INDIA’S EXPORTS

1968-99

I Introduction

Export expansion can play an instrumental role in promoting rapid economic

growth. Since exports are a component of GDP, rapid export growth means an even
faster growth of GDP, through the Keynesian multiplier process. Moreover, export
expansion increases efficiency in the economy, which further stimulates economic
growth. This increase in efficiency takes place in three ways: firstly, through the
exploitation of increasing returns to scale by producing for a larger market, as Adam
Smith emphasised. Secondly through more efficient allocation of resources by
specialisation in accord with comparative advantage, elucidated by David Ricardo and
thirdly, through fiercer competition, which encourages innovation, product and
process improvements and cost reductions. In a developing country, by relaxing the
foreign exchange constraint and increasing import capacity, export orientation can
provide another fillip to the growth process.

For decades, our planners ignored exports as a means to increasing national

income. Exports were to be resorted to only for earning as much foreign exchange as
the country needed to meet its ‘essential’ 1 import requirements. India’s Import
Substitution policy with emphasis on heavy and basic industries and public sector
dominance succeeded in its proximate aim of isolating India from the rest of the world
and building an industrial base, but its ultimate aim of elimination of absolute poverty
and deprivation was still beyond grasp when the policy was abandoned in 1991. With
the objective of export expansion having been given its due place in the list of tools to
be used for economic development, analysis of its past performance assumes greater
importance.

This study analyses the trends in aggregate Indian exports and its constituent
commodity groups in the decade before and after 1991, and their responsiveness to

1
The essentiality being defined by the government itself.
1
demand and supply stimuli, for a longer period of 1968-99. The focus is on volume
growth rather than growth of value of exports in order to isolate quantity from price
changes. An increasing volume of exports reflects the country’s increasing capacity to
generate exportable surpluses. Moreover, an increasing value of exports based solely
on price increases can hardly be sustainable in the long run, even if it increases import
capacity in the short run.

The paper is organised as follows: Section II gives a brief review of recent

empirical work on Indian exports. Section III presents the methodology used in
computation of export trends and analysis of demand and supply functions. Section IV
summarises the trend regressions and analysis and Section V the results of estimation
of demand and supply functions. Concluding observations appear in the final section.

II Indian Exports: Recent Research and its Outcomes

Indian exports have received considerable empirical attention in the past. Two
distinct strands of research are reviewed here: the first one compares Indian export
performance with that of other Asian countries, with respect to growth rates,
commodity composition, terms of trade, price competitiveness, world market shares
etc. and relates this performance to domestic growth. The focus is on evaluating how
well or poorly India has performed given the potential, that potential being measured
by performance of other Asian countries, which share some characteristics of the
Indian economy. The studies cover periods of flourishing world trade and economic
activity, as well as periods of turbulence and slow growth. The picture that emerges is
that though our post 1980’s performance is an improvement over earlier years, it pales
significantly when compared with that of other Asian countries, and that it is domestic
rather than international factors that are responsible for this. The second strand of
research further strengthens this argument by providing evidence that the elasticities
of our exports with respect to world income, exchange rate depreciation and price
changes are large enough to be exploited for significant income gains, and stagnation
of exports is not the fait accompli of a developing country.

2
II.1 Tracking Indian Exports: Actual vs. Potential

The reforms process that was initiated in 1991 sought to integrate the Indian
economy with the world and to improve the incentive structure towards more efficient
utilisation of resources so as to achieve faster economic growth, reduction of absolute
poverty and promotion of human development. The essay by T N Srinivasan (1998)
is a stocktaking exercise at the end of seven years of reforms, aimed at deriving
lessons from the past so as to direct future economic policy in a way that is most
conducive to achieving its aims. It begins with a review of the recent empirical
research on the relationship between economic growth and openness and argues for a
positive effect of trade liberalisation on long run growth rate of the economy and on
its likelihood of convergence in terms of income per capita and per worker, with other
open economies. Next, a non-structural, eclectic model of India’s exports during
1963-94 is estimated. Export performance is measured in 2 ways for each year - the
value of India’s exports in US dollars and India’s share in world exports. The
following equations were estimated:

ln ES = α 0 + α1 ln REERsa + α 2 ln(realGDP ) + α 3t + α 4 ln ES −1 + µ

ln ES = α 0′ + α1′ ln REERsa + α 3′t + α 4′ ln ES −1 + µ ′

ln EX = β 0 + β1 ln REERsa + β 2 ln(realGDP) + β 3 ln EXW + β 4t + β 5 ln EX −1 + υ

ln EX = β 0′ + β1′ ln REERsa + β 2′ ln(realGDP) + β 3′ ln EXW + β 5′ ln EX −1 + υ ′

where ES = India’s export share in total world exports

EX = value, at current prices, of India’s exports in US dollars
EXW= value, at current prices, of World exports in US dollars
REERsa = Index of (1985 = 100) real effective exchange rate adjusted for
export incentives

Real GDP = Indian Gross Domestic Product at 1980-81 prices.

t = time

3
 The price elasticity of exports (respectively export share) is estimated to be
negative and in the range (-0.304, -0.278) (respectively -0.225, -0.162) in the short
run and (-0.493, -0.537) (respectively –0.444, 1.690) in the long run. The coefficient
of real GDP is positive and highly significant in both equations, implying domination
of supply effect. The coefficient of world exports is positive and that for time trend is
negative, implying that all the time varying exogenous factors not included in the
model have on the whole been detrimental to Indian exports. These findings lead the
author to conclude that price competitiveness of India’s exports is an important
determinant of the volume of exports and that rupee depreciation can have a
significant positive effect on its current account balance.

The study also makes a comparative analysis of India’s export competitiveness

since the mid-1980’s. The trends in India’s world market share in selected labour
intensive commodities (for example, textiles, garments, leather manufactures and
gems and jewellery), in which India should have gained market shares that the
developed countries and some East Asian countries lost due to rising labour costs, are
compared with those of other developing countries. It is clear from the analysis that
India could have done better in terms of gaining market share and has in certain
commodities lost share to other developing countries. The policy implications derived
from these include an urgent addressing of the infrastructural constraints, which
would improve export competitiveness not only by reducing costs, but also by
attracting Foreign Direct Investment (FDI); completion of financial sector reforms and
avoidance of inflationary financing of fiscal deficits in order to prevent real
appreciation of the rupee.

The paper by Veena Mishra (1998) is an extensive documentation of India’s

export performance and the various policy regimes in force since independence that
explain its dismal nature. The external sector is rightly seen as being influenced not
only by foreign trade policies but also by the whole plethora of controls on economic
activity - in the form of industrial licensing, import controls, labour laws, exchange
rate controls and the thoroughly unplanned nature of incentives that they resulted in –

4
that managed to prevent India from reaping the gains from a liberalising and growing
world in the post World War II period.

The actual export performance is then put in perspective of what could have
been by comparing India’s rate of growth of exports (aggregate and sector wise) and
its shares in total world exports since independence with those achieved by some
other developing countries, e.g. China, Brazil, Indonesia, and South Korea.
Comparisons of specific industries and sectors (e.g. Iron and Steel industries of India
and South Korea), where the differences in performance have been particularly
striking are made. The restrictiveness of import regimes as indicated by licensing and
quota restrictions, tariff rates and tariff collection rates are also compared with those
of other countries. However, the study does not compare different indicators across
the same set of countries. In each category, comparisons are done across different
countries, a technique that does not give a clear picture of where India stands vis-à-vis
other developing countries.

The next part of the study deals with the economic crisis of 1991 – its causes,
the wide-ranging reforms that were initiated as a response and their consequences on
the economy as a whole and at the firm (micro) level. It also elucidates the next
logical steps in reforms – reforms of policies relating to Small Scale Industries
reservation and labour laws - that economists and industrialists have been asking for,
for years but that are yet to be touched upon due to lack of political will. The study
also brings out the seriousness of the infrastructural bottlenecks prevailing in the
country which, as long as they exist, will continue to mitigate any beneficial impacts
that policy reforms may have.

In two comprehensive, cross country studies, Tendulkar emphasises the role

that export orientation can play in Indian development, by placing Indian experience
in the context of countries that have either adopted export orientation as a conscious
choice in the past or are in the process of trade liberalisation. The focus is on
exploring long term trends, and the analysis is done for sub-periods of a decade or
more.

5
 In the 1999 study, Tendulkar first establishes that over the long historical
period of almost 3 centuries, opportunities for mutually gainful exchange (as
measured by volume growth of exports) have always grown faster than world GDP,
except for the brief aberration of the period, 1913-50. This relationship is explored in
greater detail for the period 1963-95. He computes trend rates of growth and gross
elasticities of total merchandise, agricultural and manufacturing exports with respect
to world GDP and world production, based on two-variable time series regressions
and finds that trade offered opportunities irrespective of conditions of the world
trading environment and that prospects for manufacturing exports appear to have been
brighter than those for agricultural exports in the recent period.

