Indian Institute of Management Bangalore: Working Paper No: 363

INDIAN INSTITUTE OF MANAGEMENT
BANGALORE
WORKING PAPER NO: 363
Overview of India Export Performance: Trend and !river
"#amee$ %&$#er'ee
Economics & Social Science
shameek.mukherjee@ imb.ernet.in Indian
Institute of Management Bangalore
"#a#ana %&$#er'ee
Economics & Social Science
shahana.mukherjee@ imb.ernet.in Indian
Institute of Management Bangalore
Year of Publication - April 2012
i
Overview of India Export Performance: Trend and !river
(
"#amee$ %&$#er'ee and "#a#ana %&$#er'ee
)
A*tract
Exports have played an increasingly important role in Indias economic gro!th in the last t!o
decades" #his paper analyses the performance of Indias exports and the various economic
factors !hich have contributed to its gro!th" $ince manufactured exports comprise a significant
share of Indias aggregate %merchandise& exports' the paper also provides an overvie! of the
export performance of three important commodities( namely' gems and )e!elry' cotton and
electronic goods and concludes !ith *ey policy changes !hich could have a bearing on the
current trends seen in these sectors"
+ey!ords, export performance' manufacturing sector' export competitiveness' trade policy
reforms
1 #his paper !as !ritten under an II-. funded research pro)ect on /Exchange 0ates and Export
1ompetitiveness2 !hich is being carried out by Profs" 0upa 1handa and Anubha 3hasmana" It is the first of
t!o !or*ing papers under this pro)ect"
2$hamee* and $hahana !ere Academic Interns in the Economics and $ocial $ciences Area of II- .angalore
Assistant under Professor 0upa 1handa "
during 2010-11" At present' $hamee* is a $enior Associate at 4enpact' .angalore and $hahana is a 0esearch
2
( Introd&ction
#he Indian economy has gained considerable momentum over the last one decade' by achieving
and sustaining an annual 43P gro!th rate of over 5 percent" #his high gro!th rate can be in part
attributed to the gro!ing contribution of the export sector to the economy"
#he $econd 6orld 6ar severely impacted the economic stability of many countries' ho!ever'
Indias economic performance remained less affected as its 43P continued to gro! at 7"8 percent
per annum !hile the per capita income averaged at 1"7 percent per annum' a phenomenon better
*no!n as the /9indu rate of Economic gro!th2 and this gro!th rate persisted till 1:5:-;0
%<irmani 200=&"
7
Indias international trade policy follo!ing her independence in 1:=5 focused
on being self-sufficient' !hich also implied minimal reliance on international trade as a source of
income" An alarming large number of people !ere living in ab)ect poverty and the central
government sought to improve the !ell-being of people by adopting the strategy of >import-
substituting industriali?ation" #o implement this' the government developed a complex'
extensive and often costly system of price controls and @uantitative restrictions"
It !as during the eighties that the government undertoo* expansionary fiscal and monetary
policies" #he gro!th surged at an average annual rate of 8"; percent( !ell above the 9indu rate
of gro!th" .ut this rapid expansion !as supported by a large current account deficit" A mounting
deficit' coupled !ith high inflation %at 17"8 percent& and the 4ulf !ar led India to a balance of
payment crisis in 1::1" Aollo!ing the crisis' the Indian economy !as opened up to foreign
participation for the first time' in an attempt to improve the efficiency and competitiveness of
Indian industries" Post 1::1' the gradual liberali?ation of the Indian economy characteri?ed by
such policy reforms created a conducive environment for Indias exports to flourish and evolve
into an engine of social and economic gro!th" 9ence' the last t!o decades have !itnessed India
transform from a closed economy to a considerable player in the global mar*et"
7 #he >9indu rate of gro!th is term used often to refer to the lo! rate of annual gro!th prior to1::1" #his rate
persisted for nearly three decades' bet!een 1:80 and 1:;0' a period !hich !as characteri?ed by high levels of
protectionist and interventionist policies in India"
http,BB!!!"pbs"orgB!gbhBcommandingheightsBsharedBminitextloBintCmeghnaddesai"htmlD= %last
accessed on 2E"1"2012&"
7
Indias susceptibility to international crises became evident !hen the financial crisis of 200; had
an impact on Indias economic performance" #he financial turmoil had a dampening effect on
global demand and slo!ed do!n capital inflo!s !hich affected Indias export sector" #he impact
of the crisis !as felt most acutely in )ob oriented sectors !hich experienced up to a 50 percent
fall in their gro!th rates and affected other segments as !ell" #his had a cascading effect on
overall economic gro!th' as Indias 43P gro!th rate fell from : percent in 2005-0; to 5"1
percent in 200;-0:" #he impact of this crisis on the export sector !as evident as Indias exports
!hich had previously gro!n at nearly 20 percent bet!een 2002 and 200; plummeted to a
negative 20"7 percent in 200:-10"
=
#hough India had previously experienced a negative gro!th
in its exports' such a prolonged period of decline had not been !itnessed in over t!o decades"
8
It
is evident from the preceding discussion that Indias export performance and economic gro!th are
closely inter-lin*ed" Fver time' the export sector has gro!n to be a significant earner of foreign
exchange and a ma)or contributor to Indias national income" Aurther' the performance of this
sector is highly dependent on domestic as !ell as global factors" As a conse@uence of this'
domestic as !ell as international economic policies have a bearing on the overall export
performance of India"
#his paper analyses Indias export performance and changes in its composition over time" #he
paper also identifies Indias main export commodities and investigates the relevance and
competitiveness of these commodities in ma)or export mar*ets" It finally highlights *ey policy
changes !hich could impact local production as !ell as international demand for these exports"
#he paper is organi?ed as follo!s, $ection 2 presents a discussion of Indias export performance'
including a discussion of the evolution in the structure of Indias exports over time' follo!ed by
the sectoral composition and relative competitiveness of Indias exports" $ection 7 analyses
Indias manufacturing sector performance !ith special focus on three commodities and related
trade policies" $ection = summari?es the main findings of the paper and concludes"
4
#he steep decline is reflected by the @uarterly figures' !hich reveal that the exports registered a negative
gro!th of =0 percent in the early @uarterly of AY 200;-0: and the decline in gro!th continued till the third
5
#he period bet!een1:;8-;E !itnessed a serious decline in exports by :": percent and this persisted for
@uarter of AY 200:-10"
over a year"
=
) India export performance
)+( India overa,, export trend
Indias aversion to international trade and reliance on domestic factors to fuel gro!th
during the fifties meant that exports played a smaller role and this is evident from the
follo!ing table' !here Indias exports lost its !orld mar*et share bet!een 1:81-1:E0
and 1:E1-50"
E
#ill the mid seventies' Indias policy !as restrictive and focused on
developing the domestic industry' !hile tightening control on foreign trade %using
@uantitative restrictions as a tool&" 9igh levels of protection coupled !ith an overvalued
domestic currency resulted in a gro!ing demand for imports and discouraged exports"
-oreover' Indias exports also suffered because export incentives !ere only available to
a limited number of manufacturing industries and selected agricultural exports %!hich
!ere sub)ected to export duties at varying rates&"
5
#he table belo! reveals that the period bet!een 1:E1 and 1:50 had higher imports %as a
share of 43P&' compared to exports !hich may have contributed to a gro!ing foreign
exchange shortage" Additionally' high levels of inflation and budget deficits coupled
!ith the India-Pa*istan !ar severely affected foreign aid and led to a foreign exchange
crisis' !hich resulted in the devaluation of the rupee in 1:EE"
;
6
#he first @uin@uennial plan %1:81-8E& focused on increasing the saving rate in India' !hile the second five
year plan under P"1" -ahalanobis emphasi?ed heavy industriali?ation and >import-substituting policies as
an
Athu*orala' Prem 1handra

%200;&" engine of gro!th"
!
#he G$ and other countries had stronger support for Pa*istan" 9ence' !hen the !ar bro*e out in
1:E8' most countries !ithdre! their aid to India and this further necessitated devaluation" %Hohri'
3evi*a and -iller' -ar*& !!!"ccsindia"orgBpolicyBmoneyBstudiesB!p002;"pdf %last accessed on
2"10"2011&"
8
Ta*,e (: India: Export and Import -rowt# ./0
Avera-e
ann&a,
-rowt# rate
over period
Percent of G!P
"#are of India
export in wor,d
export ./0
Per iod Export Import Export Import
1:81-E0 0"5 ;"E E"7 ; 1"=
1:E1-50 ="E 0"7 ="2 8"; 0":
1:51-;0 E"; ;"5 8"; E"5 0"8
1:;1-:0 E"1 7": E"8 ;"= 0"8
1::1-:5 11"= 1="= :": 10"E 0"E
0eproduced from Economic Policy reforms and the Indian Economy %2002&' p" 17
3ue to the occurrence of t!o ma)or oil shoc*s in the seventies' India experienced a rise
in the import cost of oil and thus a shrin*ing foreign exchange reserve position" #he
pressure to earn foreign currency led the government of India to adopt export promotion
policies in the form of export subsidies %such as duty dra!bac*' subsidi?ed credit and
direct subsidies&"
:
3uring this time' the end of the .retton 6oods system led to a
depreciation of the floating pound sterling" #he Indian rupee' !hich !as pegged to the
.ritish pound at the time also depreciated' a fact !hich probably contributed to the rise
in gro!th of Indian exports relative to global exports"
10
#his period !as also
characteri?ed by a stronger import substitution strategy and greater government control
over economic activities' a strategy !hich !as maintained even after the occurrence of
the India-Pa*istan !ar in 1:51 and the first oil price shoc*"
11
Indias overall trade'
ho!ever' experienced a setbac* bet!een 1:5: and 1:;1' as the import cost of crude oil
more than doubled' follo!ing the oil-price shoc*s" #he Indian rupee steadily appreciated
by almost 20 percent bet!een 1:5: and 1:;E and had an adverse impact on its export
competitiveness"
"
$rinivasan' #"I"
%2001&
#
$harma'
+ishore %2002&
1$
Acharya' Ahlu!alia' +rishna J Patnai* %2007&
E
9o!ever' the situation reversed in 1:;5 !ith a gradual decline in the value of the rupee'
though
it remained overvalued till l::1 %in terms of the real effective exchange rate&"
12
It is interesting to note that in the early eighties' !hen !orld exports gre! at 2"5
percent per year( Indian exports gre! at a higher rate of over E percent"
Ionetheless' Indias share in !orld merchandise exports fell to less than 1 percent
from as much as 2"1 percent in 1:81"
17
#he liberali?ation of the Indian economy follo!ing the balance of payment crisis
resulted in ma)or policy and exchange rate changes' !hich had a favourable
impact on Indias trade' as seen in Aigure 1"
1=
#he figure reveals a sharp increase
in the share of exports and imports bet!een 1::0 and 200;" $hare of exports in
Indias 43P increased from 5"17 percent to 27"=; percent in 1::0 and 200;' !hile
the share of imports %in 43P& rose from ; percent to 2: percent in the
same period"
18
1i-&re (: Export and Import #are ./0 in India G!P
$ource, Authors calculations based on 6orld 3evelopment Indicators %63I& and Gnited Iations %GI&
1omtrade
database
http,BBdata"!orldban*"orgBdata-catalogB!orld-development-indicators %last accessed on 8":"2011&
http,BBcomtrade"un"orgBdb %last accessed on 2":"2011&
$%
4hosh' Arunava %200E& http,BB!!!"globaleconomicgovernance"orgB!p-
contentBuploadsBghosh-path!aysCindia"pdf %last accessed on 1"10"2011&"
14
#he policy changes !ere a combination of tariff and non-tariff barrier reductions along !ith a
devalu
ation
&
$rini
vasan' #"I" %2001& and Hoshi' <" J Kittle' I"-"3" %1::=&"
$5
http,BBcommerce"nic"inBpublicationsBanualreportCchapter7"asp'%last accessed on
="10"2011&"
of the 0upee' !hich are discussed at length in the next section"
5
Indias export performance since 1::1 has fluctuated" #he East Asian 1risis of 1::5 had
a serious impact on Indias exports' !hich registered a negative gro!th of 2"77 percent in
the same year" $ince the A$EAI countries and Hapan !ere most acutely affected by the
crisis' their respective currencies lost value' !hich also meant that the Indian rupee
appreciated against these currencies %due to interest rate differentials&" In 1::5' for the
first time after liberali?ation' Indias exports registered a negative gro!th of 2"77
percent"
1E
#he situation for India !orsened !hen its competitor countries %in A$EAI&
devalued their currencies amidst the crisis' !hich reduced the competitiveness of Indias
exports in the international mar*et for textile and electronics commodities' !here India
directly competed !ith A$EAI exports in overseas mar*ets"
15
Indias imports also
suffered and reduced by 2"== percent due to !ea* domestic demand' lo!er industrial
activity and a lo!er unit value of imports"
1;
In 2001-02' India faced another setbac* in its exports' at large' due to the semi-recession
faced by the G$( one of Indias biggest trading partners" #he terrorist attac* on the 6orld
#rade 1entre caused a net loss of 0"28 percent of G$ 43P and also had an impact on
Indias exports' !hich gre! only at 8 percent that year"
1:
#he slo!do!n of the G$
economy permeated to other economies including the A$EAI countries' !hich !ere
recovering from the 1::5 crisis"
#he next ma)or setbac* for Indias exports !as the global crisis of 200;" #he collapse of
large investment ban*s around the !orld coupled !ith high oil prices and rising inflation
led to a global recession" Indias trade deficit dampened in 200:-10 !ith a negative
import gro!th %-0"5; percent& for the first time in more than t!o decades !hile exports
!ere also impacted' registering a negative gro!th rate of 2": percent in 200;-0:"
6
0efer to Aigure 1 in Appendix section"
Economic $urvey of India' -inistry of Ainance' 1::;-::"

1#
Economic $urvey of India' -inistry of Ainance' 2001-
02"
!
