CHAPTER-II

PROBLEM STATEMENT AND REVIEW OF LITERATURE

2.1 Problem Statement

Economic development is one of the major goals of every society in the world and economic
growth is fundamental to economic development. Several factors affect economic growth and
development. International trade is also a powerful factor for economic development. The export
proceeds of developing countries are essentially needed to compensate the imports bill of capital
goods, whereas, developed countries can find markets for the sale of surplus production of
capital and consumer goods. The share of exports of a country is also an indicator of its
importance in the world economy. Meier (1980) states that foreign trade would make an
impressive contribution to the development of a country. It is considered that foreign trade is not
simply a means of achieving productive efficiency; but it is also a growth engine. The economy
of India has grown appreciably in post liberalisation era by achieving and sustaining an annual
GDP growth rate of approximately seven percent. India’s impressive economic growth rate,
during 1990s and onward, can be attributed to the constant economic reforms to a great extent
and in part to the continuously increasing role of the export and import in the economy.

The history of Indian trade reflects that despite the frequent political upheavals of the twelfth to
the sixteenth century, the country was still prosperous. India was well known for its textiles, one
of the leading export items. However, the British rule over India affected the trade adversely and
India became a source of export of raw material and a market for imported manufactured
products. India’s foreign trade started to gain significance during the latter half of the 19th
century. India’s foreign trade was severely hit by the great depression of 1930s. However, during
the Second World War, India achieved huge export surplus, enabling her to accumulate
substantial amount of sterling balances. After independence, India followed a path of five years
economic planning for her economic development. But the emphasis of Indian government was
on ‘inward oriented’ policies. As far as foreign trade is concerned, this meant large scale import
substitution (through extensive protection of domestic industries), direct over-valued exchange
rates (World Bank, 1987). India’s international trade policy after her independence in 1947
focused on being self-sufficient and minimal reliance on international trade as a source of
income. Patel (1959), quoted that after independence, the widely prevalent view in Indian
Government circles was that the Indian exports faced a stagnant world demand and nothing
much could be done to increase them.

The period covered by the first plan was a period of progressive liberalization. However, India
used full import controls in 1956-57 because of the balance of payments crisis. This paradigm
shift in policy led to a major reversal of liberalization and produced a regime of protectionism
(Bhagwati and Padma Desai, 1970). In late 1960s and early 1970s, the liberalization measures of
1966 were reversed and import controls were further strengthened. As a result of tighter import
controls, the share of non-oil and non-cereal imports in GDP fell from 7 percent in 1957-58 to 3
percent in 1975-76. Trade Policy of 1985-88 provided some trade promotion measures based
upon the recommendation of Abid Husain Committee 1984 which envisaged “Growth Led
Exports, rather than Export Led Growth”. Despite these measures, the trading regime continued
to be characterized by a licensing system that, combined with a high tariff structure, protected
the economy from external competition.

The decade of 1950s witnessed balance of payments crunch. In the mid-1950s the sterling balance
that India acquired during the Second World War got exhausted and so India also witnessed
balance of payments crunch in this decade. The export proceeds were not enough to meet the
growing import demand. The Government of India emphasised on the development of industry,
mining and transport during the second five year plan and therefore needed a lot of foreign
exchange. The foreign currency crunch necessitated the stiffening of import policy at a later stage
and resultantly, a progressive tightening up of import policy took place in 1957. The Open General
License (except for poultry, fish, vegetables, etc., from Pakistan) discontinued; instead limited
quotas in respect of essential commodities were granted to importers on the basis of their actual
imports during 1952-56. The import of capital goods were the priority and so licensing continued
to be confined to this sector. On account of this policy, the imports came down drastically.
However, during late 1950s, the government imports witnessed a continuous upward trend.

Imports of food grains, raw cotton and metals contributed significantly in 1960-61. In this period,
12 Export Promotion Councils were set up by government to promote exports in respective areas.
In some cases, larger import licenses were issued as part of export production. In 1964-65, the
balance of payments once again came under pressure because of several factors like rising debt
service burden, increase in imports of food and goods for development, etc. As a result, India had
to resort to 57.5 per cent devaluation of Rupee(Rs 4.7 to Rs 7.5 per dollar) in the face of financial
crisis in June 1966. The devaluation of domestic currency was accompanied by liberalization of
foreign trade, particularly liberalization in import controls and tariff cuts. According to T.N.
Srinivasan “devaluation was seen as a capitulation to external pressure which made liberalization
politically suspect… (Srinivasan, p. 139)”. India’s war with Pakistan in late 1965 and withdrawal
of foreign aid by the US and other countries, friendly with Pakistan, aggravated the problem along
with the drought of 1965-66.

India’s trade regime was based on a complex system of licensing in the late 1970s and early 1980s
as the trade policy heavily relied on quotas rather than on tariffs (Bhagwati, J.N. and Srinivasan
T.N. 1975). During this period, the imports were to be permitted only if the firm in question
certified to the government that they were ‘essential’ (as inputs or equipment for production. In
nutshell, almost all imports (except commodities listed in OGL category like capital goods) were
subject to discretionary import licensing or were ‘canalized’ by the government monopoly trading
organizations. The import of consumer goods was banned (except essential goods). As a result, the
import control stiffened the manufacturing sector which made economic reform necessary.
Therefore, the process of liberalization began in mid-1980s. Many export incentives were
introduced and imports were tied to exports. With the aim to modernise domestic industry, several
capital goods were shifted to the OGL category and the number of capital goods in this category
increased from 79 in 1976 to 1170 in 1988. The import licensing of capital goods in the restricted
list was administered with less stringency during the 1980s (Pursell, G., 1996). The Rajiv Gandhi
Government in November 1985, further relaxed the restrictions on imports of capital goods to
encourage technological modernization. There was more emphasis on export promotion in mid-
1980’s and the government became more liberal in the allotment of REP (replenishment) licenses-
tradable import entitlements awarded to exporters on a product specific basis.

