDP causes imports,
exports cause agricultural GDP, and any two variables jointly cause the third one. The study further found
the existence of evidence for the agricultural GDP causing exports and imports causing agricultural GDP,
though these results were found sensitive to model specification. In case of manufacturing, the study
highlighted that a two-way causality between manufacturing GDP and exports was found. Imports
cause manufacturing GDP, manufacturing GDP and imports jointly cause exports and exports and imports
jointly cause manufacturing GDP, but manufacturing GDP and exports do not seem to cause imports.

Objectives, Hypotheses, Database and Research Methodology

Objectives of the Study

In an export-led economic development model, it is important to know the relationship between
agricultural GDP and exports of a country. Therefore, the focus of the study is to find out the existence
and direction of Granger causality and cointegration between agricultural GDP and total exports, rather
than on explaining the determinants of these relationships. The present study has been designed to
identify causality between the variables under study, which can help policy makers to obtain a better
insight into the economic growth in India and to formulate effective economic policies and develop-
ment strategies. The present article is a modest attempt to investigate the causal relationships among
agriculture gross domestic product (GDP) and exports in India by using time series data covering the
period from 1970–1971 and 2010–2011.

Database and Research Methodology

The present study is based primarily on secondary data. The annual data of India relating to the variables,
namely, exports and Agriculture GDP under study has been taken from Handbook of Statistics of Indian

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Exports and Agricultural GDP in India 109

Economy, 2010–2011 published by the Reserve Bank of India (RBI). The data used in the study from
1970–1971 to 2010–2011 (base year: 2004–2005), comprises 41 observations. The variables used in the
study are transformed in to natural log to minimize the variance in time series data set. The data series
are denoted as lnAGDP (log of agricultural GDP) and lnEXP (log of total exports).
Different analytical tools, like Unit root test, Cointegration analysis and Granger causality test with
Vector Error Correction Model (VECM) have been used for the analysis of data. Granger causality test
in a multivariate Vector Auto-Regression (VAR) framework is considered an appropriate tool to analyze
the causal links among the total Exports and agricultural GDP under the study period. All necessary
procedure followed before testing for causality, start with testing whether the data series are stationary,
cointegrated and lastly test for causality with the VECM model. E-view econometrics software was
applied for the analysis of time series data.

Unit Root Test (Non-Stationary)

The researchers has emphasized that a time series data must be required to be stationary for feasibility of
inference and forecasting. A number of unit root tests namely, Augmented Dickey Fuller (ADF) Test,
Phillips–Perron (PP) Test and Kwiatkowski, Phillips, Schmidt and Shin (KPSS) Test are available to test
the stationarity of a time series data. In the present article, we selected the PP test to examine whether a
variable has a unit root or not. The following hypotheses were framed:

1. Null hypothesis H0: the variables contain a unit root

2. Alternative hypothesis H1: a stationary process has generated the variable.

It is based on the Dickey–Fuller test of the null hypothesis δ = 0 in Λ yt = δy t–1 + ut; where λ is the first
difference operator. Further, the variables must fulfill two conditions, that is, (i) all the variables
are stationary at same order; and (ii) differenced series or the residual series are stationary at level for the
application of Johansen Cointegration Test. PP test has also been used to check the integration order
of the variables.
Johansen Cointegration Test
The concept of Cointegration was introduced by Granger (1981, 1983) and Engle and Granger (1987) to
explain stationary equilibrium relationship among the non-stationary variables. The Cointegration test
was conducted to determine the long-run economic relationship between the variables (Thomas, 1993).
This is the first step in exploring the causality relation between the variables. The maximum likelihood
test procedure {established by Johansen and Juselius (1990)} was also used to find out the cointegration
rank and the number of cointegrating vectors. The null hypothesis of no cointegration is rejected, if there
exist, at least, one cointegrating vector, which exhibit a stable long-run relationship between the variables.
The hypotheses of Johansen Cointegration test are as follows.

H0: r = 0;  H1: r = 1

In this case two likelihood ratio tests are considered, namely, the Trace Test and Maximum eigenvalue
Tests.

