India: Characteristics & Performances of Exports - Example

INDIA CHARACTERISTICS & PERFORMANCES OF EXPORTS TABLE OF CONTENTS 1. EXECUTIVE SUMMARY 3 2. INTRODUCTION 4 3. EFFORTS TO INTEGRATE WITH WORLD ECONOMIES 5 4. EXPORTS TRENDS IN INDIA 7 5. SWOT ANALYSIS 13 6. REFERENCES 17 1. EXECUTIVE SUMMARY India has registered outstanding growth performances in recent years. Its growth along with that of China has been anticipated to help sustain growth of global economy as economic prospects world over are not bright. Indian economy grew at more than 8% after 2003. India’s trade has shown impressive increase at the growth rate of 11% after 1978 which is much above economy’s growth rate. Its export share has grown from 0.4% to 1.2%. But still it is a minor in terms of its share. In spite of this, expectations are huge regarding India’s growth, as China’s expansion may be constrained by its rising cost and comparative disadvantage of geographical dividend with respect to India. India’s trade restructuring has not been very intensive. Service trade is very important from India’s perspective, as this also forms major chunk of economy. China on the other hand has focused more on manufacturing and hence been able to transform from low technology labor intensive to more technology and capital intensive goods. This difference is mainly because of role of Foreign direct investment in China, which in turn was determined by overall business friendliness and openness to world economy. The outlook for trade of Indian economy is not very certain. India’s trade has not undergone complete restructuring unlike China. It continues to depend upon exports of low skilled labor intensive goods. Moreover as India still spends huge amount of precious foreign exchange on import of energy needs, it is very risky because of price fluctuations. Moreover in terms of industrialization also, India has to go a long distance. 2. INTRODUCTION According to Macroeconomic accounting, Exports are a component of National Income as per the equation: Y = C+I+G+(X-M) Where Y, C, I, G, X, M are consumption, investment, government expenditure, exports, imports respectively. In standard macroeconomic theory, exports are are independent of national income unlike imports. But exports do have a significant effect on national income through Foreign trade multiplier. In current phase, exports and imports are not independent of each other. As an increase in exports raises national income which raises imports. Further, in most of the cases, exports are based on imported raw material, intermediate products and capital equipment. Hence imports may generate value added exports. Countries which prefer protectionist policies with high tariff and non tariff barriers often face similar retaliation from other countries. This was view was not so popular until a few decades ago. India and China were world’s 1st and 3rd largest economies at the onset of industrial revolution i.e. a few centuries ago. Even in late 70s both seemed to have similar fate. But then China turned into miracle economy. It happened because of its decision to pave way for economic reforms in 1978. This helped China leap forward and India remained stagnant. In 1991-92, when India’s economy worsened, India had no option other than systematically adopting to the phenomenon of Globalisation, Liberalisation and Privatisation. Internal debt was 50 % of GDP with 39% of revenue collections were used for interest payments only. Inflation reached at a high of 14%. Rupee depreciated by 26 % against Dollar. India’s credit rating fell from AAA to BB+. . 3. EFFORTS TO INTEGRATE WITH WORLD ECONOMIES Various steps were taken to initiate reforms with long lasting impact on Trade policy, such as: Delicensing Increase in investment ceiling of small scale enterprises. Liberalization in tax provisions for selected sectors Shifting of products and industries from administered price mechanism. Tax exemptions, holidays and concessions. Increase in the limit of Foreign direct investment in a number of areas. Permission to exporters to keep foreign exchange accounts abroad to finance trade transactions Creation of Foreign Investment Promotion Board as separate body to study and clear foreign direct investment proposals. Simplification, rationalization and standardization of a number of export-import procedures and documentations Wide range of facilities and incentives to export-oriented units (EOU), export processing zones and special economic zones. Replacement of restrictive Foreign Exchange Regulation act with more liberal Foreign Exchange Management act (1999) Freeing of the financial institutions from compulsory investment in government securities with simultaneous reduction in CRR (cash reserve ratio) and SLR (statutory liquidity ratio), hence providing more funds to businesses. Continuation of process of reduction in fiscal deficit to reduce interest rate pressure and inflationary pressure, hence positively affecting exports. Phased deregulation of the export credit rates by RBI. Now banks can provide export finance at or below their Prime Lending rates. Under revised policy, exporters have been allowed to repay their preshipment credit out of balances in their Export earners foreign currency accounts. Export Import (EXIM) Policy