Report No. 1352-IN FILE COPYIndia: Export Performance, Problems,Policies and Prospects(In Two Volumes)

Volume 1: OverviewMay 18, 1977

South Asia Programs

FOR OFFICIAL USE ONLY

Document of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may nototherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS(as of September 1976)

US$1.00 = Rupees (Rs 8.77)Rs 1.00 = US$0.114

Rs 1 million = US$114,000

All years to 1965/66 US$ = 4.7619 Rupees1966/67 = 7.0

1967/68-1970/71 = 7.51971/72 = 7.4441972/73 = 7.706

1973/74 = 7.7911974/75 = 7.9761975/76 = 8.653

1976/77 = 9.000

WEIGHTS AND MEASURES(Metric System)

1 kilogram (kg) = 2.20 pounds

1,000 kg = 1 metric ton = 0.98 long ton1 meter (m) = 1.09 yards = 3.28 feet

1 kilometer (km) = 0.62 mile

1 hectar (ha) 2 = 2.47 acres

1 square kilometer (km ) == 100 ha 3 = 0.38 square mile

1 cubic meter (m) = 35.39 cubic feet50.802 kilograms = 1 quintalUnless otherwise specified all measures are metric.

FISCAL YEAR

The Indian fiscal year runs from April 1 through March 31.

ABBREVIATIONS

DCIS Department of Commercial Intelligence and StatisticsDEA Department of Economic AffairsDGTD Directorate General for Technical DevelopmentDRC Domestic Resource Cost RatioERP Effective Rate of ProtectionFERA Foreign Exchange Regulation Act, 1973GOI Government of IndiaLDC Less Developed CountriesMRTP Monopolies and Restrictive Trade Practices Act, 1969NCAER National Council for Applied Economic ResearchREP Import Replenishment LicenseSTC State Trading Corporation of India, Limited

n.a. = not availablen.s. = not significant

- = nil

(blank) = not applicable

FOR OFFICIAL USE ONLY

PREFACE

i. This volume was prepared by M. Wolf with the assistance ofR. Grawe, W. Dellalfar and Ms. J. Voigt. It draws on the analyses inVolume II, which were prepared under the general direction of M. Wolf (IndiaDivision). Those contributing were M. Baird, W. Dellalfar, R. Grawe, and C.Taylor (India Division), and J. Harrison (New Delhi Office). Ms. S. Sengupta(New Delhi Office) and Ms. J. Voigt (India Division) acted as research assist-ants. Ms. K. J. Hong (India Division) advised on preparation of the leatherpaper. A. Hone and Industrial Development Services of New Delhi served asconsultants, with the latter providing most of the analysis of iron ore.

ii. The data underlying the reports were collected on Bank missionsin October/November, 1975 and January/February, 1976. Wherever possible,the reports have been updated to reflect actual figures for 1975/76 and1976/77, and policy changes made in 1976/77. However, it has not provedpossible to give uniformly adequate treatment to developments since January1976.

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

INDIA'S EXPORT PERFORMANCE, PROBLEMS, POLICIES AND PROSPECTS

VOLUME I

OVERVIEW

Page No.

PREFACE

TABLE OF CONTENTS

SUMMARY AND CONCLUSIONS .............................. i-iv

PART I - INTRODUCTION ..............................

Focus of the Report ............................. 1Assessing Export Performance ................ 2

PART II - PAST PERFORMANCE ......................... 5

Introduction .................................... 5The Overall Context ............................. 5Overall Export Trends ........................... 7The Pattern of Growth ........................... 10India's Exports in the World Economy .... ........ 18The Role of Exports in India's Economy .... ...... 24

PART III - DOMESTIC AND INTERNATIONAL CONSTRAINTS .. 28

Introduction ........ ............................ 28Domestic Constraints on India's Exports .... ..... 29

Constraints on Industrial Exports .... ......... 33Constraints on Agricultural and Mineral Exports 41

External Constraints on India's Exports .... ..... 42Conclusions ....... ............... ............... 44

PART IV - EXPORT POLICIES AND PROGRAMS .... ......... 45

Introduction ........ ............................ 45Export Incentives and Taxation .... .............. 45Some Special Export Programs ..... ............... 59Recent Export Policy Developments .... ........... 60Incentives and Performance -- an Evaluation ..... 66

Page No.

PART V - PROSPECTS AND ISSUES ...................... 72

Introduction .................................... 72Near Term Prospects ............. .. .............. 72Long Term Prospects ........... ........ . ........* 73

STATISTICAL ANNEX

TEXT TABLES

Page No.

2.1 Growth Rates of Export Volume ....................... 72.2 India's Share in World Trade ........................ 82.3 Value of Total Exports of Selected Developing

Economies .102.4 Value and Growth of Major Exports Ranked by

Their Importance in 1950/51 .112.5 Value and Growth of Major Exports Ranked by

Their Importance in 1974/75 .122.6 Exports Ranked By Their Contributions to the

1960/61 - 1974/75 Value Increment .132.7 Exports Ranked By Their Contributions to the

1960/61 - 1974/75 Value Increment in Constant1968/69 Prices .14

2.8 Estimated Trend Real Growth Rates of MajorExports 1965/66 - 1974/75 .16

2.9 Manufactured Exports of Developing Economies from1965 to 1973 .20

2.10 Manufactured Exports of Leading DevelopingCountries from 1971 through 1974 in SelectedCommodity Classes ................................. 21

2.11 Direction of Exports ................................ 232.12 Export Orientation and the Effects of Export

Growth on a Number of Exports ..... ................ 25

3.1 Purchasing Power Parity Effective Exchange Rates .... 313.2 Unit Values of Exports and Imports and Terms

of Trade .42

4.1 Cash Assistance Rates and Shares in Cash Assistance . 474.2 Distribution of Replenishment,Licenses .504.3 Distribution of Duty Drawbacks .524.4 Value of Export Taxes and Incentives in 1974/75 554.5 Export Duty Rates and Economic Efficiency .584.6 Profitability and Efficiency of Some Engineering

Exports .68

SUMMARY AND CONCLUSION

i. This report reviews the performance of India's exports and therelationship between export trends and the performance of the economy as awhole, with special reference to the manufacturing sector. The focus of thereport is fairly narrowly on the factors that have determined past exportperformance, and will determine future prospects. It argues that an increasedemphasis on exports is justified in the Indian context, in order to accelerateindustrial growth, remove import bottlenecks, and foster greater competition.The report analyzes the overall constraints that have operated on exports, theexport policy framework and its recent evolution. The links from the rest ofthe economy to exports and from exports to the rest of the economy are animportant part of the analysis.

ii. The most important single aim of export growth is an increasedcapacity to import, and this depends not only on the growth of export volume,but also on prices of exports and imports. For India, however, volume is thecentral issue, both because it is what India can affect most readily, and be-cause it is by far the most important single factor. Nevertheless, exogenousfactors such as prices and market access must be taken into account, especiallyfor those goods over whose markets India has some monopoly power. However,accelerated volume growth will usually be beneficial to India, and is themost useful way to assess performance and prospects.

iii. Although neither its GNP nor its industrial sector are particularlylarge by international standards, India's economy is exceptionally, and, untilvery recently, increasingly closed and self-sufficient. India's past exportperformance has been relatively poor, but it has also been improving, with therecent trend annual volume growth rate reaching 5 - 6% from 1.3% in the 1950s.India experienced a sustained fall in its share of world trade from 2.4% in1948 to 0.5% in 1974, but there was an improvement in 1975. The stagnation ofinitially dominant categories, above all tea, jute manufactures, and cottontextiles, which accounted for more than 50% of India's exports in 1950, was themajor determinant of poor overall performance until the early 1960's; however,the stagnation in these categories was not simply the result of adverse worldmarket conditions, since India's share in world trade of these categories hasfallen steadily. There have been a number of new and faster growing exports,which are responsible for recent improvements in the overall growth rate, butgrowth of the individual items has tended to be fragile and unsustained, andeven in these categories India has fallen far behind major competitors.

iv. India's exports face a number of serious constraints. India'sindustrial structure has been characterized by fragmentation, wide variationsin firm quality, and inadequate product development. In particular, whileexcess capacity has been a general phenomenon, and has, undoubtedly, been afactor in recent growth of engineering and chemical exports, it is unevenlydistributed, with the best firmp having the least excess capacity, and, there-fore, the least incentive to export. Restrictive import policies and the

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policy of protecting all domestic production hindered exports by raising theprice of inputs, limiting the range of available inputs, and creating a sig-nificant amount of poor quality production. Analysis of the overall exchangerate regime indicates that the incentive to produce exports has been consis-tently below that to produce import substitutes. Finally, there are overseasmarket restrictions on a few key goods, such as garments, and rather poormarkets for a few others.

v. Recent exchange rate changes, increases in export incentives, andreductions in export duties have improved the relative incentive to produceexports. In addition, recent liberalization of import and industrializationpolicies should also have a beneficial effect. By increasing the range ofreadily importable items especially among capital goods and industrial rawmaterials, by removing most quantitative restrictions on permissible itemsfor import, by relaxing industrial policy constraints on the expansion offirms, and by reducing bureaucratic hurdles in both import and industrializa-tion policies, these changes should lead to increased competition and reducedconstraints on the growth of efficient firms. However, the principle of pro-tection and the ambivalent attitude towards internal competition persist, andare likely to continue to exercise a powerful effect on the evolution ofIndian industry and hence exports.

vi. India has a complex system of export incentives and programs tomake exports both more attractive and more feasible. These include cashassistance, duty drawbacks, import replenishment licenses, and many otherdevices. The value of these incentives seems now to be about 7% of the grossvalue of exports, but the average incidence varies greatly from product toproduct. Cash assistance and import replenishment licenses, in particular,have historically gone largely to the engineering goods and chemicals indus-tries. Although there are some high potential items in both categories, thesegroups as a whole are certainly not the only ones of high potential, and somestudies indicate that the potential is, in fact, relatively low when comparedwith more labor-intensive activities like leather and leather goods, marineproducts, handicrafts, and garments. This same observation applies to agri-cultural products, especially those unconstrained by world demand, such asoilcakes.

vii. Since chemicals and engineering goods tend to be more import-intensive than most other categories, the high level of gross subsidizationraises the possibility of negative value added exports at world prices, andseveral such cases have been observed. The incentives' effect has also beendiminished by their essentially short-term nature, which has resulted from aninadequate recognition of the need to offset the penalization of exports rela-tive to import substitution implicit in the trade policy regime. Consequently,the value of incentives has been highly unpredictable. Equally important hasbeen the apparent lack of an underlying rationale for the allocation of in-centives. India has also imposed export taxes on a range of exports, predo-minantly primary products and traditional manufactures, such as jute textiles.It appears that the monopoly power that India could exploit was usually smallerthan implicit in the tax, and the result has been severely diminished compe-titiveness. These taxes are significant - in 1974/75 their value was half that

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of all the export incentives combined. However, the average incidence ofexport duties has been falling as has the percentage of dutiable exports.

viii. Recent policy changes have been evolutionary, and in the rightdirection. Industrial licensing restrictions have been eased; cash assist-ance has been extended to a number of new categories, the amounts have beenincreased and the period for which it is guaranteed has been extended; importreplenishment licenses for exporters are more generous and the principle ofprohibiting all import of goods produced domestically has been modified; theavailability of imported inputs has been increased with the result that thereplenishment license is now in excess of production requirements for manyproducers, which makes it more clearly an export incentive; procedures forarranging duty drawback have been accelerated, and so has payment of cashassistance and granting of replenishment licenses. All these together shouldmake exports more attractive and easier to arrange. In addition, the valueof incentives has been increasing in relation to the value of exports since1974/75.

ix. Recent exchange rate policy has had the effect of improving thecompetitive position of India's export products. Until September 1975 thiswas achieved through the currency depreciation caused by the link with thepound sterling, but subsequently the major factor was control of inflation.After breaking the connection to the pound, the rupee was revalued by 16%against sterling, and devalued by 0.2% against the US dollar, by 11% againstthe DMf, and 7% against the Japanese yen by February, 1977. The purchasingpower parity adjusted nominal exchange rate declined by 6% between the thirdquarter of 1975 and the second quarter of 1976, which followed a real deva-luation of 8% between May 1971 and the third quarter of 1975. However, overthe past year the real exchange rate has revalued again because of India'saccelerating inflation. This makes clear how important it is to ensure thatthe real exchange rate does not get out of line, especially given the depen-dence of export profitability on discretionary, uncertain, and highly visibleincentives, and the small inflationary effect of general depreciation in theIndian economy.

x. The incentives are of great importance for Indian exports, and with-out them many industrial exports would be completely unprofitable. With in-centives, export profitability for many categories of engineering goods andchemicals was close to that on domestic sales, though it varied more betweenindustries and was much more uncertain. Export profitability has also beenimproving. The incentives combined with the prevalence of excess capacityhave been the major explanation for the rapid rise in exports of engineeringgoods and chemicals. However, while incentives have been successful in en-

couraging greater exports, India's performance has lagged behind that of manycompetitors and in 1976 Korea, by comparison, experienced a US$2.8 billionrise in the value of exports. This relatively poor performance is no doubt inpart a consequence of reliance on somewhat arbitrary and differentiated in-centives not related to any overall view of trade and industrializationstrategy.

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xi. The current incentive policy and overall environment should lead toimproved growth, and our current near term projection is about 7-10% p.a.Improved performance can be expected from such labor-intensive exports asgarments, leather products, and handicrafts. In the case of engineering goodsthe question is whether the current policy environment, more attractive thoughit is, will induce firms to invest in export oriented capacity. Without sucha development, export growth will slow down as excess capacity is fully usedup. However, incentives are still quite short term and such investment is,consequently, very risky.

xii. Long term prospects depend in large part on policy choices, whichwill have affect well beyond the sphere of exports alone. India now has theopportunity to consider the strategic issues of trade policy in an environ-ment free from immediate foreign exchange shortages. If India continues tomove in the direction of the past several years a new virtuous circle of in-creased exports and improved economic performance should ensue. There seemto be two broad strategic options: one is to continue to import only"essentials", however defined, and the second is to pursue comparative advant-age in a more thorough going way. The latter will have very major merits forIndia. However, both presuppose promoting exports in the most efficient pos-sible way, the former up to some target level, and the latter up to the pointat which marginal transformation costs are equated throughout the economy.Export targets have a role to play and even achievement of current long termexport targets of 8-10% volume growth will probably require further policyevolution. In addition, incentives should be stable and fairly uniform, andexporters should be permitted access to imports whenever necessary for com-petitiveness.

I. INTRODUCTION

Focus of the Report

1.01 The focus of the report is fairly narrowly on exports and, moreprecisely, on the factors that have determined past performance, and willinfluence future prospects. This limited scope is largely the result ofthe origin of the study in an evaluation of the prospects for achieving theofficial annual export volume growth target of 8-10%. However, the narrowfocus is also determined by the immense complexity of the wider issues oftrade and industrialization policy and by the view that exports are of greatdirect importance simply through their effect on import capacity. Never-theless, the links from the rest of the economy to exports and from improvedexport performance and policy to the rest of the economy are very strong.These issues will be taken up below in the discussion of the problems affect-ing exports and of export prospects and broad strategic options. The reportdoes not enter into the details of policy choice.

1.02 In the Indian context a steady and accelerated expansion of ex-port earnings can be presumed to have strongly positive effects. WlhileIndia's current foreign exchange position is quite comfortable, the overallbalance of payments surplus is little more than 1% of GNP and, which caneasily be absorbed in an expanding economy. Thus, India can readily returnto the more usual situation of bottlenecks and shortages that are caused byforeign exchange constraints, which, in turn, will be relieved by improvedexport performance. In a more comfortable foreign exchange situation furtherliberalization of the import control regime is feasible and should lead togreater competition for protected domestic manufacturers and more choice forthose previously compelled to use domestically produced goods. Indeed,greater concentration on exports should itself have a salutary effect on qua-lity through the effects of competition. In addition, for some categories ofgoods accelerated growth of exports, should also accelerate the overall growthof the industries. In the longer term an increased emphasis on exports im-plies greater specialization in those products which use India's abundantfactors more intensively, and a saving of scarce factors, especially capital.Since the latter is the most rapidly growing factor of production, a capital-saving strategy can accelerate the growth of GNP, and should certainly helpto reverse recent trends towards declining capital productivity. Finally, ahigher share of exports in GNP may produce a somewhat greater degree of eco-nomic stability, especially for the industrial sector, which is now highlysusceptible to fluctuations in agricultural production. For all these reasonsit is presumed here that an expanded export drive will have beneficial effectson India, even if it is not associated at all times with scrupulous attention

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to economic efficiency. However, the benefits of somewhat greater attentionto efficiency than at present are considerable, and this issue will be takenup again in the final chapter. 1/ 2/.

1.03 Given the focus on export prospects, this report is concernedlargely with the key problems, and with Government policies and programs.For this purpose it draws heavily on the detailed analysis of seventeenmajor export commodities and categories, which is presented in Volume II ofthis report, and covers their past performance, major problems, policies andprospects. It also draws on previous Bank Group work on the engineeringindustries. 3/

1.04 The report also includes an analysis of past performance whoseaim is to put the current situation in context, and to bring out the successof past efforts. 4/ Correspondingly, the discussion is not comprehensive,but deals largely with performance in areas subject to India's control.

Assessing Export Performance

1.05 The primary aim of expanding exports is to increase the real capa-city to import, which is dependent on some factors within India's controland on others outside it. Although account has been taken here of externalfactors like market access and overseas demand, in order to assess prospectsfor the future, the emphasis is on what India can control, which is both themain determinant of import capacity and the more relevant subject fromIndia's point of view.

1.06 The real capacity to import on the trade side (i.e. excludingcapital flows, transfers, and factor service payments) is determined byexport volume, export prices, and import prices. Of these India has

1/ On efficiency aspects of the trade policy regime, see IBRD, EconomicSituation and Prospects of India, Report No. 1073-IN, March 29, 1976;J.N. Bhagwati and P. Desai, India-Planning for Industrialization, Ox-ford University Press, 1970; and J.N. Bhagwati and T.N. Srinivasan,Foreign Trade Regimes and Economic Development - India, ColumbiaUniversity Press, 1975.

2/ It should be noted that foreign exchange losing exports have occurred.(See IBRD, Op. Cit., p. 58, footnote 1.) However, this possibilitydoes not offset the general presumption in favor of exports.

3/ See footnotes 2 through 6 on page 35, and 2 and 3 on page 36.

4/ There exist many studies of past performance. See, for example,Manmohan Singh, India's Export Trends, Oxford University Press, 1964;R. Banerji, Export of Manufactures from India, Institut fur Weltwirtschaftan der Universitat Kiel, 1975; Deepak Nayyar, "India's Export Perform-ance in the 1970s," Economic and Political Weekly, May 1976; IBRD,India's Export Prospects, Volumes I and II, Report No. SA-26, May 1971.

a fair amount of control over the first, and relatively little over the lasttwo. Thus effort is largely to be measured in terms of volume growth.

1.07 Export volume is not only what India can most easily control. Itis also the most important determinant of import capacity in the long term -at least on the trade side. A 1% per annum rate of growth of the volume ofexports has roughly the same effect on the real capacity to import out ofexport earnings as an equivalent rate of improvement in the terms of trade.However, while 8% per annum volume growth may be achieved, an equivalentsustained rate of improvement in the terms of trade is hardly conceivable,except for a special case like that of the oil exporting countries.

1.08 It should be noted that export volume is not an unambiguous concept.One specific problem is that effort may take the form of increasing the volumeof ail exports roughly equally or of emphasizing those exports whose relativeprices are rising, or are expected to. rise, most rapidly. A base weightedvolume index of the kind used by GOI, will not indicate the latter kind ofeffort. However, this particular problem can be resolved rather readilysince the ratio of an end-weighted to a base-weighted volume index showsexactly the proportion by which exports rise more rapidly because of sucha process of quantity adjustment to price opportunity. 1/

1.09 Index numbers of volume can, therefore, be used as indicators ofimportant aspects of export effort. Nevertheless there are dimensions of

1/ To show this, using the well known identity, let:

(1) Vi = PkiLpiki

where V = value index in constant dollarsPq = Paasche quantity index (end weighted)Lp = Laspeyre price index (base weighted)k = constant dollar deflatori = period.

If all exports grow in equal proportion, Pqi = Lqiwhere Lq = Laspeyre quantity index.

Then)A _LqiLpi

(2) Vi = ki

Awhere V = normalized value in constant dollars. Theratio V/V shows the extent to which the actual valueincrease in constant dollars exceeds that which wouldhave occurred if the volume of all exports had grownequally.

(3) Vi/Vi = Pqi/Lqi

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response to opportunity that volume indices do not capture. For example,in certain cases India has a degree of control over the prices at which itsells. The most obvious cases are such exports as jute manufactures, silver,tea, cashews, and pepper. In theory, the correct response to such opportunityis to equate marginal social cost to marginal revenue. In practice, this isalmost impossible to do, and has proved to be beyond the scope of this studyto evaluate. Nevertheless, this is an important qualification to an assessmentof export performance based on volume.

1.10 It must also be remembered that indicators of gross exports, eitherof volume or value, will not necessarily reflect changes in net foreign ex-change earnings. This is a real problem, since the Government is concernedabout such changes, and has as one of its main aims increasing value-addedin exports. If the change is entirely on the side of exports - for example,further processing of an already exported good - no problem should be created.Such a change will be reflected in the growth both of export value and volumeindices, provided the latter are sufficiently disaggregated. However, changesthat involve imports will not be similarly reflected. For example, the sub-stitution of domestically produced for imported inputs into exports is, ofcourse, not indicated by gross exports; neither is increased absorption ofthose imported inputs, or domestically produced import substitutes, whichare required for export expansion. Thus, changes in the net foreign exchangeposition can easily be exaggerated or understated by changes in the gross ex-port figures. This is inevitable, since the figures do not show both sidesof the trade picture. Failing a comprehensive input-output analysis, thebest way to resolve the problem is to look out for cases where the issue isvery obvious, such as cashew kernels, polished diamonds, or electronic goodsfrom the Santa Cruz Electronics Export Processing Zone. This approach willtake care of the most obvious examples of associated increases in directimports. It should be noted, moreover, that, while it will be impossibleto assess the impact of exports that use those domestically produced importsubstitutes, which must in turn be replaced by further imports, such caseswill probably be few in the Indian context of foreign exchange licensing andexcess capacity.

1.11 Thus, while export volume indices are the best and simplest way toassess effort, they are very far from perfect. Furthermore, it is possiblethat volume growth will not provide a satisfactory indication of the capacityto import, because of exogenous factors, such as shifts in terms of trade.Thus, volume growth of about 15% between 1972/73 and 1975/76 was associatedwith a decline in the real capacity to import of about 16%. Consequently,the assessment of prospects, and of the effort that is needed, requires pro-jection of export and import prices. However, current Bank projections arethat the terms of trade are not likely to deteriorate further. Thus, growthin export volume should be close to growth in real import capacity, and theemphasis below on export volume is, consequently, justified.

II. PAST PERFORMANCE

Introduction

2.01 This section briefly reviews India's past performance and placesit in context. It first provides information on relevant aspects of over-all development strategy and performance. It then examines overall growthtrends in themselves and in relation to world trade. The pattern of exportgrowth is reviewed, paying special attention to the growth of major exportcategories and their respective contributions to overall growth. The per-formance of individual categories in relation to world trade is then analyzed,along with a brief look at the direction of trade. Finally, there is a briefdiscussion of the role of exports in India's economy.

2.02 The major conclusions of the review are that India's is an excep-tionally closed economy; that although India's export performance has gener-ally been poor, it has also been improving, with the recent trend volumegrowth rate reaching 5-6%. India has experienced a sustained fall in its shareof world trade, at least until the last two years. The stagnation of initiallydominant categories, above all tea, jute, and cotton textiles, was the majordeterminant of poor overall performance until the early 1960's; however, thestagnation in these categories was not simply the result of adverse world mar-ket conditions, since India's share in world trade of tea, jute, and cottontextiles has fallen steadily and this is especially true of the latter. Therehave been a number of new and faster growing exports, which are responsiblefor recent improvements in the overall growth rate, but even in newer catego-ries India has not only fallen far behind major competitors, but growth hascontinued to be relatively poor, except when the base has been markedly lowerthan that of these competitors. Finally, although exports play only a smallpart in the overall economy, this is not the case for many export activities.There are a number of industries highly dependent on exports, both for sus-taining their level of activity and for generating growth.

The Overall Context

2.03 India is the world's second most populous country, but has theworld's thirteenth largest GNP. 1/ Its industrial sector in 1973 ranked six-teenth in size among market economy countries, after the Netherlands, Spain,

1/ According to the World Bank Atlas of 1976. The twelve largest in termsof GNP were: USA, USSR, Japan, Germany, France, The People's Republic ofChina, The United Kingdom, Italy, Canada, Brazil, Poland and Spain, in

that order.

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Argentina, Australia, Belgium, Brazil, Mexico and Sweden, (apart from theobvious list of larger countries). Including the centrally planned economies,India's industrial rank would be about twentieth. W4hile India's overalleconomic performance has been better since Independence than before, it hasbeen somewhat worse than that of most other countries, especially in the lastdecade. India's GDP growth between 1965 and 1973 at 3.5% per annum put itin the 89th rank out of 118 market economy countries. Similarly, its indus-trial growth has also lagged: in 1955 India's industrial sector was the eighthlargest among market economy countries and tenth in the world.

2.04 India's basic economic strategy and its consequences have beenextensively analyzed. 1/ It has been characterized by across-the-boardimport substitution as an overriding aim and by emphasis on the development of(largely public sector) "heavy industry." India's policies have been noteworthyfor extensive reliance on quantitative restrictions on trade (QRs), and on de-tailed, industrial licensing. Thus, India's has been an administered and highl]bureaucratic economic system. The Government has also tended to be pessimisticabout export possibilities, especially for "traditional" exports. The viewthat India faces highly inelastic demand for most products, has been used tojustify policies of export taxation.

2.05 As a result of the strong bias towards import substitution, Indiahas a relatively closed economy and an increasingly unspecialized indus-trial sector. As an indication of the latter, a marked shift in the compo-sition of industrial production has occurred, and consumer, intermediate, andcapital goods now contribute about one third each of value added, compared toan overwhelming preponderance of consumer goods production twenty five yearsago. The ratio of imports to GNP, at 5.5% in 1973 was lower than that for anyother country in that year except the USSR, (whose ratio was only a littleless, at 4.6%) 2/. The share of manufactured imports in the total utilizationof manufactured goods was 9.5% in 1973, which was lower than for all LDCs otherthan Argentina, and also lower than for most industrialized countries. Thus,for the size of its economy and its industrial sector, India is strikinglyself-sufficient.

2.06 Not only is India's an exceptionally closed economy, but it hasbecome increasingly so until very recently. The share of manufactured exportsin manufactured output fell from 9.7% in 1960 to 8.6% in 1973 - a virtuallyunique experience among LDCs. The share of manufactured imports in utilization

1/ See, for example, J.N. Bhagwati and P. Desai, Op. Cit., and J. Mellor,The New Economics of Growth, Cornell University Press, 1976.

2/ See World Bank, World Tables, Table 3. For comparison with other largecountries, the ratio for the USA was 7.0%, and for Brazil was 11.0%.Figures for the People's Republic of China are not available.

of manufactured goods fell from 19.3% to 9.5%. Finally, the ratio of importsto GNP fell from 7.5% to 4.5%, while the level of manufactured imports remainedvirtually constant at about $1.6 billion until recently. 1/

2.07 To sum up: India's development strategy and performance have sig-nificant implications for any analysis of trade related questions. Althoughneither its GNP nor its industrial sector are particularly large by inter-national standards, the economy is exceptionally closed and self-sufficient.In addition, these tendencies have been steadily reinforced over the post-Independence period. This situation has profound implications for industrialcosts and consequently for international competitiveness and export perform-ance.

Overall Export Trends

2.08 The growth of India's exports overall has been slow but improving.Between 1950/51 and 1968/69 the dollar value of exports grew at a compoundrate of only 2% per annum. Thereafter the rate of value growth has risenappreciably. Between 1968/69 and 1971/72 average compound growth in valueterms was 6% per annum, in 1972/73 it was 18.3%, in 1973/74 it was 24.6%, in1974/75 it was 28.9%, in 1975/76 it was 9%, and in 1976/77 it was about 18%.However, the rapid rates of growth in current terms between 1971/72 and1974/75 are misleading, since the bulk of the increase reflects inflation.

2.09 Trends in volume growth are indicated below. The clearest conclusionis that there has been a steady acceleration, with growth rising from a 1.3%annual rate between 1950/51 and 1960/61 to 6.5% between 1969/70 and 1975/76:

Table 2.1

Growth Rates of Export Volume(% per annum)

1950/51-1974/75 1950/51-1960/61 1960/61-1970/71 1965/66-1975/76 1969/70-1975/76

2.8 1.3 3.5 5.6 6.5

Note: Growth rates are log linear trends.

Source: Statistical Annex Table 5.

1/ See B. Balassa, Export Incentives and Export Performance in DevelopingCountries: A Comparative Analysis, January 18, 1977, Mimeo, Table 2.

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2.10 For recent years, the Bank has prepared its own index, which may becompared with that of the government. 1/ Between 1969/70 and 1974/75 the trendvolume growth using the Bank's base-weighted index was 5.1%, while with theend-weighted index it was 5.2%. The very small difference between the twoindicates that the effect of faster growth of items whose prices have beenrising relatively rapidly, is not marked.

2.11 India's share in world trade slipped continuously until 1975, eventhough the rate of volume growth rose.

Table 2.2

India's Share in World Trade(US$ millions and %)

1948 1958 1967 1968 1970 1972 1973 1974 1975 /a

India'sExports 1,387 1,222 1,613 1,761 2,026 2,415 2,946 3,906 4,371

WorldExports 57,500 108,600 215,000 239,800 314,000 417,600 578,300 848,700 864,100

(India'sExports/WorldExports %) 2.41 1.12 0.75 0.73 0.64 0.57 0.50 0.46 0.50

/a 1975 figures are taken from the UN, Monthly Bulletin of Statistics,March 1977.

Source: UN Yearbook of International Trade Statistics, 1975Special Table A

1/ The reason for preparing the index was that, until 1975, the Governmentrelied on a volume index with a 1958/59 base, which was consequently outof date. See Statistical Annex Tables 6 and 7.

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2.12 The decline in India's share of world exports has been an across-the-board phenomenon. Including raw cotton and unmanufactured tobacco inagricultural commodities the value of India's agricultural exports rose fromUS$364 million in 1950/51 to US$470 million in 1960/61 and US$973 million in1973/74. Thus, agricultural commodities accounted for 31% of India's 1950/51-1973/74 value growth. In the period 1960 to 1973 exports of food and otheragricultural products from all market economies rose from US$37 billion toUS$106 billion. 1/ Thus, India's agricultural exports grew by 107% between1960 and 1973, while world exports grew by 186%. The value of India's ex-ports of manufactures went from US$591 million in 1950/51 to US$572 million in1960/61 and US$1,476 million in 1973/74 (including jute and cotton textiles).Excluding these stagnant items, they rose from US$104 million in 1950/51 toUS$167 million in 1960/61 and US$936 million in 1973/74. Exports of manu-factures accounted for 46% of the 1950/51-1973/74 value increment. Worldexports of manufactures (excluding centrally planned economies) rose fromUS$54 billion in 1960 to US$317 billion in 1973, and LDC exports of manufac-tures rose from US$4.4 billion to US$37.5 billion. Thus, India's manufacturingexports grew by 158% between 1960/61 and 1973/74 and by 460%, excluding juteand cotton textiles, while world exports rose by 487% and LDC exports grew by752%, over the same period.