Global Business Review, 15, 1 (2014): 105–120

110 Rajwant Kaur and Amarjit Singh Sidhu

Trace Test
In the equation form, trace test is presented as:

m
λtrace = –N ∑ ln[1 – (r*)2]
i = r + 1

Here, N is the number of observations; m is the number of variables; and ri* is the i correlation
between i-th pair of variables. λtrace has a chi-square distribution with M–r degrees of freedom. Large
values of mtrace give evidence against the hypothesis of r or fewer cointegration vectors.

Maximum Eigenvalue Test

According to Johansen and Juselius (1990), this test is more influential than the trace test. Maximum
eigenvalue test evaluates the null hypothesis H0: r = 0 against alternative hypothesis H1: r = 1. The
following equation is considered for this test:

λmax = –T ln (1 – λr + 1)

Tests for Granger Causality with VECM

Engle and Granger further found that, in the existence of cointegration, there always presents a
corresponding error-correction representation, captured by the Error Correction Term (ECT). It is
used to determine long run adjustment of cointegrated variables and the incorporation of ECT in
the VECM which allow us to detect both short and long run causal relationship among variables.
We applied the VECM to examine the direction of long-run and short run causality among real exports,
real GDP and trade openness and whether or not the ELG or GLE or both hypotheses are existing in
case of India.

Block Exogeneity Wald Test

Finally, the direction of the export-economic growth relationship was attained by using Block Exogeneity
Wald Test. The Granger causality test in VAR framework is known as Block Exogeneity Wald Test.

Hypotheses
The study is based on three hypotheses for testing the causality and cointegration for India, which are as
follows:

1. H1: There is a bidirectional causality between agricultural GDP and total export
2. H2: There is a uni-directional causality between two variables under study.
3. H3: There exists a long run relationship between agricultural GDP and total export.

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Exports and Agricultural GDP in India 111

Export and Agriculture Sector of Indian Economy: An Overview

Indian economy is an emerging economy which has witnessed unprecedented levels of economic
expansion, alongside China, Brazil, Russia and Mexico. It is a cost effective and labour intensive
economy, and has benefited immensely from outsourcing of work from developed countries, and has a
strong manufacturing and export oriented industrial framework. Evidences show that the international
trade could be a viable vehicle to achieve economic development of the developing economies like
India. The exponential growth of the export sector and agriculture sector of Indian economy can
be attributed to the economic development of the country. These two sectors have contributed a major
share in Gross Domestic Product (GDP) of the country. The detail of these two sectors is presented in the
following discussed:

Agriculture Sector
Indian Economy is called an ‘Agrarian Economy’. The role of agriculture sector remains critical as it
accounts for 58 per cent of employment in the country as per Census, 2001. Moreover, this sector is a
supplier of food, fodder and raw materials for a vast segment of industry. Hence the growth of Indian
agriculture can be considered a necessary condition for ‘inclusive growth’. The rural sector’s share in
total GDP of the country was 14.6 per cent in 2009–2010 out of which agriculture alone accounted for
12.3 per cent (Economic Survey of India, 2010–2011). Agriculture derives its importance from the fact
that it has vital supply and demand links with the manufacturing sector. During the post-reform period,
agriculture sector has witnessed spectacular advances in the production and productivity of food grains,
oilseeds, commercial crops, fruits, vegetables, food grains, poultry and dairy. India has emerged as the
second largest producer of fruits and vegetables in the world in addition to being the largest overseas
exporter of cashews and spices. Further, India is the highest producer of milk in the world.
However, development strategy and policies, particularly those focused on agriculture and rural areas,
would be a critical factor influencing the agricultural scenario as it actually unfolds in the decades to
come. Table 1 reveals that growth of agricultural GDP of India decelerated from over 3.5 per cent per
year during 1981–1982 and 1996–1997 to only around 2 per cent during 1997–1998 and 2004–2005. The
data analysis shows that this declining trend has been occurred in almost all States and covered almost
all major sub-sectors, including those sectors where growth was expected to be high such as horticulture,
livestock and fisheries. Even, the growth of agricultural GDP has remained well below the target of
4 per cent set for both Ninth and Tenth Plans. Moreover, the first four years of the Eleventh Five Year
Plan (2007–2012), the growth in the agriculture sector has been estimated at the rate of 2.87 per cent
(per annum) which is again below the target of average 4 per cent for the entire plan.
It is clear that the post-Independence decades have witnessed a veritable transformation in Indian
agriculture. The increase in production was made possible by expansion of irrigation, spread of new
technology and additions to rural infrastructure like irrigation works, roads, market yards and warehouses.
These changes in the physical features of agriculture needed changes in the institutional structure—like
new credit institutions, extension agencies, regulated markets and control of moneylenders. India, despite
being an agrarian economy, still lags behind in providing transparent and efficient agro marketing
infrastructure to the farmers and traders.

