Influence of Exports on Indian Economy Essay Example

Influence of Exports on Indian Economy Essay Exports have played an increasingly important role in India’s economic growth in the last two decades. Still Export instability and its impact on the domestic economies of developing countries like India has been of continuing interest. However, studies dealing with the impact of export instability on economic growth have yielded two fairly different views. The 1st view emphasizes the negative impact of export instability on growth. This is based on the variability in export earnings, uncertainty in this also has an impact on private investment decisions and adversely affects both the level of capital. Due to this close link of the government revenue with export revenue instability in the exports causes variability, which amounts to disruptions in public investment and infrastructure. The second view emphasizes that export instability does not inhibit the process of growth, in fact it may encourage the growth. Rise in income due to deviations of export revenues from their trend will leave consumption unchanged and savings will rise which is believed to raise the level of investment and rate of economic growth. EXPORTS IN INDIA: India has been described as an ‘import substituting country par excellence’. A balance of payments crisis in 1991 led to the initiation of an ongoing process of trade liberalization. These events corrected the in-built systemic bias against exports and they have led to a degree of correction of the price distortions in the Indian economy through the creation of a more open economy. We will write a custom essay sample on Influence of Exports on Indian Economy specifically for you for only $16.38 $13.9/page Order now We will write a custom essay sample on Influence of Exports on Indian Economy specifically for you FOR ONLY $16.38 $13.9/page Hire Writer We will write a custom essay sample on Influence of Exports on Indian Economy specifically for you FOR ONLY $16.38 $13.9/page Hire Writer More importantly, increased competition and the presence of firms from foreign markets has injected a greater degree of quality consciousness and customer orientation, which has been largely absent due to the lack of competitive pressures. In the past there were few foreign firms present in the protected domestic Indian market. These changes have reduced the tendency of Indian firms to seek and obtain protection from foreign imports. Policy reform has also reduced the effectiveness of attempts by Indian firms to hide behind high tariff barriers and it has challenged interests that have attempted to perpetuate inefficient production. In recent years, India’s percentage share in world exports has been increasing steadily, though at a slow pace. Further, India is building up new areas of strength in export markets by moving to computer software exports, exports of pharmaceuticals and engineering manufactures in addition to traditional export strengths in gems amp; jewellery amp; textiles. Post 1991, the gradual liberalization of the Indian economy characterized by policy reforms created a conducive environment for India’s exports to flourish and evolve into social and economic growth. Hence, the last two decades have witnessed India transform from a closed economy to a considerable player in the global market. Though India had previously experienced a negative growth in its exports, such a prolonged period of decline had not been witnessed in over two decades. It is evident that India’s export performance and economic growth are closely inter-linked. Over time, the export sector has grown to be a significant earner of foreign exchange and a major contributor to India’s national income. Further, the performance of this sector is highly dependent on domestic as well as global factors. As a consequence of this, domestic as well as international economic policies have a bearing on the overall export performance of India. India’s export performance : India’s international trade and reliance on domestic factors fueled growth during the fifties, exports played a smaller role, where India’s exports lost its world market share between 1951-1960 and 1961-70. Till the mid seventies, India’s policy was restrictive and focused on developing the domestic industry, while tightening control on foreign trade . Moreover, India’s exports also suffered because export incentives were only available to a limited number of manufacturing industries and selected agricultural exports. The table below reveals that the period between 1961 and 1970 had higher imports (as a share of GDP), compared to exports which may have contributed to a growing foreign exchange shortage. Additionally, high levels of inflation and budget deficits coupled with the India-Pakistan war severely affected foreign aid and led to a foreign exchange crisis, which resulted in the devaluation of the rupee in 1966. Export and Import growth (%) Following the oil-price shocks, the Indian rupee steadily appreciated by almost 20 percent between 1979 and 1986 and had an adverse impact on its export competitiveness. It is interesting to note that in the early eighties, when world exports grew at 2. 7 percent per year, Indian exports grew at a higher rate of over 6 percent. Nonetheless, India’s share in world merchandise exports fell to less than 1 percent from as much as 2. 1 percent in 1951. India’s export performance since 1991 has fluctuated. In 1997, for the first time after liberalization, India’s exports registered a negative growth of 2. 33 percent. The situation for India worsened when its competitor countries (ASEAN) devalued their currencies amidst the crisis, which reduced the competitiveness of India’s exports in the international market for textile and electronics commodities, where India directly competed with ASEAN exports in overseas markets. India’s imports also suffered and reduced by 2. 44 percent due to weak domestic demand, lower industrial activity and a lower unit value of imports. Export and Import share (%) in India’s GDP : Source: Author’s calculations based on World Development Indicators (WDI) and United Nations (UN) Comtrade database http://data. orldbank. org/data-catalog/world-development-indicators , http://comtrade. un. org/db In 2001-02, India faced another setback in its exports, at large, due to the semi-recession faced by the US; one of India’s biggest trading partners. The terrorist attack on the World Trade Centre caused a net loss of 0. 