Jan 30, 2018

Economic Survey 2018 - international trade insights

Economic survey was released yesterday. It is a good commentary on the current state of Indian economy and analyses most issues that matter from the policymaking point of view. It provides some interesting insights about international trade due to the chief economic advisor's deep knowledge in this area. I shall briefly enumerate a few points that I found interesting (among vast treasure trove of information)

Link between prosperity and trade

Economic survey states that there is a strong correlation between prosperity of a state and their participation in international and intra national (inter-state) trade as shown in figures. The only outlier appears to be Kerala (KE) which seems to be doing well and yet not participating in international or intra-national trade. This is partially explained due to the Kerala's economy earning through tourism and remittances which has not been probably factored into as trade. The survey doesn't attribute causation of one on another; it just points out this important fact as a correlation. 

image of Economy survey Exports and prosperity of states
Exports and prosperity of states

image of Economic survey inter state trade and prosperity of states
Interstate trade and prosperity 

Causal link between Export incentives and Export performance

This blog has wondered about casual linkages between export incentives and export performance for long time. This economic survey tries to answer this question. Talking about the package of Refund of State levies (ROSL) that was given as an export incentives to textile sector, the survey has this to say: 

A key question is: did the package succeed? To answer this, we use a well-recognized Difference-in-Difference (DD) approach, which allows us to isolate, albeit imperfectly, the impact of the package. Essentially, the approach asks whether the gap between clothing and comparator group export growth increased after the package was introduced. Three main findings emerge:
The package increased exports of readymade garments (RMG) made of man-made fibres (MMFs)
The package did not have a statistically positive impact on RMG made of other fibres (silk, cotton, etc.); and
The impact on MMF-RMGs increased gradually over time; by September 2017, the cumulative impact was about 16 percent over other comparator groups.
The figure below shows the growth in clothing exports compared to other labor-intensive and manufacturing goods, which did not receive ROSL. The positive impact on RMGs made of MMF after the package emerges starkly. 

image of Economic survey 2018 Effect of export incentive on exports
Effect of ROSL on export performance - a causal link
While it appears that RMG was making a turnaround at the time of notification, and given that the survey itself doubts the DD approach of isolating the effect, we need to look at the data more closely before jumping to conclusions. Nevertheless, survey has done well to open up this question to public debate. 

Egalitarian exporters?


The survey states that there are not many export superstars unlike other countries. The spoils of exports are spread relatively evenly with low Gini perhaps? In the words of the survey: 

Top 1 percent of Indian firms account for 38 percent of exports; in all other countries, they account for a substantially greater share (72, 68, 67, and 55 percent of exports in Brazil, Germany, Mexico, and USA respectively). And this is true for the top 5 percent, 10 percent, and so on. 

image of Economic survey 2018 Egalitarian exporters of India
Egalitarian exporters of India

The never ending trade deficit 

The figures below are self explanatory

image of Economic survey 2018 - exports, imports and trade deficit
Exports, imports and trade deficit in recent years

image of Economic survey 2018 - trade deficit in recent years
Trade deficit in recent years