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Sources of India's Export Growth in Pre- and Post-Reform Periods

The pace of India's export growth has not been distinctly high during the larger part of the post-reform period (1993-2005), though it has accelerated since 2002. In contrast to the pre-reform period (1950-90), the actual growth of exports in the post-reform period has been above the potential offered by the growth of world demand. The gap between the actual and potential is mainly explained by an improvement in the overall competitiveness of India's exports. The rapid growth of India's merchandise exports since 2002 gives no room for complacency since it has been mainly determined by a buoyant world economy. The competitiveness effect, though positive, has not been the major contributing factor to the acceleration in the growth rate of merchandise exports in recent years. It appears that exports have been adversely affected by the appreciation of the real effective exchange rate during the post-reform period.

Spacial articlas

Sources of India’s Export Growth in Pre- and Post-Reform Periods


Economic and Political WeeklyJune 23, 20072420distribution effect, and (iv) overall competitiveness effect.Finally,Section IV concludes.IExport Trends in Pre-Reform Period:Brief OverviewExports were largely neglected during the first and the secondfive-year plans, which was justified on the ground that demandfor Indian exports was inelastic. Whilst the world merchandiseexport was growing at 6.3 per cent per annum during the 1950s,exports from India stagnated (Table 1). As the world merchandiseexports expanded relatively faster during the 1960s at 8.8 percent per annum, the growth rate of India’s exports improvedsomewhat to 3.6 per cent per annum. Clearly, the country failedto make the best use of the trade possibilities available duringthe 1950s and 1960s. The share of India’s exports in world exportsdeclined sharply from 1.4 per cent during the 1950s to 0.9 percent during the 1960s. In order to offset the detrimental effectsof overvalued exchange rates and other government policies onexports, various implicit and explicit measures of exportsubsidisation have been adopted.2World exports registered a hefty growth rate of 20.4 per centper annum during the 1970s. Buoyancy of world demand anda relatively favourable domestic policy provided an atmosphereconducive to a rapid growth of exports from India. Thus, India’sexports of merchandise and services grew at the annual rate ofabout 18 per cent and 27 per cent respectively during the 1970s.Joshi and Little (1994), while recognising the importance ofworld demand, attributed the export growth of the 1970s mainlyto the depreciation of the real effective exchange rate (REER),provision of export subsidy and a relatively liberal import policyfor export production. Despite the high growth, India’s share inworld merchandise exports declined to 0.5 per cent during the1970s from 0.9 per cent during the 1960s. This is not surprisingsince the growth rate of world exports remained higher than thatof India during the 1970s.The export boom of the 1970s, however, could not be main-tained during the first half of the 1980s. As the growth rate ofworld exports turned negative in the aftermath of the second oilprice hike, India’s exports decelerated sharply. During the secondhalf of the 1980s, however, the world economy recovered andIndia’s exports grew at a healthy pace (17.8 per cent). Accordingto Joshi and Little (1994), there was a genuine improvement inthe export competitiveness of India during this period due to amajor depreciation of the REER and increased export subsidies.This period also witnessed some doses of industrial deregulationand liberalisation of capital goods imports.IITrends and Patterns of Exportsin Post-Reform PeriodThe process of economic reforms became far more comprehen-sive and systemic after a severe balance of payment crisis in 1991.Significant reforms have been made in terms of the removal ofstate controls on domestic and foreign investment, foreign trade,prices and exchange rates. It was hoped that the policy changeswould boost exports through efficient resource allocation, greaterspecialisation, diffusion of international knowledge and height-ened competition. The pace of India’s export growth, however,has not been distinctly high in the most part of the post-reformperiod but it has accelerated since 2002.3 In what follows, weanalyse the pattern of India’s export growth in the post-reformperiod in more detail. The post-reform period (1993-2005) isdivided into three sub-periods: 1993-97 (the period before theeast Asian crisis); 1999-2001 (the period immediately after thecrisis); and 2002-05 (the period of rapid export growth).Growth