25 percent of US GDP and also had an impact on India’s exports, which grew only at 5 percent that year. The next major setback for India’s exports was the global crisis of 2008. The collapse of large investment banks around the world coupled with high oil prices and rising inflation led to a global recession. Even though the export sector plays a significant role in the domestic economy by contributing close to 25 percent to India’s GDP (in 2009), its contribution to world exports continues to remain minimal, at a mere 1. 5 percent of world exports in 2009. Between 1991 and 2009, India’s share in world exports rose from 0. 56 to 1. 52 percent. But overall, the economic reforms implemented in India did not have a significant impact on India’s position in the world export market, unlike the reforms implemented in countries like China, South Korea or Taiwan. Sectoral composition of Exports Merchandise exports comprise a major portion of India’s exports to the world. However, a decline in its share and a rise in the contribution of services is visible post 1996. India has experienced a rapid growth in its services sector in the last decade and this is likely to continue in the near future. A combination of demand and supply side factors has influenced the growth of services in India. Sectoral contribution of India’s total merchandise exports : Source: Author’s calculations based on United Nations (UN) Comtrade database http://comtrade. un. rg/db A comparison of India’s export composition with that of its competitors reveals a major point of difference. While for India, services has grown to be a major contributor to its world exports, some of its key competitors like China, Brazil and South Africa continue to earn close to 90 percent of their export revenue through merchandise exports alone. Therefore, the merchandise component plays a bigger role in the exports of other emerging economies, a fact which could explain why India’s share in world merchandise exports has remained low. India- Goods (merchandise) and Services share (%) in total exports Source: Author’s calculations based on UNCTAD (United Nations Conference on Trade and Development) database http://unctadstat. unctad. org/ReportFolders/reportFolders. aspx? sCS_referer=amp;sCS_ChosenLang=en Government Initiatives Even though India’s manufacturing exports have resurged since 2001 and grown at a steady rate of over 25 percent between 2002 and 2008, the manufacturing sector has not performed as well. Where the share of manufacturing GDP has remained stagnant. In contrast, the services sector has performed well and contributed significantly towards India’s economic growth. Moreover, India’s performance in services exports has been stronger than most other emerging economies for which their manufacturing sector has been the main driver. A historical review 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 towards becoming a more open economy, policies have evolved to support trade and increase the volume of exports. However, the average performance of the manufacturing sector has for long, been a cause of concern. In recent years, the Indian government has acknowledged the severity of this issue and taken an important policy initiative in 2011 by approving the New Manufacturing Policy. This policy is aimed at building the capacity of the sector, strengthening its contribution to the GDP as well as improving the international competitiveness of the manufacturing sector. The Indian economy, however, continued to be resistant towards imports and this was reflected in the existing tariff rates. Share of manufactured exports in world (manufacturing) exports: Source: Author’s calculations based on United Nations (UN) Comtrade database http://comtrade. n. org/db India’s key manufactured exports: Since manufactured goods constitute a majority of India’s merchandise exports, it is important to analyze the composition of manufactured exports to identify India’s key export commodities. The following figure shows the distribution of top manufactured goods exports. Source: Autho r’s calculations based on United Nations (UN) Comtrade database http://comtrade. un. org/db Overall, the figure depicts a structural shift in India manufactured exports, away from cotton and textile oriented exports and towards more technique and technology-based items such as pharmaceutical products (medicaments), elecommunication equipment’s etc. The export barriers in India have been hampering Indian exports to a great extent and most of such barriers have been announced by the European Union regarding certification requirements, application of pesticides, dumping of waste products. But the most significant export barrier faced by the Indian exporters is red tapism which is mostly accompanied by corruption. However, the government of India has considered plans to liberate the Indian exporters from the cumbersome paper works and simplify the required procedures. Indian Government keeps swinging on the products that are banned from being exported from India . Frequent ban on export of food grains and other farm commodities should soon be addressed by the commerce department. The move will help India restore some global credibility as it has often faced flak for its banning. Indian Government has banned 58 products from being exported from India. Flip-flop on exports of onions, sugar and cotton in particular has been criticized at the international forum such as  WTO  and G-20, creating fears of India being branded as an unreliable supplier. CONCLUSION: Growth of an economy is directly related to exports. If exports increase at a faster pace as compared to imports, nothing can stop an economy from being a developing one. On the other hand, the instability in exports can adversely affect the process of economic development. It is clear that the export performance of an industry is shaped by a number of factors, including global and partner country economic conditions, costs, market structure, domestic regulations and policy incentives. India’s export performance is equally likely to be affected by macroeconomic variables such as inflation, world demand (or GDP), tariff and non-tariff barriers and also exchange rates. In particular, an RBI report suggested that fluctuation in the value of the rupee affected Indian industries asymmetrically. While labor-intensive sectors such as cotton and leather experienced a fall in export growth (due to an appreciated rupee between 2006 and 2007), high import-intensive sectors like engineering were expected to perform better during the same period, due to lower import costs. Rest apart Government olicies do play a vital role in this sector. Government needs to plan the development, look into other influencing factors and accordingly regulate the EXIM ( Export-Import ) policies to better growth.