FINANCE INDIA Vol. X No.

3, September 1996 Pages 699703

Abstract of Doctoral Dissertation

Indias ExportsAn Analysis of Instability and Performance*

NARINDER KAUR** EXPORTS HAVE ASSUMED a place of paramount importance in the development process of the economy. Since exports are just one aspect of the allocation of resources, a minimum of foreign exchange is necessary if a developing country is going to achieve a rapid growth. The problem of bottlenecks and shortage that has been afflicting India, reflects to some extent, the scarcity of foreign exchange. Moreover, an analysis of export trends, brings out an alarming picture of Indias adverse balance of payments situation. From 1970-71 to 1992-93, there was a rise in imports by about 29 times while exports increased by about 24 times. Cut backs in imports would only mean slackening the process of the development of the economy. Imports, however, have to be paid for either by current foreign exchange earnings or by a withdrawal from the reserves of foreign exchange or by a fresh capital inflows. The withdrawal from the reserve of foreign exchange, is not an unlimited process. Capital inflows ultimately lead to higher service charges and repayment obligations. The sources of foreign exchange are foreign aid, foreign private investment and export earnings. The prospects of foreign aid is not bright due to the restrictive conditions imposed by the donor countries. Inflow of private foreign investment results in ruthless exploitation of national resources by multinational corporations and increases foreign influence on the economy, policy and the society. The only safe way, in the long run, is to finance imports through exports from the country. The study has been undertaken to assess the performance and instability of Indias exports. It is intended to examine specifically the relationship between instability in the value of exports and a set of variables such as quantity, value and price; to analyse the impact of export instability and export performance on Indias economic development; to analyse the price and income elasticity of demand for Indias exports; and the role of export promotion policies in export performance and export instability. This study seeks to analyse the export performance and exports instability of India during 1970-71 to 1989-90. However, an attempt has also been
* The thesis submitted for the degree of Doctor of Philosophy in the Faculty of Business Administration and Commerce. ** Department of Business Management, Punjabi University, Patiala.

Submitted August 94, Accepted January 95

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made to include the latest data. Commodities specifically included are tea, jute, cashew kernels, engineering goods, handicrafts, iron-ore, marine products, leather and leather manufactures, cotton apparels and chemicals. The share of these commodities was more than 68% in 1989-90. Fundamentally, the selection of commodities not now prominent but are growing in importance have also been included. Countries specifically included are U.K., U.S.A., former U.S.S.R., Canada, France, Japan, Australia, former West Germany, Italy, Iran, Iraq and Kuwait. The study is based on the secondary data. To isolate, the factors responsible for Indias export performance in different markets, an attempt has been made to estimate the price elasticities and income elasticities. The Gini coefficient of concentration has been used to measure commodity concentration and geographic concentration. To measure the export performance of a country, basically two types of growth rates have been calculated, viz. compound growth rate and trend growth rate. The instability indices - commodity wise and countrywise have been worked out with the help of linear and exponential trend lines and with the help of ordinary least square method. Moreover, to know the impact of structural variables in generating fluctuations in export earnings (quantity, value and per unit value) and to examine the validity of ranking of the countries for each commodity, Spearmans rank correlation have been estimated. Data have been collected from the Indian as well as international sources. Among the Indian sources: Director General of Commercial Intelligence and Statistics (DGCIS), Reserve Bank of India and Ministry of Agriculture, Industry and Commerce. Information on commoditywise composition and direction of exports for major export categories studied, has been gathered from the various Export Promotion Councils and Commodity Boards. For comparative study, international sources have been used such as various publications of United Nations, United Nations Conference on Trade and Development (UNCTAD), International Monetary Fund (IMF) and the World Bank. The information relating to national income for different countries has been converted into Indian currency. Findings of Study The study shows that growth in world demand, changes in the commodity composition, changes in the market distribution of exports, foreign income and income elasticity of foreigners demand, price elasticities, changes in competitiveness e.g. export prices, trade policies tend to be the main determinants of export performance. Over a period of time, Indias relative share in world exports has declined. The world exports grew at a faster rate than that of India. Traditional commodities such as tea, spices and cotton fabrics etc., which still constituted the bulk of world exports recorded a decline in their shares during the period 1970-71 to 1990-91. The decade of 1970s and 1980s, however, noticed substantial structural changes with regard to composition of exports. The share of traditional commodities went down whereas the share of non-traditional export commodities registered a significant increase. Further, the trend growth

