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India: Selected Issues

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
February 2017
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India’s Exports: What is Behind the Slowdown?1

India’s exports have done remarkably well since the early 2000s, but export growth has slowed in recent years. This chapter analyzes India’s export competitiveness and explains the slowdown of India’s exports. Key factors underpinning the slowdown include weak trading partners’ demand and real appreciation of the Indian rupee, while India’s high tariffs and trade costs could also affect its export performance. Going forward, steps to further reduce barriers to trade and facilitate a focus on higher value-added products, as well as continued supply-side reforms, are vital to unleash India’s export potential.

1. India’s exports have done remarkably well since the early 2000s, but export growth has slowed in recent years. India’s goods and services exports grew robustly during 2000-2011, on average at about 20 percent per year. During that time, India gained significant export market shares in both goods and services exports. Nevertheless, this trend has reversed since 2013, where India’s export growth has decelerated significantly. The slowdown of merchandise exports was particularly strong, though services exports have held up so far.

Share of Non-oil Exports

(In percent of World non-oil goods export)

Sources: IMF, World Economic Outlook, and IMF staff estimates.

Growth in Non-oil Goods Exports

(2000=100)

Sources: IMF, World Economic Outlook, and IMF staff estimates.

2. This chapter analyzes India’s export competitiveness and explains the factors underpinning the slowdown of its exports. It identifies key features of India’s export competitiveness based on quantitative and qualitative measures, using granular data and cross-country comparisons. It then empirically identifies the key drivers of India’s goods exports and derives policy recommendations. The chapter focuses on the export performance of India’s merchandise exports, given that the slowdown was more evident there and data limitations preclude detailed examination of services exports.

3. Despite the recent slowdown, India’s export competitiveness has held up well in relative terms. Comparing across emerging economies (EMs), Indian exports have not fallen as much as peers. The resilience of India’s export performance benefits from (Figure 1):

  • India’s exports are well-diversified across advanced and emerging economies. India’s major export markets span from the European Union, the United States, ASEAN, China, and United Arab Emirates (UAE), among others.
  • India’s export basket is also broad-based, ranging from primary to more sophisticated products. Key export products include energy, machinery and transport goods, but manufactured goods exports are lagging.
  • India has also successfully integrated into the global value chain. India’s foreign value added—the fraction of country’s exports that are part of foreign production—rose from 15 percent of total merchandised exports in 2000 to 22 percent in 2011, although there is still room for improvement compared to the world average.

Exports of Goods

(Value in US$, seasonally adjusted, 2008Q1=100)

Sources: Haver Analytic; IMF staff calculations.

Exports of Goods

(Percent, 2008-2015 annual average growth)

Sources: IMF, Global Economic Environment Database; Haver Analytic.

Figure 1.India: Export Structure

4. India’s trade weakness can be attributed to both external and domestic factors. Despite India’s diversified export base, weak trade appeared to be a common phenomenon after the global financial crisis of 2008. In particular, the growth of India’s trading-partners’ import demands in the post-crisis period was only half that of the pre-crisis period. As refined petroleum products made up about one-fifth of the value of India’s goods exports, export values fell in line with the collapse in commodity prices during 2015-2016. Historically high inflation vis-à-vis trading partners contributed to the real appreciation of Indian rupee, thus affecting India’s price competitiveness. India exports high-quality products, but there is still room for India to converge further with other EMs in manufacturing exports of greater quality and complexity. Moreover, high trade barriers including tariffs and trade costs, as well as administrative burdens, could also have affected Indian export performance. Rigidities in Indian labor and product markets could also have played a role.

5. This study finds trading partners’ demand and international relative prices are the key drivers of Indian exports. This study empirically identifies the determinants of export growth, utilizing the framework of Santos-Paulino and Thirlwall (2004) and Morel (2015). The empirical estimation is based on panel regressions of sixteen emerging economies, using annual data ranging from 1981-2015 (Table 1). The variables include the growth of real non-oil goods exports; the growth of real non-oil goods import demands weighted by the shares of country’s exports to trading partners; CPI-based trade-weighted real effective exchange rates; changes in import tariff rates; foreign direct investment inflows as share of GDP; and structural and institutional indicators.2 In line with Santos-Paulino and Thirlwall (2004), Morel (2015), as well as Raissi and Tulin (2015), this study finds India’s export performance largely depends on the strength of trading partners’ demand and international relative prices. When analyzing the export growth decomposition during 2013-2015, a decline in import demand from India’s export partners and real rupee appreciation explained about 39 percent and 29 percent, respectively, of the slowdown in real non-oil export growth.3 A trade slowdown caused by weak trading partners’ import demand is also a common feature of other emerging economies.

