Institutions and Free Trade Agreements as Determinants of Trade Potential of India: a Stochastic Frontier Gravity Model Analysis

Naseer Ul Hassan, Md. Sarafraz Equbal, Quaseen Jahan
Statistika, 105(4): 509–521
https://doi.org/10.54694/stat.2025.5

Abstract
This study examines how institutions and free trade agreements affect India's actual export and import potential using a panel data set of 40 nations for the years 2000–2022. A simultaneous single-step stochastic frontier model was generated in order to determine the trade efficiency (actualized trade potential). A system generalized method of moments estimator was then used to calculate the influence of institutions and free trade agreements. The results indicate that average export efficiency and import efficiency were found to be approximately 76% and 57%, respectively. Bilateral Free Trade Agreements are positively correlated with the trade efficiency while Multilateral Free Trade Agreements produce negative or insignificant results. The institutional-distance variables yield distinct outcomes for import efficiency and export efficiency.

Keywords
Trade potential, institutional distance, FTA, Gravity Model, Stochastic Frontier Model, GMM