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112 Rajwant Kaur and Amarjit Singh Sidhu

Table 1. Average GDP Growth Rates—Overall and in Agriculture

(% per Year at 1999–2000 Price)
Total Agriculture and Crops and
Sr. No. Period Economy Allied Sectors Livestock
1 Pre-green revolution 1951–1952 to 1967–1968 3.69 2.54 2.65
2 Green revolution period 1968–1969 to 1980–1981 3.52 2.44 2.72
3 Wider-technology dissemination period 1981–1982 to 5.40 3.52 3.65
1990–1991
4 Early reforms period 1991–1992 to 1996–1997 5.69 3.66 3.68
5 Ninth Plan 1997–1998 to 2001–2002 5.52 2.50 2.49
6 Tenth Plan period 2002–2003 to 2006–2007 7.77 2.47 2.51
of which 2002–2003 to 2004–2005 6.60 0.89 0.89
2005–2006 to 2006–2007 9.51 4.84 4.96
7 Eleventh Plan 2007–2012 – 14.6 –
Source: National Accounts Statistics 2008 (New Series), Central Statistical Organization, Ministry of Statistics and Programme
Implementation, New Delhi.

Table 2. Growth Rates of National State Domestic Product (NSDP) from Agriculture
(States Ranked by % of Rainfed Area)
Growth Growth
Rate in NSDP Rate in NSDP
Agriculture Agriculture
State (%) Ranifed (%) State (%) Ranifed (%)
1 2 3 4 5 6 7 8
Punjab 4.00 2.16 3 Gujarat 5.09 0.48 64
Haryana 4.60 1.98 17 Rajasthan 5.52 0.30 70
Uttar Pradesh 2.82 1.87 32 Orissa –1.18 0.11 73
Tamil Nadu 4.95 –1.36 49 Madhya Pradesh 3.63 –0.23 74
West Bengal 4.63 2.67 49 Karnataka 3.92 0.03 75
Bihar –1.71 3.51 52 Maharashtra 6.66 0.10 83
Andhra Pradesh 3.18 2.69 59 Kerala 3.60 –3.54 85
All-India 3.62 1.85 60 Assam 1.65 0.95 86
Source: National Accounts Statistics, (State Series) Central Statistical Organization, Ministry of Statistics and Programme
Implementation, New Delhi.

Export Sector
The role of external sector is very significant for a country to achieve growth at domestic and international
level. The performance of export of any country is hallmark of its competitive status at global level and
performance of imports are recognized as an indicator of high standard of living of people of a country.

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Exports and Agricultural GDP in India 113

Over the last two decades, significant changes introduced in the EXIM policy of India have helped to
strengthen the export production base; remove procedural, irritants; facilitate input availability focusing
on quality and technological up gradation; and improving competitiveness. Several Steps have also been
taken to encourage exports through multilateral and bilateral initiatives, identification of thrust areas and
focus regions.
As a result of these policy changes, the percentage change in exports has shown an impressive growth
till 1996 but sluggish export performance towards the close of millennium reflected the effect of a range
of factors: decline in growth of world trade since 1997; a decline in export prices of some major Indian
manufactured goods; growing infrastructural bottlenecks and the appreciation of rupee in terms of
real effective exchange rate. The recessionary tendencies across the world have also severely affected
the demand for Indian exports. The performance of Indian exports is shown in Figures 1 and 2.
The growing share of export and import as a percentage of GDP shows the positive impact of liberal
policies on the Indian economy. However, the balance of trade shows a negative balance due to the fact
Value in Percentage

10
8
6 Exports % of GDP
(%)

4 Imports % of GDP
2
0
1

4
−8

−8

−8

−8

−8

−8

−8

−8

−8

−9

−9

−9

−9

−9
80

81

82

83

84

85

86

87

88

89

90

91

92

93
19

19

19

19

19

19

19

19

19

19

19

19

19

19

Year

Figure 1. Exports and Imports as a Ratio of GDP

Source: Authors.