of ExportsDuring 1993-97, India’s merchandise exports recorded a growthrate of about 13 per cent per annum and services exports showeda comparable growth rate of about 14 per cent per annum(Table1). This was attained in spite of the appreciation of theREER by about 1 per cent per annum.4 Table 2 shows that theTable 2: India’s Merchandise Exports across CommodityGroups, Average Annual Growth RatesSITCCodeCommodity Group1993-971999-20012002-050Food and live animals14.425.9211.441Beverages and tobacco23.44-12.5413.712Crude materials, inedible, except fuels12.568.8551.123Mineral fuels, lubricants and related-4.14403.0166.654Animal and vegetable oils and fats14.49-16.3523.075Chemicals20.4113.6126.856Manufactured goods classifiedchiefly by material9.702.7419.277Machinery and transport equipments17.1022.1935.478Miscellaneous manufactured articles9.825.5520.729Commodities and transactions notclassified according to kind17.5826.54-3.09Total (excluding SITC 33)13.507.5622.10Total (excluding SITC 33 + SITC 9)13.437.0822.64Source: COMTRADE-WITS (author’s calculations). To compute the growthrates of total exports in the last two rows, export values of SITC 33 andSITC 9 (reported in COMTRADE) are subtracted from the total exports(reported in WTO). The WTO data on total exports are used so thatthese growth rates are comparable with the ones in Table 1. We usethe WTO data in Table 1 as it gives a longer time series (from 1948)than COMTRADE-WITS (from 1962).Table 1: Indicators of India’s Export Growth, 1950-2005(US $ millions)PeriodAverage Annual Growth RatesaIndia’s Share inIndia’s ExportsWorld Exports,of Goods andAveragesServicesGoodsServices bGoodsServices(Per Centof GDP),IndiaWorldIndiaWorldAverages1950-590.226.303.78NA1.39NANA1960-693.588.771.78NA0.90NA4.211970-7917.9720.4126.61NA0.54NA5.201980-852.39-0.863.790.360.470.816.051986-9017.7612.3610.4714.140.480.636.291993-9713.3010.5614.109.220.600.5910.501999-0110.264.099.523.070.661.0712.522002-0525.2917.5845.3615.160.811.6417.19cNotes:aGrowth rates are calculated using semi-logarithmic regressions.bServices represent commercial services excluding governmentservices.cExports (per cent of GDP) for the year 2005 was extrapolated basedon the trend for the previous three years (the average for 2002-04 was16.08).Source:Data on merchandise exports (for 1950-2005) and services exports(from 1980-2005) have been accessed from the WTO website; India’sservices exports for 1950-79 are from the RBI; Exports of goods andservices (per cent of GDP) are taken from the World DevelopmentIndicators database, World Bank.
Economic and Political WeeklyJune 23, 20072421merchandise export growth during this period was, by and large,broad-based with double-digit growth in most of the commoditygroups. Within the services sector, the growth rate of exportswas the highest for the group miscellaneous (which includessoftware) followed by insurance (Table 3). As a result of the slow-down in world demand triggered by the crisis in east Asia,merchandise exports of India (and of the world) in 1998 declinedin absolute value from the level in the previous year. Depreciationof the REER of the rupee by more than 6 per cent between 1997and 1998 could not avert the decline in the value of India’s exports.India’s exports showed signs of recovery during 1999-2001by growing by about 10 per cent per annum.5 The growth rateof merchandise exports declined to about 7.6 per cent if petroleum(SITC 33) exports, which skyrocketed from $ 55 million in 1999to $ 1,929 million in 2000 are excluded from the total.6 As theworld economy fully recovered after the Asian crisis, India’smerchandise exports showed a high growth rate of about 25 percent per annum during 2002-05 (22 per cent if petroleum exportsare excluded). In particular, services exports showed exceptionalperformance, growing at the rate of 45 per cent per annum. Thegrowth was broad-based with almost all the commodity groups(except SITC 9) and services sectors showing double-digit growthrates (see Table 2 and Table 3). It is significant that this highgrowth occurred despite the appreciation of the REER by about1 per cent per annum during the period.7The latest (provisional) data indicates that the growth momen-tum of the previous four years continued, by and large, in 2006.The cumulative value of India’s merchandise exports duringApril-March 2006-07 was $ 124.6 billion (provisional) as against$ 100.6 billion (provisional) in 2005-06. The growth rate ofmerchandise exports in 2006-07 over the previous year on a like-to-like basis is 23.8 per cent.8 This has been attained in spiteof the appreciation of the REER by about 2.8 per cent duringApril-January of 2006-07.In sum, India’s exports during the post-reform period have beengrowing faster than