STRUCTURAL ANALYSIS OF INDIAN GOLD EXPORTS: PERSPECTIVES FOR TRADE POLICY DEVELOPMENT

Gold is an important trade item, and India is the second leading importer and fifth leading exporter of gold in the world. Though India has a prominent position in the gold trade, it generates huge trade deficient that significantly erode the foreign exchange reserves of the country. This paper attempts to offer policy directions for India’s economic development by limiting imports of gold. The study uses historical trade data from the International Trade Center (ITC) website www.trademap.org. The study adopts descriptives, revealed comparative advantage, future predictions using Markov chain analysis, etc to gain the insights about various trends in India’s 4043 STRUCTURAL ANALYSIS OF INDIAN GOLD EXPORTS gold trade. India’s export of gold jewelry is highly dependent on the United Arab Emirates, and other markets in the Middle East are under-explored. India’s export to major gold importers in the World is meager, and no changes in export directions predicted. For competitiveness, curbing of gold imports is essential. Policy level efforts that discourage the diversion of imported gold to domestic market, attracting domestic gold for export production, limiting gold import licenses to a specific percentage of exports achieved, etc are suitable for a positive change in the trade deficit position in gold trade.


INTRODUCTION
Gold has been consistently occupying one of the top slots in India's foreign trade [1,2,3]. In the covered in chapter 71, India is the second leading importer in the world with 11.4% share in world imports, but only fifth largest in world exports with only 6.5% share. On examining the trade balance position that contributes to the current account position and net income from foreign trade [4], India's trade in chapter 71 was always negative. Even though schemes like gold monetization etc were introduced by the government to reduce India's massive gold imports, no significant changes are visible till date [5,6]. This paper evaluates the competitiveness of Indian gold exports to gain some insights for proposing policy suggestions for addressing India's trade deficit in gold trade. The paper has three parts. The first part provides a trend analysis of gold trade of India with details related direction of imports and exports etc. The second part attempts to evaluate the Revealed Comparative Advantage and perform a Markov chain analysis to predict structural transformation in India's gold exports. In the last part, based on observations from the study, policy interventions are proposed to boost the export competitiveness of India in gold trade. Commodity Description and Coding System, also known as the Harmonized System (HS) of tariff nomenclature is an internationally standardized system of names and numbers to classify traded products [7]. The HS is organized into 21 sections, which are subdivided into 97 chapters.   [8,9] were computed. The Revealed Comparative Advantage (RCA) index measures competitiveness of a country in export of a specific product [10,11,12]. RCA is measured as a ratio between the product shares in the country's exports in relation to its share in the world exports [13]. If, RCA>1, it implies that the country has an advantage. The RSCA is an extension of RCA and if, RSCA<0, the commodity has a disadvantage in export or if the RSCA>0, the commodity has advantage in export of a particular commodity [14,15,16] three classes (b, c, d) approximately divide the products related to revealed comparative advantage into three levels: "weak comparative advantage" -class b, "medium comparative advantage" -class c, and "strong comparative advantage"class d. In order to prevent the problem of asymmetry, the modification of RCA indexsymmetric revealed comparative advantage (RSCA) [13] was calculated. The value of RSCA ranges from -1 to +1. The nearer the value is to +1, the higher the competitiveness of a country in the product of interest [18].
The Markov chain analysis, using the time series data from 2001 to 2017 helps to determine market share [19] and changing direction [20] of gold trade of India over time.
The assumption was that average export from India to importing countries in any period depends on export in the previous period and this dependence is the same along all periods. Further, an attempt was made to predict future tendency of Indian gold export for the period 2018-2022 using auto regressive approach.   Therefore, HS 710812 is the major import item and HS711319 is the major export item for India.

Preliminary Explorations on Trends in Gold
Hence, further explored the trade trends related to these two tariff lines were carried out. Table 4 illustrates a comparative picture of trade in HS codes 710812 and 711319 in the world an India.    Also, on evaluating trends in global imports in HS 711319 (Table 7), it is evident that the global demand was almost stable but the supply from Switzerland has significantly increased during the period 2012-17. The exports in HS 711319 in quantity terms was just 170 tons in 2017 indicating the possibility of huge domestic consumption since in the same year import quantity was in tune of 1027 tons.

Detailed Trend Analysis of HS 710812 and 711319:
Therefore, from preliminary analysis, it appears that to improve India's competitiveness in gold trade, significant increase in the export of HS711319 is required. Also, India should initiate efforts to curb imports in HS710812 and focus more on increasing exports in HS711319 using indigenous gold as raw material for export production. In the next section, a detailed analysis to understand competitive position of India in export of gold jewelry and future trends in trade directions are done. Table 8 illustrates RCA and RSCA of India's gold exports calculates on value terms (billion USD) The trends indicate that India has strong comparative advantage in gold exports but substantial decrease in competitiveness is noticed from 2013 onwards. Generally analytical tool starts with description and summarization of the information collected in any study. As such in this study also, to examine the nature of each series these have been subjected to various descriptive statistical measures. Table 9 illustrates basic descriptive statistics about India's gold export destinations.