In 1991, government initiated a process of major economic reforms and liberalization. The
government abolished the import licensing with respect to imports of most machinery, equipment
and manufactured intermediate products. The main trade policy changes after 1991 included the
simplification of procedures, the abolition of quantitative restrictions and the substantial reduction
of tariffs and their dispersion, as recommended by the Tax Reform Committee, 1992 (Chairman:
Raja J. Chelliah ). The trade policy focussed primarily on liberalization of capital goods and inputs
for industry, to encourage domestic and export-oriented growth. The financial sector saw several
reforms(Ahluwalia, 1999), however, imports of consumer goods remained regulated. India
amended its copyright law in 1994 to comply with its obligations under the Trade Related
Intellectual Property Rights (TRIPs) agreement. India became member of WTO in 1995 after
which a significant change in tariff rates were made. The peak rate of tariffs was reduced from 300
per cent to 150 per cent. Tariffs were further reduced from an average of 71 per cent in 1993 to 35
per cent in 1997. As of December 1995, more than 3000 tariff lines covering raw-materials,
intermediaries and capital goods were freed from import licensing requirements. The Government
of India introduced an Exim policy for the period 1997-2002 with a series of reform measures such
as tariff reduction from 15% to 10% under the EPCG scheme, provision of additional SIL of 1 %
for export of Agro-products, allowing EOU’s and other units in EPZs in agriculture sectors to 50%
of their output in the domestic tariff area (DTA) on payment of duty, foreign investment allowed
for 100% foreign participation in the case of units created in EPZs etc. Over the years, the number
of goods subject to import licensing have been reduced with an emphasis on industrial and capital
goods rather than consumer products (Srinivasan, T.N., 2001).

Foreign Trade Policy 2004-09 was built around two major objectives: doubling India’s share of
global merchandise trade by 2009, and using trade policy as an effective instrument of economic
growth with a thrust on employment generation. The policy proposed to set up Special
Economic Zone (SEZ). Bhat(2011) finds that in 2000-01 to 2008-09 period, the higher exports
and imports growth rates pushed up the GDP growth rate to over 7 percent from the previous
level of 5.72 per cent. This study has clearly shown that exports and imports growth has a
positive effect on GDP. Ahmed et.al (2013) finds a negative impact of imports on GDP. The
Foreign Trade Policy 2009-14 was announced on 27th August 2009 with a short term objective
of arresting and reversing the declining trend of exports, and the long term objective of achieving
an annual export growth of 15% with an annual export target of US $200 billion by March 2011
and to double India’s exports of goods and services by 2014. The current export import
policy(FTP- 2015-2020) attempts to clean up the plethora of export promotion programs and
consolidate them under two regimes namely MEIS (Merchandise Exports from India) and SEIS
(Services Exports from India). The Modi government is aiming at lifting India’s share in global
exports to 5% by 2020, from just 1.7 per cent in 2016.

It is obvious from the above paragraphs that the foreign trade environment has radically changed
in India over the last two and half decades. India’s government has been making all possible
efforts to ensure higher growth of foreign trade through its trade and economic policies since
1991. Presently, India exports approximately 7500 commodities to about 190 countries, and
imports around 6000 commodities from 140 countries. There has been a considerable change in
composition of export of goods and services since integration of Indian economy with the world
under new trade policy 1991.

Research Gaps and research issues: The literature indicates that there are several gaps in the
existing studies. For instance, the review of literature offers that after liberalisation and WTO the
trade has performed satisfactorily. However, the results of these studies regarding the relation
between export/import growth and economic growth are mixed. Some researchers(e.g. Balassa,
1985; Bhagwati, 1988; Krueger, 1997; etc.) indicated positive influence of both export and
import on economic growth while others indicate mixed opinion(e.g. Chandra, 2002; Raju and
Kurien, 2005); Pushpalata Singh, 2014. etc.). Second gap in the previous studies relate to the
limited time frame. Third, the previous studies have taken either one main issue or two i.e. either
growth performance or structural and directional changes or competitiveness. There is a lack of
studies which focused on detailed and comprehensive ways to investigate about the structural
changes in composition and direction of India’s export of merchandise and services. These gaps
are main motivations for this study.

The above discussion poses several questions before the researchers. First, what has been the
growth of India’s exports in post WTO period ? Second, what has been the magnitudes of the
changes that have taken place with respect to share of India's exports in GDP and her exports in
world exports? Third, whether there has been a considerable shifts in composition and direction
of trade during the reforms- regime and post WTO era. Fourth, what is the competitive standing
of India viz-a-viz her major trading partners with respect to major export commodities. It is
under this background that an attempt has been made to examine the changes occurred in the
performance of India’s foreign trade during both pre as well as post-WTO period. The present
study was an attempt to fill the above mentioned gaps and answer the questions raised in it. It
covers a long term view for reference of pre liberalisation and WTO and since WTO for detailed
investigation.

2.2 Review of Previous studies

The objective of this section is to provide an overview of the research work on the relation
between foreign trade and economic development, impact of reforms in foreign trade policy and
World Trade Organization (WTO), and to present performance India‘s exports in post
liberalisation era. For this purpose, the chapter is divided into following sections:

2.2.1 Review of Studies on the relationship between Exports and Economic Growth
2.2.2 Review of Studies concerning India’s Exports performance
2.2.3 Review of Studies concerning Competitiveness of India’s Exports

2.2.1 Review of Studies on the relationship between Exports and Economic Growth

The issue about role of exports in economic growth has dominated the debate in the
international growth literature. Many economists have argued that faster export growth can lead
to stronger economic growth. This is known as the export-led growth assumption (ELGH) (see,
for example, Beckerman 1965, Balassa 1978, Bhagwati 1978, and Edwards 1998). The export-
led growth assumption has several reasons to rely on. First, exporters must sell their products in
competitive global markets, which forces them to become more competitive and adopt or
innovate new technologies more quickly. Second, even domestic competition is encouraging
even non-exporters to be more competitive and adopt or innovate new technologies faster,
leading to faster productivity gains in the overall economy and, hence, more growth. quick

Balassa (1985) and Bhagwati (1988) suggest a two-way causal link between exports and growth.
They argue that the expansion of exports led to efficiency and allocation effects, which gave the
initial growth momentum to production. This momentum strengthens the international
competitiveness of many sectors through economies of scale.

