India’s Trade in 2020 Essay

IntroductionIndias duty has generally magnanimous at a fast-paced pace comp bed to the gain of GDP everywhere the past two decades. With the liberalization since 1991 in bulge outicular, the importance of international cargon in Indias saving has grown good. As a result the ratio of international manage to GDP has gone up from 14 per penny in 1980 to nearly 20 per cent towards the end of the decade of 1990s. Given the trends of globalization and liberalization, the openness of Indian economy is expected to grow further in the coming two decades.The more submit magnitude of Indias trade in 2020 and its proportion to Indias national in deduce would be determined by a variety of factors. Many of these factors argon in the nature of external shocks and are beyond the control of national policy making. One illustration is the recent surge in the crude oil prices in the international market to unprecedented levels that view as impacted the areas imports in a significant manner . In addition, the implementation of various WTO agreements are in all likelihood to affect the Indias trade. Indias trade is also likely to be stirred by various bilaterally symmetrical/ regional preferential trade ar sitements that abide been concluded and those that might take shape in the coming years.This paper attempts to provide a mapping of different factors that are likely to shape the patterns and magnitudes of Indias imports and merchandises over the coming two decades. These factors are classified into three, namely 1) factors touch the want for Indias exports of goods and services 2) factors affecting the supply of Indias exports of goods and services and 3) factors affecting the demand for Indias imports.The supply of imports may be assumed to be elastic and hence is not discussed.The structure of the paper is as follows. Section 1 maps out various factors affecting demand for Indias exports, Section 2, factors affecting supply of Indias exports. Section 3 l ists the factors that are likely to affect demand for Indias imports. Section 4 briefly summarizes emerging patterns of Indias comparative advantage in exports of good and services. Section 5 makes some concluding remarks.1.Factors impact the Demand for Exports on that point is a multitude of factors that are likely to affect the demand for Indias exports of goods and services as seen below.3 Growth Performance of adult male Economy and Key Trading RegionsThe growth place of the world economy and world trade do influence the overall demand for Indias exports. For instance, the judge of stagnation in the growth rate of world trade in the period since 1996 have affected the growth of Indias exports. roughly broad proportionality between the growth rates of world trade and Indian exports is evident from Figure 1. Depending upon the intensities of Indias trade relations the growth prospects in these specific regions may also affect the demand for Indias exports. The regions which may be break outicularly important for Indias exports acknowledge North America, the European Union, Middle East, East and selenium Asia and South Asia. Therefore, it will be important to watch the growth outlook and projections for these regions.Figure 1 Growth Rates of World Trade and Indias Exports everywhere the 1990s Source RIS on the basis of WEO Database of the IMF1.1.1. World Output and Trade at the Turn of the Century and the Outlook The world economy in 2000 seems to have fully recovered from the s lack up voltaic pile of 1998-1999 on account of the East Asian crisis. The estimated world output growth of 4.8 per centum in 2000 is highest since 1988 and of world trade at 12.4 percent is highest of the past 25 years ( card 1, Figure 1). The impressive recovery of the world economy and world trade in the early part of 2000 generated optimism all more or less as countries expected to benefit from favourable spillovers in the form of attire in demand for their exports . However, the optimism has proved to be short lived.It has been partly tarnished somewhat by the crude oil prices hitting the roof in the third quarter of 2000 and adversely affecting the outlook of many regions besides bringing up the threats of inflation in different parts of the world. Furthermore and more importantly, the emerging trends confirm that a trend of slow down was set in the US economy in the third quarter of the 2000. Hence, fears of a hard landing of the US economy in 2001 have continued to grow. A scenario of hard landing of the US economy in 2001 is thus likely to short-circuit the rebound of the world economy of 1999-2000, even though the major European Union economies are improving their performance. The Japanese economy continues to remain sluggish.The slow down of the US economy has a compounded effect on the growth of the world economy by adversely affecting the demand for the products of partner countries as well. As a result the growth rate of world out put is likely to slow down in 2001 from the levels reached in 2000 to 3.2. The world economy is expected to pick up moderately to 3.9 per cent in 2002. The effect of the impending slow down is more severe on the growth rate of world trade which is likely to reduce by nearly half from the rate achieved in 2000 to around 6.5 per cent in 2001 and 2001. In the light of recent trends, the outlook for the world economy and trade growth over the next ten years could be taken at 3 and 6 per cent respectively.