30
Value in Percentage

25 Exports as a
20 %age of GDP
(%)

15
Imports as a
10
%age of GDP
5
0
5

1
−9

−9

−9

−9

−9

−0

−0

−0

−0

−0

−0

−0

−0

−0

−0

−1

−1
94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10
19

19

19

19

19

19

20

20

20

20

20

20

20

20

20

20

20

Year

Figure 2. Exports and Imports as a Ratio of GDP

Source: Authors.

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114 Rajwant Kaur and Amarjit Singh Sidhu

that imports has increased at a higher rate during the post reforms period which further widened the trade
deficits in India. If exports increase at a faster pace as compared to imports, only than it enable an
economy to become a developed economy.

Empirical Results

Unit Root Test Results

The results of PP Test of Unit root are shown in Table 3. The test is conducted on both the level and first
difference of the lagged variables. The critical values for the variables are based on Mac Kinnon (1996)
that is, –3.6104, –2.9389 and –2.6079 at 1 per cent, 5 per cent and 10 per cent significance level
respectively. All variables, ‘Exports’ and ‘Agricultural GDP’ was found non-stationary at the level but
all were stationary at the first difference according to this test. This implies that both variables are
integrated of order 1 that is, I (1). We have also checked unit root of the differenced variables series. The
results indicate that the differenced series were not stationary at level; therefore we tested the stationarity
of residuals series with the help of the following regression equation.

GDP = α + Βx + µ

The residuals in unit root were stationary at level; therefore, the data has justified the properties for the
application of cointegration test.

Johansen Cointegration Test Results

On the basis of results of the PP Test, we observed that all variables, namely, total exports and agricultural
GDP have the same order of integration, that is, I(1), and therefore, the Johansen cointegration Test has been
used to find out the cointegration rank and the number of cointegrated vectors. Prior to conducting this test,
the lag length of the test VAR has to be specified. The optimal lag length is chosen based on the minimum
values of AIC (Akaike Information Criterion); SBIC (Schwarz Bayesian Information Criterion); and

Table 3. Univariate Stationary Properties of Time Series Phillips–Perron Test Results (Intercept)

Level First-difference
Variable Test Statistics Critical Values Test Statistics Critical Values
LnX 0.4947 (0.9845) –3.6055 –5.8628 (0.000*) –3.6104
LnAGDP 1.4401 (0.9988) –3.6055 –10.565 (0.000*) –3.6104
Source: The results of software have been presented in the above table.
Notes: *MacKinnon (1996) one-sided p-values.
All the variables are stationary at their first difference and 1 per cent level of significance is used.

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Exports and Agricultural GDP in India 115

Table 4. Johansen Cointegration Test Statistics

Unrestricted Cointegration Rank Test (Trace)

Hypothesized No. of CE(s) Eigenvalue Trace Statistic 0.05 Critical Value Prob.**
None* 0.387842 21.28062 12.32090 0.0012
At most 1 0.053413 2.140785 4.129906 0.1691
Source: Trace test indicates 1 cointegrating eqn(s) at the 0.05 level.
Notes: *denotes rejection of the hypothesis at the 0.05 level.
**MacKinnon-Haug-Michelis (1999) p-values.

Unrestricted Cointegration Rank Test (Maximum Eigenvalue)

Hypothesized No. of CE(s) Eigenvalue Max-eigen Statistic 0.05 Critical Value Prob.**
None* 0.387842 19.13983 11.22480 0.0017
At most 1 0.053413 2.140785 4.129906 0.1691
Source: The results of software have been presented in the above table.
Max-eigenvalue test indicates 1 cointegrating eqn(s) at the 0.05 level.
Notes: *denotes rejection of the hypothesis at the 0.05 level.
**MacKinnon-Haug-Michelis (1999) p-values.

