India’s Export Competitiveness of Selected Agricultural Products

CASIRJ Volume 5 Issue 2 [Year - 2014] ISSN 2319 – 9202

International Research Journal of Commerce Arts and Science http://www.casirj.com Page 528

India’s Export Competitiveness of Selected Agricultural Products

Ashish Gupta Ph.D. Scholar

National Dairy Research Institute

(Deemed University)

Karnal – 132001,Haryana

[email protected]

Abstract

From a food grain importing country in the 1950’s, India turned itself to a net exporter of food

grains to the world. The presence of India’s agricultural sector, particularly in exports is modest

in size in the international market. After the new economic reforms in 1991, there is a shift in the

policy from import substitution to export promotion. India has a competitive advantage in

several commodities for agricultural exports due to cheap labor, self sufficiency in inputs and

diverse climatic conditions. For certain commodities like rice and several dairy products, India

have a niche market. Although India enjoys advantage in exports due to the above mentioned

factors, in the post WTO period the trade has become highly competitive and the competitive

advantage may be lost due to the lack of sufficient infrastructure as compared to the competing

countries. The trends in agriculture trade show that there is some notable increase in the trade

volume in agriculture since late nineties, which have contributed to foreign exchange earnings of

the economy. It is essential to examine what factors have led to the change and whether such an

outcome is sustainable. An attempt is made here to examine the factors that determined trade in

agriculture in India in two periods viz. 2005 and 2010 so that changes in them are captured. The

study explores the changes in trade pattern in agriculture through changes in the General import

demand, commodity composition and competitiveness effect of exports using the decomposition

model of Constant Market Share Analysis. This model explains the reasons that why a country

exports does not grow as per the world average growth rate. This may happen due to

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concentration of exports in commodities for which demand is growing slowly, exports may be

going to relatively stagnant regions, or the lack of country’s competitiveness. The paper

disentangles these effects and explores the growth and performance of exports in the most

notable areas viz. cereals and dairy products. The study is based on the data from 2005 to 2010

of value of export (US $) as per 6 digit Harmonized System (HS) classification related to Indian

export of cereals and dairy products.

Keywords: Constant Share Market Analysis, Export.

JEL: F13, F15

Introduction:

Globalization is a process of unifying the diverse world economies under one umbrella to

facilitate freer trade, which aims overall growth and welfare. India too is part of globalization

and it enabled the country to face competition in the international market (NAAS report1,

2001a). The peculiarities associated with agricultural sector kept the policy makers away from

liberalizing agricultural sector equitable to that of other sectors. The amendments of EXIM

policy made during April 2001 gave importance to agricultural sector through creation of

Agricultural Export Zones wherein the state governments could identify product specific zones.

Import duties on capital goods to be used in agriculture were lowered and credit availability for

exports was increased. Income tax exemptions for profits from agricultural exports were

provided.

The EXIM Policy 2002-07, has given more importance to agriculture, especially for exports.

With sluggish growth in exports and rising imports, liberalization of agricultural exports was an

inevitable outcome. Export restrictions like registration and packaging requirements were

removed on butter, pulses, wheat and wheat products, groundnut oil, cashew and coarse grains.

As a result, the contribution of agriculture to the total trade of India and its importance to the

export earnings of the economy has increased over time. It is essential to examine what factors

have led to the change and whether such an outcome is sustainable. We make an attempt here to

examine the factors that determined trade in agriculture in India in two periods viz. 2005 and

2010 so that changes in them are captured. The changes in trade pattern in agriculture are



examined through changes in the General import demand, commodity composition and

competitiveness effect of exports.

Objective:

To study growth and competitiveness of cereals and dairy products export from India. The paper

also identifies the changes in trade pattern in agriculture in 2010 as against 2005 and causes for

such changes. The paper aims to scrutinize whether the export growth is due to rising demand,

diversification of product basket or due to competitiveness effect.

Methodology:

The study is based on the data from 2005 to 2010 of value of export (US $) as per 6 digit

Harmonized System (HS) classification related to Indian export of cereals and dairy products.