the rate of growth of world exports. Thisis in contrast to the pattern observed for the pre-reform period,particularly during 1950-80. It appears that the growth of worlddemand is the most important determining factor of India’smerchandise export growth for both the pre- and post-reformperiods. The strong correlation of India’s exports with worldexports during the post-reform period is evident from the figure.It is tempting to conclude that the appreciation of the REER inthe post-reform period has not had any adverse effect on exportgrowth. In order to make a firm conclusion, however, it isimportant to control for other factors that determine the growthof exports.9 The growth decomposition exercise carried out inSection III provides some insight into this issue.Market Share, Commodity Composition,and Comparative AdvantageTable A-1 in the Appendix presents the composition of India’sexports and market shares (share of India’s exports in worldexports) at the 2-digit level of commodity disaggregation. Asmany as 46 product groups (out of the total number of 59) showan increase in their market shares in 2005 compared to 1993.Only nine product groups show a decline in their market shareswhile no change has been observed for the remaining four groups.The increase in the market share can be seen in all groups atthe 1-digit level of commodity disaggregation. In the recentperiod – that is from 2002 to 2005 – the market shares of 37product groups increased while there has been some decline inthe case of 17 groups. The groups that gained market sharessignificantly between 1993 and 2005 include: metalliferous oresand metal scrap (SITC 28); textile fibres, not manufactured (SITC26); crude chemicals (SITC 52); crude fertilisers and minerals(SITC 27); cereals and cereal preparations (SITC 04); textile yarn,fabrics, made-up articles (SITC 65); petroleum and petroleumproducts (SITC 33); clothing (SITC 84); chemical elements andcompounds (SITC 51); non-metallic mineral manufactures (SITC66); iron and steel (SITC 67), etc.Some changes notwithstanding, it appears that the structureof India’s merchandise exports at the 2-digit level shows arelatively high degree of persistence over time (see column 3,Table A-1).10Spearman’s rank correlation coefficients are es-timated to gauge the extent of structural changes over time inIndia’s exports. Between 1993 and 2005, the correlation coef-ficient of the shares of various commodities (at the 2-digit level)in India’s total exports is 0.92. The correlation coefficient between2002 and 2005 is as high as 0.98. The high positive correlations(both significant at the 1 per cent level) suggest that there havebeen no major structural changes (at the 2-digit level) in India’smerchandise exports during the post-reform period. These cor-relations, however, do not rule out any structural changes thatmight have occurred within the 2-digit groups.Previous studies by this author, using highly disaggregatedtrade data (4-digit level) for the period 1988-2001, showedsignificant growth of intra-industry trade in India’s multilateraltrade during the post-reform period [Veeramani 2002, 2004].Intra-industry trade refers to the simultaneous occurrence ofexports and imports within the same 4-digit industry. Updatedestimates for the period 2001-05 show further increases in theshare of intra-industry trade in India’s trade flows.11 Growth ofintra-industry trade is a manifestation of specialisation in narrowproduct lines and resource reallocation within the industry asopposed to between industries. Econometric analysis, using paneldata from Indian industries, showed that the reduction of tradebarriers contributed significantly to the increase in the intensityof intra-industry trade [Veeramani 2007a]. Thus, while we donot observe major structural changes at the 2-digit level, analysisusing more disaggregated data suggests significant structuralchanges within the narrowly defined industries.A comparison of the export structure of India with that of theworld (excluding India) helps us to identify the product groupswhere India has a comparative advantage (see columns 3 and4,Table A-1). We say that India has a comparative advantage inTable 3: India’s Services Exports across Sectors, AverageAnnual Growth RatesSector1993-971999-20012002-05Travel7.671.6533.25Transportation6.5712.5136.40Insurance18.2611.6647.22Miscellaneous25.994.2649.81Miscellaneous of whichsoftwarea.NA7.27a35.29Total commercial servicesb13.964.8345.59Notes:aValue of software for the year 1999 was estimated based on the shareof software in miscellaneous in 2000 (RBI has been reporting separatedata on software exports from the year 2000 onwards).bExports of Government not included elsewhere (Gnie) are excluded.Source:Reserve Bank of India.