Sharma and Dhakal (1994) provide some evidence for the export-led growth assumption for
India, but the empirical evidence it offers is unreliable. The study concludes that the income and
export series for India are not stationary according to the Phillip-Perron test. It tests the causality,
but does not check the cointegration. However, the correct application of Granger tests requires
the identification of a possible cointegration relationship. Krueger (1997) finds a strong link
between exports and economic growth.

Nidugala (1999-2000) analyzed the impact of exports on India's economic growth for the period
1960-1980 using the modified Isfahan growth model (1991). The study concludes that growth in
manufactured exports had a significant positive relationship with GDP growth, while growth in
primary exports had no influence on GDP growth. The study suggested that further reforms were
needed to support current growth and achieve high growth rates.
Export growth increases efficiency as exporters are able to compete in foreign markets, resulting
in technological growth and support from local manufacturers. Anwar & Sampath (2000)
analyzed the export-led growth hypothesis in 97 countries and Pakistan for the period 1960-
1992. The study used econometric tools such as the Granger-Causality test to test the hypothesis.
They discovered unidirectional causality in the case of Pakistan. They find that exports and
economic growth in India are co-integrated but find no solid evidence of causality of exports to
economic growth or vice versa.

The empirical study of Vohra (2001) showed the relationship between exports and economic
growth in case of five Asian countries namely- India, Pakistan, the Philippines, Malaysia and
Thailand, for the period 1973 to 1993. Its results have shown a positive and significant impact
on economic growth. The study also showed the importance of liberal market policies by
pursuing export expansion strategies and attracting foreign investment. Li and. al (2003) suggest
that services imports have a significant positive impact on the economic growth of developed
countries and a negative impact on developing countries.
Raju and Kurien (2005) with the Granger causality test on historical data show that exports and
GDP are "weakly" cointegrated for the period 1960-1992. This study indicated that export
performance has been an important contributor to growth in itself, and exports could have
contributed directly to India's economic growth by mitigating the severe import constraints,
particularly in the industrial sectors. vital capital goods. Indirectly, exports may have somewhat
alleviated the balance of payments problem and initiated structural adjustment programs in
response to the trade shocks of the 1970s and 1980s. There is no definitive conclusion for the
entire period of 1950 to 1992.

Jordaan and Eita (2007) analyzed the causal link between Namibia's exports and GDP for the
period 1970 to 2005. The export-led growth assumption is tested using causality and
cointegration of Granger. It checks whether there is one-way or two-way causality between
exports and GDP. The results revealed that exports were attributable to Granger's GDP and GDP
per capita, and suggested that the export-led growth strategy, with various incentives, positively
influenced growth.

Dash (2009) analyzes the causal link between export growth and economic growth in India for
the period from 1992 to 2007, and the results indicate that there is a long-term relationship
between production and exports, and that it is unidirectional from the growth of exports to the
growth of production.

Mishra, PK (2010) aims to study the dynamics of the relationship between exports and economic
growth in India using annual data for the period 1970 to 2009. In this study, the variables are
Total Exports by India ( EX) and Economic Growth FOR EXAMPLE). In addition, real gross
domestic product (GDP) was used as an indirect indicator of economic growth in India. All
variables were taken in their natural logarithms to avoid problems of heteroscedasticity. The
estimation methodology used in this study was cointegration and error correction modeling. The
results of the co-integration test based on the Johansen procedure indicated the existence of co-
integration between exports and real GDP.
Bhat (2011) conducted a study to highlight structural changes in India's foreign trade before and
after economic reforms. The results show that the GDP growth rate does not show a consistent
positive relationship with the growth rates of exports and imports over the period 1951-1952 to
1959-1960. The average growth rate of exports for the above mentioned period was 1.05% and
that of imports was 6.93%. GDP increased by 3.73% during the corresponding period. Between
1970-1971 and 1979-1980, the GDP growth rate dropped to 3%, but exports and imports
increased by 16% and 20% respectively. During 2000-01 and 2008-09, higher growth rates of
exports and imports pushed the GDP growth rate to over 7 per cent. This study clearly showed
that the growth of exports and imports had a positive effect on GDP.

Ranjit Chakrabarty's (2012) paper attempts to analyze exports and imports of black (oil) gold
over the Indian scenario. The study attempts to identify trends observed over the last four
decades. Existing elements focus mainly on real GDP, exports, imports and the share of exports.
In contrast to existing documents, this study has attempted to identify the problem of exports and
imports of oil, petroleum and related products. In this context, we considered three variables: oil
export, oil import and constant price GDP for the Indian case. It has been found that the three
data in the time series are integrated in the first order. In what follows, a cointegration analysis
was done to show that the two-dimensional relationship between oil exports and imports is
negative. Taking their first difference, an appropriate VAR specification was proposed.
However, the bivariate cointegration results were positive for oil import and GDP, as were the
trivial results of the three variables. This result provides an interesting corroboration of Milton
Friedman's theory of the permanent income hypothesis.
Barry Eichengreen and Poonam Gupta (2012) examine India's export experience in services. The
survey shows that the country's experience is unique in that modern tradeable services account
for a much larger share of GDP than in other countries with comparable levels of economic
development. India's performance, however, is limited to recent years. Alongside others, political
initiatives and the reform of the industrial and national service sectors have been important
factors in this regard. The regressions for a representative sample of countries indicate the
importance of a large number of factors, such as general economic development, communication
infrastructure, access to foreign technology, and spillovers between exports of goods and
services. services. However, these factors do not remove the significance of a dummy variable
for India. Thus, India stands out a lot as an exporter of services.