Economic $urvey of India' ' -inistry of Ainance'
1::;-::"
;
1i-&re ): India: %erc#andie export #are in wor,d export
1.60%
1.40%
1.20%
1.00%
0.80%
0.60%
0.40%
0.20%
0.00%
$ource, Authors calculations based on Gnited Iations %GI& 1omtrade database
Even though the export sector plays a significant role in the domestic economy by contributing
close to 28 percent to Indias 43P %in 200:&' its contribution to !orld exports continues to
remain minimal' at a mere 1"8 percent of !orld exports in 200: %ho!ever' this share has
improved since the economic reforms of 1::1&" .et!een 1::1 and 200:' Indias share in !orld
exports rose from 0"8E to 1"82 percent" .ut overall' the economic reforms implemented in India
did not have a significant impact on Indias position in the !orld export mar*et' unli*e the
reforms implemented in countries li*e 1hina' $outh +orea or #ai!an"
20
#his may be in part due to the unusual development model follo!ed by India" #he transition
phase for East-Asian economies !as characteri?ed by a reduced dependence of the economy on
the agriculture sector and increased emphasis on the labour-intensive manufacturing sector"
Economies have traditionally developed a strong manufacturing base and over time moved
to!ards a capital and s*ills- oriented services sector" 9o!ever' #hirl!ell %200E& states that India
has follo!ed a different tra)ectory" Aollo!ing the economic reforms in 1::1' the Indian economy
made a transition from being agriculture-driven to being considerably service oriented" #he
manufacturing sector' !hich had been the prime engine of gro!th for countries such as 1hina or
$outh +orea' !as not as strengthened in India and its development !as constrained by a
%"
Athu*orala' Prema-1handra %200;&"
:
combination of factors" As a conse@uence of this' the Indian economy !as not able to fully
exploit its potential comparative advantage in the sector"
)+) "ectora, compoition of Export
-erchandise exports comprise a ma)or portion of Indias exports to the !orld' as seen in Aigure
7" 9o!ever' a decline in its share and thus a rise in the contribution of services is visible post
1::E" India has experienced a rapid gro!th in its services sector in the last decade and this is
li*ely to continue in the near future" A combination of demand and supply side factors has
influenced the gro!th of services in India" 9igh income elasticity for final product services
fueled demand' !hereas increased levels of foreign direct investment and constant supply of
technically s*illed !or*force ensured the necessary resources for the gro!th of the services
sector"
21
Additionally' India !as able to sei?e the opportunities offered by the gro!th in foreign
demand' arising from the Y2+-related re@uirement for I# s*illed professionals and later follo!ed
by large-scale off-shoring of business processes"
22
1i-&re 3: India2 Good .merc#andie0 and "ervice #are ./0 in tota, export
$ource, Authors calculations based on GI1#A3 %Gnited Iations 1onference on #rade and 3evelopment& database
http,BBunctadstat"unctad"orgB0eportAoldersBreportAolders"aspxLs1$CrefererMJs1$C1hosenKangMenN %last accessed
on 28";"2011&"
2%
#hirl!ell' -ar* %August' 200E&"
$

.anga' 0ashmi %2008&"
10
A comparison of Indias export composition !ith that of its competitors reveals a ma)or point of
difference" 6hile for India' services has gro!n to be a ma)or contributor to its !orld exports'
some of its *ey competitors li*e 1hina' .ra?il and $outh Africa continue to earn close to :0
percent of their export revenue through merchandise exports alone"
27
#herefore' the merchandise
component plays a bigger role in the exports of other emerging economies' a fact !hich could
explain !hy Indias share in !orld merchandise exports has remained lo!' as seen in Aigure ="
Aigure = also reveals ho! 1hina has become a leading mar*et for merchandise exports and also
highlights the difference bet!een India and 1hinas mar*et positions" .et!een 1::8 and 200:'
1hinas share in !orld merchandise exports has risen from 7"2 percent to 10"7 percent' !hereas
Indias share rose from a mere 0"5 percent to 1"8 percent in the same period"
1i-&re 3: "#are in wor,d merc#andie export
12.0% -
10.3%
10.0%
9.3%
8.0% - 7.7%
6.0% -
4.1%
4.0%
-2.0%
-0.0% -
3.2%
1.5% 0.5%B 0.7%J 0.7%B
1.0%
1.1%H 1.5%H
1985 1995 2000 2005 2007 2009
INDIA CHINA
on 25";"2011&
3espite the gro!ing contribution of services exports' merchandise exports continue to dominate
Indias exports and it is therefore important to understand the composition of the latter" As Aigure
8 reveals' a ma)or portion of Indias merchandise exports is comprised of manufactured exports"
#hough agriculture !as a ma)or component till the early years follo!ing independence'
%&
0efer to Aigure 2 in the Appendix section"
11
a shift to!ards manufactured exports occurred due to the industriali?ation !hich too* place
during that time" Aigure 8 reveals that the contribution of manufactured exports had already
surpassed that of agriculture exports by over 5"8 percent by 1:58 and that the gap has !idened
over time"
#he share of agriculture has fallen more rapidly post trade liberali?ation' !hich may' in part be
because an important goal of agricultural policy !as to achieve self sufficiency in agriculture and
this limited the scope of trade" 9o!ever' technological developments and macroeconomic policy
reforms %follo!ing the Gruguay 0ound agreement& have contributed to changes in international
trade of agriculture"
2=
In 2008' !hile Indias agricultural export !as almost G$O:"7 billion' the
import !as G$O 8"8 billion' ma*ing India a net exporter of food"
1i-&re 4: "ectora, contri*&tion of India tota, merc#andie export
http,BBcomtrade"un"orgBdb %last accessed on =":"2011&
In recent years' agricultural exports have annually gro!n by over 18 percent due to higher
exports of rice' cotton and soya bean' amongst other commodities" Indias agricultural imports as
2= #he Gruguay 0ound !as the ;th round of multilateral trade negotiations' conducted !ithin the frame!or* of the
4eneral agreement on tariffs and trade %4A##&' bet!een 1:;E and 1::=" 6hile the earlier rounds !ere mainly
focused on tariff and non-tariff issues' this round emphasi?ed on agriculture trade' even though it contributed a small
share %17 percent& in total merchandise trade" In Gruguay round it !as agreed that subsidies on exports of
agricultural commodities !ould be reduced over a six year period by 7E percent' belo! the base period of 1:;E-:0"
Additionally' the number of subsidi?ed exports !as to be cut do!n to 21 percent" 3omestic farm support !ould be
reduced by 20 percent in developed countries and by 17 percent in developing countries" Aor more information' see
$andiford !or*ing paper on the 4A## and Gruguay 0ound"
12
a share of its total imports have also risen from 1"5 percent in 2000 to 2"E percent in 200:' !hich
could be partially attributed to a sharp increase in the imports of edible oil over the same period"
#he manufacturing sector contributes the largest share to Indias merchandise exports" In
particular' it is seen from Aigure 8 that the sectors share increased from 80 percent in 1:;8 to
over E= percent in 200:" A closer loo* suggests that the annual gro!th in Indias manufactured
exports has been cyclical in nature"
28
#he economic reforms introduced in 1::1 %follo!ing the
balance of payments crisis& had a significant impact in improving the efficiency of the sector"
1onse@uently' these reforms had a positive impact on manufactured exports !hich gre! by
1:"17 percent bet!een 1::1 and 1::2 and continued to gro! consistently at a 1A40 of nearly
17 percent till 1::5"
3espite the importance of the manufacturing sector to the Indian economy' the sectors exports
have had a minimal impact on the global scale' as seen in Aigure E" Indias share in !orld
manufacturing exports increased from 0"E percent to 1"= percent bet!een 2000 and 200:'
!hereas 1hina tripled its contribution from 7"2 percent to over 10 percent in the same period"
1i-&re 6: "#are of man&fact&red export in wor,d .man&fact&rin-0 export
12.0% -
10.0% -
8.0% -
6.0% -
4.0% -
2.0% -
0.0% -
0.9%
0.4%
1995
2.3%
0.59
1995
2000 2005
INDIA CHINA
8.9%
2007
10.2%
1.49
2009
7.2% 3.2%
0.6%
%5
0efer
to Aigure 8 in the Appendix"
17
Aigure E reveals the magnitude of 1hinas mar*et po!er in !orld manufactured exports" 3uring
the reform period' Indias manufacturing sector !as transformed from a non-competitive mar*et
%!hich !ould operate on large margin but lo! sales& to a competitive one %!ith lo! margin but
high volumes&' !hich gave India an advantage over 1hina" 9o!ever' compared to 1hina' India
has made minor progress in exporting manufactured goods bet!een 1::0 and 200:"
0egardless of their uni@ue socio-economic history' 1hina and India are large economies
representing large populations" #hough the difference bet!een exports of these t!o countries
al!ays existed' the gap !as narro!er in 1:;0' !hen 1hina initiated the first set of reforms" #he
years !hich follo!ed !itnessed 1hina building a strong manufacturing base !hich contributed
significantly to the domestic 43P as !ell as global manufacturing exports' !hereas the Indian
manufacturing sector made a less visible impression on the global scale" A number of factors
may explain this difference bet!een the efficacies of the manufacturing sectors of the t!o
countries' and some of these are identified belo!"