Δ=∑ +∑ −∑ +Δ− ∑X rX rX rX X rX

iiii ii iii i


1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Economic and Political WeeklyJune 23, 20072424potential offered by the growth of world demand ($7,615). Thedifference is attributable to the positive market distribution effect(12 per cent). The commodity composition effect, however,turned negative once again (–6 per cent) and so did the competi-tiveness effect (–3 per cent). The second half of the 1980swit-nessed a sharp depreciation of the REER, which might havehelpedIndia to exploit the growing world demand. In the case of servicesexports, however, the actual growth remained below thepotential.Decomposition of Export Growth,Post-Reform Period (1993-2005)Throughout the post-reform period, the actual growth rates ofIndia’s merchandise and services exports have been above thepotential offered by the growth of world trade (Tables 5and6).It is significant that the gap has been mainly explained by thepositive competitiveness effect. From 1993 to 2005, India’smerchandise exports increased by $ 80,493 million, which wasclearly above the potential offered by the growth of world trade($ 46,241 million). The positive competitiveness effect (49 percent) more than offsets the negative commodity compositioneffect (–12) resulting in the superior performance. This resulthas not been particularly driven by the rapid growth of exportsfrom India since 2002: the competitiveness residual remainspositive and high at 45 per cent for the period 1993 to 2000 and46 per cent for the period 1993 to 2001.Breaking the period 1993-2000 into two sub-periods (1993-97and 1997-2000), however, reveals that the positive competitive-ness effect is attributable mainly to the second period. Thecompetitiveness residual was only 20 per cent for the sub-period1993-97 while it was 73 per cent for the sub-period 1997-2000.Value of the competitiveness residual is even higher (77 per cent)if we consider the sub-period 1997-2001.From 2002 to 2005, India’s exports increased by $ 51,131million, which is mainly explained by the world trade effect (78per cent). It may be emphasised that the competitiveness effect,though positive (15 per cent), has not been the major factor behindthe acceleration of India’s export growth in the recent years. Thisis not surprising given the appreciation of the REER during thisperiod. That exports did grow rapidly since 2002 despite theappreciation of the REER should not be taken to mean that thelatter had no adverse effect on the former. The actual increaseof exports (and hence value of the competitiveness residual)would have been larger had the REER not appreciated.The positive market distribution effect for both the pre- andpost-reform periods underscores the Indian exporter’s ability toexploit the relatively fast growing international markets. Thecommodity composition effect, however, has been negativeforboth the pre- and post-reform periods, which is indicativeof specialisation in the “wrong” commodities. Commoditycompositionhas become less serious, a problem in the recentyears than in the past with the increasing product diversificationof exports from India.20 Competitiveness residual remains positivethroughout the post-reform period although its magnitude variesfor different sub-periods. As mentioned earlier, the residualcaptures both the price and non-price factors of export competi-tiveness. Thus, despite the possible erosion of price competitive-ness in some of the