The data was collected from electronic data base of Commodity Trade Statistics (COMTRADE)

of United Nations. The methodology is divided into two stages. As it is not possible to bring all

products and countries into analysis , At the initial stage, , four countries for cereals and 3

countries for dairy products are selected for analysis based on the availability of data. These

countries are amongst the top 10 importers of the selected agricultural products.

At the second stage, the paper concentrates on the dynamics of export growth of selected

products in short listed countries. For this purpose Constant Market Share (CMS) model has

been picked up. CMS analysis is a popular tool for analyzing changes in exports of a country.

The model used in this paper has been inspired by the work done by Ichikawa (2003),

Richardson (1971), Fagerberg and Sollie (1987), etc. The constant market share analysis

compares the actual growth performance of a country with the performance that could have been

achieved if the country have maintained its exports relative to some standard. The intrinsic norm

of this analysis is a country's export share in a given market should remain unchanged over time.

However, in reality trade is dynamic and market share keeps on changing. The difference

between the actual export growth from a member country into a given market and the

unchanging export share implied by the ‘constant-market share norm’ is attributed to the

following three factors:



1. The effects of a general increase in demand for imports in the given market

2. Commodity composition, and

3. Changes in competitiveness

Keeping the market share constant, the model expresses the competitiveness term as negative or

positive to adjust the actual change in market share.

X(t) – X(0) = mX(0) + ∑{(mi – m) Xi(0)} + ∑{Xi(t) – Xi(0) – miXi(0)}........(1)

where

X: exports of country A to country B

Xi: commodity i exports of country A to country B

m: Percentage increase in country B's total imports from period 0 to period t

mi: Percentage increase in country B's imports of commodity i between period 0 to period t

and X=∑Xi

The right hand side can be divided into three components

(a) The general rise in country B's total imports

(b) The commodity composition of country A's exports to B in period 0, and

(c) An unexplained residual indicating the difference between country A’s actual exports

increase to country B and the hypothetical increase if country A maintained its share of exports

of each commodity group in country B.

Let us assume,

= country B's imports of commodity i in period t

= the change of Mi between period 0 and t

Mi(t)

Mi


International Research Journal of Commerce Arts and Science http://www.casirj.com 32

In that case, for a particular commodity, the (c) part can be written through growth in B’s import

from A, or in other words,

)0(1)0()()0()0()(

Mi

MiXitXimiXiXitXi …………(2)

Dividing the above term by Mi(t), we get

……………(3)

= [A’s share of product i in B's market at time t] - [A’s share of product i in B's market at time 0]

Demand for imports in a given market (country B) from two competing sources of supply

(country A and the rest of the world) is described by the following relationship-

…………...(4)

where Pi = the export price of commodity i to country B

WXi = the rest of the world’s export of commodity i to country B

WPi = the export price of commodity i from the rest of the world to country B

The expression (4) can be altered by multiplying Pi/WPi

……………(5)

The expression (5) implies a relative demand function of export from A in B’s market in terms of

B’s import from the rest of the world.

Mi(t)Xi(t)- Xi(0)

Mi(0)

Xi(t) Xi(0) -

Mi(t) Mi(0)

Xi Pi=

WXi WPif

Pi Xi Pi Pi Pi= =

WPi WXi WPi WPi WPif g



In other words, it may be stated that for any product i, country A's share in country B will remain

constant except as varies.

So,

Now we shall consider the residual term (c) again. It may be expressed as-

=

= ………………..(6)

The expression (6) provides the overall effect of competitiveness measured through changes in

relative prices and thus the term (c) may be called the ‘competitive effect’. Through it is a

residual term we have identified the residual term as a function of relative price. Change in

competitiveness here is defined through the change in relative prices. If a country fails to

maintain its market share in a given market, the competitiveness term will be negative. This

indicates that the relative price increase for that country is greater than its competitors.

The tables described in the paper with respect to CMS model considers that the sum of these

three effects is always 100 and competitiveness reflected through residual is always adjusted

accordingly. This is due to the fact the model by force brings down the market share to a

constant level and measures the net change. It is important to note availability of detailed trade

data on a continuous basis for selected countries is the major limitation and hence to bring

symmetry among the countries, CMS has considered the data period of 2005 and 2010.