2.13 Before completing this discussion of India's relative export per-formance, it is worth noting that there are now indications of a significantimprovement. It will be seen from Table 2.3 that, while India's overallvalue growth between 1972 and 1973 was worst of these nine countries, between1973 and 1974 it was fourth and between 1974 and 1975 it was second. Itsrelative performance was particularly good in the year of global recession,1975, which was also a year of stagnant world trade.

1/ IBRD, Comparative Economic Data Tables, (World Tables, Part III)September 25, 1975.

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Table 2.3

Value of Total Exports of Selected Developing Economies(US$ million)

Growth Growth Growth1972-73 1973-74 1974-75

1972 _ 1973 % 1974 % 1975

Argentina 1,941 68.3 3,266 20.4 3,931 -24.7 2,961Brazil 3,991 55.3 6,199 28.3 7,951 9.0 8,670Hong Kong 3,448 47.0 5,070 17.5 5,959 1.0 6,019India 2,452 19.0 2,917 34.6 3,926 9.5 4,299Korea,

Rep. of 1,624 98.6 3,225 38.3 4,460 13.9 5,081Malaysia 1,717 74.0 2,987 41.8 4,235 -9.7 3,826Mexico 1,861 41.4 2,631 34.5 3,540 16.6 2,952Singapore 2,192 67.3 3,667 58.5 5,811 -7.5 5,376Yugoslavia 2,237 27.5 2,853 33.5 3,805 7.0 4,072

Source: IMF, International Financial Statistics.

The Pattern of Growth

Long Term Stagnation of Major Items

2.14 A major factor in explaining India's poor past performance has beenthe composition of its exports. In 1950/51, 52% of India's exports were inthree categories, namely cottoni textiles (mainly piecegoods) (19.7%), jutemanufactures (18.9%), and tea (13.4%). The first ten categories in 1950/51,which then accounted for 72.7% of India's exports, accounted for only 31.7%by 1974/75. Over this long period of twenty-three years, of those ten onlyleather and tobacco showed fairly high value growth. Tea, jute manufactures,and cotton textiles (excluding garments) were all stagnant. Clearly a situa-tion in which items accounting for 72.7% of exports in 1950/51 grew in valueby only 44% over twenty-three years is one likely to show overall stagnation,in the absence of extremely high growth in other categories.

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TABLE 2.4

Value and Growth of Major Exports Ranked by Their Importance in 1950/51(US$ millions)

% Increase1950/51 (%) 1974/75 (%) 1950/51-1974/75

Cotton Textile Fabrics 247.9 (19.7) 200.3 (4.8) -19.2Jute manufactures 239.0 (18.9) 370.7 (8.9) 55.1Tea 168.9 (13.4) 285.9 (6.9) 69.3Leather & Manufactures 54.5 ( 4.3) 189.9 (4.5) 248.4Spices 53.4 ( 4.2) 76.9 (1.9) 44.0Vegetable Oils 53.0 ( 4.2) 42.2 (1.0) -20.4Unmanufactured Tobacco 29.6 ( 2.3) 100.8 (2.4) 240.5Essential Oils 26.6 ( 2.1) 11.7 (0.3) -56.0Coir Manufactures 22.8 ( 1.8) 22.7 (0.5) -0.4Mica 21.0 ( 1.7) 22.8 (0.5) 8.6Others 344.6 (27.3) 2,849.7 (68.3) 727.0

TOTAL 1,261.3 (100.0) 4,173.6 (100.0) 230.9

Source: IBRD Report No. 1073-IN, Op. Cit., Appendix Table 3.1; andStatistical Annex, Table 1.

Growth of New Items Since 1960/61 1/

2.15 During the decade 1950/51 to 1960/61 India's exports changed littleboth in aggregate and composition. In the latter year, the three initiallydominant categories still accounted for 48% of India's exports, and the tencategories enumerated in Table 2.4 accounted for 61.5%. In subsequent years,however, there have been some notable changes. By 1974/75 only four of theinitially dominant ten categories were still in the "top ten." In the mean-time, there had been quite rapid growth of a number of new groups, including,in particular, engineering goods, iron ore, sugar, chemicals, garments, handi-crafts, and silver. On the other hand, the overall sluggishness of India'sexports is indicated by the fact that although cotton textiles (includinggarments) grew by only 3.1% per annum in volume between 1960/61 and 1974/75,tea grew by 1.1%, and jute manufactures by -1.0%, these three remained amongthe five largest export categories in 1974/75.

1/ The analyses in this and subsequent sections rest on the individualcommodity papers of Volume II. Because of differences in classification,the series used are slightly different from those in IBRD economic reportsand Government summary statistics. The seventeen enumerated categoriesaccounted for 61% of 1950/51 exports, 75% of 1960/61 exports, 83% of1970/71 exports and 85% of 1975/76 exports. The series are shown in theStatistical Annex Tables 1 (current prices) and 2 (constant prices).

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TABLE 2.5

Value and Growth of Major Exports Ranked by Their Importance in 1974/75(US$ millions)

% Increase1950/51 % 1974/75 % 1950/51-1974/75

Engineering Goods 1.2 (0.1) 442.3 (10.6) 36,758.3

Sugar 0.8 (0.1) 424.5 (10.2) 52,962.5Cotton Textilesand Garments 252.1 (20.0) 420.4 (10.1) 66.8

Jute Manufactures 239.0 (18.9) 370.7 (8.9) 55.1

Tea 168.9 (13.4) 285.9 (6.9) 69.3Handicrafts n.s. /a (n.s.) 233.9 (5.6) n.s.Iron Ore 0.5 (n.s.) 201.1 (4.8) 40,120.0Leather andLeather Manufactures 54.5 (4.3) 189.9 (4.6) 248.4

Chemicals, Pharma-ceuticals andCosmetics n.s. /a (II.s.) 163.5 (3.9) n.s.

Cashew Kernels 18.0 (1.4) 148.1 (3.5) 722.8

Others 526.3 (41.7) 1,293.3 (31.0) 145.7

Total 1,261.3 (100.0) 4,173.6 (100.0) 230.9

/a In both these cases exports were insignificantly small in 1950/51.

Source: Statistical Annex, Table 1.

2.16 The performance of seventeen major export categories is shown in

current prices in Table 2.6 and in constant prices in Table 2.7. 1/ Certain

conclusions emerge, namely: 2/ (1) in terms of contribution to the currentvalue increment, the ten largest were sugar, engineering goods, cotton textiles

and garments (overwhelmingly the latter), handicrafts, iron ore, chemicals,

leather and leather manufactures, cashew kernels, silver and oilcakes, which

1/ It should be noted that the deflation of the figures for the seventeen

categories into constant prices - an uncertain business, at best - gives

slightly different results from those of the overall volume indicesdiscussed above.

2/ The reason for the choice of 1960/61, 1968/69, and 1974/75 is that half

of the increase in exports in constant prices between 1960/61 and 1974/75occurred between 1960/61 and 1968/69. 1968/69 is, consequently, an

appropriate mid-point.

Exports Ranked by their Contributions Co the 1960/61 - 197417:,

Value Increment(US$ million)

1960/61- Annual Average 1960/61- Annual Average 1968/69- Annual Average

1974/75 7, of Growth Rate 1968/69 % of Growth Rate 1974/75 % of Growth Rate

Increment Increment ( Increment Increment ( Increment Increment (

Sugar 419.3 ( 15.0) (37.0) 8.4 ( 2.0) (12.8) 410.9 ( 17.4) (77.4)

Engineer.ng Goods 404.5 ( 14.5) (19.2) 52.0 ( 12.3) (11.4) 352.5 ( 14.9) (30.4)

Cotton Textiles and Garmentsll 290.3 ( 10.4) ( 8.7) 11.9 ( 2.8) ( 1.1) 278.4 ( 11.8) (19.8)

liandicrafts-21 238.8 ( 8.6) n.a. 100.3 ( 23.7) (n.a.) 138.5 C 5.9) (15.6)

Iron Ore 165.3 ( 5.9) (13.1) 82.0 ( 19.3) (16.1) 83.3 ( 3,5) ( 9.3)

Chemicals 148.5 ( 5.3) (18.6) 14.1 ( 3.3) ( 8.6) 134.4 ( 5.7) (33.3)

Leather and Leather Manufactures 113.7 ( 4.1) ( 6.8) 33.2 ( 7.8) ( 4.7) 80.5 ( 3.4) ( 9.7)

Cashew Kernels 108.4 ( 3.9) ( 9.9) 41.5 ( 9.8) ( 9.4) 66.9 ( 2.8) (10.5)

Silver 100.2 ( 3.6) n.a. 4.4 ( 1.0) (n.a.) 95.8 ( 4,1) (68.4)

Oilcakes 90.0 ( 3.2) (10.4) 36.0 ( 8 5) (10.4) 54.0 ( 2.3) (10.5)

Jute Manufactures 86.9 ( 3.1) ( 1.9) 6.8 ( 1.6) ( 0.3) 80.1 ( 3.4) ( 4.1)

Iron and Steel 83.6 ( 3.0) ( 9.6) 91.1 ( 21.S) (18.3) -7.5 ( -0.3) (-1.0)

Marine Products 76.1 ( 2.7) (16.8) 23.2 ( 5.5) (16.5) 52.9 ( 2.2) (17.3)

Tobacco 70.1 ( 2.5) ( 8.9) 13.5 ( 3.2) ( 4.7) 56.6 ( 2.4) (14.7)

Coffee 49.2 ( 1.8) (10.9) 8.7 ( 2.1) ( 5.8) 40.5 ( 1.7) (18.0)

Spices 42.0 ( 1.5) ( 5.8) 1.5 (- 0.4) (-0.5) 43.5 C 1.8) (14.9)

Tea 26.3 ( 0.9) ( 0.7) -50.9 (-12.0) (-2.7) 77.2 ( 3.3) ( 5.4)

Others 273.9 ( 9.8) ( 4.2) 50.8 (-12.0) (-1.9) 324.7 L1 3

.7) (13.0)

TOTAL 2,787.1 (100.0) ( 8.2) 424.0 (100.0) ( 3.4) 2,363.1 (100.0) (14.9)

I/ Assumes garments were zero in 1960/61; comparable figure is not available.

2/ Assumes category was zero in 1960/61; comparable figure is not available

Source: Statistical Annex Table 1.

August 1976.

Exports Ranked by their Contributions to the 1960/61 - 1974/75Value Increment in Constant 1968/69 Prices

(US* millions)

1960/61- Annual Average 1960/61- Annual Average 1968/69-1974/75 % of Growth Rate 1968/69 7. of Growth Rate 1974/75 % of Annual AverageIncrement IncremenIncrement ( n t ncrement Increment Increment Growth Rate

Engineering Goods 173.9 ( 19.1) (12.7) 49.6 ( 10.8) (10.6) 124.3 (27.6) (15.6)

Iron Ore 144.0 ( 15.8) (15.1) 94.5 ( 20.6) (22.5) 49.5 (11.0) ( 6.0)

Handicrafts- 128.3 ( 14.1) n.a. 100.3 ( 21.8) (n.a.) 28.0 ( 6.2) ( 4.2)

Sugar 86.9 ( 9.5) (19.7) 6.0 ( 1.3) ( 7.5) 80.9 (17.9) (38.1)

Chemicals 72.0 ( 7.9) (13.0) 13.2 ( 2.9) ( 7.8) 58.8 (13.0) (20.2)

Cotton Textiles and Garments2/ 71.5 ( 7.9) ( 3.1) 9.3 ( 2.0) ( 0.9) 62.2 (13.8) ( 6.2)

Silver 53.2 ( 5.8) n.a. 4.4 ( 1.0) n.a. 48.8 (10.8) (51.5)

Leather and Leather Manufactures 46.2 ( 5.1) ( 3.8) 41.5 ( 9.0) ( 6.2) 4.7 ( 1.0) ( 0.7)

Tea 34.2 ( 3.8) ( 1.1) 2.0 ( 0.4) ( 0.1) 32.2 ( 7.1) ( 2.4) >Cashew Kernels 32.9 ( 3.6) ( 3.7) 31.0 ( 6.8) ( 6.2) 1.9 ( 0.4) ( 0.4)Oilcakes 31.7 ( 3.5) ( 4.8) 31.7 ( 6.9) ( 8.5) 0.0 ( 0.0) C 0.0)Marine Products 30.8 ( 3.4) ( 6.0) 8.3 ( 1.8) ( 3.7) 22.5 ( 5.0) ( 9.1)Coffee 24.5 ( 2.7) ( 6.7) 7.2 ( 1.6) ( 4.6) 17.3 ( 3.8) ( 9.5)Tobacco 24.5 ( 2.7) ( 3.6) 5.8 ( 1.3) ( 1.8) 18.7 ( 4.1) ( 6.0)Spices 3.0 0.3) ( 0.6) 1.4 ( 0.3) ( 0.5) 1.6 ( 0.4) ( 0.8)Iron and Steel - 7.0 ( -0.8) (-1.3) 80.7 ( 17.6) (14.2) -87.7 (-19.4) (-18.7)Jute Manufactures -36.8 ( -4.0) (-1.0) 14.1 ( 3.1) ( 0.6) -50.9 (-11.3) (-3.2)Others - 3.8 (0,4) (-0.1) -41.9 L-9.1 ) (-1.6) 38.1 ( 8.4) ( 2.0)

3/TOTAL 910.0 (100.0) ( 3.8) 459.1 (100.0) ( 3 7) 450.9 (100.0) 3.8

l/ Assumes category was zero in 1960/61: comparable figure is not available.

2/ Assumes garments were zero in 1960/61; comparable figure is not available.

3/ This growth rate is about 1% p.a. below that derived from the GOT volume index. The reason for this discrepancy is unclear.Source: Statistical Annex, Table 2.

August 1976.

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together accounted for 74.5% of the total growth. In terms of contributionto the constant value increment the ten largest categories were almost thesame, with the substitution of tea for oilcakes, although the order was some-what different. (2) Both in constant and current prices India's export growthhas been quite evenly distributed. Between 1960/61 and 1974/75 no categoryaccounted for more than 15% of the increment in current prices, or 20% inconstant prices. It should be noted that, taking only the enumerated cate-gories, manufactured goods of all kinds accounted for 54% of the 1960/61-1974/75 current value growth and 52% of 1968/69-1974/75 growth. Agriculturalcommodities (mainly sugar) accounted for 31% and 36%, respectively. (3) Therank correlation coefficient between contributions to value and volume incre-ments is 0.8. However, in a few important cases the difference is marked,namely sugar, for which the value contribution in current prices considerablyexceeds that in constant prices, and engineering goods, iron ore, handicraftsand tea, for which the reverse is true. (4) Fast growth tended to occur onlyfrom a low base and was almost never sustained. There are two pieces ofevidence that can be cited: (i) categories showing volume growth of more than10% per annum in constant prices between 1960/61 and 1974/75, namely engineer-ing goods, iron ore, sugar, chemicals, handicrafts, and silver all started fromvery low bases, these six together making up only 9% of exports in 1960/61.(This is, of course, a major factor in explaining the fairly slow overallgrowth rate.) (ii) Of the items which grew at 10% per annum in volume, ormore, between 1960/61 and 1968/69, only engineering goods achieved this alsobetween 1968/69 and 1974/75. 1/ Similarly, of the eight largest contributorsto 1960/61-1968/69 growth in constant prices only engineering goods grew by asmuch again in absolute terms between 1968/69 and 1974/75.

2.17 The statistical Annex Tables 3 and 4, which report the result ofregressions of exports in constant prices on time for 1965/66 to 1974/75, pro-vide further illumination of a few of the above points. Of the seventeenmajor categories, eleven have significant positive growth trends namely cas-hew kernels, chemicals, coffee, cotton textiles and garments (because ofgarments), engineering goods, handicrafts, iron ore, leather and leather manu-factures, marine products, oilcakes and tobacco. Of these, only four showtrend growth of more than 10% per annum, namely engineering goods, chemicals,marine products, and handicrafts. With disaggregation the situation improvesa little, because of the addition of garments and finished leather. However,in 1965/66 these six categories accounted for only 9% of India's exports.Thus, it is far from surprising that overall growth has not been high. Theweak trends are indicated by the fact that the corrected R squared is below0.5 for eight of the seventeen categories. Annex Table 3 also reports theratios of the standard error of estimate to the mean, which is an indicatorof the strength of variations about the trend. Unstable spill-over exportslike sugar and iron and steel are clearly indicated. The high ratios forsilver, chemicals, garments, and finished leather show the effect of suddenspurts in the last few years, while those for tanned hides and skins, andcarpet backing show the exact reverse. The high ratio for sacking indicatesstrong fluctuations about the falling trend. Thus, the existence of both

1/ Silver did so also, but only because the 1960/61 base was close to zero.

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spasmodic growth and strong fluctuations is clearly indicated by these ratios.It is encouraging to note that total exports are less unstable than any ofthe individual components.

Table 2.8

Estimated Trend Real Growth Rates of Major Exports 1965/66-1974/75

Growth Rate per Annum R Squared

Silver 35.3 /a -0.08Engineering Goods 23.3 0.86Chemicals 14.7 0.84Marine Products 12.8 0.92Handicrafts 10.3 0.85Coffee 8.4 0.80Leather and Manufactures 7.9 0.54Iron Ore 7.8 0.91Tobacco 6.6 0.46Cotton Textile and Garments 5.9 0.56Oilcakes 3.7 0.25Sugar 3.5 /a -0.10Cashew Kernels 2.9 0.26Tea 0.9 /a 0.02Spices -0.2 /a -0.12Jute Manufactures -3.3 0.66Iron and Steel -6.9 /a 0.10Total 4.4 0.83

/a Not significantly different from zero at the 95% confidence level.

Source: Statistical Annex Table 4.

Recent Developments

2.18 The work carried out in order to prepare the Bank's volume indexfor 1968/69 to 1974/75 (see Statistical Annex Table 7), makes possible amore disaggregated picture of export growth over this latter period. Onerather interesting point is that, of the one hundred and eleven items coveredby the index (which includes about 80% of India's exports by value), onlythree grew in every one of these six years, namely handloom towels, girls'cotton dresses, and cotton T-shirts. These are insignificant items account-ing in 1974/75 for only 1.1% of total exports. The really fast growing itemsbetween 1968/69 and 1974/75 fall into four categories. 1/ The first is a

1/ It should be noted that some of the faster growing categories referredto above do not appear in the index, because they comprise a very largenumber of small individual items. Examples are chemicals, and handi-crafts (excluding woolen carpets).

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long list of agricultural products, accounting for 11.6% of total exports in1974/75, but dominated by sugar which accounted for 88% of their collectiveshare. The others were meat, rice, mango jams, mango slice brine, potatoes,mango chutney, compound animal feed, oilseeds, raw jute and gour flour. Thesecond category covers garments and a few textiles, which accounted for 4.7%of total exports in 1974/75. The specific items were fabrics woven of syntheticfibers, handloom cotton textiles, handloom towels, mens' outer garments ex-cluding cotton trousers, girls' cotton dresses, dresses for girls of othertextiles, cotton dress shirts, cotton T-shirts, cotton under shirts, and woolen

sweaters. The third group is a wide array of engineering goods, only a pro-portion of which are in the index because of the non-homogenous nature of thiscategory. Fast growing items included in the index are pipes and pipe fittings,bolts, spanners, files and rasps, EPNS ware, internal combustion engines(stationary) parts of diesel engines (stationary) buses and bicycle parts.The final category is a miscellany, of which silver is by far the most im-portant, but which also includes cigarettes, ilmenite and fur skins. Thefour dynamic exports or export categories in this latter period have, there-fore, been sugar, engineering goods, garments, and silver. On the basis ofanalysis in Volume II, chemicals should be added. As remarked above, highvolume growth tends to be correlated with low initial significance. The itemslisted immediately above (excluding chemicals), each of whose 1968/69-1974/75volume growth was more than 15% per annum, accounted for only 2.8% of ex-ports in 1968/69.

2.19 Overall growth in 1975/76 was 9.1% in current dollars, but 12.1%in constant 1975/76 prices (and 14.9% in constant 1974/75 prices) 1/. Thiswas a remarkable performance in a year of global recession. However, a closerexamination of the figures shows that 68.9% of the volume growth increment wascontributed by sugar (46.7%) and silver (22.2%). The volume growth of exportsother than sugar and silver was only 4.2% in 1975/76 prices, (and 5.3% in 1974/75 prices). Both of these commodities were first pushed enthusiastically asexports in 1974 in response to substantial price increases in the world market.Maximum export effort was attained in 1975/76 in the face of then decliningprices. Since further growth of sugar exports will be very difficult toachieve (which has been borne out by experience in 1976/77) while silverexports come from a large private stock and generate no value added, 1975/76performance could not be taken as an indication of the beginning of export-led growth. (Of significance in this context was the 1.9% decline of manufac-tured exports in constant 1975/76 prices, which was largely the result of a15.1% decline in engineering goods). However, the 1975/76 performance didshow increased commitment to exports.

2.20 In 1976/77 growth appears to have been very strong virtually across-the-board. Volume growth is estimated to have been about 12%. In value terms,exports are estimated to have risen by 18% to US$5,400 million. Earnings fromsugar, which had accounted for almost one-third of the total increase in export

1/ Because the two fastest growing items, sugar and silver, both experiencedprice falls, the volume growth in 1975/76 prices is below that in 1974/75prices.

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earnings during 1975/76, fell by about 70% during 1976/77. This was theconsequence of both a sharp fall in international prices, and of domesticmarket pressures following the rapid increase in sugar exports during theprevious two years. Excluding sugar, exports in 1976/77 are estimated tohave risen 21% in volume terms and 30% in value terms. The most rapidlygrowing item was exports of iron and steel, the volume of which rose over200%. Export earnings from iron and steel are estimated to have increasedby 167% to US$350 million. The value of coffee exports rose by about 80%,despite a fall in volume, as world prices soared. Other exports which grewrapidly in both volume and value terms were oilcakes, leather products,chemicals, engineering goods, marine products and cotton textiles. Turn-key projects, especially in the rapidly expanding markets of the MiddleEast and South East Asia, became increasingly important as vehicles forIndia's exports of engineering goods. Apart from sugar, the only majorexport items to decline in value terms were jute manufactures and silver.

India's Exports in the World Economy

2.21 Three specific questions will be addressed. The first is the extentto which the sluggish growth of the initially dominant export categories wasa function of adverse world market conditions; the second is how well Indiahas taken advantage of new opportunities in other exports in comparison withother LDC's; and the third is the extent to which the direction of India'sexports has been a significant constraint.

2.22 For the decade 1951-1960, Bhagwati and Srinivasan calculate theloss in aggregate exports due to India's declining share in world trade injute manufactures, tea, cotton textiles, unmanufactured tobacco, groundnutsand groundnut oil, and linseed and linseed oil. 1/ India's share fell inevery case and the total loss in earnings over the decade was calculated atRs. 5,740 million, which was 16.5% of all the earnings generated by thesecommodities. (Of course, India could not have maintained its market shareswithout a reduction in prices. However, it appears that in most cases Indiawould have gained more foreign exchange than it lost by maintaining itsvolume share.)

2.23 In the sixties there were further declines for the three majorcategories of jute manufactures, tea, and cotton textiles. While Indiaaccounted for 74% of world exports of jute manufactures in 1965/66, thisshare had fallen to 52% by 1974/75. In its competition with synthetics inthe crucial US carpet-backing market jute's share fell from 67% in 1969 to26% in 1974 for primary backing, and from 76% to 63% for secondary backing.Further, it is clear that the price disadvantage which led to the marketerosion, was in good part the result of government policy towards the ex-change rate and export taxes. 2/ In the case of tea, India's exports as a

1/ Bhagwati and Srinivasan, Op. Cit., Table 3-4.

2/ See Volume II, Chapter IX.

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share of world exports fell from 35% in 1967/68 to 27% in 1973/74. However,in the latter case, efforts to expand the volume of exports, in order tomaintain the market share, would have led to a price fall. Given its currentmarket share, the demand curve faced by India is probably more than unitelastic, and, consequently, aggregate receipts should rise if output wereexpanded, but the low profit margin of Indian tea producers would be seriouslyeroded. 1/

2.24 Undoubtedly, the most serious case of unnecessary market erosion isthat of cotton textiles. Mellor and Lele 2/ show that in 1953 India accountedfor 58% of all LDC exports of textiles, and that this share had fallen to 8%by 1969. Both South Korea and Taiwan moved from zero to surpass India duringthis period. Furthermore, it was not a necessary erosion. Japan's textileexports which were 75% larger than India's in 1953 tripled by 1969,.adding$1.8 billion. In recent years India has seen a small and narrow boomlet ingarment exports, but these are still less than 10% of those of Hong Kong. 3/

2.25 It is clear that the stagnation of the major "traditional" itemswas not inevitably determined by stagnant world demand. For all these com-modities it went along with a steady loss in world market share, which is anindicator of poor performance on India's part.

2.26 As pointed out above, while the major traditional items stagnated,new categories have grown sharply, (if spasmodically). Has this growth, atleast, taken advantage of what the world has had to offer?

2.27 A comparison between India and a number of important LDC exportersof manufactured goods is shown for 1965-1974 in Table 2.9. It will be notedthat India's growth is the lowest of the countries shown in all sub-periods.Between 1965 and 1974, India slipped from being the second largest of thisgroup of ten countries in terms of manufactured exports to fourth.

1/ See Volume II, Chapter XVI.

2/ John Mellor and Uma Lele, The Interaction of Growth Strategy, Agricultureand Foreign Trade: The Case of India, Occasional Paper No. 74, Employ-ment and Income Distribution Project, Department of Agricultural Economics,Cornell University, June 1974, p. 20 seq.. See also Deepak Nayyar, "AnAnalysis of the Stagnation in India's Cotton Textile Exports During theSixties", Bulletin of the Oxford University Institute of Economics andStatistics, February, 1973.

3/ See Volume II, Chapter IV; see also, IBRD, Report No. 976-IN, India-Survey of the Textile Machinery Industry, Annex I. It should be notedthat quotas are not the main reason for this performance, since theyhave frequently been unfilled.

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Table 2.9

lianufactured Exports of Developing Economies from 1965 to 1974 /a(US$ millions)

Compound Annual Growth Rates

(%)

1965 1971 1973 1974 1965-71 1965-73 1971-73 1971-74

Argentina 83.9 262.9 730.1 957.3 21.0 31.1 66.6 53.8Brazil 124.3 441.2 1,216.8 1,920.7 23.5 33.0 66.1 63.3Hong Kong 989.1 2,672.8 4,682.4 5,444.6 18.0 21.4 32.4 26.8India 809.0 1,092.9 1,560.7 2,031.3 5.1 8.6 24.8 23.0Korea,

Rep. of 103.8 872.9 2,709.8 3,775.4 42.6 50.3 76.2 62.9Malaysia 67.8 123.3 346.5 547.4 10.5 22.6 82.1 64.4Mexico 165.9 503.5 1,098.7 n.a. 20.1 26.7 47.7 n.a.Singapore 300.4 583.8 1,598.6 2,316.8 11.7 23.2 65.5 58.3Yugoslavia 616.7 1,149.1 1,917.5 2,524.3 10.9 15.2 29.2 30.0

/a SITC 5-8 minus 68

Source: Donald B. Keesing and Phi Anh Plesch, Preliminary Report on RecentTrends in Manufactured Exports of Developing Countries,Annexes A and B, IBRD, Mimeo, March 15, 1976.

2.28 A longer term perspective is provided by a paper, to which referencehas been made above. 1/ In 1960 India's exports of manufactured goods, atUS$600 millions, exceeded those of Argentina, Brazil, Chile, Columbia, Israel,Korea, Mexico, Singapore, Taiwan and Yugoslavia taken together. By 1973,India's manufactured exports accounted for only 10% of this group's total.

2.29 Since cotton textiles and jute manufactures are included in theabove categorization, it is useful to examine a few specific cases of fastergrowing Indian exports in the global context. The comparative data in ourpossession covers the period 1971-1974, which, being the most recent, isperhaps the most relevant period, given the aim of examining India's abilityto exploit current opportunities. Table 2.10 gives information for a numberof important goods and categories and roughly ranks countries in eachclassification by their importance in 1974.

2.30 The categories shown in Table 2.10 cover many manufactures,which are important for India's recent past and future prospects. It shouldbe noted that, with the exception of leather, we have only shown India andthose above it in each of these categories. In spite of this relatively lowposition, only in clothing is India's performance superior, and the diff-erence in starting level in that category is so great that this result is

1/ B. Balassa, Op. Cit., Appendix Table 2

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Table 2.10

Manufactured Exports of Leading Developing Countries from 1971 through 1974in Selected Commodity Classes

(in Millions of Current US Dollars)

Annual GrowthRates

1971 1972 1973 1974 1971-74_ /

(%)841 Clothing

(not of fur)

Hong Kong 895.0 1,077.9 1,417.8 1,673.4 24.0Korea 303.3 439.6 743.6 946.8 48.3Taiwan 413.3 549.1 780.0 894.2 29.3India 43.6 67.3 126.7 170.7 60.4

7 Machinery andTransportEquipment

Taiwan 369.7 641.7 985.8 1,308.5 52.5Singapore 241.9 432.9 797.5 1,192.9 71.6Hong Kong 345.2 461.7 713.7 909.3 39.7Korea 87.4 171.6 395.9 672.3 100.5Brazil 133.2 217.2 303.8 638.0- 65.5Mexico 174.3 237.8 463.7 n.a. 63.1-Argentina 82.6 118.0 254.9 n.a. 75.73/India 102.5 107.2 150.5 266.4 37.8

611 Leather

India 110.6 183.3 211.8 167.8 15.0Argentina 36.2 89.8 97.6 n.a. 64.23/Pakistan 29.6 44.8 52.3 35.1 6.9Brazil 13.8 39.6 38.2 60.5- 55.2

851 Footwear

Taiwan 95.0 143.5 226.4 276.4 44.2Korea 37.4 55.4 106.4 179.52 70.9Brazil 29.3 54.6 93.5 120.3- 61.2Hong Kong 59.7 55.8 53.7 65.1 2.2India 16.0 17.1 17.2 25.7 15.3

5 Chemicals

Singapore 60.6 78.0 160.1 375.5 85.7Hong Kong 118.1 124.5 179.9 223.7 25.7Mexico 106.2 113.4 169.0 n.a. 26.1-/Taiwan 42.6 49.4 64.8 141.5 47.3India 45.3 50.1 74.0 130.0 42.7

89 minus 892

MiscellaneousManufacturedProducts

Hong Kong 5i7.8 563.1 780.0 835.7 16.2Taiwan 184.5 290.7 397.7 530.9 41.7Korea 90.3 121.1 222.9 292.8 51.3India 31.7 39.4 60.6 76.2 35.8

1/ Semi-Logarithmic Least Squares Time Trends2/ National equivalent (approximate)3/ 1971-1973

Source: Donald B. Keesing and Phi Anh Plesch, Preliminary Report on RecentTrends in Manufactured Exports of Developing Countries AnnexesA and B, IBRD, Mimeo, March 15, 1976.

