Import Demand Function in India Under the Liberalised Trade Regime

Abstract

The trade liberalisation policy was initiated in India in the 1980s but executed effectively since the early 1990s. Since then India’s foreign trade embarks on a new road with a rapid expansion of export and import. Over the period, import exceed export. Identifying factors influencing such a significant elevation of import is a relevant issue of research. This study appraises import demand function in India for the liberalised trade regime particularly, for an extended period 1980–2018, and for the post-reform period, 1992–2018. The study identifies domestic income in aggregated and disaggregated level with exchange rate, trade openness and population growth as significant determinants of import demand. The income has a positive impact on import demand, where income elasticity of import demand differs significantly across the aggregate income and its components—consumption, investment and export expenditure. The exchange rate has a negative impact, implies a depreciation of Indian currency decrease import demand. The trade openness causes a rise in import demand both in the long run and in the short run. Population growth also raises import demand. The econometric diagnostics corroborate the fact that the estimated import demand functions are stable and robust. JEL Codes: F10, F14, C22