post-reform years, as reflected in the ap-preciation of the REER, the competitiveness residual may wellremain positive if there have been improvements in the non-pricefactors.21A somewhat puzzling relationship may be noticed in the post-reform period between the pace of merchandise export growthand magnitude of the competitiveness residual: whenever theexports grew relatively faster, the residual showed a relativelysmaller value and vice versa. When exports (of India and theworld) showed relatively high growth between 1993 and 1997,the value of the residual was just 20 per cent. In contrast, whenthe growth rate (of India and the world) slowed down during1997-2001, the residual increased to 77 per cent. Again, whenthe growth rate (of India and world) accelerated in 2002, thecompetitiveness residual fell to 15 per cent.22We believe that the relationship discussed above is reflectiveof the intervention strategy of the Reserve Bank of India in theforeign exchange market since the switch to the floating exchangerate regime in 1993. It appears that whenever world demand slowsdown, the central bank’s interventions are intended to achievea significant depreciation of the REER so as to moderate thefall in the growth rate of India’s exports.23 For example, from1997 to 2001, a period that witnessed a significant slowdownin the world demand, the REER depreciated by about 3.6 percent and the nominal effective exchange rate (NEER) depreciatedby about 2.7 per cent. If the intervention was indeed successful,it may show up as an increase in the competitiveness residual.Note that the competitiveness residual showed a high value of77 per cent for 1997-2001, which may indicate the effectivenessof central bank intervention.The central bank, however, may not be very concerned aboutthe currency appreciation whenever world demand is buoyant.Thus, from 2002 to 2005, the REER and NEER appreciated byabout 4.3 per cent and 3.6 per cent respectively, and consequently,the competitiveness residual fell to 15 per cent. Whenever thepace of world demand growth is satisfactory, it is likely that thecentral bank interventions, if any, are intended to slow down thespeed of the REER appreciation (smoothing) rather than toreverse the trend.Table 6: Growth Decomposition of India’s ServicesExports, 1980-2005(in millions of US $)PeriodActual ChangeWorld TradeCommodityMarket Distributionin the ExportsEffectCompositionand Competitivenessof IndiaEffectEffects1980-86275650241-616(100)(236)(88)(-224)1986-901473232834-889(100)(158)(2)(-60)1993-200551485720820244075(100)(14)(0.4)(85)1993-2000109952936-1068165(100)(27)(-1)(74)1993-2001117642947-1358952(100)(25)(-1)(76)1993-9738912020-441915(100)(52)(-1)(49)1997-200071041160285916(100)(16)(0.4)(83)1997-200178731173416659(100)(15)(0.5)(84)1997-2002102001901648235(100)(19)(0.6)(80)2002-0536969972435326892(100)(26)(1)(72)2000-0540064992673429404(100)(25)(2)(73)Note:Figures in parentheses are percentage shares.Source:Estimated using WTO data.
