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Working Paper
CITT / WP/ 2015 /01
Centre for International Trade in Technology
Indian Institute of Foreign Trade
Disclaimer: This is a working paper, and hence it represents research in progress. The opinions expressed in this
paper are those of its author. They are not intended to represent the positions or opinions of the CITT, IIFT Delhi.
Any errors are attributable to the author.
Competitiveness of Indian Exports in The Backdrop of Economic Reforms: A Brief Analysis
Kashika Arora*
The study attempts to analyse the pattern of competitiveness of Indian exports, mapping of select (top 10)
commodities and decipher if any structural change in the pattern of comparative advantage occurred in the year
1991 when the economic reforms were just initiated, then in the year 2008 so as to examine the impact of the
recent global financial crisis and then lastly for the year 2013 to examine the post recovery from the crisis. The
study used calculation of revealed comparative advantage indices on trade data to measure the competitiveness
of India before and after second generation reforms (1991‐2008) and then from 2008 to 2013. The indices were
calculated at the sector level (HS‐2) of the Harmonized System of classification. The report also analyses the
structural shift in comparative advantage patterns in post reform period using ordinal measures as well as inter
temporal movement of RCA reflecting the consistency and stability of indices respectively. The paper analyses
the competitiveness of commodity exports based on RCA indices. India had comparative advantage in 34 sectors
in 1991 out of which 30 retained it in 2008. 10 new sectors gained advantage and 4 sectors slipped into
disadvantage over the same period of time. However, with imports taken into account, 85 sectors enjoyed
comparative advantage in 1991 which dropped to 38 in 2008. With imports accounted, 9 new sectors find place
in the top 10 list in 2008. There appears to be no structural shift in the RCA of sectors under study when only
exports data is analysed. Yet a slight structural shift in RCA is reflected when imports and exports are analysed
together. Comparing 2008 and 2013, 40 sectors enjoyed RCA in 2008 which fell to 34 out of which 32 retained
and 2 new sectors gained advantage in 2013. However, with imports taken into account it has increased to 41
out of which 21 have retained in 2013 as compared to 38 in 2008. There is no study examining India’s structural
shift in RCA in the pre and post‐reform period (1991 to 2008) and then from 2008 to 2013 in the selected
commodity sectors. The findings will help in understanding the impact of second generation reforms on
comparative advantage of Indian commodities in global context. Also it will contribute in formulating policy
recommendations to improve competitiveness in leading sectors and uplift the lagging sectors in relation to the
rest of the world.
KEYWORDS
Revealed comparative advantage, Harmonized system of classification, RCA index, economic reforms
*Kashika Arora is pursuing Masters in Economics from CDS, JNU. She can be reached at 10kashika@gmail.com
INTRODUCTION
The maxim “Globalisation has made this world a smaller place” stands well in the current economic scenario as
economies of the world have integrated through trade and financial flows, as also through mutual exchange of
technology and knowledge and free international mobility of labour. Thus global trade and exchanges have
become inevitable. Over the past few decades, economic activity has globalised and so has commodity trading:
commodities remain the key building blocks for basic economic activity, human consumption, and economic
development. This integration of international and domestic markets has primarily resulted from the smooth
information flow from participants across the commodity value‐chain.
This could be seen through the trade to GDP ratio of India which captures the interdependence of the country
and thus its openness which stands at 51.7% (2010‐12) according to the WTO – Statistics Database (March 2014)
Countries are earning prosperity for their citizens by maximizing export of their products and minimizing the
intake, i.e. imports. But as an emerging economy of the world, Indian foreign trade scenario is not very
encouraging. India still has a very low percentage contribution in world trade. The second fastest growing
country in GDP terms, ranks 19th in merchandise export and 11th in merchandise import with only 1.44 percent
share in total world export while import stands at 2.12 percent. WTO – Statistics Database (October 2011)
The economic reforms that were introduced in 1991 to boost trade through ease of restrictions by dismantling
the QR’s on import of capital goods and intermediates, custom duties in the manufacturing industries,
simplifying the tariff structure, eliminating the import license lists and then creating a “negative” list and with
the introduction of exim policy reaffirmed the India’s commitment to freer trade.
The exchange rate regime also went through a fundamental change in the early 1990’s with the year 1993
considered to be the benchmark for defining the post‐trade reform period since full convertibility on trade
account was introduced. The reforms, by reducing the anti‐export bias of protectionist policies, were expected
to improve export competitiveness and growth. Thus the explicit goal of economic reforms with respect to trade
liberalisation was to create a major shift in momentum of export growth and attract export oriented FDI
(Muttukadu, 2006). As export sector is considered as a catalyst agent for sustaining and accelerating process of
economic growth (Aggarwal, 1982). According to Kohli (2006) “By India’s own past standards, the changes were
quite dramatic”.
The economic reforms were aggressively carried over to second phase by opening up Indian economy to import
penetration. The major highlights being to boost export promotion special economic zones (SEZ) were set up
with 100% FDI allowed in all products, sector specific packages were introduced in core areas like gems,
jewellery, biotechnology, pharmaceuticals, silk, agro‐chemicals. Deemed export benefits were extended to core
infrastructural sectors (coal and hydrocarbon). Zero‐duty export promotion capital goods (EPCG) was extended
to all software exporters. Other fiscal measures were exemption from MAT, tax holidays, rationalization of duty
drawback rates and replenishment of license scheme along with procedural simplifications like extension of
electronic filling of license applications and green channel facility.