The next part of the paper explores the relationship between exports and
economic growth on the basis of an international cross-section of 31 industrial
countries. A single equation model is used, because the author expects the broad
directional conclusion not to change if a simultaneous equation model postulating a
two-way causal relationship between exports and economic growth is used. The
economy is assumed to be divided into two vertically integrated Export (X) and Non
Export (N) sectors. Externalities generated by Export for Non Export sector are
incorporated by assuming:
N = f (K n , Ln , X )

where K n and Ln are capital and labour employed in non-export sector.

Taking GDP (Y) to be a sum of X and N, the estimated equation is:

R y = a (I / Y ) + bRl + c( X / Y )Rx + dRx

where I/Y= rate of investment

X/Y = share of exports in GDP.
R y , R l , R x are rate of growth of GDP, workforce and exports
respectively.
The period 1966-95 is divided into 3 sub-periods - 1966-73, 1973-83 & 1983-
95. The growth of export volume is found to be statistically significant in all 3-sub
periods. Both R l and the Feder variable [(X/Y)R x ] were statistically insignificant. The
6
coefficient of export volume growth varied in a narrow range, between 0.26 and 0.29,
with the upper limit being registered for the period 1973-83. These results confirm
that contribution of export volume growth to economic growth is independent of
world trade situation.

Further evidence is provided by comparing India’s performance with 9 Asian

countries - South Korea, Taiwan, China, Thailand, Malaysia, Indonesia, Pakistan,
Bangladesh and Philippines for the 3 sub periods. The countries’ performance is
compared with respect to the following indicators:

a) Gross elasticity of each country’s export volume with respect to the world trade
volume. This reflects their degree of success in exploiting world trading
opportunities.
b) Volume growth of country’s exports which indicates its success in generating
exportable surpluses.
c) Net barter terms of trade 2, which represent the terms of exchange, associated
with export volume growth.
d) Income terms of trade 3, which reflect import capacity of export earnings.

The analysis indicates that rapid economic growth is associated with rapid
volume growth of exports and that in the period of higher world trade, this association
becomes stronger.

This study lastly compares India’s export performance of manufactured

products with that of China, both at the disaggregated 3-digit SITC level and in terms
of the following six broad categories of products: Resource intensive, Labour
intensive, Scale intensive, Differentiated products, Science based products and the
Miscellaneous category.

2
Net barter terms of trade are the ratio of unit value index of exports to the unit value index of imports.
3
Income terms of trade are the product of net barter terms of trade and the unit value index of exports.
7
 Besides comparing rate of growth and percentage share in world exports in
different categories, the study also computes Balassa measures of Revealed
Comparative Advantage (RCA). RCA is defined as the ratio of 2 shares:

a) Share of country’s exports to world exports in the same SITC category and
b) Share of country’s total exports of manufactured products to total world
exports of these products.

While recognising the crudeness of RCA measure because of its ambiguity - a

country with decreasing world market share in a particular commodity might show an
increasing RCA over time if the market share of its overall export basket is declining
even faster - the author justifies its use by citing its ease of computation and the non-
observability of autarky point in multilateral trading necessitating macro level
inference of comparative advantage. He uses RCA computed for each sub-period to
group the products where India shows comparative advantage and then track the
movement of shares of these products in India's export basket. Agrawal et al. (2000) 4
also make RCA comparisons but their analysis runs the other way round - they
compute RCA for broad categories of products over time to infer where each country
is increasing its competitiveness and then look at whether this increase in
competitiveness (for manufactured products only) is real or spurious (caused by a
more rapid fall in denominator).

The picture that emerges is that while India has increased the share of
conventional labour intensive items like textiles in its total exports, China has reduced
their share while diversifying its exports into certain products within the labour
intensive category and outside. China’s overall better growth and export performance
was a direct result of its fast opening up in the period 1980-96; and India’s
performance has been commensurately worse.

‘An analysis of India’s exports during the 1990’s’ by Nilanjan Banik (2001) is
an investigation - but sadly, not an objective one - into the factors causing

4
Discussed in more detail later.
8
deceleration in Indian export growth in the late 1990’s. The paper identifies the nature
of the slowdown, and outlines the demand and supply constraints, in the form of trade
barriers, price competitiveness, procedural bottlenecks, product and factor market
distortions and poor infrastructure, that have been (or have the potential of becoming)
the stumbling blocks for Indian export growth. But in doing so, the paper clearly
reflects the author’s anti-globalisation-export pessimistic sentiments. In examining
India's export profile and shares in world exports, the author finds them quite similar
to that of South East Asian countries. Perplexingly, the analysis of the same table
(Table 2 in the article) tells another story: the 0.82 per cent share of Woven,
Manmade fibres/fabric India’s exports seems to me nowhere similar to 20.26 per cent
of Korea and 6 per cent of China, nor a 0.138 per cent share of electrical machinery in
India similar to 3.15 per cent in China or even 0.97 per cent of the much larger value
of exports of Thailand. In analysing India’s price competitiveness, the author finds
that India’s poor performance during the first three quarters of 1996-97 was not
triggered by a fall in Indian competitiveness vis-à-vis other South East Asian
countries. It was only in 1997, with the depreciation of South East Asian currencies,
that India lost its competitive advantage. Then what explains the sharp fall in exports
in 1996? This question is left unaddressed.

The author also finds that the volume of imports of industrial countries did not
fall in 1996 and 1997, rather they grew faster than before for US and UK, implying
that there was no lack of potential demand for Indian products. This finding should
suggest a role of India’s supply factors in causing the slowdown. But Mr. Banik looks
the other way - he attributes the lack of actual demand for Indian exports to Non-
Tariff Barriers (anti-dumping duties, countervailing duties, quotas, sanitary and
phyto-sanitary measures, rules of origin, property rights, service barriers et al.), that
are becoming popular amongst WTO members. These measures exist, no doubt. But
the questions to ask are the following: was there a significant increase in such
measures in 1996? Was this increase targeted at products of greatest importance to
India, so as to cause the sharp fall in growth of export volumes? Was this increase
targeted only against Indian exports or against exports of all Less Developed
Countries (LDCs), and if so, did these other LDCs also suffer such a sharp drop in

9
volume growth? If this was the case, then how did the industrial countries manage to
increase their import volumes? It seems reasonable to me that since India is not a
major exporter to any of the industrial countries, and other South Asian countries are
far larger suppliers, protectionist sentiments against products of these countries would
be greatest, and therefore these countries would be the first ones to face barriers.
Without a thorough understanding of these issues, to blame our poor performance on
demand factors seems like nothing but a modern version of the Prebisch-Singer
theory.

The paper by Hajra and Sinate (1997) gives a detailed decade wise analysis of
Indian trade performance since independence, relating it to domestic policies and
external developments. It also discusses some issues in India’s foreign trade viz.
trade-growth linkage, movements in India’s terms of trade and competitiveness of
India's export sector. Export growth since independence is explained in terms of
exchange rate changes and foreign trade policies; poor performance is blamed on the
persistent overvaluation of exchange rate, inadequate coverage of export subsidies and
other export incentives. There is, however, a marked lack of emphasis on the inter-
linkages of foreign trade sector with developments in the domestic economy and
policy, particularly the draconian controls that the import substitution policy imposed.

In examining the linkage between exports and growth, the authors conclude,
“increased openness of the current trade strategy of India would make domestic
growth more important in shaping the future of country’s export expansion.” This
conclusion is unexceptionable, but unfortunately the arguments on which it is based
are not. The authors are of the view that: firstly, exports form an important percentage
of our GDP, since they hover at around 10 per cent of our GDP. This is much lower
than the export-GDP ratios of China, Thailand, Singapore, Malaysia, Indonesia,
Taiwan, South Korea as well as Pakistan 5. Moreover, exports measure the value of
output whereas GDP is the value added. If we consider the value added in exports,
that would form and even smaller percentage of GDP. Can we then really say that
exports are an important component of our GDP? Secondly the authors argue that

5
See Tendulkar (2000), Table 9
10
sluggish GDP growth creates supply bottlenecks, thereby fuelling domestic inflation
and encouraging domestic sales over exports. But is this necessarily so? Does sluggish
GDP growth not imply sluggish growth of domestic demand, creating excess supply
and therefore promoting exports?

Price competitiveness of India’s exports is measured using three indicators:

i) India’s export prices relative to competitors. This is the ratio of unit value
index of India’s exports to a weighted average of unit value index of exports of
its competitors. The competitors considered here are Indonesia, South Korea,
Malaysia, Pakistan, Philippines, Sri Lanka and Thailand. The weights assigned
to each competitor are calculated using the formula:

Wj = ∑ Xik * Yjk
k
100 100
Where W j is the weight of jth country, X ik is the export share of India to kth
country, Y jk is the export share of jth country to kth country, i is India, j is
India’s competitors, and k is India’s major export destinations.