Ahmed et al. (2013) find a negative impact of imports on GDP. Shamurailatpam (2013)
examines the causal link between real GDP and total exports of goods and services produced in
India between 1990-91 and 2011-12. The study attempts to determine the validity of the
economic growth strategy driven by exports in the case of India. The empirical findings of the
study indicate that there is a two-way causality between exports and the GDP of the economy.
The assumption of export-led growth is valid for the Indian economy for the period 1990-91 to
2011-12.
Pushpalata Singh (2014) analyzed the impact of trade on India's economic growth. The
researcher found that India's total exports had increased after the adoption of the new Indian
economic policy and that the liberalization era had helped India achieve strong economic growth
given the rapid growth of its imports of capital goods and technical raw materials to meet the
demand for industrial growth.

Aggarwal (2014) analyzes the role of exports in India's economic growth and examines whether
the export-led growth hypothesis applies to India using an econometric methodology. The
analysis confirms the validity of the export led growth concept for India for the period following
the liberalization of trade. The results of the "error variance decomposition" also corroborate the
results of the causality analysis. As a result, research suggests that rapid export growth played a
significant role in the growth of India's growth rate as a result of trade liberalization in 1991.

Ishita Ghoshal (2015) studies the causal link between trade and growth in India. The study
focuses mainly on the effects of the introduction of various trade agreements. The results reveal
that before India became an integral part of trade agreements, exports led to growth, but this
growth did not lead to the formation of exports. In addition, it was found that under the pre-trade
regime, the effect on growth was insignificant; while in the post-agreement regime, GDP was the
source of exports and the relationship was statistically significant.

2.2.2 Review of Studies concerning India’s Exports performance

 Patel (1959) analyzed long-term trends in Indian exports until the end of the first five-year plan
in terms of volume, composition and direction of exports. It attributes that the falling world
demand for Indian traditional exports is the main factor responsible for relative stagnation of
Indian exports during the concerned period.

Singh (1964) studied India's export performance and trends and presented the growth prospectus
for the period 1951-1960. The study explained that the relative intensity or importance of
external and domestic factors affecting India's export performance varied across commodities,
but that the stagnation of India and even its declining share in world exports during the period
under review was partly a consequence of defective economic policies on import substitution
adopted by the government in 1951-1960. Bhagwati and Srinivasan (1975) claimed that import
substitution policy played a bias against the export promotion and resulted in poor export
performance.

Nambiar (1979) traced the role of exports in job creation in the Indian economy during the
periods 1963-1964 and 1973-1974. He concluded that exports have contributed much less to job
creation in India and the Export-related employment increased by only half a million between
1963-64 and 1973-74 and represents only about 2% of total domestic employment. No major
structural changes have been observed in global exports. The most significant observations are
that the fastest growing exports require less labor and the outward orientation of the industry is
inversely related to labor intensity. Hence, export promotion does not offer a substantial solution
to the problem of unemployment in India.
Dhindsa (1981) examined trends in exports of major traditional commodities such as tea, cotton
and jute manufactures. The paper also studied the main causes of weak export growth in major
importing countries during the last three decades. The main factors affecting the exports of these
products are the increasing profitability of domestic sales over foreign sales, the heavy export
taxes, the increase in domestic demand, the weakness of production and productivity, and the
relative increase in production costs. All selected products face stiff competition from their own
substitutes.

Nayyar (1988) examined the underlying factors and the relative importance of the domestic and
external constraints that affected India's exports during the period 1977-1985. The lack of
competitiveness of Indian exports due to price and non-price factors, the pressure of domestic
demand, infrastructure and supply bottlenecks have proved to be the main constraints to export
growth. External factors such as the steady rise in protectionism in the industrialized countries
and the fierce price and non-price competition caused by the virtual stagnation of international
trade during the 1980s also had a negative influence on the growth of Indian exports.

Wadhawa (1988) attempted to examine some specific aspects of India's export performance in
quantitative terms and the impact of the real effective exchange rate on India. The econometric
results confirm that the depreciation of the exchange rate had a significant effect on the five
selected products. The results further confirm that for the five selected products, real exports are
highly elastic relative to the real effective exchange rate (RRSP) and the real effective exchange
rate adjusted for the incentive.

Rao (1989), who presented an overview of India's foreign trade, indicated that with the 36.5%
devaluation of the Indian rupee in June 1966, the periods of 1966-1969 and 1969-1974 were
marked by considerable stimulation of exports. As a result, the unfavorable trade balance was
reduced and even became a favorable balance in 1972-1973. Between 1972-1973 and 1976-
1977, Indian exports improved remarkably. But in absolute terms, import growth outpaced
exports and led to a trade deficit during this period. Imports had reached their highest level, at
10% of GDP in the 1980s, and remained between 9.5% and 7.7% until 1989-90, while exports
worked at 6.74% of GDP in 1976-1977, but remained below 6% in the eighties.

Marjit and Chaudary (1997) analyzed India's export performance and trade policies from 1970
to 1990 as well as the prospects for reforms undertaken in the light of past performance. The
study showed that India's export performance was far from satisfactory. The lack of price
competitiveness was the biggest gap in Indian exports.
In a working paper on Indian exports and economic development, Tendulkar (2000) found that
during the period 1980-96, Indian export earnings had risen above the world average for all
major categories of goods. Double-digit growth rates of labor and intensive products was seen.
However, Indonesia, Malaysia and Thailand had much higher and more stable growth rates than
India during above mentioned period. It is interesting to note that South Korea and Taiwan fared
much better than India in terms of resource-intensive products as well as differentiated and
technologically sophisticated products.

