India’s Merchandise Exports in a Comparative Asian Perspective

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.