Pi

WPi

Xi(t) Xi(0) Pi(t) Pi(0)

Mi(t) Mi(0) WPi(t) WPi(0)g g

{Xi(t)- Xi(0)-miXi(0)}

Xi(t) Xi(0)Mi(t) -

Mi(t) Mi(0)

Pi(t) Pi(0)Mi(t)

WPi(t) WPi(0)g g



Factors affecting the Indian Exports:

Exports are considered to be Fuel for India’s growth. Post 1991, reforms in India have gathered

momentum with liberalization of the foreign investment norms, reduction in trade tariffs and

removal of the licensing policy.

One channel refers to demand-side factors, which can lead to a sudden turnaround in growth,

while the other channel refers to supply-side factors. If supply-side factors are not favorable; this

may prevent a quick revival of exports and may also act as an obstacle to maintaining high

growth for a long period.

The demand for products is price-sensitive and firms offering a lower relative price would be

able to sell more than their competitors. Therefore, it makes sense to examine the importance of

India’s external competitiveness .To measure lower relative price, it is necessary to look at price

and exchange rate (rupee appreciation benefits exporters) as compared to those of its

competitors. Since imports by India’s major trading partners are based on derived demand (that

is, as a function of their GDP), Thus, the growth in India’s exports can be partly explained by the

growth in imports by its trading partners.



The positive impact on exports has come mainly from reforms in the domestic economy and in

the external sector. Other factors, such as growth in world trade since 2003 and the change in the

composition of trade towards value items, have complemented growth in India’s exports.

Agricultural trade status

Beyond several constraints in production and marketing of agricultural commodities,

performance of Indian agricultural and allied sector is noteworthy in global context. India is the

largest producer of milk, cashew nuts, coconuts, tea, ginger, turmeric and black pepper. It is the

second largest producer of wheat, rice, sugar, groundnut and inland fish and third largest

producer of tobacco. India accounts for 10 per cent of the world fruit production and it is the

largest producer of banana and sapota. Though India’s share in world agricultural export and

imports has been increasing over the years, it is still a marginal player as it accounted 1.22 per

cent of world imports as well as 1.70 per cent of world exports in 2010-11.

The share of agricultural trade in agricultural GDP has been increased since 1990–91. During

recent times, India is facing challenges on the import side when the international prices go very

low, imports become cheaper, causing fall in domestic prices of agricultural commodities.

Further, in India post-harvest and sanitary infrastructure is poor and massive investment in this

area will be essential to ensure a level-playing field in external trade in agriculture (NAAS2,

2001b). Global competition also forces domestic businesses to innovate and improve the quality

of their products (Weidenbaum3, 2003).

In this paper we focus on the factors behind the export growth of cereals and dairy products. The

figure shows the trends of cereals and dairy exports over the period



Source: World Integrated Trades Solution , UN Comtrade

Source: World Integrated Trades Solution, UN Comtrade

239191

266

419

179238 223

0

100

200

300

400

500

2005 2006 2007 2008 2009 2010 2011

Exports of Dairy Products(in mn US $)

TradeValue (in mn US $)

19151589

2771

3912

2987 2924

5371

0

1000

2000

3000

4000

5000

6000

2005 2006 2007 2008 2009 2010 2011

Exports of Cereals(in mn US $)

TradeValue (in mn US $)



Trade competitiveness of agricultural commodities

India has a competitive advantage in several commodities for agricultural exports because of

near self-sufficiency of inputs, relatively low labour costs and diverse agro-climatic conditions.

These factors have enabled export of several agricultural commodities over the years such as

marine products, cereals, cashew, tea, coffee, spices, oil meals, fruits and vegetables, castor and

tobacco. For certain commodities like Basmati Rice, India have a niche market access in spite of

competition.

Trade competitiveness of commodities varies across space and time. It is largely influenced by

cost, output prices, production structure and quality. Export of agricultural commodities from

developing countries like India is posed to a risk; in terms of gap in quality and food safety

standards at the international markets. To bridge those gaps and improve competitiveness of

agricultural commodities at world markets, India has made several significant reforms at

institutional level. These reforms enhanced the access to international markets with Sanitary and

Phyto-sanitary (SPS) measures and Trade Related Intellectual Property Rights (TRIPS). Setting-

up of Agricultural and Processed Food Products Export Development Authority (APEDA) are

the other formal institutional reforms to enhance both domestic and international marketing.