India adopted an intensive, import-oriented, inward-looking industrialization strategy that favors

a large and diversified industrial sector. All of this was done to serve certain national interests,
for example to preserve domestic industries from foreign competition, encourage import
substitution, and so on. This model experienced a crisis in the early 1980s due to the decline in
production and the deterioration of its position in world exports. India's share of world exports
fell rapidly from a respectable 2% in 1950 to 0.5% in 1980. Several studies have argued that
import substitution policies have created a bias in favor of Indian exports. Despite the various
export promotion programs adopted in the 1970s and 1980s, the profitability of the highly
protected domestic market remained well above that of the export market (Kathuria 1996).
Before the liberalization of 1991, India was a closed economy due to average tariffs above 200%
and considerable quantitative restrictions on imports. Foreign investment was strictly limited to
the sole property of Indian companies. Since liberalization, the Indian economy has improved
mainly through the intensification of foreign trade.

In 1992-1993, the EOU-EPZ system was extended to agricultural and allied exports. An
electronic equipment technology park system was introduced at par with the EPZ in 1994-1995.

The creation of the World Trade Organization in 1995 led to a sharp reduction in tariff and non-
tariff barriers to trade in all member countries. The concept of a free trade area was accepted in
1999-2000 and the Foreign Exchange Management Act was introduced on June 1, 2000,
replacing the former Foreign Exchange Regulation Act (Foreign Exchange). Regulation Act -
FERA). The Special Economic Zones (SEZ) policy was announced in April 2000 to address the
weaknesses of the EPZs, such as the multiplicity of controls and approvals, the lack of world-
class infrastructure and the unstable tax system. The 2005 SEZ Act, supported by SEZ rules,
came into force on February 10, 2006 (Economic Survey, 2006-07). In addition to SEZs, a
number of export promotion programs such as the Special Import Licensing Scheme (SILS), the
Export Program for 30 Capital Goods (EPCGS), Exemption from imports (DFIES), etc., were
also introduced (Joshi and Little, 1996).
According to the study by Joshi and Little (1996), it was only after the serious macroeconomic
crisis that serious attempts were made to liberalize trade, domestic competition and the influx of
technology and attract investment. foreigners. The study indicates that the phase of India's
economic reform was launched in mid-1991 which focused mainly on trade policy reforms.
Foreign trade policy reform was the first step in India's external sector reform process and was an
integral part of the macroeconomic stabilization and structural adjustment program launched in
the economy in July 1991. This step was very important in the sense that the trade deficit in the
1990-1991, was abnormally high, exceeding $ 9.4 billion, or 3.20% of GDP (Government of
India, 1999). A number of studies have examined foreign trade reforms and their impact on the
foreign trade sector as a whole and on the export sector in particular. Joshi and Little (1996)
described all the dimensions of India's economic reforms. The withdrawal of various quantitative
restrictions, the reduction of tariff protection and the introduction of a special export promotion
regime were highlighted as major reforms on the trade front, during 1991-2000.

Kathuria (1996) examined the impact of recent policy changes on India's exports, particularly
with respect to pre- and post-reform export incentives. Using a simple template, this paper
examines whether export incentives have been improved as a result of policy changes. The
model is divided into two parts: one compares the profitability of exports (PE) from one regime
to another, and the other compares the gap between domestic profitability and the profitability of
exports from one system to another. The export basket is divided into eight sub-sectors and the
model is applied to each of these sectors. Several series of simulation exercises were performed.
The study provided that the gap between domestic profitability and export profitability widened
during study period, which means that domestic sales have become even more attractive than
they were already in relation to export. This unfavorable development of export incentives
reversed with the unification of the exchange rate in March 1993.

Prasad (1997) highlighted the impact of economic reforms on Indian exports from 1990 to 1994.
The study concluded that the reform process has helped Indian exports, despite relatively lower
world demand. This period was marked by an increase in India's competitiveness compared to its
competitors. It also paved the way for India to benefit from any increase in global demand.
Ghomawat and Patibandla (1999) examined the export performance of the Indian diamond,
apparel and software industries and also quantified the impact of economic reform on the
competitiveness of these three exports. The authors argue that economic reforms have
strengthened India's competitiveness in labor-intensive and skilled labor industries The reforms
also helped reduce the dependence of competitive industries on inefficient domestic suppliers
and infrastructure. The devaluation of the rupee, the reduction of tariffs on the import of capital
goods, the liberalization of imports of raw materials, the formation of alliances for the transfer of
technology and international marketing resulting from the liberalization of FDI and the reduction
of dependence on domestic inputs and technologies sub-optimal reform process that greatly
benefited the exports from India.

Bhatachariya et al. (2000) examined India's export performance after liberalization. The analysis
shows that Indian exports have shifted to more categories of value-added products. The gain was
mainly at the price of labor-intensive products. In addition, the study finds that demand for
knowledge-intensive or capital-intensive products is growing faster than labor-intensive
products, which is in line with the global trend.

Sharma (2000), studied the determinants of export performance in India in a framework of

simultaneous equations for the period 1970-98. The results of the study suggest that demand for
Indian exports increases as its export prices fall relative to world prices. In addition, the real
appreciation of the rupee has hurt Indian exports. Export supply was positively related to the
relative domestic price of exports, and increased domestic demand reduced the export supply.
Foreign investment did not appear to have a significant impact on export performance, although
the FDI coefficient has a positive sign.

Srinivasan (2001) who analysed improvement in export performance of India in 1990s,

recognizes that India still lags behind compared to other South East Asian Countries. Hargopal
(2001) assessed the performance of India's external sector in light of trade policy reforms from
1980-1981 to 1997-1998 by dividing the entire period into sub-periods. The study concluded
that, on the whole, trade liberalization measures had a positive impact on external variables. The
post-liberalization period was marked by substantial growth in exports, imports, foreign
exchange and a reduction in domestic debt. The only concern was the faster growth of imports
relative to exports.