Economic and Political WeeklyJune 23, 20072425AppendixTable A-1: Commodity Composition of Exports, India and World (Excluding India)SITCComposition of India’s ExportsComposition of World ExportsaIndia’s Share in the World ExportsCodeDescription(3)(4)(5)(1)(2)1993199720022005199319972002200519931997200220050Food and live animals:15.4715.9611.538.037.616.855.865.0412.9713.8314.5814.0200Live animals0. and meat preparations0.500.630.550.611.100.910.780.730.290.460.600.7902Dairy products and eggs0. and fish preparations3.693.522.751.551.010.890.840.632.282.542.742.3204Cereals and cereal preparations2.022.793.351.731.311.170.940.760.971.562.972.1405Fruit and vegetables2.492.201.771.551.511.341., sugar preparations and honey0.270.220.780.190.350.350.270.230.490.432.410.7907Coffee, tea, cocoa, and spices2.963.631.461.000.520.640.440.393.513.622.732.3908Feed-stuff for animals3.422.770.621.100.500.460.380.294.213.861.393.5009Miscellaneous food preparations0. and tobacco:0.730.870.460.331.251.150.990.930.821.141.111.2011Beverages0. and tobacco manufactures0.670.850.410.290.550.500.330.240.771.111.051.142Crude materials (inedible, except fuels):5.544.974.266.953.743.642.992.997.457.509.3914.3021Hides, skins and fur skins0., oil nuts and oil kernels0.390.740.290.310.280.320.260.200.871.510.941.4523Crude rubber0., lumber and cork0. and paper0. fibres, not manufactured1.030.780.180.780.480.500.330.251.351.030.462.9427Crude fertilisers and crude mineral0.890.510.810.690.310. ores and metal scrap2.271.682.074.390.750.810.711.061.901.352.423.8229Crude animal and vegetable materials, nes0.951.240.820.620.410.350.320.281.452.322.152.083Mineral fuels, lubricants:, coke and briquettes0. and petroleum products1.831.075.0411.315.545.186.788.600.210.140.631.2534Gas, natural and manufactured0.340. energy0. and vegetable oils and fats:0.460.520.340.300.420.500.410.371.271.521.962.1941Animal oils and fats0. vegetable oils and fats0.410.440.230.230.310.400.310.290.840.720.640.7443Oils and fats, processed0. elements and compounds2.363.744.215.192.842.933.083.280.530.841.161.5052Crude chemicals0., tanning and colouring materials1.411.411.170.830.640.640.580.541.391.451.691.4454Medicinal and pharmaceutical products2.212.783.442.821.481.602.733.190.941.141.070.8455Perfume materials, toilet and cleansing0.690.540.550.500.750.780.880.930.590.460.530.5156Fertilisers, manufactured0. and pyrotechnic products0. materials, etc0.340.741.461.652. materials and products, nes0.431.030.971. classified chiefly by material:41.5639.2639.1433.0816.1415.8414.2814.5013.4313.0518.1917.3361Leather and products and dressed fur skins2.471.911.670.970.490.460.410.333.142.673.402.7462Rubber manufactures, nes1.110.940.910.860.830.830.780.770.850.741.001.0763Wood and cork prodts excluding furniture0., paperboard and manufactures0.160.240.490.401.841.821.741.500. yarn, fabrics, made-up articles13.3215.3511.728.153.363.102.592.082.473.183.723.6266Non-metallic mineral manufactures17.8614.3216.1612.872.131.981.961.985.074.586.585.8767Iron and steel3.623.624.555.242.872.842.383.210.800.841.611.5468Non-ferrous metals0.600.781.201.841.732.011.741.950.220.260.580.8969Manufactures of metal, nes2.202.022.372.672. and transport equipments:6.928.158.6310.9839.4641.3342.1341.120.330.390.520.7771Machinery, other than electric2.873.473.454.2814.9315.7514.8915. machinery and apparatus1.392.052.742.6811.7413.6214.3214. equipment2.662.642.444.0112.7911.9612.9212. manufactured articles:19.5618.8018.5516.5614.9713.9313.7012.575.485.807.278.3081Sanitary, plumbing, and heating0. goods, handbags and similar0.910.920.660.540.310. and control instruments0.330.430.500.513. manufactured articles3.303.654.505.245.214.674.814.500.400.510.791.119Commodities and transactions notclassified according to kind:, nes, incl zoo animals0. of war and ammunition0., other than gold coin0. India’s exports excluded from world exports for computing the market distribution of world exports.
