Abstract
As part of a major economic reform program aimed at improving external competitiveness, India’s trade and exchange rate policies were liberalized and restructured since the early 1990s. The major reforms included (i) exchange rate reforms to remove anti-export bias, (ii) trade liberalization to induce resource allocation along the lines of comparative advantage, and (iii) liberalization of inward foreign direct investment (FDI). How did Indian exports respond to changes in the incentive structure engendered by the reforms and what are the emerging issues? This paper highlights some key empirical results and stylized facts pertaining to India’s merchandise (goods) exports. While India’s merchandise exports in dollar terms grew moderately at about 8.1% per year during the first decade of economic reforms (1993-2001), the second decade of reforms (2002-2011) stands apart for its strong growth rate of 21.3% per annum. Data for the more recent years, however, indicate that the value of exports plummeted from a peak of US$323 billion in 2014 to US$299 billion in 2017 with a negative annual growth rate of 1.9% per annum. Further, throughout the post-reform period, India’s imports have grown faster than exports resulting in increasing trade deficits in the merchandise account. Needless to say, the long-term solution to the problem of unsustainable current account deficit lies in ensuring that export growth keeps pace with import growth. The crucial question is: what type of policy interventions would help achieve faster export growth?. The answer, taking a cue from some recent studies, hinges on whether export performance is primarily driven by growth at the extensive margin (new trading relationships) or at the intensive margin (increase in trade of existing relationships). The intensive margin of a country’s export growth is attributable to its persistent export relationships—that is, exports of already exported products (old products) to already existing market destination for those products (old markets). Note that intensive margin growth can arise as a result of price growth, quantity growth, or both. The extensive margin refers to changes in the value of exports due to diversification of old products to new market destinations and/or due to the exports of new products. What has been the relative contribution of extensive and intensive margins to India’s export growth during the recent past? How does India’s performance compare with that of China? We argue that China’s high degree of specilisation in labour-intensive industries/product lines and its high export market penetration in traditional richer partner countries (particularly high income OECD countries) hold the key in understanding its superior export performance. India, by contrast, due to an idiosyncratic pattern of specialization in capital- and skill-intensive activities, has failed to exploit its export potential in high-income countries. The composition of Indian exports shows an anomaly in that, despite being a labor-abundant country, the fast growing exports from India are either skilled labor-intensive or capital-intensive. While the share of capital-intensive products increased consistently from about 32% in 2000 to nearly 53% in 2015, the share of unskilled labor-intensive products declined from about 30% to 17%. This type of specialization is an anomaly in a country like India with large pools of unskilled labor. Due to its idiosyncratic specialization, India has been locked out of the vertically integrated global supply chains in several manufacturing industries. It is almost tautological to state that export growth that is driven by capital- and skill-intensive industries cannot be sustained in a capital scarce but labor-abundant economy. The disproportionate bias of its export composition toward capital-and skill-intensive products has provided India with a comparative advantage in relatively poorer regions (such as Africa) but at the cost of losing market shares in the richer countries. Products from India with high technology and skill content are unlikely to make inroads into the quality conscious richer country markets. These products, however, enjoy a competitive advantage in the relatively poorer countries. At the same time, rich country markets provide a huge potential for labor-intensive exports from developing countries such as India. Thus, specialization out of traditional labor-intensive products implies a general loss of India’s export potential in advanced country markets. In the past, high-income OECD countries accounted for a major share of India’s export basket. However, their dominance has declined considerably over the last two decades. The aggregate share of these markets in India’s merchandise exports decreased from 58.2% in 1992 to 38.6% in 2015. On the other hand, India’s market share in low- and middle-income countries increased steadily from 18.4% in 1992 to 35.8% in 2015. For China, the share of high-income OECD countries increased sharply from 37.7% in 1992 to 62% in 2000 and then declined to 47.5% in 2015. China’s export market penetration in high-income OECD countries, despite some decline in the last decade, remains significantly higher than that of India. Contrary to the general perception, there exists a significant potential for India to expand and intensify its export relationships with the traditional developed country partners. However, this would necessitate greater participation in global value chains and a realignment of India’s specialization on the basis of its true comparative advantage in labor-intensive production processes and product lines.
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Notes
- 1.
We consider 1993 as the benchmark for defining the post-trade reform period since full convertibility on trade account was introduced in that year.
- 2.
Manufactured goods include chemicals (SITC 5), manufactured materials (SITC 6 less 667 and 68), machinery and transport equipment (SITC 7), and miscellaneous manufactured articles (SITC 8).
- 3.
As per the original classification of the ITC, the category “refined petroleum products” (SITC 334) is included as part of primary goods. However, since petroleum refining in India is based on imported crude oil and is a highly capital-intensive process, it is appropriate to include it in the capital-intensive, rather than primary category. Accordingly, we exclude SITC 334 from primary goods and include it under capital-intensive goods. Capital-intensive goods include human capital-intensive goods, technology-intensive goods, and SITC 334. The share of SITC 334 in India’s export basket increased rapidly from just 0.2% in 2000 to as high as 19.1% in 2012 and then declined to 10.4% in 2015.
- 4.
