Does export diversification drive economic growth? An empirical analysis for India

The close relationship between growth in GDP and growth in a country's trade volume has been empirically validated by many researchers. A diversified export basket that often enables a country to enter more global markets acts as a cushion to protect a country from sector-specific and country-specific shocks. As more sectors get exposed to foreign competition, the positive externalities that are generated help improve the overall economic efficiency in the domestic economy. Similarly, import diversification also boosts competition in domestic industries and increases productivity. It contributes positively to consumer welfare by increasing their choice and reducing product prices. In this study, we examined the effect of export diversification on India's economic growth over the period April 2012-March 2025. We found 11 product groups dominated our export basket during the study period. Using a Vector Error Correction Model (VECM) in the Autoregressive Distributed Lag (ARDL) framework, we found that 75% of the gap between actual GDP and its level as determined by long-run export diversification was covered in the next period.