Sharan and Mukherji (2001) gave a comprehensive picture of India's foreign trade reforms and
also highlighted their impact on the trade sector. They found that foreign trade reforms did not
meet expectations. It is true that the terms of trade went in favor of India, which confers
commercial advantages. It is also true that the pattern of trade has diversified in favor of more
commodities and countries, which is a positive trend. However, the trade deficit has increased
despite the decline in the growth rate of imports in recent years, which has made the
development process more vulnerable.

Verma (2001) briefly describes exports of the textile and clothing sector before and after the
Uruguay Round. The study revealed the positive impact of the WTO agreement on the Indian
textile and clothing industry. Again, the formation of customs unions and free trade areas
(NAFTA, IWC, sub-Saharan Africa region, etc.) has adverse effects on textile exports rather than
on new non-tariff measures.

Nanda and Raikhy (2003) examine the impact of environmental and labor standards in the WTO
context on Indian textile exports. They discover that Germany, the Netherlands and other
European countries make extensive use of the strict environmental and labor standards they have
imposed. A study found that developed countries remain the main destination for Indian textile
exports and the imposition of strict environmental and labor standards is a concern for Indian
textile exports. A number of suggestions, including the precautionary approach to the use of
industrial chemicals, are intended to remove the restrictions that may arise from the United
States and many other European countries.

Sekhar (2003) analyzed the likely implications of agricultural trade liberalization for the rice
sector in India, with a particular focus on determining the role of major exporters in the global
rice market. The results indicate that world rice markets are mainly influenced by declining
income levels in the major importing countries. The demand functions showed a high elasticity
with respect to India's export prices relative to those of Thailand and Pakistan.

Aggarwal (2003) analyzed the inter-firm determinants of the export performance of the Indian
manufacturing sector in the late 1990s by taking a sample of firms in the Indian manufacturing
sector. The results show that in low-technology industries, firms with high foreign ownership
have performed better. The results also suggest that in technology-based sectors, the
technological capabilities of firms are crucial determinants of export performance. Export
performance was also found to be related to the size of the firm and the import of raw materials
into most technology groups. In addition, market liberalization and ongoing technological
change have changed the type and determinants of cross-border activity by multinational
enterprises.
Devi and Rao (2004) also examined the impact of economic reforms on the external sector of
India as a whole and on exports in particular. They argue that the reforms have strengthened
India's competitiveness in labor-intensive and skilled labor-intensive industries, reduced the
dependence of competitive industries on suppliers and suppliers. inefficient national
infrastructure and improved the conditions of national competition. Exports rose 20% in dollars.
More significantly, the share of manufactured goods in the export basket has increased, while
that of primary products has declined over the years.

Kaundal (2005) examines the characteristics, causes and determinants of growth and instability
of India's major exports. The structure of Indian exports underwent radical changes from 1970-
71 to 2001-02. The share of major traditional items such as tea, manufactured jute and cotton
textiles, raw jute and raw cotton has declined sharply, while that of new non-traditional items
such as machinery, transportation and metal products, including iron and steel, chemicals and
related products, and imports for development increased during the period under review. The
direction of exports has remained mainly towards the industrialized countries of the West. Early
post reforms experienced considerable buoyancy in exports.
Hosamane and Bisaliah (2006) study the behavior of exports during the post-reform period and
tested the validity of the constant market share model (CMS). The CMS analysis showed that the
share of exports increased due to the increase in the volume of world trade (56.7%) and
competitiveness in the international market (53.5%). While India lost a significant market share
due to the dismantling of the USSR at the time, it gained in Asia and in European regions. Thus,
the CMS analysis suggests that the opening of the Indian economy has led to the growth of
Indian trade.

Veeramani (2007) indicates that one of the main objectives of the trade reforms was to reduce
and eventually narrow the gap between domestic profitability and export profitability. Overall,
export policy has shifted from product-specific incentives to more generalized exchange-rate
incentives. The downward adjustment of the rupee exchange rate against major currencies in July
1991 was a major element of this policy change. In addition, the rupee was devalued twice in
July 1991, resulting in a 20 per cent depreciation of its value. It was felt that a more realistic
exchange rate would make exports inherently more attractive. In 1993, the government adopted
the full convertibility of the rupee into the current account and the exchange rate were now to be
determined by the demand and supply of foreign exchange on the foreign exchange market. The
exchange rate has been used as a general instrument for export promotion and import
management.
Pillania (2008) states that the value of Indian exports has evolved considerably since
independence in 1947. The total value of Indian merchandise exports increased from US $ 1.3
billion in 1950-51 to US $ 63.8 billion in 2003 -04, which indicates a compound rate of 7.6%.
Trade growth resumed after liberalization and the composition of trade was dominated by
manufactured goods and services. In addition, it has been noted that East Asian countries,
particularly China, have become an important trading block.

Sarkar, Amal (2010) attempts to find the main determinants of India’s exports of the major
commodity groups to ASEAN. The top ten commodity groups, which have been found in this
study, are gems & jewellery, machinery & instruments, dyes & intermediates, primary & semi-
finished iron & steel, oil meal, drugs/pharmaceuticals & fine chemicals, transport equipment,
electronic goods, inorganic/organic/agro-based chemicals, and manufactures of metals in recent
years. Among these items, gems & jewellery, machinery & instruments, dyes & intermediates
and transport equipment have registered higher growth than others in study period. To explore
the determinants, an export demand function was formulated at the commodity level. As regards
to results, it can be said that all the commodities under study, except oil-meal, are not only price
competitive in the ASEAN market but also very much elastic in demand. These elasticities are
indicative of the fact that real devaluation of Indian rupee against dollar has high impact on
India’s export of these products to ASEAN market. Further, economic growth in ASEAN
region would also be helpful for expanding India’s exports of these products to that Region.