2E
#he large share of manufacturing in a countrys 43P can be explained by a combination of
government policies !hich promote industrial gro!th and a high investment rate !hich *eeps
the demand for materials and machineries high" Although Indias saving and investment rate has
improved over the years' it continues to considerably lag behind 1hina"
#he 1hinese government liberated the agricultural sector in the early stages of their reform plan"
An example of this !as a special programme named >#o!nship and <illage Enterprises %#<E&'
!hich !as primarily responsible for initial labour-intensive rural industriali?ation in 1hina" As a
result of this' an important portion of labour !as released from the agricultural sector and
channeli?ed into the manufacturing domain" #his meant higher rural incomes' !hich stimulated
the demand for consumer goods %met by rural enterprises&" Indias approach' ho!ever' has been
different and it has been a policy priority of the Indian government in recent years to address the
need for higher levels of public investment in agriculture"
4erhaeusser' +" %2010&"
1=
-oreover' the 1hinese government had supported small and medium si?ed enterprises %$-Es&
and policies !ere designed to encourage firms to expand their operations" 9o!ever' $-Es in
India had incentives to remain small as certain sectors had been exclusively reserved for these
categories" As these sectors !ere highly protected' there !as little fear of competition and
minimal need to gro! and reali?e economies of scale" -oreover' regulatory frame!or*s' and
labour la!s' in particular' !ere often biased against larger firms" Access to credit !as yet another
challenge for many $-Es !hich compounded the problem further and they conse@uently
depended on informal mar*ets for resources"
Another advantage of the 1hinese economy !as in the form of labour reforms !hich reduced
rigidities and made the labour mar*et flexible" #his resulted in firms hiring labour !ithout
!orrying about the implications of an economic slo!do!n" #he flexibility of the 1hinese mar*et
ensured that retrenched labour !ould secure similar )obs in other firms" In comparison to 1hina'
India continues to have a rigid labour mar*et !hich hampers efficient utili?ation of human
capital in the manufacturing sector" Additionally' unli*e 1hina' India has not been able to
effectively mobili?e labour from rural areas' primarily due to lo! s*ills of the rural population"
1hina on the other hand' has succeeded in doing so due to a large number of technical training
institutes !hich provide a bul* of the labour force !ith the appropriate technical education
needed for small and medium scale firms in 1hinas manufacturing sector" As a result of this' the
manufacturing sector has employed a gro!ing !or*force over time"
#he 1hinese economy also opened up to foreign direct investment %A3I& in export oriented
sectors during the seventies' !hereas the Indian economy liberali?ed t!o decades later" Evidence
also suggests that 1hina adopted a more comprehensive and pro-active approach to attract A3I
and focused on export oriented A3I %!hich brought in better technological *no!ledge& !hereas
Indias emphasis !as on A3I in its domestic mar*et rather than exports" As a result of this' A3I
gave an impetus to 1hinas exports and provided the manufacturing sector !ith strong incentives
to expand production"
#hus' a number of factors have contributed to the high productivity of 1hinas manufacturing
sector' !hereas India has been relatively less successful in developing these *ey features"
18
)+3 5ompetitivene of Indian Export
International competitiveness is the ability of an economy to compete in the global mar*et by
either producing goods at a lo!er cost andBor selling them at a cheaper price than competitor
countries"
#he 0evealed 1omparative Advantage %01A& method developed by .alassa %1:E8& is a
commonly used measure of export competiveness" 01A is calculated as the ratio of a countrys
export share in !orld trade for a specific commodity or a group of commodities" In particular'
the 01A for country >i and commodity >) %vis-P-vis the !orld& is given as, '()ij* +,ij-,.j/-
+,i-,0/
6here'
,ij* >i th countrys export of commodity >)
,0j* !orld export of commodity >)
,+* total exports of country >i
,0* total !orld export
An 01A %for a commodity& greater than unity implies that a countrys export of the commodity
has a larger share in !orld exports %of that commodity&' relative to the countrys %aggregate&
export share in !orld exports and in this case' the country is said to have a revealed comparative
advantage in exports of the commodity"
%
#he advantage of this method is that it ta*es into consideration the intrinsic advantage of a particular export
commodity and is consistent !ith changes in an economys relative factor endo!ment and productivity" A
criticism' ho!ever' is that it cannot distinguish the change in factor endo!ment and significant changes in the
trade policies of a country %.atra' Amita J +han' Qeba %2008&&"
1E
1i-&re 6: India2 R5A in -ood .merc#andie0 and ervice export
2
1.8
1 .6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
S!"#$% M!$&'()#%
on 28";"2011&
As Aigure 5 reveals' India has a clear comparative advantage in services exports to the !orld and
its competitiveness has improved since 1::E" Aor services in particular' Indias competitiveness
remains higher than that of many other emerging mar*ets"
2;
9o!ever' Indias 01A for merchandise exports has al!ays stayed belo! unity' !hich suggests
that merchandise exports have remained lo! and not gained a larger share in !orld exports
%relative to total exports&" #he merchandise exports of emerging economies li*e .ra?il' 1hina
and $outh Africa perform better as they have higher 01As and are thus more competitive than
Indias merchandise exports"
2:
)+3 Government Initiative
Even though Indias manufacturing exports have resurged since 2001 and gro!n at a steady rate
of over 28 percent bet!een 2002 and 200;' the manufacturing sector has not performed as !ell'
as seen in Aigure : !here the share of manufacturing %value added& in 43P has remained
stagnant" In contrast' the services sector has performed !ell and contributed significantly
to!ards Indias economic gro!th" -oreover' Indias performance in services exports has been
%!
0efer to Aigure 7 in the Appendix section" 2:
0efer to Aigure = in Appendix"
15
stronger than most other emerging economies for !hich their manufacturing sector has been the
main driver"
.et!een 1:58 and 200=' the share of agriculture sector in 43P declined !hile that of the
industrial and services sectors rose" 9o!ever' the contribution of the manufacturing sector
remained the same and increased marginally from 1= percent to 1E percent" #his is in star*
contrast !ith 1hina' !hich has a manufacturing sector contributing to 78 percent of its 43P and
the figures are similar for many other countries"
70
It is therefore important to examine the role of
government policy in shaping Indias manufacturing sector performance"
1i-&re 7: "ectora, #are ./0 in India G!P
$ource, Authors calculations based on Gnited Iations Iational Accounts -ain Aggregates 3atabase
http,BBunstats"un"orgBunsdBsnaamaBselbasicAast"asp %last accessed on 2:";"2011&
A historical revie! of government initiatives reveals that the policies designed by the Indian
government have been instrumental in shaping the development of international trade" As India
has progressively moved to!ards becoming a more open economy' policies have evolved to
support trade and increase the volume of exports" As manufactured exports form a si?eable share
of Indias total exports' the sector is of *ey importance to the economy" 9o!ever' the average
performance of the manufacturing sector %reflected by the considerably lo! share of its
contribution to the 43P& has for long' been a cause of concern"
&"
#he manufacturing %value added& share in 43P is more than 70 percent for countries li*e $outh +orea' -alaysia or Indonesia"
Katin American countries li*e .ra?il and Argentina too have a higher share of nearly 2= percent of 43P %+umar' 0a)iv J $en
4upata' Abhi)it %200;& &' %last accessed on 12";"2011&"
1;
In recent years' the Indian government has ac*no!ledged the severity of this issue and
ta*en an important policy initiative in 2011 by approving the Ie! -anufacturing
Policy" #his policy is aimed at building the capacity of the sector' strengthening its
contribution to the 43P %from 1E percent to 28 percent& as !ell as improving the
international competitiveness of the manufacturing sector" #he initial industry reactions
to the I-P has been positive and it is expected that a proper execution of the I-P !ill
be beneficial for the Indian economy as it can generate large-scale employment for
nearly a hundred million !or*ers in the next ten years"
71
#he implementation of the
policy !ill involve the establishment of a number of Iational -anufacturing Investment
Qones %I-IQ& !hich !ill have features such as a progressive exit policy' strong
physical infrastructure' investment incentives and business-friendly approval
mechanisms to support the production in these units"
72
#hough the implementation of the
I-P may ta*e time' this policy is expected to provide a strong impetus to Indias
manufactured exports in the near future"
9o!ever' the policy environment in India !as not as conducive to international trade in
the past" Indias foreign trade policy had been largely restrictive till the early eighties' in
order to protect the domestic mar*et from international competition" 9o!ever' several
attempts !ere made in the mid-eighties to brea* a!ay from the restricted external sector
regime" Export promotion policies in the sixties and seventies !ere introduced in the
form of compensatory support %11$&' duty dra!bac*s %33$& and mar*et development
assistance %-3A&' among others"
77
Additionally' a fe! export promotion councils !ere
established along !ith commodity boards and speciali?ed service institutions" #his !as
also the time !hen the government allo!ed a 28 percent increase in the capacity of
manufacturers !ithout any license"
7=
Aurther' the asset limit under the -0#P Act !as
raised from 0s" 20 crores to 0s" 100 crores !hile the -0#P clearances !ere entirely
!aived off for a fe! industries" 3uring this period' the government also introduced
several export incentives !hich included a reduction of foreign exchange controls to
import ra! material from
&$
http,BB!!!"displaysearchblog"comB2011B11Bindian-government-approves-ne!-manufacturing-policyB
%last accessed on 5"2"2012&"
%
dipp"nic"inBI-PC3iscussionPaperBI-PC3iscussionPaperC2010"pdf %last
accessed on 5"2"2012&"
34
#he original limit for re@uirement of a license !as bet!een 0s" 7"8 crore to 0s" 80 crores in bac*!ard
areas .hatt' P"0" %2008&"
and 0s" 18 crores is all other areas"
1:
foreign countries and also a provision of 0eplenishment %0EP& licenses to exporters' !hich
permitted the import of goods from the restricted list"
-edium and large firms !ere allo!ed in the eighties to invest in industries reserved for the
small-scale sectors %on the condition that 58 percent of their output !ould be exported& and this
provided an impetus to Indian exports" #he ERI- %export-import& policy adopted by the Indian
government for the period 1:;8-;; focused on the abolition of automatic licensing and the
inclusion of 201 items of industrial machinery in the list of %permitted& imports under open
general license %F4K&" #he policy also increased the minimum limit for the import of capital
goods against import replenishment licenses %from the initial 0s" 1 la*h to 0s" 2 la*h& for
registered exporters"
78
#he Indian economy' ho!ever' continued to be resistant to!ards imports and this !as reflected
in the existing %import-!eighted& tariff rates' !hich !ere at an average of ;5 percent in 1::0-
:1%!ith rates on certain imports exceeding 700 percent&" 3omestic consumer goods' in
particular' !ere protected as tariff rates on imports of consumer goods !ere at a high of 1E=
percent" Additionally' the Indian government resorted to the use of non-tariff barriers %I#.&'
!hich !ere applicable on E8 percent of all imports %:0 percent of !hich !ere imported by the
manufacturing sector& in 1::0" #he government !as also s*eptical about the impact of foreign
investment and therefore limited A3I to specific areas of the economy and placed an upper limit
of =0 percent on %foreign& e@uity participation"
7E
India reacted to the balance of payments crisis in 1::1 !ith a series of reforms intended to open
up the economy to foreign participation" #he current account !as to be less influenced by the
balance of external payments and more by exchange rates" #he list of %imported& commodities
!hich !ere sub)ected to @uotas !as shortened' though a number of consumer goods !ere still
bound by @uantity restrictions" Aurther' the rupee !as depreciated by 22"; percent relative to a
bas*et of other currencies' a step !hich devalued the real effective exchange rate %0EE0& by
1E"7 percent" Additionally' temporary measures such as foreign exchange licensing' export-based
36
Hoshi' <" J Kittle' I"-"3" %1::=&"
5

.hatt' P"0 %2008&"
20
imports' import compression and a dual exchange rate system !ere introduced for a short period
of time in an attempt to increase export competitiveness"
#here !ere also changes in the I#.s on imports" #he monopoly of government agencies for
canali?ed imports of 80 commodities %except petroleum and agricultural products& !as
abolished" A phased reduction in the maximum rate' the average rate as !ell as the dispersion of
tariff rates !as implemented" #he maximum tariff rate !as reduced from 788 percent in 1::0-:1
to =8 percent in 1::5-:; and the %imported-!eighted& average tariff rate !as reduced from ;5
percent in 1::0-:1 to 2="E percent in 1::E-:5" Fver time' the average %!eighted& share of
imports for all sectors covered by I#.s has reduced from :8 percent in 1:;;-;: to E2 percent in
1::;-:: and further to 2= percent in 1:::-00"
#he restrictions !ere also eased on Indian exports' as the restricted export list !as modified !ith
an abolition of taxes on certain mineral and agricultural exports" Aurther' the share under
@uantitative restriction !as reduced from :7 percent %of total tradable 43P& in the pre-reform
period to EE percent 1::8"
75
#hus' the trade policy reforms in India initiated in 1::1 have been instrumental in orchestrating
the transition of the Indian economy from a protectionist approach to an open mar*et conducive
for higher volumes of international trade"
3 India $e8 man&fact&red export
3+( 5ompoition of %an&fact&red export
$ince manufactured goods constitute a ma)ority of Indias merchandise exports' it is important to
analy?e the composition of manufactured exports to identify Indias *ey export commodities"
#he follo!ing figure sho!s the distribution of top manufactured goods exports and reveals
certain changes in its composition over time"
&
Pursell'4 J $harma' A%1::E& and http,BB!!!"econ"yale"eduBSsrinivasBIntegratingIndia"pdf%last accessed on
22":"2011&"
21
Petroleum and related products have continued to be a ma)or component of Indias manufactured
exports bet!een 1::0 and 200: and their contribution has increased from 8"7 percent in 1::0 to
over 1= percent in 200:" Fther than petroleum' gems and )e!elry has been an important export
commodity throughout the period' though its share in manufacturing exports has declined from
25"2 percent in 1::0 to 18 percent in 200:" It is also seen that cotton' !hich !as traditionally an
important export item for India' has declined in its contribution' from 8"5 percent in 1::0 to
under 1 percent in 200:"
1i-&re (9: 5ompoition of India man&fact&red export
a+
^
m
1990
G*% '() J+,,!-
C.//.(
0/!.,1* '() !,'/)
27.2%
2!.)1$/%
L'/&!
