A Decade of Economic Reforms - Review by RBI
[Source: RBI Report on Currency and Finance 2001-2002 dated March 31, 2003]

Module: 5 - External Sector

Current Account: Approach, Developments and Issues
Export Growth - Examples of other Countries

The areas in which South-East Asian countries have achieved their highest export growth during the 1980s have been typically labour intensive, relatively low technology products such as textiles, clothing, shoes, toys, sport goods and the like. Subsequently, during the 1990s they have graduated up to somewhat higher technology consumer goods and then even higher technology and capital-intensive sectors such as capital goods and petro-chemicals. Over the same period, the Indian export pattern has remained stationary with persistent dominance of labour-intensive low technology products such as clothing, textiles, shoes and other leather goods. Adequate quality upgradation has been absent and unit prices have stagnated. The attainment of both higher volume growth and of higher unit value realisation will require both larger scale of operation and higher quality. It is, therefore, essential to loosen constraints in these sectors so that they can grow freely in volume, utilise better machinery, graduate up to higher technology levels, and utilise better international marketing channels. What is observed in other countries in Asia is that production of such consumer goods may be achieved through final assembly operations that are large in scale, but where a great deal of out-sourcing to small enterprises is undertaken to preserve their competitiveness. Consequently, freeing of restrictions on the size of small-scale industries through de-reservation is likely to lead to the growth of many more small-scale enterprises than is currently the case, along with a much higher potential for growth in manufacturing employment (Mohan, 2002).

Destination-wise analysis of the Indian exports indicates an unchanged position in respect of the Organisation for Economic Cooperation and Development (OECD) group being the largest market, increasing prominence of the Organisation of Petroleum Exporting Countries (OPEC) and the developing countries (Asia, Africa and Latin America), and a steep erosion in the relative position of the Eastern Europe. With the break-up of the Soviet Union, the share of the East European countries fell dramatically from 17.9 per cent in 1990-91 to just 2.9 per cent in 2001-02, primarily on account of the termination of Rupee trade and its adverse impact on exports of agricultural products such as tea, tobacco and spices to this region. The loss of this market share was, however, made up by increasing the shares in developing countries and the OPEC region, both of which doubled between the years 1987-88 and 2001-02.

India’s export share in world trade has increased perceptibly during the recent period. India’s exports as a percentage of world exports improved to 0.56 per cent during 1991-96 and further to 0.65 per cent during 1996-2002 from 0.48 per cent in the 1980s. The ratio was 0.71 per cent in 2000-01, the highest achieved so far since the 1970s. Nonetheless, India’s share in world exports is still very low and appears unimpressive when compared with the other major trading Asian countries, such as, China and other East Asian economies like Malaysia, Thailand, Singapore, Korea and Indonesia. China demonstrated the most dramatic change as its share in world exports more than doubled in a decade from 2.0 per cent in 1991 to 4.4 per cent in 2001. Group-wise, India’s share in the imports of industrialised countries in the 1990s declined as compared to that in 1986. In respect of the developing countries as a group, however, it has increased from 0.5 per cent in 1986 to 1.1 per cent during 1996-2000.

The commodity-structure of India’s imports has also shown marked changes, reflecting, inter alia, the impact of trade policy, the movements in international prices and the pattern of domestic demand. The share of oil imports in India’s total imports increased from 17.1 per cent during 1987-90 to 23.9 per cent during 1992-97 and further to 27.2 per cent in 2001-02. While the share and absolute value of these imports showed sharp fluctuations over the years mainly on account of the large movements in international crude prices, the volume of such imports has grown significantly on account of increase in domestic consumption and the stagnation in domestic crude oil production. Given the large swings in international crude prices, as also a trend rise in the oil import bill, there is a need for a comprehensive review of energy policy of the country covering the demand-supply aspects, as well as the price policy. Renewed efforts to improve energy supply from domestic sources by encouraging explorations, and stepping up of production and refining capacities are necessary to bring about a structural change in this area.

Reflecting the impact of a series of policy measures undertaken in the post-reform years starting with the repeal of the Gold Control Order in 1991 for liberalising the imports of gold and silver, these imports showed a sharp pick-up from 1992-93. The imports of gold and silver (including passenger baggage) rose from a meagre US $ 6 million in 1991-92 to US $ 1.3 billion in 1992-93 and further to US $ 5.9 billion in 1997-98. A large part of the increase in these imports could be due to a switchover from the unofficial channel to the official channel, initially through the Non-Resident Indian (NRI) baggage route and subsequently through the OGL route.5 In the subsequent years, however, these imports have stabilised and, in fact, declined to US $ 4.6 billion in 2001-02.

Imports of capital goods registered sharp increases in the initial reform years from US $ 4.5 billion in 1992-93 to US $ 10.3 billion in 1995-96, but exhibited a declining trend thereafter. The share of these imports, which had declined from 29.5 per cent in 1987-88 to 24.2 per cent in 1990-91, rose in the post-reform period to 28.2 per cent in 1995-96 but dropped to 18.1 per cent in 2001-02, reflecting the lack of investment demand associated with the sluggish pace of domestic industrial activity. Among other import items, the relative shares of fertilisers, non-ferrous metals, ‘metalliferrous ores and metal scrap’ and ‘iron and steel’ generally showed a declining trend.

