Has India achieved its potential efficiency in merchandise exports?

Abstract

India transformed itself from an agricultural to a services economy skipping the intermediate industrial-manufacturing stage. It is argued that the industrial and manufacturing sectors got neglected and most of the human capital was concentrated in the services sector. Recently Varghese (2018), in his report submitted to the Department of Foreign Affairs and Trade of the Commonwealth of Australia, remarked that till 2035 India will be in the list of top three economies and will be in Asia's top three trading partners for Australia. Accordingly, India needs to improve its performance of the manufacturing sector to realise the potential noted by Varghese and to make use of its demographic dividend. In this context, the research questions addressed in this paper are: What is the current efficiency level of India in exporting the merchandises What constraints does India have to overcome to improve its export efficiency; and Has the governance structure of the "majority government' played an effective role in rigorous opening up to improve its export efficiency. The empirical analysis will use the database of the World Bank, Reserve Bank of India archives, World Integrated Trade Solution (WITS hereafter), the Heritage Foundation data set, and Statista covering the period from 2001 to 2019. The results indicate that the gap between India's actual Merchandise exports and potential Merchandise exports is still quite large, around 20% on average. The empirical analysis has identified lack of human capital in the form of weak tertiary enrolment, lack of physical capital in the form of poor infrastructure along with lack of effective opening up of the economy for attracting Foreign Direct Investment (FDI hereafter), and a committed governance structure in the form of a "majority government' to implement policies effectively, as important factors to close the gap between the actual and potential exports.