*Indonesia, South Korea, Malaysia, the Philippines, and Thailand. ASEAN-4. Source RIS based on World Bank (2001), IMF (2001).1. WTO discernmentsSince the implementation of the Final Act of the Uruguay dishonor in 1995, the WTO Agreements have become important factors in determining the patterns of world trade. Their full impact is not yet obvious as many render of these agreements are yet to be implemented beca subroutine of the transition period provided. Most of the remaining provi sions of the WTO agreements would be implemented in the coming five years. Therefore, the patterns of trade in 2020 would have to be speculated keeping in mind the impact of full implementation of the WTO agreements. Some of the agreements which are likely to affect Indias exports are the following.1. Agreement on Textiles and ClothingThe Agreement on Textiles and Clothing (ATC) proposes to phase out the MFA quotas imposed by the developed countries on the imports of textiles and clothing from developing countries over a period of 10 years ending on 31st December 2004. Given the fact that India has substantially fulfilled her quota for the products coming to a lower place MFA, it may appear that the phasing out of these quotas would help in the expansion of exports. However, the impact of the phase out is likely to be a mixed bag.This is because with MFA phase out, Indian exporters would be competing directly with different exporters of textiles and garments such as chinaware, Ko rea, Taiwan, Pakistan, Thailand, Turkey, Mexico, Hong Kong, Indonesia, Macau, Philippines, Sri Lanka, Bangladesh, among other(a)s. Therefore, while ATC provides an opportunity to Indian exporters to expand their exports of textiles and garments by removing the quota restrictions, it also poses a challenge of increase international competition. Some of them will enjoy preferential access to the importing countries due to their to the lowest degree developed country (LDC) status such as Bangladesh.There are apprehensions on the full benefits of phase out being on tap(predicate) to developing countries. As such the schedule of the phase-out has been back-loaded over a ten-year long phase-out period. The industrialized countries may use other protectionist measures such as anti-dumping to prevent market access after the phase-out of quotas. A large number of textiles and clothing products already face tariffs in the range of 15 to 30 per cent in the Quad countries (World Bank, 2000) . Some attempts of restricting them with anti-dumping duties have already been made against these exports including those from India.Another factor that will affect the competitiveness of Indian exports of textiles and garments in the post-MFA regime is the availability of trade preferences to emerging competitors of India. For instance, Mediterranean countries such as Turkey, Cyprus and Malta and Central and Eastern European countries enjoy free trade agreement with the European Union ahead of their full membership. The Caribbean countries enjoy a similar preferential access to the United States market under the Caribbean Basin go-ahead (CBI).Mexico enjoys a privileged access to the North American Market as a member of NAFTA. These trade preferences have already resulted into diversion of trade in textiles and clothing to these countries. For instance, Mexican exports of clothing to the United States have grown at the rate of 27 and 15 percent in 1998 and 1999, respectively with the growth rate of exports to Canada in these years being 30 percent and 26 percent, respectively. Similarly, exports of clothing from Bulgaria, Hungary, Poland, Romania, Turkey to the European Union in 1998 have grown at 26 percent, 14 percent, 11 percent, 23 percent and 11 percent, respectively (WTO, 2000).The ability of Indian exporters to take advantage of phase out the MFA quotas by 2004 will appear upon a number of factors such as their ability to enhance overall international competitiveness with productivity and efficiency improvements, quality control, ability to quickly come up with new designs, ability to respond to changes in consumer preferences rapidly and the ability to move up the value chain by building brand call and acquiring channels of distribution to more than outweigh the advantages of her competitors. The reservation of the garment industry for small-scale sector has affected capital investment, modernization and automation in the sector in the country. Alt hough the small sector operation has imparted flexibility, it has prevented effectation of economies of scale and scope by the Indian industry. The new Textiles Policy takes care of some of the concerns. It rest to be seen if the Indian industry will be able to exploit the opportunities provided by the change magnitude market access with the MFA phase-out.2. Agreement on Agriculture (AoA)The AoA proposes to modify the international trade in agriculture by restricting the bucolic subsidies provided by governments to the farmers, reduction in export subsidies in agriculture, removal of QRs and establishment of tariff rate quotas applicable to trade in agricultural commodities. In general Indias obligations under AoA are limited given the low level of agricultural subsidies compared to EU and the US. It is believed that implementation of the AoA commitments by industrialized countries will benefit countries like India in terms of market access for some agricultural commodities. Ho wever, the implementation of the commitments on the part of industrialized countries so far does not provide any room for optimism. The extent of subsidies given by industrialized countries have actually increased over the past few years as acknowledged by OECD reports. It is possible that in the coming years the provisions of the Agreement are implemented in the letter and spirit.The likely effect of the full implementation on Indias trade is difficult to be speculated. However, one can have an thought about the likely scenario from efficiency indicators and incentive structure. Given lower than world prices of rice, wheat, maize, sorghum, chickpea and cotton in India, their exports may expand under the liberalised trade in agriculture. Hence the area under cultivation for these crops may increase since profitability and effective incentives will get tilted in