India’s Export Potential in China

5.3. India’s Export Potential in China

India has been maintaining a high export growth to China since 2004, but this has been adversely affected by the recent episode of global recession. Growth of imports in most of the important export markets of India became either negligible or negative since September 2008. This trend is slowly turning around in recent months. China is one among the important market destinations in which India’s export potential has been inadequately realised on account of the recent global India has been maintaining a high export growth to China since 2004, but this has been adversely affected by the recent episode of global recession. Growth of imports in most of the important export markets of India became either negligible or negative since September 2008. This trend is slowly turning around in recent months. China is one among the important market destinations in which India’s export potential has been inadequately realised on account of the recent global

levels of technology-intensive products. The Medium Term Export Strategy (MoC, 2002) has identified nearly twenty-five important destinations to focus on medium- term exports, and China has been identified as one of the most important countries for India. 44

China recently became India’s largest trading partner, and its exports have increased so sharply that it is inflicting an unsustainable trade deficit on India which has achieved a moderate bilateral export growth only so far. For reversing the problem of trade imbalances without interrupting the present flow of bilateral trade, sharp focus on the growth of India’s exports may be emphasised for the balanced growth of the domestic external sector. For addressing trade imbalances, India should substantially improve its presence in the Chinese export market. In this context, an attempt has been made to estimate India’s export potential in China at a disaggregated product level based on the export competitiveness of India.

In the economic literature, there are two important approaches, that are commonly pursued to examine the competitiveness of an economy at the disaggregated product level, namely, the Vinerian approach (1950) and the revealed

comparative advantage (Balasa, 1973, 1989). 45 Between the two approaches, the framework of Viner is considered to be better than the other in terms of examining export competitiveness and the estimation of trade potentials (Greenway et al., 1989; Mohanty, 2009; Mohanty and Arockiasamy, 2010; Mohanty; 2001; Kumar and Mohanty, 2000). Viner evolved dual concepts of trade creation and trade diversion effects to explain the gains from tariff liberalisation between partner countries using policy-induced preferential trade. It is argued that the approach provided the framework for enhancing bilateral trade through trade creating effects which could

be the most enduring basis for trade expansion among partner countries. It has mostly focused on demand-driven aspects of trade, taking into account product pricing as the major determinant of trade (see Appendix II for a detailed discussion on the model for the estimation of trade potential using the Vinerian approach). This approach recognises the relevance of supply and non-pricing constraints which have been the guiding factor in determining the magnitude of trade potential in the partner country.

We have modelled both demand and supply factors to examine the level of trade potentials in the Chinese market in the present study. Earlier studies 46 in India have estimated the trade potential of India in the Chinese market on the basis of its competitive strength. The Joint Study Group (JSG) report has highlighted the

44 Other identified countries under the Term Export Strategy (2002-06) are Argentina, Australia, Brazil, Canada, Hong Kong, Indonesia, Israel, Japan, Korean Republic, Mexico, Norway, Poland, Russian

federation, Saudi Arabia, Singapore, South Africa, Switzerland, Thailand, Turkey, the EU and the USA. 45 For survey of literature see, Appendix II.

46 See for example, Joint Study Group Report (2004), CII (2004), Mohanty and Chaturvedi (2006).

presence of high trade potentials in both the countries. Similar results have been reported by other studies. Based on the empirical results, the JSG report

recommended the formation of a Comprehensive Economic Partnership Agreement between the two countries. With global and domestic dynamics, the economic strength of both the countries have changed remarkably, and, therefore, fresh estimation of trade potential is required based on recent trade information.

While examining trade possibilities under the proposed arrangement, price competitiveness forms the basis for identifying potential products exported by a supplier to an importing country. At this point, a comparison is made between the level of demand for a product by an importer and supply capabilities of the exporter and the minimum of the two is considered as trade potentiality of the exporting country in the importing market. In this exercise, potential exporter’s supply price for a product (i.e. at 6-digit HS) is evaluated with other suppliers of the importing country, and in case some existing supplier is found to be uncompetitive to the potential exporter in price competition, then a portion of the current market share retained by the inefficient supplier will be treated as trade potential of the potential efficient exporter. This exercise is iterated for different pairs of countries at the disaggregated product level for estimating the export potential for the partner country. A major disadvantage of this approach is that factors determining competitiveness of a product such as its quality and post delivery services among various others are not accounted for in the model. The approach is constrained by not accommodating these factors in the model. As a matter of fact, international trade data is so distorted that more accurate analysis may not be possible with the existing database.

The trade potential of each trading country in the markets of its trading partners are examined empirically based on the Vinerian framework. In this context, two important issues are discussed in this section. First, attempts have been made to

estimate the level of export potential at a more disaggregated level of products, 47 on the basis of their price competitiveness. Second, the distributional pattern of export

potential is examined across various trade sectors to understand the prospects of gains from the proposed trade liberalisation.

47 For the present analysis, we have used the trade creation effect to estimate trade potential of individual countries. In a situation where tariff rates are declining very fast among developing countries, the relevance

of trade diversion as a part of shallow integration is very little. For this reason, trade potentials on account of trade diversion is not estimated. If the trade diversion element is included in the analysis, India has to open up its market more than others because of her high tariff regime. With the inclusion of trade diversion, the present balance between the sectors in terms of trade potential may be changed. Methodology for the estimation of trade potential using modified trade creating effect is discussed in Appendix VI.