Also changes in EXIM policy have helped to strengthen export production base, remove procedural restrictions,
facilitate input availability and technological upgradation. For promoting exports through trade policy reforms
several measures were announced in Budget 2000‐2001 like reductions in customs duty, removal of QR, setting
up of SEZs, abolition of SIL.
Also there was a shift from quantitative restriction on imports to gradual reduction in tariffs which led to a
reduction in import duties to average level of 20% by 2004‐05. The focus being to bring domestic prices in line
with world prices and making domestic production more efficient by creating conditions for competitive exports.
Trade policy reforms in recent past with their focus on liberalization, openness, transparency and globalization
as well as creation of WTO have provided an export friendly environment with simplified procedure for trade
facilitation (Economic Survey, 2004‐05).
When barriers to trade exist then interpreting the trade flow data as providing evidence and information of
comparative advantage becomes arguable but removal of barriers in these reforms give a more authentic
picture of underlying structure of comparative advantage.
In the above backdrop current study intends to highlight the variation in international competitiveness of India’s
exports through RCA measures post 2000 trade policy initiatives.
The study is organized as follows. The next section gives the basic purpose of study along with specific objectives
and research methodology. Section 3 is a review of elective literature on measuring comparative advantage and
analysis of structural patterns for commodities and services.
Using trade data, section 4 gives empirical results after calculating RCA indices for all commodities at HS‐2 level
and maps the pattern of comparative advantage in pre and post reform period for top 10 commodities along
with the analysis in the backdrop of economic reforms.
Section 5 focuses to analyze the presence of any structural shift in competitiveness of Indian Commodity trade
through discussions on stability of RCA indices and inter temporal variation across 1991 to 2008 and to 2013.
Section 6 gives a brief summary of findings and conclusion.
PURPOSE / OBJECTIVES
The study aims to identify the stability of RCA over two phases (before and after second generation economic
reforms) and whether the trade liberalization efforts of Indian Government have resulted in a fundamental shift
in structure of RCA (strengthening and or weakening of certain sectors). It also examines the pattern of
international trade specialization using data on trade flows.
The current study attempts to analyze the following aspects:
Mapping the pattern of competitiveness in all commodities (trade merchandise and goods) in India by
measuring RCA indices using sectoral level trade data.
Identifying top 10 sectors using indices for 1991, 2008 and 2013.
Deciphering if the pattern of comparative advantage has undergone structural changes past second
generation economic reforms from 1991 to 2008 and then from 2008 to 2013.
To analyze the inter‐temporal variation in all selected sectors along with the stability of indices (Chapter
1 to chapter 97) on RCA: 1991‐2008 and 2008‐13.
Linking the change in the comparative advantage of different sectors with economic reforms and
policies.
DESIGN / METHODOLOGY
The paper/study intends to make systematic evaluation of global competitiveness of selected sectors
commodity trade in India. It starts with a review of select literature on methods of measuring RCA, studies on
RCA measurement done for commodities and services using empirical data on exports for developing countries
in general and India in specific. Such studies have been rare and literature on such empirical analysis of export
data and measuring competitiveness thereafter is almost scarce with reference to India.
The basic framework of measuring comparative advantage for commodity exports using various RCA indices
along with the techniques of identifying change in structural pattern of comparative advantage has been
developed after literature review as summarized in next section.
At the outset, all sectors corresponding to chapter 1 to chapter 97 of Harmonized System of classification for
the commodities traded in India have been selected. The year 1991 has been selected as reference
(corresponding to pre reform period), 2008 has been identified for comparison (which relates to the post second
generation reforms timeframe) and then year 2013 is taken for comparison since the crisis broke out in 2008.
RCA indices have been calculated for all commodities at HS‐2 level (sector wise). To reflect their relative
importance in export basket of commodities in India, top10 commodities with their rankings and RCA values
have been shown here for the respective years.
RCA analysis has been done using Balassa (1965) index for export data. Index will be calculated at sector level of
harmonized system of classification.
At the aggregate level, sector wise RCA calculation are at HS‐2 digit level. Within the sectors we can further
delineate RCA at disaggregated commodity level (HS‐4 and HS – 6 digit level).
One alternate index given by Vollrath (1991) with modifications of Balassa index will be calculated. While the
Ballasa (1965) index helps us understand the national structure of commodity exports by identifying
comparative advantage in specific sectors, the alternate index accounts for imports taking a wider perspective
of trade.
Further, statistical tests were conducted on indices (ordinal measures) to evaluate the stability of RCA indices
and as a dynamic measure of structural shift in patterns of comparative advantage. The inter‐temporal variation
1991‐2008 and then from 2008‐2013 reflects the shift in RCA structure, is used as an alternative measure for
evaluation.
It is a desk research with information collected through trade related databases like WITS (UN COMTRADE) for
all selected category of commodities taken for a period of 1991, 2008 and 2013 about there imports and exports.
SELECTIVE REVIEW OF LITERATURE
Few studies have been undertaken till date which use the concept of revealed comparative advantage in the
Indian context. One of these compared the structure of revealed competitive advantage of India and China
(Amita Batra, Zeba Khan, 2005). The paper concluded that India and China, both, enjoy maximum advantage in
the category of manufactures chiefly by material followed by agriculture and allied products. Further, both the
countries did not experience any structural change in manufacturing category over a period 2000 – 2003.