Although India enjoys advantages in exporting some commodities, in the post-GATT period

international trade has become highly competitive and the competitive advantage of some of

these commodities would be lost due to the infrastructural advantage prevalent in the competing

countries.

Analysis of Export dynamics through CMS modeling:

Cereals Indonesia Saudi Arabia Malaysia Iran

General increase in imports 50.04 100.13 6.22 .35

Commodity composition -17.45 .963 3.16 .060

Increased competitiveness 67.04 -1.12 90.6 99.64

Note: HS code (6 digit)- 100110-100890, No. of commodities-16 , time period 2005-2010



Interpretation:

As the model is segregated into 3 components, it is the first component which explains the

general rise in exports. It assumes that whether the exports of India have risen at the same pace

as the world imports to a particular country. Second effect explains the diversification in

commodity composition, like in cereals according to HS code system there are more than 16

products at 6 digit level but India exports to Iran is only 2 products whereas Iran imports the

other products under cereals HS code from other countries. This is a commodity composition

effect. The residual is explained by the competitiveness effect.

In the case of cereals it has been noticed that Indian exports is increasing mainly due to

competitive effect. However, in some countries the general rise in imports also account for a

major factor of rise in exports of India. Overall, India is very strong in terms of competitive

effect. India needs to give attention in product diversification in these sectors to sustain the

competitive advantage. Despite lot of competition, India has positive competitive effect which is

partly associated with rise in overall demand in other countries.

DAIRY PRODUCTS USA Saudi Arabia Germany

General increase in imports 1.71 57.85 -81.66

Commodity composition 31.77 -21.50 34.69

Increased competitiveness 66.50 63.64 146.96

Note: HS code (6 digit) - 040110-041000, No. of commodities-27, time period 2005-2010

In the case of dairy products it has been noticed that Indian exports is increasing mainly due to

competitive effect. However, in Saudi arabia the general rise in imports also account for a major

factor of rise in exports of India. India commodity composition effect is significant in case of

United States of America.

Ways to Promote India’s Exports:

Improvement of infrastructure directly reduces the cost of Indian exports. It is hardly

surprising to see why the country’s services exports (which are less dependent on



infrastructure) are outperforming its other exports (which are more dependent on

infrastructure).

The irregular power supply hurts manufacturing activities. So this is a crucial area to

focus upon.

There is a need to increase operational efficiency in road and railway projects. National

highway development programs are hampered by time overruns and budgetary

constraints.

There is a need for more aggressive negotiations and policy dialogue among developing

nations, especially in the agricultural and services sectors in India. India could strengthen

its involvement in meaningful Regional Trade Agreements (RTAs*) to facilitate better

market access for its exports.

On the domestic front, there is a necessity for proper infrastructure and eliminate the

problems associated with burdensome government regulations and procedural

bottlenecks.

Conclusion:

The current paper analysis India’s Export Opportunity in Selected countries Africa for some

selected Products viz. Cereals and dairy products. Four countries have been selected for Cereals

and three countries have been selected for dairy products subject to the availability of data. In

case of cereals products, we have identified countries like Indonesia, Malaysia, Saudi Arabia and

Iran etc. can be considered for good opportunity in near future. Indian exports show less product

diversification. So far the growth is mainly driven by increase competitiveness. Hence, Indian

exporters must think of expanding their product profiles to have a long run stability in the export

growth.

In case of Dairy Products, India has enjoyed a export growth despite financial crisis of 2008.

Countries such as USA, Saudi Arabia, and Germany are selected for analysis. India’s export

basket lacks focus and it is very concentrated. Sanitary and phyto sanitary (SPS) measures are

the major bottlenecks which government may start having discussion with other countries.The

study provides the analysis that the export growth in selected sectors is not because of

competitiveness only. The growth itself pulls up the import demand and India is a beneficiary of



that. However, considering competition from China and other developing economies, India must

take focused approach in improving competitiveness considering both macro (trade issues) and

micro (firm specific) aspect at the one hand and diversify product basket on the other as exports

are currently concentrated only to limited number goods and thereby increases long run.

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India’s Export Competitiveness of Selected Agricultural Products

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