Interestingly, this study does not include China and Taiwan as competitors,
even though China had a 12.02 per cent share of world exports of labour
intensive products and Taiwan, 4.8 per cent in 1993-96. 6

ii) India's export prices relative to those of industrialised countries. The major
export destinations considered in this study are US, UK, France, Germany and
Japan. It is my view that domestic prices of industrial countries would have
been a better proxy to use. The export basket of industrial countries is likely to
differ so significantly from that of India, as to render any comparisons between
the unit values of the two meaningless. It is therefore not surprising that the
authors find the different indicators of competitiveness often moving in
opposite directions.

11
iii) Real exchange rate based on Consumer Price Index. This is the ratio of the
consumer price index of India relative to that of India’s major trading partners
(i.e. industrial countries) multiplied by the nominal exchange rate.

The book by Agrawal, Gokarn, Mishra, Parikh & Sen (2000) focuses on the
factors behind the success of the East Asian ‘miracles’. It compares India and the East
Asian economies in terms of environment and causal mechanisms. Chapter 4 of this
book on measures of competitiveness provides a quantitative description of the
changing patterns of competitiveness of these countries, both at an aggregate level
and at the level of individual commodities. Two measures, RCA and market share are
used to characterise export performance over a two decade period from 1970 to 1990.
RCA comparisons reveal that while other Asian countries have increased their RCA in
aggregate manufacturing exports through increasing their world market share of such
exports, India’s RCA in manufacturing sector has been increasing because its world
market share in manufactured exports has been more or less constant while its market
share in total world exports has declined somewhat.

The authors next look at the compound annual rates of growth of the countries
for 4 sub periods: 1970-75, 1975-80, 1980-85 & 1985-90. They find that the export
growth of Asian countries followed the booms and slumps of the world trade but their
exports always grew faster than the world average. India followed a different pattern -
during the first three sub-periods, India’s growth of exports was close to world
average and increased significantly above it only in the last sub-period, though it
remained lower than other Asian countries in the sample. The study also computes
RCA and market shares at the SITC (Revision 1) 3-Digit level of disaggregation. Each
country’s performance in the sub-periods is placed in the perspective of the policy
regime in place in the country at the time.

As far as regional pattern of growth is concerned, the authors find that the
export outcomes of these countries show a contemporaneous and lagged pattern that is

6
Tendulkar (2000), Table 4.4
12
consistent with the ‘Flying Geese’ hypothesis 7. This conclusion is derived on the basis
of rank correlations between the commodity export proportions, rank correlations
between RCAs and simple correlations between RCAs.

The studies reviewed emphasise the instrumental role that export orientation
can play in an economy’s development process by comparing Indian performance with
other similarly placed countries that have successfully exploited this tool. Through
comparisons of Indian export performance and export competitiveness with these
countries, they also highlight the domestic constraints on Indian export growth.

II.2 Modelling Export Demand and Supply

Krishnamurty and Pandit (1996) and Virmani (1991) model the behaviour of
imports and exports, distinguishing between demand and supplies. Krishnamurty and
Pandit’s analysis is for four groups of products (comprised of SITC categories 0-9),
whereas Virmani’s deals with manufactured and primary products. The former take a
‘small country view’ of India and estimate the following model for export and import
demand and supply for different categories of exports for the period 1970-71 to 1990-
91. Only 20 observations and OLS with Cochrane-Orcutt procedure rather than 2SLS
or 3SLS are used, but the authors are optimistic about the robustness of the estimates
because the model is large. The estimated model is:

Export demand:
ZEX i = α 0 + α1ZGDPW − α 2 EXUVi / (RSUS * WEUVi ) + α 3 (ZEX i )−1

Export supply:
EXUVi (1 + Si ) = β 0 + β1ZEX i − β 2 ( ZGDPi / ZGDP ) + β 3WPi + β 4 ( EXUVi ) −1

where, ZGDP = total real GDP (a proxy for overall demand)

and for each category i,

7
The term Flying Geese is used to describe the pattern of regional structural change - new generation of countries taking the
place of first generation of developers in labour intensive exports. (Ref. Akamatsu (1961 & 1962) & Gore (1996), cited in

13
 ZEX = volume of exports
ZGDPW = world real GDP
EXUV = unit value of exports
WEUV = international unit value index in US dollars
RSUS = exchange rate (Rupees per US dollar)
ZGDP = output in ith sector
S = ad valorem subsidy
WP = price level in domestic market

The Z prefix denotes real values. The term EXUV i (1+ S i )/WP i reflects
incentive to export rather than sell in the domestic market.

This specification however assumes the impact of GDP i and GDP to be equal in
magnitude but opposite in sign. No justification is given in the study for imposing this
additional constraint. This becomes significant when the results of this study are
contrasted with those obtained by Virmani (1991). He estimates demand and supply
functions for manufacturing and primary sector for the period 1970-71 to 1985-86 and
uses growth rates of variables rather than logs. He also includes a measure of rainfall
as a proxy for domestic demand and supply factors. The estimated equations are:

GRQX it = α 0GRPX i Dt + α1GRPXWt + α 2GRWYWt + α 3GRYW−1 + GRERJ t + ε t (1)

and

GRPX it = β 0GRQX it + β1GRPH it − β 2GRGDPit + β 3GRRAIN t + ηt (2)

Where PX i D = unit value index of sector i’s exports PX i , multiplied by the US

dollars per Rupee exchange rate.

PXW = US dollars based unit value index for world exports.

YW = world GDP
ERJ = real exchange rate index
PH = average wholesale price index for all commodities.

Agrawal, Gokarn, Mishra, Parikh & Sen (2000)

14
 GPD i = real GDP of ith sector
RAIN = index of rainfall, which represents domestic demand and supply
factors.
The prefix GR stands for growth rate.
Equation (1) is the demand function and (2) is the supply function for exports
of sector i, and QX = growth rate of export quantity.

Estimates of these equations reveal a positive relationship between growth

rates of GDP in manufacturing and an increase in price of manufactured exports,
whereas an increase in rainfall over previous period has a direct dampening effect on
export prices. Krishnamurty and Pandit get the opposite result - an increase in
manufacturing sector GDP relative to total GDP leads to a fall in price of such
exports, though their time period overlaps with that of Virmani, extending only 5
years beyond the latter’s analysis.

Joshi and Little (1994) 8 estimate structural as well as non-structural equations

for aggregate exports, for the period 1961-87. Their aggregate demand and supply
functions are of the form:

X d = ƒ(PX/PW, WY)
X s = g (PX/P, DD, trend)

Where PX = Indian export prices

PW = price of exports of competitor countries
WY = world income
P = domestic wholesale price index
DD = a measure of pressure of domestic demand

Two separate measures of pressures of domestic demand are used:

i) TFE, defined as the total final expenditure as a proportion of GDP at

market prices, and

8
The demand and supply functions proposed in this study are based on the model used by Joshi and Little (1994)
15
 ii) exD3 t or exRD3 t , which measure the excess of monetary growth (the R
prefix indicates a real variable) over growth rate of real GDP and are
defined as:

exD3t = ∆M 3t − ∆Yt

exRD3t = ∆ ( M 3 / P ) t − ∆Yt

where M3 = broad money

Y = real GDP of India
P = domestic wholesale price index

and GFD, which is the consolidated government fiscal deficit as a

proportion of GDP at market prices.
The time trend is included to capture trended movements not modelled
explicitly.
The single equation models are of the form:

X = f ( RERsa, GDPW , DD )

where, X = India’s non-oil exports

RERsa = real effective exchange rate adjusted for export incentives
DD = a measure of pressure of domestic demand, defined as above
GDPW = World demand for Indian exports

The estimation of these equations yield price elasticity of supply of total

exports for India equal to about 0.7 in the short run and 1.1 in the long run with over
80% of the long run effect coming through within a year. The price elasticity of
demand for exports is about 1.1 in the short run and about 3 in the long run with 80%
of the long run effect coming through in 2 years. These estimates are similar to that of
Arize (1990), who estimates export demand and supply functions for 7 Asian
countries: India, Indonesia, South Korea, Malaysia, Pakistan, Philippines and
Thailand, using quarterly data for the period 1973-85. The export demand function is
not assumed to be perfectly elastic because given the tariffs and other restrictions in

16
export markets of developing countries, the author of the study is of the view that it is
unlikely that they can sell all they want at given prices. But since such restrictions
exist for developing countries as a whole and not for specific developing countries
only, and if the exports of the LDCs are homogeneous in each category, and they are
all small players in the market, a fall in the price of any one LDC’s products would
imply a large substitution away from other LDC’s products, giving an elastic demand
for their products.

The demand and supply functions in the study are specified as follows:

ln X td = α 0 − α1 ln PX t + α 2 ln PX wt + α 3 ln X wt + µt
or ln X td = β 0 − β1 ln( PX t / ln PX wt ) + β 2 ln X wt + ν t .

and ln X ts = γ 0 − γ 1 ln( PX t * E / ln P d t ) + γ 2 ln TYt + ηt

Where X d = volume of exports demanded

X s = volume of exports supplied
PX = export unit value in US dollars
PX w = alternative price faced by prospective buyers of the country’s exports
measured as weighted average of export prices of the country’s trading
partners and competitor countries.