Global production networks refer to the links between a lead or a key firm and its suppliers in different countries (Weiss 2011). In certain industries, such as electronics and automobiles, technology makes it possible to subdivide the production process into discrete stages. In such industries, the fragmentation of production process into smaller and more specialized components allows firms to locate parts of production in countries where intensively used resources are available at lower costs.
- 5.
India’s partner countries are classified into different income-based groups based on the World Bank Classification.
- 6.
This is mainly driven by India’s exports to countries like UAE, Hong Kong, Singapore, and Saudi Arabia.
- 7.
Between 2000 and 2015, total world exports to high-income countries declined from 74.4 to 60.9% and that to high-income OECD countries declined from 70.4 to 56.2%.
- 8.
An illustrative example will make this point clearer. India’s exports of passenger motor vehicles (SITC 7810), a capital- and skill-intensive product, increased remarkably from $102 million in 2000 to $5392 million in 2015, registering an annual average growth rate of 34%. In 2015, high-income OECD countries accounted for only 22% of Indian exports of passenger motor vehicles while low- and middle-income countries accounted for 68%. On the other hand, India’s exports of apparel (SITC 84), a traditional labor-intensive category, grew at a much lower rate of 9% per annum during 2000–2015. In 2015, while high-income OECD countries accounted for 64% of India’s exports in this category, low- and middle-income countries accounted for just 12%.
- 9.
See Hummels and Klenow (2005) for a detailed discussion on the importance of different export margins in different trade models.
- 10.
The assumption that Nhijt is a subset of Nhirt means that the number of products that India exports to partner group j is lesser than that to all other partner countries r. This is indeed the case in our data.
- 11.
\(s_{ijt}^{h} = \frac{{x_{ijt}^{h} }}{{\mathop \sum \nolimits_{{h \in N_{ijt}^{h} }} x_{ijt}^{h} }} \;s_{irt}^{h} = \frac{{x_{irt}^{h} }}{{\mathop \sum \nolimits_{r \in D,r \ne j} \mathop \sum \nolimits_{{h \in N_{ijt}^{h} }} x_{irt}^{h} }}\) and \(w_{ijt}^{h} = \frac{{\left( {\frac{{s_{ijt}^{h} - s_{irt}^{h} }}{{lns_{ijt}^{h} - lns_{irt}^{h} }}} \right)}}{{\mathop \sum \nolimits_{{h \in N_{ijt}^{h} }} \left( {\frac{{s_{ijt}^{h} - s_{irt}^{h} }}{{lns_{ijt}^{h} - lns_{irt}^{h} }}} \right)}}\)
- 12.
Unit values (export value divided by quantity), required to measure price and quantity margins, are computed at the eight-digit HS level. A small number of eight-digit HS codes, for which data on quantity are either zero or not reported, are excluded from the analysis.
- 13.
Manufactured goods include SITC codes 5–8 less 667 (Pearls and precious or semi-precious stones, unworked, or worked) and 68 (Non-ferrous metals): Chemicals (SITC 5), manufactured materials (SITC 6), machinery and transport equipment (SITC 7), and miscellaneous manufactured articles (SITC 8). The HS codes corresponding to these SITC codes are identified using the HS-SITC concordance table available in WITS. It should, however, be noted that during the entire period of our analysis, the nomenclatures used by the DGCI&S to classify products into HS codes have undergone changes. For instance, HS 1996 is used for product classification from 2000 to March 2003, HS 2002 is followed from April 2003 to March 2007, and HS 2007 is used thereafter. In order to maintain a uniform classification, we use the concordance between different HS series and SITC revision 2 and map each eight-digit HS product code to a one-digit SITC code.
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Appendix: Decomposition Methodology—A Numerical Illustration
Appendix: Decomposition Methodology—A Numerical Illustration
Suppose a country exports three products to a set of partner countries—A, B, C, and D.
Product | Country A | Country B | Country C | Country D |
|---|---|---|---|---|
1 | 10 | 0 | 50 | 40 |
2 | 20 | 40 | 10 | 30 |
3 | 50 | 20 | 0 | 0 |
Column total | 80 | 60 | 60 | 70 |
Calculation of intensive margin | Calculation of extensive margin | |
|---|---|---|
Country A | \(\frac{80}{60 + 60 + 70} = 0.42\) | \(\frac{60 + 60 + 70}{60 + 60 + 70} = 1.00\) |
Country B | \(\frac{60}{70 + 10 + 30} = 0.55\) | \(\frac{70 + 10 + 30}{80 + 60 + 70} = 0.52\) |
Country C | \(\frac{60}{30 + 40 + 70} = 0.43\) | \(\frac{30 + 40 + 70}{80 + 60 + 70} = 0.67\) |
Country D | \(\frac{70}{30 + 40 + 60} = 0.54\) | \(\frac{30 + 40 + 60}{80 + 60 + 60} = 0.65\) |
From the above example, it is easy to understand that the value of the exporting country’s extensive margin in country A is equal to 1, since it exports the entire set of products to A.
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Veeramani, C., Aerath, L. (2020). India’s Merchandise Exports in a Comparative Asian Perspective. In: Aggarwal, S., Das, D., Banga, R. (eds) Accelerators of India's Growth—Industry, Trade and Employment. India Studies in Business and Economics. Springer, Singapore. https://doi.org/10.1007/978-981-32-9397-7_6
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