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far from surprising. Even in 1974, India's clothing exports were 19% ofthose of Taiwan, after which India came a poor fourth of those listed. Growthin exports of machinery and transport equipment and of footwear was markedlyless than that of major competitors. In chemicals and "miscellaneous manu-factures" 1/ growth was comparable, but in the latter case the base was low,while, in the former, growth was to a considerable extent the spill-overfrom a large industry facing stagnant domestic demand. 2/ What is strikingwhen reviewing exports, in which India should have a comparative advantage, ishow far the more dynamic exporters have left India behind. In 1974 Taiwan'sexports of clothing, machinery and transport equipment, and "miscellaneousmanufactures" exceeded all of India's manufactured exports.

2.31 Analysis of the direction of exports is important for many exportcategories, and is undertaken in Volume II, wherever appropriate. The issueis explored in aggregate in the chapter on exports in the World Bank's 1976Economic Report on India. 3/ The first point to be touched on here is theextent to which the direction of India's exports has been a significant retar-dant on overall performance. In 1953, the United Kingdom received 29% ofIndia's exports while by 1975/76 this was down to 10%. India's initial con-centration on a relatively stagnant market parallels the concentration onstagnant commodities. The major offset was rapid growth of exports to EasternEurope, and also exports of iron ore to Japan. However, it is not plausible toargue that the initial concentration on the UK was a major barrier to subsequentgrowth, given the ability of other successful exporters to shift directions,and the inability of India to achieve any significant growth throughout the1950's and most of the 1960's anywhere at all except in the relatively uncom-petitive Eastern European markets. It should be noted that this has changedrecently, especially in the huge surge of exports to OPEC countries, whichis shown below.

1/ Toys and sporting goods, articles of plastic, sound recorders, phono-graphs, works of art, jewelry, artificial flowers, wigs, brooms,etc.

2/ See Volume II, Chapter II.

3/ IBRD Report No. 1073-IN, Economic Situation and Prospects of IndiaM4arch 29, 1976. The main points made there were: (1) the dominance ofEastern Europe in export growth between 1955/56 and 1967/68; (2) thesubsequent rough equivalence in growth rates of convertible currencyand "rupee" exports and (3) the very rapid growth of exports to MiddleEastern OPEC Countries during the 1970's.

INDIA

Direction of Exports(US$ Millions)

Export Areas 1960 1965 1970 1972 1974 1975Amount % Amount- % Amount % Amount % Amount % Amount %

Industrial Countries 801.7 (57.7) 919.7 (54.2) 982.2 (48.5) 1,220.4 (50.0) 1,860.7 (47.8) 2,004.5 (42.4)

Other Europe 41.4 ( 3.0) 62.6 ( 3.7) 86.5 ( 4.3) 65.7 ( 2.7) 91.1 ( 2.3) 125.5 ( 2.7)

Australia, New Zealand,South Africa 62.4 ( 4.5) 53.3 ( 3.1) 41.8 v 2.1) 49.4 ( 2.0) 110.5 ( 2.8) 75.1 ( 1.6)

Oil Exporting Countries 43.8 ( 3.2) 51.4 ( 3.0) 132.3 ( 6.5) 132.2 ( 5.4) 479.6 (12.3) 932.5 (19.7)

Other Less Developed La

Areas 319.5 (23.0) 373.0 (22.0) 388.5 (19.2) 436.2 (17.9) 632.7 (16.3) 762.0 (16.1)'

USSR, East Europe,China, etc. 119.9 ( 8.6) 296.5 (17.5) 393.1 (19.4) 539.0 (22.1) 717.5 (18.4) 831.0 (17.6)

TOTAL 1,388.7 (100.0) 1,696.5(100.0) 2,109.7 (100.0) 2,442.9 (100.0) 3,892.1 (100.0) 4,730.6 (100.0)

Source: IMF, Direction of Trade, Annual 1960-75.

IN)

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The Role of Exports in India's Economy

2.32 Two closely related issues can usefully be dealt with, namely therelative importance of exports and domestic sales for the categories underdiscussion, and, in particular, the role of exports in generating past growth.It will be noticed that, while exports now generate little more than 5% ofGNP, and directly produced much less than 10% of GNP growth during the lastdecade, they are not insignificant for many individual categories. Specificinformation on the recent contribution of exports to growth is given inTable 2.12.

2.33 One major group consists of those products for which exports accountfor about half or more of total output. These include pepper, cashew kernels,coffee, jute manufactures, tea, leather and leather manufactures, polisheddiamonds, garments produced by large scale manufacturers, 1/ and iron ore.Together these products account for about 35% of India's total exports. Themajority are simple agricultural or agriculture-based goods. Others involvelabor-intensive processes, in which there exists a clear comparative advantage.In certain cases, such as cashew kernels, and leather and leather manufac-tures, these two sub-categories overlap. Iron ore is sui generis, but isagain a primary product. Thus, highly export-oriented industries seem toinvolve simple and often very labor-intensive technologies, and/or exploitone of India's natural resources.

2.34 Exports of five of these categories have been growing quite fast(see Statistical Annex Tables 2 and 4), namely garments, gems, leather andleather manufactures, and iron ore. In all these cases except leather, ex-ports accounted for virtually the entire growth of the industry. Cashewkernel exports have been stagnant, while generally declining exports of jutemanufactures have led to a decline in the production of the entire industry,(although this was not the case for 1970/71 to 1974/75). In the case ofpepper, exports served as a spill-over for increased production in the excel-lent years of 1973/74 and 1974/75 and were otherwise static. In the case ofleather, exports accounted for about half of output growth, while in the caseof tea the contribution was less, (see Table 2.12).

2.35 A second and closely related group consists of industries for whichexports account for 15-40% of output. Two agricultural exports come inthis category, namely, oilcakes and tobacco, which together contribute about5% of total exports. Between 1965/66 and 1974/75 trend growth of tobaccoexports was 6.6% in volume, and that of oilcakes was 3.7%. Growth in tobaccoexports was accounted for by flue cured Virginia (FCV), which now contributes90% of total tobacco earnings. Moreover, exports account for more than halfof India's production of FCV tobacco (65% in 1974/75), and most of the growthin production. Thus, FCV tobacco might be placed in the previous group of

1/ Large scale clothing manufacturers suffer from a competitive dis-advantage in the domestic market vis-a-vis custom tailors, because ofthe lack of a mass retailing system.

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Table 2.12

Export Orientation and the Effects of Export Growth on a Number of Exports(Rs. millions)

Change in Marginal Export- Average Export- Average Export-Exports in Change in Exports Domestic Production Output Ratio Output Ratio Output Ratio

1970/71 1970/71-1974/75 1970/71-1974/75 1970/71 1974/75

(%) (%) (%)

Chemicals 374.9 788.3 16,307.0 4.8 2.2 3.C

Machinery exceptElectrical 326.9 759.2 9,820.0 7.7 3.2 5.9

ElectricalMachinery 186.2 501.3 10,190.2 4.9 2.2 3.7

TransportEquipment 444.7 343.5 10,o92.5 3.4 4.1 3.8

Metal Products 321.8 500.0 2,247.9 22.0 6.7 12.0

Basic Metals 1,181.4 966.8 18,488.1 5.2 7.1 6.1

Leather 875.7 584.4 1,448.7 40.0 49.0 47.01/ 1/

Cotton Textiles 1,013.3 794.5 7,256.5 11.0 5.0 6.6

Tea ('000 tons) 213.0 15.0 71.0 21.0 47.0 43.02/

Jute('OOO tons) 558 26.0 - 50.0 - 52 58.0 64.0

Tobacco('000 tons) 47.5 27.5 13.0 212 13.0 20.03/

Oilcakes('OO0 tons) 879.0 - 86.0 _ 1,141.0 1.5 20.0 24.02/

Coffee ('000 tons) 32.1 17.3 - 18.2 - 95.0 29.0 54.0

1/ 1970/71-1973/742/ Negative output growth3/ Negative export and output growth

Sources: Central Statistical Organization, National Accounts Statistics, 1960/61 to 1974/75, Vol. II;DCIS, Monthly Statistics of the Foreign Trade of India, various volumes.

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highly export-oriented industries, to whose growth exports have made a sig-nificant contribution. In the cases of oilcakes, domestic demand has "led"growth of output, with exports tending to be stagnant.

2.36 A third major category consists of industries for which exportsare marginal, namely engineering goods, chemicals, marine products and cottontextiles other than garments. These categories contribute about 22% of totalexports. Engineering goods, chemicals, and marine products have all beenvery fast-growing exports. Cotton textiles, on the other hand, have beenvirtually stagnant with only a temporary surge in 1973/74. The growth ofengineering and chemical exports has exceeded overall growth of the industries,but because of the relatively low share of exports in production, exportshave not played an overwhelming role in overall growth. Our estimates in-dicate that about 5% of the real growth of the engineering and chemicalsindustries between 1970 and 1974/75 was directly contributed by exports. 1/Both of these ratios are higher than shares of exports in output because ofrapid growth of "spill-over" exports in a period of slow growth of the domes-tic economy. This spurt is indicated for chemicals by the marked upwarddeviation from the longer term trend during this latter period. Hlarine pro-ducts present a different picture. Exports account for less than 3% of thetotal catch of what is largely a very traditional industry. hlowever, the ex-port sector itself is quite distinct, since it employs more modern vesselsand shore facilities, and is also concentrated almost entirely on frozenshrimp, which account for about 85% of export value. 2/ Exports have playedan extremely significant role in the development of this modern sector of theindustry and accounted for most of the growth. Thus, marine products shouldperhaps be put along-side garments and tobacco as an industry with a highlyexport-oriented segment. Finally, in the case of cotton textiles, millmadepiecegood exports have virtually not grown, and neither has the domesticindustry. 3/ Handloom piecegood exports, on the other hand, have grownmarkedly, but being a small proportion of total handloom production (about2%), this has contributed very little to overall growth, or rather has notchanged the position of overall stagnation.

2.37 A final group consists of iron and steel, sugar, and silver. 4/Exports in these categories have been highly unstable. Iron and steel is theextreme case of a homogenous industrial export, where marginal exports fluctuatesharply with the shifting balance of supply and demand. It is, therefore, like

1/ For reference to Table 2.12, the engineering industries cover the twomachinery sub-sectors, transport equipment, and metal products.

2/ See Volume II, Chapter XI.

3/ The use of 1973/74 as an end year in Table 2.12 gives a misleadingpicture of the contribution of export growth, because this wasan exceptional boom year, both for export and production.

4/ It has not been possible to relate handicrafts, other than diamonds, todomestic production and these exports have, consequently, been excludedfrom this analysis.

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chemicals, but still more extreme, since the balance has shifted more widelyand production decisions of this overwhelmingly public industry have beenlittle affected by domestic demand. Sugar and silver exports have grown sharplyin volume since 1973, because of a combination of government policy changesand improved opportunities. In the case of sugar a conscious decision wasmade to exploit the improved world prices and squeeze domestic consumption.Sugar exports grew from 6% of output in 1973/74 to 25% in 1975/76. The growthin exports led a substantial rise in sugar production, which, in turn, largelyreflected a switch in use of cane from khandsari/gur to the sugar mills.Silver export is not an industry, but involves sale from a stock. Silver ex-ports were legalized in March, 1974 and, thereafter grew rapidly, partly inresponse to very favorable international prices. 1/

2.38 To sum up this sub-section: (i) there are a number of industries forwhich exports are very important, and to which exports have contributed aconsiderable amount of growth. These industries tend to be rather simple andto be based on very obvious sources of comparative advantage, such as agricul-tural production, availability of a mineral, or labor-intensity. The growthof industries like coffee, leather and leather manufactures, iron ore, FCVtobacco, garments, diamond polishing, and frozen shrimp has depended in largepart on exports. Other, more stagnant industries, like jute manufactures,pepper, tea, and cashew kernels, are dependent on exports for maintenance ofdemand. (ii) For more sophisticated industrial products, like engineeringgoods, chemicals, and iron and steel, exports have been much more marginal.(iii) Shifts in policy and changes in world opportunities have generated someof the observed instability of exports, and this applies especially to silverand sugar. Instability of some exports as well as sudden growth spurts tendsto reflect rapid changes in the balance between supply and demand. Iron andsteel, chemicals, pepper and oilcakes are especially important examples ofthis category.

1/ The extent to which silver exports really grew, rather than shiftedfrom illegal to legal channels, is unclear.

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III. DOMESTIC AND INTERNATIONAL CONSTRAINTS

Introduction

3.01 India's exports occur in the context of an overall context determinedby Indian conditions, Government policy towards the economy as a whole andindustry in particular, and the international environment. Some salientaspects of these constraints are reviewed immediately below. It is within thiscontext that the Government has framed the specific policies for export promo-tion and taxation that are reviewed in the succeeding chapter. However, beforeconsidering the details of the environment, a number of preliminary pointsshould be made.

3.02 Importance of Incentives. Exports are largely a private sectoractivity. This is somewhat less true at the trading than the production stage,but it is true there too. This does not mean, of course, that public activi-ties do not have pervasive effects, both in curbing and in promoting exportactivity. It does mean, however, that incentives are crucial.

3.03 Of the seventeen categories of exports, on which we have focussed,only two, namely iron ore and iron and steel, have equal, or more than equal,participation from public sector production. About half of India's iron oreexports originates in the public sector (virtually all that originates outsideGoa) as well as more than half of the iron and steel exports. Public sectorproduction has a role, but not a very large one, in exports of engineeringgoods (e.g. Bharat Heavy Electricals Limited, and Hindustan Machine Tools),and of chemicals. It is in the cases of iron ore and iron and steel thatincentives matter least and the ability simply to produce and transportadequate quantities the most.

3.04 The public sector has a more important role in the sale of India'sgoods through trading companies usually known as canalizing agencies. TheSteel Authority of India Limited (SAIL) is responsible for all exports ofsteel; the Minerals and Metals Trading Corporation (MMTC) is responsible forall exports of iron ore from outside Goa; and the State Trading Corporation(STC) is responsible for all exports of sugar and, supposedly, for tannedhides and skins, in addition to the footwear which it sells to Eastern Europeancountries. The STC has recently been given a monopoly on exports of silver aswell. The Handicrafts and Handloom Export Corporation (HHEC) is an activepromotor of handicraft exports (but not a monopolist). Many other bodies areinvolved, but these are the most important cases.

3.05 Generally, state trading organizations act on commercial grounds,as do other public sector coporations. Even the STC, which is charged withvarious public purposes, acts commercially within the confines of publicpolicy. Furthermore, the latter is also largely determined by a view ofcommercial opportunity. Thus, the export of sugar in 1974/75 and 1975/76 was

- 29 -

highly profitable for India and for the STC, which acted on the Government'sbehalf. Current dwindling enthusiasm for sugar exports is correlated with thefalling international price.

3.06 To sum up: exports are largely a private, profit-oriented activity,and where they are not private, public agencies act on commercial lines.Government policy, including bans and quotas, affects public and privateagencies alike. Iron ore and steel are probably the only industries whereprofitability can be to some extent ignored.

3.07 Diversity. Yet another significant feature of India's exports isthat, given their rather low level, they are highly diverse. This is, ofcourse, largely a consequence of India's strategy of promoting almost anyfeasible export, but is also of benefit to India since it provides a measureof stability. In 1974/75 about 34% of India's exports were agriculturalcommodities, that undergo little further processing including sugar, tea,cashew kernels, oilcakes, tobacco, fish, spices, coffee, vegetable oils, rawcotton, and essential oils); 6% were minerals (including iron ore, mica, andmanganese); 23% were manufactures, whose primary raw material is agricultural(including jute and cotton textiles, leather and leather manufactures, clothing,and coir manufactures); 15% were manufactures, whose primary input is mineral(including a wide range of engineering goods and chemicals, iron and steel, andmineral fuels); and 6% were handicrafts, including precious gems. Even withthis lengthy list, 16% are not accounted for. Furthermore, many of thesecategories are in turn highly heterogenous, especially engineering goods andchemicals.

3.08 As a consequence of the diversity of India's exports, the problemsand policies are almost equally diverse. Indeed, the conditions that determinethe profitability, quality, availability, and market prospects of India'sexports obviously vary from category to category, and such special factors arediscussed in the chapters of Volume II. However, there are also a number offactors common to many of India's exports, which are considered below.

Domestic Constraints on India's Exports

The Basic Policy System and Efficiency

3.09 India's basic policy system and some broad characteristics of theeconomy have been discussed above (see paras. 2.03-2.07). It is this overallsystem which, whatever its benefits - especially in the early stages throughpromotion of industrial growth via import substitution, has created the largestproblems for exports. Equally, as will be argued in Chapter V, a policy witha greater emphasis on exports should have major beneficial repercussions onthe overall economy.

3.10 The most significant effects of the system for exports are onthe relative incentive to produce import substitutes and exports, as well ason the dispersion of effective protection and subsidization rates. A summarymeasure of the former, can be given by comparing the "purchasing power parity

- 30 -

effective exchange rate" (PPP-EER) for imports and exports, which shows thereal rupees that can be earned over time by producing a given import substi-tute or export product.

3.11 The data presented in Table 3.1 are, of course, only suggestive.Given that the quota-created premia on imports have been excluded, whilethe export subsidy rate had to be guessed, this qualification is absolutelycrucial. In general, the result will be to underestimate the bias towardsimport substitution. Furthermore, an average of this kind evidently cannotindicate anything about the situation of individual import substitutes andexports.l/ Nevertheless, a few points do emerge: (i) the PPP-EER for importshas been consistently higher than that for exports; (ii) there has been a weaktendency for both to rise since 1950, a fall between 1972 and 1974 because ofIndia's relatively rapid inflation and a jump between 1974 and 1975, whichindicates an increased incentive to produce tradeable in place of non-tradeable goods; the PPP-EER for exports, in particular, is now at its highestlevel since 1950; (iii) while the 1966 devaluation had a significant effect onthe incentive to produce import substitutes, it had very little immediateeffect on the incentive to produce exports, largely because of associatedreductions in export subsidies and increases in export duties; however, theseoffsetting changes were reversed in succeeding years; and (iv) mainly becauseof reduced average import and export duty rates, and increased export subsidies,the PPP-EER's for imports and exports, have been coming together in 1974 and1975. 2/

1/ It should be noted that, if the aim of the calculation of the effectiveexchange rate for imports is to indicate the price relationship forimport substitutes, it is a seriously defective measure. This is sonot only because the effect of controls is ignored, but because theweights of goods in production will be very different from their weightsin trade. If, in addition, the nominal protective rate for goods pro-duced is different from that for goods imported, then the ratio of dutiesto imports will not be a correct indicator of the weighted average ratioof the prices of goods produced and their prices in world trade.

2/ The effective exchange rate summarizes all policies and thus includesthe effects of those policies discussed in this and the succeedingchapter. However, it seemed appropriate to make this summary measurethe cornerstone of a discussion of constraints on exports, and thusbring it in at this stage.

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Table 3.1

Purchasing Power Parity Effective Exchange Rates(Rs/US$ in 1963 Prices)

/a /bImports Exports Imports/Exports

1950 5.25 4.14 1.271955 7.30 5.74 1.271960 5.67 4.86 1.171965 5.72 4.79 1.191967 6.22 4.86 1.281970 6.64 5.38 1.231972 /c 6.90 5.28 1.311974 /c 5.73 5.08 1.131975 /c 7.19 6.50 1.11

/a The calculation of the effective exchange rate includes only theeffect of import duties. Since the implicit premia on imports,created by the import control regime, are excluded, the effectiveexchange rate is considerably underestimated.

/b The calculation of the effective exchange rate allows for exportduties, and, because of the impossibility of making precise estimates,allocates an arbitrary export subsidy rate as follows: 1950-1960at 0%; 1965 at 20%; 1967 at 5%; 1970 at 10%; and 1972-75 at 20%.Subsidies are applied only to non-traditional exports. Assumptionsabout subsidy rates follow Bhagwati and Srinivasan, Op. Cit.

/c Fiscal Years.

Source: Bhagwati and Srinivasan, Op. Cit., Table 2-1. Their calculation hasbeen updated to 1975 following their methodology, except that theexport-weighted wholesale price indices in India's export and importpartners are used.

3.12 One of the most common criticisms of the basic trade policy regimeis that it leads to overvaluation of the currency. This means that tradeablegoods as a group are "too cheap" in relation to non-tradeable goods, whenforeign exchange is converted at the official exchange rate. There are severalquite distinct definitions of the "correct" exchange rate, from which thedegree of overvaluation is to be computed. One is the free trade equilibriumexchange rate, allowing for available net transfers from abroad. There can belittle doubt that the current rate is indeed overvalued in relation to that,but it is equally impossible to tell by how much. 1/ A second definition is

1/ In the Indian context of pervasive controls the various elasticitiescan hardly be estimated.

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the equilibrium rate after removing only controls. Again the rate would haveto rise although presumably by less than would be required if all tariffs andsubsidies were also removed, since increased imports following abolition ofimport tariffs would exceed increased exports following abolition of exportduties. (The average import tariff rate is vastly greater than the averageexport duty rate-in 1974/75, for example, the average import duty rate was 26%while the average export duty rate was 3%.) It should be noted, however, thatneither of these first two definitions of exchange overvaluation show that,given all the tariffs, controls, and subsidies, the incentive to producetradeable goods, taken as a group, is too low. They show merely that theincentive is too low for any relatively unprotected or unsubsidized importsubstitute or export. Quite a different indication of exchange overvaluationis the willingness-to-pay for foreign exchange as revealed by the domesticprices of tradeable goods in relation to foreign prices. This latter conceptis measureable and frequently used in project evaluation. Estimates haveshown a premium over the actual foreign exchange rate (on a willingness-to-paybasis), of 50% or more. Thus, by all these definitions, India's exchange ratehas indeed been overvalued, but no single measure of the degree of overvalu-

ation can be given, nor can its significance be judged.

3.13 Broad measures of the relationships between non-tradeable goods,import substitutes and exports provide only a small indication of thecosts of India's policy system. Information on a much more disaggregatedbasis is useful. In this context it should be noted that not only has Indiantrade policy shown a consistent bias toward import substitution, but therehas also been only slight concern with the concept of economic efficiencyin selection of what to produce and export.

3.14 The study of domestic resource costs per unit of foreign exchangeearned or saved (DRC) in Bhagwati and Srinivasan shows that in 1968-69 theunweighted mean DRC for 64 sectors was 21.67 rupees per dollar, against anofficial exchange rate of 7.50. 1/ 2/ The standard deviation was 31.79:DRCs varied from Rs 5.9 for printing and publishing to Rs 259.2 for 'gur andkhandsari.' Thus, the study, which is largely based on c.i.f. prices forimport substitutes, shows very high resource costs per unit of foreign ex-change saved and an enormous dispersion.

3.15 Another study has been undertaken of forty two export sectors. 3/

In the primary analysis with almost no shadow-pricing, DRCs varied from

1/ Bhagwati and Srinivasan, Op. Cit., Table 13-4. Four negative DRCs areexcluded.

2/ This converts into an average gross effective rate of protection of189%.

3/ Charles P. Staelin, The Costs and Composition of Indian Exports, Universityof Michigan, Center for Research on Economic Development, DiscussionPaper 22, May 1972, Mimeo. Similar variations are shown in a recentlycompleted study by the Industrial Credit and Investment Corporation ofIndia on India's manufactured exports.

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Rs 4.76 for silk textiles to Rs 26.69 for man-made fibers. The median DRCwas Rs 7.82, but that for non-traditional exports was Rs 11.80, and that forthe engineering goods sector was Rs 21.42. 1/ It may be noted that tradi-tional exports, which are taxed, were shown to be consistently more efficientthan the more highly subsidized non-traditional sectors.

3.16 Too great a weight should not be placed on studies of this kind.Apart from the well-known objections to static analyses, these particularstudies suffer from three defects in the Indian context. First, a much moredisaggregated analysis is required - a point to which we return below, whenreviewing the specific problems of industrial exports. Second, the problem ofthe relative efficiency of, and relative incentive to produce, exports andimport substitutes is not addressed, except to the extent that whole sectorscan be described as export or import-substitution oriented. However, mostsectors and industries produce for both markets and only very few are predomi-nantly export-oriented. Value added per unit of output is very likely to bedifferent within each industry (and between firms) for import substitutes andexports. This will affect measures of DRCs (and ERPs). Third, there can beno measurement of the costs of not producing potentially highly efficientexports. Thus, all that can reasonably be concluded is (i) that there is avery large dispersion in DRCs (and ERPs), and (ii) that non-traditionalexports are apparently generally less efficient (and more highly subsidized)than traditional ones. The higher DRCs in Bhagwati and Srinivasan's study,which looks at import substitution (i.e. c.i.f. prices of output), thanStaelin's, which looks at export promotion (i.e., f.o.b. prices of output) mayindicate higher protection to import substitutes than to exports, and thetable of purchasing power parity effective exchange rates strongly supportsthis hypothesis.

Constraints on Industrial Exports 2/

Introduction

3.17 Many of the problems that constrain India's industrial exports aredeeply embedded in the structure of the industrial sector, even though thatstructure itself is at least in part the consequence of trade policy. However,their significance extends beyond the sphere of exports or even that of gainsfrom trade to the larger question of efficient use of resources. While thediscussion below focusses on the gains for exports of resolving these problems,it should not be forgotten that such a resolution is of even greater value inits own right. In addition, a greater emphasis on exports will itself be amajor contribution to the solution of these problems, since exports will allow

1/ From these figures the conclusion should certainly not be drawn thatall non-traditional exports are inefficient.

2/ This section draws heavily on Chapters II, IV and V of Volume II ofthis report.

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greater exploitation of economies of scale, will engender increased competi-tion, and will release foreign exchange constraints.

3.18 It should be noted that the measures of comparative advantage (DRCs)and of resource allocation effects of trade policy (ERPs) capture some, butnot all of the problems discussed below. In order to clarify the relationshipbetween industrial structure and trade policy, on the one hand, and exports,on the other, the following categorization is useful: (i) a bias towardsimport substitutes in trade policy shifts production away from exports; themost direct effect will be on the price of inputs, which will, in turn, becaptured in measures of trade policy such as the ERP. In equilibrium theDRCs for exports will be below those for import substitutes. (ii) Policiesthat thwart the exploitation of economies of scale and other policies thatreduce technical efficiency, lower the potential real product of the economyand alter the pattern of comparative advantage. Such changes largely affectabsolute advantage, and do not show up in the DRC, which only measures com-parative advantage. However, their significance for industrial exportsis considerable since a range of potentially efficient exports will ceaseto be so. (iii) Policies that make the environment uncertain, because ofthe variability of incentives, the range of administrative discretion, and soforth, alter the expected value of relative prices facing enterpreneurs.Measures of DRCs and ERPs are very unlikely to capture these effects. And(iv) failures in product quality, service, and marketing will reduce exportprices and lower the benefits from export. 1/ DRCs cannot measure this sincethe f.o.b. price is taken as given. Thus, the discussion below does addsignificantly to the understanding of the export problem, and, a fortiori tounderstanding of the wider industrial problems, which increased exportorientation may help to solve.

Industrial Structure

3.19 One key area long discussed, but emphasized in a number of recentWorld Bank reports has been the structure of India's major industries, espe-cially in the key engineering category. By international standards India'sindustries have been fragmented into a large number of rather small firms.The quality of production, in a rather uncompetitive environment has beenvariable. Because of their small size India's firms have found it difficultto exploit economies of scale in production, and, still more important, inproduct development. Combined with curbs on collaboration agreements and onimport of technology, the effect has been to render India's exportable productsunsatisfactory in a number of cases. The strong bias toward import substitu-tion has encourage firms to produce a large range of products, if permitted,rather than focus on a few, in which international competitiveness might beachieved. While excess capacity has been a general phenomenon, it has oftennot existed in the best firms, whose products would be the easiest to export.

1/ Of course, it can be efficient to export shoddy goods, if the cost ofimproving quality is greater than the increase in f.o.b. realizations.This does not appear to be the case generally in India, where, in partbecause of lack of competition, poor products can be as costly to pro-duce as better ones.

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Formal or informal curbs on the expansion of these leading firms in thedomestic market, combined with the uncertain profitability of exports, havereduced the incentive of these firms to promote exports. A protected domesticmarket has accustomed producers to a sellers' market, with the result thatmarketing and service of exports has sometimes been inadequate. Furthermore,the scale of India's firms has also militated against such an effort, whichis costly.

3.20 Most of the features of Indian industry, referred to above, havebeen in part the result of trade policy. However, industrial fragmentationhas also been the result of several other factors, including industriallicensing aimed at creating a substantial number of producers by placinglimits on the size of new undertakings, restrictions on the growth of "dominantundertakings," "large houses," and foreign controlled firms; 1/ allocationof essential imports directly to firms, which curbed growth of the efficientand protected the inefficient; direct support for failing firms; and theprevalence of conglomerate "large houses", which defend their various parts,even when weak.

3.21 A few examples can be given of fragmentation. For example, inthe case of phthalo pigments the Indian licensed capacity is 1,000 tonsp.a., which is divided among four "large scale" and twelve "small scale"units, while the typical capacity of one plant in Germany is 5,000 tonsp.a. 2/ The IBRD industry studies provide several other examples. In thecase of tractors a total production of 32,000 units in 1972/73 was sharedbetween seven firms, while this level of production would be extremely smallfor any one of the world's large producers. 3/ In the case of commercialvehicles there were ten producers with a total installed capacity of 81,000units, in a world, in which twelve firms produced more than 100,000 commercialvehicles per annum each. 4/ A Bank report on steel forgings made the samepoint with respect to that industry, in which Government policy encouragedexcessive entry and a large number of small firms with low technical skillssuffered from severe excess capacity. 5/ In the textile machinery industry,there were some twelve major manufacturers, while the entire Indian productionwas smaller than that of the largest European firms. 6/

1/ "Dominant undertakings" and "large houses" are regulated under theMonoplies and Restrictive Trade Practices Act, 1969 and foreign firmsunder the Foreign Exchange Regulation Act, 1973. A "dominant undertaking"is one that accounts for one-third or more of a particular market, and a"large house" is a group with fixed assets of Rs 200 million or more.

2/ See Volume II, Chapter II. Other examples are given there fromthe chemicals industry.

3/ See IBRD, INDIA-Survey of Tractor Manufacturing Industry, ReportNo. 166-IN, May 16, 1973, p. 7.

4/ See IBRD, INDIA-Survey of Commercial Vehicle Industry, ReportNo. 165-IN, May 16, 1973, p. 4 and Annex 4.

5/ See IBRD, INDIA-Survey of the Steel Forging Industry, ReportNo. 432-IN, April 25, 1974, pp. 10-11.

6/ See IBRD, INDIA-Survey of the Textile Machinery Industry, ReportNo. 976-IN, December 1975, p. 5.

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3.22 While small firms tend to suffer from some inefficiencies in pro-duction, and this seems to be clearly the case for industries like chem-icals, it is not always a severe problem. Certainly, the Bank's in-dustrial studies show that there are a number of competitive industries, suchas textile machinery, machine tools, iron and steel castings, and commercialvehicles. More significant perhaps are the problems created by small scale inmarketing, service, and product development. India's industries usuallystarted with collaboration agreements, under which foreign designs wereimported. Subsequently, the agreements ended and the Government expected thefirms to develop their own products. However because of small scale and slightincentive to modernize, the firms have sometimes not managed to keep up withglobal developments. As a result, Indian industries show a wide array ofproduct vintages. While the older products are not necessarily inefficientfailing large price discounts, they are often not attractive in world markets.Finally, where modernization has occurred, there has been a strong tendency tomove into the newer and more sophisticated areas rather than build on existingtechnical strengths, because of the pressure from import substitution todiversify into all market nooks, and the aim of technological self-sufficiency.

