ECONOMIC NOTES

 The Export Growth Story

Jayati Ghosh

ECONOMIC reforms since 1991 have been strongly associated with external trade liberalisation. As officially stated, the chief purpose of this was to bring domestic relative prices into line with world prices, thereby supposedly creating conditions for greater efficiency and competitiveness of domestic production. This in turn was supposed to generate more rapid increases in exports, which were then expected to shift the economy towards more labour-intensive forms of production.

Until a few years ago, it seemed that these expectations were not met, as the rate of growth of exports (in US dollar terms) in the 1990s was only marginally higher than that of the 1980s, and significantly lower than in the “closed economy” days of the 1970s. However, very recent increases in export growth since 2001, resulting in rates of export expansion of around 20 per cent per year and increases in India’s (admittedly small) share of world trade, have created great optimism about export potential.

WORSENING TRADE BALANCE

As Chart 1 shows, exports have indeed increased at a relatively rapid rate in the very recent past. However, it should be noted that imports have increased at an even more rapid rate, so that the aggregate trade balance has deteriorated very sharply, and in the current year it is estimated to cross $30 billion.

(The increase in import values is usually blamed on oil prices; however, non-oil imports have increased at an even more rapid rate in value terms.)

The process of global integration and the effects of the WTO agreements were expected to cause particular increases in India’s exports of agricultural goods, textiles and garments, leather and gems and jewellery.

However, all of these categories have actually declined in share of exports. Instead, chemicals and engineering goods showed substantial increases in export shares.

Overall, however, even the manufacturing trade balance has gone increasingly into deficit in recent years. From a surplus in 2000-01 (which is incidentally a year of relatively poor performance in exports) and balance in 2002-03, the manufactured goods trade deficit alone was more than $14 billion in 2004-05.

However, it is certainly the case that manufacturing exports have increased quite sharply since 2000-01, and so this deserves further examination. This has not necessarily been the result of massive undercutting in price terms, at least as far as overall manufacturing exports are concerned. In general, and especially since 2000, both the quantities of manufactured goods exported and the unit values of such exports have been rising.

If this suggests that Indian manufacturing has reached a new stage where it is internationally competitive without having to resort to major price competition, then it is certainly good news. But to come to such an assessment we would need to examine the patterns of exports more closely in terms of which commodities are showing the most rapid increase.

“ENGINEERING GOODS” EXPORTS

It turns out that even in manufacturing, the recent increase has not come from those sectors which were expected to benefit from greater openness, such as textiles and garments and gems and jewellery, which have declined in terms of share of total exports. Rather, engineering goods and chemical products have emerged as the biggest gainers in recent times. So within the category of engineering goods exports, which have been the more dynamic sectors?

It is generally thought that the recent increase in exports is because of greater exports by the automobile sector, as India emerges as one of the developing country car exporters based on local assembly using components made here but mostly abroad. However, India remains one of the small exporters in this area, although clearly there may be scope for expansion here. In fact, while exports of transport equipment have increased in recent years, this increase has not been all that dramatic. In fact, the share of transport equipment in total engineering goods exports has come down from an average of 21 per cent in the mid-1990s to 15 per cent in the period 2002-05.

This is also true of exports of electronic goods, whose share in the engineering exports category has come down from an average of 15 per cent to around 11 per cent in the most recent period. The share of machinery and instrument has remained broadly stable at around 22 per cent.

The biggest increase – and the real source of the recent expansion in aggregate export increases in this sector – has come from iron and steel, which has increased its share of exports in this sector from just 7 per cent at the start of the 1990s to 15 per cent in the mid 1990s to 22 per cent in the most recent period. This reflects the recent surge in demand for steel worldwide, which is the result of large demand emanating from China in particular. The other important exporting sector is metal manufactures, and here too the export increase is the result of changing conditions in the world market.

Significantly, therefore, the bulk of the increase in “engineering goods” exports is accounted for by exports of bulk intermediates like steel which are going to booming East Asian markets. This may or may not reflect enhanced industrial competitiveness of India in general – certainly on the basis of this evidence alone, it would be hard to come to such a conclusion.

CHANGES IN DIRECTION OF TRADE

The pattern is corroborated by changes in India’s direction of trade in the recent past. Between the late 1980s and the most recent three-year period, there have been substantial shifts in the direction of exports. While the US had broadly maintained its share of around 18 per cent of India’s exports, there is evidence of some shifts and substantial geographical diversification in terms of other regions.

The largest decline, predictably, is in exports to Russia, whose share has fallen from 14 per cent to only 1 per cent. But even the European Union is less significant, and other developing countries have emerged as more significant markets. The good news is that Africa and Latin America have emerged as export markets of some significance, unlike in the past.

The biggest increase is to other developing countries in Asia, most particularly PR China, Hong Kong China and Singapore. Since the latter two are essentially zones of re-export within the region, exports to these two areas reflects the growing pattern of intra-regional trade based on industrial relocation through geographically dispersed production, as well as the growing demand for raw materials and intermediates emanating from East Asia in general.

Of these, by far the most significant is China. While India currently has a trade deficit with China, from where final manufactured goods are imported into the country, it has a reasonably large trade surplus with Hong Kong, which routes many of these exports through to mainland China. It has a similarly large trade surplus with Singapore, which is also dominantly a re-exporter to the region and elsewhere. Of course it is good news that India is getting integrated to these production chains in Asia; the only concern here is that these chains themselves are still ultimately dependent upon demand from the US which still acts as the basic engine of growth for East Asia.

Clearly, therefore, important changes are taking place in both the rate and pattern of India’s exports. However, the evidence thus far is not enough to allow for the conclusion that there has been a significant increase in India’s external competitiveness. In fact, since so much of the export growth has come from iron and steel and chemical products, it may just reflect the greater dynamism of other economies in East Asia which are importing these at more rapid rates.

This in turn means that a substantial part of the recent increase in exports reflects higher demand for basic and intermediate goods from countries in Asia where growth rates have been even faster. This is not a success of the export-led growth strategy, since the goods for which export growth was projected to be high have not actually performed that well. Instead, the exports of these goods indicates that domestic industrial dynamism has not been sufficient to absorb these for production of final goods.