favour of these crops. The same is authorized for pearl millet, pigeonpea and soyabean. However, production of oilseeds e .g. groundnut, rapeseed, mustard and sunflower, and pulses may be adversely affected in a free-trade scenario given the lower world prices. Thus, the import dependence in edible oils and pulses may increase.3. Anti-dumping RegulationsThe Indian exports of a number of commodities have been subjected to anti-dumping regulations by some of our important merchandise partners such as the United States and the European Union. The fire of the anti-dumping measures on Indian exports is likely to increase in future with the growing competitiveness of Indian products. In order to minimize their disruptive effect of these regulations on Indias exports, the industry and government will have to strengthen the machinery to counter such actions (Panchamukhi, 2000).1.2.4. Tariff Negotiations and New Trade RoundAlthough the average tariff rates in the industrialized countries are low, they have high peak tariffs for certain products, some of which are of export interest to India such as textiles a nd garments, and agricultural commodities (see Table 3). Market access for these products could be facilitated by our ability to secure reduction in these tariffs in the industrialized countries through future tariff negotiations in the WTO framework.N.B. HS Chapters are given in parentheses.Source RIS based on UNCTAD/WTO (2000) The Post-Uruguay Round Tariff Environment For Developing Country Exports Tariff Peaks and Tariff Escalation, UNCTAD, Geneva (TD/B/COM.1/14/Rev.1 28 January 2000)1.2.5.Trade Preferences for the Least Developed CountriesOne emerging development in the WTO system has been the tendency to divide the developing countries with the offer of special trade preferences for the to the lowest degree developed countries. A sizeable proportion of Indias exports still comprise labour and vision intensive goods that are also exported by some of the least developed countries. If successful these preferences have the prospects of skylarking trade from India to the least de veloped countries. The potential of these trade preferences for adversely affecting Indias exports needs to be unploughed in mind.2. Chinas Accession to WTOOne of the important events of the coming years for the world trade may be the entry of China into the WTO regime. China signed an agreement with the US for its entry into the WTO in November 1999. It has subsequently been negotiating such agreements with other WTO members. The accession of China to the WTO and hence the MFN status that it will receive from other WTO countries may have some implications for the competitiveness of Indias exports. This is because India and China compete in the international market for a number of labour intensive and maturate technology goods such as textiles and garments, leather goods, light engineering products, chemicals and pharmaceuticals, among others. China has already been giving tough competition to Indian exports in many commodities and markets.There is a view that the accession to WTO may further strengthen Chinas competitiveness and hence may affect the Indian exports adversely. There is other view that the accession of China to WTO would force it to follow WTO norms and procedures, etc. and will bring their trade policy under international surveillance. State subsidies will be regulated and hence it will make it more difficult for the Chinese exporters to dump their products in the world market. The exact impact of the accession of China to the WTO on the Indias export prospects will depend upon these counteracting effects. It is important to analyze the effects of Chinese accession to WTO on the competitiveness of Indian exports.1.4. Preferential Trade Arrangements/ step down Trade Arrangements in Rest of the World The last decade and a half has seen the proliferation of regional trading arrangements in different parts of the world. The major trading blocks that have emerged over the years include the European Union, NAFTA, Mercosur, AFTA, COMESA, among othe rs. Besides, these free trade and common market agreements, a number of other countries have become unified with the trading blocks through a variety of preferential or free trade arrangements. For instance, European Union has extended free trade agreement give-and-take to a number of Central Eastern European Union and Mediterranean countries in anticipation of full membership to these countries in the EU. These arrangements could also act to divert trade away from India especially in the labour intensive goods, as indicated earlier in the case of textiles and clothing.1.5.Regional/Bilateral Free Trade ArrangementsIndia has taken some(prenominal) steps to liberalize trade with her trading partners in the South Asia region on regional as well as bilateral basis. These steps include participation to SAARC Preferential Trading Arrangements (SAPTA) that came into being in December 1995. Under this Agreement, India has exchanged trade concessions with the SAARC member countries for ne arly 3000 commodities in the first three rounds of negotiations. The poop round of these negotiations is in the process. It is expected that the process of trade liberalization in the framework of SAARC will culminate into a South Asia Free Trade Agreement (SAFTA), although, it may take some time to take shape given the current impasse in the SAARC process. Besides SAPTA, India has belatedly signed a bilateral free trade agreement with Sri Lanka.India already has bilateral free trade agreement with Nepal and Bhutan. A bilateral free trade agreement is being contemplated with Bangladesh as well. There are other attempts of regional/sub-regional economic integration which may also come into being in the coming decade, for instance, BIMST-EC (Bangladesh, India, Myanmar, Sri Lanka and Thailand Economic