Future Prediction on Export Directions-Markov Chain analysis:
The structural change in exports of gold jewelry is estimated by the one step transition probability matrix [21,22,23] using Markov Chain model. This econometric analysis helps to know the trend in sustaining existing market and informs about the shift in shares from one country to another over a period of time [24,25]. The share of export of gold jewelry to a particular country at time 't' was considered as a random variable and a linear relationship is assumed between the export share 'E i,t gold' to a country 'i' in the period 't'. The export share to other countries 'j' on time 't-1'i.e 'Ej, : Probability that exports shift from the ℎ country to the ℎ country.
E , −1 : Share of Gold exports from India to the ℎ country during the year − 1.
In the present study, seven major importing countries of India gold are considered. The set of data is for the period (2001-2017). On incorporating the lagged dependency variable E , −1 as an explanatory; a loss of one degree of freedom (or an observation) was resulted. A lot of studies used the sum of mean deviance as an objective function [26,27]. Here, the optimization problem is under the sum of squared errors as an objective function, and mathematically we work with a probability that a country might lose to other countries with respect to gold exports. Table 10 presents the transitional probability matrix computed form Indian gold export data from 2001 to 2017   So, for the world export level, the whole matrix, (i.e), the export gold projected on the year + is given by: Table 11 depicts the observed and predicted Indian Gold export level for the world over the     Figure   2 depicts the alarming increasing trend in gold imports in HS710812 and unappealing exports trends in HS711319 mapped up to 2018 Q3. The total demand of gold in India is highly dubious.
However, as per industry reports India requires around 1000 tons of gold every year, but India produces hardly 1.5 tons on an average per year. Therefore, for the survival of Indian gold jewelry industry which contributes around 15% of country's GDP and employs 4.64 million workforce (https://www.ibef.org/industry/gems-jewellery-india.aspx), imports are essential.  emerging middle class and their view of gold as a safe investment propels further demand for gold. The inability is seen in utilizing the huge gold reserves in Indian household for a better productive purpose. Third, major observation was that, India's export of gold jewelry is highly dependent on UAE market. Table 14 illustrates share of leading importers in India's total export of jewelry during the period 2008 to 2017 Switzerland (10.1%) are in the top list. India's penetration the above markets and many other markets in Middle East region negligible. The competitive advantage UAE created in Middle East markets for gold jewelry appears to be highly indebted to Indian produce. The observation also points out the inability of India to capitalize its potential in gold jewelry exports in Middle East markets.
Fourth, the Markov chain analysis predicts the dominance of UAE in India's jewelry exports in future also. India being an import dependent country for export production jewelry, reliance on few countries for export market can be highly detrimental. The world market for gold jewelry is 300 billion USD big and leading consumers are China, India, USA, Germany, Switzerland etc.
17.3% of world jewelry imports in 2017 are destined to Switzerland and India's share is meager.
Similarly, Hong Kong, China is the second largest jewelry importer in the works with of 15%, but India's supply is grossly inadequate. Therefore, identification of new export markets for Indian jewelry should be given top priority.
Fifth, 2016 was a better year for India in gold trade in terms of trade balance as evident from figure 3. The imports in HS 710812 in 2016 was 648 tons at 22.8 billion USD which was less than average import for last 10years i.e. 827 tons. Interestingly. In 2016, India could export jewelry for 9.21 billion USD to result in a relatively less trade deficit. On quantity terms average imports of gold by India is around 850 tones and exports in the tune of just 70 tons. This observation leads to a conclusion that majority of imported gold is consumed in domestic market and are not utilized for export production.
The explorations conclude that, to improve competitiveness of Indian gold industry certain policy initiatives to curb gold imports is essential. In India, a major portion of imported gold is diverted to domestic market and hence foreign exchange earnings from export of gold jewelry doesn't commensurate the huge outlay of foreign exchange from gold imports. Better schemes to attract domestic gold for export production is required. The policy makers should impose restriction of gold imports and introduce a scheme for issuing gold import licenses to exporters as a percentage of gold exports achieved in the preceding period to limit gold imports. Similarly, an awareness creation about domestic investments in other assets than gold should be created.
This study was mostly descriptive, and the purpose was more to understand the prevailing trends.
No attempt was made to understand the implications of existing policy on gold imports to India or to examine the impact of existing export promotion schemes on gold. The challenges to the industry in attracting domestic gold worth a detailed investigation. To what extent the gold industry act as a driver to the Indian economy requires further investigation. The present attempt is a modest step in the domain many future studies about economy of gold.