Capital Account Liberalisation in India: Implications for Economic Growth

Abstract

We construct a time varying financial openness index by estimating a small open economy model of interest rate determination and examine the implications of evolution of capital account liberalisation on economic performance over the period April 1993 - March 2004. The behaviour of openness index seems to closely reflect the financial liberalisation policies followed. The empirical evidence from cointegration test indicates that financial openness has significant positive impact on output while the impulse response coefficients confirm that such impact is persistent. The results from Granger causality and forecast error variance reveal that the process of financial openness emerged as an exogenous sequence. The overall evidence is in favour of the cautious and gradual approach followed in matters relating to financial liberalisation in so far as their implication on output is concerned.

Keywords: Capital account liberalisation, Openness index, Cointegration and error correction models

JEL Classification: F36, F40, F43