HQIC (Hannan–Quinn Information Criterion), which is ‘1’ in the present study. The results of Johansen
Cointegration Test for the cointegration rank are presented in Table 4.
The statistics of the Johansen’s λtrace and λmax in Table 4 reveals that long-run relationship exist among
the variables under study because the rejection of null hypothesis is suggesting that there is, at least, one
cointegrating vector in each sample to exhibit a stable long-run relationship among the variables.
The results suggest the rejection of the null hypothesis of no cointegration presence on the basis
of existence of 1 cointegration equation (both tested at 5 per cent significance level). This implies
that the alternative hypothesis (H1: r = 1) could be accepted. According to Trace test, the null hypothesis
(H0: r = 0) is rejected against the alternative hypothesis (H1: r = 1) at the 5 per cent level of significance.
Similarly, in case of max-eigenvalue statistics, the null hypothesis (H0: r = 0) is rejected against the
alternative hypothesis (H1: r = 1) at the 5 per cent level of significance. Thus, the existence of one coin-
tegrated vector is supported by the empirical evidence, which implies that long-run relationship exists
among the variables like exports and agricultural GDP in India during the period under study.

VECM Test Results

The results of statistics of the Johansen’s λtrace and λmax has proved that long-run relationship exists among
the variables under study. According to Engle and Granger (1987), if the variables are cointegrated, then
there exists a valid error correction representation of the data. The results of the VECM are summarized
in Table 5.
The term ECM (Error Correction Model) is used to determine the speed of adjustment of the system
towards a long-run equilibrium and, the short-run dynamics are captured through the individual

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116 Rajwant Kaur and Amarjit Singh Sidhu

Table 5. Summarized form of Results of VEC Model

Vector Error Correction Estimates

Sample (adjusted): 6 52
Included observations: 47 after adjustments
Standard errors in ( ) & t-statistics in [ ]
Cointegrating Eq: CointEq1
LNAGDP (–1) 1.000000
LNEXP(–1) –0.041632
(0.10841)
[–0.38404]
Error Correction: D(LNAGDP) D(LNEXP)
CointEq1 –0.003441 0.030771
(0.00630) (0.01041)
[0.54641] [2.95698]**
R-squared 0.337221 0.226579
Adj. R-squared 0.256884 0.132831
Sum sq. resids 0.089353 0.243929
S.E. equation 0.052035 0.085975
F-statistic 4.197593 2.416900
Source: The results of software have been presented in the above table.
Notes: * and ** denote statistical significance at 1 per cent and 5 per cent levels of significance respectively.

coefficients of the difference terms. The coefficient of Error correction tells us about whether the past
values of the variables affect the current values of the variables under study and, a significant coefficient
means that past equilibrium errors plays a role in determining the current outcomes (J. Bhattacharya and
M. Bhattacharya, 2009). The cointegrating equations are shown in Table 5 and the detailed results of
VECM are presented in Annexure-I. The changes in Agricultural GDP are shown in first column and
changes in Exports are shown in second column. The estimate of ECTt–2 found statistically significant at
the 5 per cent level of significance, which implies that error term contributes in explaining the export
changes and a long-term relationship exists between independent variables and the agricultural GDP.
The lagged coefficient of ΔAGDPt–1 and ΔAGDPt–2 are negative and has been found statistically
significant at the 5 per cent level of significance, which implies that unidirectional causality exist between
exports and agricultural GDP during the period under study. The lagged coefficient of ΔEXPt–1 is positive
and has been found statistically significant which implies that higher exports have a positive impact
on the Agricultural GDP.

Causality Test with VECM

The results of the causality test with VECM Granger Causality/Block Exogeneity Wald Tests are
presented in Table 6. The analysis of results reveals that Uni-directional causality exists among the

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Exports and Agricultural GDP in India 117

Table 6. VEC Granger Causality/Block Exogeneity Wald Tests

Dependent variable: D(LNAGDP)

Excluded Chi-sq df Prob.
D(LNEXP) 6.601682 2 0.0369
All 6.601682 2 0.0369
D(LNX)------- D(LNAGDP)
Dependent variable: D(LNX)
Excluded Chi-sq df Prob.
D(LNGDP) 5.087583 2 0.0786
All 5.087583 2 0.0786
Source: The results of software have been presented in the above table.

variables under study. The causality is running from the exports to the agricultural GDP of India, which
further implies that exports have positively influenced the agricultural GDP of India.