.
Mishra (2011) in his study noted some key issues about performance of the exports and imports
in reforms era. The authors indicated that, in the name of trade liberalization, a large number of
importing companies were allowed to import huge quantities of non-essential goods by without
considering national needs. India's import bill is increasing every year because of heavy imports
of petroleum products and lubricants. It is therefore necessary to find alternative sources of
energy in order to reduce the importation of POL items. It is also suggested to identify those
items / goods over which India has a competitive advantage and to promote their production.

Malini L. Tantri (2012) analyzed empirical evidence of the effectiveness of the recent policy of
the Special Economic Zone (SEZ) of India on the structure of export processing zones by
aggregating data from seven Conventional SEZs from 1986-1987 to 2007-2008. It reveals that
the creation of SEZs in place of its predecessor, the export processing zone, has a significant and
positive impact on the commercial performance of this trade at the global level. However, in
terms of contribution to national trade, Indian SEZs are lagging behind the expectations of
policymakers. The SEZ policy does not seem to have succeeded in diversifying the export
basket. Authors strongly advocate a cautious decision in the sectoral choice of SEZs and careful
consideration of its approval in major Indian states.

The discussion paper by Shameek Mukherjee and Shahana Mukherjee (2012) summarizes the
export performance of three Indian manufacturing industries namely Indian exports of precious
stones and jewelry, cotton exports and the electronics industry. This paper also provides a
summary of changes in government policies that may explain new trends in Indian exports of
manufactured goods of choice. Labor-intensive sectors such as cotton and leather have been
found to have decreased export growth, but import-intensive sectors, such as engineering, gems
and jewelry, performed better because of lower import costs.

A study on the direction and composition of trade by CARE Ratings (2013) highlights the
evolution of India's foreign trade structure over the last decade. The report looks separately at
India's exports and imports in order to assess their composition (i.e. commodity basket) and their
orientation (i.e. the profile of trade in country). It found that the trends in years 2012 and 2013
were quite similar and did not show significant variances.

In March 2014, PHD Research Bureau, PHD Chamber of Commerce and Industry, New Delhi,
published a study analyzing the structural changes in India's foreign trade orientation. The study
covers the period from 2004 to 2013 and uses tables and pie charts to present the data. It was
found that the main destinations of Indian exports had undergone various other changes in terms
of strengthening and weakening the positions of different major countries. United Kingdom,
Germany has declined in the top ten destinations of Indian exports, while Belgium and Italy have
finally disappeared from the list. On the other hand, the countries of Saudi Arabia and the
Netherlands have become one of the top ten destinations for Indian exports for the period 2007-
2009.

Sahni (2014) highlights both the pattern of demand and supply factors that affect Indian exports
and how their production structures, institutions and policies respond. With regard to the change
in the composition of exports since the 1980s, it was observed that the share of agriculture and
related products decreased continuously, while that of ores and minerals remained more or less
stable. The share of manufactures accounted for more than 75 per cent of India's total exports
after the reform.
Pushpalata Singh (2014) analyzes the trend and composition of foreign trade since 1991 and
observed that India's total exports have increased after the adoption of the new economic policy
in India. Harikumar (2014) also conducted a survey to examine India's foreign trade before and
after liberalization. Study data are collected from secondary sources. Secondary data was
analyzed using the paired t test of the software package and SPSS graphs. The study shows that,
except in 1971 and 1977, imports for all years are higher than exports. However, both exports
and imports have increased every year. Similarly, India's foreign trade during the post-
liberalization period had fluctuated and imports were higher than exports for all years.

Mathur and Sagar (2015), in their research paper indicates that Indian exports are increasing at a
declining rate, but that imports are increasing at an increasing rate. The trade deficit increased
sharply in 2004-05 and 2009-10. The composition of India's foreign trade has undergone
profound changes, especially after liberalization and globalization. Major items exported now
include engineering goods, petroleum products, chemicals and related products, precious stones
and jewelry, textiles, electronics, etc.
Author states that India has transformed herself from a predominantly primary goods exporting
country into a manufactured goods exporting country.

Sinha (2016) who analyzes the structural changes in the composition of India's post-reform
exports revealed a significant shift in the value, composition and direction of Indian exports. The
share of manufactured goods, high value and incremental products, as well as petroleum
products increased in the Indian export basket, reflecting the diversification of the Indian
economy. Precious stones and jewels were seen at the top. The compound annual growth rate of
the product composition concentration ratio turned positive and statistically significant.
However, India is required to make its products more competitive globally. It is also necessary to
add new products and services at a competitive price to the export basket in order to increase
export performance.

According to the annual report (2016-2017) of the Ministry of Commerce, India's merchandise
exports reached a level of US $ 262.00 billion in 2015-2016 and registered negative growth of
15.57% compared to negative growth of 1.29% in the previous year. However, despite the recent
slowdown in the Indian export sector merchandise exports registered a compound annual growth
rate (CAGR) of 8.43% from 2006-07 to 2015-16.
Harsha (2017), in his working paper, examines the changes in India's trade policy over the past
25 years, identifying both the significant progress achieved through reforms and the areas in
which further progress is needed. The paper stresses that India's trade reforms have been
successfully completed, as internal disruptions are manageable. The growth rate of trade is
considered very high after the launch of trade reforms, with the ratio of exports and imports to
GDP rising from around 24% in 2000 to around 49% in 2014. The current account deficit has
also been sustainable in the corresponding period except between 2011 and 2013. The traditional
view that India is a country with relatively high tariff barriers needs to be revised as tariffs
compares well with foreign countries.

2.2.3 Review of Studies on Competitiveness of India’s Exports

David Ricardo (1817) in his book title -Principles of Political Economy and Taxation,
discovered that ‘Comparative advantage’ is the useful tool as it determines the pattern of
international trade. The basic theoretical understanding of comparative advantage states that a
country having comparative advantage exports and other having comparative disadvantage
imports. However, its application in empirical analysis is difficult, particularly when measuring
the trade performance.