Table 1.Drivers of Export Growth in Major Emerging Markets 1/
Dependent variable: Real non-oil export growth
(1)(2)(3)(4)(5)(6)
Real effective exchange rate change−0.221−0.237−0.213−0.211−0.216−0.095
[4.24]***[4.38]***[3.01]***[3.01]***[3.08]***[0.60]
Growth of real non-oil goods import demand of trading partners 2/0.8530.8730.8440.8120.8150.739
[8.76]***[7.65]***[6.93]***[6.17]***[6.22]***[4.91]***
Change in MFN tariff rates−0.141−0.299−0.290−0.286−0.686
[0.87][2.91]**[2.80]**[2.82]**[0.69]
FDI inflow in percent of GDP0.2000.2060.1880.217
[1.21][1.40][1.30][2.15]*
Change in export diversification0.1340.134
[1.72][1.72]
Change in manufacturing export quality0.002
[0.73]
Number of documents to export−2.973
[1.64]
Change in good market efficiency score 3/5.916
[0.82]
Real non-oil export growth, lagged−0.002−0.046−0.033−0.026−0.029−0.178
[0.05][0.92][0.63][0.50][0.54][1.57]
Constant0.5130.403−0.268−0.264−0.24216.315
[0.56][0.37][0.26][0.24][0.21][1.56]
Adjusted R20.350.350.350.350.350.51
N328277269269269117
Source: IMF staff estimate

To quantify the role of trade slowdown, relative prices, and other factors, the empirical approach estimates a standard model of export demand. The estimated equation is:

in which XGit, Dit, Pit and Xit denote, respectively, real non-oil export growth, real non-oil import growth of trading partners, relative prices, and a set of structural indicators of country i in year t. Panel regression of real non-oil export growth of 16 emerging economies, including Brazil, China, Hungary, India, Indonesia, Malaysia, Mexico, Peru, the Philippines, Poland, Russian Federation, Singapore, Slovak Republic, South Africa, Thailand, and Turkey. Data are unbalanced panel from 1981-2015. Dependent variable is the growth of non-oil good exports. Standard errors are robust and fixed effects are also included. Significant level is indicated by *** at 1% level, ** at 5% level, and * at 10% level respectively. T-statistics are reported in brackets.

Data are from IMF’s Global Economic Environment database. Partners’ real non-oil goods import demands are weighted by trade exports to partner countries.

Data are from Global Competitiveness Indicator. The indicator measures the level of market competition, trade barriers, business and tax burdens, and market discipline. The higher the indicator the more efficient the product market is.

Source: IMF staff estimate

To quantify the role of trade slowdown, relative prices, and other factors, the empirical approach estimates a standard model of export demand. The estimated equation is:

in which XGit, Dit, Pit and Xit denote, respectively, real non-oil export growth, real non-oil import growth of trading partners, relative prices, and a set of structural indicators of country i in year t. Panel regression of real non-oil export growth of 16 emerging economies, including Brazil, China, Hungary, India, Indonesia, Malaysia, Mexico, Peru, the Philippines, Poland, Russian Federation, Singapore, Slovak Republic, South Africa, Thailand, and Turkey. Data are unbalanced panel from 1981-2015. Dependent variable is the growth of non-oil good exports. Standard errors are robust and fixed effects are also included. Significant level is indicated by *** at 1% level, ** at 5% level, and * at 10% level respectively. T-statistics are reported in brackets.

Data are from IMF’s Global Economic Environment database. Partners’ real non-oil goods import demands are weighted by trade exports to partner countries.

Data are from Global Competitiveness Indicator. The indicator measures the level of market competition, trade barriers, business and tax burdens, and market discipline. The higher the indicator the more efficient the product market is.

6. Continued efforts to lower trade barriers and reduce trade costs could help boost exports and revive the virtuous cycle of trade and growth. High import tariffs can be costly, as they are likely hurt export performance, employment and growth thus resulting in negative welfare effects (Obstfeld, 2016). Since the 1980s, most countries have made significant progress in reducing tariffs, but the pace of tariff reduction has slowed in recent years (IMF, 2016). In India, import tariffs remain high relative to peer EMs, particularly among food, agriculture, and manufacturing industries.4 High tariffs and trade costs could discourage exports and new investment needed to better integrate Indian exports into global value chains. The empirical analysis presented in Table 1 emphasizes the role of trade policy—particularly tariffs—on international trade in line with IMF (2016). To illustrate the potential impact of import tariff reductions on exports, a scenario analysis—assuming India’s import tariffs are lowered to the level of the EM average—suggests a significant boost of nearly 2 percent to India’s export growth over the medium term.