3.23 These problems were also well-illustrated in the IBRD studies. Inthe case of commercial vehicles, the report noted that engines were often outof date and costly, both to build and maintain. Diesel trucks were under-powered, and the designs of even the best manufacturers' trucks were consideredout of date. In many cases, these deficiencies made the vehicles costlyto manufacture. 1/ In the case of transformers, foreign collaboration waslimited by policy to heavy power transformers and to special purpose trans-formers, whereas exports have mainly comprised light distribution transformers.As a result, distribution transformers made in India were exclusively of thecoil type, while manufacturers in most other countries have abandoned coil forlayer windings with considerable savings. 2/ The problem of inappropriatetechnological development was illustrated also by the machine tool industry,in which most products were based on designs acquired from collaborators 10 to20 years ago, while the most advanced firm oriented its efforts toward develop-ment of numerically controlled machines, which are both highly sophisticatedand labor saving. 3/

3.24 Apart from some degree of inadequate, or misdirected, research anddevelopment, Indian exporters also appeared to suffer in the areas of marketingand service. As was pointed out in the report on machine tools: "Capitalgoods such as machine tools are not purchased by users on the basis of pricesalone. A maker's reputation for quality and service often outweighs priceconsiderations ..... Clearly, these may not be economic operations in a smallexport volume."

1/ IBRD Report No. 165-IN, Op. Cit., p. 10.

2/ From a draft note prepared by Dr. H. Choi for the IBRD, entitled India -The Electrical Equipment, and Cable and Wire Industries February 3, 1976.

3/ From a draft note prepared by Dr. H. Choi for the IBRD, entitled India -Export Potential of the Machine Tool Cutting and Small Tool IndustriesJanuary 10, 1976.

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3.25 Small scale was a constraint on product development, and marketingand service effort. However, India's protected industrial structure seemsalso to have led to a number of managerial deficiencies. The Bank's report ontextile machinery for example, found major deficiencies in many firms inmanufacturing processes, (including foundry operations, machine shop layout,and finishing); in materials management, with inventories running two to fourtimes higher than in developed countries; 1/ in labor productivity, whichvaried by 275% between the best and worst firms, and in certain cases was atenth of European and Japanese levels - far more than the factor-intensitydifference in the equipment used; in marketing; and in financial returns. 2/Similar observations have been made about other industries. 3/

3.26 More significant perhaps was the range in the quality of productionfound in virtually every industry. In almost all these industries a few firms(perhaps 25%) were found to be fully competitive internationally in bothprices and quality. However, it was just these firms that did not suffer fromthe chronic excess capacity of India's industry. Thus, in the case of medium/heavy commercial vehicles, average capacity utilization in 1971/72 was 69%,while that of the most successful firm was 104%; in light commercial vehiclesthe figures were 67% and 79% respectively; in tractors the figures were 54%and 129%; and in textile machinery while average capacity utilization was30-60%, the leading firm faced an order backlog of over five years. Thus, itappeared to be consistently true that the firms in the best position to exporthad the least incentive given the relatively secure profitability of domesticsales. For them, a necessary condition for export expansion was overallexpansion.

3.27 There are some other factors that explain weaknesses of India'sindustry. For example, past controls on prices of sugar, cotton textiles,and tractors appear to have had a significant effect on profitability, and,consequently, on willingness and ability to undertake required modernizinginvestment. In addition, the slow growth of demand for India's industrialoutput reduced the incentive to invest. Modernizing investment was notlikely to occur except when investment for expansion was also required.

3.28 While inevitably brief, the above discussion makes clear thatIndian industry has suffered from a number of problems created by the mixof industrialization and trade policies, that go well beyond those of static"efficiency" in the economic sense, and affect India's ability to expand

1/ It should be noted that uncertain supply of raw materials, due to re-current shortages, is a factor in this pattern of high inventories.

2/ See IBRD Report No. 976-IN, Op. Cit.

3/ See Annex I of the IBRD report on the textile machinery industry.

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industrial exports. With all this it must be said that there exist excellentfirms in most industries, as well as highly competitive industrial structures,as in the foundries industry. 1/

Price, Availability, and Quality of Inputs

3.29 The historic pattern of controls on imports of raw materials,components, and capital goods, and the virtually complete ban on imports ofanything produced in India, has been perhaps the single most severe problemfor India's industrial exports. It has meant, inter alia, that poor qualityor high cost production at one stage penalized export activity at the next.

3.30 Industries that have been affected by the poor quality of domesti-cally produced inputs include steel foundries, which suffered from lowquality steel scrap and sand; iron foundries, for which pig iron qualitywas the major problem; cotton textiles, whose major handicap was the qualityof Indian cotton; and electrical equipment, which was penalized by unsatis-factory inputs of dynamo grade steel sheets and electrical grade copper. Theeffect has been to lead to raised transformation costs because of high rejec-tion rates.

3.31 Exporters have also to be concerned about the availability of rawmaterials. Steel, for example, has gone through cycles of glut and shortage.High speed steel for cutting tools has been particularly scarce. Furthermore,the range of qualities and types of basic raw materials and capital goods,that is available in developed countries is not produced in India. This lackcould not easily be made up from imports, because of India's restrictivepolicies.

3.32 The cost of raw materials is reflected in trade policy measures, buta few examples will indicate the significance of the problem. The Bank's variousstudies have identified cases such as: a price premium of as much as 300% onsynthetic fabrics for garment manufacturers, prices of basic chemicals and rawmaterials for the chemical industry averaging 90% above world prices; pricesof batteries, tires, and electrical equipment, which are inputs into commercialvehicles and tractors, all two to three times above c.i.f. prices; prices offorging quality steel 50-60% above international prices; and prices of highspeed steel for cutting tools also 50% above international prices.

3.33 Few industries have been as seriously damaged by trade policies astextiles. Restricted to low quality cotton, whose prices move out of rhythmwith those of the world, India's cotton cloth has been progressively displacedin world markets. The high cost of synthetic yarn has virtually precluded

1/ It is, of course, the case that in industries, where economies of scaleare not significant, protection does not rule out the existence ofeffective competition. That this is the case for the foundries' industrywas made clear by the Bank report.

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exports of blended fabric. Furthermore, the high cost of blended fabricsand the quality of cotton textiles precluded development of a broadly-basedgarment industry. The range of choice of fabric is too limited withoutextensive trade. 1/ Apart from these problems, another noteworthy effect oftrade restrictions has been to make it difficult for firms to time theirimports of commodities subject to rapid price changes. This has affectedwool, for example, and thus the important woolen textiles industry. Equallyimportant has been the difficulty in making subcontracting arrangements,which has proved so vital to export growth of LDC's. The electronics industryhas been significantly curbed by this constraint. (Indian electronics exportsin 1975/76 were less than US$20 million.)

Other Constraints

3.34 Canalization of imports through state trading agencies seems fre-quently to have imposed delays, and raised costs. The bureaucratic managementof the economy also created delays and imposed considerable uncertainty.These uncertainties were inevitable, given the tendency to make frequentsmall changes in policies, the "ad hoc" administration of the system, thecomplexity of basic documents on policy, such as the "Import Trade ControlPoligcy" guidelines, and the ever present possibility that some vital inputmight be banned because of indigenous production.

Special Features of Industries Other Than Engineering Goods

3.35 In the discussion of industrial exports, we have focussed largely onengineering goods, but other major industries suffer from some of the sameproblems. Chemicals and textiles are, like engineering goods, predominantlydomestically-oriented industries. Industrial licensing policy appears to havebeen a factor in fragmenting the chemicals industry. In both cases tradepolicy has resulted in high cost and low quality raw materials. Textiles havealso been affected by price controls, and their effects on profitability andinvestment. Both have only marginally profitable exports, with export-orientedinvestment in present circumstances being, apparently, quite unattractive.However, neither produces heterogeneous goods of a type that requires constantdesign modernization, marketing effort, or service arrangements. Thus, theyshare some, but not all, of the problems of engineering goods.

1/ In precluding imports of fabric the Government has been motivated by anumber of concerns including the fear of "leakage" of imports into thedomestic market and the desire to maximize domestic value added per unitof exports. MIaximizing foreign exchange earning per unit of resourceexpended seems a more logical aim. Finally, it should be noted that fora given net foreign exchange earning in exports, the higher the valueadded per unit of exports, the greater the effect on GNP of a givenreduction in gross exports, and the more vulnerable GNP is to changes inthe trading environment, since the policy is virtually certain to restrictthe range and diversity of exports.

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3.36 Iron and steel is distinctly different from the other major in-dustries. Being a predominantly public sector industry, exports have beendetermined largely by the availability of a surplus. In practice, this hasvaried considerably over time, with resulting fluctuations in the volume ofexports.

3.37 Quite a different group of manufactures includes those labor-intensive activities, such as garments, leather and leather goods, gempolishing, traditional handicrafts, and agricultural industries, like cashewprocessing, in which India's comparative advantage is strong. Performance inseveral of these industries has left much to be desired. Secure access to rawmaterials at international prices seems to have been the most significantproblem for these industries, followed closely, in the case of garments,handicrafts and leather, by deficiencies in design, sales, quality control,marketing, and so forth. Many of these difficulties may be resolved in theright trading environment, as Indian firms gain greater experience. Oneproblem that seems to affect some of these industries is that of obtainingadequate working capital, since collateral is not easy to provide. In thecase of leather, the relationship between large and small scale firms appearto be a problem, as the industry moves into more sophisticated production.Organizing exports from a plethora of small tanners, cobblers and so forth,will prove difficult. However, given India's proven entrepreneurial capacity,none of these problems would seem to be insuperable if the trade policy prob-lems were resolved, and the current negative net effective protection of manysuch activities were ended.

Recent Policy Developments

3.38 The policies that have played a large part in creating the problemsdiscussed above are changing. While the full implications of these changesare difficult to assess, the most important in terms both of size and signifi-cance are in import policy. As might have been expected, import policy haschanged as a consequence of improved export performance and other factorsthat have made the foreign exchange position easier. Thus, the feed-backfrom exports to import availability, and back to exports, appears to havebegun.

3.39 The main features of import policy changes, other than those forexporters, over the past two years have been: (i) to make it easier to importpermissible items up to the limit that actual users wish for their own produc-tion; (ii) to increase the range of readily importable items especially amongcapital goods, industrial raw materials, and goods for mass consumption. Withrespect to the former a significant breach has been made in the principle thata good may be imported only if it is not available domestically; and (iii) toreduce the bureaucratic hurdles in the way of import. On the other hand,the policy does not embody a fundamental change of attitude with respectto import of final goods, to the practice of banning a substantial range ofimports, or to the more general issue of the relationship between trade policyand exploitation of comparative advantage.

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3.40 The changes should have a number of positive effects on India'sindustry by increasing competition, especially for producers of capital goodsand by removing the constraint on expansion which the scarcity of imports andtheir bureaucratic allocation created. Furthermore the reduction in bureau-cracy should improve private firms' ability to plan. However, the basicprinciple of protection has not changed and is likely to continue to exercisea powerful effect on the evolution of India's industry.

3.41 Industrial licensing changes has been extremely complex, but theirmain feature has been to allow fairly unconstrained use of installed capacity,to relax restrictions on the expansion of "large houses" and "dominant under-takings" and to accelerate the processing of license applications. The mostsignificant effect is likely to be to increase internal competition and con-sequent industrial restructuring. However, the degree to which majorchanges will be permitted as a consequence of such competition is still farfrom clear.

3.42 On balance recent developments must be considered likely to helpIndia's industrial sector, and this is especially true when changes inxport policy itself, (which are discussed in Chapter IV), are taken into

account. However, the protection of much of India's industry from externalcompetition and the ambivalent attitude towards internal competition continue.Thus some of the structural weaknesses discussed above are likely to remaina constraint on exports, and are also likely to be removed only by the con-tinued direct and indirect effects of export growth.

Constraints on Agricultural and Mineral Exports

3.43 Leaving aside the important policy issue of export taxes, thereare few general issues affecting agricultural exports. 1/ Lack of produc-tion, which in certain cases such as cotton, is closely related to yieldsis the main endogenous constraint on agricultural exports. This lack ofproduction is related to export duty policies, as well as to more fundamentalaspects of India's agricultural economy. These various problems are dis-cussed in Volume II as they affect individual commodities.

3.44 In the case of mineral exports, however, the dominant category isiron ore, for which a number of clear issues arise. The first is whether theGovernment has given adequate priority to the export of the mineral. Thesecond is the constraints on production and transport, and the investmentprogram designed to relieve them. In practice, India has invested heavily inthe expansion of a large number of ports. However, this is probably a costlystrategy, and has certainly run into a number of delays. Although these issuesare touched upon in the paper on iron ore in Volume II, many significanteconomic problems remain to be explored.

1/ Export taxation is discussed in the context of specific export policiesin Chapter IV, paras 4.25-4.28, below.

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External Constraints on India's Exports

3.45 While prices are not strictly a constraint on export performance,they can clearly be a problem. Low prices affect the returns from differentexport activities, and the average of export prices in relation to importprices determines the returns to exports as a whole. Thus, as was mentionedin Chapter I, it is appropriate to take a brief look at price experience andprospects.

Table 3.2

Unit Values of Exports and Imports and Terms of Trade(1958 = 100)

Exports 1960 1965 1968 1970- 1972- 19749 - 1975-

Food 110 110 164 166 184 331 343Beverages and Tobacco 107 109 188 196 179 291 346Crude Materials,

Inedible (Except Fuels) 102 88 123 128 138 194 237Mineral Fuels, etc. 99 110 191 199 367 590 840Animal and Vegetables

Oils and Fats 100 147 181 239 329 496 375Chemicals 158 151 268 247 247 512 488Manufactured Goods

Classified Chieflyby Material 111 128 188 209 248 384 378

Machinery and TransportEquipment 89 76 91 95 113 114 164

Miscellaneous ManufacturedArticles 112 131 200 216 226 302 326

UNIT VALUE OF ALL EXPORTS 109 112 163 173 196 298 321UNIT VALUE OF IMPORTS 98 102 145 145 141 347 406TERMS OF TRADE 111 110 112 119 139 86 79

/1 1968/69 Base; fiscal years. The base shift in 1968 was made withoutallowing for the small calender year/fiscal year discrepancy.

Source: Statistical Abstract of India, 1972; Department of CommercialIntelligence and Statistics, mimeo; and Indian Trade Journal,August 1976. (From Statistical Annex Tables 10 and 11.)

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3.46 Table 3.2 indicates that, until 1974/75, India's terms of tradegenerally improved after 1958. The deterioration in 1974/75 reflects thespurt in food, fertilizer, and POL prices. Further deterioration after1975/76 is considered unlikely. It will be seen that only crude materials andmachinery and transport equipment did much worse than average, while mineralfuels and chemicals, of course, did exceptionally well. 1/ For the future, theprice prospects of cashews, coffee, jute manufactures, and silver are expectedto be significantly better than average, and that of sugar worse.

3.47 In a few cases India's exports bulk large enough in world marketsto affect prices. India is an important contributor to world trade in tea,silver, jute manufactures, cashews, pepper, polished diamonds, semi-finishedleather, frozen shrimp and recently sugar. The degree of demand inelasticitythat India faces is difficult to determine but for most goods is probablynot very significant. In some cases, this is so because of high elasticitiesof substitution with other products, for example between jute and polypropylene,tea and coffee, and cashews and other edible nuts; in other cases, while Indiahas quite a large share in trade, it has a much smaller share in world con-sumption, examples being shrimp and sugar; in still other cases, the productitself faces high price and income elasticities of demand as in the case ofpolished diamonds. In all, there is probably no commodity in which the ownelasticity of demand is lower than unity, and, consequently, increased exportVolumes will increase foreign exchange earnings in all cases celeris paribus.Nonetheless, India should attempt to exploit what small monopoly power it has,even though it should be particularly careful to avoid overestimating thatpower as has occurred sometimes in the past.

3.48 One interesting price related problem is that Indian firms in theengineering industry, in particular, have to offer sharp discounts below theprices of developed country competitors. Some recent research indicates thatfor homogenous products like steel bars that discount is 0 to 10%, for simpleproducts like hand tools and twist drills the discount is 10 to 20%, but forcomplicated products like machine tools, automobile parts, and diesel enginesthe discount is 20 to 40%. 2/ These discounts evidently reduce the return toexporting in the short term and form a sort of initial barrier to export.However, their significance can be exaggerated. They are certainly in partthe result of difficulties in initial market penetration and brand recognition,and of providing less back-up service to distributors than competitors. Theformer problems can be expected to be resolved in time while the latter maybe a rational strategy for small volume exporters.

1/ See Statistical Appendix Tables 10 and 11.

2/ M. Frankena, "Marketing Characteristics and Prices of Exports ofEngineering Goods from India," Oxford Economic Papers, New Series,Vol. 25 (1973), Vol. 1, pp. 127-132.

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3.49 In the above, we have omitted the serious problem of quota restric-tions. Quotas in major markets such as the USA, the EEC, and Japan affectseveral of India's exports, including cotton textiles and garments, jutetextiles, and tobacco. Strong pressures for protection tend to occur wheneverthere is significant market penetration. In most of these cases we do not knowhow serious a problem the quota restriction, in fact, is. Consider, for ex-ample, the situation of cotton textiles, which is both the most important caseand the one apparently most tightly constrained. As has been frequently pointedout, India has often not met its quotas in cotton millmade piecegoods. 1/ TheBank's own report on the industry argues that quality of production is a moreserious problem, although this does not rule out the possibility that knowledgeof the existence of quotas reduces modernizing investment, thus creating avicious circle. In the case of garments, quota restrictions do appear to bea constraint, but again the limited range of garments offered--the product oftrade policy--is just as serious a problem. To the extent that quotas imposea limit on garment exports, this seems largely to be the result of enteringthe market far too late, after major strides had already been made by countrieslike Hong Kong, Korea, and Taiwan, with historic market shares being frozen inthe early 1970's. Finally, at least for cotton textiles, the quotas haveactually protected Indian exports from competition.

3.50 For the future, India's labor-intensive exports, especially garmentsand leather and leather products may face binding quota restrictions. Thisalso applies to a few agricultural products such as tobacco. However, there isa very large range of products for which such action is highly unlikely, and inthe case of engineering goods, India with 0.1% of world trade, is effectivelyunconstrained. Thus, provided India enters markets early and is reasonablyflexible, there is no reason why India's overall export performance should belimited, even if that of individual commodities is.

Conclusions

3.51 To sum up: The overall domestic policy environment has had the fol-lowing major consequence for India's exports: (i) exports have been penalizedvis a vis import substitutes as part of an overall trade policy which has notled to an efficient allocation of resources; (ii) the industrial structure re-sulting in part from general trade and industrialization policies has penalizedexports through loss of economies of scale, poor quality, and inadequate productdevelopment; and (iii) lack of access to imports has been a particularly severeproblem for the industrial sector as a whole and exports in particular. Thesevarious problems, which are of great importance in their own right, should bealleviated, but not removed by the policy changes (especially import liberaliza-tion) that have followed from recent export success and this, in turn, shouldhave further beneficial effects on exports. The substantial institutional andentrepreneurial strengths built up in India over the past thirty years willmake this process of adjustment much easier. The external environment, has notbeen a major constraint on India's general export growth, although it may havebeen for some specific export categories.

1/ See, for example, J.N. Bhagwati and T.N. Srinivasan, Op. Cit., p. 143.

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IV. EXPORT POLICIES AND PROGRAMS

Introduction

4.01 It is in the context of the overall policy system and external

environment that India has formed its export incentive and taxation policies.The export policy system is discussed immediately below. We then turn to afew specific programs. Next, the implications of the extensive recent policychanges are reviewed, the conclusion being that the incentive system has beensignificantly improved. Finally, the impact of export policy on export pro-fitability and on past and prospective performance is considered. The latterhighlights the real successes and continued weaknesses of export policy,relates these to the performance and problems analyzed in the precedingchapters, and looks forward to the policy issues and prospects covered inthe next and final chapter. 1/

Export Incentives and Taxation

The Exchange Rate

4.02 The most general action taken to encourage exports was the 57.5%devaluation of the rupee in June 1966. However, at that time many exportsubsidies were reduced and export duties imposed on some "traditional" itemsover which India was thought to have monopoly power. The resulting net devalu-ation on trade account has been estimated at 21.6% for exports and 42.3% forimports. 2/ Thus, in a somewhat perverse development, although the devaluationincreased the profitability of tradeables vis-a-vis non-tradeables, it alsoraised the rupee price of imports by more than that of exports. That is,import substitutes were encouraged more than exports. Subsequently, the inade-quacy of this devaluation was accepted, and the Government introduced a seriesof further measures for promoting exports.

4.03 Between August 1971 and September 1975 the rupee floated with the

pound sterling. This meant a fairly steady devaluation of the currency on atrade-weighted basis. Between May 1971 and the third quarter of 1975 India'sexport weighted nominal exchange rate devalued by 12.4%. However, becauseIndia's inflation over that period exceeded those of its trade partners, thepurchasing power parity adjusted nominal exchange rate (PPP-NER) devalued by

1/ This and the succeeding chapter draw heavily on pp. 57-67 of the WorldBank's economic report on India of 1976, (IBRD, 1073-IN).

2/ J. N. Bhagwati and T.N. Srinivasan, Op. Cit., p. 97.

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only 8.3%. However, the devaluation did at least more than offset the differ-ences in inflation. 1/ The position has now been reversed so that the exchangerate devaluation was only 8.4% by May of 1976, compared with May 1971, whilethe real devaluation was 12.6%. This substantial real devaluation has no doubtbeen a significant factor in explaining the improved export performance ofrecent years.

Export Incentives

4.04 Given the overall trade regime with significant protection grantedto import substitutes, exports require more than just overall exchange rateadjustments, since the latter only affect the relative incentives to producetradeables and non-tradeables. Special incentives for exports are requiredto offset some of the bias towards import substitution, and this is espe-cially true for those products dependent on protected inputs. The WorldBank's industry studies cited in Chapter III, as well as a recent analysis byICICI, 2/ show that f.o.b export prices are generally well below domesticprices, that exports are not profitable on a long run basis without incen-tives, and that this is even true in the short run for many products. 3/

4.05 The most important export incentive is cash assistance whichwas introduced in August 1966. Its rationale and the basis for the calcula-tions have not been explicit. Sometimes it appeared to be aimed at off-setting those many domestic taxes (sales taxes and octroi duties) which donot come within the range of the duty drawback system. At other times itwas said to offset the differences between domestic short run marginal costsof production and the f.o.b. realization. To the extent that the latter wasthe case and high marginal costs reflected high transformation costs in thesubsidized activities, the incentive tended to be concentrated on industrieswith the least comparative advantage. In practice, it was a variable andsomewhat arbitrary incentive. Furthermore, it has usually been regarded astemporary in nature--a means of overcoming the short-term bottlenecks to ex-ports, thus ignoring the deep seated penalization of exports implicit in thetrade policy regime.

1/ See IMF, INDIA - Recent Economic Developments, June 16, 1976, p. 53. Forthe movement of the PPP-EER see Table 3.1 above. It should be notedthat both the nominal exchange rate and the PPP-NER devalued considerablymore, if Bangladesh is excluded from India's export customers.

2/ Industrial Credit and Investment Corporation of India, Export Performanceof ICICI Assisted Units, A Sample Study, 1976.

3/ See paras. 4.49 - 4.58 below, where the overall effectiveness of theexport incentive system is discussed.

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Table 4.1

Cash Assistance Rates and Shares in Cash Assistance

1970/71 1971/72 1972/73 1973/74 1974/75Rate / Share Rate-/ Share Rate-/ Share Rate-/ Share Rate-/ Share

Product Promotion

Engineering goods 14.5 (40.6) 15.9 (33.8) 16.7 (36.4) 15.9 (38.7) 18.9 (41.4)Chemicals andAllied Productsand PaperProducts 13.7 (12.8) 15.3 (11.7) 15.3 (12.5) 14.4 (12.9) 14.9 (14.6)

Plastics goods 9.4 ( 1.2) 11.3 ( 1.6) 9.3 ( 1.0) 9.3 ( 1.2) 9.2 ( 1.3)Sports goods 14.5 ( 0.8) 19.9 ( 0.6) 18.9 ( 1.0) 19.7 ( 1.3) 19.4 ( 2.0)Woolen Carpets,

Rugs and Druggets 10.5 (n.s.) 10.1 ( n.s.) 9.3 ( 0.2) 10.2 ( 1.3) 5.7 ( 2.2)Processed Foods 8.5 ( 0.6) 7.9 ( 0.4) 9.8 ( 0.7) 7.4 ( 0.8) 8.0 ( 0.2)Leather Footwear - - 8.4 ( 0.2) 8.5 ( 0.6) 5.2 ( 1.0) 5.6 ( 1.2)Natural Silk

Fabrics andGarments - - 9.9 (n.s 10.1 ( 0.1) - - 7.6 ( 0.2)Handicrafts - - - - - - - - 5.1 (n.s)

Walnuts, Kernelsand Shells - - - - - - - - 7.9 (n.s)Miscellaneous - - - - - - - - (n.s.)

CommodityDevelopmentAssistance

Iron and SteelScraps 3.0 ( 0.8) 4.5 ( 0.2) 5.0 ( 0.1) 5.0 C 0.1) 3.8 C 0.1)

Decorticated CottonSeed Cakes 12.6 ( 1.8) 12.6 ( 0.2) 10.2 ( n.sl 10.1 ( 1.0) 10.8 (n.s.)

Groundnut CakeExtractions 3.2 ( 0.3) 10.1 ( 0.9) 1.9 ( 1.7) 2.9 ( 1.5) n.a. ( 0.6)

Prime Iron andSteel 14.2 (11.9) 14.2 (12.1) 17.9 ( 3.3) 16.0 ( 2.2) n.a. ( 0.1)

Iron and ManganeseOre 0.5 ( 1.5) 7.2 (15.4) 6.6 (12.6) - - - -

Machine Twisted/Curled Coir Fibre 14.3 ( n.s) 14.5 (n.s.) 14.3 (n.s.) 6.9 (n.s.) 4.7 (n.s.)

Rice BranExtractions - - - - 13.7 ( 0.2) n.a. (n.s.) - -Other - - - - - ( 2.6) - (1.4) - -

Others

Export CreditDevelopment - ( 9.1) - ( 7.4) - ( 8.0) - ( 7.2) - ( 9.5)

Assistance to IndianCotton MillsFederation forTextile Exports 4.7 (13.5) 4.9 (10.0) 5.2 (12.5) 6.0 (21.7) 3.4 (14.4)Others - ( 4.4) - ( 5.5) - ( 6.4) - ( 7.4) - (12.1)

TOTAL - (100.0) - (100.0) - (100.0) - (100.0) - (100.0)

TOTAL (US$ million) 54.2 72.1 80.8 8C.0 95.8

1/ Payments/f.o.b. exports.

Note: Rates are calculated on the basis of exports eligible for the cashassistance paid in the relevant year. This can be different fromthe level of exports in the year because of payment lags andrestrictions on eligibility. The largest discrepancy is for engineer-ing goods in 1974/75.

Source: Department of Economic Affairs.

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4.06 Table 4.1 shows the allocation of funds under the Market DevelopmentFund (MDF) from which Cash Assistance was paid until recently. 1/ 2/ Inpractice, between 33% and 42% of total expenditures have gone to engineer-ing goods, and these, along with chemicals, and cotton textiles, which alto-gether accounted for 17% of total exports, received 70% of total disburse-ments in 1974/75. 3/ Other significant expenditures of the MDF were on exportsof oilcakes, and iron and steel; on export credit development; and on importduty rebates to Hindustan Steel Limited. Export promotion councils were alsofunded by the MDF.

4.07 A significant disadvantage of cash assistance was its concentrationon a few categories, which, according to our own and other analyses, arenot the only high potential exports. Indeed, in certain cases that long runpotential must be doubted. 4/ Meanwhile, handicrafts, leather goods other thanfootwear, garments, and most agricultural products received little. A dif-ferent problem was that the announcement was traditionally made quarterly,which obviously made it difficult for firms to plan investments with an export

1/ It should be noted that the I4DF was abolished in 1975/76, with all ex-penditures on "Foreign Trade and Export Promotion," of which the MDF wasthe dominant part, now being handled directly by the Ministry of Finance.It should also be noted that expenditures under this broader head rosesharply from a budgeted figure of Rs 970.5 million (US$112.1 million) for1975/76 to a revised estimate of Rs 1,717.7 million (US$198.5 million).The budget estimate for 1976/77 is Rs 1,905 million (US$212 million).Thus, the average incidence on exports has now jumped to 4%.

2/ Details of actual cash assistance rates by product are reported in Inter-national Monetary Fund, India - Recent Economic Developments, June 16,1976, pp. 55-56; see also Pocket Book on Cash Assistance published inIndia by the Export Times.

3/ It should be noted that the use of cash assistance on low value addeditems can lead, and has led, to very high effective subsidy rates. Seeon this Report of the Comptroller and Auditor General of India for theyear 1972-73, p. 39 et seq.. In certain cases, negative value added ex-ports have resulted (e.g. galvanized pipes and black pipes at that time).

4/ A rigorous analysis of the relationship between the provision ofincentives and economic efficiency has not been carried out. That therelationship is weak is indicated by the range in observed DRC ratios.The test of the efficiency of an export incentive regime is whetherDRCs for all exports are equated at the margin. Of course, even thisdoes not preclude the possibility that a range of efficient exports isnot being produced at all.

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orientation, given the critical importance of cash assistance to profitabil-ity. 1/ Of course, to the extent that cash assistance was not designed tocover long-run costs, it provided no incentive for such investment. Yet athird disadvantage was delays in making payments.

4.08 Import Replenishment Licenses (REPs) were, in practice, given toexporters, both as an incentive, since the inputs commanded a scarcity premium(especially as Replenishment Licenses are in free foreign exchange), and as anecessary condition for increased export activity, since additional importedinputs were thus made available to exporters. 2/ A limited transferability ofREPs has been permitted-initially to suppliers of inputs to the exporter, andthen to firms in the same industry group. The degree of transferability hassteadily been increased. Thus, the possibility that REPs might be in excessof the needs of the firms has been implicitly admitted. In theory, however,the REP was supposed only to supply necessary inputs for the exporter himself.A problem with the REP has been the relationship between the incentive toexport and the import intensity of the activity. In the past, the applicationof restrictions on transferability, on import of items produced domestically,and on the proportion of the license permitted to be used for specific items,severely reduced both its value, and the flexibility it provided to exporters.Another serious drawback of replenishment licenses has been that their value,which depends on the premium, is both unpredictable and highly unstable,tending, in particular, to fluctuate directly with the business cycle and withforeign exchange scarcity. The ICICI study indicates that the average premiumfor its sample fell from 40% of face value in 1972/73 to 27% in 1974/75. Atpresent the premium is still lower. 3/ Premia also depend on the value of theparticular goods that a specific replenishment license permits a firm to import.

4.09 The Allocation of Import Replenishment Licenses for 1973/74, 1974/75,and 1975/76 is shown in Table 4.2. Leaving aside gems and jewelry, which area special case, as is explained in the chapter in Volume II, the largestshares go to engineering goods (31% in 1975/76), and chemicals (11%), as

1/ As a matter of fact, average rates seem to have been quite stable, asTable 4.1 shows, so that the Government could have made announcementsfor a longer period without obvious difficulty. On the other hand, itwould have been very unwise for exporters to assume this stability, andthere have been changes. For example, in 1974/75 Cash Assistance onsteel tubes was withdrawn and on wire ropes was cut from 20% to 13%.