Economic and Political WeeklyJune 23, 20072427of their foreign exchange in the free market and 40 per cent to thegovernment at the lower official price. The official and market exchangerates were unified with the introduction of full convertibility.2See Bhagwati and Desai (1970) and Nayyar (1976). The June 1966devaluation was seen as a substitute for the existing export promotionmeasures. However, the expected push on export sales did not occur afterthe devaluation, and therefore re-introduction of subsidisation becameinevitable. See Bhagwati and Srinivasan (1975) for a detailed analysisof the 1966 devaluation.3In particular, when compared to China, India’s export performance leavesmuch to be desired. China’s share in world exports is as high as 8 percent in 2006 while India’s share is only 1 per cent. See Veeramani (2007b)for an analysis of India’s export performance in comparison to China.4The indices of REER reported in different parts of the paper are basedon the 36 currency bilateral (export) weights (base: 1993-94 = 100) takenfrom the RBI’s Handbook of Statistics. The annual averages for thecalendar years are selected.5It may be noted that the growth rate of services exports for the period1999-2001 shown in Table 1 (9.5 per cent) is significantly different fromthe one reported in Table 3 (5 per cent). Growth rates in Table 1 arebased on the UN-COMTRADE database while those in Table 3 are basedon the RBI data.6Exclusion of SITC 9, however, does not significantly affect the overallgrowth rate due to its small share in total exports.7At the same time, a major increase in India’s merchandise trade deficitcan be noticed since 2002. This has been mainly on account of the oilimport bill, which posted a hefty increase, though a higher non-oil importbill also contributed to the widening trade deficit since 2004. The risingnon-oil imports could be reflective of enhanced domestic activity, andif so, can be considered a healthy development. The strong performanceof services exports has not been sufficient to check the rising currentaccount deficit, which, however, is not a cause for immediate concerndue to a healthy capital account surplus.8The white paper on ‘Methodology for Computation of Growth Rates forExports and Imports’ published by the department of commerce statesthat it is appropriate to compare the provisional figure of the currentyearwith the provisional (rather than the revised) figure of the previous year.9Srinivasan and Tendulkar (2003, p 34) note that “the negative elasticityof exports with respect to exchange rate movements did not changesignificantly from the 1980s to the 1990s”. References to a number ofother studies on the relationship between exchange rate and exports canbe seen in Mallik (2005).10The most visible change in the structure of merchandise exports is therise in the share of petroleum (SITC 33) exports from about 2 per centin1993 to about 11 per cent in 2005. Available estimates for the year 2006show that the share has further increased to 16 per cent. The structureofservices exports show significant changes over the years. In 1993, travelaccounted for the highest share (42 per cent) of India’s services exports,followed by miscellaneous (28 per cent) and transportation (27 per cent).In 2005, however, miscellaneous accounted for the highest share (75per cent) of India’s services exports: software accounted for68 per centof miscellaneous in 2002, which declined to 51 per cent by2005. Inthe recent years, business services has become the second largest com-ponent of India’s services exports (source: estimated from the RBI data).11A detailed discussion of this issue is beyond the scope of this paper.12Dividing the share of product group i in India’s exports by the shareof product group i in world exports gives the index of revealed comparativeadvantage [Balassa 1965]. A value greater than 1 implies that India hasa comparative advantage in the product group i and vice versa.13The revealed comparative advantage (RCA) index at the 2-digit levelcan mask important heterogeneities within the 2-digit group. Veeramani(2007b) shows that almost all the product groups contain certain productlines where the RCA values are greater than 1. This implies specialisationin narrow product lines within the product groups.141962 is the earliest year for which data are available in COMTRADEand 2005 was the most recent year for which data were available at thetime the analysis was carried out.15The market groups are according to the UN classification of geographicalregions. These are the same as shown in Table A-2 in the Appendix.16We believe that the market distribution effect is much less importantfor services exports compared to merchandise exports as the demandsources of the former are geographically more concentrated than the latter.17Just three primary and resource based commodity groups – food andliveanimals (SITC 0); crude materials (SITC 2) and textiles (SITC 65) –accounted for nearly 85 per cent of