Effect of the global financial meltdown on India’s aggregate export volumes

ABSTRACT

This paper sets up a demand-supply model to analyse India’s export performance (in terms of volumes rather than values) between 2000Q1–2014Q4. The main objective is to determine the impact of the financial meltdown of 2008 on India’s export performance. During the meltdown period, decline in price by India’s competitors in the international market resulted in (1) loss of competitiveness of India’s export goods and (2) a complete breakdown of the price mechanism affecting India’s export demand. Though export supply was not significantly affected by the meltdown episode we find evidence that exporting firms turned towards the domestic market to cope with the loss in export. The meltdown episode began to significantly affect India’s export demand and supply equations from 2009Q3. The demand and supply equations after that period became so unstable that ‘nothing worked’ for India’s exporters as they tried to counter the decline in export. Hence there was ample reason for them to panic and seek the government’s help. Government policies aimed at boosting export demand did have a positive impact on India’s export performance. Government policies to boost export supply had no impact except being palliative for the exporters at their moment of crisis

KEYWORDS:

• Financial meltdown
• India’s export volume
• export demand
• export supply
• government policies

JEL CLASSIFICATION:

• F13
• F14

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Also, the Focus Product Scheme (FPS) was substantially strengthened to include more products and markets and the Export Promotion Capital Goods (EPCG) scheme at zero duty was introduced for certain products. Apart from the above a host of other benefits and measures were announced for specific sectors like marine, gems and jewellery, agriculture, leather, tea, handloom and pharma which were hit by the downturn.

² Note that the fall in India’s export was smaller than that of the world in 2008. This may be construed as a partial success for the policies mentioned above. However a careful look at Figure 2 also reveals that this has almost always been the case through recent history (the blue line is mostly above the red line) – the higher position of the blue line is thus possibly a symptom of a growth rate of GDP that is substantially higher than the world.

³ Bai-Perron tests for multiple structural breaks whereas Chow Test and use of dummy variable is for identifying one exogenously provided break-point.

⁴ Baldwin and Evenett (2009), Bems et al (2010), Eaton, Kortum, Neiman, and Romalis (2011) found a decline in trade following global meltdown of 2008 was due to demand-side factors.

⁵ Ahn, Amiti and Weinstein (2009) explored the causal link between line of credit and fall in exports.

⁶ Haddad, Harrison, and Hausman (2011) analysed product entry and exit, price changes and quantity changes for exports, and found both export quantity and price fell.

⁷ Top 20 export destinations of India in 2014 represented 67% of India’s total exports.

⁸ Supply-side scale variables used in literature are the log of the trend of real income (Goldstein and Khan 1978), capacity utilization (Viramani, 1991), domestic demand pressure (Joshi and Little 1994). We used variables like an index for total manufacturing production and the total industry production index for India. But for both cases, the correlations with other variables were too high and failed to identify the supply curve.

⁹ Two break periods are reported in section 2: 2007Q4 and 2008Q3. To distinguish between the pre and the post-recession periods we, therefore, take 2008Q2.

¹⁰ For the supply side equation the export price was taken as the dependent variable and this specification is similar to Goldstein and Khan (1978). It differs from the specification of Arize (1990) which uses a different form of normalization procedure.

¹¹ Arize (1990) found India’s export demand to be price inelastic and having positive income elasticity. Viramani (1991) found price effects to be large and significant for both demand and supply of exports. Sharma (2003) found domestic price having a positive significance on the Indian export supply. Rangarajan and Kanan (2017) found World GDP is more significant on export demand of Indian than the exchange rate.

¹² There are several econometric techniques that internalize such breaks in the estimation procedure both in cointegration theory and other models of time series regression (Zivote Andrews).

¹³ 14th October 2008, Mint, ‘Handicraft exporters take a hit with buyers turning reluctant’; 11 June 2009, Economic Times, “Cashew exports plunge to a two-decade low in 2018–19 “.