X w = weighted average of real income of country’s trading partners.

P d = price of domestic inputs in domestic currency
E = exchange rate (number of units of domestic currency per US dollar)
TY = an index of domestic capacity
z = random shocks to the supply function
e = random shocks to the demand function

Assuming that exports do not adjust instantaneously to the desired long run
level following a change in any of their determinants and that export quantities adjust
to discrepancy between world desired demand in current period and actual flow of

17
exports in previous period, while prices of exports adjust to conditions of excess
supply, yields the following short run models:

ln X t = α 0 − α1 ln PX t + α 2 ln PX wt + α 3 ln X wt + α 4 ln X −1 + µt

or ln X t = α ′ 0 − α1′ ln( PX t / ln PX wt ) + α 2′ ln X wt + α 3′ ln X −1 + µt′

and ln PX = γ 0′ + γ 1′ ln X + γ 2′ ln P d + γ 3′ ln TY + γ 4′ ln PX −1 + ηt

The studies reviewed underscore the importance of relative prices and world
income in determining demand for Indian exports and of domestic income and relative
prices in determining their supply. The trends in Indian exports are explained more
through variations in domestic factors - income and prices and policies - than through
international circumstances - an approach that finds favour in the present study too,
given the evidence presented in the ones reviewed. The empirical estimation of
demand and supply functions in this study is based on the models used in the studies
reviewed. The next section outlines the methodology.

III Methodology of the Present Study

The empirical investigation covers two aspects: the first deals with estimating
annual average and trend growth rates of volume of total exports and of different
commodity groups of exports over the period 1980-81 to 2000-01 and its sub-periods
to get an overview of the fastest and slowest growing exports, and the trends therein.
Total exports would be broken into the following commodity groups:

C 1. Food and Live Animals

C 2. Beverages and Tobacco
C 3. Crude Materials, Inedible except Fuels
C 4. Mineral Fuels, Lubricants and Related Materials

18
C 5. Animal and Vegetable Oils and Fats
C 6. Chemicals
C 7. Manufactured Goods, Classified Chiefly by Material
C 8. Machinery and Transport Equipment
C 9. Miscellaneous Manufactured Articles

Details of these groups are provided in Appendix Table A2. The categories are
given codes C1 to C9 for convenience. This commodity classification is as used in
RBI, Handbook of Statistics on Indian Economy, 2001, and requires some
clarifications: C7 or Manufactured goods classified chiefly by material is not what is
conventionally understood by the term Manufactured goods. The latter category would
include Chemicals (C6), Machinery and Transport Equipment (C8) and Miscellaneous
Manufactured Articles (C9), in addition to C6, Manufactured goods classified chiefly
by material.

The choice of classification used here was dictated by the availability of an

unbroken series of volume indices for these categories of exports in RBI Handbook of
Statistics on Indian Economy, 2001. The classification used for reporting value of
exports of principal commodities underwent a change from 1987-88 and the new
classification has 4 categories: Primary Products, Manufactured Goods, Petroleum
Products and Others. Details of these are provided in Appendix Table A3. Index
numbers of volume of exports for this classification for pre-1987-88 years were not
available. The category Primary Products in the new classification would include
Food and Live Animals (C1), Beverages and Tobacco (C2), Crude Materials, Inedible
except Fuels (C3), and Animal and Vegetable Oils and Fats (C5)

The trends in volume of our exports during the period 1980-81 to 2000-01 were
studied by first calculating the annual growth rates and averaging these over sub-
periods of five years and 10 years. Trend regressions were then fitted, to estimate the
exponential growth rates for the 20-year period for each category of exports, as well
as aggregate exports. The trend equations were of the form:

19
 ln X = γ 0′ + γ 1′t + ε1t K (i )
ln X = γ 0 + γ 1t + γ 2t 2 + ε 2t K (ii )

where X is the given category of exports and t is time.

The slope parameter of equation (i) gives the relative change in X for a given
absolute change in t. Multiplying this relative change by 100 gives the percentage
growth rate of X. Growth rate at time t in the second equation is given by (100 times):

∂ ln X
= γ 1 + 2γ 2t
∂t

γ 2 measures the acceleration in growth rate of exports. A constant growth rate

over the time period would, in the regression equation (ii), imply γ 2 =0. Moreover, in
trend regressions where the coefficient of quadratic trend variable is significant, the
estimate of growth rate given by model (i) would be biased.

The second aspect covered in the study is the estimation of the demand and
supply equations for total Indian exports using annual data for the time period 1968-
99. The demand for exports is taken as a function of the ratio of price of country’s
exports to world export price and of world effective purchasing power i.e.:

X d = f (PX / PW ,WX )

where X d = export demand, measured as volume index of India’s total exports.

PX = price of India’s exports in rupees, measured as unit value index of
India’s exports

PW = price of exports from competitor countries. Two measures of PW are

suggested: PW a defined as unit value of exports from non-oil developing
countries in rupees and PW b defined as unit value index of world exports.

WX = volume index of total world exports, which measures world demand for
our exports.

20
 This specification assumes the effect of changes in price variable to be equal in
magnitude but opposite in sign. This equation in log linear form gives the following
export demand function:

ln X td = α 0 − α1 ln (PX t / PWt ) + α 2 ln WX t + ε t (1)

Without the above mentioned constraint, corresponding to the demand function

X d = ƒ(PX, PW, WY), we have the following log linear model:

ln X td = α 0′ + α1′ ln PX t + α 2′ PWt + α 3′ ln WX t + ε t′ (2)

Since the variables are expressed in natural logarithms the coefficients are
elasticities. A priori, we would expect the sign of the coefficient of PX/PW to be
negative (of PX to be negative and PW to be positive in the second equation), since if
prices of India’s exports fall relative to that of it’s competitors, demand for India’s
exports should rise. The coefficient of WY is expected to have a positive sign.

Supply of exports is specified as a log linear function of relative price of

exports (i.e. ratio of export prices to domestic prices) and the pressure of domestic
demand. The equation to be estimated is:

ln X ts = β 0 + β1 (ln PX t / Pt ) + β 2 ln DDt + β 3t + ηt (3)

or ln X ts = β 0′ + β1′ ln PX t + β 2′ ln Pt + β 3′ ln DDt + β 4′t + ηt′ (4)

where X s = volume of exports supplied

PX = export unit value in rupees
P = domestic wholesale prices
t = time
z = error term
DD = domestic excess demand, measured as the sum of:

21
 i) exD3 t , which measures the pressure of monetary excess
demand , and is defined as the excess of growth of broad
money supply (in percentage) over growth rate of real GDP
When growth of GDP at market prices is used, the
indicator obtained is labelled exD3a and when GDP at
factor cost is used, we get exD3b.

ii) GFD, which is the gross fiscal deficit of the Central

Government as a percentage of GDP at market prices.
Consolidated fiscal deficit of the centre and states would
have been a better indicator to use, but the series was not
available for the entire sample period.

The coefficient of DD is a priori expected to be negative, since pressure of

domestic demand diverts goods away from exports. A higher domestic price relative
to export prices on the one hand would make domestic sales more attractive to the
producers, it would also reduce domestic demand. The interaction of the two forces
would determine the sign of the relative price variable in equation (3) and of the
domestic price variable in equation (4).

Substituting the equilibrium condition, X d = X s = X into the demand and supply

equations, we get the following two equations:

ln X t + α 0′ + α1′ ln PX t + α 2′ PWt + α 3′ ln WYt + ε t′

ln X t = β 0′ + β1′ ln PX t + β 2′ ln Pt + β 3′ ln DDt + β 4′t + ηt′

The equations were estimated using Ordinary Least Squares (OLS) and Least
Squares with Cochrane Orcutt procedure (incorporating Prais-Winsten transformation
for the first observation), to take care of serially correlated errors. The use of least
squares is justified by the presence of co-integrating relationship among the explained
and the explanatory variables in both demand and supply equations. Significance of
all results was tested in the study at 10% level. Adjusted R 2 was used to measure the
22
goodness of fit. The Jarque-Bera test was used to test for normality of residuals.
Normally distributed residuals are essential for the t and F tests to be valid. The
Durbin Watson statistic and mean Variance Inflation Factors (VIFs) are also
mentioned along with the regression results, to measure auto-correlation among
residuals and multi-collinearity among independent variables respectively.

The data for variables pertaining to India are available on a financial year
(April to March) basis, while that for variables pertaining to the world are available
on a calendar year basis. The variables for India therefore enter with a one-quarter lag
in the equations, for example, the value for 1980-81 is used as that pertaining to
calendar year 1980. The results of the estimation exercise are discussed in the next
two sections.

IV Trends in India’s Exports: 1980-81 to 2000-01

Indian export performance can be viewed in the light of both domestic and
international developments, though in this paper, the domestic factors are deemed
more important. There exists ample empirical evidence in support of the view that
good export performance is not contingent upon favourable external environment 9.
Indian exports failed to match the rapid growth in world exports in the ‘golden age of
capitalism’ 10, 1950-73, but grew faster than world trading opportunities in the post-
1985 period of much slower growth of world output. The performance of other Asian
countries, notably South Korea, Taiwan, Thailand, Malaysia and China with respect to
export and economic growth in the past few decades clearly shows that opportunities
exist even for developing countries to share in the growth in world trade, only India
failed to exploit them for long periods in the past.

