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.
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.
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. Trends in imports will be examined in a subsequent MacroScan.)
What is interesting about the recent export expansion is that it also
marks a further diversification in terms of commodity composition,
in rather unexpected ways. Chart 2 compares the two periods 1987-88
to 1989-90 and 2002-03 to 2004-05.
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, it is apparent that all of these categories have actually
declined in share of exports. Instead, chemicals and engineering goods
show substantial increases in export shares. The other surprise comes
in the export of petroleum goods, when the thrust of Indian policy
has been to increase domestic processing of such material for domestic
therefore, the important thrust in exports has come from certain categories
of manufacturing goods. Overall, however, even the manufacturing trade
balance gone increasingly into deficit in recent years, as Chart 3
indicates. 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
it is certainly the case that manufacturing exports have increased
quite sharply since 2000-01, and so this deserves further examination.
Chart 4 shows that this has not necessarily been the result of massive
undercutting in price terms, at least as far as overall manufacturing
exports are concerned. While some degree of inverse relationship is
apparent between the quantity of export and the unit values, in general
there is an increasing trend for both. Also, while the unit values
have not reached the peaks achieved in the late 1990s, the period
after 2000, both the quantum index and the unit value index have been
This is certainly good news, and if it 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 even better
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.
As we have already noted from Chart 2, 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. It is therefore worth examining
the composition of engineering goods exports, to see which have been
the dynamic sectors.
Chart 5 provides a glimpse into exports of various categories of engineering
goods since 1987, in terms of millions of US dollars. This provides
an interesting picture which is somewhat at variance with the image
that is sought to be created by current press reports.
is generally thought, for example, 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, in fact India
remains one of the small exporters in this area, although clearly
there may be scope for expansion here. In fact, as Chart 5 shows,
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 most recent three-year period.
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
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 nor 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.
The pattern is corroborated by changes in India's direction of trade
in the recent past, as shown in Chart 6. 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.
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.