Samuel and Mote (1970) analyzed the competitiveness of Indian exports at the micro level, both
theoretically and empirically, and emphasized that the competitiveness of exports depends both
on non-price factors (i.e. the quantity and service) and price factors.
Ballance, Forstner, and Murray (1987) link the theoretical idea of comparative advantage with
the practical measure of comparative advantage achieved by the Revealed Comparative
Advantage (RCA) method. They gave the following relation: EC- CA- TPC- RCA. This
relationship shows that the economic condition (EC) that determines the country's international
comparative advantage model (CA) depends on the country's model of international trade,
production, consumption (TPC), which will make it possible to assess the actual measurement of
comparative advantage (RCA). Balassa (1965) introduced for the first time the concept of
Revealed Comparative Advantage (RCO). This was improved later. The RCA formula is defined
as a country's share of world exports of a commodity divided by its share of total world exports.
When the RCA of a product is greater than one, it indicates that the country is effectively
exporting that product to the world market.
To compare the comparative advantage of India and China, Batra and Khan (2005) assessed the
RCA index at the 2 as well as 6-digit level of HS classification. The study investigated the
changes in the structure of comparative advantage in 200-2003. It also examined the comparative
advantage according to factor intensity using the SITC. This study does not find any structural
changes in the comparative advantage of India and China, except for some manufacturing
sectors.
Chakraborty et al., (2005) compares the recent Indian export performance with that of China and
attempted to analyse the situation through various features of Indian export basket, namely
competitiveness, diversification trends and instability and examined the recent stance adopted by
India after WTO. Results of the study reveal that while diversification of the export basket has
slightly been increased, the instability index is quit insignificant for a number of commodity
groups at major export destinations. Also, the number of product groups has declined in post WTO
phase.
Burange and Chaddha (2008) investigate the structure of comparative advantage in India from
1996 to 2005. It uses HS classification data to calculate the RCA index at various levels of
aggregation for exports. and imports. The study indicates that India has a comparative advantage
for the export of labor-intensive products, such as textiles.

.
A similar study by Shoufeng et al (2011) analyzes the competitiveness of agricultural products
for export between China and Central Asian countries using the RCA index and the
competitiveness index of trade. It leads to the following conclusions: (1) China's total
agricultural products do not have comparative advantage while Central Asian countries have
moved from comparative advantage to disadvantage; and (2) China and Asian countries have
different structures on specific categories of agricultural products, which presents a large
bilateral trade potential on the basis of comparative advantages.
Andhale Ashish and Elumalai Kannan (2015) estimate India's comparative advantage in agri-
food products relative to the rest of the world for the period 2003 to 2013. The researchers
followed the pattern of product aggregation adopted in the Global Integrated Trade Solution
(WITS). Using the four variants of revealed comparative advantage indices, India was found to
have a comparative advantage in exports in 7 out of 32, 12 out of 40 and 7 out of 44 exports of
processed animal products, plants and food products, respectively.

Subhash Jagdambe (2015) writes a discussion paper based on his survey aimed to assess India's
trade intensity and the revealed comparative advantage (RTA) of the agricultural sector with
respect to trade with ASEAN (Association of Southeast Asian Nations). It presents the structure
of comparative advantage for a 13-year period from 2001 to 2013. International Trade Center
(ITC) data available in the public domain were used to conduct the study and the HS
classification is used to calculate the Business Intensity Index and the VC Index. The findings of
the study indicate that India's export intensity in total agricultural trade has increased relative to
ASEAN. However, the import intensity declined during the period under review. In addition,
India's trade intensity in agricultural trade varied from country to country. Although India's
export intensity increased with Vietnam, Thailand, Brunei, Cambodia, and Lao PDR during the
period under review, it declined with the rest of the ASEAN countries such as Malaysia,
Indonesia, the Philippines and Singapore. The study also found that India's comparative
advantage from 2001 to 2008 turned into a comparative disadvantage from 2009 to 2011, but
resumed in 2012 and 2013 in the ASEAN markets. He concluded that it was still possible to
increase the destinations of Indian agricultural products in the ASEAN markets, particularly in
Brunei, Cambodia, Vietnam and Thailand.
Gupta and Khan (2017) measure the competitiveness of the Indian textile industry by comparing
twelve of the major players in the global textile industry. To measure competitiveness, Balassa's
international market share and revealed comparative advantage were applied, along with other
useful techniques such as compound annual growth rate and coefficient of variation. The results
of this study reveal that India is the country that benefits the most after China after the
elimination of the ATC (that is to say on January 1, 2005).

2.3 Conclusion

The review of literature in this chapter has highlighted the following facts:

1. The relationship between External Trade and Economic Growth is a controversial

phenomenon in the existing literature as many of the studies discover strong positive
relationship between exports and economic growth, on the other hand, many other
 studies negate the existence of such a relation between the two. Thus, some studies found
export promotion outward-oriented strategy inferior to that of import substitution one
with respect of such strategy on economic growth in the long run.

2. The literature on India’s exports before liberalization in 1991 and also before WTO
shows that exports during this period were subject to many tariff and non- tariff trade
controls and protections. Export promotion up to 1980s was a generally a neglected area
in policy making. Because of this, India’s Export performance in pre-liberalization period
found to be very weak due to restrictive trade policy.
3. According to previous studies, impact of WTO on India’s export sector is a mixture
juncture. A few studies show that domestic economic reforms combined with WTO
commitments has lowered down the tariff barriers to export in the markets of member
countries and exports have benefited from the reduction in tariff barriers by the WTO
member countries. However, many of the studies related to WTO and India‘s export
confirmed that in new era anti-dumping duty, countervailing duty; environmental
standards, labour standards and IPRs, etc. have restricted growth of several Indian
exports.
4. Careful analysis of the literature on Indian exports shows that most of studies have
analyzed mainly agricultural exports, textile exports and pharmaceutical exports and even
some specific exports within these during the post-reforms period where as exports of
iron and ore exports and other manufactured exports except textile and pharmaceutical
exports are neglected and covered only fewer studies.