The trends in Indian exports can be gleaned from Table A4 and Table 1 below,
which give the annual growth of volume of exports and averages for sub-periods of 5

9
See, for example, Tendulkar (1999 &2000) and Veena Mishra
10
This was the period when developed countries managed to smoothen business cycles, world output expanded rapidly,
exchange rate stability was maintained under the Bretton woods system and there was lowering of tariff and non-tariff barriers
under the aegis of GATT. See Tendulkar (1999)
23
and 10 years respectively, and Table 2, which gives the results of the trend
regressions.

The average annual growth rate for volume of Total Exports was a low 0.7 per
cent in 1981-82 to 1985-86, turning negative in 1983-84 and 1985-86. This was the
period after oil price hike of 1979, the subsequent fall in primary commodity prices
and a fall in world export volumes. Accordingly, categories C1 (Food and Live
animals) and C3 (inedible Crude Materials, except Fuels) posted negative average
growth rates during the period, while Beverages and Tobacco posted a marginal
positive average annual growth rate of 0.07 per cent. Mineral Oils and Lubricant
exports (C4), on the other hand, grew by 261 per cent per annum. With most OECD
countries adopting contractionary policies, Indian exporters faced a shrinking market
for their exports. Moreover, the Indian government had started following
expansionary fiscal policies, beginning 1977-78, bolstered by comfortable foreign
exchange reserves and food stocks. The rupee’s real exchange rate appreciated and
Indian exports further lost out on competitiveness. Three categories of manufactured
exports, C7 (Manufactured goods classified chiefly by Material - which includes our
sizeable leather and textile exports), C8 (Machinery and Transport equipment) and C9
(Miscellaneous Manufactured items) posted low export growth rates of 0.84, 0.87 and
2.11 per cent per annum respectively. The combination of stagnant exports with
expansionary policies inflated the country’s current account deficit, and its external
debt mounted.

In the mid-1980’s, to redress the poor economic performance of the past 11,
some steps towards macroeconomic reform were taken. There was limited relaxation
of industrial licensing controls, import controls, expansion of export incentives and
rupee depreciation, all of which contributed to a healthy export volume growth.
Aggregate export volume growth averaged 11 per cent per annum over 1986-87 to
1990-91, with a 15.4 per cent growth in 1987-88. Much of this growth was contributed
by high rate of growth of manufactured goods exports, with C6 (Chemicals) showing
an annual average rate of growth of 34 per cent, C8 (Machinery and Transport

24
equipment) 20 per cent and Miscellaneous manufactures 14.3 per cent. This reflects
the spurt in manufacturing sector growth that the limited reform process brought
about, as also the substantial increase in export subsidies. The traditional export
subsidies - cash assistance, premium on import replenishment licenses, duty
drawbacks - were increased and new incentives in the form of exemption of export
income from income tax, cheaper credit, duty free imports of capital goods for export
industries were introduced.

The rate of growth of volume of exports increased sharply over the previous
periods in 1991-92 to 1995-96, averaging 14.9 per cent. There was a continuation of
the high growth rates achieved in C7 (Manufactured goods classified chiefly by
Material), C8 (Machinery and Transport Equipment) and C9 (Miscellaneous
Manufactured articles) in the previous period and though the growth rates in C5
(Animal and Vegetable oils and Fats) and C6 (Chemicals) fell somewhat, they were
still of the order of 47 per cent and 17 per cent respectively. This period also saw an
accelerated growth of exports of Food and Live Animals (C1) and Beverages and
Tobacco (C2). The exports of Crude Materials (C3) did rather poorly, with an annual
average growth rate of only 1.2 per cent. The three years, 1993-94 to 1995-96 saw
double-digit growth rates of volume of aggregate exports, with the growth rate
peaking at 31.3 per cent in 1995-96. The commodity wise growth rates in these
periods were also striking, with a 73 per cent growth in volumes achieved in
Machinery and Transport Equipment (C8) in 1995-96, and 63 per cent in Animal and
Vegetable oils and Fats (C5). The radical reform process that was undertaken in 1991
certainly seems to have had its impact on export performance, at least in the first five
years. The reforms were triggered by the balance of payments crisis of 1991, when
mostly due to the profligate government spending in the 1980’s and the accumulation
of foreign debt, a brief stoppage of remittances following the gulf war pushed the
country to a crisis like situation. When the reforms were introduced in June 1991,
India’s foreign exchange reserves covered less than two weeks of imports and the
country was on the verge of defaulting on her external debt service payments.
Reforms included exchange rate devaluation in 1991, introduction of market based

11
The country had consistently lost share in world exports, its growth rate had remained stuck at 3.5 per

25
exchange rate system in a phased manner, substantial reduction of tariff and non-tariff
barriers and encouragement of direct and portfolio foreign investment. They reduced
the bias against exports that the earlier system introduced, and also encouraged
growth in the domestic manufacturing sector, both of which were responsible for the
high growth rates seen in the period 1991-92 to 1995-96.

The late 1990’s broke the momentum that the earlier years had built into export
growth. The growth rate declined in 1996-97 to 7.16 per cent and turned negative in
1997-98 to –6.27 per cent. In the next year, the growth rate though positive, was a low
3.37 per cent [much of this was contributed by the high and positive growth rate of
Miscellaneous Manufactured Articles (C9) and Food and Live Animals (C1) - all other
commodity groups recorded high negative growth rates in 1998-99 also]. Many factors
were responsible for this. One was the loss of competitiveness of Indian exports in the
international markets following the steep depreciation of East Asian currencies, which
was not matched by the rupee, and a steep decline in manufactures’ prices in dollar
terms. Another was the slowdown in world economy and in world export growth and
perhaps increasing non-tariff barriers (sanitary and phyto-sanitary measures,
environmental and social restrictions) in developed country markets against Indian
exports. But more importantly, it was the domestic constraints - infrastructural
bottlenecks that the reforms had failed to ease and the liquidity crunch and high
interest rates prevailing in the economy, which adversely affected exports, both by
slowing down growth in the manufacturing sector and by rationing out small-scale
units (which supply a large proportion of our exports) from credit markets - that were
responsible for the steady loss of competitiveness of Indian exports in the world
markets.
The growth rate showed a turnaround in 1999-2000, with a 15.5 per cent
volume growth and a 13.2 per cent value growth 12. The positive trend continued in
2000-01, but was largely contributed by a jump in exports of mineral fuels, lubricants
and related materials. With the growth projections for Indian and world economy
turning positive, export volumes are expected to maintain the upward trend in the near
future. However, though Indian exports have done better than the past in the post

cent per annum for long and freedom from deprivation remained a distant dream for millions of Indians.

26
reform period, this performance pales significantly when compared to what East Asian
countries managed to achieve and sustain 13. With India’s infrastructural and
procedural bottlenecks still in place 14 and the world market becoming increasingly
competitive under the aegis of WTO, even these low growth rates may be difficult to
sustain.

To supplement the above analysis with estimates of the trend rates of growth in
the entire period 1980-81 to 2000-01 (average annual growth rates tend to be unduly
affected by extreme values) as also to test the hypotheses of a change in the long term
growth path in the post reform period, trend regressions were run, the results of which
are shown in Table 2 and explained below.

The adjusted R 2 increases on fitting regressions with allowance for change in

growth rate, in all but three commodity groups (namely, Crude Materials (C3),
Chemicals (C6) and Machinery and Transport Equipment (C8)), indicating a better fit
of the latter model in a majority of the groups. Expectedly, for the three groups where
adjusted R 2 does not increase, and for group C4, Mineral Fuels, Lubricants and
Related Materials, the coefficient of t 2 in the log quadratic regression is insignificant,
and the Chow breakpoint test shows no break in the trend line in the post reform
period. This implies that the reforms had no impact on the exports of these
commodities. However, the Chow test for groups C6 and C8 shows a break in the
trend line post 1986, which indicates the positive impact of the reforms introduced in
1985 on the exports of these commodities. Another thing to note is that in two of the
four commodity groups constituting the Primary Sector exports namely, Beverages
And Tobacco (C2), Crude Materials, inedible except Fuels (C3) and in Mineral Fuels,
Lubricants and Related Materials (C4), the adjusted R 2 is low, even with the log
quadratic form. This is because the world production (and therefore price) of these
commodities is subject to high fluctuations, which in turn make our export volumes
highly variable 15.

12
Source: RBI annual Report, 2000, Chapter 6 on external sector.
13
See Tendulkar (1999 & 2000)
14
Literature on these is voluminous. See, for example, Banik (2001) and Mishra.