A paper on revealed competitive advantage and competitiveness on services (Belay Seyoum, 2005) shows that
a strong comparative advantage exist for many developing countries in transport and travel services. It examined
the competitiveness based on three indices of revealed comparative advantages as given by Balassa 1977 and
Volrath 1991.
The consistency test of the indices was made by using cardinal, ordinal and nominal measures of comparative
advantage. The level and trend of service export patterns in developing countries is explained by RCA. Though
there is evidence of some weakening in RCA in the service sectors under study, there is no fundamental shift in
the structure of their comparative advantages.
Balassa (1977) has undertaken an analysis of the pattern of comparative advantage of industrial countries for
the period 1953 to 1971.
Fertı and Hubbard (2002) assess the competitiveness of Hungarian agriculture vis‐à‐vis EU using four indices of
revealed comparative advantage. The four indices are original Balassa index, relative trade advantage, relative
export advantage, and relative competitiveness (difference of the log values of relative export and import
advantage).
(Utku Utkulu et al, 2004) analyse the competitiveness of trade flows from Turkey to EU on sectoral levels using
alternative indices of RCA including the Balassa Index. It also tests the stability of various measures of RCA.
Assessment of comparative advantage of India in agricultural exports vis a vis Asia in post reform period (Shinoj
and Mathur,2008) found that India retained comparative advantage in commodities like cashew and oil meals
but lost to Asia in several others like tea, coffee, spices and marine products etc.
For linking the sectors with their comparative advantage values with the economic reforms, several economic
surveys and annual budgets were viewed. Also WTO statistical database was referred.
The main point that they summarised was that the trade policy liberalisation sought to create an environment
to provide a stimulus to export and reduce the degree of regulation and licensing control on foreign trade.
During 2008 when the crisis struck the world, Indian authorities converted the challenge of the crisis into an
opportunity to wean itself away from traditional markets and traditional products to experiment with the
boldest policy initiative that it put in place in the five‐year Foreign Trade Policy (FTP) for 2009‐14, which included
the goal of doubling India’s exports of goods and services by 2014 also with the long term objective of doubling
India’s share in global trade by the end of 2020.
Mention needs to be made of the two significant export promotion schemes that are essentially tailored to
enable innovative entrepreneurs to explore new markets and products that is the twin schemes of Focus product
and Focus market. Meanwhile, the Government also intensified the concept of Special Economic Zones (SEZs)
that were exclusively designed to offer a trouble‐free and dedicated infrastructure amenities in the export
enclave.
Government has also taken the initiative through new manufacturing policy of enhancing global competitiveness
to Indian exporters by appropriate policy support.
MEASURING REVEALED COMPARATIVE ADVANTAGE PRE AND POST REFORM
PERIOD ‐ EMPIRICAL FINDINGS
DEFINITIONS OF RCA INDICES:
The following definitions of RCA indices have been given in the context of service sector in the studies of RCA of
Service Sectors in Developing Countries (Belay Seyoum, 2005) which have been modified further in the context
of commodity sectors under study.
The first RCA index employed in our study uses the original index formulated by Balassa and is defined as follows:
RCA1 = (Xj/Xc) / (Xnj/Xnc)
Where X represents exports, j is a commodity sector, c is a set of all commodity exports and n is a set of countries
(the world). RCA 1 is based on observed trade patterns and measures a country’s exports of commodity in a
particular sector relative to its total exports and to the corresponding exports of all countries in the world.
Comparative advantage is revealed if RCA1 is greater than 1 (RCA1≥1).
Second RCA index (RCA2) considers exports and imports within a particular commodity sector which is derived
by subtracting a country’s import advantage (RMA) from its relative export advantage (RCA1):
RMA = (Mj/Mc) / (Mnj/Mnc)
Where M represents imports, j is a commodity sector, c is a set of all commodities and n is a set of all countries.
RCA2 = RCA1 – RMA
Comparative advantage is revealed if RCA2 is greater than 0 (RCA2≥0).
The RCA analysis based on RCA indices contributed by Balassa and Volrath is a measure of comparative
advantage (Belay Seyoum, 2007) and has been done for all commodities at aggregated (sectoral) level for India
for years 1991, 2008 and 2013.
RCA indices have been calculated taking data from WITS for all 97 chapters of harmonized system of classification
at HS‐2 digit level. It is primarily done to show their global competitiveness rather than against any specific
partner country or regions. Though main findings are based at HS‐2 level classification, taking into account there
is a possibility that at dis‐aggregated level sub products may reflect a different pattern of RCA. Exports which
may show a strong comparative advantage at sector level may have sub products which may not hold true at HS
‐ 4 level.
Complete RCA Analysis of all commodities was done. Indices of RCA1 and RCA2 for all commodities reflect the
following significant results:
1. 34 commodities enjoyed a comparative advantage in 1991 revealed by RCA1 values greater than 1,
increased to 40 in 2008 for exports. 85 commodities enjoying comparative advantage in 1991, fell to 38 in
2008 for imports. As discussed earlier, RCA2 accounts for country’s import advantage and is obtained by
subtracting the RMA from RCA1:
Table 1: Sectors enjoying comparative advantage (1991, 2008)
also RCA2≥0
2. All 34 sectors which have RCA1≥1 also have RCA2≥0 in 1991. In 2008, out of 40 sectors showing
competitiveness through RCA1≥1, 19 sectors reflect RCA2≥0. This implies that more sectors gained the
RMA, which is import advantage, during the course of post reform period. The reason could be special
concessions on tariff and dilution of non‐tariff barriers to facilitate imports.