2/ The REP license was introduced in August 1966. On the development ofthe various incentives after the devaluation, see J.N. Bhagwati and T.N.Srinivasan, Op. Cit., ch. 7. For details of REPs see Import TradeControl Policy Annual, Volume II, GOI, Ministry of Commerce. It shouldbe noted that the Replenishment License does not affect the duty statusof imports.

3/ ICICI, Op. Cit., p. 64.

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Table 4.2

Distribution of Replenishment Licenses(US$ millions and %)

1973/74 1974/75 1975/76Export Category Value Share Value Share Value Share

Engineering Goods 41.3 (21.3) 47.8 (22.9) 66.5 (31.4)Chemicals 21.8 (11.2) 23.4 (11.2) 22.6 (10.7)Plastics 3.6 ( 1.9) 5.7 ( 2.7) 6.0 ( 2.8)Leather and Leather Goods 8.8 ( 4.5) 7.3 ( 3.5) 9.5 ( 4.5)Sports Goods 0.9 ( 0.5) 1.8 ( 0.9) 1.5 ( 0.7)Fish and Fish Products 8.8 ( 4.5) 9.2 ( 4.4) 10.8 ( 5.1)Processed Foods 1.4 ( 0.7) 1.9 ( 0.9) 2.1 ( 1.0)Handicrafts 2.2 ( 1.1) 3.3 ( 1.6) 7.3 ( 3.4)Cashew Kernels 1.7 ( 0.9) 4.6 ( 2.2) 4.2 ( 2.0)Tobacco and Tobacco Products 2.8 ( 1.4) 2.7 ( 1.3) 3.0 ( 1.4)Woolen Carpets, Rugs and

Druggets 1.7 ( 0.9) 5.1 ( 2.4) 1.7 ( 0.8)Woolen Textiles, Hosiery

and Mixed Fabrics 0.7 ( 0.4) 0.7 ( 0.4) 0.5 ( 0.2)Coir Products 0.4 ( 0.2) 0.5 ( 0.2) 0.4 ( 0.2)Cotton Textiles 7.2 ( 3.7) 7.0 ( 3.4) 8.7 ( 4.1)Ready Made Garments

(other than silk) 4.5 ( 2.3) 6.0 ( 2.9) 9.0 ( 4.3)Natural Silk Fabrics and

Garments 2.4 ( 1.3) 2.0 ( 1.0) 1.9 ( 0.9)Stainless Steel Products 0.5 ( 0.3) 0.5 ( 0.3) 1.1 ( 0.5)Gems and Jewelry 80.0 (41.2) 71.3 (34.2) 53.4 (25.2)Cinematographic Film 0.5 ( 0.3) 0.4 ( 0.2) 0.5 ( 0.2)Non-Cellulosic Products 0.5 ( 0.3) 0.9 ( 0.4) 0.3 ( 0.1)Cellulosic Products 0.3 ( 0.2) 0.6 ( 0.3) 0.3 ( 0.1)Others 2.0 ( 1.0) 6.0 ( 2.9) 1.0 ( 0.5)

TOTAL 194.1 (100.0) 208.6 (100.0) 212.1 (100.0)

Source: Department of Economic Affairs.

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with Cash Assistance. 1/ In fact, excluding the import of diamonds, these twoindustries received 52% of all licenses in that year. Assuming an averagepremium of 25% and the complete superfluity of REPs in relation to importrequirements for export, the value of the REP as an export incentive in1975/76, (again excluding gems and jewelry), was only about US$40 million.

4.10 One difficulty with the structure of licensing is that, although ithas not proved too difficult to continue exporting a specific product oncestarted, starting itself can be a problem. For this purpose "Advance" and"Imprest" Licenses exist. The former are given against firm export orders,(and now permit duty free import), while the latter are given to any exporterwith an approved export plan. Advance licenses seem to be becoming quitesignificant in value, running at 28% of REP licenses in 1975/76.

4.11 An important offset to existing disincentives, is the duty draw-back. 2/ It is designed to repay the exporter excise and import dutieslevied on his inputs. 3/ The sums involved are not very large--US$43 millionin import duty draw-backs in 1975/76, and US$52 million in drawbacks ofcustoms excise duties in the same year. However, for industrial products, onwhich drawbacks are concentrated, these are significant figures, the combinedfigure of US$95 million in 1975/76 being about half of the level of expendi-tures from the NDF.

4.12 Duty drawback is provided either on an all-industry basis, or aspecial brand rate can be computed for the firm's products, if this isrequested. Eighty percent of drawback paid is on the former basis. Allindustry rates are supposed to be recomputed quarterly, and especially whenthere are significant changes either in raw material prices or industryrates. The drawback is usually at a specific and not an ad valorem rate,in order to avoid inflation of duty drawbacks just because of a rise inthe f.o.b. value of the export. This procedure has created problems whenthe duty itself is ad valorem and the prices of inputs rise rapidly, as hashappened in recent years.

4.13 Drawback is provided for excise duties on domestic products and forcustoms duties on imports. 4/ In general, for the same input the latter duties

1/ Information for 1975/76 indicates engineering goods had then exceededgems and jewelry as a recipient of REPs.

2/ The actual rates granted are complex. A complete account is givenas of August 20, 1975, in Export Duty Rules with Latest All-CommodityRates, Cencus Publications, August 1975. See Table 4.3 for a categorywise breakdown.

3/ The existence of a high level of excise duties on intermediate inputsin a deeply entrenched part of India's tax structure. Since such taxesare high, duty drawbacks are vital for international competitiveness.It should be noted also that drawbacks are possible only on currentinputs, and not on capital goods. State sales taxes and octroi dutiesare not eligible for duty drawback, but the Central sales tax now is.

4/ Custom Duty = Import Duty + Countervailing Excise Duty on Imports.

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Table 4.3

Distribution of Duty Drawbacks(US$ millions and %)

1974/75 /1 1975/76 /1Export Category Value Share Value Share

Processed Food and FruitPreparations 0.4 ( 0.5) 0.1 ( 0.1)

Concentrates and Base forNon-Alcoholic Beverages 0.3 ( 0.4) 0.1 ( 0.1)

Tobacco Manufacture 0.1 ( 0.1) 0.1 ( 0.1)Chemical and Chemical Products 1.0 ( 1.3) 3.1 ( 3.3)Drugs and Pharmaceuticals 1.2 ( 1.6) 2.0 ( 2.1)Dye-Stuffs 0.7 ( 0.9) 2.0 ( 2.1)Payment, Colors, Paints, etc. 0.7 ( 0.9) 2.3 ( 2.4)Essential Oils, etc. 0.3 ( 0.4) 0.1 ( 0.1)Explosives and Pyrotechnic

Products n.s ( n.s.) n.s ( n.s.)Photographic and Cinematographic

Goods 0.7 ( 0.9) 0.7 ( 0.7)Plastic Goods 1.9 ( 2.5) 2.9 ( 3.1)Rubber Products 1.9 ( 2.5) 2.2 ( 2.3)Finished Leather and Leather

Goods, Except Footwear 2.8 C 3.7) 3.4 ( 3.6)Plywood Products 3.0 ( 4.0) 3.6 ( 3.8)Paper Products 1.8 ( 2.4) 1.9 ( 2.0)Textile Manufacture 21.5 (28.5) 19.7 (20.8)Footwear 0.7 ( 0.9) 0.7 ( 0.7)Products of Asbestos/Cement 0.3 C 0.4) 0.8 ( 0.8)Glass and Glassware 0.2 ( 0.3) 0.3 ( 0.3)Umbrellas and Umbrella Parts n.s ( n.s.) n.s. ( n.s.)Iron and Steel Products 10.5 (13.9) 13.7 (14.5)Metal Manufactures 7.9 (10.5) 7.9 ( 8.3)Tools 0.9 ( 1.2) 1.7 ( 1.8)Engineering Tools 15.2 (20.2) 23.3 (24.6)Others 1.3 ( 1.7) 2.1 ( 2.2)

TOTAL 75.4 (100.0) 94.8 (100.0)

/1 Errors due to rounding.

Source: Department of Economic Affairs.

- 53 -

are much higher than the former. Thus, it makes a great deal of differencewhether the inputs are counted as domestically produced or imported. While,by and large, duty drawbacks have been adequate, this probably was not the casefor an exporter, for whom any excess over the c.i.f. price for inputs under-mined competitiveness. In order to obtain drawback of the customs cluties onall his inputs, he had to prove that some specific set of imported inputs wereembodied in the export product. In the absence of such proof the rate wascalculated on a weighted average basis either for a product or a manufacturer.The weights were the relative quantity of domestic and imported inputs used inthe product for all production in India, or by the manufacturer himself. Con-sequently, those who wished to obtain the largest possible drawback had tokeep separate books for domestic and imported inputs and record the use ofboth.

4.14 Difficulties were also created by the complex procedures involved inagreeing on the initial rate of drawback, a process which used to take appre-ciably over a year. This was particularly serious for firms with a frequentlychanging input mix, which applies to most multiproduct firms. It has alsobeen frequently argued that drawbacks do not give adequate allowance forwastage which raises costs for inputs that go through a long productionchain.

4.15 There has existed for some time a scheme under the import policy toprovide indigenous raw materials at international prices. 1/ 2/ It appearsthat, in effect, this is a restrictive scheme. Thus, if a manufacturer claimsthat he can provide a raw material at an international price and the claim isaccepted upon examination, the product is put into the scheme. The ChiefController of Imports and Exports (CCIE) certifies the international pricewhich is fixed by the export promotion council concerned, and may be changedquarterly following a meeting at which producers and consumers are represented.Account is taken of data on c.i.f. prices, where applicable, international tradejournals, and so forth. The exporter must obtain a release order on the manu-facturer from CCIE. If the domestic producer does not undertake to supply thematerial within one month at the price mentioned in the release order or doesnot reply within that period, the licensing authority considers the requestfor direct import. The indigenous supplier is entitled to all export incen-tives except duty drawback, i.e., cash assistance, replenishment licenses, andadjustment against export obligations.

1/ Items currently covered are: polystyrene, PVC resins (suspension grade),sodium hydrosulphite, silicon emulsions, sulphuric acid, U.F. mouldingpowder, polyethylene moulding powder (HDP/LDP), red phosphorous, nylontype yarn/cord/fabric, sodium nitrite, resorcinol, white/yellow phos-phorous sodium bichromate, potassium chlorate, angora hair, stampingfoil, aniline/aniline oil, beta naphthol.

2/ The most successful such scheme was for iron and steel, and this was ineffect between 1967 and 1972.

- 54 -

4.16 A closely related scheme is that for supply of indigenous materialat negotiated prices, which is regarded as a trial ground for the schemereferred to above. Under this scheme an import license can be turned in wholeor in part into a release order on a domestic supplier who agrees to supply aninput (including machinery) at a negotiated price. The supplier is entitledto REP licenses, and such supply counts against the discharge of export obli-gations.

4.17 The value of imports supplied under the scheme to provide raw mate-rials at international prices is small-a mere US$1.7 million in 1975/76. Thescheme has not worked well, perhaps because of delays involved in obtainingrelease orders and then waiting for the response of the potential suppliers.

4.18 There are a number of other incentives: e.g. freight subsidies, in-come tax concessions, and subsidized export credit. However, those discussedabove are certainly the most important.

4.19 Table 4.4 summarizes all the major export incentives for 1974/75--the last year for which such information is available. 1/ It should beremembered that, since it relates incentives to the gross export value ofthe various categories and not to value added, it understates effective pro-tection for those categories (engineering goods for example) which are depen-dent on tradeable inputs. What should be noted is: (i) that engineeringgoods received 42% of all incentives (41% of cash assistance, 35% of thepremia on replenishment licenses, and 46% of duty drawbacks), cotton textilesreceived 18% (14%, 5%, and 29%, respectively) and chemicals received 12% (15%,17%, and 7%) respectively. Thus these three categories, accounting for about20% of exports, received 72% of all the major incentives; (ii) the ratio ofall incentives to f.o.b. value exceeded 20% for processed foods, engineeringgoods, chemicals, plastic goods, sports goods, iron and steel, natural silkfabrics and garments, and plywood products, while such high potential exportsas fish and fish products, leather and leather products, woolen carpets,ready made garments, and gems and jewelry benefited from much lower incen-tive rates; 2/ and (iii) the total value of these incentives at US$206 mil-lion was 5% of exports, and of this 47% came from cash assistance, 37% fromduty drawbacks, and 16% from the assumed premia on REPs.

1/ In theory duty drawbacks might be regarded as compensation for specificpenalization of exports, while cash assistance and the REP premiumprovide more general support. However, the latter also work againstvarious forms of penalization of export, such as exchange rate over-valuation, non-refundable taxes on inputs, etc. Thus, a distinctionon economic grounds between the kinds of incentives cannot usefully bemade.

2/ Recent changes in cash assistance will have changed this situationsomewhat although the broad picture still remains true. It should benoted that the goods with lower rates of incentive are the more labor-intensive. R. Banerji, (Op. Cit., p. 285) notes, correspondingly thatthe share of capital intensive exports in total exports has risenrapidly since 1965.

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- 56 -

4.20 The value of incentives in relation to exports appears to havefallen between 1972/73 and 1974/75 largely because of the declining REPpremia, the lag in the value of specific duty drawback rates in a highlyinflationary situation, the reduction in a number of cash assistance rates,and payment lags following a huge rise in export values. 1/ However, in1975/76 the average rate rose significantly from about 5% to 7%, largelybecause the outflow from the MDF went up by 80% over that of the previousyear.

4.21 A measure taken by the Government to offset the attractiveness ofthe domestic market is imposition of general and specific export obligations.General obligations to export at least 10% of output were imposed until re-cently on six engineering industries, and obligations to export 5% of out-put were also imposed on six other industries. Special obligations havebeer. imposed at various stages of the licensing process. Thus, of 2,020specific obligations imposed by January 1975, 889 had been imposed by theCapital Goods Committee, 602 had been imposed as a condition of receipt ofAdvance Licenses, 327 had been imposed during the normal industrial licensingprocess, and 202 had been imposed in the context of foreign collaborationagreements. Of these, 2,020, only 1,221 had been accepted, and exports hadcommenced only in the case of 528. However, since the policy was put intoeffect only in 1970, the latter low figure may merely reflect lags. As ofJanuary 1975 there had been 47 defaults on specific export obligations. Datafor 1975 and 1976 indicate that the acceptance of such obligations continuedto be low--only 30% of obligations imposed during those years had been acceptedby December 31, 1976.

4.22 The low rate of acceptance of these specific obligations (which maybe still lower, since some firms have probably been discouraged from makingapplications at all) probably reflects the low and insecure profitability ofinvestments, whose export orientation may be required to be 60% or more.Furthermore, these are dangers to India from forcing a wide range of firmsto export, many of whose products will be poor in quality, and thus damageIndia's reputation.

4.23 Perhaps the most important single fact about the incentives in thepast has been the uncertainty of their value and the consequent impossibilityof making long range plans based upon them. What is important to remember isthat profitability in the domestic market is ensured by import quotas and bans;thus, in that market the firm faces a limited number of competitors, all ofwhom are in the same situation with respect to costs as it is itself. However,in the export market the Indian producer faced a huge range of competitors,most of whom can operate on the basis of fairly uniform international pricesof inputs and outputs. The Indian producer, however, because of the nature ofdomestic economic policy faced a different set of prices from those of hiscompetitors, and in general his input prices including protection were higherin relation to export realizations excluding incentives than those facing for-eign competitors. Thus, he was dependent on the incentives for competitiveness.

1/ Payments from the MDF rose 18% between 1972/73 and 1974/75 while exportsrose 63%.

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However, with cash assistance announced quarterly, the REP premium highlyvariable, and duty drawbacks inadequate in periods of inflation the exportercould not base long run plans on these incentives. There was consequently atendency towards adoption of a rather short run view of exports, as a meansof exploiting existing, and hopefully temporary, excess capacity. These dis-advantages were compounded by bureaucratic delays in making payment, grantinglicenses, and agreeing on duty drawback rates.

4.24 Even a brief review of India's major export incentives makes clearhow immensely complex the situation is. The analysis both of export problemsand the incentive system entails substantial simplifications. It is alsodifficult to pull together their effects into a few numbers. Not only is therange of commodities large, and the policies overlapping, but the principleof Indian policy is elaboration of rules (and exceptions to them), which areboth detailed and specific, and subject to extremely wide areas of ad hocdiscretion. Nonetheless, it is probably fair to list a few conclusions: (i)the total value of the major export incentives - cash assistance, duty draw-backs and REP's - was in the order of US$300 million in 1975/76, or 7% ofgross exports, (with the precise value depending largely on the value of REPs);(ii) the incentives have in the past been concentrated on a few industries,especially engineering goods and chemicals, which are certainly not the onlyhigh potential categories, and are just about the least labor-intensive; (iii)the burden of administrative costs and delays is enormous; and (iv) the uncer-tainty of the value of incentives has made any highly export-oriented expansionextremely risky. Thus, quite apart from being unevenly distributed, they haveprobably not been as effective as they might have been.

Export Taxation 1/

4.25 While providing incentives to some products, India has imposed taxeson others. Table 4.5 shows average export duties in 1974/75. The total valueof export duties in that year was more than half of the value of incentives,(see Table 4.4). It has not proved possible to relate export performance tothese taxes. Nor has degree of successful exploitation of monopoly power beenassessed. Certainly in several cases there has been little to exploit: forexample, coffee, raw cotton, groundnut meal (because of substitutability withother oilseed products), unmanufactured tobacco, jute manufactures (becauseof substitutability with synthetics), and iron ore are all products over whichIndia's monopoly power is effectively small. It should also be rememberedin this context that in an import-substitution oriented trade policy regimeall unsubsidized exports or unprotected import substitutes are already taxedvis-a-vis their position in free trade.

4.26 There have been frequent changes in export duties. For example, theduty on coffee was increased from Rs 50 per quintal to Rs 1,300 per quintal inNovember, 1976, 2/ the duty on hides and skins and semi-finished leather wasraised from 20% to 25% in May 1976, duty was imposed on HPS groundnuts in

1/ This discussion does not cover cesses on primary products.

2/ It was Rs 300 per quintal between 2/12/76 and 11/6/76.

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February, 1976, while the duty on all jute manufactures was recently abolishedin a series of measures. Overall, the incidence of export duties has beenfalling steadily, from 4.6% of total exports in 1972/73 to 1.9% in 1975/76,and the percentage of dutiable exports has fallen from 62% in 1966/67 to 25%in 1974/75.

Table 4.5

Export Duty Rates and Economic Efficiency

Category Average Export Duty Rate in 1974/75 /a DRC(%) (Rs/$)

Jute Manufactures 9.4 6.68Raw Cotton 9.3 n.a.Tea n.s. 7.27Coffee 5.3 7.27Pepper 9.0 n.a.Groundnut Meal 7.9 7.50Unmanufactured Tobacco 6.8 7.45Hides, Skins, and Leather 18.4 6.44Coir and Coir Manufactures 6.2 n.a.Mica 30.3 n.a.Manganese Ore 7.6 n.a.Iron Ore 9.4 6.77

/a In 1974/75 all the export duties were worth about US$120 million.

Source: DCIS Monthly Statistics of the Foreign Trade of India; Governmentof India, Ministry of Finance Explanatory Memorandum on the Budgetof the Central Government for 1976/77; Staelin, Op. Cit., Table 2,Column 3.

4.27 The imposition of export duties has not only been motivated by thedesire to exploit India's monopoly power. There have been two other factors:the first is the wish to mop up windfall profits, as in the recent cases ofcoffee and HPS groundnuts. This makes sense to the extent that changes inprice do not reflect changes in fundamental opportunities, to which producersought to be encouraged to respond. The second reason is the desire to en-courage further processing of raw materials, as with the duty on exports ofsemi-finished leather. This also makes sense, if there are significantexternal benefits, which are not being taken into account by producers.

4.28 In all, it is not easy to assess either the effects or the appro-priateness of India's export taxation policies. Certainly, their importanceas a constraint on export performance will have decreased with the generalreduction in the tax incidence. On the other hand, it does seem likely thatthe taxes have not been well designed with a view to exploiting monopoly

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power, (although they may have been appropriate from other points of view).Given the export "taxation" implicit in the trade policy regime, the addi-tional effect of export duties may have been a major factor in inhibitingthe growth, or accelerating the decline, of some major traditional exports,of which jute manufactures are certainly the most important example. However,it appears from the DRCs shown in Table 4.5 that several of these exportsare highly efficient.

Some Special Export Programs

4.29 The Government has a large number of special programs and schemesfor promotion of exports. These are discussed at appropriate points inVolume II. The most important are the comprehensive plan for leatherdevelopment and the investment program for iron ore. In addition, thereare several schemes for expanding the production of key agriculturalcommodities like FCV tobacco, tea, and cashews.

4.30 One scheme worth special discussion is the export processing zone,of which India now has two. Given the problems created by trade policy,especially for the arrangement of subcontracting, these zones could poten-tially be a useful, if clearly a second best, solution. As is pointed out in arecent Bank study of the Indian experience, only some products, namely lightindustrial goods, can really take advantage of a zone. Furthermore, India'sadvantages of a large domestic market and a highly developed industrial sectorwill not be fully utilized by such enclave development. Nevertheless, theBank study makes clear that India has enormous potential as a subcontractor -a potential which export processing zones might help it achieve. 1/

4.31 Kandla Free Zone was established in 1964, but, by July 1975, atotal of only US$10 million had been exported from the zone. This failurewas the product of poor logistics, and the survival of the complete gamutof import controls and MRTP and FERA restrictions. The Santa Cruz ElectronicsExport Processing Zone (SEEPZ), established very recently, is in Bombay, andthus has an excellent location. Initially, although the range of controlswere in operation de jure, the Zone Commissioner had considerable de factofreedom to liberalize their implementation. In 1976/77 imports into bothzones were put under Open General License (OGL). In practice, proceduresin SEEPZ now appear to be quite flexible. Broadly speaking the zones nowhave three major advantages over domestic production, namely no indigenousangle clearance; much easier availability of all imported inputs and speed-ier industrial licensing; and a much more relaxed attitude to participationby foreign firms, "dominant" undertakings, and "large houses".

4.32 At the time of writing the report, SEEPZ had had some-success butonly on a limited scale. There were some 1,500 employees, and exports wererunning at an annual rate of about US$6 million. Eighteen units were in pro-duction. It appeared not to be attractive to those very large international

1/ This potential derives essentially from three factors: (i) cheaplabor; (ii) a high level of skill; and (iii) a highly developedindustrial system.

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concerns capable of mounting a global search for appropriate locations. Partof the reason may have been lingering suspicion of Indian "red tape", anothermay be the official statement that "the Zone is not to be regarded as an areawhere cheap labor is available for unskilled and relatively simple operationsproviding certain employment opportunities and foreign exchange earnings". 1/The Zone management also insisted on quite high value added as well as a planto increase that value added over time, although by now 30% is the acceptableminimum. Not surprisingly, major firms seemed unwilling to make a commitmentto produce high technology products in what is for them an untried environment.Finally, the zone's opening coincided with a global electronics slump, and anadverse shift in global comparative advantage in the industry.

4.33 The failure of SEEPZ, or at least its lack of shining success, seemsto have led GOI to decide to abandon plans for future processing zone develop-ment. 2/ Depending on how far GOI is prepared to go in general trade liberal-ization, this may be a sensible decision. Should the idea be extended, con-sideration should be given to the following points: (i) simplifying proceduresfor sub-contracting out of the zones; (ii) clarification of policy towards100% foreign-owned subsidiaries; (iii) somewhat liberalized access to thedomestic market; (iv) greater attention to competitiveness with zones elsewhere,especially in the treatment of foreign firms; and (v) greater clarity aboutexactly what the position of investors will be. 3/

Recent Export Policy Developments

Export Policy

Introduction

4.34 In part because of the large trade deficit that started to open in1973/74, the Government appreciably increased its emphasis on exports.Although the fundamental features of India's industrialization and tradepolicies have remained the same, as have the instruments of export policy, asignificant shift in emphasis and in the way policies are operated has occur-red. These are important, both because they are likely to lead to improvedperformance and because they are an indication of willingness to make policyadjustments, as necessary, to expand exports. Changes made so far are largely

I/ Investment Opportunities in Bombay for Electronics Export publication ofSEEPZ.

2/ Report of a speech by the Minister of Commerce in the Economic Times ofAugust 15th, 1976.

3/ The mission also investigated bonded factories, but with the devel-opment of duty free imports under Advance Licenses and acceleratedduty drawback payments, the complex procedures of operating afactory under customs bond no longer seem worthwhile.

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in four areas, namely industrial licensing, import licensing, export incen-tives, and bureaucratic procedures. 1/

Industrial Licencing

4.35 The most significant changes in industrial licensing policy resultedfrom the recommendations of the Sondhi Committee on Engineering Exports. Ofparticular interest was the automatic approval for production beyond author-ized capacity, when earmarked for exports, 2/ and improved arrangements forthe supply of inputs for export production. A second policy change of rele-vance to a problem considered above is the permission to fifteen engineeringindustries of automatic capacity expansion of 5% per annum or 25% over a fiveyear period. 3/ Other important recommendations of this committee, notstrictly limited to industrial licensing, were (i) extension of the period forwhich cash assistance is guaranteed; (ii) exemption from import duty on rawmaterials imported under Advance Licenses; (iii) largely limiting the right toimpose export obligations to the Licensing Committee; and (iii) various changesin export credit. All these recommendations have been accepted, and implemented.

Import Policy

4.36 Another major area in which changes have occurred, is that of importlicensing. Under the 1975/76 import policy any actual user was guaranteed anautomatic license for import of raw materials equal to the quantity used orthe quantity of import licenses obtained in the previous year, whichever wasthe less. However, for those who exported more than 20% of their production,

1/ It should be noted that these changes are enormously complex, andwould take many pages to list, let alone evaluate. There are numerousqualifications and restrictions, only some of which are indicated.

2/ In a Press Note of November 4, 1975, it is explained that such approvalis not automatically given to firms coming under the Monopolies andRestrictive Trade Practices Act or the Foreign Exchange Regulation Act,but a simplified procedure for disposing of these cases is in operation.

3/ The industries affected are automobile ancillaries; castings andclosed die forgings; tractors; commercial vehicles; conveyingequipment; diesel engines and pumps; cranes; earth-moving, miningand metallurgical equipment; hydraulic equipment; industrial machin-ery, including chemical plant and machinery; machine tools; textilemachines, power transmission and distribution equipment (other thancables and wires); power transformers; and switchgear. The followingrestrictions are in force: (i) the product mix should not conflictwith items reserved for the small scale sector; (ii) no loans fromfinancing institutions should be required; and (iii) no import ofcapital equipment should ordinarily be involved. Moreover, per-mission of a special Task Force in the Department of Heavy Indus-try is required for "dominant" undertakings. These restrictionssignificantly limit the value of this measure. (From a Press Noteof 21st August, 1975 entitled Automatic Growth of CapacityAllowed to Selected Engineering Industries.)

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the automatic license was available for the greater of the two. 1/ In addition,replenishment licenses were available, as before, and imprest licenses equalto last year's replenishment licenses were also available on acceptance of anequivalent export obligation. Replenishment licenses were increased by 10%for a wide range of exports, 2/ and by an additional 10% for those whosereplenishment licenses were less than 50%. Finally, both the transferabilityof replenishment licenses, and the flexibility with which they could beused, were significantly increased, partly through de jure and de facto re-ductions in restrictions on import of goods domestically produced. Thus,problems with the availability of imports were significantly reduced. Further-more, since successful exporters could get all of the previous year's importsthrough actual user licenses, the replenishment license had to be regardedas predominantly as incentive, except to the extent that the REP licenseallowed access to otherwise banned imports.

4.37 The import policy for 1976/77 continued in the direction laid downby that for 1975/76. Under the automatic licensing system, industrial unitscould exercise a choice between the lesser of: (i) the c.i.f. value of actualconsumption of imported raw materials and components during 1974/75 or 1975/76;or (ii) the value of actual user licenses/release orders obtained for theperiod 1974/75 or 1975/76 (including the value of supplementary licenses),plus the value of REP licenses obtained by the unit during 1974/75 or 1975/76.However for those who exported more than 20% of their production, the auto-matic license was still available for the greater of the two.

4.38 Perhaps the most interesting innovation in the 1976/77 policy forexporters was the introduction into the import replenishment licenses of anumber of items that were not normally permissible. "Under the import policyfor Registered Exporters, a higher import replenishment may be allowed toan exporter to accomodate essential raw materials or components required tobe imported on the grounds that the quality or quantum of the indigenoussubstitute is not adequate, or its price is too high to maintain the competi-tive strength of the export product." 3/ The Press Note on the 1976/77 importpolicy stated: "On these considerations (i.e. those mentioned above) new itemshave been allowed for import against 129 export products, a higher import re-plenishment has been given to 83 export products and 46 new export products

1/ This policy change was largely relevant to overall import policy, andnot to export-related import policy. The expansion of automatic licen-sing is one of the most important features of the import liberalizationdiscussed in Chapter III, para. 3.39 above.

2/ viz. engineering goods, chemicals and allied products, leather andleather goods, sports goods, handicrafts, cotton textiles, and ready-made garments.

3/ Ministry of Commerce, Import-Trade Control, Handbook of Rules andProcedures, 1976-77, Vol. II, p. 2.

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have been added in the list of exports which qualify for import replenish-ment." 1/ The main innovation was the introduction in Column 5 of the replen-ishment license of a number of non-permissible items, (over and above the 10%of the REP License that can be used to import non-permissible items). Underthis provision the manufacturer-exporter was not allowed to transfer thelicense to another manufacturer. Yet another change in the 1976/77 policyfor exporters was permission to use all of the REP license for import ofmachinery required for replacement, modernization, balancing, and research anddevelopment. Schemes for supply of indigenous raw materials at internationalprices were also expanded. The most important change during 1976/77 was thata firm which had exported 20% of output for three years or more was allowedto import up to Rs 10,000,000 worth of machinery without indigenous angleclearance.

4.39 An apparently significant step taken during 1976/77 was the intro-duction of a previously announced scheme to enable duty-free import underAdvance Licenses. The procedures were as follows: applications for advancelicenses were to be made in quadruplicate to CCIE, DGTD and Ministry of Finance;the application had to include a list of materials to be imported, with theirc.i.f. value and quantity as well as a description of the export order forwhich the imports were to be made; the DGTD made a technical examination andthe Advance Licensing Committee under CCIE then made a decision; the licensewas issued subject to the condition that the goods imported under the orderhad to be used exclusively in the execution of the export order; after obtain-ing the advance license from the licensing authority the license holder had toapproach the Deputy Secretary (Drawback) to obtain a Duty Exemption EntitlementCertificate; before clearance of the first consignment the license holder exe-cuted a bond with the licensing authority; after the exports had been completedthe exporter had to check that all the imported raw material had been used andotherwise pay duty on it; following export the Duty Exemption EntitlementCertificate was endorsed by customs; the manufacturer then certified that allthe imported raw material was accounted for either in shipment or by paymentof duty and then requested redemption of the export bond from the licensingauthority.