27
 Table 1
Volume of Exports
Average Annual Growth Rates 1

To t a l
YEAR C1 C2 C3 C4 C5 C6 C7 C8 C9
E x po rt s
1981-82 to 1985-86 -1.01 0.07 -3.19 260.85 11.57 8.41 0.84 0.87 2.11 0.74
1986-87 to 1990-91 5.44 6.1 16.29 15.16 52.70 33.95 9.68 20.36 14.32 11.8
1981-82 to 1990-91 2.22 3.09 6.55 138.01 32.13 21.18 5.26 10.61 8.22 6.27
1991-92 to 1995-96 11.67 7.95 1.21 -7.55 47.31 16.46 17.33 24.95 12.29 14.96
1996-97 to 2000-01 6.77 16.8 1.09 312.95 -2.08 17.61 12.19 5.03 17.52 8.73
1991-92 to 2000-01 9.22 12.37 1.15 152.7 22.61 17.04 14.76 14.99 14.91 11.85
1992-93 to 2000-01 8.63 14.5 4.95 168.83 15.43 14.92 15.03 17.48 15.33 12.33
Notes : 1. Simple averages of annual growth rates given in Table 1.
2. The commodity groups C1 to C9 are: C1 Food and live animals, C2 Beverages and tobacco, C3 Crude
materials, inedible, except fuels, C4 Mineral fuels, lubricants and related materials, C5 Animal and
vegetable oils and fats, C6 Chemicals, C7 Manufactured goods classified chiefly by material, C8
Machinery and transport equipment and C9 Miscellaneous manufactured articles.

Source: Author’s calculations

15
Since India is not a major supplier of these commodities in the world market, the causation cannot be the other way round.

28
 Table 2
Dependent Variable: lnX
Time Period 1980-81 to 2000-01

Trend
C1 C2 C3 C4 C5 C6 C7 C8 C9 Total Exports
Variable

0.06* -0.01 0.02# -0.14 0.03* 0.05# -0.01 0.23 0.14* 0.03 0.16* 0.13* 0.09* 0.06* 0.12* 0.10* 0.12* 0.04* 0.09* 0.03*
t
(11.1) (-0.3) (1.8) (-3)* (5.0) (1.79) (-0.4) (1.56) (7.13) (0.36) (18.5) (3.52) (16.8) (2.58) (14.1) (2.72) (19.9) (2.26) (19.3) (2.25)

0.003 0.01* 0.00 -0.01 0.01 0.002 0.001 0.004 0.003

t2 (3.9)* (4.2) (-0.7) (-1.7) (1.43)
0.00
(1.65) (0.61) (5.0)* (4.1)*

Adjusted
0.86 0.92 0.10 0.52 0.54 0.53 -0.04 0.05 0.71 0.73 0.94 0.94 0.93 0.94 0.91 0.91 0.95 0.98 0.95 0.97
R2

Notes: 1. The trend regressions were of the form:

ln X = γ 0′ + γ 1′t + ε1t
and
ln X = γ 0 + γ 1t + γ 2t 2 + ε 2t
2. * indicates significance at 1 per cent level and # indicates significance at 10 per cent level.
3. The commodity groups C1 to C9 are: C1 Food and live animals, C2 Beverages and tobacco, C3 Crude materials, inedible, except fuels, C4 Mineral fuels, lubricants and
related materials, C5 Animal and vegetable oils and fats, C6 Chemicals, C7 Manufactured goods classified chiefly by material, C8 Machinery and transport equipment
and C9 Miscellaneous manufactured articles.

29
 A reading of Table 2 reveals that the aggregate exports grew at a relatively
modest rate of 3.17 per cent per annum during the twenty year period, but with a
significant acceleration of this growth rate over time, at the rate of 0.3 per cent per
annum. The chow breakpoint test for stability of the trend regression on total exports
shows a break in the trend in the post-reform period. The most dynamic elements in
this export growth were manufactured goods exports. The exports of Chemicals (C6)
showed a steady trend growth rate of 16 per cent per annum and that of Machinery
and Transport Equipment (C8) 12 per cent per annum. The Miscellaneous
Manufactured Articles started out with a growth rate of 4 per cent per annum, which
accelerated at an annual rate of 0.4 per cent. The Primary Commodity exports on the
whole did poorly, with one group, Crude Materials (inedible) except Fuels (C3)
showing a deceleration in export growth, and the other two groups, Food and Live
Animals (C1) and Beverages and Tobacco (C2) starting out with negative (though
accelerating) rates of growth.

The overall picture that emerges is one of accelerated growth rate in the post
reform period, and of the dominant contribution of manufactured goods exports in this
growth. Though primary goods exports are intrinsically more subject to fluctuations
than manufactured exports, certain types of agricultural exports particularly processed
items with higher value additions, can form an important source of income, but remain
unexplored. There is an urgent need to remove direct and indirect controls on
marketing, movement and stocking of agricultural produce and to rationalise
agricultural taxes for vibrant agricultural growth. Our exports continue to be
influenced by external developments, which is natural given that India is a small
supplier for most commodities, but the dominant constraints to a more spectacular
performance lie in the domestic economy. The next section explores the strength of
domestic and international influences on our export growth for the 31-year period,
1968 to 1999.

31
V. Demand and Supply Factors in India’s Exports: 1968 to 1999

The demand and supply equations were first estimated using OLS. To take care
of serially correlated errors, Least Squares regressions with iterative Cochrane Orcutt
procedure and incorporating Prais-Winsten transformation to include the first
observation were run. The use of least squares is justified by the presence of co-
integration among the explained and the explanatory variables in both demand and
supply equations. The Augmented Dickey-Fuller (ADF) and Phillips Perron (PP)
statistics for testing the hypotheses of non-stationarity of the residuals of OLS
regressions are given in Appendix Tables A5 and A6 for supply and demand equations
respectively. It is clear from these that all the residual series show stationarity,
validating the regression estimates and the t and F tests.

The estimated export supply equations are shown in Table 3 below. Equations
(i) and (ii) were estimated using OLS and (iii) and (iv) using least squares with Prais
Winsten-Cochrane Orcutt procedure. The adjusted R 2 in both equations are very high,
lying between 0.92 and 0.97, implying that the explanatory variables together explain
92 to 97 per cent of the variation in our export volumes. These high values indicate
the goodness of fit of the model. The residuals are normally distributed, thus enabling
valid inference. There is no evidence of multicollinearity between the proxies for
monetary and fiscal excess demand. The correlation between exD3a (or exD3b) and
GFD is only 0.25. The coefficient of current export prices in all equations has the
expected positive sign, but it is statistically insignificant, implying a zero price
elasticity of supply of our exports. This result clearly points to the inability of our
exporters to respond to price stimulus due to the supply bottlenecks existing in the
country. Domestic price level, on the other hand seems to have a significant positive
impact on our export volumes, implying the dominance of the demand effect. The
elasticity of our exports to domestic price changes is between 0.80 and 0.91, implying
that a one percent rise in domestic wholesale prices increases export supply by 0.8 to
0.9 per cent. However, in equations (iii) and (iv) which correct for serial correlation
among errors, the proxies for domestic monetary and fiscal excess demand

32
 Table 3
Export Supply: Estimated Equations
Estimation Method: Least Squares
Dependent Variable: lnX
Time Period: 1968- 1999
Explainatory Variables (i) (ii) (iii) (iv)

2.12* 2.12* 2.00* 2.00*

Constant
(9.62) (9.61) (5.39) (5.39)
0.06 0.06 0.05 0.04
lnPX
(0.31) (0.30) (0.28) (0.225)
0.90* 0.91* 0.80* 0.81*
lnP
(3.79) (3.83) (3.53) (3.58)
-0.01 -0.02
lnexD3a
(-0.36) (-0.76)
-0.01 -0.02
lnexD3b
(-0.33) (-0.62)
-0.43* -0.43* -0.09 -0.09
lnGFD
(-5.44) (-5.45) (-1.03) (-1.01)
LnX-1 0.8278 0.8280

Adjusted R2 0.9774 0.9774 0.9202 0.9196

Durbin Watson Statistic 1.18 1.19 1.70 1.72

χ 2)
Normality Pr (χ 0.60 0.61 0.71 0.71

Mean VIFs 1.58 1.58 1.58 1.58

Notes: 1. Figures in parentheses are t-statistics.
2. * Indicates significance at 1% level for a two tail test.
3. Equations (i) & (ii) are OLS. Equations (iii) & (iv) incorporate the Cochrane Orcutt procedure with
Paris-Winsten transformation for the first observation.
Source: Author’s Calculations.

used here do not influence export volumes in a statistically significant way, though
their coefficients have the expected negative signs. This may reflect the inadequacies
of the proxies as measures of domestic demand - the fiscal deficit term includes only
central government fiscal deficit, though state governments also run substantial fiscal
deficits.

The estimated export demand equations are presented in Table 4 below.