42.1%
:
M)#$'*(/%
m
v
5.7% T 3/#, 4'!(
;
i
5.2% M') 12 '!/#$,%5 / 3 /#, %
3.4% 3 6% 4.0%4.5% O/&!%
*+
2000
G*% '() J+,,!-
T3/#, -'!( 0/!.,1* '()
!,'/)
2!.)1$/%
26.5%
M') 12 '! /#$, %5
/3/#,%
48.0% C.//.(
7.0% M)#$'*(/%
5.3% O!6'(#$ $&*#$',%
4.2% O/&!%
1.9% J
4.0% 3.1%
22
c+
^
2005
G*% '() J+,,!-
0/!.,1* '() !,'/)
2!.)1$/%
1
18.4%
T3/#,5M')512 '!/#$,%
M)#$'*(/%
T3/#, 4'!(
50.6%
1
15.1% O!6'(#$ $&*#$',%
^ 3.5%
I! .( '() (.(5',,.- %/ ,
^P^^ 3.3% 2.8%
L3.3%
^^^*
O/&!%
1.9% _
200
9
0/!.,1* '() !,'/)
2!.)1$/%
|
G*% '() J+,,!-
20.4%
14.9% M)#$'*(/%
T,$.**1(#$'/#.(%
71#2*(/
S&#28% 9.'/%
M./.! $'!% '() "&#$,%
O!6'(#$ $&*#$',%
^^^^ 4.0% 3.6%
O/&!%
2.2% 2.6% 3.3%
d+
$ource, Authors calculations
based on Gnited Iations %GI&
1omtrade database
http,BBcomtrade"un"orgBdb %last
accessed on 1E"5"2011&
Fverall' the figure depicts a structural shift in India
manufactured exports' a!ay from cotton and textile
oriented exports and to!ards more techni@ue and
technology-based items such as pharmaceutical
products %medicaments&' telecommunication
e@uipments etc"
#he follo!ing discussion focuses on three
commodities !hich have played an important role in
48.5%
Indias
manuf
acture
d
export
s
bet!e
en
1:58
and
200:"
#he
comm
odities
identif
ied
are,
- 1em
s and
je0elr
2
!hich
contrib
ute
over
1E
percen
t to
Indias
export
s and
is a high labour-intensive as !ell as an import-
intensive industry(
- 'ead23made 1arments %'M1& (otton !hich
contributes nearly E percent to Indias exports and is
highly labour intensive(
27
3Electronic goods !hich is an upcoming industry and employs a large number of technically-
s*illed !or*ers"
In addition to contributing an important share to Indias exports' the selected industries also
represent a combination of traditional as !ell as contemporary exports of India" -oreover' as the
follo!ing discussion !ill reveal' there is a distinct variation in the structure of these industries"
6hile cotton and gems and )e!elry are labour-intensive industries' electronic goods production
relies considerably on capital-intensive techni@ues" Fther areas of divergence include the import-
intensity of production and the extent of policy intervention' both of !hich vary across the
selected industries" An analysis of these industries !ill conse@uently present various facets of
Indias manufactured exports"
3+) Gem and <ewe,r8 .wit# pecia, reference to !iamond export0
3+)+( Ind&tr8 and trade overview
4ems and )e!elry has been an important industry for the Indian economy" It is one of the fastest
gro!ing industries and a leading earner of foreign exchange for India" #he gems and )e!elry
sector covers a !ide range of items !hich include diamonds' precious and semi-precious stones'
in addition to gold' silver' studded and costume )e!elry"
7;
#he gems and )e!elry industry in India
is mostly concentrated in the unorgani?ed sector and employs around 2 million !or*ers" An
important feature of this industry is that it contributes a large share to Indias total exports as !ell
as to the countrys imports %averaging over : percent of total imports since 1::5&"
7:
#he main
component of Indias gems and )e!elry export is cut and polished diamonds" 0ough and uncut
diamonds are imported and processed in India and finally exported in the form of diamond
)e!elry for final consumption" It is this feature that ma*es the industry highly import-intensive in
nature"
#he importance of this industry for Indian exports is evident from Aigure 11" Its contribution to
Indian exports has steadily gro!n since 1:58 and is responsible for nearly 18 percent of Indias
&#
0efer to Aigure E in the Appendix" 7; #he I10A industry report on the Indian 4ems and He!elry Industry
%last accessed on 18";"2011&"
2=
total exports since 1:;E" As a commodity' it has the %single& highest share in Indian merchandise
exports and is therefore' one of the most significant industries for India"
#he diamond segment contributes a ma)or share of nearly 50 percent of the total %gems and
)e!elry& export and thus the remainder of the analysis focuses on the performance of Indian
diamond exports" 9o!ever' the latters share has declined since 200;' in part' due to the
economic meltdo!n !hich reduced the import demand from G$A and other trading partners of
India"
1i-&re ((: Gem and <ewe,r8 #are ./0 in India tota, export
-a)or producers of diamonds in the !orld are $outhern Africa' 1anada' Australia and 0ussia"
Around 10 percent of the !orlds total diamonds belong to the gemstones category' !hich are
processed and set in diamond )e!elry" A uni@ue feature of diamonds is that' unli*e gold' silver or
platinum' they do not have an internationally set standard price" #he price is determined based of
physical attributes %such as cut' color' clarity and carat %!eight&&" Ki*e other forms of %valuable&
)e!elry' diamonds are a luxury item and conse@uently have a highly elastic demand in the
mar*et" In this industry' India has a comparative advantage in labour-intensive activities li*e
gem cutting and polishing" #herefore' Indian companies operate at a beneficial level in the value
chain !here they import rough diamonds' !hich are processed and exported for final
consumption as diamond )e!elry" #he Indian 4ems and He!elry industry plays an important role
28
in the value chain as it contributes E0 percent to the value share and ;8 percent to the volume
share"
3+)+) India poition in t#e wor,d export mar$et
Indias position in the !orld mar*et for gems and )e!elry exports is seen in Aigure 12" #he figure
reveals that India has al!ays been an important source mar*et for gems and )e!elry and its
significance has gro!n considerably over time" Indian exports performed particularly !ell in
200: and India became a leading exporter of gems and )e!elry' !ith a mar*et share exceeding
27 percent" Indias diamond exports' !hich form the ma)or share of aggregate %sector& exports'
too have an important share in the !orld mar*et %diamond exports&' !hich has gro!n from 17"=
percent in 2000' to 20"1 percent in 200:' as seen in #able 2"
1i-&re (): India #are in Wor,d export of Gem and <ewe,r8
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
2E
Ta*,e ): %a'or exporter of !iamond and t#eir #are in wor,d export ./0
2000 2005 2009
Exporting countrymarket sare Exporting country market sare Exporting country market sare
B,6#1* 25.9%B,6#1* 18.7%I()#' 20.1%
I%!', 19.3%I%!', 18.5%I%!', 14.0%
I()#' 13.4%I()#' 13.9%B,6#1* 13.4%
U: 13.1%U: 10.7%USA 12.1%
USA 8.5%USA 10.0%H.(6 :.(6 9.8%
B./%+'(' 4.6%H.(6 :.(6 5.2%UAE 9.3%
H.(6 :.(6 3.8%B./%+'(' 3.8%U: 6.7%
S.1/& A;!#$' 3.5%UAE 3.6%B./%+'(' 2.6%
S+#/<!,'() 1.9%S.1/& A;!#$' 3.1%C'(')' 2.1%
C&#(' 1.1%S#(6'2.! 2.0%C&#(' 1.8%
Indias main competitors in the diamond industry are Israel and .elgium' and both these
countries have a technological advantage in the processing of ra! diamonds" India has
traditionally speciali?ed in the processing of small diamonds' !hereas .elgium and Israel have
had the advanced technology to !or* !ith larger diamonds" $ince the mar*et for small-si?ed
diamonds is relatively small' Indias share in the !orld mar*et has usually been lo!er than that
of Israel and .elgium"
#able 2 reveals the change in mar*et share since 2000" It is seen that Indias mar*et share
remained unchanged and !ell belo! Israel and .elgiums share bet!een 2000 and 2008" In
200:' ho!ever' Indias share rose considerably above that of .elgium and Israel' !hich could
partly be due to the stronger impact of the sub-prime crisis of 200; on the demand for large si?ed
diamonds' !hich resulted in a decline in mar*et share for Israel and .elgium"
3+)+3 !irection of Trade
a" #he Gnites $tates
#he G$ has been the largest importer of diamonds for a long time and accounts for more than 1;
percent of !orld diamond imports" #herefore' it has al!ays been a *ey trading partner for India
in this sector" #he G$ has a t!o tier mar*et for diamond )e!elry !hich consists of a potentially
gro!ing mar*et for %lo! value& diamond )e!elry and the older mar*et for large-diamond
25
)e!elry" Karge-si?ed diamonds %or solitaires& are considerably expensive and thus this segment of
diamond )e!elry is highly priced"
#able 7 sho!s a disaggregation of the t!o segments of the G$ diamond mar*et" Israel is
evidently the most important source mar*et for all diamond imports by the G$' though its share
has declined over the years' from 82"5 percent in 2008 to =="E percent in 200:" India is the
second most important exporter of diamonds for the G$' and its share in the G$ mar*et has
steadily risen from 20 percent in 2008 to 2="; percent in 200:" #he table also reveals that India is
the only country !hich has consistently exported a higher value of diamonds or registered a
positive gro!th every year since 2008"
Ta*,e 3: =" import of c&t and po,i#ed diamond from t#e Wor,d
!a"ue Growt# !o"ume 4r o! th
2005 )996 200# 200$ 2009 2010 2009 2010 2005 )996 200# 200$ 2009 2010 2009 2010
% 0&5 carats 28651 28690 28460 18996 18654 18367 517.1% 31.7% 118020 11.275 9.539 78959 5'1E= 5.853 510% 33%
'n(ia 18817 18776 18655 18427 18150 18056 519.4% 49.8% ;5;0 88563 78392 68521 58762 58075 -11"E0T
'srae" =28 426 380 267 198 141
525.7% 5.9%
843 843 696 512 400 278 521% 3%
)e"gium 197 203 204 118 127 63
7.4% 525.8%
530 526 494 295 344 157 16.5% -70"20T
*+E 23 35 25 18 30 11
64.7% 556.0%
92 131 122 69 153 49 121% -85"70T
,ogn -ong 58 70
33
25 24 12
55.0% 521.3%
228 390 132 157 239 100 52.3% -1:"20T
./it0er"an( 18 25 1 1 3 0
406.5% 534.3%
34 54 2 1 1 1 10.4% 1821T
1ussia 1 5 2 3 3 1
55.1% 562.1%
2 5 3 5 3 2 -=0"=0T -28"00T
.out +2rica 2 2 2 4 10 9
139.7% 43.2%
5 3 4 12 2 0 -;8"50T -5:"70T
3ina 13 16 36 34 18 12
546.7% 55.6%
79 63 68 110 26 20 -5E"80T 22"00T
4ters 95 130 122 82 92 62
11.2% 19.1%
426 696 625 276 233 170 516% 23%
5 0&5 carats 128724 13.759 158657 16.996 108791 108422 536.5% 61.6% 5.977 5.791 5.944 48957 7'E58 3.287 -28":0T =E"50T
'n(ia 18262 18480 28031 28450 18934 28389 521.0% 111.4% 18340 18385 18691 1.442 18114 1.305 522.7% 92.5%
'srae" 78672 88141 98101 98116 58354 48982 541.3% 51.4% 38069 28863 28846 28209 18666 18355 -2="E0T 28%
)e"gium 28623 28601 28800 38125 28131 18913 531.8% 54.3% 18161 18121 982 929 640 432 -71"10T 17.6%
*+E 64 111 79 124 60 28
551.5% 513.2%
50 83 54
33
34 8 2.5% 557%
,ogn -ong 162 154 87 361 76 69
579.0% 27.8%
83
66
31 77 27 31 -E8"20T 99%
./it0er"an( 138 191 238 383 238 200
538.0% 77.9%
17 11 13 19 23 9 22.3% -2=T
1ussia 126 132 185 178 137
55
523.0% 59.5%
58 54 73 58 58 14 0.3% -10"10T
.out +2rica 336 559 712 759 533 498
529.8% 62.0%
46 78 85
55
35 42 -75"10T 182T
3ina 29 61 94 103
33
38
568.4% 67.2%
12 30 41 51 13 13 -5="00T =7T
4ters 314 329 330 396 295 252
525.6% 15.8%
142 :7 130 84
66
57 -21";0T 7;T
6ota" 15.375 168449 188117 188992 128445 118789 -7="80T 85"=0T 168997 178065 158483 128916 10838 9.140 -1E"10T 75"E0T
'n(ia 38080 38256 38686 38876 38084 38445 520.4% 89% 108120 98949 98083 78963 68876 68379 -17"50T 82T
'srae" 88097 88567 98482 98383 58552 58123 -=0";0T 50% 38912 38708 38542 28720 28066 18634 -2="10T 23%
)e"gium 28820 28804 38003 38243 28258 18976 -70"=0T =:"10T 1.691 18647 18476 18224 984 610 -1:"E0T -0"10T
*+E 87 146 104 143 90 39 -7E"50T -71"70T 142 213 175 102 187 57 ;2"50T -85";0T
,ogn -ong 220 224 120 386 100 81 -5="10T 17.4% 311 456 163 234 266 131 13.7% -E"10T
./it0er"an( 156 217 239 384 241 200 -75"20T 77% 50 65 15 20 24 10 21.8% 1.8%
1ussia 127 137 187 182 140 56 -22"E0T -12"10T 60 58 76 63 61 17 -7"00T -12"=0T
.out +2rica 338 561 714 764 543 506 -20":0T 62% 52 82 89 68 36 42 -=ET 17=T
3ina 41 76 130 137 51 50 -E7"10T =0"70T 91 93 109 161 39 32 -58";0T 2:"E0T