4.40 This description of a tortuous procedure is necessary to explain whya much heralded scheme apparently had little effect. 2/ The problems were:(i) the licenseholder had to keep all the imported inputs in separate physicallocations as well as maintain separate books; (ii) a new license had to beobtained for each individual order; (iii) imports could only be made after thelicense was received, which led to lengthy delays in fulfilling the order; (iv)only a limited number of inputs were covered - 55 at first and then 91.

4.41 In the recently announced policy for 1977/78 the trend of liberaliza-tion has been significantly furthered. Changes that affect exporters are:(i) general export obligations have been abolished; (ii) the restrictions on

1/ Ministry of Commerce, Press Note - Import Policy for the Year 1976/77,para 35.

2/ The reliance on Advance Licenses hardly increased up to the middleof 1976/77.

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what can be purchased under REPs have been largely removed; (iii) the REPlicense can be nominated in favor of any manufacturer without industry restric-tions; (iv) the scheme for duty free import under Advance Licenses has beensignificantly improved by allowing applications without an export order and byallowing the license holder to use existing stocks with duty free import ofreplacements; and (v) garment machinery has been placed under Open License.The automatic licensing provisions have been further liberalized to allowimport of any permissible item and the basis is actual consumption in 1976/77or 1975/76.

Export Incentives

4.42 In October 1975, the Government announced an extension of cashassistance to some marine products, coir products, processed food, handicrafts,leather products, some chemicals, and jute products. This announcement indi-cated GOI's intention to increase the range of products eligible for incentivesand modified the extremely narrow focus of cash assistance. However, the cashassistance rates on these products are generally below those on engineeringgoods. In addition the basis for computation has been changed. Instead ofattempting in a somewhat mechanical way to equate marginal cost to the f.o.b.realization, cash assistance is now set on the basis of a "balanced judgement"of several factors. These include the potential of the product, supply elas-ticities, barriers to penetration, the cost of raw materials (including non-refundable taxes such as octroi, state sales tax, duties on fast depreciatingcapital goods, etc.) and, in some rough and ready way, the domestic resourcecost. Cash assistance is now guaranteed for three years for all productsexcept cotton textiles, jute manufactures, some basic chemicals, oilseed pro-ducts, and products using non-ferrous metals to a sensitive degree. In theselatter cases it has been felt that the price relationships vary too much forstability of incentives to be justified. For these exceptional items cashassistance is guaranteed for one year. Of course these changes do not affectthe right of exporters under turn-key projects to have their cash assistanceprotected for the period of the contract. There has also been a decision -probably sensible in Indian circumstances - to limit cash assistance to ex-ports with 25% domestic value added or more. In addition, the total sumexpended on this, the most important incentive, has recently been rising. Itshould be noted, however, that even a three year period is inadequate forplanning an export-oriented investment, whose production may only start in thethird year. Given the demonstrated importance of these incentives for exportprofitability, this is an important disadvantage.

4.43 In order to tackle the fundamental difficulty with duty drawbacksdiscussed above, and ensure that, where the ex-factory price of the domesticinput is much higher than the c.i.f. price because of protection, the exportergets the highest possible drawback, a new proposal has been made. Under thisthe export product shall be deemed to be produced from the imported input ifthe material is in short supply in the country or the price is very high andthe material used in the export product is less than the total import of theinput. In other words, exports will be assumed to use imported inputs at themargin and receive a corresponding drawback. Two bases for this are proposed:

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the first is to examine the imports and export on an all-India basis forcertain products; the second is to ask the exporter to produce an import dutycertificate on his imported inputs and, provided the quantum of importableinputs used by the firm in his exports (according to DGTD formulae) is lessthan his total imports of the inputs, the export will be deemed to have beenmade from imported inputs. As a special measure under the proposed schemethe proof of customs duty payment need not be in the firm's name.

4.44 Of the 20% of drawbacks that are provided on a brand-rate basishalf have rates that are fixed at the time of the first export. In the re-maining cases (e.g. machinery, garments and other goods with variable inputmixes) brand rates must be fixed repeatedly, and this is highly time consuming.The scheme for duty-free import under Advance Licenses is one attempt to solvethe problem. Another new idea is that an exporter can give the anticipatedduty on his materials, whereupon a provisional drawback rate is fixed. Then,as with the scheme for accelerated payment of duty drawback through banks,to which we turn below, the exporter transfers his entitlement to the fulldrawback to his bank and receives an advance, after the customs officercertifies on the shipping bill that a certain sum is due to the exporter onthe basis of the anticipated duty drawback.

Procedures

4.45 There has been in existence for some time a simplified payment sys-tem for REPs (and cash assistance). Currently the simplified system involvespresenting the same documents as for the normal system (e.g. bank certificateof exports, a bank attested invoice, and the shipping bill) as well as astatement of exports certified by a Chartered Accountant. Applications canbe made monthly. The acceleration consists in the fact that the licensingauthority (the regional office of CCIE) makes a preliminary scrutiny and issupposed to advance 100% of the REP (and 95% of cash assistance) within oneweek. Following fuller scrutiny the balance is adjusted against subsequentREP entitlements. In practice, 32% of REP applications and 30% of applicationsfor cash assistance are currently being processed within fourteen days.

4.46 Duty drawback advance has been available through the commercial bankssince January, 1976. The advance is made in the form of a 90 day interest freeBank loan after certification of the Shipping Bill by the Customs Authorities.In 96% of cases the full processing is completed within 90 days. If it isnot, the exporter is liable to pay the Bank the sum advanced or the differencebetween the sum advanced and the agreed drawback. However, in cases where abrand rate must be settled and an anticipated drawback rate is required, theprocedure can take a long time. Thus, it is now proposed that the advance befor 180 days in such cases. This accelerated payment system covers 50% ofall duty drawback payments. It may also be noticed that, with this and othersimplified payment schemes, the Government's experience has been of consider-able accuracy in claims.

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Exchange Rate

4.47 In September, 1975 the rupee was delinked from the pound sterling

and tied to an unspecified basket of currencies. By February, 1977 it had

revalued by 16% against the pound sterling, and devalued by 0.2% against the

dollar, 11% against the DM, and 7% against the Yen. India's competitive

position continued to improve between the third quarter of 1975 and the second

quarter of 1976, during which there was a real devaluation of 6%. Over the

last year the real exchange rate has revalued again somewhat, because of

India's accelerating inflation. This makes it clear how important it is

to ensure that the real exchange rate does not get out of line. Fortunately,

in Indian circumstances a very Large range of goods is likely to behave as if

non-tradeable. Thus, exchange rate depreciation is not likely to have a large

inflationary effect, but should have a very beneficial effect on the incentive

to produce exportables. Use of the exchange rate as a stimulant to exports

will reduce the need to rely on discretionary, uncertain and highly visible

incentives, and will have to be a continuing part of any trade promotion

strategy.

Conclusion

4.48 The policy changes of the past three years are cumulatively signifi-

cant, not only in themselves, but probably even more so because they signal

to private firms the Government's interest in exports and its determination

to ensure adequate profitability. It does appear from analysis of the effec-

tive exchange rate as well as of the details of export policy changes that

exports have been made more profitable. Incentives are more generous and

bureaucratic obstacles have been in large part removed. The only caveat--a

somewhat ironical one--is that, as general import liberalization proceeds,

the value of some of the special privileges received by exporters, (REP

licenses, for example) have been eroded.

Incentives and Performance--an Evaluation

4.49 It is now possible to relate the performance and problems to the

incentive system and its development reviewed immediately above. A number of

questions can be explored, although a rigorous analysis has not been attempted.

These are: (i) what is the relative price and profitability of domestic and

export sales, and how successful have incentives been in closing the gap?

(ii) Could exports continue without incentives? And (iii) do recent improved

export performance and policies show that India is now on a new growth trend?

The analysis of these issues focuses largely on manufactured exports, on which

India's future performance largely depends.

Past Performance

4.50 The evidence of World Bank studies is reasonably clear: (i) in all

cases other than textile machinery the f.o.b. export price was well below the

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domestic price--the discount ranging from 20% to 50%; (ii) where the infor-mation was available, exports were not profitable on a full cost basis withoutincentives; (iii) India had to offer a discount below the prices of thirdcountry competitors for most products; and (iv) with incentives, and leavingtheir uncertainty out of account, export profitability was quite close to thaton domestic sales. 1/

4.51 Other studies of industrial goods support some of the points thatemerge from the Bank's work. A study of the automobile ancillary industryby Anne Krueger 2/ showed that the ratio of the domestic price to the f.o.b.or world price varied from 118% for one assembler to 286% for one chemical.The mean domestic/world price ratio was 1.85 with a standard deviation of0.5. Staelin 3/, in a study of the efficiency of fifty eight engineering goodsshowed that domestic prices exceeded f.o.b. prices in all but two cases, theratios varying from a low of 0.92 to a high of 3.57. (Although not directlyrelevant to a discussion of constraints on exports the results of these studieson efficiency are interesting: Krueger showed DRCs varying from 7.87 to184.27, with two infinite DRCs (i.e. negative world value added). The un-weighted mean was 31 and the standard deviation 43. Staelin showed DRCsvarying from 8.4 for a stainless steel dissecting set to 73.6 for a blackconduit, while gas mantles had negative value added at world prices.) Ittherefore seems clear from these studies also that (i) domestic prices aregenerally well above f.o.b. prices, and, consequently, exports are only likelyto be as profitable as domestic sales, if explicitly subsidized; and (ii) theefficiency of India's exports at the margin varies enormously, which impliesconsiderable inefficiency in export incentives.

4.52 A recently completed study by the Industrial Credit and InvestmentCorporation of India provides the most interesting recent information onexport prices and profitability. 4/ For twenty four industry groups it found

1/ See Table 4.6.

2/ Anne Krueger, The Benefits and Costs of Import Substitution in India -A Microeconomic Study, USAID, October 1970, as cited in J. N. Bhagwatiand T. N. Srinivasan, Op. Cit., p. 186. The study covered over thirtyancillary producers.

3/ Staelin, Op. Cit., Table 3.

4/ ICICI, Export Performance of ICICI Assisted Units, A Sample Study,Bombay, 1976.

profitability and_Efficiency of Some Engineerirng Export

Export Price? Domestic Thcice/PTof it on E7xports/ Proiit On EXPOrts? Effective DomesticExoreti Price/' InterstOa rc ~ poi nDmstic Saces Profit on Domestic Sales protective Rate Resource) ( ternational erice3/ srof (With Incentives) Sct Cost Ratio

M M (Witnout~~~~~~(4' Incentives)____ (.eI$

1/ 2/ 141 N.A N.A.

Textile Machinery 6120 50 0A Y.2t 44 10.05 to 10.5N.A

Commrcia 60-5 11-120N.A. N.A. - 22 to -44 1005t 1.Commercial Vehicless N. N,A, 7.5 to ll

Tractors 8| N.A. 130 N.A. -6t1 N,A. 710 to 12Tractors- 8/9/ N5,1At.1

Closed-Die Forgings 60 to 70 120 to 180 - 350 91 1- 60 to 2015 N,A. 8,5 t 9.5

Steel Castings 70 to 80 125 to 140 - 400 to - 230 753 to 240 NA.A.Steel Ssting -9755/o 40 NA.

Machine Tools 70 to 80 50 - 150 to - 50 -ve N,A. N.A.

11/ 50 90 -ve-e N.A. NAcutting Tooqs / e0 to 80 200 -ve Marginal N.A. 1.A.

1/ From IBRD "INDIA - Survey of the Textile Machinery Industry," Report No. 976-IN, December 1975, pp. 26-32. Figures are for the best manufacturers.2/ Excluding incentives, there is no profit on exports because of additional manufacturing, marketing, packaging, transport and other costs.3/ The "international price" is the estimated f.o.b. price of major competitors, The implied difference between the "export price" and the "international price" reflects the effects of

penetration pricing. Iransportetion costs are also a factor when the main competitors are significantly closer to the markets than India.4/ On export of medium/heavy vehicles. The corresponding figures for import substitution are -31 to -38% and 6.3 to 6.9. There is a variation for individual firms.5/ From IBRD "INDTA - Survey of the Commercial Vehicle industry," Report No. 165-IN, May 16, 1973, pp. 14-15 and 19-21,6/ From IBRD "INDIA - Survey of the Tractor Manufacturing Industry," Report No. 166-IN, May 16, 1973, pp. 13, 15.7/ For import substitution. The variation is a result of differing firm quality.8/ From IBRD "INDIA - Survey of the Steel Forging Industry," Report No. 432-IN, April 25, 1974, pp. 20-27.9/ Excluding incentives, there is negative profit on exports.

10/ From IBRD "INDIA - Survey of the Foundry Industry," Report No. 433-IN, April 25, 1974, pp. 15-17. t11/ Draft Note "India -- Export Potential of the Machine Tool, Cutting and Small Tool Industries," January 10, 1976, pp. 18, 23 and 29. a12/ 507. on motors and transformers and 65-807 on switchgears. t13/ Draft Note "India -- The Electrical Equipment and Cable and Wire Industries," February 3, 1976, pp. 9-15.14/ For the best firm visited.

15/ The range indicates significanit differences for the individual firms.

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that, excluding incentives, the weighted average ratio of gross profits tosales was -25% in 1972/73, -17% in 1973/74, and -3% in 1974/75, which con-

trasts with 13%, 16%, and 15% on domestic sales. 1/ 2/ However, with incen-tives the ratio for exports rose to 8%, 7%, and 12% respectively. In 1974/75,eleven of the twenty four industries had negative gross profit margins onexports without incentives, compared to none on domestic sales, but with in-centives only seven had negative gross profit margins on export sales. Whilea positive gross profit margin is a sufficient (but not a necessary) condi-tion for the short run viability of exports, it does not indicate long runprofitability. A relevant measure used by ICICI is operating profits (i.e.gross profits less interest and depreciation). 3/ The study showed that in1974/75 eighteen out of the twenty four industries had negative operatingprofits in exports without incentives, but that this number was reduced tonine when incentives were included. However, on domestic sales only fourindustries had negative operating profits.

4.53 The conclusions of this important study support and extend thosecited above: (i) without incentives, exports were generally not sufficientlyprofitable to cover long run costs, but they were usually profitable on ashort run basis (i.e. revenues covered variable costs); (ii) with incentives,export profitability was close to that on domestic sales, though it variedmuch more between industries; (iii) nevertheless, even with incentives,there were a large number of industries for which exports did not appear tobe a viable long term proposition; (iv) there was a very marked trend toimprovement in the profitability of exports between 1972/73 and 1974/75, andthis was more striking without incentives, than with. This particular resultis consistent with the analysis of PPP-EERs above (see Table 3.1).

1/ The industries were: heavy commercial vehicles, light commercialvehicles, auto ancillaries, cement, dyes, caustic soda, soaps and deter-gents, electric motors, PVC/PILC cables, switchgear/transformers,storage batteries, glass and tiles, abrasives refrigeration/AC equipment,textile machinery, diesel engines, machine tools, steel tubes, wireropes, hand tools, castings/forgings, paper, tires and tubes, and

cotton textiles.

2/ Gross profits.equals sales less all costs other than charges on capital(i.e. interest, depreciation, and taxes).

3/ Short run profitability is possible even with negative gross profitmargins to the extent that administrative costs, which are chargedagainst gross profits, are not variable in the short run. ICICI computeda short run DRC to assess short run private returns to exports. Theresults seem to indicate positive short run profitability for all buttwo industries, without incentives.

4/ Operating profits are gross profits less interest and depreciation, but

before taxes. It is a necessary, but not a sufficient condition for longrun export profitability that the operating profit margin be positive.

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4.54 The congruence of adequate short run profitability with incentives,the largely short run nature of those incentives, and the prevalence of excesscapacity is the most powerful explanation for the rapid growth of exportsof engineering goods and chemicals during the past several years. 1/ Whilethe ratio of exports to sales remains low for most firms and is above 10%for very few industries indeed, growth has been dramatic in some cases. Inthe case of textile machinery, for example, the value of exports rose 1,2Q0%between 1968/69 and 1974/75 from a very low base. Similar increases haveoccurred for commercial vehicles, machine tools, and castings and forgings.

4.55 Thus, while incentive policy has been successful in encouraginggreater exports and, especially in leading to greater use of existing capacity,this success must be put in context. India's performance lagged behind mostother LDCs until very recently, and the relatively good performance of 1975 waslargely due to the unique and essentially temporary performance of sugar andsilver. In 1976, while India's performance was good, that of other countrieswas still better - South Korea, for example, experienced a 40% rise in thevalue of exports, and the rise from US$5 billion in 1975 to US$7.8 billion in1976 exceeded the total value of India's exports of manufactures in 1975/76.Thus the reliance on somewhat arbitrary and differentiated incentives andprograms, not related to any overall view of trade and industrializationstrategy, while not without success in the field of exports has also leftIndia lagging well behind major competitors and there is no evidence yet thatthis situation has changed.

Current Incentives and Future Prospects

4.56 What are the implications for the future? It should be rememberedthat even in 1976/77 growth was partly the result of successful exploitationof a unique opportunity with iron and steel. 2/ The excellent performance ofindustrial exports in 1976/77 over 1975/76 also does not necessarily indicatea new and more dynamic trend, since 1975/76 was a depressed year. For thefuture, long term accelerated growth will depend on continued success with anumber of labor-intensive exports such as garments, leather and leather manu-factures and handicrafts, and with industrial goods especially those in theengineering category. In the case of the latter, past performance, in whichthere was a rise from negligible to low shares of export in sales in the faceof capacity underutilization, cannot be taken as an indication that such

1/ On the importance of excess capacity see J. N. Bhagwati and T. N.Srinivasan, Op. Cit., pp. 147-9, citing Mark Frankena, Export ofEngineering Goods from India, Ph. D dissertation, MassachusettsInstitute of Technology, 1971.

2/ The very large increase in iron and steel exports in 1976/77 was theresult of greatly improved capacity utilization and new capacitycoming on stream in the face of sluggish domestic demand. Allof these factors are temporary.

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growth can continue, especially if domestic demand picks up strongly. Sus-tained growth will require significant changes in the orientation of majorfirms and this in turn will depend in large measure on whether current incen-tives, that have been shown to be so important for long run profitability,will now be considered an adequate basis for an export oriented expansion.

4.57 With recent trade liberalization, and the extension of incentivesthe situation of labor-intensive exports like garments, leather, marine pro-ducts and handicrafts has improved and performance should change accordingly.Thus, these categories provide hope for the future, even though varioushandicaps are still imposed upon them through import policy (as with fabricimport), and import duties. The situation of engineering goods and chemicalsis more uncertain. Evidently incentives have been successful for many productsin these categories in bridging the gap between domestic and export prices.However, it must also be remembered that exporting is more costly in many ways,especially initially, than selling in a protected domestic market, and thatthe long run profitability of exports, dependent on incentives as it is, iseven now very uncertain. The rate of cash assistance is guaranteed only forthree years, which is obviously a very short term horizon for investment; theREP premium will continue to fluctuate unpredictably; and the present easyaccess to raw materials at favorable prices is on past Indian experience im-possible to rely on. In addition, import policy continues to be announcedonly for a year ahead and the exchange rate policy in terms of the desiredrelation between Indian and world prices has not been specified. Given allthis, it is reasonable to doubt whether export oriented investment is likelyto occur on a large scale, even with current more favorable policies, and ithas certainly not done so this far. It would certainly be very risky forfirms to allow exports to climb to a level at which they rely on them fortheir profitability. It is more probable that export growth will tend tocoincide with that of domestic sales once excess capacity has been used up.

4.58 To conclude: given the importance of such industrial exports asengineering goods to prospective performance and the special characteristicsof past successes, it is still questionable whether either past trends them-selves or current incentive policy can be taken as indications that India'sexport performance in these categories will continue to improve. The problemmay be summarized by stating that India has in some sense exploited many of theeasy opportunities for export promotion and it is not clear whether the manyfavorable policy changes are sufficient to allow it to exploit the more diffi-cult ones.

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V. PROSPECTS AND ISSUES

Introduction

5.01 The prospects for Indian exports can be viewed in two time perspec-tives. In the near term the structure of industry is largely given, and thereis considerable excess capacity. The problem is to take the best advantage ofthis situation. In the longer term India faces a range of policy options;the decisions among these will determine whether India's export performancecontinues to improve and by how much; they will also have direct bearing oneconomic development as a whole.

Near Term Prospects

5.02 In the near term and given the policies now in effect detailedanalysis of major categories indicates that India's export growth could be inthe range of 7-10% p.a. in real terms. The most important contributions arelikely to come from engineering goods, iron and steel, iron ore, chemicals,leather and leather manufactures, handicrafts, and marine products. The con-tinued improvements in policy, as well as the good performance of 1976/77indicate that earlier projections of 6% annual volume growth was probablytoo conservative a projection of overall performance.

5.03 In the near term India has the opportunities afforded by the factthat the economy has considerable, if diminishing, excess capacity, espe-cially in the industrial sector. Thus policies to increase exports shouldalso enable India to increase both production and domestic expenditures. Aparticularly important aspect of policy is the import liberalization thatfollowed from improved foreign exchange availability; the latter was itselfthe result of improved export performance which followed, in turn, from ex-change depreciation, more generous and reliable incentives, and earlierimport liberalization.

5.04 Performance could be still better than projected even in the nearterm. One possible way to achieve this is to continue to improve incentivesfor those highly efficient and labor intensive industries such as garmentsand handicrafts that have been relatively neglected until quite recently.While favorable changes have taken place, assistance is still concentrated onengineering goods and chemicals. A review of cash assistance with the aim ofrelating it to the domestic resource cost of earning foreign exchange acrossall activities would probably prove a useful step. The last restrictions onimports of intermediates into industries such as garments could also be use-fully lifted.

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Long Term Prospects

The Global Environment

5.05 In determining the value of an increased emphasis on exports themajor initial question is the environment within which India will act. Inthis context three distinct questions arise, namely: (i) is India constrainedby the current size of the world market? (ii) Is India constrained by traderestrictions, where it is not constrained by the world market? (iii) Howfast can world trade be expected to grow?

5.06 As far as the first question is concerned, the answer is simple:in those categories, in which India's future might be expected to lie,namely, in the most promising category, engineering goods, apparel, handi-crafts, marine products and leather and leather manufactures, and in a some-what lower category, coffee, iron ore, iron and steel, textiles and chemicals,India's shares in world trade are very small. It ranges from less than 0.1%for engineering goods to about 10% for handicrafts. It does not seem reason-able to assume that the market itself will be a constraint in the foreseeablefuture.

5.07 In certain cases, trade restrictions, actual or potential, could bea real problem. The most significant case is that of cotton textiles andgarments. Recently, for example, the USA ruled that garments of handwovenmaterial made on powered sewing machines are not excluded from the quota ashandicrafts. Growth is, consequently, restricted to 7% per annum in volumeterms. In the EEC there are also quota restrictions, except on items likeutility and industrial garments. But such exports will depend on the avail-ability in India of cheap high quality, internationally acceptable textiles.The textile industry, if significantly modernized and improved, will facesimilar marketing difficulties, and this could also happen to leather goods.However, against this pessimistic view it should be remembered that there isa wide range of products and categories, even within textiles or leather,which do not face any market restrictions; moreover, South Korea, which isa far more visible market entrant than India in many sensitive categories,was able to increase its exports by US$2.8 billion in 1976.

5.08 The future of world trade is largely a matter of speculation. Itdepends both on the growth of developed countries and the strength of thetendency towards increased international division of labor. The currentWorld Bank projection of weighted average real GDP growth in the majorindustrial nations is 4.5% per annum between 1976 and 1985. On this basisworld trade might grow at 6-8% per annum in real terms. For a country whoseshare in world trade is less than 0.5%, whose target is only 8-10% exportgrowth in real terms, and which has a number of high potential exports whichare insignificant in world trade, a reasonable evaluation has to be that,whatever the problems facing some specific categories, its own supply isfar more likely to be a constraint than global demand.

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Strategic Issues

5.09 For at least twenty years India has had to deal with a permanentforeign exchange shortage. This provided the main impetus to policies of com-prehensive import substitution, centralized allocation of foreign exchange,and limitation of imports to "essentials". Ironically, the approach takento deal with the foreign exchange problem has penalized exports and has, con-sequently, led to a vicious circle of worsening foreign exchange availability.In addition, the strategy has had serious effects on industrial efficiencyand, consequently, on overall development. However, the flexibility thatIndia had to extricate itself from the vicious circle was limited, given therisks attendant an import liberalization.

5.10 Following the exceptionally severe foreign exchange crisis of1973-74, the Government has pursued a different policy. Instead of tighten-ing import controls, they have been loosened, and exports have received in-creased encouragement. This was made possible in part by an exceptionallyrapid response by aid donors. The new approach has been rewarded, sincethere have been improvements in both export performance and industrialgrowth since that time. Thus, partly because of these measures, India isnow in an exceptionally comfortable foreign E-Xchange position, and one whichallows it to consider its long run strategy towards trade without facing over-whelming short term pressures. The discussion below focusses on the choicesthat India now faces, on the opportunity it now has, and on the view that, ifpolicy continues to move in a coherent manner towards greater reliance ontrade, not only exports but also economic performance itself will continueto improve. The vicious circle will become a virtuous circle.

5.11 The fundamental strategic issue is that of the relationship betweenexport and import policy, or more broadly that of trade policy. India is oneof those few countries that can manage a virtually completely self-sufficientindustrial economy from a technical point of view. This has been made evenmore clear by such recent successes as the discovery of oil, and the markedimprovements in capacity utilization in major intermediate good producingindustries such as steel, fertilizers, and coal. Industrial planning has beencharacterized by a process of identification of all those imports that canfeasibly be produced domestically. Then, once identified, protection is pro-vided and production begins. A similar process has occurred in agriculture,the aim here also being self sufficiency in most major outputs, and especiallyin foodgrains. Given India's resources, it has been technically possible totake this process very far indeed, as has been shown above. 1/

5.12 This import substitution strategy has now created a number of macro-economic problems given the recently successful export drive. If India is toshow an overall trade deficit, the sum of all surpluses of production overconsumption of exportable goods valued at world prices must be less than thesum of all deficits of importables. Consequently, increased net export earn-ings requires an offsetting increase in excess of consumption over production

1/ See paragraphs 2.03 - 2.07 inclusive.

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of importables. What happens if the traditional policy of displacing allcompeting imports continues to be followed at the same time as there is asuccessful export drive? There are a number of possibilities: (i) The excessof aggregate income over supply is saved, and India lends money to the rest ofthe world; (ii) The excess income spills over onto exports, which are re-absorbed into the economy - a phenomenon which shows itself in all individualcases as an inadequate exportable surplus; and (iii) The inflationary gapcreated by the excess of income over supply is not removed by savings and doesnot lead to a painless reabsorption of exports, but generates inflation, whichcontinues until imports are allowed to expand or exports are rendered increas-ingly uncompetitive. It will be noticed that what is happening in India nowis a combination of these three. This situation is the result of combiningan export drive with a continued emphasis on import substitution, when exportearnings already provide more foreign exchange than is needed for the bareminimum of irreplaceable imports. 1/

5.13 The macroeconomic problem that has now emerged shows that Indiafaces the fundamental problem of getting the most out of trade. To use thepotential import capacity a policy system must be created which leads to somedegree of specialization in production. A range of possibilities are openfrom development of the current basic approach to reliance on comparativeadvantage as revealed in the market. These differences in strategy will alsoreflect themselves in differences in policy.

5.14 Current Indian strategy is roughly as follows: imports need notbe restricted only to goods which it is impossible to produce, but they shouldbe restricted to "essentials" such as producers' goods, raw materials, anditems of mass consumption. 2/ Export policy is designed to promote mostfeasible exports. The result has tended to be considerable specializationin imports, rather little specialization in exports (a reflection of theunspecialized economy), and very little specialization in economic activity

1/ It is evident that, given the dilemma described here, merely increasingdomestic investment will not solve the problem of surplus foreign ex-change, unless increased import is also possible. Failing an adequatelyliberal import policy, alternative (iii) above will materialize, namelyinflation.

2/ The logic behind the proposition that, given a consumption patternwhich includes some luxuries and a wide range of consumer goods, itmakes sense to use domestic resources to produce all goods directly,but does not make sense to produce them indirectly through exportand import, is far from clear. The reason for the policy was largelythe urgency of saving scarce foreign exchange. It may be noticed thata basket of imports, which consists entirely of "essentials" is verydifficult to manage, since it is difficult to compress without seriousconsequences for economic activity and real income. Another irony isthat the inputs into industries producing "inessentials" are themselvesregarded as "essentials".

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as a whole. 1/ While this approach is costly, it is not inconsistent witha coherent export policy with some modifications, provided a desired levelof imports can be defined. There are two problems, however: the first isthat the quantity of imports is arbitrary and the process of achieving itdoes not generate any automatic equilibrating mechanism for export incentives.The second is that it is almost impossible to predetermine a policy to achievea given export target. While targets can determine imports by quantitativecontrols, this is not true for exports. In spite of these difficulties,India's current policy goal can be reformulated in a comprehensible manner:it is to achieve a level of exports, at least cost, sufficient to enableIndia to import without constraint the desired level of imports in the"essential" category. 2/

5.15 The idea of exploitation of comparative advantage is based on asimple general principle, namely anything can be produced or traded (but notnecessarily consumed) provided that marginal rates of transformation in pro-duction (at shadow prices) are equated throughout the economy. 3/ India'spolicy has not followed such a principle, and it is also evident that anexport policy based on a different view of what is to be gained from tradecan exist. Nevertheless this approach at least provides a criterion forevaluating potential gains from trade. What needs to be emphasized is thatsuch a policy is not, as is often argued, purely static, since capital isa reproducible factor of production. Consequently, policies that affectthe capital output and capital labor ratios in capital scarce economies canalso have a dramatic effect on growth. Thus, the ICOR in manufacturing inSouth Korea during the 1960s was 0.97, while in India it was 5.0. 4/ Thisdifference, which is in part the consequence of investment patterns deter-mined in the case of South Korea by comparative advantage but in the caseof India by the goal of import substitution, implies that a unit of invest-ment generated five times as much income in South Korea as in India. Equallyinteresting, a recent paper comparing India with Taiwan shows that changesin the structure of industry between subsectors with different labor inten-sities added 272,000 man years of employment in Taiwan between 1961 and 1971,while in India the same process lost 290,000 man years of employment between

1/ It is one of the more interesting reversals of the normal thathas followed from Indian strategy that imports are much more spec-cialized than exports. In 1975/76, for example, three categories(cereals, POL, and fertilizers) made up 60% of imports, while tencategories contributed an equivalent proportion of exports.

2/ Such essential imports include imports necessary for export produc-tion. The aim of achieving the target at least cost is a change fromcurrently formulated policy, but presumably not a controversial one.

3/ This does not entail free trade. Any number of externalities,infant industry problems, etc. can be allowed for.

4/ From L. Westphal, Korea's Experience with Export-Led IndustrialDevelopment, Bank Staff Working Paper, January 1977, Mimeo,Table 14; and M. Wolf, Capital and Growth in India, March, 1977Mimeo.

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1960 and 1969. 1/ Taiwan moved towards more labor-intensive industrieswhile India moved away from them. Thus, the approach based on the idea ofcomparative advantage can be a significant factor in growth and employmentgeneration and should be seen as a factor in formulating a strategy to obtainthe best out of trade.

5.16 It should be remembered that any development along these lineswill create severe problems of transition - problems that already affect thedomestic capital goods industry, which is facing increased competition fromabroad. These cannot be properly discussed here, but what is important isto plan a slow transition, with a program announced well in advance as a basisfor planning, and a carefully worked out system of adjustment assistance.