3. Four sectors out of 34 which enjoyed revealed comparative advantage in 1991 weakened and revealed
comparative disadvantage in 2008. On RCA2 index while 10 new sectors gained comparative advantage
(RCD→RCA). Out of 34 sectors which had RCA in 1991, 30 retained advantage 2 in 2008.
4. Top 10 sectors which enjoyed comparative advantage in 1991 and 2008 as indicated by RCA1 results show
that nine sectors retain their comparative advantage. Only one sector shifted to comparative disadvantage
from 1991 to 2008 and that was related to articles of leather, saddlery etc.
Table 2: Top 10 sectors based on RCA1 (1991)
Rank HS Code Description RCA1 1991
One new sector moved from RCD to RCA in 2008, which is related with Residues and waste from the food
industry. Looking at RCA structure of top 10 commodities pre and post reform shows that most of the
commodity sectors retained their top 10 positions with slight changes in rankings.
Table 3: Top 10 sectors based on RCA1 (2008)
1 50 Silk. 8.37
2 13 Lac; gums, resins & other vegetable 8.17
3 52 Cotton. 7.54
4 57 Carpets and other textile floor co 6.96
5 14 Vegetable plaiting materials 5.23
6 53 Other vegetable textile fibres; paper 5.20
7 71 Natural/cultured pearls, precious stone 4.78
8 09 Coffee, tea, matï and spices. 4.75
9 63 Other made up textile articles; set 4.47
Analysis of RCA2 on observed trade data for all sectors had shown that 85 sectors which had RCA in 1991
dropped to 38 by 2008. RCA2 calculations take into account the RMA which accounts for the import
advantage India has in a particular sector.
Table 4: Top 10 sectors based on RCA2 (1991)
Comparison of top 10 sectors indicated by RCA1 and RCA2 values in 1991 show that most of the sectors retained
comparative advantage on both indices except the sector in vegetable plaiting material with HS code 14 which
had RCA1≥1 but RCA2≤0. Similarly, one sector appears to have gained advantage as measured by RCA2≥0 which
is the sector with HS code 62 that is Art of Apparel and clothing accessories. Structure of RCA for top 10
commodities appears to remain stable over both indices in 1991.
Table 5: Top 10 sectors based on RCA2 (2008)
But in contrast in 2008 there appears to be a significant shift in the patterns of RCA1 and RCA2 for top 10 sectors
identified by both indices. Nine sectors have dropped from the list of top 10 from 1991 to 2008 except Coffee,
tea, mati and spices sector (HS Code 09) which retains its advantage on RCA2 index. When import advantage is
taken into account there appears to be a structural shift in patterns of RCA which needs to be explored further.
Stability of RCA indices and inter temporal variation in Revealed Comparative Advantage (1991‐2008)
Stability measures of RCA facilitate the evaluation of structural shifts in RCA’s (Belay Seyoum, 2007) over a period
of time. This is analyzed by measuring the temporal movement of RCA on RCA1 index for our study.
Table 6: Inter temporal movement of India’s RCA based on RCA1
Total number of sectors for which India hold advantage :
1991:34 2008:40
Number of sectors that have retained advantage(1991‐2008):30
Number of sectors that gained advantage (1991‐2008) :10
HS‐code Sector Description
27 Mineral fuels, oils
29 Organic chemicals.
36 Explosives; pyrotechnic prod; match
67 Prepr feathers & down; arti flower;
72 Iron and steel.
73 Articles of iron or steel.
74 Copper and articles thereof.
79 Zinc and articles thereof.
89 Ships, boats and floating structure
97 Works of art, collectors' pieces an
Number of sectors that have lost advantage(1991‐2008) : 04
HS‐code Sector Description
05 Products of animal origin
33 Essential oils & resinoids
34 Soap, organic surface‐active agents
60 Knitted or crocheted fabrics.
Table 7: Inter temporal movement of India’s RCA based on RCA2
Total number of sectors for which India hold advantage :
1991:85 2008:38
Number of sectors that have retained advantage(1991‐2008):34
Number of sectors that gained advantage (1991‐2008) :4
HS‐code Sector Description
01 Live animals
16 Prep of meat, fish or crustaceans,
74 Copper and articles thereof.
97 Works of art, collectors' pieces
Number of sectors that have lost advantage(1991‐2008):51
HS Codes: 02, 03, 05, 06, 11, 13, 14, 15, 20, 21, 26, 29, 30, 32, 33, 35, 41, 42, 47, 49, 50, 51, 52, 53,
56,
57, 58, 59, 60, 61, 62, 63, 64, 65, 66, 68, 69, 70, 71, 72, 76, 80, 82, 83, 84, 85, 86, 90, 91, 92, 96
Stability of RCA indices is measured by shifts in comparative advantage on RCA1 and RCA2 indices over a period
of 1991 to 2008.
