Assessing the Effect of Commodity Price, USD Exchange Rate, Trade Balance on India’s Economic Growth: An Empirical Analysis

Abstract This study investigates how external macroeconomic forces crude oil prices, gold prices, the USD/INR exchange rate, and the trade balance shape India’s real GDP over 2000–2025 using annual data. India dependence on imported energy and its exposure to global price and currency shocks, the study evaluates whether these external variables exert persistent (long-run) effects on growth and how shocks transmit in the short run. The empirical strategy combines Johansen cointegration to assess long-run relationships, a Vector Error Correction Model (VECM) to capture short-run dynamics and adjustment toward equilibrium, and a Structural VAR (SVAR) to interpret the transmission of structural shocks across the system. The results indicate a stable long-run linkage between output and the external-sector variables, with short-run disturbances transmitted primarily through cost-push pressures and external balance constraints. Oil-price increases and rupee depreciation are associated with weaker growth dynamics, while gold exhibits a dual role providing hedging/wealth effects in risk-off periods but also intensifying external pressures through import demand. The findings highlight the need for an integrated resilience framework for India that prioritizes energy diversification and efficiency, credible exchange-rate and reserve management, stronger trade competitiveness, and structural measures to moderate import-intensive gold demand through monetization and attractive financial saving alternatives. JEL Classification: F41, F31, F14, Q41, C32