4ters 409 460 451 495 386 314 -21":0T 1E"=0T 432 568 794 755 361 160 -82"20T -15"70T
0eproduced from an I10A 0eport on the Indian 4ems and He!elry Industry %Fctober 2010&' p" 70
2;
Karge diamonds comprise a ma)or share of the G$ mar*et and the concentration has intensified
from ;2"5 percent in 2008 to ;E"5 percent in 200:" It is therefore seen that the import of smaller
diamonds by the G$ is increasingly phasing out"
India !as predominantly an exporter of small diamonds and supplied as much as 8: percent of
all small diamonds imports of the G$ in 2008 and this increased to E:"8 percent by 200:" In
recent years' ho!ever' India has identified the potential in the large diamonds segment and has
focused on increasing large diamond exports to the G$" #his is evident from the fact that its large
diamond exports constitute E:"E percent of its total diamond exports to the G$ in 200:' compared
to E2"5 percent in 2008" -oreover' Indias share in the G$ mar*et for large diamonds has risen
substantially from :": percent in 2008 to 15": percent in 200:" It is also seen that India has
succeeded in capturing some of Israels mar*et share in this segment' !hich has declined from
E0"7 percent in 2008 to =:"E percent in 200:"
.eing a luxury good' the 200; economic crisis had a severe impact on the imports of diamonds"
#hough imports from all trading partners fell' India experienced a drop of the least magnitude in
200: %of 20"= percent&" In particular' the price sensitive segment of large diamonds experienced a
steep fall of over 7E percent in 200:' though imports from India !ere again least affected' relat
ive to Israel or .elgium"
#he overall evidence suggests that India is a considerably strong player in the G$ diamond
mar*et" Iot only has it successfully exported higher volumes % and values& of large diamonds'
the relatively small impact of the 200; crisis on Indias diamond exports suggests that India has a
strong foothold in this mar*et and has performed more consistently than its competitors %Israel
and .elgium& in recent years"
Indian exports of gems and )e!elry %including diamonds& have performed !ell in the G$ mar*et"
#he annual gro!th in Indias gems and )e!elry exports to the G$ has more often been higher
than its competitors"
=0
b" 9ong +ong $pecial Administrative 0egion %$A0& and 1hina
Aor the annual gro!th in Indias 4ems and He!elry exports to the G$' refer to Aigure ; in the Appendix"
2:
It is seen from #able = that 9ong +ong has become a significant importer of diamonds since
2000" #hough its share remained unchanged bet!een 2000 and 2008 %at E percent of !orld
diamond imports&' this rose significantly to 10 percent in 200: amidst the economic crisis' thus
ma*ing 9ong +ong the third largest importer of diamonds" Additionally' 9ong +ong has
succeeded the G$ as the main importer of cut and polished diamonds from India' !ith 71 percent
of its import share"
=1
Ta*,e 3: %ain Wor,d Importer of !iamond
2000 2005 2009
'mporting 3ountry 7arket sare 'mporting 3ountry7arket sare 'mporting 3ountry 7arket sare
USA
22.8%
USA
18.7%
I()#'
16.8%
B,6#1*
14.1%
I()#'
11.8%
USA
14.5%
U:
10.7%
B,6#1*
11.2%
H.(6 :.(6
10.2%
I()#'
8.2%
U:
8.4%UAE 10.1%
I%!',
7.5%
H.(6 :.(6
7.7%
B,6#1*
6.3%
H.(6 :.(6
6.3%
I%!',
6.9%
U:
5.9%
S+#/<!,'()
4.7%UAE 6.1%
S+#/<!,'()
4.2%
J'2'(
4.7%
S+#/<!,'()
3.4%
G!*'(-
3.5%
I/',-
3.4%
J'2'(
3.4%
I%!',
3.2%
G!*'(-
2.6%
G!*'(-
2.5%
A1%/!',#'
2.7%
#able 8 reveals that India is clearly the *ey partner for 9ong +ongs diamonds imports and over
== percent of all diamond imports have been sourced by 9ong +ong since 2000" India also has a
dominant position in gems and )e!elry exports' !hich account for over == percent of 9ong
+ongs total imports for the sector"
4$
Page 71' I10A 0eport on the Indian 4ems and He!elry Industry%Fctober 2010&%last accessed on
18";"2011&"
70
Ta*,e 4: %ar$et #are of main tradin- partner in >on- Kon- !iamond and Gem and
<ewe,r8 import
7arket .are in 8iamon( 'mports 7arket .are in 9ems an( Je/e"ry 'mports
)e"gium 'srae" 'n(ia )e"gium 'srae" 'n(ia
2000 11.3% 16.7% 47.5% 10.2% 15.0% 43.4%
2005 12.3% 15.7% 44.1% 11.4% 14.5% 41.1%
200# 13.5% 15.3% 44.6% 12.5% 14.2% 41.8%
2009 14.0% 11.9% 47.6% 13.2% 11.2% 45.1%
$ource, Authors calculations based on Gnited Iations %GI& 1omtrade database http,BBcomtrade"un"orgBdb %last
accessed on 27":"2011&
Fther than the G$ and 9ong +ong' Indian gems and )e!elry are also exported to 1hina" 1hinese
imports of cut and polished diamonds have increased by ;5 percent bet!een 2000 and 200: and
India is the largest exporter to this mar*et !ith a share of 2 percent" A fe! Indian companies
have also planned to begin retailing operations in collaboration !ith manufacturing units in
1hina" India is also the leading exporter to EG countries' though EG imports of gems and
)e!elry from India have fluctuated over the years"
3+)+3 5ompetitivene of Gem and <ewe,r8 export
#he 01A for Indias gems and )e!elry exports has remained considerably above unity indicating
that this is a competitive export item for India" #his can be attributed partially to Indias gro!ing
exports of large-si?ed diamonds to mar*ets such as the G$" Additionally' introduction of the
3iamond 3ollar Account and 4reen card for exporters of polished diamonds have facilitated
trade competitiveness"
=2
=2 Gnder this scheme dollar transaction is allo!ed for purchase of rough diamonds by exporters" Aor more
information on this scheme' refer to .urange' K"4" J 1haddha' $heetal H" %200;&"
71
1i-&re (): R5A for India Gem and <ewe,r8 export .to t#e Wor,d0
25.000
20.000 -------------------------------------------------6----------------------------------------------------------------------------------
0.000 -------------------------------------------------------------------------------------------------------------------------------------
1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
A comparison of Indias 01A !ith its competitors suggests that Israel and .elgiums exports are
more competitive in the G$ mar*et' as they contribute a larger share to G$ imports of gems and
)e!elry" 9o!ever' in the case of gems and )e!elry exports to 9ong +ong' India is more
competitive than Israel or .elgium' o!ing to the fact that over =0 percent of 9ong +ongs gems
and )e!elry imports are sourced from India"
3+)+4 Ke8 i&e 2 Gem and <ewe,r8 "ector
#here are some persistent issues that the Indian 4ems and He!elry sector has faced for a long
time" Fne of the main factors has been the large-scale presence of the unorgani?ed sector in this
industry" In the future' India can possibly face competition from 1hina' as an increasing number
of Indian' .elgian and Israeli diamond processors are setting up branches in 1hina' to capitali?e
on cheap labour" #his could pose a threat for the large-scale processing of diamonds in India" A
similar threat can be expected from African countries in the near future' !hich have invested in
developing the domestic %diamond& processing industry' in order to create better employment

==
possibilities"
4&
0efer to #able 7 in the Appendix" ==I10A Industr y report on the Indian 4ems and He!elry
Industry" %last accessed on 18";"2011&"
72
3+)+6 Government Initiative
4overnment policies have been supportive of the gems and )e!elry sector" #he government
introduced the replenishment %0EP& license in the si4ties under !hich producers could import the
relevant ra! materials !ithout an upper limit on foreign exchange" Additionally' the 1::5-2002
Aoreign #rade Policy simplified a number of procedures to export diamond )e!elry" .randed or
partially processed )e!elry could no! be exported by India" Aurther' the customs duty %of =8
percent& on rough gemstones and semi-processed diamonds !as abolished by the Gnion budget
of 2007-0=" #he import tariff on cut and polished diamonds and gemstones !as also reduced
from 18 percent to 8 percent"
Aurther reforms !ere implemented in 2008' !hich included an exemption on the service tax
levied on the production related to the manufacturing of cut and polished diamonds' gemstones'
and other forms of %gold and other precious metal& )e!elry" #he ERI- policy %2002-05& reduced
value addition norms on exports of plain )e!elry from 10 percent to 5 percent and the subse@uent
policy for the period of 200=-0:' allo!ed the import of precious metal scrap and used )e!elry for
melting' refining and re-export of )e!elry' in order to increase the production capacity"
Additionally' )e!elry export !as allo!ed on a consignment basis' !hich permitted domestic
exporters !ith unsold inventory %in foreign mar*ets& to re-import" Aoreign direct investment up
to 5= percent %under the automatic route& !as approved by the government' for the exploration
and mining of gemstones and diamonds" -ore recently' the Gnion .udget of 200;-0: reduced
the net profit rate from ; percent to E percent for institutions !hich !ere engaged in the diamond
manufacturing and trading sector %under .enign Assessment procedure&" #he most recent foreign
trade policy %200:-1=& has implemented a ne! facility to permit the import of cut and polished
diamonds %on a consignment basis& for the purpose of grading and certification"
=8
#he recent
Iational -anufacturing Policy has identified the gems and )e!elry sector as one of the thrust
areas given its potential for employment creation"
I10A Industry report on the Indian 4ems and He!elry Industry" %last accessed on 18";"2011&"
77
3+3 Read8 %ade Garment .R%G0? 5otton
3+3+( Ind&tr8 and Trade Overview
1otton' textiles and garments are traditional export items and an important industry for India"
Indias textile industry' in particular' is the second largest textile industry in the !orld after
1hina" Fver time' a number of changes in the domestic and global environment have had a
bearing on this industry" #he Indian textile industry contributes nearly 1= percent to industrial
output and 15 percent to aggregate export earnings" #his industry also contributes to about =
percent of 43P along !ith : percent of total excise collections"
It is a highly labour-intensive industry and therefore of chief importance to the Indian economy"
#his industry employs the largest number of !or*ers after agriculture' around 78 million
!or*ers' and an additional 80 million people !ho are typically engaged in allied activities" Karge
scale employment of this magnitude stems from the fact that many segments of this industry
operate on a very high scale" Aor instance' India is the largest producer of )ute' the second largest
producer of $il* and the third largest producer of cotton %and 1ellulosic AibreBYarn&"
1onse@uently' this industry is visible in global trade' and contributes to 12 percent of !orld
exports of textile fiber and yarn' and up to 28 percent of !orld trade in cotton yarn" #he apparel
industry is one of largest foreign revenue earners and in aggregate' contributes 12 percent of
Indias total exports"
=E
#he textile industry comprises of unorgani?ed firms and manufacturers
!ho sell the products to organi?ed firms in India' !hich are in turn responsible for exporting
these items" Aurther' the industry comprises of small as !ell as large-scale firms' and smaller
firms have an advantage in that they have the flexibility to underta*e a !ider range of
production"
A segment of the textile industry !hich has been a significant contributor to Indias exports is the
cotton industry" #herefore' the follo!ing section analyses the performance of Indian cotton
exports"
#hough international trade is an important aspect of the !orld cotton mar*et' there has been a