Table 8: Stability of RCA indices (1991, 2008)
*Revealed Comparative Advantage **Revealed Comparative Disadvantage
When measured on RCA1 index it shows that more sectors gained advantage over a period of 1991 to 2008 and
impact of second generation reforms is positive but RCA2 measures (which account for RMA that is revealed
import advantage as RCA2=RCA1‐RMA) show weakening of sectors considerably. It appears that the reforms
have been encouraging more imports than exports in many sectors and policy is skewed to boost imports rather
than providing incentives for exports.
Table 11 RCA1 values for the year 2013 for HS‐2
1. 40 sectors enjoyed RCA1 in 2008 which actually fell to 34 in 2013. As far as RCA2 is concerned, it has
increased to 41 in 2013 as compared to 38 in 2008. RCA2 which accounts for country’s import advantage
and is obtained by subtracting the RMA from RCA1 shows that the increase in 2013 when compared
with 2008 is mainly due to the fall in RMA, meaning that the RCA1 for these commodities is more than
their RMA’s.
2. 19 sectors enjoyed both RCA1≥1 & RCA2≥0 in 2008. In 2013, out of 34 sectors having RCA1≥1, 16 sectors
reflect RCA2≥0. This implies that more sectors gained the RMA, which is import advantage.
3. Four sectors out of 40 which enjoyed revealed comparative advantage in 2008 weakened and revealed
comparative disadvantage in 2013. Out of 40 sectors which had RCA in 2008, 32 retained RCA1≥1 in
2013.
4. Top 10 sectors which enjoyed comparative advantage in 2008 and 2013 as indicated by RCA1 results
show seven sectors retained their comparative advantage with slight changes in their rankings. Sectors
like natural/cultured pearls precious stones, coffee, tea, matii and spices and residues and waste from
the food industry lost their comparative advantage values in 2013.
5. Three new sectors moved from RCD to RCA in 2013, which is related to prepared feathers and down
and arti, cereals, articles of apparel and clothing.
6. Analysis of RCA2 on observed trade data for all sectors had shown that 38 sectors which had RCA in
2008 increased to 41 by 2013. RCA2 calculations take into account the RMA which accounts for the
import advantage India has in a particular sector.
7. For RCA2, 21 sectors retained advantage out of 41 in 2013. And thus 20 others gained it in the same
year.
8. Top 10 sectors which enjoyed comparative advantage in 2008 and 2013 as indicated by RCA2 results
show three sectors retained their comparative advantage. Thus seven sectors moved from RCD to RCA
in 2013.
9. Comparison of top 10 sectors indicated by RCA1 and RCA2 values in 2013 show that five sectors
retained their comparative advantage on both indices. The sectors that lost RCA2 in HS code are 13, 63,
14, 57 & 62. But sectors which gained RCA2 but lost RCA1 are 89, 27, 25, 75 & 02.
Table 12 RCA2 values for the year 2013 for HS‐2
Sl. Product
No. Code Product Description RCA2
Stability of RCA indices and inter temporal variation in Revealed Comparative Advantage (2008‐13)
Stability measures of RCA facilitate the evaluation of structural shifts in RCA’s (Belay Seyoum, 2007) over a period
of time. This is analyzed by measuring the temporal movement of RCA on RCA1 index for our study.
Inter temporal movement of India’s RCA based on RCA1
Total no. of sectors for which India hold advantage: 2008:40 2013:34
No. of sectors that have retained advantage (2008‐2013):32
No. of sectors that gained advantage (2008‐2013):2
HS ‐code Sector‐description
02 Meat & edible meat offal
78 Lead & articles thereof
No. of sectors that have lost advantage (2008‐2013):8
17 Sugars & sugar confectionary
26 Ores, slag & ash
36 Explosives. Pyrotechnic products
8 Edible fruit & nuts, peel of citrus fruits
74 Copper & articles thereof
97 Works of art, collectors' pieces an
12 Oil seed, oleagi fruits; miscell gr
30 Pharmaceutical products.
Inter temporal movement of India’s RCA based on RCA2
Total number of sectors for which India hold advantage :
2008:38 2013:41
Number of sectors that have retained advantage(2008‐2013) : 21
Number of sectors that gained advantage (2008‐2013) : 20
HS Codes: 95, 86, 80, 76, 72, 69, 66, 65, 64, 62, 61, 60, 59, 53, 52, 50, 45, 42, 31, 06
Number of sectors that have lost advantage(2008‐2013): 17
HS Codes: 87, 81, 79, 78, 73, 55, 54, 40, 39, 38, 37, 34, 23, 16, 12, 08, 07
Stability of RCA indices is measured by shifts in comparative advantage on RCA1 and RCA2 indices over a period
from 2008 to 2013.
Stability of RCA indices (2008, 2013)
Seeing the above table, sectors enjoying RCA1 have decreased in 2013 while many sectors have gained RCA2 in
the same period. Showing that export competitiveness of certain sectors has increased in 2013 more than their
RMA’s.
Consistency of RCA indices and structural shift in comparative advantage
Use of ordinal measures of RCA indices to determine whether pairs of RCA yield a consistent ranking of
comparative advantage was initially suggested by (Balance et al,1987) through statistical tests. Further,
Spearman rank correlation coefficient was used as the statistical tool (Amita Batra, Zeba Khan, 2005) to track
dynamic structural changes in comparative advantage.