MFN Applied Tariff Rates 1/

(In percent)

Source: WTO’s World Tariff Profile 2016.

1/ Simple average of most-favored nation (MFN) tariff rates.

India: Non-Oil Export Growth 1/

(Percent, in real term)

Source: IMF staff estimates.

1/ Reform scenario is to illustrate the impact of various reforms on India’s export growth, assuming India’s structural indicators to reach the EM average level. Export diversification is not included as Indian exports are more diversified than EMs. The estimates are derived from the panel regression of non-oil export growth equation (5).

7. Removal of structural impediments—supply-side bottlenecks, labor and product market rigidities, and difficulties of doing business—could help India reinforce its productivity gains and support future expansion of exports. An international ranking based on country’s structural and institutional setting shows that structural impediments to both effective product competition and efficient labor markets remain for India. In particular, supply-side constraints and rigidities in product and labor markets can weigh on India’s export performance (see Raissi and Tulin (2015); Anand et al (2015)). Taking into account institutional and structural indicators, the estimated results also show that foreign direct investment (FDI) inflows and structural improvements could potentially have positive impacts on exports, although the results are not statistically significant possibly due to the short sample length arising from data limitations.

Emerging Markets’ Structural Indicators

(Relative ranking among 16 EMs, lower ranking implies better performer, data as of 2015)

Sources: WITS, GCI, IMF staff calculations.

1/ EM average is the ranking of the simple average of each structural indicators among 16 emerging markets, including Brazil, China, Hungary, India, Indonesia, Malaysia, Mexico, Peru, the Philippines, Poland, Russian Federation, Singapore, Slovak Republic, South Africa, Thailand, and Turkey.

8. Continued supply-side reforms, and steps to further reduce barriers to trade and facilitate a focus on higher value-added products, are vital to unleash India’s export potential. India’s economy is largely domestically driven and, despite the expansion in exports over the past decade, the contribution of exports to Indian growth remains small. Nonetheless, India’s export potential is large. India’s Foreign Trade Policy (FTP) 2015–2020 aims at increasing both manufacturing and services exports to US$900 billion, or a doubling of the current level, by 2020. Nonetheless, the tepid and volatile global outlook suggests weak global trade will likely persist. Given the broad-based slowdown in external demand, the need for continued reform efforts to improve India’s competitiveness, further trade and investment liberalization, and improving the quality and complexity of export products, has become even more pressing.

References

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    International Monetary Fund2016Global Trade: What’s Behind the Slowdown?” Chapter 2 of IMF World Economic Outlook October 2016 (International Monetary Fund: Washington).

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    ObstfeldM.2016Tariffs Do More Harm Than Good at HomeiMFdirect-The IMF Bloghttps://blog-imfdirect.imf.org/2016/09/08/tariffs-do-more-harm-than-good-at-home/

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    RaissiM. and V.Tulin2015Price and Income Elasticity of Indian Exports: The Role of Supply-Side BottlenecksIMF Working Paper No. 15/161 (International Monetary Fund: Washington).

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    Santos-PaulinoA. and A.P.Thirlwall2004The Impact of Trade Liberalization on Exports, Imports and the Balance of Payment in Developing CountriesThe Economic Journal Vol. 114 No. 493.

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1

Piyaporn Sodsriwiboon and Anh Le.

2

Although oil exports account for a significant share in India’s exports, oil exports are excluded from the analysis given the large volatility of commodity prices since the global financial crisis. This also allows the analysis to focus on core (non-commodity) Indian exports and avoids commodity-price movements distorting the results.

3

The decomposition of real non-oil export growth for India is based on the estimation results of equation 5, as presented in Table 1. Overall, the estimated results explain about 81 percent of India’s export slowdown during 2013-2015.

4

According to the World Trade Organization’s 2016 World Tariff Profile, India’s tariff rate (a simple average of MFN tariff rates) is 13.4 percent for all products, 32.7 percent for agricultural products, and 10.7 percent for nonagricultural products—in all three cases India has the second-highest rate among comparator EMs.

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