Conclusion and Policy Implications

This article has been designed to examine cointegration and possible Granger causality among Indian
exports and agricultural GDP. For the purpose of analysis, the study employed a variety of analytical
tools, including unit root tests, Cointegration analysis and Granger causality test with VECM. The article
sets three hypotheses for testing the causality and cointegration for India, (i) there is causality between
agricultural GDP and total export; (ii) whether there is causality between the variables under study and;
(iii) exists a long run relationship between agricultural GDP and total exports. This has important
macroeconomic implications, since any economic policy which affects on one of these sectors will also
have an impact on another sector in the long run. In view of above, identification of causality can help
policy makers to design such policies which contribute to the economic growth of India, which could
further promote international trade to achieve the higher level of economic growth.
For the reason of significance of agriculture sector in the Indian economy, the objective of this
study was to investigate the relationship between GDP of agriculture sector and total exports. It has
already been seen in empirical studies that growth of exports is an important factor to achieve higher
level of economic development even for developing countries. Results of this study confirm the same
that, exports causes agriculture GDP. Thus there is need to promote such policies which contribute to
achieve higher level of exports. Furthermore, India has large potential in improving its agriculture sector
which could further contribute to achieve higher level of agriculture GDP. It is pertinent to mention that
planning commission has given priority to agriculture sector by allocating more funds during the Tenth,
Eleventh and even in the Twelfth plan. However, the share of agriculture sector in the total credit
disbursed by the banks is still very small. So there is a need to strengthen the agriculture sector by
providing extension services to the farmers, cheaper credit, warehousing facilities and reasonable prices
for the agriculture crops.

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118 Rajwant Kaur and Amarjit Singh Sidhu

Annexure-I
Results of VEC Model
Vector Error Correction Estimates
Sample (adjusted): 6 52
Included observations: 47 after adjustments
Standard errors in ( ) & t-statistics in [ ]
Cointegrating Eq: CointEq1
LNAGDP (–1) 1.000000
LNEXP(–1) –0.041632
(0.10841)
[–0.38404]
Error Correction: D(LNAGDP) D(LNEXP)
CointEq1 –0.003441 0.030771
(0.00630) (0.01041)
[0.54641] [2.95698]**
D(LNAGR_GDP(–1)) –0.50527 0.205249
–0.16185 –0.26741
[–3.12190]** [ 0.76754]
D(LNAGR_GDP(–2)) –0.32981 –0.45884
–0.15768 –0.26052
[–2.09172]** [–1.76123]
D(LNEXP(–1)) 0.250387 0.157521
–0.10197 –0.16848
[ 2.45558]** [ 0.93498]
D(LNEXP(–2)) 0.033208 0.2183
–0.1093 –0.18059
[ 0.30384] [ 1.20885]
R-squared 0.337221 0.226579
Adj. R-squared 0.256884 0.132831
Sum sq. resids 0.089353 0.243929
S.E. equation 0.052035 0.085975
F-statistic 4.197593 2.416900
Notes: * and ** denote statistical significance at 1 per cent and 5 per cent levels of significance respectively.

VAR Lag Order Selection Criteria

Lag LogL LR FPE AIC SC HQ
0 –19.59922 NA 0.010685 1.136801 1.222990 1.167466
1 98.65122 217.8298* 2.62e-05* –4.876380* –4.617814* –4.784384*
2 102.0043 5.823747 2.71e-05 –4.842331 –4.411387 –4.689005
3 106.5394 7.399428 2.65e-05 –4.870496 –4.267175 –4.655839
Notes: *indicates lag order selected by the criterion.
LR: sequential modified LR test statistic (each test at 5 per cent level).
FPE: Final prediction error.
AIC: Akaike information criterion.
SC: Schwarz information criterion.
HQ: Hannan-Quinn information criterion.

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Exports and Agricultural GDP in India 119

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