It is used as a non‐parametric test for independence of two random variables measured on an ordinal scale. A
high positive value (range varies from +1 to ‐1) will indicate a high correlation between sectors ranked on values
of RCA. This is interpreted as no significant change in ranking of RCA and hence a small structural shift.
Analysis of SRC coefficients in SPSS on paired RCA1 values from 1991 to 2008 show a value of .778 which
indicates that there is hardly any structural shift in Comparative advantage patterns of export sectors.
Table 9: SRC Coefficients of paired RCA1 (1991, 2008)
RCA1 1991 RCA1 2008
N 96 96
Sig. (2‐tailed) .000 .
N 96 96
**. Correlation is significant at the 0.01 level (2‐tailed).
SRC coefficients between paired RCA2 indices for 1991 to 2008 indicate a value of ‐.262 implies that such sectors
which enjoyed comparative advantage in 1991 failed to maintain the same and slipped into a state of
disadvantage. Corollary to it is, the structure of comparative advantage of sectors shows a slight shift over the
period of the time under study.
Table 10: SRC Coefficients of paired RCA2 (1991, 2008)
RCA2 1991 RCA2 2008
N 96 96
Sig. (2‐tailed) .010 .
N 96 96
**. Correlation is significant at the 0.01 level (2‐tailed).
The analysis of SRC coefficients was done in Excel for the period ranging from 2008 to 2013. The SRC for the
paired RCA1 values show a value of
0.9022 which indicate that there is hardly any structural shift in Comparative advantage patterns of export
sectors.
SRC coefficients between paired RCA2 indices for 2008‐13 indicate a value of 0.2781 implying that such sectors
which enjoyed comparative advantage in 2008 failed to maintain the same and slipped into a state of
disadvantage.
All the above findings reflect that there appears to be no significant shift in the comparative advantage when
measured on RCA1 which does not hold true when measured on RCA2. In fact, a structural shift is clearly
reflected in the mapping of Inter‐temporal variations across 1991 to 2008 and from 2008 to 2013. This has been
further validated by the measures of Spearman Rank Correlation Coefficients on paired RCA1 and RCA2
measures of 1991‐2008 and from 2008‐2013.
Findings and Conclusion
a) PERIOD 1991‐2008
The major trade policy changes that were to be initiated by economic reforms of 1991, aimed at three
basic things‐
1. Simplification of procedures
2. Removal of QR’s, and
3. Substantial reduction in the tariff rates
With the introduction of LERMS and Eximscrips‐ reform of trade and exchange rate policy was started. The EXIM
policy was to provide a greater thrust to exports from agriculture and labour intensive sectors in which the
country had a strong comparative advantage.
So, 34 commodities enjoyed comparative advantage in 1991 revealed by RCA1 values greater than 1 but the
probable reasons for few of them to come under top 10 category were ‐
1. The devaluation of domestic currency thus making our commodities price competitive internationally.
2. Under the Export Promotion Capital Goods scheme for exporters, concessional duty on capital goods was
reduced to 25% (with an obligation to export 3 times the value of the import) and 15% (with an obligation
to export 4 times the value of the import)
3. EOU’s and EPZ’s had the additional advantages
4. Coverage of OGL was enhanced.
NOW CONSIDERING THE PROBABLE REASONS FOR TOP 10 SECTORS BASED ON RCA1 FOR 2008 ‐
a) Articles of leather and saddlery lost comparative advantage primarily due to the spread of East Asian
crisis in 1998 which led to massive currency depreciation this thus impacted the price competitiveness of
our exports.
SECTORS THAT GAINED ADVANTAGE ‐
1. Residue and waste from the food industry came to top 10 mainly because of the special agricultural food
scheme introduced to boost exports of fruits, vegetables, flowers and their value added products.
2. Mineral fuels, oils ‐ reducing import duty to 0 in 2009‐10 for sugar, rice, wheat, pulses, edible oil and
maize.
3. With the performance of EPZ/SEZ, EOU the production was enhanced
4. Following the commitments of WTO, all major export promotion schemes were liberalised
5. 100% FDI allowance in all products in SEZ’s
6. Also FTA’s (free trade area) and CEPA (comprehensive economic partnership agreements) were signed in
mid 2000’s
7. The sharp pick‐up in exports after the crisis is explained primarily by growth in exports to Asia and the
Middle East
8. The removal of QR’s and the reduction of the high tariffs on manufactured goods favoured agriculture
and labour‐intensive manufactured exports.
ANALYSIS OF RCA1 (EXPORT ADVANTAGE) ‐ OBSERVATIONS
Though we see that most of the commodities retained their positions with slight changes in the rankings but the
value of RCA1 has dropped significantly for the same.
This shows that either the share of exports corresponding to that of the share of world has reduced due to
certain policy changes which don’t enable to penetrate the world market efficiently and effectively or there was
the surge in exports of other countries due to which the demand for our exports dropped.
Also if we see the top 10 commodities for the year 2008, many of the commodities still come in primary/natural
resource category, explaining the absence of inputs given by R&D and innovation support system for making
Indian exports competitive in hi‐tech and more skills involving products. Basically the product diversification
along the product space is missing.