Exports competitiveness and performance of firms depend upon resource advantage, organizational effectiveness, product quality, innovation and the extent and quality of international marketing efforts. The performance is greatly affected by the Export-Import policy of the government. Policy lays down an export promoting institutional infrastructure, incentives and concessions, procedures and conventions, and provisions which affect the access of exporters to foreign market. These factors along with components of macroeconomic policy, like monetary and fiscal policies, determine the transaction costs of exporters which affect the competitiveness of exporters. India’s trade policy (2004-09) envisages doubling share in world trade in 5 years and special focus has been asked on agriculture, handlooms, handicraft, gems and jewellery, leather sector. Funds shall be earmarked for Agri Export zones. A new scheme called Special agricultural produce scheme for the export of fruits, vegetables, flowers etc has been introduced. The state governments were encouraged for participation in promotion of exports; hence a new scheme was formulated named ASIDE. 4. EXPORTS TRENDS IN INDIA India has roughly completed 2 decades of economic reforms and economy has moved towards a more market based system. Its economy is said to become 3rd largest economy by 2050. But today its share of global trade is just around 1%. Still, its integration with regional members like ASEAN is also not satisfactory. For example, India and China’s share to ASEAN countries is 1.6% and 11% respectively. SHARE OF CHINA (series1) & INDIA (series 2) in ASEAN’s TOTAL IMPORTS Although overall trade of India has increased but it has suffered trade deficit largely. Also share of manufactured goods in total trade has not increased while overall trade has rapidly increased. India’s GDP growth has been remarkable after 1992 and it has surpassed global average quite satisfactorily as shown by the figure below where series 1 is India, series 2 is world average. GDP Growth Rate of INDIA(series1) vs WORLD AVERAGE(series2) India’s trade performance has been impressive since 1978, after which its average growth rate in exports is huge 11%. From value of 10 b$ goods & services traded in 1978, it has reached in 2005 to value of around 165b$. GOODS & SERVICES TRADED With the adoption of Globalization, Liberalisation, Privatisation India has become more open which is measured by trade to output or GDP ratio. In 1978 trade to GDP ratio for India was around 14%, while the world’s average was 34%.Until late 1980s it remained stable. Then after from 1987 to 2001 it almost doubled from 13% to 26% to touch a high of 44% in 2005. Still this figure is lower than the world’s average of 52%, but higher than major economies like US, Japan, Brazil with trade to GDP ratios 25% .25% ,26% respectively in 2004. OPENNESS OF INDIAN ECONOMY: TRADE to GDP RATIO In 2006, India was world’s 28th largest exporting nation and 17th largest importing nation, whereas its total ranking was 18th.From 1983 to 2006 it doubled its exports share from 0.5% to 1%. India’s trade expansion has been dominated by exports of services, unlike in China where commodities have influenced commodities. In India, commodities share in total exports have dropped from 82% to 72%. SHARE OF COMMODITIES IN TOTAL EXPORTS The composition of goods traded by India has been very uncertain. Between 1988 and 1999 share of manufactured goods in India’s commodities exports have suffered fluctuations between 73% to 82%.After that, it fell steeply to around 69% in 2006. This reflects lack of structural transformation of the Indian economy. It is more evident by looking at composition of traded goods. In 1988 top 3 categories with highest export shares were Textiles 23%, natural pearls & precious stones 22%, vegetable products 11%. In 2006, exports were still dominated by sectors with low technology and low skilled intensive labor. The top 3 categories being mineral products 20%, textiles 15% and precious stones 13%. Share of labor intensive sectors such as textiles etc decreased from around 30% in 1990s to around 17% in 2006. SHARE OF LABOR INTENSIVE SECTORS IN EXPORTS In spite of increase in proportion of more sophisticated manufactured items such as machinery and instruments, a much more is desired as its share went up from 8% to just 12%, compared to that of China’s 51%. SHARE OF TECHNOLOGY INTENSIVE TRADE IN EXPORTS Before 1990s India’s trade was negligible with other Asian countries, with the exception of Japan. In the past decade India has strengthened its trade ties with ASEAN nations. In 80s, for example, only East-Asian country among top ten export destinations was Japan. This decade, many countries have climbed up as India’s major trade partners including China. In 2006 US was the India’s largest export destination, China, Hong Kong and Singapore also figured among biggest export destinations. But still, compared to China’s export to US of around 200b$, India’s exports were one-tenth of China at 10b$. Similarly, with ASEAN members, India’s trade relations are pathetic as India’s exports to ASEAN members were only 1.6% compared to China’s 11%. India’s trade intensity is lower than many strong economies, say China. India is not integrated multilaterally and regionally as China. India’s overall trade intensity and its bilateral linkages are weaker than fundamentals would suggest. 