Cooperation) which has been formed recently may adopt a preferential trading arrangement between the member countries. Although India is also a founder member of the Indian Ocean coast Association for Regional Cooperation (IOR-ARC), a preferential trading arrangement is not contemplated as the Association has adopted the concept of open regionalism on the lines of APEC.All these attempts at free trade with the regional partners may open the markets for Indian goods further in the countries concerned. It is evident that the share of South Asian countries in Indias exports has increased from 2.73 to 4.9 over the period 1990 to 1999. The recent initiatives in regional/ bilateral trade liberalization may help to divert some trade of the countries concerned from their other trading partners in favour of India given the supply capabilities.2. Factors Affecting the Supply of ExportsIt is widely believed that the major factors constraining Indias exports lie not in the lack of demand but more in the supply side constraints. Most of the supply side factors need to be addressed as a part of the policy towards trade. Some of the factors that constrain the volume and composi tion of Indias exports are as follows1. Infrastructural BottlenecksIt is widely accepted that Indias export potential remains considerably unfulfilled because of infrastructure bottlenecks such as power shortages, port handling facilities, delays in holdation which in turn are due to poor transport links within the country and poor communication facilities. The inability of Indian exporters in meeting supply schedules costs dearly in terms of delineation of India as a reliable source of supply. Not only that the availability of the infrastructure services is inadequate but the efficiency and quality of the delivery of what is available is highly uneven. The ability of the government in removing these constraints in the coming years will also determine the supply side of Indian exports.2. Growth of internal DemandA rapid growth of domestic demand may also affect Indias ability to export at least in certain products, for instance, in tea where the rapid growth of domestic demand is expected to reduce the export surplus in the coming years. It may also apply to a number of other agricultural commodities such as rice, cotton, among others.2.3 Inflows of Export-oriented Foreign Direct InvestmentMultinational enterprises (MNEs) have played an important place in the rapid growth of manufactured exports from the East and South-East Asian countries. This is because the South East and East Asian countries were able to attract export syllabus investments from US and Japanese MNEs in the 1970s and 1980s. The export platform or export-oriented investment arises in the process of relocation of production by MNEs abroad in order to maintain their international competitiveness in the face of rising wages and other costs in their home countries. In Malaysia and Indonesia, for instance, 70 percent of the projects involving FDI have been export-oriented. In China, the share of foreign owned firms in exports has risen from 5 percent in 1988 to 40 percent by 1997. In contrast , the share of foreign affiliates in Indias exports is marginal at 5 to 7 percent (Kumar and Siddharthan, 1997, for a review of evidence from different countries).Therefore, India has not been able to exploit the potential of MNEs for export-oriented production. MNEs can play an important role in promotion of Indias manufacture exports with relocation of export platform production in the country with their access to global marketing networks, best practice technology and organizational know-how. To some extent, therefore, Indias ability to attract export-oriented FDI will determine the magnitude of Indias exports in 2020. The studies have shown that export-oriented FDI inflows are of special type and are determined by different factors than other types of FDI (Kumar, 1994). The studies also find differences in the nature and determinants of export platform investments that are geared to MNEs home markets and those targeting the third countries (Kumar, 1998). India may make an effort to target the export platform investments of both types by sharpening her bundle of resource endowments and created assets in the light of determinants identified by these studies.5. Technological Upgrading and Movement along with the Value Chain The Indian export structure has been highly dominated by simple and un-differentiated products where the main competitive advantage lies in cheap labour, low levels of skills and simple technologies compared to that of China and South East Asian countries except for recent growth of pharmaceuticals and software services (Lall, 1999). Not only these products are slow moving, the export structure is highly vulnerable to competition. Indias competitiveness has also been adversely affected by the failure to diversify the commodity composition of our exports. In fact the commodity concentration of Indias exports has increased with a 9 percent rise in the share of top six groups of exports in total and exports between 1987-1988 to 1998-99 (Kumar , 2000a).In comparison to India, Southeast and East Asian countries have rapidly change their export structure in favour of technologically advanced goods. For instance, share of technologically advanced goods (differentiated and science based goods) in Indias manufactured exports ruddiness marginally to about 8 per cent by the mid-1990s over 5.6 per cent in the mid-1970s in China, this proportion increased from 8.8 per cent to 23 per cent over the 1987-95 period, and for Malaysia from 12 per cent to 57 per cent over the 1980 to 1995 (Pigato et al. 1997). The markets for low technology undifferentiated goods are highly price competitive and margins are kept under pressure by constant competition by entry of new low wage countries.