With the introduction of liberalization and globalization in 1991 the composition, volume, value of India’s foreign trade has undergone substantial changes. To understand the structural changes and their implication in the Indian economy after LPG policies #IMPRI Center for the Study of Finance and Economics, IMPRI Impact and Policy Research Institute, New Delhi organized a talk on “Growth, Diversification, and Upgrading of India’s Exports in Post-Reforms Period: Some Policy Implications” under the series The State of Foreign Trade – #TalkingTrade on January 11, 2022.
The speaker for this session was Prof Aradhna Aggarwal (Professor), Copenhagen Business School, Denmark. Prof Mukul Asher (Former Professor), Lee Kuan Yew School of Public Policy, National University of Singapore was the Chair for the event and the discussant included Prof Shahid Ahmed (Professor), Department of Economics, Jamia Millia Islamia, New Delhi. The moderator for the event was Dr. Nalin Bharti (Associate Professor), Humanities and Social Sciences, Indian Institute of Technology (IIT), Patna.
An overview on Growth and India’s Exports in the Post-Reform period
Prof Asher discussed four main remarks in the context of the topic – First, he said that while analyzing exports, trade and while assessing the contribution for a country globally we need to consider absolute size relevant. While comparing India’s total trade (exports) with countries like Indonesia, Vietnam, and Taiwan (which are much internationally open) he bought into light that India was 2.6, 1.8, 1.6 times higher respectively.
He also commented that India is very close to South Korea but far away from countries like the USA, China, Germany, etc. Secondly, he mentioned India as the 9th largest exporter of agricultural commodities and with involvement in mega food parks improving further, India is rising as a trustworthy partner due to its rising contribution to food security.
Thirdly, he spoke about the shift of India’s agreement strategies towards those who can provide balanced treatment of goods, services, investment, and flow of professional and technical personnel. Later, he talked about the latest trade agreements signed by India. He mentioned that since 1947, India is now focusing on the external sector as a critical engine hook.
Prof Asher desires to focus on export to GDP ratio with service aspect as he believes it could give astonishing results, he adds that emphasis needs to be laid on labor reforms, including more geographical area. This could resolve geographical disparities in India fewer districts account larger proposition of exports. Lastly, he mentions that diversification can be attained but it would take a few years.
Prof Aradhna starts the discussion by stating that India pushes for a clear focus on low-skilled, labor-intensive exports and manufacturing and backed this statement by saying that growing export shares in sectors where India doesn’t have the comparative advantage. This is both export and growth dampening and called this a paradox that works against the existing theory of trade.
She then discussed some trade and openness theories covering Neo-Classical Theory, Endogenous growth theories, Melitz Theory and GVC Literature. Prof Aradhna while discussing export growth patterns stated that India has been seeing an accelerated growth rate, particularly in the 2000s which began to decelerate in the 2010s. She also mentioned that despite this accelerated growth the share of Indian exports in the world increased marginally.
Next, Prof Aradhna discussed three main indicators to understand whether post-liberalization India’s share has specialized or diversified.
1. Distribution of export shares- here she explained using Lorenz Curve (which depicts the distribution of export shares with 6-digit products) that the top 10% accounted for nearly 90% of exports in 1990 and further declined to 83%. Gini coefficient also declined marginally and Indian exports are still concentrated at the top, changes occurred but only for diversification and not specialization.
2. Variety of exports – most of the growth in exports came from the existing products and mentioned that export growth is mainly driven by an intensive margin. She also brought into notice that the number of new products increased until 2005 then declined for some point and again increased but the export share didn’t increase much.
3. Distribution of RCA. Prof Aradhna discussed that there is a continuous increase in the number of products under RCA>=1 but the percentage of exports under RCA>=1 has declined and shows India isn’t exporting products where it has comparative advantage she also talks about inconsistency in export shares and RCA. She highlights that India’s export structure upgraded substantially with both export shares and RCA showing a similar pattern.
Prof Aradhna then discussed some reasons which lead to India losing its comparative advantage in labor-intensive products. Finally, talking about recommendations she suggests that if India needs to promote exports it will need to strengthen emerging dynamic comparative advantages, India isn’t likely to compete in labor-intensive products considering the massive capacities and incentives offered in new production centers, SEZs have the best chance to promote exports and FDI, countries with competitive strengths in exports of sophisticated and complex product face better growth prospects.
She also laid emphasis on the fact that it is crucial to place international competitiveness at the core of the official rhetoric of self-reliance. Prof Aradhna asks us to focus on good infrastructure, logistics, good governance, corruption, and not just on labor reforms to prevent the economy from ailing. Lastly, she states growth is region-specific and we need to identify and promote regions that have potential.
International Trade Scenario of India
Prof Ahmed began by stating that internal strength is a very important aspect for India to grow globally. He also highlighted that for the past 30 years irrespective of regime change Indian path is common. He states that there is a broad consensus among parties in dealing with India’s integration with the global economy. Moving on towards India and China’s perspective he mentions that China is eight times higher in merchandise trade when compared to India.
According to Prof Ahmed, if you enter Free Trade Agreements (FTAs) there is no guarantee of success and there can be both gainers and losers. Then comparing India and China he mentions that China’s 80% of exports are either from consumer or capital goods while India stands at the lower end for this category. India has potential for export diversification. He suggests that we need to increase participation with East-Asia where we have a good number of agreements, even we should also focus on Africa.
Prof Ahmed considers 2019-21 as a structural break and asks to study it accordingly. Lastly, he asks us to emphasize more on multilateral trade regime, more state and structural reforms needed, protection strategy needs to be curtailed, though FTA should also be focused on if and only if it mutually benefits. India has potential in diversification and export destination. He ended by emphasizing working hard on the internal strength of the nation.
Dr. Nalin concluded the discussion with three major pointers. First, India still stands strong as one competitive exporter for those products India had a competitive advantage in the past. Secondly, new projects like Bharatmal, Sagarmala, Udaan in terms of connectivity and logistics could work great in the future. Lastly, district or regional level readiness is needed. India had lots of opportunities and still has but to grow in the future we need to be targeted in our approach otherwise we might miss the bus.