1, 2,3,4,5 are TRADE WITH JAPAN, EURO AREA, USA, CHINA, OTHER ASIA 5. SWOT ANALYSIS Looking at the characteristics of Indian Export sector, analysis in terms of Strengths, Weaknesses, Opportunities and Threats can be done as follows: STRENGTHS Excess manpower: Looking at the Indian economy, we find that agricultural and related activities’ contribution to the national income has decreased continuously over the years from over 50% to 18% today. But still on it 70% of the country’s population depends for employment. Series1, 2, 3 are agriculture, manufacturing, services as % of INDIAN GDP Hence, it is evident that if excess labor from agriculture could be shifted to the manufacturing sector, 2 objectives could be achieved. Firstly, decrease in disguised unemployment. At the same time per capita productivity could be increased as agriculture as industry is overcrowded, so optimal use of labor has not been done. Secondly, if adequate training is provided to this surplus labor, they could tap the huge potential in manufacturing. Demographical Dividend: India has one natural advantage of its demographics. India has huge population in the working age. 70% of the population is under 35 years of age. Compared to India, China suffers disadvantage in this regard, as it employed 1 child policy, so more people are ageing. Low costs: Because of abundant labor and raw material, costs of production are low compared to other economies, so exporters enjoy competitive advantage. WEAKNESSES: Infrastructure: India’s one of the most fundamental disadvantages is its infrastructural constraints. There is lack of international level ports, roads and other means of transport which can provide connectivity to every corner. Further, Power production and supply is faulty and insufficient. Because of irregular supplies, firms suffer losses worth millions of dollars. Many of the SMSEs cannot afford huge costs of having own power facilities. Further there is dearth of storage facilities. Beaurocracy: India has continuously remained at the lower rung in terms of places worth investing at. This is because of procedural delays and corruption. Starting or closing a business is an uphill task here compared to Singapore, China where it is a matter of few days. Labor Laws: India suffers from over regulation and protection of labor. It is because of a few archaic rules which render business owners rather ineffective. For example, to close a business or sack an employee, owner may have to take permission from concerned authorities. Tax laws: India’s indirect taxes are one of the highest in the world. Further, huge fiscal deficits and low efficiency in tax collection reduce chances of decrease in tax rates. OPPORTUNITIES Scope of FDI: Patterns over the previous years suggest that owing to future opportunities, FDI has been continuously increasing. This reflects huge gains in terms of excellent managerial practices, transfer of advanced technology and good corporate government practices. Increasing average global incomes: Over the years national incomes of the various economies all over the world have been increasing owing to tremendous GDP growth rates. Even, Saharan economies have grown at impressive rates. This presents huge export potential to these countries. Untapped Potential: Gravity model suggests that India’s bilateral trade with several countries is lesser than what fundamentals suggest. THREATS: Competitors: Countries like China are utilizing their potential to fullest. Owing to advanced technologies, shrewd business practices, abundant labor China has become world’s exporter, gaining huge trade surpluses. In turn improving forex earnings and hence fundamentals. At the same time they are using diplomatic measures to ensure their businesses move northwards. Uncertainties & Instability: Owing to problems like terrorism, business environment has become rather complex. This affects foreign investments as well as foreign ties. Hence, exports may be severely impacted. Comparative Technological expertise: India has remained backwards when the question of adoption of advanced technologies comes. It is because of several reasons like pressure on governments to provide employment to large population, lack of will towards modernization etc. 6. REFERENCES: Amita Batra, India’s Global Trading Potential: Gravity Model Approach, , Indian Council for Research On International Economic Relations Deepak Nayyar, Industrial Growth and Stagnation-The Debate in India, Oxford University Press Matthieu Bussiere,Arnaud Mehl,Occasional paper series NO 80/January 2008, ,European Central Bank P.Bhuyan, International trade in goods: Performance of India vis-à-vis a few important economies in South and East Asia, Sarah Y. TONG, Comparing trade performance of China and India, ,EAI background brief no. 388 Suresh Bedi,Business Environment, 1e ,Excel Books International Trade Statistics 2007, World Trade Organizations World Development Indicators, World Bank http://www.economywatch.com/policywatch/exim-policy.htm http://exim.indiamart.com/act-regulations/ftrd.html http://www.indianindustry.com/trade-information/trade-statistics.html Read More