There are noticeable changes in the sources of India’s imports and in country shares.6 The share of the OECD countries and the Eastern Europe in India’s imports declined between the years 1987-88 and 1999-2000 while that of the developing countries and the OPEC group increased during the same period. The share of India’s imports from the OPEC region rose significantly to 25.9 per cent in 1999-2000 from 16.3 per cent in 1990-91, mainly on account of the increase in the oil imports.

The Ministry of Commerce and Industry, Government of India has set an export target of 1 per cent share of world exports by 2006-07 for the medium-term which would be co-terminus with the Tenth Five Year Plan. This target is based on historical trends, current prospects and the requirement of a compound annual growth rate of about 12 per cent for exports till the year 2006-07 (Government of India, 2002a). The export performance is known to depend on price competitiveness, as well as non-price factors. As regards the price competitiveness, a number of earlier studies have emphasised that real exchange rate may be an important variable influencing the price competitiveness of India’s exports. In India, large exchange rate misalignment has not occured in the last one decade as the market itself has corrected the misalignment gradually over different episodes. The strong performance of the software exports, however, has created concerns about a possible "Dutch disease" effect which may erode the competitiveness of traditional exports.7 The export performance across commodity groups shows that most of the export groups have performed well so far, and apparently have not been affected by any "Dutch disease" effect. In a market determined exchange rate regime, exchange rate cannot be used as an instrument of export promotion, even though, at times, nominal appreciation could be prevented consistent with the overall exchange rate policy of the country. If the exporters retain the depreciation induced profits, they cannot improve their price competitiveness and therefore, exports may not increase despite a depreciation. In the Indian context, studies show that there has been an upward movement in exchange rate pass-through for India’s exports.8 While Patra and Pattanaik (1994) estimate the co-efficient (during 1970-71 to 1992-93) at 43 per cent, Dholakia and Saradhi (2000) placed this figure at 30 per cent prior to 1991 and at 70 per cent after 1991.

Some of the recent studies have analysed the role of non-price factors vis-à-vis the price factors. Studies analysing the factors contributing to the competitiveness of India’s exports have observed that non-price factors play a more important role (Marjit and Raychaudhuri, 1997). Another study observed an inverse relationship between depreciation of exchange rate of rupee and trade competitiveness, and also emphasised the role of other factors like quality, product design, reliability and after sales service in raising trade competitiveness (Bhatt, 2000).

India’s export performance is affected by domestic as well as external impediments. The domestic factors inhibiting India’s export growth, as mentioned earlier, inter alia are infrastructure constraints, high transactions cost, small-scale industry reservations, inflexibilities in labour laws, lack of quality consciousness and constraints in attracting FDI in the export sector. High levels of protection in relation to other countries also explain why FDI in India has been much more oriented to the protected domestic market, rather than as a base for exports (Ahluwalia, 2002). The exports of developing countries like India are facing increasing difficulties by emerging protectionist sentiments in some sectors in the form of technical standards, environmental and social concerns besides non-trade barriers like anti-dumping duties, countervailing duties, safeguard measures and sanitary and phyto-sanitary measures. Indian products which have been affected by such barriers include floriculture products, textiles, pharmaceuticals, marine products and basmati rice exports to the European Union and mushroom and steel exports to USA and also grapes, egg products, gherkins, honey, meat products, milk products, tea, and spices. Differential tariffs against developing countries have also adversely affected market access into these countries (Government of India, 2002b; WTO, 2002). According to the WTO, exports from India are currently subject to 40 anti-dumping and 13 countervailing measures mainly for agricultural products, textiles and clothing products and chemicals and related products. This brings into focus the importance of non-price factors like quality, packaging and the like mentioned earlier, where India still seems to be lacking as compared to the international standards. This has adversely affected India’s export performance vis-à-vis other developing countries which may have an improved standing in these non-price factors.

To sum up, India’s external trade reforms have been quite comprehensive. The protection given to domestic industries has been reduced by way of the reduction in tariff levels. However, the pace of tariff reduction needs to be accelerated (subject to revenue constraints). The tariff levels in India are still among the highest in the world. The evidence from 1991-97 and 2001-2003 suggests that faster tariff reduction is good for industry. India has completely dismantled its quantitative restrictions except for a few items. Various export promotion schemes have been put in place. In the area of multilateral commitments the progress has been satisfactory. The concerns of developing countries as voiced by India in the WTO are being considered. India is making progress on the negotiations on Services and on several issues which are in the process of study. Reforms in the trade sector have also been notable as clearly seen from the increase in India’s trade-GDP ratio. There has been a steady increase in the growth rate of exports and imports as compared with the 1980s. The export-GDP ratio has almost doubled from that in the 1980s. The rising export-import ratio is indicative of the improvement in financing capacity of exports. India’s share in world exports has been rising and in 2001, this ratio was the highest achieved so far since the 1970s. There has been a discernible shift in India’s composition of exports with overall diversification of exports. The share of manufactured goods has shown an improvement driven by the increasing share of chemical and allied products, engineering goods, textiles and handicrafts including gems and jewellery. Imports have been driven by an increase in the imports of mainly export-related items like pearls, precious and semi-precious stones and electronic goods. India has also been successful in diversifying its export market increasingly to the developing countries alongwith the OECD emerging as the largest market for India’s exports. A notable feature is that despite the loss of the East European market after the break-up of the Soviet Union, India made a safe transition to other markets like developing countries of Asia and to the OPEC.