decline over time' as the export-to-production ratio has fallen since the seventies" India is the
http,BB!!!"indiala!offices"comBpdfBtextileindustry"pdf %last accessed on 7":"2011&"
7=
second largest producer of cotton after 1hina' and accounted for nearly 20 percent of !orld
production in 2005"
=5
Annual gro!th in cotton production in India has surged since 2002' mostly
due to the introduction of a ne! variety %.t %Bacillus thuringiensis&& of cotton"
1i-&re (3: "#are of cotton export in India tota, export ./0
1i-&re (3: India #are ./0 in t#e wor,d 5otton export
It is seen from Aigure 17 that the share of cotton in Indias total exports has declined from over 8
percent in 1:5E to under 1 percent in 200;" $imilarly' Indias share in !orld exports of cotton has
declined from a high of E"8 percent in 1":5 to 7"2 percent in 200;" Fver time' the @uality
inconsistency prevalent in the textile industry' in addition to an appreciating G"$" dollar have had
4
Aor
6orld cotton production bet!een 1:50 and 2005' refer to #able 1 in the Appendix"
78
an unfavourable impact on the competitiveness on Indias cotton exports %Anantha*rishna
2008&"
=;
#he -ultifibre Agreement %-AA& of 1:57-5= enabled developed countries to bilaterally
negotiate @uotas !ith supplier countries' ta*ing into account their competitiveness and the
perceived threat to the domestic mar*et %of the importing countries&" 3uring the Gruguay 0ound
of multilateral trade negotiations %1:;E-:7&' the international community decided to integrate the
-AA into the ne! Agreement on #extiles and 1lothing %A#1&" #he A#1 included a time table for
phasing-out the @uota system !ithin a ten-year period %starting on 1 Hanuary 1::8&" #he -AA !as
phased out and textiles trade !as integrated into 4A## provisions by 2008"
=:
#he purpose of the
A#1 !as to provide developing countries more access to mar*ets of developed countries" .ut
countries li*e 1hina' +orea and India %!ith a strong textiles production base& remained at a
disadvantage as they had the capacity to produce and export more' but !ere restricted by the
@uotas" $maller countries li*e Pa*istan and .angladesh' ho!ever' used the @uota system as an
opportunity to develop their industry" #he elimination of the A#1 brought a structural change in
the pattern of textile and clothing trade" $ince 1::=' the export of clothing has exceeded textiles
exports"
3+3+3+ !irection of Trade
a" #he Gnited $tates
!
http,BBcommerce"nic"inBpublicationsBanualreport chapter7"asp
4#

Adhi*ari' 0atna*ar J Yamamoto' Yumi*o"
1i-&re (4: India and 5#ina #are ./0 in t#e =+"+ 5otton import mar$et
7E
Iote, $econdary %Y& Axis- 1hinas $hare in the G$ 0-4 1otton Import -ar*et
Fver the last fe! years' there has been a shift in the G$ imports of 0-4 cotton products from
the relatively higher cost 1entral American and Katin American countries to!ards lo!er- priced
Asian suppliers li*e India' 1hina' <ietnam' .angladesh' 1ambodia and Indonesia"
#ill the implementation of the A#1' 12 percent of G$ imports !ere from India" 9o!ever' this
share fell sharply during the @uota regime" After the elimination of the -AA' India recovered
marginally' but in 200E' the rupee appreciation against the G$ dollar made Indian exports less
competitive"
80
$ince 2005' Indias share has increased only marginally" 1hinas performance in
the same period ho!ever' has been phenomenal' as it has gro!n to contribute 70 percent of G$
cotton imports" Gnli*e India' 1hinas cotton exports remained competitive even during the @uota
period" An important feature of 1hinas %textile& sector has been its vertically integrated structure
!hich can simultaneously execute all stages of production" Additionally' though the cost of
labour is higher in 1hina than in India' the higher productivity in this sector often converts to a
better @uality to price ratio"
81
#hese factors could have cumulatively contributed to the gro!ing
share of 1hina in G$ imports of cotton"
b" #he Gnited +ingdom
1i-&re (6: India and 5#ina "#are ./0 in t#e =K 5otton import mar$et
5$
I10A industry report on the Indian #extiles and 1lothing Industry' %last accessed on 7":"2011&"
"

Economic $urvey' 200;
75
Indias cotton exports experienced a declining share in the G+ mar*et %from 1::8 on!ards& and
in recent years' have converged !ith that of 1hina at close to ; percent" $imilar to its
performance in the G$ mar*et' Indian cotton export share has gradually declined' !hile that of
1hinas has consistently risen in the same period" 1hinas performance !as aided by the fact that
1hinese firms had prepared for the end of the restrictions through substantial investment to
improve infrastructure' !hich enabled 1hina in raising its exports volume once the @uotas !ere
removed" #hus' the evidence suggests that 1hina !as better e@uipped to capitali?e on the
removal of the @uota system and !ere therefore prepared to secure a stronger hold in important
mar*ets in the post- -AA period"
3+3+3 5ompetitivene of R%G 5otton export
1i-&re (6: R5A2 India 5otton Export .to t#e wor,d0
Aigure 15 reveals that India has been competitive in !orld exports of cotton" 9o!ever' there has
been a do!n!ard trend since 1::8 !hich could be due to a possible negative impact of the A#1
on Indias share of cotton exports in total exports" #he 01A for Indian cotton exports compared
to 1hina further suggests that Indian cotton exports have been competitive in important mar*ets
li*e the G$ and the G+"
82
82 0efer to #able = in the Appendix"
7;
3+3+4 Government Initiative2 R%G 5otton
#he Indian textile industry has traditionally comprised of several small and medium scale
enterprises %$-E&" In the years follo!ing independence' the government used this sector to
provide large scale employment opportunities" #hus' a fe! labour-intensive segments of this
industry !ere reserved for small smaller enterprises" At the time' large scale production !as not
possible due to the existing restrictions on total capacity and lo! levels of mechani?ation" #his
constrained the production of this industry and discouraged capital investment"
87
9o!ever' in an attempt to improve the efficiency and productivity of this sector' the Indian
government reduced the reservation of textile products from 1::5" Additionally' the #echnology
upgradation Aund $cheme %#GA$& !as launched in 1::: !hich enabled firms to access lo!-
interest loans for technology upgradation" #he #GA$ scheme has been continued and is part of
the Eleventh Plan !here its allocation has been raised" #he Indian government has also approved
special schemes for Integrated #extile and Apparel par*s %$I#P&" Gnder this $cheme' up to 2E
par*s have been approved and the budget provision is also !idened by the government" #he
government adopted a cluster approach for the handloom sector in 2008-0E' !here 120 clusters
!ere selected for the provision of technical assistance and !ere provided subsidies for
technology upgradation' in addition to mar*eting support"
8=
Aoreign 3irect Investment %A3I& of up to 100 percent is permitted %under the automatic route& in
the Indian textile industry" #he #extile -inistry has also set up an A3I cell to provide assistance
and advisory support' sort out operational impediments' in addition to designing schemes to
attract more A3I in this sector" In 2000' the textile policy !as designed to remove the bias in
policy to!ards the small and medium si?ed firms and promote moderni?ation"
Fver time' the government has made provisions for incentives by reducing the excise duty and
the basic custom duty on importing of ra! materials" #he Gnion .udget of 200=-08 in particular'
made changes to the 1EI<A# schemes for the textile sector" Every manufacturer in the textile
industry had the option of choosing bet!een the exemption route %in !hich no excise duty !ould
87 http,BB!!!"cci"inBpdfBsurveysCreportsBindiasCtextileCsector"pdf %last accessed on 8":"2011&
8=http,BB!!!"legalpundits"comB1ontentCfolderB#9E#ER#IKEII3G$#0Y0EPF0#2:0510"pdf %last
7:
be payable at any stage& or the 1EI<A# route %in !hich credit could be ta*en for all excise
duties at earlier stages&"
88
#hough this sector has benefitted from an increased allocation of funds through various schemes'
its profitability has suffered due to increased costs of ra! materials %especially cotton& and a
sharp depreciation of the Indian 0upee against the G$ 3ollar" 9o!ever' a conscious reduction in
the protectionist attitude is expected to have a positive impact on the cotton textile sector"
Policies are designed and implemented in a !ay to ensure the moderni?ation of !eaving
machineries" Aurther' as the sector becomes more competitive and driven by mar*et forces' the
overall productivity of the textile industry !ill be enhanced" -ore investment in the form of A3I
!ill further support capital-intensive production and thereby boost the efficiency by helping to
reali?e economies of scale" #he Indian 4overnment has provided incentives to manufacturers for
establishing export ?ones or export par*s' in the form of exemption from certain labour
regulations and through provisions for land purchases' credit and taxes"
8E
As in the case of gems
and )e!elry exports' this sector too is one of the thrust areas for the Iational -anufacturing
Policy given its high employment intensity and implications for gro!th of the $-E sector"
3+3 E,ectronic -ood and IT #ardware ector of India
#he electronic industry in India has emerged as an important manufacturing sector in recent
years and has contributed positively to the gro!th tra)ectory of the Indian economy" #his
industry has registered strong gro!th in the last ten years and has increased its contribution to
Indias exports' as seen in Aigure 1;" Although the share of the electronics industry %relative to
textile or gems and )e!elry& is lo!' its performance at the domestic level has revealed the
industrys strong potential to cater to international mar*ets" 1onse@uently' this sector is expected
to play a greater role in Indias manufactured exports in the years to come"
8E I10A report %Hanuary' 200:& on the Indian #extiles and 1lothing Industry" %last accessed on 7":"2011 & 88
I10A report %Hanuary' 200:& on the Indian #extiles and 1lothing Industry" %last accessed on 7":"2011&
=0
India has made a serious effort to develop this sector since 1:E0" In the first t!o decades' the
focus !as on developing space and defense technologies' !hich gradually moved to!ards
consumer goods li*e transistor radios' .lac* and 6hite television sets' calculators and other
audio products" An impetus to this industry came in 1:;2' !hen the Indian government ordered
thousands of color #< sets to be imported on the eve of Asian games" #he gro!th of this sector
!as further aided by the introduction of computers in various government organi?ations in 1:;8
and the sector remained buoyant even during the economic crisis in the nineties"
85
#he economic
reforms' ho!ever' hampered the gro!th of the electronics industry" #he steep fall in custom tariff
made the sector vulnerable to international competition" In 1::5' India signed a trade agreement
!ith the 6#F !here India !ould lift all custom duties on I# hard!are by 2008" In subse@uent
years' a fe! companies turned sic* and had to be closed do!n' but others survived the
competition and successfully established an identity in the international mar*et"
8;
#he *ey segments of the Indian electronics sector include consumer electronics and telecom
e@uipment !hich are the largest and cumulatively represent nearly 25 percent of total production"
5!
