Does India's growth matter? Evidence from the SAARC nations

• Date: 01 May 2019
• DOI: http://doi.org/10.1002/pa.1909
• Author: Rohan Ray,Cledwyn Fernandez
• Published date: 01 May 2019

ACADEMIC PAPER

Does India's growth matter? Evidence from the SAARC nations

Rohan Ray

1

|Cledwyn Fernandez

2

1

School of Economics, Singapore

Management University, Singapore

2

Department of Economics, XLRI, Xavier

School of Management, Jamshedpur, India

Correspondence

Rohan Ray, School of Economics, Singapore

Management University, 90 Stamford Road,

Singapore 178903.

Email: ray.rohan1990@gmail.com

The study estimates the extent of spillover effects that India's real per capita gross

domestic product (GDP) growth rate has on the growth rates of other countries in

the South Asian Association for Regional Cooperation (SAARC) region for the period

2003–2016. It also identifies whether the conventional trade channel is the means

through which growth is transmitted from India to her neighboring countries. Using

a random effects model, we conclude that on average, a 1 percentage point increase

in India's real per capita GDP growth rate results in 0.46 percentage point increase in

the per capita GDP growth rates of other SAARC nations. However, this does not

occur through the trade channel primarily due to low levels of intraregional trade.

Also, using time dummies, the paper analyzes whether there has been any significant

change in the degree of spillover effects in the postfinancial crisis period, where coun-

tries have been observed to insulate themselves to a certain extent.

1|INTRODUCTION

In this globalized word, trade has become indispensable for the growth

of any economy. According to the gravity model of trade, nations that

are geographically close to each other should experience a higher vol-

ume of bilateral trade, whereas in certain economies the pattern of

trade is based on the principle of comparative advantage. Additionally,

there have also been economic unions and trade agreements among

nations to foster trade and growth as a symbiotic relationship.

Grossman and Helpman (1991) studied the relation between trade

and growth through the lens of knowledge spillover. Comparing local

knowledge with a public good, knowledge can be easily transferred,

and hence there is a possibility of innovation and technological spill-

over among trading nations.

Vamvakidis and Arora (2001) studied the relationship between

trade openness and growth and inferred that the positive relationship

has spurred only in recent years.

Whereas the South Asian Association for Regional Cooperation

(SAARC) union was formed in the year 1985, the South Asian Free

Trade Area was formulated in the year 2006 to reduce tariff rates

and eliminate nontariff barriers in an intraregional trade regime. The

SAARC comprises 24% of the world's population, 3% of the global

area, and approximately 9% of the global economy in terms of gross

domestic product (GDP).

1

Although the SAARC is an economic union, it is essential at this

point to understand that the macroeconomic fundamentals of all the

nations under this union are quite different from each other. For

instance, whereas the fiscal deficit of Pakistan and Maldives is quite

high and prone to external economic shock, the fiscal position in

Bangladesh and India is under control with proper policies in place.

In terms of the current account deficit, Maldives incurred a very high

current account deficit of almost 51% of the GDP in the year 2008.

2

In the same year, Bangladesh and Nepal had a current account surplus.

Convergence has always been a very important issue for most

developing economies all around the world. It is postulated that the

poorer economies experience higher per capita growth rates than

the developed economies, which in the long run helps to reduce

inequality. At present, India is the fastest growing country among

the SAARC nations, growing at a rate of almost 7% year on year. To

ensure that the growth rate of the SAARC nations is in tandem with

the growth rate of other countries around the globe, it is inevitable

that the other nations start having sustainable measures to foster

growth.

The average growth rates in the South Asian nations have been

close to 7%, as shown in Figure A1 of the appendix, over the last

20 years, which is twice the global average and over three times that

of the European Union (EU) economy.

1

http://ficci.in/international.asp?deskid=54522

2

World Bank database

Received: 6 May 2018 Revised: 30 October 2018 Accepted: 16 November 2018

DOI: 10.1002/pa.1909

J Public Affairs. 2019;19:e1909.

https://doi.org/10.1002/pa.1909

© 2019 John Wiley & Sons, Ltd.wileyonlinelibrary.com/journal/pa 1of8