Equations (I) to (iv) were estimated using OLS and equations (v) to (viii) using Prais
Winsten-Cochrane Orcutt procedure. The adjusted R 2 s are high (between 0.75 and

33
0.97), but models (i), (ii), (v) and (vi) have very high variance inflation factors
indicating severe multicollinearity. This problem seems not to be present in equation
(iii), (iv), (vii) and (viii) where the effects of domestic and foreign price changes are
constrained to be equal in magnitude but opposite in sign. The residuals for all the
series are normally distributed. The demand for our exports seems to be price inelastic
- the coefficients of relative prices in equations (vii) and (viii) are negative and
significant, but less than one in absolute value. In equation (vi), the coefficient of
PWb, the unit value index of world exports, 0.58, is significant at 1% level implying
that world price plays an important role in determining export demand for Indian
goods. The demand for our exports is in consonance with that for total world exports -
the elasticity being between 0.67 and 1.43. These are statistically significantly
different from zero at 1% level in all equations. An elasticity of greater than one
means that the country is in a position to capture a larger share of world exports and
thus narrow the balance of payments deficit.

The above analysis reveals that the growth of export volume is largely
determined by relative prices in the domestic and international markets and by world
exports. However, the estimated elasticities should not be taken at face value. There
are a number of reasons why these may have a downward bias. Firstly , unit value
indices used as proxies for export prices introduce a downward bias into the price
elasticity of exports. Any increase in the price of a commodity, by reducing its
quantity exported, reduces its weight in the index. Similarly, a commodity whose
price has fallen is given a higher weight, thereby introducing a downward bias in the
estimated price elasticity. The unit value index used here is based on the Paasche
index number and consequently inherits all its biases. Secondly , the quantum indices
used are computed not from the data on volume of trade, but from the value of trade
and unit value index introducing all the biases in these into the volume index too.
Thirdly , to measure price of competitors, unit value index of world exports was used,
whereas a weighted index of export prices of competitor countries would have given
truer estimates of the relevant price elasticities. Fourthly , a better measure of world
demand would have been the GDP of India’s trading partners, weighted by India’s
trade with them. But given the two month time period of the project and the

34
unavailability of relevant data, second best proxies had to be used, which may have
biased the estimates.

Table 4
Export Demand: Estimated Equations
Estimation Method: Least Squares
Dependent Variable: lnX
Time period: 1968- 1999
Explanatory Variables (i) (ii) (iii) (iv) (v) (vi) (vii) (viii)
-0.71 -0.72 -1.35 -1.32 -0.64 0.03 0.03 0.20
Constant
(-1.10) (-1.53) (-2.79) (-6.66) (-0.91) (0.05) (0.04) (0.26)
-0.19 0.20 -0.18 -0.35
lnPX
(-0.61) (0.64) (-0.65) (-1.57)
-0.01 0.42
lnPWa
(-0.03) (1.68)
-0.02 -0.43***
Ln(PX/PWa)
(-0.08) (-1.77)

LnPWb -0.02 0.58*

(-0.07) (3.13)
-0.07 -0.55*
Ln(PX/PWb)
(-0.31) (-2.96)
1.09* 1.09* 1.43* 1.41* 0.84* 0.67** 0.98* 0.91*
LnWX
(4.49) (4.48) (30.55) (14.45) (3.11) (2.69) (5.30) (5.38)
LnX-1 0.85 0.91 0.97 0.97
Adjusted R2 0.9707 0.9710 0.9699 0.9700 0.9140 0.9029 0.7450 0.8075
2
χ )
Normality Pr (χ 0.13 0.12 0.06 0.07 0.20 0.27 0.11 0.101
Durbin Watson Statistic 0.62 0.63 0.63 0.60 1.81 1.73 1.67 1.63
Mean Variance Inflation
120.39 125.5 1.07 4.63 120.39 125.5 1.07 4.63
Factors
Notes: 1. Figures in parentheses are t-statistics.
2. * , ** and *** indicate significance at 1% and 5% and 10% level, respectively for a two tail test.
3. Equations (i) to (iv) are OLS. Equations (v) to (viii) incorporate the Cochrane Orcutt procedure
with Paris-Winsten transformation for the first observation.
Source: Author’s Calculations.

VI Summary and Conclusions

The estimates of trend rates of growth of Indian exports in the study reveal a
relatively modest but accelerating rate of growth of Indian exports over the period
1980-81 to 2000-01. There was a spurt in export growth following the reforms of
1991, which is a testimony to the importance of domestic bottlenecks in constraining

35
our export growth. The reforms freed the economic activities to an unprecedented
extent from government controls, and caused an equally unprecedented acceleration in
production and export growth. However, the objective of creating a vibrant production
and export sector is still distant. The economy remains shackled by poor
infrastructural facilities, SSI reservations and inflexible labour markets that bind our
export growth below the conceivable maximum. The late 1990’s experienced a
slowdown in export growth, not all of which could be explained by external factors.
The study also reveals a very significant impact of relative prices of our
exports with respect to world export prices and of world exports on the demand side,
and of relative prices in the domestic and foreign markets on the supply side on total
Indian exports. However, these relationships can only be explored in empirical studies
within the low quantum of exports and export growth that the country achieved. Such
an econometric investigation is also constrained by the quality of trade data available.
But the fact remains that Indian exporters do respond as rational profit maximisers to
changes in the economic environment, and that there exists considerable scope for
exploiting this response to reap the benefits that global integration has to offer.

36
Data Sources

1. Aggregate Exports-Quantum and Unit Value Indices for India :

i) 1970-71 to 1998-99 from RBI Handbook of Statistics on Indian Economy,

2000-01.

ii) 1968-69 and 1969-70 were available in CSO, Statistical Abstract 1997 with
base 1968-69, and were converted to base 1978-79 by splicing.

2. Volume indices for World Exports.

WTO, International Trade Statistics, 2001.

3. Unit Value Indices for Non-oil LDCs and World Exports (in US$) :

i) 1970-99 from IMF International Financial Statistics Yearbook, 2000.

ii) 1968 & 1969 from IMF International Financial Statistics Yearbook 1995
and converted from original base, 1990 = 100. These were converted into
Rupees by multiplying with the nominal exchange rate of Re vs. US$ for
each year.

4. Indian Wholesale Price Indices:

i) 1970-99 from IMF International Financial Statistics Yearbook, 2000.

ii) 1968 & 1969 from IMF International Financial Statistics Yearbook 1995
and converted from original base, 1990 = 100.

5. Nominal Exchange Rate of the Rupee :

Calendar year averages of market exchange rate, Rs/US$. Source - IMF
International Financial Statistics Yearbook, 2000.

6. Quantum and unit value indices of commodity wise exports of India:

RBI Handbook of Statistics, 2000-01 and Government of India, Economic
Survey (various Issues).

37
References:

1. Agrawal P, Gokarn S V, Mishra V, Parikh K S & Sen K (2000): ‘Policy

Regimes and Competitiveness’ [ISEAS].

2. Arize A (1990): ‘An Econometric Investigation of Export Behaviour in Seven

Asian Developing countries’. Applied Economics 1990, vol. 22.

3. Banik N (2001): ‘An Analysis of India's Exports during the 1990’s’ Economic
and Political Weekly vol. 36 no. 44 November 3 pp.4222-4230.

4. Hajra, S & Sinate, D L (1997): ‘Fifty Years of India’s Foreign Trade: Issues
and Perspectives’ RBI Occasional Papers vol.18 Nos. 2 &3 June & Sept 1997.

5. Joshi V & Little I M D (1994): ‘ India, Macroeconomics and Political Economy

1964-1991 ’.

6. Krishnamurty K & Pandit V (1996): ‘Exchange Rate, Tariff and Trade Flows:
Alternative Policy Scenarios for India’. Indian Economic Review vol. 31 no 1.
(1996).

7. Mishra V: ‘India’s Export Performance, 1950-97’. Paper prepared for Asian

Development Bank, Manila, Philippines.

8. Nayyar B R (1997): ‘National Planning for Autarky and State Hegemony:

Development Strategy under Nehru’ Indian Economic Review 1997 Vol.32
No.1 pp. 13-38.

9. Srinivasan T N (1996): ‘India’s Export Performance: A Comparative Analysis’.

India’s Economic Reforms and Development, Essays for Manmohan Singh .
(OUP).

38
10. Tendulkar S D (1999): ‘Exports in India’s Growth Process’. ICRIER Working
Paper No. 46.

11. Tendulkar S D (2000): ‘Indian Export and Economic Growth Performance in

Asian Perspective’ . ICRIER Working Paper No. 54.

12. Virmani A (1991): ‘Demand and Supply Factors in India’s Trade’. Economic
and Political Weekly Feb 9, 1991 vol.26 (6) pp. 309-314.

39
 Appendix

The Augmented Dickey-Fuller test was used to test for presence of unit roots in
each of the variable series. The results of the unit roots tests are given in Table
A1 below. For the series ln(PX/PWa) and lnexD3a, the ADF test equation
included an intercept but no trend, and for all others, both trend and intercept
were used, because the line graphs of the latter series showed the presence of a
trend. The series for excess demand terms, domestic price level and ln(PX/PWa)
show stationarity at levels while the remaining series are first difference
stationary. However, the residual series for all the estimated OLS equations
showed stationarity, as can be seen from the ADF and Phillips Perron tests
shown in Appendix Tables A5 and A6.