ANALYSIS OF RCA2= RCA1‐RMA (REVEALED IMPORT ADVANTAGE) ‐
OBSERVATIONS
85 sectors in 1991 dropped to 38 by 2008, meaning that RMA increased for other 47 sectors. Except for coffee,
tea, mati and spices, other sectors lost RCA 2 in 2008, this basically means that the other sectors gained RMA.
This may be due to –
1. Extensive de‐control and de‐licensing that was done. The comprehensive import control (QR’s) regime
was gradually dismantled starting with capital and intermediate goods.
2. Starting with Eximscrips in 1991, coming to complete removal of QR in 2001‐02 Exim policy and to twin
schemes of focus product and focus market followed in 2004‐09 FTP, India has come a long way.
3. FII’s were permitted greater leverage in the primary and secondary markets.
4. The effective dismantling of protection started in early 2000’s
5. India’s exports have suffered because of a combination of the inability of the exporters to take advantage
of the opening up of markets following the formalisation of several free trade agreements and the slack
in global markets in the aftermath of economic downturn.
6. Also technology driven product/sectors need to be made competitive.
The RCA2 which reveals the import competitiveness of the country of 2008 showed that with comparison to
1991 its values have substantially reduced and except for coffee, tea, mati n spices all others have lost C.A in
2008. The year 2008 witnessed changes in the external demand due to the sub‐prime lending crisis initiated in
U.S. This led to fall in the trade share of the U.S, the largest trading partner, declined by 1.5 percentage points
to 10.1 per cent in 2007‐08, while that of the United Kingdom and Belgium declined by 1.6 and 2 percentage
points, respectively. India’s exports of textiles, leather & manufactures and handicrafts to US performed poorly
in 2006‐07, even though the rupee depreciated marginally. The share of China, the second largest partner in
2007‐ 08 increased to 9.2 per cent in 2007‐08 from 4.9 percent in 2003‐04. China became the largest trading
partner this year.
The changes seen this year were mainly brought by the external changes in demand. Suggesting that Indian
export sector is not insulated from the negative demand shocks emanating from the world economy. The
appreciation of the rupee vis‐à‐vis the dollar, the main invoicing currency of exports, compared to the lower
appreciation of competing countries coupled with the slow growth in imports of major trading partners like the
United States, affected exports of some sectors with low import intensity.
The fall in RCA2 of commodities in 2008 in comparison to 1991 suggests that either the RMA for those
commodities exceeded the RCA1 or RCA1 for them dropped so much that RCA2 became either very small or
negative.
India has emerged as one of world’s low protection and open industrial economies after the new tariff
reductions introduced in the March 2007 budget.
Though India has been diversifying its exports, there is plenty of scope to diversify into sectors where global
demand is high and increasing. Countries closely integrated with the global trading system have joined the
process of exporting dynamic products by continuously restructuring their production bases with efficiency,
improved productivity and constantly improving their global share in exports. There are also many sector‐
specific trade facilitation issues which need to be addressed.
Thus the rapid growth in world trade during the past 2 decades has been achieved not only by reduction in trade
restrictions but also by the transformation of production pattern and process by integrating technology and
innovative approaches.
b) PERIOD 2008‐2013
This phase gives an account of the changes in comparative advantage in the aftermath of crisis 2008. The internal
and external factors are often intertwined to determine the export performance of a country. The Indian export
sector is not insulated from the negative demand shocks can be seen from the correlation coefficient between
the annual growth rates of exports for India and the world which is as high as 0.94 (Veeramani 2012).
As noted earlier, the sectors for which RCA1 values dropped in 2013 can be linked to the fall in world demand
for our exports (despite the policy reform, a country’s exports may not grow faster if world demand happens to
decelerate) or the inability of our exports to capture the foreign markets (country may fail to exploit the
buoyancy of world demand if the domestic policy environment is highly restrictive). Reasons are many thus a
broad general idea can be imparted to this.
The sectors gaining RCA1 in 2013 from 2008 are - articles of apparel and clothing, cereals and
prepared feathers and down and arti. As this year comes under the FTP (2009-14), many
initiatives were taken in sustaining accelerated growth of exports and making India a major
player of world trade.
Vishesh Krishi and gram Udyog Yojana is one of them. The Scheme is to promote exports of
-
(ii) Minor Forest Produce and their value added variants
(iv) Forest Based Products
Exporters of notified products are entitled for Duty Credit Scrip equivalent to 5% of FOB value of exports (in free
foreign exchange) for exports made from 27.8.2009 onwards.
The short term objective of the policy is to arrest and reverse the declining trend of exports and to provide
additional support especially to those sectors which have been hit badly by recession in the developed world.
ANALYSIS OF RCA1 (EXPORT ADVANTAGE) – OBSERVATIONS
From 40 sectors in 2008 to 34 in 2013 have RCA1, showing that the export competitiveness has decreased during
these years mainly because of the combination of the inability of the exporters to take advantage of the opening
up of markets following the formalisation of several free trade agreements during the past decade and the slack
in global markets in the aftermath of economic downturn. The reason for India's export growth in 2012‐13 (April‐
November) being more negative than in 2009‐10 in the aftermath of the global recession can be seen from
India's commodity‐country export performance. India's exports to EU and China have been more negative during
the recent global slowdown than in 2009 ‐ 10, while its performance to USA has been better for most of the
sectors except gems and jewellery. The performance of India's exports to EU of textiles and readymade
garments, gems and jewellery and ores: and to China of manufactures, engineering goods, chemicals gems and
jewellery and ores was worse off in 2012 ‐ 13 (April ‐ November) compared to 2009 ‐ 10. Thus, the Euro Zone
crisis and the Chinese slowdown have affected India's exports more during the recent slowdown than in 2009‐
10. (Economic Survey 2012‐13)
Much was expected on the export front after the government adopted the “Strategy for Doubling Exports in
Next Three Years 2011‐12 to 2013‐14”, aimed at increasing exports to $500 billion by 2013‐14.