5.17 To sum up: (i) India now has the opportunity to consider thestrategic issues of trade policy in an environment free from immediate for-eign exchange shortage. If India continues to move in the direction of thepast several years a new virtuous circle of increased exports and improvedoverall performance should replace the old vicious circle of foreign exchangeshortage and export penalization. (ii) It is not reasonable to continue topromote exports beyond the current point without making explicit allowancefor the import of goods that could feasibly be produced in India, or in otherwords, for increased specialization. (iii) Failure to do this will be a fac-tor in perpetuating the current macroeconomic situation in which an economyof US$90 billion is unable to absorb productively a balance of payments sur-plus of only US$1.5 billion. (iv) The problem will also show itself at themicroeconomic level in the form of the inability to generate exportable sur-pluses (i.e. reabsorption of exportables). (v) A continuation of paststrategy is feasible, though difficult to accomplish, provided a desiredimport and total import value can be defined. The task then is to achieve thedesired export level at least cost, and this in turn implies use of efficientincentives, given the key role of the private sector. Finally, (vi) the stra-tegy based on pursuit of comparative advantage is at the least an appropriatebenchmark, and, even if not followed by India in entirety, the ideas could bebeneficial if they inform both the desired import pattern and the type ofexport incentives that are used.

Export Targets and Their Fulfillment

5.18 The Government has had a target of 8-10% real growth. Obviously,this approach has greatest merit when the aim is to achieve some more or lesspredetermined real import capacity. It has much less merit in the context

1/ See R. Banerji and J. Riedel, Industrial Employment Expansion underAlternative Development Strategies: Some Empirical Evidence, l4imeo.The paper also provides a very interesting comment on the exportmaximization strategy of India, which has placed such great emphasison exporting the products of the earlier import substitution strategyin engineering goods and chemicals. Thus between 1955 and 1970 India'smanufactured exports became 20% more capital intensive while those ofTaiwan became 16% less capital intensive, (see R. Banerji and J. Riedel,Op. Cit. Table IV).

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of a strategy based on comparative advantage. However, targets are usedby South Korea, for example, in order to evaluate progress, and identifyproblems. Thus, interest in achieving an overall target is not unreasonable,although it cannot be the sole criterion for success with export policy.

5.19 The target India has set itself is modest in relation to perform-ance of other countries, although its achievement would represent an improve-ment over past trends. It is also modest in relation to the likely growthof world trade and implies little more than maintenance of India's share.Looking at the implications of the target at a more disaggregated level itis useful to divide India's current major exports into three broad catego-ries: firstly, those whose long-term prospects are poor, and which are un-likely to show a sustained growth of more than about 3% per annum from1975/76 level - largely because of demand constraints, or difficulties inincreasing supply (e.g. tea, sugar, spices, cashew kernels, essential oils,oilseed products, tobacco, semi-finished leather, most jute manufactures,coir manufactures, and fuels). These items now account for about 35% ofIndia's total exports. A second group consists of those with intermediateprospects, which could, with more or less effort, achieve sustained growthof up to 8% in terms of volume (e.g. coffee, raw cotton, iron ore, hand-loom and mill-made cotton piece goods, iron and steel, and chemicals).These items account for about 25% of India's total exports. The finalgroup consists of items with really good potential, whose sustained rateof volume needs to be 15% or more if the overall target is to be achieved.In order of importance they are engineering goods, apparel, gems, otherhandicrafts, marine products, and finished leather and leather goods. Theremay be others still unidentified, but these are the ones most likely tofigure prominently. They are all items, in which India should have a com-parative advantage, and for which the problem of profitability will be par-ticularly important.

5.20 The relevant question with these targets is not whether they canbe achieved, but whether they can be achieved with current policies and howmuch more needs to be done. The labor-intensive categories like garments,leather goods and handicrafts face a few constraints beyond general tradepolicies. One is organization. If the great opportunity for expansion ofexports from traditional industries like handicrafts, carpet weaving, hand-weaving of cotton and silk fabrics, and leather manufactures is to berealized, organizations must be created to coordinate marketing, developdesigns, organize training, and ensure quality. In the leather goods indus-try, for example, the cobblers of Agra must be organized to produce shoesto meet the demands of Western fashion. Further development of the exportof handloom fabrics is thought to require establishment of factories espe-cially for export production. The problems are far from insuperable, andhave been tackled successfully so far, since these items, along with gem-polishing, have been sources of dynamic export growth. Nevertheless, asthey grow, both the number of people involved and their geographic disper-sion will create a significant burden for organizations like the LeatherDevelopment Corporation, the .andloom and Handicrafts Export Corporationand the All India Handloom Fabrics Marketing Cooperative Society Limited.Other problems facing these industries, which have already been discussedabove, are market access and adequacy of incentives.

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5.21 In the case of engineering goods the question is how to createexportable surpluses efficiently. Two aspects should be considered: Thefirst is how to generate the desired exportable surpluses by investment inhigh potential industry; the second is the issue of product modernizationfor heterogeneous industrial goods. These two issues are not only importantfor exports but will have great direct bearing on industrial developmentitself.

5.22 As has been observed above, much of the progress with exports ofengineering goods so far has been the result of raising the share of exportsin total sales from negligible to low levels in the context of capacity under-utilization. This process cannot continue indefinitely. Sooner or later thegeneration of exports at the overall level will require investment to generateexportable surpluses at the level of individual firms. That this may be soonerrather than later is indicated by the fact that many of the best firms arealready operating near their capacity limits. If it is also the intention toencourage exports of such products to grow more rapidly than domestic absorp-tion, in order both to accelerate industrial growth and to enable India's im-port capacity to grow somewhat more rapidly than GNP, the Government needs tochoose between two broad lines of policy. 1/ One possibility is to permitfree expansion of the best firms, expecting them to export about 20% of theiroutput at the margin, but with continued reliance on the domestic market forsecure profitability. The problem this creates for Government is that thesuccessful exporting firms will become more and more dominant in the domesticmarket, which raises ideological issues beyond the scope of this report. Asecond approach is to encourage an expansion heavily biased towards exports.Firms would be expected to sell 50% or more of incremental production abroad.If this were undertaken in India's current policy environment the firms wouldbe running major risks. Preconditions for success with such a policy are highand reasonably assured profitability, access to all required imported inputs,and a minimization of bureaucratic interference. 2/ While there has been pro-gress in both directions with liberalization of industrial policy, increasedand more secure incentives, and easier access to imports, this has not yetgone far enough to make either successful in the long term.

1/ The assumption that real import capacity should grow faster thanGNP is evidently questionable. It is based on the view that, giventhe very low current ratios, India has room, even under the modifiedversion of current development strategy discussed above for consider-ably more imports in relation to GNP.

2/ It should be noted that designing an import policy, which does notpenalize exports, but also does not discriminate against domesticproducers of inputs is very difficult for a country with India'spolicy system. Generally, allowing exporters to operate at worldmarket prices, at the existing protection-determined exchange rate,penalizes all domestic suppliers of tradeable (if protected) andnon-tradeable inputs. Thus the link from exports to the domesticeconomy is severely weakened, which is a real cost of an enclave-type export strategy.

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5.23 The issue of product development and modernization arises mostsharply when products are appropriate to Indian circumstances, well made,but simply not the newest technology. The best of Indian commercialvehicles and some textile machinery are good examples. Can such productsbe exported successfully, or is it necessary for India to engage in ahelter skelter rush to keep up with advanced technology, creating in theprocess industries that are bifurcated into domestic and export components?

5.24 A general answer cannot be given. The opportunities for individualindustries differ. In certain cases (trucks, for example), Indian productsare apparently highly appropriate to circumstances in other less developedcountries. Provided they are sold at some discount vis a vis those ofmajor developed countries, and provided they are not "import substituted"out of the market, there should be potential for such products. Even indeveloped countries, there is a large market for relatively simple products,provided they are well made and competitively priced. Thus, the degree towhich India has to keep up with the very latest technology, in order tocompete successfully is limited, provided basic quality and adequate com-petitiveness are maintained.

5.25 Although opportunities do exist in these directions, the developedcountries are bound to remain the largest markets for industrial goods, notleast because of the strong emphasis on import substitution of most develop-ing countries. Newly rich developing countries are also likely to determinetheir purchases by developed country standards. This means that India'sdesire to export heterogenous industrial goods entails some degree of con-tinued modernization which is not happening to any great extent now. How-ever, it is only with fairly few firms focusing on relatively few productsthat India's own technical and product development is likely to be adequate. 1/

5.26 Apart from the evident difficulty of achieving these targets, itshould also be remembered that, while they have value, they should evidentlynot be taken too seriously. Thus, there is at least one argument for raisingthe target for engineering goods. The growth of this sector is in part con-strained by demand, and 15% volume growth in exports will not affect growthof the sector very much, because of the low share of exports in sales. Forthis reason it may well be appropriate to raise the target for growth ofefficient engineering products, and consequently accelerate the growth ofthe entire sector. However, a more significant problem with exaggeratedemphasis on sectoral targets is that under either of the main strategies itis desirable to generate foreign exchange in the most efficient manner. Thisrequires microeconomic evaluation. Efficient growth must be the consequenceof efficient incentives, whether the aim is that of achieving a specifiedoverall import capacity or the wider one of exploiting India's comparativeadvantage in trade.

1/ The degree of lack of specialization of high potential exportsmay be indicated by the fact that, while France imports 47% of itsconsumption of machine tools, India, with 15% the consumption level,imports only 29%.

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Criteria for Incentive Policy

5.27 While it is not desirable to discuss the details of policy, a num-ber of general points should be made. Firstly, given the continuation of highnominal protection of imports and import substitutes, exports will requirepositive incentives on a long term basis. 1/ The most direct means is use ofCash Assistance. Secondly, given the complexity of defining the optimum sub-sidy for each item, even in theory, the bureaucratic difficulties of finelydifferentiating between incentives and the insecurity created by frequentpolicy changes, it is imperative that the incentive system should be as uni-form, simple, and stable as possible. Such a system is the one most likely togenerate exports efficiently. If the export subsidy is differentiated, thisshould be limited to only a few general categories. Thirdly, exporters musthave free access to inputs of international quality through continued relaxa-tion of the process of indigenous angle clearance. And, finally, if the gov-ernment wishes to encourage a highly export-oriented expansion of the leadingfirms, this must be stimulated by exceptionally attractive and secureincentives.

Conclusions

5.28 This discussion has brought out a number of key points. The firstis that long term prospects depend in large part on policy choices, whichwill have effect well beyond the sphere of exports alone. Secondly, andmost important, exports must be seen in the context of a trade policy whichdeliberately creates a degree of specialization in India's economy. Thereseem to be two broad strategic options: one is to continue to import only"essentials", however, defined, and the second is to pursue comparativeadvantage in a more thorough going way. The latter will have very majormerits for India. However, both presuppose promoting exports in the mostefficient possible way, the former up to some target level, and the latterup to the point at which marginal transformation costs are equated through-out the economy. Thirdly, export targets have a role to play and evenachievement of current export targets of 8-10% volume growth may well requirefurther policy evolution. Finally, incentives should have the properties ofstability, uniformity and efficiency, and exporters should be permittedaccess to imports whenever necessary for competitiveness.

1/ It should be noted that the fiscal cost of these incentives need notbe high, provided (i) implicit tariffs on imports brought in underquotas are captured by Government; (ii) increased export earningsare spent on increased imports which bear duty; and (iii) increasedtaxes on economic activity resulting from export expansion are takeninto account. These points are evidently stronger the greater the"export return" on incentives, which, will be closely related tothe efficiency of the exports themselves. Concentration of incen-tives on high cost exports will no doubt also have a fiscal cost.It should also be noted that the idea that import substitution doesnot have a fiscal cost is, of course, illusory. The Government losesrevenue from replaced imports as well as the consumption tax revenuedirectly transferred to producers.

INDIA'S EXPORT PERFORMANCE, PROBLEMS, POLICIES AND PROSPECTS

VOLUME I

STATISTICAL ANNEX

Table of Contents

Table No.

1. India: Exports in Current Prices2. India: Exports in Constant 1968/69 Prices3. Arithmetic Regression of 1965/66-1974/75 Constant Price

Exports on Time4. Semi-Logarithmic Regression of 1965/66-1974/75 Constant Price

Exports on Time5. Indices of India's Export Volume 1950/51-1975/766. Indices of India's Export Volume 1968/69-1974/757. India - Volume Index of Selected Exports 1968/69-1974/758. Quantity Indices of Exports 1958-19709. Quantity Indices of Exports 1968-1969-1975/76 (fiscal years)

10. Unit Value Indices of Exports 1958-197011. Unit Value Indices of Exports 1968/69-1975/76 (fiscal years)

INDIA

EXPORTS IN CURRENT PRICES(US$ million)

1950/51 1960161 1965/66 1966/67 1967/68 1968/69 1969/70 1970f71~/ 1971/72 1972/73 1973/74 1974/75 1975/76

Cashew Kernels 18 0 39.7 57,5 49.5 57.4 81.2 76.6 69.6 82.4 89.3 95.5 148.1 111.1

chemicals Pharmaceuticals & Cosmetics n a 15.0 26.1 22.8 22.4 29.1 33.8 44.4 47.2 53.8 102.9 163.5 137.0

Coffee 2.8 15.2 27.2 19.3 24.2 23.9 26.2 33.5 29.6 42.7 59.1 64.4 77.0

Cotton Textiles and Garments n.a n.a 155.2 109.6 119.9 142.0 163.1 171.4 176.4 235.2 404.2 420.4 415.8-Piecegoods (Millmade) (225.1) (110.8) (99.2) ( 70.8) ( 80.6) ( 88.1) ( 83.3) ('90.0) ( 89.5) (110.4) (206.8) (163.8) (138.0)

-(Handloom) ( 22.8) ( 10.0) (17.5) C 9.1) ( 7.7) ( 6.7) ( 9.6) C 10.4) ( 13.4) ( 21.5) ( 41.2) ( 36.5) ( 45.5)-Yam and Thread ( 4.2) ( 9.3) ( 14.6) ( 13.0) ( 10.2) ( 19.1) ( 40.5) ( 29.6) ( 23.8) ( 32.0) ( 20.5) ( 31.6) ( 7.4)-Garments ( n.a) ( n.a) (7.7) ( 3.1) C 3.8) ( 5.6) ( 7.1) C 11.9) C 18.3) ( 38.7) ( 81.7) (119.5) (167.5)-Other Manufactures ( n.a) ( n.8) (16.2) (13.5) ( 17.6) ( 22.5) ( 22.6) C 29.6) C 31.5) ( 32.5) ( 54.0) C69.0) (57.4)

Engineering Goods 1.2 37.8 41.6 30.7k1 43.5 89.8 119.4 155.3 163.1 184.9 258.9 442.3 472.3

Handicrafts n.a n.a 57.9 62.5 72.5 100.3 111.1 107.1 121.6 169.5 232.0 233.9 259.0-Gems and Jewelry ( n.8) ( n.a) (33.6) (32.7) C 44.3) ( 63.2) ( 59.7) ( 57.0) ( 70.2) (102.3) (138.9) (123.5) (142.1)-Carpets ( n.a) ( n.a) C9.5) C12.0) C 12.6) ( 14.2) ( 14.6) (144.6) ( 18.4) ( 28.6) C 32.2) C 44.0) (48.0)-Other ( n.a) ( n.a) (14.8) (17.8) C 15.6) C 22.9) ( 36.8) (35.5) ( 33.0) ( 38.6) C 57.9) ( 66.4) (69.9)

Iron Ore 0.5 35.8 88.4 93.6 99.7 117.8 126.2 152.9 140.7 142.5 170.5 201.1 247.1

Iron and Steel n.a 32.1 38.0 45.0 91.3 123.2 135.8 136.0 57.5 55.9 78.2 115.7 127.1

Jute Manufactures 239.0 283.8 984.0 332.6 312.1 290.6 275.5 253.9 356.4 324.4 292.0 370.7 287.0-Hessian ( n.a) ( n.8) (216.1) (168.8) 154.8 (123.7) (104.4) (128.6) (155.2) (150.2) (130.0) (188.2) Cn.a)-Carpet Backing ( n.a) C n.a) ( 4.9) ( 78.5) 83.1 (124.7) (140.9) (82.0) (142.8) (112.5) (104.8) C 93.3) (n.a)-Sacking ( n.a) ( n.a) ( 91.7) ( 59.8) 54.5 ( 22.8) ( 14.2) C27.0) .(39.8) C 37.2) ( 32.2) ( 57.1) n .8)-Other ( n.a) ( n.a) ( 31.3) ( 25.5) 19.7 ( 19.4) ( 16.0) C16.3) C18.6) ( 24.5) ( 25.0) C 27.1) (n.a)

Leather and Leathier Manufactures n.a 75.2 84.3 (103.7) 85.5 108.4 (128.3) (113.3) 135.1 234.3 232.1 189.9 259.3-Raw Skins ( n.a) ( 19.3) ( 18.8) ( 19 4) ( 9.1) ( 5.9) (9.8) (4.8) (0.5) (07 (1.) ( neg.) C02)0-Tanned Hides and Skins C 0.8) C 47.7) ( 53.6) ( 72 0) ( 63.9) ( 89.9) (104.3) (92.0) (114.6) (194.2) (189.5) (127.4) (157.7)--Finished Leather ( n.8) ( 3.7) C 3.1) ( 2.8) C 2.1) ( 2 2) C 3.0) C2.6) C 5.8) C 22.3) (21.0) ( 36.7) C 70.8)-Footwear C n.a) C 4.5) ( 9.0) C 9.2) (110.0) C 9.5) C 9.4) C12.1) C 11.5) Cl12.7) C13.4) C 20.1) ( 19.0)-Other Manufactures C 0.8) ( neg.) ( 0.2) C 0.3) C0.5) C 0.9) C 1.7) C1.8) C 2.7) C 4.5) C6.8) ( 4.8) ( 11.6)

Marine Products 5.2 9.7 14.8 23.2 26.3 32.9 44.6 46.8 59.8 77.5 114.9 85.8 146.3

Oilcakes 0.1 30.0 72.8 54.1 60.6 66.0 55.3 73.9 53.9 97.0 228.7 120.0 99.5

Silver 0.8. neg, neg. 0.1 0.6 4.4 6.9 neg. - - 7.2 100.2 231.1

Spices 53.4 34.9 48.5 39.4 36.3 33.5 46.0 51.7 48.6 37.8 70.7 76.9 82.0

Sugar 0.8 5.2 24.2 22.3 21.3 13.6 11.4 36.8 40.6 17.4 54.8 424.5 545.9

Tea 168.9 259.6 241.2 211.2 240.3 208.7 166.0 197.6 210.0 191.1 185.9 285.9 273.7

Tobacco 29.6 30.7 41.1 28.9 46.5 44.2 43.6 41.9 56.8 79.2 87.8 100.8 107.6

Others 489.7!! .35-1.7a' 288.5 288.7 230.0 300.9 314.5 346.6 380.7 525.0 563.5 630.5 676.5

TOITAL 1 261.3 1,386.5 1,691.8 1,537.2 1,590.4 1,810.5 1,884.3 2,032.5 2,160.4 2,557.5 3,238.9 4,173.6 4,555.2

a/ including those export categories for which disaggregated data are not available.hi Possibly based on more narrov definition of engineering goods than rest of series.c/ As recorded in the Monthly Statistics of Foreign Trade. Because of a change in the method of recording these data are thought to overstate the level of exports by about 5%.

Source: Commodity papers in Volume II, Department of Commercial Intelligence and Statistics. Monthly Statistics of the Foreig Tae fIni

August 1976

INDIA

EXPORTS IN CONSTANT 1968/69 PRICES(US$ million)

1960/61 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 1971/72 1972/73 1973/74 1974/75 1975/76(Estimates)

Cashew Kernels 50.2 65.4 52.6 65.2 81.2 77.4 64.2 77.1 84.6 66.8 83.1 68.9

Chemicals Pharmaceuticals and Cosmetics 15.9 26.7 24.4 22.3 29.1 32.6 40.0 40.0 42.0 67.7 87.9 65.5,'

Coffee 16.7 22.1 21.5 28.3 23.9 27.0 26.8 29.7 42.4 43.9 41.2 49.1

Cotton Textiles n.a. 152.2 125.6 123.3 142.0 154.1 150.2 139.2 175.5 243.9 204.2 213.3- Piecegoods (Millmade) (117.3) (100.0) ( 72.7) ( 84.0) ( 88.1) ( 79.9) ( 80.9) ( 74.5) ( 87.5) (126.7) ( 72.7) (80.9)- (Handloom) ( 8.7) ( 13.4) ( 11.7) ( 8.4) ( 6.7) ( 9.0) 9.4) ( 9.7) ( 15.7) ( 22.8) ( 16.4) (19.4)- Yarn and Thread ( 6.7) ( 14.3) ( 16.2) ( 9.6) ( 19.1) (,37,2) ( 22.9) ( 15.3) ( 21.0) ( 11.5) ( 11.5) ( 3.2)- Garments ( n.a.) ( 7.9) ( 3.3) ( 3.8) ( 5.6) ( 6.7) ( 10.6) ( 14.6) ( 27.9) ( 49.9) ( 65.7) (819)e- Other Manufactures ( n.a.) ( 16.6) ( 14.5) ( 17.5) ( 22.5) ( 21.3) ( 26.4) ( 25.1) ( 23.4) ( 33.0) ( 37.9) (28.0)

c/Engineering Goods 40.2 42.6 33.0 43.2 89.8 115.0 139.9 138.3 144.2 184.6 214.1 203.2±/

Handicrafts n.a. 59.3 67.1 72.1 100.3 107.0 96.5 103.1 132.2 152.5 128.3 123.7-'

Iron Ore 23.3 92.3 100.5 102.8 117.8 123.8 159.8 149.3 154.6 177.8 167.3 172.6

Iron and Steel 42.5 60.7 47.6 90.3 123.2 129.8 101.1 43.3 50.8 43.4 35.5 55.6

Jute Manufactures, 276,5 343.R 297.7 310.2 290.6 263.8 243.5 300.6 251.9 246.6 239.7 211.8- Hessian (166.4) (182.0) (143.7) (153.6) (123.7) (104.9) (106.9) (110.1) (102.2) ( 89.8) (105.7) (n.a.)- Carpet Backing ( - ) ( 62.4) ( 83.5) ( 92.9) (124.7) (127.8) ( 96.0) (140.9) (101.6) (106.0) ( 74.8) (n.a.)- Sacking ( 84.9) ( 68.1) ( 49.7) ( 42.9) ( 22.8) ( 15.4) ( 23.6) ( 31.6) ( 25.0) ( 25.3) ( 35.7) (n.a.)- Other ( 25.2) ( 31.3) ( 20.8) ( 20.8) ( 19.4) ( 15.7) ( 17.0) ( 18.0) ( 23.1) ( 25.5) ( 23.5) (n.a.)

Leather and Leather Manufactures 66.9 77.2 93.4 77.9 108.4 127.8 126.9 157.5 186.8 144.9 113.1 124.6-- Rav Skins ( 13.8) ( 13.4) ( 14.0) ( 7.8) ( 5.9) ( 7.0) ( 4.4) ( 0.2) ( 0.3) ( 0.3) ( neg.) (n.a.)- Tanned Hides and Skins ( 46.1) ( 53.0) ( 67.4) ( 59.0) ( 89.9) (107.4) (108.2) (137.5) (164.7) (113.2) ( 76.1) (n.a.)- Finished Leather ( 3.9) ( 3.4) ( 3.0) ( 2.1) ( 2.2) ( 2.5) ( 2.2) ( 5.4) ( 6.5) ( 13.4) ( 17.7) (n.a.)- Footwear ( 2.2) ( 7.3) ( 8.7) ( 8.6) ( 9.5) ( 9.3) ( 10.5) ( 11.7) ( 11.3) ( 11.9) ( 15.2) (11.1)- Other Manufactures ( neg.) ( 0.1) ( 0.37 ( 0.4) ( 0.9) ( 1.6) ( 1.6) ( 2.7) ( 4.0) ( 6.1) ( 4.1) (n.a.)

Marine Products 24.6 18.8 25.9 26.9 32.9 38.9 44.1 43.6 47.8 64.2 55.4 71.4

Oilcakes 34.3 65.8 53.1 59.2 66.0 55.9 69.7 58.9 79.4 101.7 66.0 78.1

Silver neg. neg. 0.2 0.9 4.4 6.4 neg. - - 3.4 53.2 130.8

Spices 32.1 42.2 35.5 35.1 33.5 28.3 31.9 44.0 30.2 41.7 35.1 33.8

Sugar 7.6 42.7 45.3 31.0 13.6 11.2 47.3 43.1 13.9 34.3 94.5 163.4

Tea 206.7 204.5 197.3 210.8 208.7 180.7 205.6 214.9 200.4 197.3 240.9 220.1

Tobacco 38.4 47.5 31.4 46.5 44.2 45.5 39.8 48.1 79.3 65.6 62.9 61.6

Others!/ 342.8-/ 280.4 290.0 227.5 300.9 305.7 326.4 348.9 443.4 396.0 339.0 359.1

TOTAL 1,351.4 1,044.2 1,542.1 1,573.5 1,810.5 1,830.9 1,913.7 1,979.6 2,159.4 2,276.3 2,261.4 2,406.6

a/ Constant price series for "Others" is calculated assuming prices rose in line with the weighted average price index for the disaggregated export categories.b/ Including those export categories for which disaggregated data are not available.c/ Possibly based on more narrow definition of engineering goods than rest of series.d/ As recorded in the Monthly Statistics of Foreign Trade. Because of a change in the method of recording, these data are thought to overstate the level of exports by

about 5%.e/ Calculated assuming prices rose 12.5% during 1975/76 (based on EPP's Index of International Inflation). For leather and leather manufactures, the constant price

increase in footwear is calculated independently.

Source: Commodity Papers in Volume II , Statistical Annex Table

October 1976

ARITHMETIC REGRESSION OF 1965/66-1974/75CONSTANT PRICE EXPORTS ON TIME

Standard Error T Ratio Standard Error T of Standard Error S.E.E.1/eanSlope of Slope of Slope Constant of Constant Constant R Squared 'R Squared of Estimate Mean SEi)

Cashew Kernals 2.0012 0.9885 2.0246 60.7533 6.1332 9.9057 0.3388 0.2561 8.9781 71.2 12.6

Chemicals 6.0830 1.2062 5.0433 7.6533 7.4841 1.0226 0.7607 0.7308 10.9556 41.1 26.7

Coffee 2.5236 0.4547 5.5501 16.8000 2.8213 5.9547 0.7938 0.7681 4.1300 30.7 13.5

Cotton Textiles and Garments 9.7188 2.9044 3.3463 106.7627 18.0211 5.9223 0.5833 0.5312 26.3802 160.2 16.5

- Millmade Piecegoods ( 0.6667) (1.8953) (0.3517) ( 83.0333) (11.7600) ( 7.0606) (0.0152) (-0.1079) (17.2149) (86.7) (19.9)

- Garments ( 6.0588) (1.3562) (4.4652) (-13.7267) ( 8.4150) (-1.6312) (0.7137) ( 0.6779) (12.3183) (19.6) (62.8)

Engineering Goods 19.9727 1.6907 11.8136 4.4000 10.4903 0.4194 0.9458 0.9390 15.3562 114.3 13.4

Handicrafts 9.3861 1.3547 6.9287 49.7667 8.4055 5.9208 0.8572 0.8393 12.3043 101.4 12.1

Iron Ore 9.7309 1.0567 9.2091 81.0800 6.5564 12.3666 0.9138 0.9030 9.5976 134.6 7.1

Iron and Steel -4.3764 3.8351 -1.1411 96.6400 23.7959 4.0612 0.1400 0.0325 34.8336 72.6 48.0

Jute Manufactures -9.5539 2.2739 -4.2016 331.3867 14.1091 23.4875 0.6882 0.6402 20.6536 278.8 7.4

- Hessian (-8.2412) (1.6829) (-4.9559) (167.5867) (10.3180) (16.2421) 0.7543 0.7236 15.1041 (122.3) (12.4)

- Carpat Backing ( 1.9964) (2.7911) ( 0.7152) ( 90.0800) (17.3186) ( 5.2013) 0.0601 (_0.0574) (25.3518) (101.1) (25.1)

- Sacking (-3.1352) (1.4681) (-2.1355) ( 51.2533) ( 9.1093) ( 5.6265) (0.3631) ( 0.2835) (13.3446) (34.0) (39.2)

Leather and Leather Manufactuf6is 8.9533 2.8500 3.0152 73.5067 17.6841 4.1567 0.5319 0.4734 25.8869 120.8 21.4

- Tanned Hides and Skins ( 5.6491) (2.5392) ( 2.2248) ( 60.1200) (15.7552) ( 3.8159) (0.3822) (0.3050) (23.0632) (97.2) (23.7)

- Finished Leather ( 1.4194) (0.3874) (3.6637) (-1.9867) ( 2.4039) -0.8264 (0.6266) (0.5799) (3.5190) (5.8) (60.7)

Marine Products 4.4806 0.4411 10.1581 15.2067 2.7369 5.5562 0.9280 0.9191 4.0064 39.9 10.0

oilcakes 2.6394 1.3671 1.9307 53.0533 8.4825 6.2545 0.3178 0.2326 12.4171 67.6 18.4

Silver 2.8915 1.6255 1.7788 - 9.0533 10.0862 -0.8976 0.2834 0.1938 14.7647 6.9 214.0

Spices 00600 0.6178 -0.0971 36.0800 3.8331 9.4129 0.0012 -0.1237 5.6110 35.8 15.7

Sugar 2.4600 2.7233 0.9033 24.4800 16.8979 1.4487 0.0926 -0.0209 24.7359 38.0 65.1

Tea 1.9339 1.6716 1.1570 195.4733 10.3717 18.8467 0.1433 0.0363 15.1827 206.1 7.4

Tobacco 3.3212 1.1498 2.8885 32.8133 7.1345 4.5993 0.5105 0.4493 10.4438 51.1 20.4

TOTAL 82.4752 11.4765 7.1864 1,451.9267 71.2100 20.3894 0.8659 0.8491 104.2407 1"5.5 5.5

1/ Standard Error of Estimate

Source: Data in Statistical Annex, Table 2.

August 1976.

