Factors Determining Balance of Trade in India

Abstract

This paper aims to determine the major factors influencing Balance of Trade (BoT) of India over the last 40 years (1981-2019). The OLS method of regression analysis has been used in the paper to analyse the relationship between balance of trade of India and its determinants. It is found that four main factors influence balance of trade in India-Real Effective Exchange Rate (REER), real value of global crude oil prices, private investment in India, and GDP per capita of India. Global oil prices have a significant negative relationship with India’s trade balance. Investment, REER and GDP per capita have a significant positive relationship with India’s trade balance. Furthermore, trade balance of India has been exceptionally low in two years - 2011 and 2017 - mainly due to global financial crisis and global recession respectively. These years are captured by dummy variables in the regression model.