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rates of various export categories indicates the comparative importance of traditional and non-traditional exports during the entire period under study. All non-traditional export categories witnessed positive stable growth rates. The highest growth was observed in case of handicrafts followed by chemicals and allied products. Inspite of statistically significant high growth rate of these commodities, Indias overall growth rate remained low during the period under study. The study shows that jute manufactures, tobacco, oil cakes and sugar have insignificant role in Indias exports. The need is to stabilize the production of these commodities. Further, engineering goods, cotton textiles, coffee, iron-ore, fish and fish preparations and leather manufactures are the commodities for which attempts should be made to increase their production. In order to boost the exports of engineering goods and to popularise its products, India had to offer heavy discount in the international market. The shares of North America and E.E.C. countries in Indias export registered an increase while those of Asia and Oceania, O.P.E.C. and East European countries declined. The trend growth rate of exports to these regions for the period under study, did show the highest growth in North America followed by E.E.C. Countries, East European countries and Asia and Oceania. O.P.E.C. countries, however, exhibited insignificant growth rate. Among the major markets, former U.S.S.R. and U.S.A. evidenced increase in their shares whereas share of Japan and U.K. declined. Further, the share of former F.R.G. increased whereas Canada, Iran, Australia also witnessed decline in their respective shares. Moreover, the highest growth was observed in former F.R.G. followed by former U.S.S.R., U.S.A. and Japan. The other countries did not register significant growth rates. Of course, there is a shift in the commodity composition of exports but it is concentrated to only few commodities. Destination wise, the study shows unfavourable changes in geographical distribution of exports for India. This created a passimism in exports diversification because India was unable to capture non-traditional markets. Moreover, Indias exports are suffering from both price and non-price competition. In various cases, income elasticities calculated are negative. This suggests that the products concerned are relatively inferior. Consequently, importers are switching to the better quality products available from other sources or to the close of substitutes. This is in the case of U.S.A., Canada and Australia for Jute Exports; and U.K. and U.S.A. for tea exports. Thus, income is not an important factor for these markets. Further, negative price elasticity of demand in Italy and former West Germany in case of jute exports, Australia in case of tea, and Canada in case of cashew kernels indicates the supply of the products at a cheaper rate might be a significant inducement to increase the demand for the products. Besides, price and income are the significant factors in determining future trade in case of jute exports to Canada, Australia and U.S.A.; tea to Japan, former West Germany, Canada, Iran and Kuwait; iron-ore to Japan and Italy. Indias export performance