SEMI-LOGARITHMIC REGRESSION OF 1965/66-1974/75CONSTANT PRICE EXPORTS ON TIME

Standard Error T Ratio Standard Error T Tatio Standard Error Growth RateSlope of Slope of Slope Constant of Constant of Constant R Squared R Squared of Estimate

Cashew Kernels 0.029 0.014 2.021 4.104 0.089 46.057 0.338 0.255 0.130 2.945

Chemicals 0.137 0.020 6.981 2.862 0.122 23.443 0.859 0.841 0.179 14.726

Coffee 0.080 0.013 6.119 2.948 0.082 36.155 0.824 0.802 0.119 8.374

Cotton Textiles and Garments 0.057 0.016 3.507 4.738 0.101 46.727 0.606 0.557 0.148 5.898

- Millmade Piecegoods ( 0.004) (0.020) ( 0.22l) (4.424) (0.123) (36.023) (0.006) (-0.118) (0.180) ( 0.445)

- Garments ( 0.314) (0.052) ( 6.021) (0.735) (0.324) ( 2.272) (0.819) ( 0.797) (0.474) (36.894)

Engineering 0.210 0.028 7.510 3.409 0.173 19.682 0.876 0.860 0.254 23.319

Handicrafts 0.098 0.014 7.246 4.035 0.084 48.028 0.868 0.851 0.123 10.309

Iron Ore 0.075 0.008 9.521 4.466 0.049 91.539 0.919 0.909 0.071 7.774

Iron and Steel -0.071 0.050 -1.432 4.572 0.308 14.830 0.204 0.104 0.451 -6.866

Jute Manufactures -0.034 0.008 -4.262 5.810 0.049 117.737 0.694 0.656 0.072 -3.333

- Hessian (-0.064) (0.012) (-5.323) (5.135) (0.075) (68.898) (0.780) ( 0.752) (0.109) (-6.193)

- Carpet Backing ( 0.023) (0.028) ( 0.820) (4.460) (0.176) (25.391) (0.077) (-0.038) (0.257) ( 2.348) l

- Sacking (-0.072) (0.044) (-1.623) (3.833) (0.274) (13.977) (0.248) ( 0.154) (0.401) (-6,920)

Leather and Leather Manufactures 0.076 0.022 3.400 4.338 0.138 31.430 0.591 0.540 0.202 7.855

- Tanned Hides and Skins (0.084) (0.033) (2.565) (4.054) (0.202) (20.063) (0.451) (0.383) (0.296) (8.713)

- Finished Leather (0.206) (0.054) (3.790) (0.317) (0.338) ( 0.940) (0.642) (0.598) (0.494) (22.900)

Marine Products 0.121 0.012 10.415 2.960 0.072 41.142 0.931 0.923 0.105 12.836

oilcakes 0.036 0.018 1.980 3.998 0.113 35.535 0.329 0.245 0.165 3.655

Silver 0.302 0.501 0.603 -3.742 3.108 -1.204 0.043 -0.076 4.549 35.252

Spices -0.002 0.017 -0,i22 3.578 0.106 33.635 0.002 -0.123 0.156 -0.209

Sugar 0.034 0.079 0.432 3.256 0.489 6.654 0.023 -0.099 0.716 3.462

Tea 0.009 0.008 1.088 5.278 0.050 106.141 0.129 0.020 0.073 0,875

Tobacco 0.063 0.022 2.941 3.552 0.134 26.521 0.519 0.459 0.196 6.553

TOTAL 0.043 0.007 6.665 7.305 0.040 180.958 0.847 0.828 0.059 4.432

Source: Data in Statistical Annex, Table 3.

August 1976.

TABLE 5

INDICES OF INDIA'S EXPORT VOLUME

(1950/51-1975/76)

Index WithBase Base Base Base Shifting Bases1948/49 1952/53 1958 1968/69 1950/51=100

1950/51 123 - - - 100

1951/52 98 - - - 80

1952/53 109 100 - - 89

1953/54 109 100 - - 89

1954/55 115 105 - - 93

1955/56 - 115 - - 102

1956/57 - 110 - - 98

1957 - 119 105 - 106

1958 - 108 100 - 961959 - 119 107 - 1021960/61 - - 100 - 96

1961/62 - - 105 - 1011962/63 - - 112 - 107

1963/64 - - 126 - 120

1964/65 - - 132 - 126

1966/66 - - 124 - 1141966/67 - - 119 - 114

1967/68 - - 122 - 117

1968/69 - - 142 100 1361969/70 - - 163 100 136

1970/71 - - 153 106 144

1971/72 - - 151 107 1451972/73 - - 168 120 1631973/74 - - 174 125 1701974/75 - - 179 133 1811975/76 - - - 147 200

Source: Department of Commercial Intelligence and Statistics aspublished in various volumes of Statistical Abstract of theIndian Union, and mimeo.

TABLE 6

INDICES OF INDIA'S EXPORT VOLUME(1968/69 - 1975/76)

IBRD IBRD IBRD DCIS

Base Weighted Chain Weighted End Weighted Base Weighted

(1968/69=100) (1974/75=100) (1968/69=100)

1968/69 100 100 78.1 100

1969/70 97.7 97.7 77.4 100

1970/71 105.4 105.6 83.1 106

1971/72 107.2 106.3 83.0 107

1972/73 117.8 117.8 88.8 120

1973/74 122.2 123.5 95.3 125

1974/75 124.6 124.5 100 133

1975/76 n.a. n.a. n.a. 148

Source: Statistical Annex Table 5 and IBRD.

TABLE 7

India - Volume Index of Selected Exports

(1968/69 = 100)

Commodity Weight 1968/69 1969/70 1970/71 1971/72 1972/73 1973/74 1974/75

1. Meat, fresh, chilled or frozen 53 100.0 201.9 498.1 323.0 690.4 948.1 1060.02. Fish and fish preparations 1990 100.0 121.6 133.1 133.5 140.4 190.2 157.1

3. Rice 116 100.0 214.7 482.4 1307.4 336.8 342.6 613.2

4. Bakery products 32 100.0 152.0 83.9 132.0 102.9 66.3 122.8

5. Papad 18 100.0 113.9 143.6 176.4 123.5 138.2 161.5

6. Pulses and flour of bean, pea, lentil, etc349 100.0 156.1 114.8 84.1 58.3 28.4 20.5

7. Bananas fresh 46 100.0 72.5 78.4 38.2 40.4 0.1 0.0

8. Cashew 5468 100.0 95.3 79.1 94.9 104.2 82.2 102.4

9. Walnut 255 100.0 49.9 58.6 61.8 88.9 70.6 45.3

10. Mangoes 22 100.0 124.2 107.5 110.8 150.8 143.3 133.3

11. Mango Jams 3 100.0 375.0 455.0 355.0 634.0 595.0 638.1

12. Mango Juice 66 100.0 261.0 203.4 202.4 331.2 155.8 58.6

13. Mango slice brine 4 100.0 485.0 260.0 350.0 560.0 465.0 750.0

14. Potatoes 12 100.0 123.5 34.8 152.0 154.9 186.8 510.0

15. Onions 410 100.0 126.1 150.0 53.2 50.2 62.6 66.9

16. Mushrooms 28 100.0 107.6 75.6 55.6 93.6 87.2 60.0

17. Mango chutney, pickles, etc. 51 100.0 101.6 105.2 108.3 104.1 116.8 147.4

18. Sugar 916 100.0 82.0 348.0 317.0 102.0 252.5 694.6

19. Coffee 1612 100.0 111.5 112.2 124.4 177.3 183.6 172.5

20. Tea 14047 100.0 86.7 99.1 103.1 96.1 94.5 111.8

21. Spices 2256 100.0 84.4 95.1 131.2 90.0 124.5 104.7

22. Deoiled rice bran 126 100.0 117.2 178.6 241.5 175.8 177.1 170.6

23. Oilcakes 4440 100.0 84.7 105.6 89.2 120.3 154.1 100.0

24. Compound animal feed 0.4 100.0 3250.0 58850.0 53500.2 106000.0 109050.0 71964.3

25. Extract essence or concentrate oftea mate etc. 28 100.0 180.1 242.2 86.3 190.6 206.3 226.4

26. Unmanufactured tobacco 2976 100.0 103.1 90.2 108.8 179.4 148.4 142.3

27. Cigarettes 0.6 100.0 150.0 950.0 5900.0 5350.0 4200.0 525.0

28. Thbao0 31 100.0 101.8 166.0 175.1 206.3 156.9 145.5

29 Groundnuts 630 100.0 97.6 69.4 71.9 57.6 247.5 149.330. Oilseed, oilnut and oil kernals 26 100.0 147.0 76.5 128.4 435.0 254.6 588.9

31. Rosewood 302 100.0 155.9 114.7 142.0 188.8 211.1 88.8

32. Sandalwood 40 100.0 124.1 117.6 127.2 107.4 112.7 68.9

33. Silk 44 100.0 119.2 141.0 121.0 231.1 263.4 79.6

34. Wool and other animal hair 520 100.0 85.7 90.2 72.2 83.5 72.9 61.7

35. Raw cotton 996 100.0 126.8 113.0 111.6 133.8 193.3 70.4

36. Raw Jute 229 100.0 143.8 157.8 428.2 172.7 121.9 560.2

37. Kyanite 160 100.0 126.5 137.2 54.2 70.1 46.9 69.938. Mica 1208 100.0 115.4 128.4 109.6 129.8 124.0 164.4

39. Iron Ore 7934 100.0 105.1 135.0 126.7 131.2 151.0 142.040. Manganese Ore 1208 100.0 88.5 125.2 80.2 63.4 58.0 76.941. Ilmenite 23 100.0 192.7 64.8 121.9 149.1 268.5 236.1

42. Bones, ivory horns, etc. 436 100.0 95.2 96.6 96.8 101.8 121.2 134.6

43. Natural gums and resins 727 100.0 96.3 95.9 99.2 68.5 59.8 72.044. Opium crude 390 100.0 136.3 148.3 186.2 196.7 166.0 162.6

45. Gaur flour 92 100.0 157.9 410.5 379.0 207.0 452.6 650.9

46. Palm fibre for brush 172 100.0 91.3 104.0 91.3 92.1 96.0 84.1

47. Coal 206 100.0 61.6 96.8 39.5 97.5 91.3 106.1

48. Vegetable Oils 1051 100.0 48.2 48.2 50.9 109.4 81.3 98.6

49. Essential oils resinoids 388 100.0 114.4 110.7 133.2 131.8 160.1 116.2

50. Calf leather 521 100.0 98.1 94.4 119.5 134.4 102.6 69.8

51. Leather of other bovine cattle 654 100.0 97.2 97.8 141.2 468.2 170.5 100.0

52. Other leathers 5040 100.0 100.9 104.6 118.6 141.4 107.9 92.6

53. Fur skins tanned or dressed 4 100.0 381.5 14.0 41.9 3784.4 3360.5 8152.1

54. Tire cases for trucks and buses 167 100.0 83.6 148.1 203.8 174.7 155.7 134.6

55. Cotton yarn and thread 1285 100.0 193.1 116.2 77.5 108.8 59.3 56.9

56. Silk fabrics woven 339 100.0 134.3 93.2 92.2 96.6 123.8 106.9

57. Fabrics woven of synthetic fibres 96 100.0 136.2 155.6 192.6 244.5 795.9 332.6,58. Fabrics woven of regenerated fibres 218 100.0 76.5 104.0 133.5 128.9 372.5 133.6

59. Coir yarn and manufactures 1242 100.0 92.1 83.6 79.5 80.7 77.8 71.2

60. Woolen carpets, druggets and mattings 954 100.0 89.5 85.6 106.6 151.9 130.4 155.6

61. Cotton textiles: handloom 449 100.0 138.5 143.1 147.2 241.5 345.6 253.362. Cotton textiles: mill made 5932 100.0 90.7 91.8 84.5 99.3 144.5 82.5

63. Tarpaulin tents 78 100.0 70.6 63.2 50.7 52.9 64.0 144.964. Bed sheets, etc. - handloom 185 100.0 92.6 103.4 134.2 96.0 98.7 91.9

65. Bed sheets, etc. - mill made 223 100.0 85.6 133.3 137.9 151.3 204.1 185.6

66. Pillow case slip - mill made 92 100.0 77.9 98.8 126.7 166.3 264.0 218.6

Table 7Page 2

Commodity Weight 1968/69 1969/70 1970/71 1971/72 1972/73 1973/74 1974/75

67. Towels - handloom 36 100.0 159.4 321.9 328.1 403.1 431.3 603.168. Towels - mill made 413 100.0 97.0 114.2 87.9 97.9 100.7 99.369. Jute yarn and manufactures 19566 100.0 83.6 82.1 98.1 84.9 82.4 85.870. Cement 203 100.0 65.9 82.4 96.1 154.6 154.3 78.571. Pig iron including cast 1929 100.0 65.9 65.4 26.4 54.3 57.4 18.672. Ferro manganese over 9% carbon 338 100.0 207.6 157.6 31.8 135.1 47.8 95.3

73. Blooms, billets, slabs, etc. ofiron or steel 491 100.0 32.7 24.6 0.3 9.4 7.8 19.1

74. Bar rods except wirerod of iron or steel 1600 100.0 102.7 44.7 6.9 7.8 10.9 15.975. Angles, shapes and sections 80mm or more 348 100.0 79.8 207.8 83.2 58.9 5.8 0.8

76. Tubes and pipes of cast iron 89 100.0 115.1 140.8 92.1 136.2 123.0 127.077. Tubes and pipes of iron or steel

exccpt cast iron welded etc. 777 100.0 116.0 64.1 60.7 62.7 92.9 114.778. Tubes and pipe fittings of iron or steel

cast iron etc. 79 100.0 140.0 224.4 293.3 233.3 271.1 397.879. Silver unworked or partly worked 298 100.0 144.7 0.2 0.0 0.0 76.8 1209.680. Copper and alloys worked 279 100.0 125.3 200.0 149.8 175.5 157.5 41.081. Aluminum and alloys worked 172 100.0 235.9 206.8 163.1 169.2 160.0 131.782. Finished structural parts 493 100.0 176.8 114.5 30.3 42.2 30.3 32.483. Wire cables, ropes and similar articles

- not insulated 90 100.0 108.7 55.1 117.4 73.9 95.7 207.284. Bolts with nuts 40 100.0 67.9 92.9 50.0 75.0 117.9 246.485. Spanners 31 100.0 135.7 395.2 464.3 569.0 559.5 500.0

86. Files and rasps 31 100.0 140.0 258.8 306.6 199.9 338.9 401.587. EPNS ware 55 100.0 89.6 120.8 129.0 249.7 381.4 392.988. Internal combustion engines vertical

up to 10 BHP FR diesel stationary 8 100.0 482.4 446.5 956.8 865.6 3048.8 5756.589. Parts of diesel engine stationary 46 100.0 64.0 113.3 158.2 173.9 278.6 527.490. Ceiling fan 154 100.0 85.7 68.0 66.9 106.3 92.0 190.391. Buses 60 100.0 127.9 328.0 184.7 207.8 149.7 258.6

92. Lorries and Trucks assembled new 155 100.0 179.3 293.2 146.7 161.8 61.4 136.693. 732 1 to 732 5 motor vehicle initial

equipment 164 100.0 99.5 126.1 101.5 84.0 146.8 210.794. 732 1 to 732 5 motor vehicle replace-

ment parts 81 100.0 97.6 193.3 168.2 142.3 146.6 177.795. Bicycles 132 100.0 105.6 161.2 101.6 171.5 136.5 123.496. Bicycles parts others 148 100.0 116.3 171.7 132.9 222.1 351.2 379.497. Cotton trousers etc. for men and boys 68 100.0 257.5 354.9 333.2 386.6 149.7 114.1

98. Men cotton outer garments others -handloom and mill made 73 100.0 73.3 99.0 160.2 435.4 1342.1 2019.4

99. Other textile fabrics outer garmentsfor men and boys 48 100.0 191.0 103.4 189.4 423.5 354.8 418.8

100. Cotton dresses ,for girls 28 100.0 206.3 498.1 1152.6 2618.9 4740.0 6344.1101. Woollen dresses for girls 63 100.0 43.9 18.8 5.8 14.3 36.8 1.3102. Other garments of silk for *women 18 100.0 19.5 18.2 27.4 50.2 69.4 41.7103. Other textile dresses for girls 32 100.0 115.2 479.5 118.7 239.3 450.0 435.7

104. Cotton dress shirt 42 100.0 76.0 108.5 244.7 651.8 1252.5 1387.1105. Cotton T-shirt 61 100.0 127.3 173.3 233.2 299.8 371.9 414.1

106. Cotton undershirt others 6 100.0 82.4 155.9 273.5 789.7 1492.6 2804.4

107. Handkerchief excluding Madras andArab rumals 100 100.0 49.1 97.2 55.8 58.6 94.6 74.7

108. Wool sweater and cardigan 439 100.0 98.7 249.3 297.3 354.7 264.0 237.5109. Footwear 824 100.0 98.5 102.3 120.0 110.0 109.2 136.2

110. Frames for spectacles, etc. 11 100.0 173.6 245.4 247.1 749.4 156.9 155.3111. Cinematographic film developed 264 100.0 133.7 149.0 159.3 152.9 155.1 161.8

a/Weighted Index 100000 100.0 96.1 103.2 106.1 113.1 119.2 121.7

a/ Based on 1968/69 prices and weights.

Source: Department of Commercial Intelligence and Statistics - Monthly Statistics of Foreign Trade of India, Volume I.

QUANTITY INDICES OF EXPORTS(1968 = 100, calendar years)

1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970

FOOD 84.7 84.7 77.9 92.3 99.1 107.6 105.0 94.9 90.6 98.3 100.0 88.9 102.5

-Fish and Fish Preparations 70.4 8.4 49.1 54.2 39.4 54.9 65.4 52.8 67.5 76.0 100.0 109.8 128.8

-Fruits and vetetables 72.4 71.7 73.9 82.6 91.3 99.2 94.2 91.3 81.1 88.4 100.0 106.5 95.6

-Coffee 53.1 50.0 57.4 105.3 66.4 76.0 107.4 87.2 82.9 115.9 100.0 123.4 97.3

-Tea and mate 109.8 103.2 93.4 98.9 102.1 107.6 101.0 95.6 84.6 102.1 100.0 80.2 94.5

-Spices 69.4 72.2 84.7 98.6 113.1 98.6 100.6 94.4 92.3 87.5 100.0 70.8 79.1

Oilseed cake 28.9 63.8 55.4 58.6 87.5 108.6 114.1 101.7 96.8 84.6 100.0 80.0 97.3

BEVERAGES AND TOBACCO 104.1 77.0 78.1 88.5 133.3 138.5 152.0 133.3 77.0 111.4' 100.0 105.2 94.7

CRUDE MATERIALS, INEDIBLE EXCEPT FUELS 61.3 70.5 66.8 68.0 63.8 80.9 95.7 90.1 96.3 95.7 100.0 100.0 119.6

Hides, Skins, etc., undressed 212.7 21.2 206.3 193.6 246.8 263.8 202.1 248.9 206.3 200.0 100.0 127.6 95.7

Wool and other animal hair 156.2 195.3 139.0 150.0 115.6 87.5 137.5 107.8 107.8 96.8 100.0 89.0 81.2

Raw cotton other than linters 181.8 - - - - 152.7 134.5 110.9 76.3 121.8 100.0 89.0 101.8

Cotton waste 222.2 - - - - 182.2 142.2 135.5 120.0 104.4 100.0 57.7 26.6

Crude minerals excluding coal 103.0 111.3 109.2 108.2 111.3 96.9 106.1 108.2 96.9 90.7 100.0 106.1 109.2

Metalliferous ores and metal scrap 29.2 35.9 42.6 39.7 32.7 59.3 80.4 78.9 91.2 90.9 100.0 97.0 128.0

Animal and vegetable crude materials 78.1 88.2 89.8 86.7 78.9 81.2 84.3 80.4 88.2 83.5 100.0 100.7 94.5

MINERAL FUELS, LUBRICANTS, ETC. 125.0 98.7 123.7 86.2 96.2 126.2 151.2 118.7 121.2 87.5 100.0 88.7 63.7

Coal and Coke 370.3 296.2 274.0 185.1 192.5 166.6 244.4 181.4 77.7 62.9 100.0 66.6 133.3

ANIMAL & VEGETABLE OILS & FATS 125.0 242.5 182.5 82.5 165.0 302.5 221.2 51.2 23.7 22.5 100.0 46.2 51.2

CHEMICALS 56.1 54.4 56.1 51.6 48.3 59.5 84.8 97.1 83.1 83.4 100.0 126.4 180.8

MANUFACTURED GOODS 80.5 74.6 100.0 98.5 101.4CLASSIFIED CHIEFLY BY MATERIAL 71.9 79.8 78.4 76.2 82.0 86.3 97.1 89.2 70. 8 79.1 100.0 104.6 99.5

Leather 42.1 56.9 48.1 52.3 48.1 51.4 55.2 56.5 110 9. 0. 5. 6.Textile Yarn and Thread 104.1 96.8 87.5 83.3 98.9 114.5 104.1 102.0 94.0 103.3 100.0 88.9 98.3

Cotton Fabrics 84.7 112.7 97.4 82.2 77.1 83.0 85.5 105.0 ° 10 100.0 .9 8.8Fabrics of Jute 84.7 94.0 89.8 81.3 111.8 113.5 125.4 101.6 25'7 28.3 100.0 88.1 83.5

Fabrics of Synthetic Ftber & Spunglass 121.9 95.1 218.2 413.4 432.9 436.5 367.0 217.0 1.1 8.2 100.0 67.9 111.3

Bags and Sacks for Packing 188.6 207.5 213.2 205.6 211.3 196.2 233.9 235.8 7.1 85.2 100.0 7.9 111.3

Floor Coverings 98.0 100.9 100.9 84.3 73.5 90.1 92.1 79.4 51.7 100.0 85.2 89.2

MACHINERY AND TRANSPORT EQUIPMENT 4.0 6.3 9.9 9.5 13.7 15.9 23.4 33.2 47.4 80.6 100.0 125.8 147.5

MISCELLANEOUS MANUFACTURED ARTICLES 39.5 49.3 50.1 52.5 51.3 64.8 66.4 71.1 71.1 87.8 100.0 135.9 147.8

GENERAL 71.4 76.4 72.1 75.0 80.0 90.0 96.4 88.5 84.2 116.9 100.0 97.8 77.8

Source: STATISTICAL ABSTRACT OF INDIA, various issues. The series have converted from the original base year 1958 = 100.

TABLE 9

QUANTITY INDICES OF EXPORTS

(1968/69 = 100, fiscal years)

Commodity Heads 1969-70 1970-71 1971-72 1972-73 1973-74 1974-75 1975-7(

FOOD 94 112 113 128 121 138 163Fish and Fish Preparation 125 134 137 164 220 189 253Fruits and Vegetables 98 86 93 105 84 100 96Coffee 113 111 119 171 175 163 205Tea and Mate 86 99 104 96 95 112 106Spices 93 109 145 104 142 120 131Oilseed Cake 81 104 87 114 141 98 111

BEVERAGES AND TOBACCO 101 93 120 199 165 157 158

CRUDE MATERIALS, INEDIBLEEXCEPT FUELS 105 114 108 107 128 129 129Hides, Skins and Fur Skins 125 72 9 13 14 14 4Wool and Other Animal Hair 88 91 66 87 68 56 37Cotton 109 93 89 109 151 54 148

CRUDE FERTILIZERS AND MINERALSEXCLUDING COAL, PETROLEUMCRUDE, ETC. 119 120 108 128 139 195 121Metalliferous U@res and Metal Scrap, 102 125 111 113 132 127 127Animal and Vegetable Crude Materials 95 97 103 88 98 116 88

MINERALEFUELS AND LUBRICANTS 119 100 62 138 85 55 67Coal and Coke 67 126 36 88 81 94 87Petroleum Crude, etc. - - - - - - -

ANIMAL & VEGETABLE OILS & FATS 43 45 50 117 86 105 141

CHEMICALS 135 167 149 185 233 229 208

MANUFACTURED GOODS CLASSIFIEDCHIEFLY BY MATERIAL 98 92 94 102 105 94 110Leather and Manufactures Thereof 96 97 119 170 109 86 110Textile Yarn and Thread 174 139 108 121 89 77 50Cotton Manufactures 96 101 95 112 157 104 114Jute Manufactures 90 83 102 85 83 81 78Floor Coverings 94 93 113 140 123 137 137Non-ferrous Metals 109 72 53 59 72 295 630

MACHINERY AND TRANSPORT EQUIPMENT 131 166 144 156 188 386 325

MISCELLANEOUS MANUFACTURED 129 151 171 215 283 341 410

GENERAL 100 106 107 120 125 133 147

Source: Department of Commercial Intelligence and Statistics, mimeo; andIndian Trade Journal, August, 1976.

IUNTT VAT,UE TNDTCF.S OF EXPORTS~

(1968=100 Calender Years)

1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970

FOOD 61.0 61.6 67.1 62.2 61.0 64.0 67.1 67.1 106.1 101.8 100.0 101.2 108.5-Fish and fish preparations 38.2 35.9 38.9 35.1 42.4 48.1 46.2 56.8 105.3 109.2 100.0 129.8 112.6-Fruits and vegetables 43.3 4 3. 7 50.7 48.1 43.3 45.5 55.0 57.1 97.8 88.3 100.0 99.6 106.1-Coffee 77.5 72.1 67.4 49.6 64.3 58.1 71.3 73.6 116.3 95.4 100.0 94.6 132.6-Tea and mate 75.8 75.0 78.0 76.5 72 .7 75.0 74.2 72.7 111.4 110.6 100.0 90.2 91.7-Spices 45.7 50.7 75.3 58.9 52.5 53.9 57.5 7 7 .2 127.4 108.7 100.0 134.7 176.7-Oilseed cake 50.8 59.9 56.9 51.8 58.9 62.9 65.5 70.6 106.6 105.6 100.0 103.6 108.6

BEVERAGES AND3 TOBACCO 53.2 61.2 56.9 53.2 45.2 55.9 53 .7 58.0 93.1 89.4 100.0 100.5' 108.7-Tobacco and manufactures 53.2 61.2 56.9 53.2 45.2 55.9 5 3.?7 58.0 93.1 89.4 100.0 100.5 103.7

CRUDE MATERIALS, INEDIBLE EXCEPT FUELS 81.3 81.3 82.9 85.4 83.7 75.6 70.7 71.5 104.9 102.4 100.0 106.5 105.7-Hides, Skins, etc., undressed 5 5.9 7 7 .7 84.4 72.1 68.7 70.4 72.1 63.7 132.4 103.9 100.0 105.6 95.5-Wool and other animal hair 99. 104. 105.0 103.0 104.0 106.9 116.8 103.0 14. 119 100 98080-Cotton (raw and waste) 1001' 9446' 11029/ 1171/8 1031/

-Raw cotton other than linters 56.4 53.1 57.6 66.1 - 54.2 57.0 68.3 101.1 85.3 100.0 110.1 111.8-Cotton waste 78.1 76 .5 78.1 78.1 - 78.1 7 3. 3.4 94.5 105.4 100.0 96.8 201.5-Crude minerals excluding coal etc. 62.5 5 7. 5 62.5 62.5 61.2 61.2 61.8 67.5 106.2 110.0 100.0 98.7 116.8-Metalliferous ores and metal scrap 93.4 85.9 85.6 87.8 85.0 71.9 64.4 64.4 98.1 99.0 100.0 103.7 103.7-Animal and vegetable crude materials 62.1 56.3 66.4 68.3 70.1 70.8 72.6 116.7 116.7 109.3 100.0 105.5 122.3

MINERAL FUELS, LUBRICANTS, ETC. 52.3 53.9 51.8 47.6 47.1 43.4 50.7 57.5 83.7 93.1 100.0 89.5 132.9-Coal and Coke 50.7 54.8 5 2 .2 46.1 4 7 .7 45.1 54.3 69.5 84.7 108.6 100.0 98.9 101.5

ANIMAL & VEGETABLE OILS & FATS 55.2 51.3 55.2 57.4 53.0 51.3 63.5 81.2 124.8 109.3 100.0 92.2 98.8

H3CHEMICALS 37.3 4 3. 2 58.9 75.0 78.7 57.4 53.3 56.3 95.8 98.5 100.0 105.5 95.5 >

MANUFACTURED GOODS11. 10. 100 117 147CLASSIFIED CHIEFLY BY MATERIAL ~~~~~ ~~~~~~53.1 52 .6 59.0 64.8 60.6 60.6 60.6 68.0 129.2 114.2 100.0 115.5 106.4 CD

-Leather 64.9 75.3 80.5 74.6 70.7 73.3 74.0 72.0 103.3 96.8 100.0 101.0 114.1-Textile Yarn and Thread 5 2 .3 51.8 58.1 69.1 69.6 66.4 65.9 65.4 97.5 99.3 100.0 108.6 106.1-Cotton Fabrics 61.7 61.1 69.7 70.3 69.1 67.2 75.3 67.9 109.0 100.8 100.0 117.1 112.4-Fabrics of Jute 42.9 43.3 50.6 60.0 57.9 60.0 55.3 65.2 75.5 108.1 100.0 108.1 126.5-Fabrica of Synthetic Fiber & Spunglass 204.0 142.8 69.3 55.1 69.3 69.3 71.4 67.3 12. 110 100 113 163-Bags and Sacks for Packing 52.6 47.8 61.5 80.0 63.6 60.0 61.0 75.2 124 1. 100 173 163-Floor Coveringa 50.2 50.7 51.2 58.7 63.3 60.8 62.8 614.8 105.5 99.4 100.0 114.0 112.0

MACHINERY AND TRANSPORT EQUIPMENT 109.8 102.1 97.8 101.0 86.8 87.9 90.1 83.5 92.3 85.7 100.0 108.7 129.6

MISCELLANEOUS MANUFACTURED ARTICLES SC,.0 52 .5 60.5 47.5 50.5 61.0 62.5 65.5 102.5 98.0 100.0 102.0 118.0

GENERAL 61.3 61.3 66.8 68.0 65. 0 65.0 65.0 68.7 106.7 104.2 100.0 106.7 106.1

Source: STATISTICAL ABSTRACT OF INDIA, various issues. The series has been converted from the originalbase year 1958 = 100.

TABLE 11

UNIT VALUE INDICES OF EXPORTS

(1968/69 = 100, fiscal years)

Commodity Heads 1969-70 1970-71 1971-72 1972-73 1973-74 1974-75 1975-76

FOOD 101 101 100 112 151 202 209Fish and Fish Preparations ill 103 136 148 179 155 224Fruits and Vegetables 99 104 104 107 148 186 189Coffee 97 126 103 107 146 175 181Tea and Mate 92 96 96 98 97 128 142Spices 148 141 99 111 154 204 216Oilseed Cake 104 108 93 132 244 198 157

BEVERAGES AND TOBACCO 98 104 111 95 127 155 184Tobacco and Tobacco Manufactures

CRUDE MATERIALS, INEDIBLEEXCEPT FUELS 104 104 105 112 131 158 193Hides and Skins, Undressed 127 99 138 129 199 55 96Wool and Other Animal Hair 97 97 111 139 215 269 234Raw Cotton Other Than Lintern 104 112 133 144 154 201 192Cotton, Waste

CRUDE FERTILIZERS AND MINERALSEXCLUDING, COAL, PETROLEUM CRUDE, ETC. 99 100 105 99 83 92 141Metalliferous Ores andMetal Scrap 103 100 96 98 104 137 184

Animal & VegetableCrude Materials 108 120 123 151 200 269 266

MINERAL FUELS AND LUBRICANTS 66 104 105 192 149 309 440Coal and Coke 115 119 112 134 142 270 723Petroleum Crude etc. - - - - _ - -

ANIMAL AND VEGETABLE OILS AND FATS 98 132 124 182 303 274 207

CHEMICALS 95 92 91 92 103 191 182

MANUFACTURED GOODS CLASSIFIEDCHIEFLY BY MATERIAL 107 111 116 132 156 204 201Leather and Manufactures Thereof 117 102 105 141 217 231 251Textile Yarn and Thread 97 102 107 126 140 201 187Cotton Fabrics of Standard Type 103 110 120 129 170 234 213Fabrics of Jute 105 105 119 134 125 167 145

Floor Coverings 110 108 111 121 163 202 228

MACHINERY AND TRANSPORTEQUIPMENT 97 104 113 124 140 125 180

MISCELLANEOUS MANUFACTURED 105 108 103 113 131 151 16'

GENERAL 104 106 108 120 146 183 197

Source: Department of Commercial Intelligence and Statistics, mimeo; andIndian Trade Journal, August, 1976.