http,BB!!!"cci"inBpdfBsurveysCreportsBelectronics-industry"pdf%last accessed on 15"10"2011&
http,BB!!!"cci"inBpdfBsurveysCreportsBelectronics-industry"pdf%last accessed on 15"10"2011&

=1
1i-&re (@: "#are of e,ectronic -ood export in India tota, export ./0
8:
I# hard!are is the fastest gro!ing segment' !ith a 1A40 of 21 percent"
8:
Fther
important segments of the electronics industry include electronic components and
strategic electronics"
Even though the Indian electronics mar*et has gro!n at a remar*able 1A40 of 28
percent in the last five years and !as estimated at O=8 billion in 2010' it has a minor
share in the global electronics mar*et' accounting for )ust over 0"E percent of global
exports of electronic goods in 200:"
E0
#his may in part be explained by the fact that the
Indian electronics industry exports only 8 percent of total production and the ma)ority is
intended for domestic consumption"
E1
In fact' the gro!ing consumption demand of the
Indian mar*et has attracted global attention' despite the industrys lo! share in !orld
mar*et" As income levels rise' more people in India are able to afford better lifestyles
and this raises the demand for durables li*e television sets' mobile phones' computers'
etc" Aoreign players have reali?ed this immense potential and are thus see*ing
investment opportunities in the Indian electronics mar*et" #he electronics industry'
therefore' attracts considerable foreign investment and comprises of ma)or multinational
companies li*e K4' Phillips and $amsung among other international players"
1i-&re (7: India #are in wor,d export of e,ectronic -ood
5#
As per the I$31 report titled' /9uman resource and s*ill re@uirements in the Electronics and I#
hard!are
6"
Arost and $ullivan 0eport on the Indian Electronics Industry
%2010&"
sector %2002&2"
http,BBelectronicsb2b"comB!p-contentBuploadsB2011B02BPart-2CIndian-Electronics-Industry"pdf
6$
I.EA 0eport on the Indian Electronics $ector
%200E &"
% last accessed on 20"11"2011&
http,BB!!!"ibef"orgBdo!nloadBibefreportelectronicsC)une0E"pdf %last accessed on 20"11"2011&
=2
$ource, Authors calculations based on Gnited Iations %GI& 1omtrade database http,BBcomtrade"un"orgBdb %last
Indias electronic exports have gro!n steadily over the years' largely fueled by contract
manufacturing"
E2
In particular' the electronic components segment contributes the largest share to
the sectors exports Uthe export items include passive components such as capacitors and
resistors( !ound components( 13-0F-$( connectors( color picture tubes and computer
componentsBassemblies' such as head stac*s' memory modules and 0AI3 productsV" #he other
important export segments are industrial and consumer and computer electronics"
#he ma)or export mar*ets for Indian electronic goods are the G$' G+ and $ingapore" #he share
of Indian exports in these mar*ets' ho!ever' continues to be under 1 percent' though this has
improved since 1::8" 1hina remains the dominant player in the global mar*et for electronic
exports" It has more than tripled its share in the above mar*ets bet!een 1::: and 200: and
supplied over 7= percent of G$ imports of electronic goods in 200:"
E7
Fverall' Indias electronics exports have remained uncompetitive %compared to !orld exports&'
as seen in the Aigure belo!" 9o!ever' the up!ard trend in the 01A %for electronic exports& since
2000 is indicative of an improvement in global competitiveness over time" Aactors !hich have
contributed to this include the gro!ing presence of global multinational companies in India and
increased outsourcing of manufacturing by Indian as !ell as global e@uipment manufacturers" An
important resource !hich has contributed and can further improve Indias competitive advantage
is the availability of s*illed manpo!er at competitive costs in India" .eing an industry !hich
crucially relies on technical *no!ledge' this industry has the potential to absorb high @uality
labour from the large pool of technologically s*illed !or*force in India" #he Iational $*ill
3evelopment 1orporation has estimated that the industry !ill employ bet!een 7-7"2 million
s*illed !or*ers by 2022 and 50 percent of them are li*ely to be absorbed into the
http,BB!!!"ibef"orgBdo!nloadBibefreportelectronicsC)une0E"pdf %last accessed on 20"11"2011& E2
I.EA 0eport on the Indian Electronics $ector %200E&"
6&
0efer to #able 2 In the Appendix"
=7
manufacturing and servicing support"
E=
#his industry can exploit this advantage of s*illed human
capital to fuel its productivity and thereby maximi?e exports of this sector"
1i-&re )9: R5A2 Indian .Wor,d0 export of e,ectronic -ood
Economic reforms and regulatory policies have also played an important role in supporting the
electronics industry" Aollo!ing the economic crisis in the early nineties' industrial licensing has
been virtually abolished from the electronics and I# hard!are sector %excluding manufacturing
electronic aerospace and defense e@uipment&" Additionally' the Indian government signed the
I#A-I agreement %as imposed by 6#F and effective from -arch 2008& !hich abolished all the
custom duties to facilitate trade in this sector" Gnder this agreement' there !as no reservation for
P$Gs in this industry and private investments !ere allo!ed in every segment" #his sector also
opened up to foreign participation and allo!ed foreign companies to establish operations in India
under the Indian companies Act' 1:8E' in addition to !holly o!ned subsidiaries"
E8
#he state-level governments have continued to encourage )oint ventures as they provide the
advantage of established contracts' financial support and a distribution-mar*eting net!or* for the
Indian partner" In general' the foreign trade policy permits the import of all electronics and I#
products' !ith the exception of some defense related items" #he schemes provided for setting up
Export Friented Gnits for the electronics industry provide dra!bac*s on duties and are
64
http,BBarticles"economictimes"indiatimes"comB2011-07-28Bne!sB2:1;;880C1Chard!are-industry-
electronics-telecom-e@uipment %last accessed on 18"10"2011&
E8 Aoreign e@uity shares in such Indian companies could be up to a 100 percent"
==
designed to also attract foreign participation" #he $oft!are #echnology Par*s of India %$#PI&
$cheme in particular has been a ma)or success"
#he challenges !hich afflict this sector result from the broader difficulties faced by the Indian
manufacturing sector"
EE
#he policies are designed to improve the overall efficiency by attracting
the most competitive firms and s*illed human capital' but higher investments in research and
development %0J3& can improve the productivity of this sector and subse@uently its contribution
to Indias manufacturing exports" In this regard' the electronics sector is li*ely to benefit from the
Ie! -anufacturing Policy %2011&" 6hile it is expected that electronics !ill possibly account for
a ma)or share of Indias total manufacturing by 2022' the various investment and tax incentives
provided %under the I-P& for electronics' KE3 and semi-conductor industries can succeed in
attracting many more multinational companies to India' thereby ma*ing India an important part
of the global electronics supply chain"
E5
3 5onc,&ion and cope for f&t&re wor$
It is evident from the preceding discussion that India has follo!ed a development model unli*e
that of the East Asian Economies" 6hile the services sector has registered remar*able gro!th
and contributed significantly to Indias 43P' the manufacturing sector has gro!n at a
comparatively slo!er pace" #he overall performance of the Indian manufacturing sector has
!idespread implications for various aspects of the economy( employment' being one of the chief
areas of impact" $ince this sector generates large scale employment for lo! and medium s*illed
!or*ers' it is imperative to develop features !hich !ill create a conducive environment for
industries to gro! further" #he paper identifies the various inade@uacies !hich prevail !ithin the
sector" In particular' the presence of the unorgani?ed component !ithin industries reduces the
benefits that can be derived from economies of scale" $uch constraints cumulatively prevent the
manufacturing sector from achieving its potential"
http,BB!!!"cci"inBpdfBsurveysCreportsBelectronics-industry"pdf %last accessed on 22"11"2011&
66 #he -inistry of 1ommerce 0eport on the Electronics Industry in India
67 http,BB!!!"displaysearchblog"comB2011B11Bindian-government-approves-ne!-manufacturing-policyB %last
accessed on 5"2"2012&
=8
3+( "&mmar8 of dic&ion
#he paper summari?es the export performance of three uni@ue industries !hich comprise Indias
manufacturing sector and thereby reveals the heterogeneity that exists among industries !ithin
the sector" Indian gems and )e!elry exports constitute a significant share of the countrys
aggregate exports and have also performed !ell internationally' thereby ma*ing India an
indispensable player in this mar*et" Fn the other hand' cotton exports !hich are a traditional
export item for India have declined in importance !ith a falling contribution to Indian exports as
!ell as to the global cotton mar*et" Ainally' the electronic goods industry is an upcoming sector
!hich has gro!n at an impressive rate domestically and has strong potential to contribute to
Indias exports in the near future" In general' these sectors have performed better since trade
liberali?ation !as underta*en in 1::1" #he reduction and subse@uent removal of export and
import barriers have further supported exports and contributed to!ards a stronger performance"
#he paper also provides a summary of changes in government policies !hich could explain the
emerging patterns in Indias exports of select manufactured products" It clearly highlights the fact
that the export performance of an industry is shaped by a number of factors' including global and
partner country economic conditions' costs' mar*et structure' domestic regulations and policy
incentives" 6hile the paper addresses the industry related features stated above' Indias export
performance is e@ually li*ely to be affected by macroeconomic variables such as inflation' !orld
demand %or 43P&' tariff and non-tariff barriers and also exchange rates" Industry reports often
discuss export competitiveness in the light of exchange rate movements' amongst other variables'
and therefore suggest that this variable may be relevant in the Indian context" In particular' an
0.I report suggested that fluctuation in the value of the rupee affected Indian industries
asymmetrically" 6hile labour-intensive sectors such as cotton and leather experienced a fall in
export gro!th %due to an appreciated rupee bet!een 200E and 2005&' high import-intensive
sectors li*e engineering and gems and )e!elry !ere expected to perform better during the same
period' due to lo!er import costs"
E;
$imilarly' other industry reports suggested that
6!
