Bilateral Trade Between India and Canada: An Error Correction Model.

The improvement of the trade balance of India vis-à-vis Canada can be attributed to the devaluation of Indian rupee as a part of the reform program in July 1991 and the subsequent depreciation of the Indian currency owing to the managed floating exchange rate regime. However, but for the increasing inflation in the post-reform period, the result could have been more in favor of India. Thus, the obvious policy prescription for India is to reduce the inflation rate so that the impact of devaluation and depreciation will be more prominent on the trade balance, at least with Canada. This suggestion can be tentative as inflation in India could have been unavoidable owing to its other compulsions. However, the negative response of export of India to its GDP and its perceived fluctuation in the short run could be a major cause of concern to the policy makers. [ABSTRACT FROM AUTHOR]