India’s total exports in 1962. The worlddemand for these commodities, however, had grown relatively slowly from1962 to 1970. This explains the negative commodity composition effect.18Just four commodity groups accounted for nearly 81 per cent of India’stotal exports in 1970, which includes the three groups mentioned above(SITC 0, SITC 2 and SITC 65) and “other manufactured goods classifiedchiefly by material” (SITC 6 – (65 + 66). All these groups, showeda decline in their shares in the total world exports in 1980 comparedto 1970, which means that the world demand for these commodities grewrelatively slowly. Therefore, the negative commodity composition effectduring 1970-80 is not surprising.19This contradicts Joshi and Little (1994, p 270) who argue that “inadequatecompetitiveness must take a large part of the blame although slow growthof world demand contributed to some extent”.20The commodity composition effect remains negative for the post-reformperiod. This could be related to one of the following. First, India’scomparative advantage lies in commodities where the growth rate ofworld demand has been relatively small. Second, domestic factor marketrigidities (like those in the organised labour market) and other bottlenecks(for example, infrastructure constraints) might be standing in the wayof reallocating resources on the basis of the considerations of comparativeadvantage and changing international demands for different commodities.See Banik (2001) for a discussion on the various supply side constraintsthat the Indian exporters have been facing in the post-reform period.21For example, India’s increasing intra-industry trade reflects improvementsin the non-price factors such as product differentiation and scale economies.22A similar pattern can be observed for the 1980s: the competitivenessresidual was 11 per cent for the first half of the 1980s (period of slowexport growth from India and stagnant world exports) but it turnednegative for the second half of the 1980s (period of relatively higherexport growth for both India and world).23When the authorities aim at putting a break on the recent trend of theexchange rate movement, it is called “lean-against-the wind” interventions.For example, when the rupee has appreciated, the interventions to sellthe rupee are regarded as the lean-against – the-wind operations. Thiscan be further subdivided into an intervention that is intended to reversethe trend (that is, the rupee depreciates due to intervention), and anintervention that is intended only to slow down the speed of appreciation[Ito 2002]. Kohli (2003) finds that the central bank intervention behaviourduring 1993-99 in India was characterised by a significant effort to lean-against-the-wind.ReferencesBalassa, B (1965): ‘Trade Liberalisation and Revealed ComparativeAdvantage’, Manchester School of Economics and Social Studies, 33(1):99-123.Banik, N (2001): ‘An Analysis of India’s Exports during the 1990s’, Economicand Political Weekly, Vol 36 (44): 4222-30.Bhagwati, J and P Desai (1970): India: Planning for Industrialisation,Oxford University Press, London.Bhagwati, J and T N Srinivasan (1975): Foreign Trade Regimes andEconomic Development: India, Columbia University Press, New York.Ito, Takatoshi (2002): ‘Is Foreign Exchange Intervention Effective? TheJapanese Experiences in the 1990s’, NBER Working Paper 8914.Joshi, V and I M D Little (1994): India: Macroeconomics and PoliticalEconomy, 1964-1991, World Bank and Oxford University Press,Washington DC and New Delhi.Kathuria, S (1996): ‘Export Incentives: The Impact of Recent Policy Changesin India’, Indian Economic Review, Vol 31 (1): 109-26.Kohli, R (2003): ‘Real Exchange Rate Stabilisation and Managed Floating:Exchange Rate Policy in India, 1993-2001’, Journal of Asian Economics,Vol 14 (3): 369-87.Leamer, E E and R M Stern (2006): Quantitative International Economics,Aldine Transaction (paperback edition): New Brunswick and London.Mallik, J K (2005): ‘India’s Exports: Policy Defeating Exchange RateArithmetic’, Economic and Political Weekly, Vol 40 (52): 5486-96.Nayyar, D (1976): India’s Exports and Export Policies in the 1960s,Cambridge University Press, Cambridge.Srinivasan, T N and S Tendulkar (2003): Reintegrating India with the WorldEconomy, Oxford University Press, New Delhi.Veeramani, C (2002): ‘Intra-Industry Trade of India: Trends and Country-Specific Factors’, Weltwirtschaftliches Archiv (Review of WorldEconomics), Vol 138 (3): 509-33.– (2004): ‘Growing Intra-Industry Trade in Manufacturing: Implications forPolicy’, Economic and Political Weekly, Vol 39 (41): 4556-59.– (2007a): ‘Trade Barriers, Multinational Involvement, and Intra-IndustryTrade: Panel Data Evidence from India’, Applied Economics(forthcoming).– (2007b): ‘India and China: Changing Patterns of Comparative Advantage’in Kirit Parikh and R Radhakrishna (eds), India Development Report2006 (forthcoming), Oxford University Press, New Delhi.

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