Table A1
Unit Roots Tests

Unit Roots Test at Levels Unit Roots Test for First

Series ADF Statistic Differences
ADF Statistic
LnX -1.28 -3.75
LnPX -2.70 -3.44
LnPWa -2.34 -3.48
LnPWb -2.82 -3.48
Ln(PX/PWa) -2.48 @ -5.05 @
Ln(PX/PWb) -3.39 -5.71
LnWX -1.44 -3.70
LnGFD -1.52 -5.60
LnexD3a -4.34 @ -5.69 @
LnexD3b -4.43 -5.94
LnP -4.33 -4.61
Notes: 1. For the tests at levels, the ADF critical values at 10 per cent, 5 per cent and 1 per cent level of
significance were –3.22, -3.57 and –4.29 respectively, where both trend and intercept were
included, and –3.22, -3.57 and –4.31 respectively, where only intercept and no trend was included
in the test.
2. For the tests of first differenced series, the ADF critical values at 10 per cent, 5 per cent and 1 per
cent level of significance were –2.62, -2.96 and –3.67 respectively, for test equations including
both trend and intercept and –2.62, -2.97 and –3.68 respectively for tests including only intercept.
3. @ inticates ADF statistics from equations that included only intercept, and no trend for testing
stationarity.

40
 Table A2
Classification of Export Items
( in the present study)

CATEGORY CONSTITUENTS

C1 Food and Live Animals 1. Cereals and Cereal Preparations

a) Wheat
b) Rice
c) Others
2. Cashew Nuts Raw
3. Spices
4. Others
C2 Beverages and Tobacco 1. Tobacco, Unmanufactured
2. Others
C3 Crude Materials, Inedible, except Fuels 1. Crude Rubber Incl. Synthetic and Reclaimed
2. Cotton
3. Jute
4. Wool and Other Animal Hair excl. Wool Tops
5. Manmade Fibres and Waste thereof
6. Synthetic Fibres suitable for Spinning
7. Matalliferrous Ores and Metal Scrap
8. Crude Fertilisers and Crude Minerals
9. Others
C4 Mineral Fuels, Lubricants and Related 1. Petroleum Crude and Partly Refined
Material 2. Petroleum Products
3. Others
C5 Animal and Vegetable Oils and Fats 1. Vegetable oils, fixed
2. Others
C6 Chemicals 1. Chemical elements and compounds
2. Dyeing, tanning and colouring materials
3. Medicinal and Pharmaceutical Products
4. Fertilisers, manufactured
5. Others
C7 Manufactured Goods Classified Chiefly by 1. Pearls, Precious and Semi-Precious Stones
Material 2. Paper, Paperboard and manufactures thereof
a) Newsprint paper
b) Others
3. Textile Yarn, Fabrics, Made-up Articles and
Related Products
4. Iron and Steel
5. Non-Ferrous Metals
6. Manufactures of Metal, n.e.s.
7. Others
C8 Machinery and Transport Equipment 1. Machinery, other than Electric
2. Electrical Machinery, Apparatus and Appliances
3. Transport Equipment
a) Railway Vehicles
b) Others
C9 Miscellaneous Manufactured Articles

41
 Table A3
Alternative Classification of Export Items

S.No. CATEGORY CONSTITUENTS

I. Primary Products
A. Agriculture and Allied Products 1. Tea
2. Coffee
3. Rice
4. Cotton Raw including Waste
5. Tobacco
6. Cashew including Cashew Nut Shell Liquid
7. Spices
8. Oil Meals
9. Fruits and Vegetables
10. Processed Fruits, Juices, misc. Processed Items
11. Marine Products
12. Sugar and Molasses
13. Meat and Meat Preparations
14. Others

B. Ores and Minerals 1. Iron Ore

2. Mica
3. Others

II. Manufactures Goods 1. Leather and Manufactures

2. Chemicals and Allied Products
a) Drugs, Pharmaceutical and fine Chemicals
b) Others
3. Plastic and Linoleum Products
4. Rubber, Glass, Paints, Enamels and Products
5. Engineering Goods
6. Readymade Garments
7. Textile Yarn, Fabrics, Made-ups etc.
a) Cotton Yarn, Fabrics, Made-ups etc.
b) Natural Silk Yarn, Fabrics, Made-ups etc.
c) Others
8. Jute Manufactures
9. Coir and Manufactures
10. Handicrafts
a) Gems and Jewellery
b) Carpets (Handmade excluding Silk)
c) Works of Art (excluding Floor Coverings)
11. Sports Goods
12. Others

III. Petroleum Products

IV. Others

42
 Table A4
Volume of Exports
Annual Growth Rate 1
1981-82 to 2000-01
Y EA R C1 C2 C3 C4 C5 C6 C7 C8 C9 Total
Exports
1980-81*
1981-82 3.51 50.93 -27.89 783.33 -4.17 47.66 3.53 -0.77 -5.56 1.85
1982-83 -5.93 -3.68 0.94 599.71 38.04 -2.65 -7.95 -14.73 -11.76 5.99
1983-84 -4.50 -33.12 7.48 -11.97 31.50 -25.54 3.70 -16.36 8.57 -3.17
1984-85 0.94 -4.76 4.35 -2.47 2.40 35.04 7.14 23.91 19.30 6.90

1985-86 0.93 -9.00 -0.83 -64.36 -9.94 -12.43 -2.22 12.28 0.00 -7.86
1986-87 -2.78 7.69 20.17 -4.88 -37.01 22.84 14.77 8.59 9.56 8.98
1987-88 5.71 -23.47 -15.38 52.67 -34.02 17.09 18.81 45.32 22.82 15.42
1988-89 1.80 -25.33 14.05 -29.23 -37.50 56.22 13.33 13.37 3.83 8.64
1989-90 23.89 28.57 19.57 -29.95 355.00 39.56 0.00 30.13 25.79 14.99
1990-91 -1.43 43.06 43.03 87.19 17.03 34.06 1.47 4.36 9.62 10.98

1991-92 14.49 -6.80 -33.05 7.60 87.32 36.12 12.32 -7.40 11.07 7.47
1992-93 10.13 20.83 -15.19 -34.97 -17.29 -38.19 31.61 7.99 7.90 6.86
1993-94 13.22 8.62 59.70 -4.60 69.09 29.32 12.25 15.11 5.73 15.52

1994-95 -1.02 -45.24 -23.83 0.75 34.05 31.58 17.47 36.31 21.08 13.67
1995-96 21.54 62.32 18.40 -6.51 63.37 23.49 13.01 72.75 15.67 31.29
1996-97 29.54 53.57 26.94 -15.60 -23.81 21.59 12.83 -9.73 11.61 7.16
1997-98 -12.05 28.49 -4.49 -13.27 -12.24 20.70 -11.66 -10.78 5.78 -6.27
1998-99 23.33 -40.27 -31.62 -57.81 -7.22 -9.00 -11.22 -16.49 49.36 3.37
1999-2000 -17.12 57.58 30.00 -38.08 32.19 24.56 16.36 15.34 38.78 15.54
2000-01 10.14 -15.38 -15.38 1689.54 0.70 30.20 54.63 46.79 -17.93 23.86

Notes: 1. Growth over previous year, in percentage.

2. The commodity groups C1 to C9 are: C1 Food and live animals, C2 Beverages and tobacco, C3 Crude
materials, inedible, except fuels, C4 Mineral fuels, lubricants and related materials, C5 Animal and
vegetable oils and fats, C6 Chemicals, C7 Manufactured goods classified chiefly by material, C8
Machinery and transport equipment and C9 Miscellaneous manufactured articles.

Source: Author’s calculations

43
 Table A5
Co-integration Tests
Export Supply Equations

Test of Stationarity of Residuals (i) (ii)

ADF st a t i st i c -3.13 -3.13

Phillips Perron Statistic -3.41 -3.43

Notes: 1. For the ADF test, the Mackinnon critical values for rejection of the hypothesis of a unit root
in the residual series, at 10%, 5% and 1% significance levels were –2.62, -2.96 and –3.67
respectively. For the Phillips Perron test, these values were -2.62, -2.96 and -3.66
respectively.
2. (i) and (ii) refer to supply equations (i) and (ii) estimated using OLS, shown in text Table 3.

Table A6:
Co-integration Tests
Export Demand Equations

Test of Stationarity of Residuals (i) (ii) (iii) (iv)

ADF statistic -2.80 -2.82 -3.14 -3.05

Phillips Perron Statistic -3.18 -3.19 -3.59 -3.55

Notes: 1. For the ADF test, the Mackinnon critical values for rejection of the hypothesis of a unit
root in the residual series, at 10%, 5% and 1% significance levels were –2.62, -2.96 and –
3.67 respectively. For the Phillips Perron test, these values were -2.62, -2.96 and -3.66
respectively.
2. (i) - (iv) refer to demand equations (i) – (iv) estimated using OLS, shown in text Table 4.

44