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of tea with U.K., U.S.A., Japan, former West Germany, Iran & Kuwait is purely conditional on the rate of growth of price. On the other hand, non-traditional exports such as engineering goods, handicrafts, leather manufacturers, cotton-apparel, chemicals and marine products, income elasticities with different selected markets are significant. The significant income elasticities are found with U.K., U.S.A., Canada, Japan, Australia, France, Italy and former West Germany in the case of the engineering goods; with U.K., U.S.A., Canada, Japan, France, Australia, Italy, former West Germany and Kuwait in handicrafts; with U.K., U.S.A. in leather manufactures; with U.K., U.S.A., France & Kuwait in chemicals; with U.K., U.S.A. Japan & France in marine products. This suggests that Indias future exports performance is purely conditional on the rate of growth of income in these countries. Thus, there is a further scope for the expansion of trade with these countries. Moreover, in respect of traditional and nontraditional commodities, though price and income factors are important, non price factors like quality, designing, packaging, advertising and marketing etc. are also important to improve the price efficiency in the international market. India suffered instability in its exports earnings during 1970s, 1980s and for the entire period of 1970-71 to 1989-90. The commoditywise picture is composite. Some exportables witnessed higher instability while others experienced a relatively low instability. Non-traditional exports have shown highest degree of instability followed by traditional exports during 1980s and for the entire period under study. The commoditywise picture also reveals that instability was caused by fluctuations both in export prices and volume exported. The degree of fluctuations in these two components, however, varied from commodity to commodity. In case of traditional commodities, the fluctuations in export earnings were caused primarily by prices during 1980s and from 1970-71 to 1989-90. Whereas in case of iron-ore, the source of instability was found in volume during 1980s. The fluctuations in traditional commodities are due to the price factor. Thus, jute, tea, cashew kernels, iron-ore, handicrafts, leather manufacturers and marine products had a stabilising effect on Indias total export earnings during 1970s. Further, it had a destabilising effect in case of handicrafts, engineering goods, leather manufactures, chemicals and cotton apparel on the other hand, jute manufactures, tea, cashew kernels, iron-ore and marine products, had a stabilising effect during 1980s and the period under study. On the whole, the selected commodities had a destabilising effect on the total export earnings of India. The countrywise picture is also composite. Indias export to U.K., U.S.A., former U.S.S.R., Canada, Italy and former West Germany had a stabilising effect but had a destabilising effect in the case of jute exports to Japan and Australia. Export of tea to former U.S.S.R., Japan and former West Germany had a stabilising effect. There was a stabilising effect of iron-ore exports to Japan and Kuwait and destabilising effect of exports to Italy and Iraq. Cashew

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kernels trade with Japan, France, Italy and Kuwait had a stabilising effect. Handicrafts exports to U.S.A., Canada and Australia also had a stabilising effect. Former U.S.S.R. and former West Germany had a stabilising effect in chemicals and cotton apparels respectively. Leather manufactures export to U.S.A., former U.S.S.R., Japan, France and former West Germany had a stabilising effect. U.S.A. and Australia had a stabilising effect in case of imports of marine products from India. Thus, Indias trade with U.K., U.S.A., former U.S.S.R., Japan and former West Germany was instrumental in stabilising the export proceeds of jute manufactures, tea, engineering goods, handicrafts and leather manufactures. On the whole, the selected countries had more of a destabilising effect on Indias total trade. Thus, the need is to explore the new markets for Indias exports. The targets of projected exports suggests that there is a divergence between the export projections made by the planning commission and the present study. This justifies policy changes recently introduced. Moreover, the incentive system for export promotion undertaken from time to time was largely a marginal addition to the basic policy system designed not so much to permit efficient specialisation, as to facilitate the exports of surplus commodities. A review of Indias major incentives indicates their utmost complexity. Most of the incentive schemes have not worked well. The general perception of export incentives is that they lack predictability and transparency. Either the coverage was too small or procedures were much complicated. The frequent changes rendered the schemes less useful than anticipated. Hence, these proved to be unconducive to the objective of promoting the exports. Moreover, the export incentive policy was focussed largely on those major sectors that were oriented strongly towards the home market and was designed to facilitate the export of a modest proportion of their output with little attention to the economic cost. This is the reason why the Government has radically changed the policy towards massive liberalisation. The International Trading Environment is undergoing rapid transformation. Protectionism is growing and multilateralism is under pressure. The inequality of the present international trading system from the view point of India is an important factor. New linkages are sought to be enforced through the multilateral trade negotiations under the aegis of GATT and symbolised by Dunkel Draft proposals. Keeping in view Indias development, trade and financial needs, India should prepare to play an active role in the international trading system consistent with the national objectives. Indias resistance to the introduction of new linkages intended to circumscribe the autonomy of development policies must continue with renewed vigour. Hence, the export promotion measures should be adopted in the light of broader economic and social needs of the country and the changing global environment.