Further lowering of tariffs to ASEAN levels, while carefully taking note of domestic concerns and simultaneously
removing duty benefit schemes which may become redundant in a low tariff regime. While India is relatively
less vulnerable to the developments in the US, EU, and other developed countries due to its diversification of
exports to Asia and ASEAN, there are concerns on the bilateral trade deficit front with countries like China and
Switzerland.
For boosting agricultural products exports further, the government’s thrust should be on Good Agricultural
Practice standard for ensuring that Indian food products are accepted by consumers across the supermarket in
Europe, USA and other developing countries.
Considering the top 10 list, most of the sectors come under labour‐ intensive manufacturing in which India has
comparative advantage. The experience of the successful east Asian countries which showed that export‐led
industrialisation based initially on labour‐intensive industries is crucial for sustaining employment generation
and poverty reduction can come handy for India.
ANALYSIS OF RCA2 (IMPORT ADVANTAGE) ‐ OBSERVATIONS
Considering the sectors in 2013 with RCA2 greater than zero tells that the RCA1 is more than the RMA of the
sectors, the number has increased from 38 to 41, showing that reforms have boosted the exports more than the
imports of the sectoral commodities.
Considering the top 10 commodities for the RCA2 values, 3 sectors retained their ranks namely prepared
feathers and down and arti, ships, boats and floating structure and mineral fuels, mineral oils and products. And
thus seven other sectors came in the top 10 list.
India has been fairly successful in diversifying its export markets from developed countries like the US and
Europe to Asia and Africa, which has helped to a great extent in weathering the global crisis of 2008 and the
recent global slowdown. Export of Products/Sectors of high export intensity/ employment potential (which are
not covered under present FPS List) would be incentivized at 2 % of FOB value of exports (in free foreign
exchange) under FPS when exported to the Linked Markets (countries).
India has been pursuing a policy of market diversification directing her export promotion efforts at Asia and
ASEAN, Latin America and Africa through Focus Market initiatives and bilateral trade agreements.
CONCLUSION
This report analysed the RCA1 & RCA2 values of all the sectoral‐ level commodities at the HS‐2 level, taking into
account there is a possibility that at dis‐aggregated level sub products may reflect a different pattern of RCA.
Exports which may show a strong comparative advantage at sector level may have sub products which may not
hold true at HS ‐ 4 level or at the sub sub level which is measured at HS‐6. Thus to get the more precise evaluation
of the economic reforms for boosting the competitiveness of exports would be to check for the comparative
advantage at not just HS‐2 level but also at 4 & 6. This process would take care of all the commodities of different
sectors and would enable in better policy making and thus in implementing them
Seeing the list of top 10 commodities for both RCA1 & RCA2, we see that India holds comparative advantage in
labour‐intensive manufacturing, thus giving an indication of considering the manufacturing sector as the engine
of growth combined with marketing and technology strategies so as to access new markets in line with the
growth projections and continue the quest for achieving higher efficiency and productivity.
The fluctuation in India’s export growth rate had been strongly linked to cycles in world demand. Consistent
with the trends in world exports, the first decade of reforms was characterised by a moderate export growth
from India while the second decade witnessed a high growth. This growth can be attributed to the strategy of
diversification across trading partners which helped India in weathering the effect of the crisis on trade.
India has been pursuing a policy of market diversification directing her export promotion efforts at Asia and
ASEAN, Latin America and Africa through Focus Market initiatives and bilateral trade agreements also called
‘Look East Policy’. Some of the Major bilateral agreements which have been concluded in the recent past include:
CEPA with Republic of Korea, CECA with Malaysia, conclusion of CEPA with Japan, continuing relations with US,
USA remains one of India’s major trade partner, and India ‐ EU Broad based Trade and Investment Agreement
(BTIA) Negotiations etc.
In the last five years, India’s export growth has seen ups and downs, being in negative territory twice: in 2009‐
10 as an aftershock of the 2008 crisis and in 2012‐13 as a result of the euro zone crisis and global slowdown.
India’s exports were US$ 312.6 billion against a target of US$ 325 billion during 2013‐14, though they grew by a
positive 4.1 per cent as compared to the negative growth of 1.8 per cent during the previous year. But a return
to strong export growth will depend on the revival of growth in industrial countries.
Thus the following dimensions that can be crucial for the enhanced growth in exports as indentified by the
Planning Commission ‐
Contribution of MSME sector in export promotion
Role of manufacturing and engineering goods in export promotion
New manufacturing policy
Tapping the potential of services export
Export performance of SEZs by enhancing training and skills by way of providing R & D to make the
products globally competitive
The above set of policies/issues at the sectoral and micro level are just illustrative and in no way exhaustive. If
these and other such issues are addressed, the wheels of exports can move faster with minimum costs.
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