Annual 0eport %2005-0;& of the -inistry of 1ommerce and Industry, Impact of 0upee Appreciation on Indias
Exports http,BBcommerce"nic"inBpublicationsBanualreportCchapter7"asp %last accessed on :"12"2011&
=E
high import-intensive sectors !ere more exposed to international price volatility' !hich affected
their profitabilit y"
E:
3+) !irection for f&t&re wor$
1learly' the determinants of export performance are numerous and the complexity of this issue
re@uires an empirical investigation" #his relationship needs to be explored in greater detail in
future !or* !hich ta*es into account the various industry-specific factors discussed above
alongside important macroeconomic factors such as the state of the !orld economy' the
exchange rate' and the policy environment" In particular' it !ould be interesting to examine the
role of exchange rate movements in influencing Indias export competitiveness given the
periodic bouts of appreciation of the Indian 0upee typically on account of rapid inflo!s of
foreign capital and the concerns such movement typically raises in exporting sectors of the
economy" Aor instance' during 2005' driven by a surge in AII inflo!s' the Indian 0upee
appreciated significantly against the G$ dollar' reaching the 0s =0Bdollar threshold" #his led to
demands from Indian industry to prevent further appreciation and calls for intervention by the
0.I to pre5ent an adverse impact on their exports" Again' more recently' in the aftermath of the
200; global financial crisis' similar concerns about the adverse effects on exports !ere voiced
!hen the rupee temporarily appreciated against the dollar"
9ence' in a future study !hich delves deeper into the micro as !ell as macro level factors that
shape export competitiveness for Indian manufactures' it !ould be !orth testing through
rigorous empirical analysis !hether and to !hat extent exchange rate movements really affect
Indias export competitiveness" #o date' empirical evidence in this regard is limited and there
seems to be a presupposed conclusion that a depreciated rupee is good for Indias exports"
9o!ever' given the diverse nature of Indias exports' the various structural' regulatory' industry-
specific and other factors that influence competitiveness' as highlighted in this paper' can one
expect such a clear cut relationship bet!een exchange rates and export competitiveness to hold
for IndiaL 9o! important are these other factors compared to the exchange rateL Are the
implications similar across manufacturing and services' across different manufacturing
6#
#he 3un and .radstreet report on the Indian 4ems and He!elry $ector %2010&
http,BB!!!"dnb"co"inBIndian4emsandHe!ellery$ectorBAoreign#rade"asp %last accessed on 2:"10"2011&
=5
industries' and for import-intensive exports !hich might benefit from cheaper imports follo!ing
appreciationL A subse@uent !or*ing paper under this same research pro)ect !ill empirically
examine these issues and attempt to arrive at some firm conclusions on the relative importance of
industry-specific versus macroeconomic factors in shaping Indias export competitiveness and
specifically on the role of exchange rate movements in this context"
=;
A+ Overa,, trend
Appendix
1i-&re (:
India2
Import
and Export
Growt#
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1i-&re ): "#are
of merc#andie
export in tota,
export of
emer-in-
economie ./0
$ource, Authors
calculations based on
GI1#A3 %Gnited
Iations 1onference on
#rade and 3evelopment&
database
http,BBunctadstat"unctad"or
gB0eportAoldersBreportAol
ders"aspxL
s1$CrefererMJs1$C1hos
enKangMenN
=:
1i-&re 3: R5A2 "ervice export
1.500 1.000 0.500 0.000
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
B!'<#, C&#(' S.1/& A;!#$' I()#'
http,BBunctadstat"unctad"orgB0eportAoldersBreportAolders"aspxLs1$CrefererMJs1$C1hosenKangMenN
1i-&re 3: R5A2 %erc#andie export
1.400 1.200 1.000
0.800 0.600 0.400
0.200 0.000
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
B!'<#, C&#(' S.1/& A;!#$' I()#'
http,BBunctadstat"unctad"orgB0eportAoldersBreportAolders"aspxLs1$CrefererMJs1$C1hosenKangMenN
80
1i-&re 4: India2 Growt# in man&fact&red export ./0
http,BBcomtrade"un"orgBdb
81
A+ 5ommodit82pecific trend
."1 4ems and He!elry
1i-&re 6: India -em and 'ewe,r8 import a a #are of tota, import
Iote, #he missing data point for the period 1:;2-;7 is due to the import data %for the year 1:;2& !hich is not
available and therefore not reported
1i-&re 6: India2 !iamond export a #are of -em and 'ewe,r8 export
100.0%
90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0%
%&'! .; )#'*.()% #( 6*% '() =+,!- 32.!/%
82
1i-&re @: Growt# in =+"+ Import of Gem and <ewe,r8 from India .and ot#er co&ntrie0
."2 1otton
Ta*,e (: %a'or o&rce of Wor,d cotton prod&ction ./ #are0
$ource, http,BB!!!"ifpri"orgBsitesBdefaultBfilesBpublicationsBifpridp00;01"pdf
87
Ta*,e ): India and 5#ina mar$et #are in important .import0 mar$et for E,ectronic -ood
1995 2000 2005 2007 2009
C.1(/!- C&#(' I()#' C&#(' I()#' C&#(' I()#' C&#(' I()#' C&#(' I()#'
S#(6'2.!
702
2.4% 0.2% 4.6% 0.1% 12.7% 0.1% 16.2% 0.5% 14.5% 0.6%
U: 826
1.2% 0.2% 5.5% 0.2% 10.3% 0.3% 14.7% 0.5% 18.5% 0.4%
USA 842
7.0% 0.1% 10.8% 0.1% 25.9% 0.4% 31.1% 0.5% 34.3% 0.5%
Ta*,e 3: R5A2 Gem and 'ewe,r8 export to important mar$et
India
Export
%ar$etBCear
(7@4 (779 (774 )999 )994 )996 )997
>on- Kon- 2=0":2 180"72 17="7: 125"=0 ;E"E8
=K 0"=; 0"78 0"7; 0"87 0"7E 0"88 0"E7
="A ;1"20 77"15 2="82 1E"87 E";7 8"=; ="::
Ae,-i&m
Export
%ar$etBCear
(7@4 (779 (774 )999 )994 )996 )997
>on- Kon- E2"08 7:"72 E0"0= 7E":0 2;"20 2="0; 1:"0E
=K E"88 8"=0 7"2: 1"78 0"=: 0"E1 0"7=
="A ;0":: 82"E5 E2"5: =2"22 :"22 5"5; 2":5
Irae,
Export
%ar$etBCear
(7@4 (779 (774 )999 )994 )996 )997
>on- Kon- :2"2= E0"27 105"01 E5":0 =;"5= 7:"1E 70":5
=K 2"2; 2";E 10"E0 ="1= 8"8= ;"20 E";2
="A 11;"5: 5="E= ;E";; 55"52 81"8: =="07 2:"22
8=
Ta*,e 3: R5A2 5otton export .India and 5#ina0
India
Export
%ar$etBCear
(7@4 (779 (774 )999 )994 )996 )997
=K 2:"82 72"E0 72"78 72"=1 ;"0: 8"58 7";1
="A 27"E8 21":; 20":1 E";2 2"E8 7";0 7"=E
5#ina
Export
%ar$etBCear
(7@4 (779 (774 )999 )994 )996 )997
=K =;"=7 1:"81 ;"8: 2"=; 1"01 0"5= 0":=
="A 81"=8 1;"11 ="2E 1"=0 0";E 1"2; 1"E:
88
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<erma' $" %2002&" Export 1ompetitiveness of Indian #extile and 4arment Industry" I10IE0
6or*ing Paper Io":="
<irmani' A" %200=&" IndiaYs economic gro!th, Arom socialist rate of gro!th to .haratiya rate of
gro!th" I10IE0 6or*ing paper Io" 122"
<irmani'A" and 3anish'A" %2011&" H-1urve of Productivity and 4ro!th, Indian -anufacturing
Post-Kiberali?ation" I-A 6or*ing Paper' 6PB11B1E7"
E1
3ata $ources,
#he data used in this paper has been sourced from the follo!ing databases,
1" 1F-#0A3E 3atabase, Annual data on aggregate and commodity-!ise exports and
imports http,BBcomtrade"un"orgBdbBd@Xuic*Xuery"aspx
Iote, #he calculations for each of the sectors and commodities are based on the
follo!ing classification and codes,
"ector:
Agricultural goods and manufactured goods
$ectoral 1lassification - "IT5
"ector 5ate-orie a--re-ated ."IT50
Agricultural goods
0WAood and Kive Animals' 1- .everages and
#obacco
-anufactured goods
7 W -ineral fuels' lubricants' 8W 1hemicals'
E W -anufactured goods classified by material'
5 W -achinery and #ransport e@uipment
Fthers
2- 1rude materials' except fuels' =- Animal and
vegetable oils' fats and !axes' ;-
-iscellaneous manufactured articles' :-
1ommodities and transactions not classified
else!here in the $I#1
E2
5ommoditie:
1otton' 4ems and He!elry and Electronic goods
1ommodity 1lassification - "IT5
5ommodit8 5ommodit8 code ."IT50
1otton
E82 - 1otton fabrics' !oven %not including narro! or special
fabrics&
4ems and He!elry
Electronic goods
51
%aggregated&
EE5 W Pearls and precious and semi-precious stones' un!or*ed
or !or*ed
51E' 575' 5E1' 5E2' 5E7' 5E=' 551' 552' 557' 558' 55E' 55;
68 Gnited Iations Iational Accounts -ain Aggregates, $ectoral 1omposition of 43P %for
India and other countries& http,BBunstats"un"orgBunsdBsnaamaBselbasicAast"asp
69 6orld 3evelopment Indicators, $hare of Exports in 43P
http,BBdata"!orldban*"orgBdata-catalogB!orld-development-indicators
70 GI1#A3 %Gnited Iations 1onference on #rade and 3evelopment& database, $hare of
merchandise and services in aggregate exports %for India and other countries&
http,BBunctadstat"unctad"orgB0eportAoldersBreportAolders"aspxLs1$CrefererMJs1$C1hose
nKangMenN
8" 0eserve .an* of India- 9andboo* of $tatistics, Annual data on the 0eal and Iominal
Effective Exchange 0ate %0EE0 and IEE0&
http,BBdbie"rbi"org"inBInfo<ie!AppBlistingBmain"doLapp+indMInfo<ie!JserviceMT2AInf
o<ie!AppT2AcommonT2Aapp$ervice"do
7$
Electronic goods include components of industrial and electrical machinery' telecommunications and
"
#his
category of gems and )e!elry does not include gold and metal )e!elry"
related apparatus and e@uipments"
E7
50

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INDIAN INSTITUTE OF MANAGEMENT

Athu*orala' Prem 1handra

Economic $urvey of India' -inistry of Ainance' 1::;-::"

http,BB!!!"cci"inBpdfBsurveysCreportsBelectronics-industry"pdf%last accessed on 15"10"2011&

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