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Impact of the Global Slowdown on India’s Exports and Employment

Working paper by UNCTAD, 2013

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The paper forecasts the impact of the slowdown in global GDP on India’s total exports and exports of 10 major sectors. It also estimates economy-wide and sectoral employment impacts in October 2009 and November 2010. Further, the study identifies vulnerable sectors with high potential for employment generation for immediate policy interventions.

U N I T E D N AT I O N S C O N F E R E N C E O N T R A D E A N D D E V E L O P M E N T


UNCTAD series on assuring development gains from the international trading system and trade negotiations


IMPACT OF THE GLOBAL SLOWDOWN
ON INDIA’S EXPORTS AND EMPLOYMENT





















IMPACT OF THE GLOBAL SLOWDOWN ON
INDIA’S EXPORTS AND EMPLOYMENT











































UNITED NATIONS
New York and Geneva, 2013



3




ii IMPACT OF THE GLOBAL SLOWDOWN ON INDIA’S EXPORTS AND EMPLOYMENT






NOTE




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Mention of such a symbol indicates a reference to a United Nations document.


The views expressed in this series are those of the authors and do not necessarily reflect the
views of the United Nations Secretariat. The designations employed and the presentation of the
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concerning the delimitation of its frontiers or boundaries, or regarding its economic system or
degree of development.


Material in this publication may be freely quoted or reprinted, but acknowledgement is requested,
together with a reference to the document number. A copy of the publication containing the
quotation or reprint should be sent to the UNCTAD secretariat at: Palais des Nations, 1211
Geneva 10, Switzerland.




Series Editor:




Ms. Mina MASHAYEKHI


Head, Trade Negotiations and Commercial Diplomacy Branch


Division of International Trade in Goods and Services, and Commodities


United Nations Conference on Trade and Development


Palais des Nations


CH-1211 Geneva 10






























UNCTAD/WEB/DITC/TNCD/2009/1



















UNITED NATIONS PUBLICATION


ISSN 1816-2878





Copyright © 2013 United Nations
All rights reserved worldwide




ACKNOWLEDGEMENT iii




ACKNOWLEDGEMENT




This publication was prepared by Abhijit Das (Deputy Project Coordinator), Rashmi Banga (Senior
Economist) of the UNCTAD-Government of India-DFID Project "Strategies and preparedness for
trade and globalization in India", Ramaa Sambamurthy (consultant) and Dinesh Kumar (consultant
under the supervision of Bonapas Onguglo, Senior Economic Affairs Officer, UNCTAD). They are
grateful to Mina Mashayekhi, editor of the series.

Sophie Munda carried out the desktop publishing, and the cover page was designed by Laura
Moresino.








PREFACE v






PREFACE




As the focal point of the United Nations for the integrated treatment of trade and development and
interrelated issues, and in accordance with the Accra Accord adopted at the twelfth session of
UNCTAD in 2008, the UNCTAD secretariat supports member States in assuring development
gains from international trade, the trading system and trade negotiations, with a view to their
beneficial and fuller integration into the world economy and to the achievement of the United
Nations Millennium Development Goals. Through intergovernmental deliberations and consensus-
building, policy research and analysis, and technical cooperation and capacity-building support,
the work of UNCTAD on trade negotiations and commercial diplomacy aims to enhance the
human, institutional and regulatory capacities of developing countries to analyse, formulate and
implement appropriate trade policies and strategies in multilateral, interregional and regional trade
negotiations.

This paper is part of a series on “Assuring development gains from the international trading system
and trade negotiations” with a focus on the impact of the global economic crisis and successful
mitigating strategies. The targeted readership is government officials involved in trade
negotiations, trade and trade-related policymakers and other stakeholders involved in trade
negotiations and policymaking, including non-governmental organizations, private sector
representatives and the research community.

The objective of the series is to improve understanding and appreciation of key and emerging
trade policy and negotiating issues facing developing countries in international trade, the trading
system and trade negotiations. The series seeks to do so by providing a balanced, objective and
sound analysis of the technical issues involved, drawing implications for development and poverty
reduction objectives and assessing policy options and approaches to international trade
negotiations in goods, services and trade-related issues. It also seeks to contribute to the
international policy debate on innovative ideas and practical solutions to realize a development
dimension for the international trading system with a view to the achievement of the Millennium
Development Goals. Authors are invited to express their personal opinions and the papers do not
necessarily reflect the views of the UNCTAD secretariat.

The series is produced by a team led by Mina Mashayekhi, Head, Trade Negotiations and
Commercial Diplomacy Branch, DITC.




ABSTRACT vii




ABSTRACT


The study forecasts the impact of the slowdown in global GDP on India’s total exports and exports
of 10 major sectors and estimates economy-wide and sectoral employment impacts in 2009–10
and 2010–11. It also identifies vulnerable sectors with high potential for employment generation for
immediate policy interventions.






CONTENTS ix




CONTENTS



ACKNOWLEDGEMENT ........................................................................................... iii
PREFACE ..................................................................................................................... v
ABSTRACT ................................................................................................................ vii
EXECUTIVE SUMMARY .......................................................................................... xi


Forecast of Indian Exports Using the Income Elasticity of Exports................ xi
Impact of Global Slowdown on Employment .................................................... xii
Mitigating Strategies ............................................................................................. xii


I. INTRODUCTION...................................................................................................... 1
II. TRENDS IN INDIA’S TOTAL EXPORTS ............................................................ 5


2.1. Trends in India’s Merchandise Exports ........................................................ 5
2.2 Trends in India’s Services Exports ................................................................ 9
2.3. Trends in India’s Imports of Goods and Services .................................... 14


III. IMPACT OF THE SLOWDOWN ON INDIA’S EXPORTS ............................. 17
3.1 Methodology and Data ................................................................................... 17
3.2 India’s Income Elasticity of Total Exports ................................................... 19
3.3 India’s Income Elasticity of Sectoral Exports ............................................. 19


IV. FORECAST OF INDIA’S EXPORTS USING INCOME ELASTICITY OF
EXPORTS ........................................................................................................... 21


V. IMPACT OF THE SLOWDOWN ON EMPLOYMENT THROUGH
INTERNATIONAL TRADE ................................................................................ 23


VI. IDENTIFICATION OF SECTORS FOR EMPLOYMENT GENERATION .. 25
VII. CONCLUSIONS AND MITIGATING STRATEGIES ..................................... 27
REFERENCES .......................................................................................................... 31
ANNEX ........................................................................................................................ 33


Results of Stationarity Tests ................................................................................ 33





TABLES


Table 1. Snapshot of the World Economy 2
Table 2. Growth in India’s Trade (in real terms): 2005-06 to 2007-08 (per cent) 3
Table 3. Growth in India’s Sectoral Exports in 2008 over 2004 in 10 Major Sectors 6
Table 4. Change in Composition of India’s Export Basket , 2004-2008 7
Table 5. Share of Region/Country in India’s Exports, 1990-91 to 2007-08 8
Table 6. India’s Total Exports of Services to the World and the United States 10
Table 7. Composition of India’s Exports of Services 10
Table 8. Miscellaneous Receipts, Non-Software, 2005-06 to 2007-08 11
Table 9. Miscellaneous Receipts, Business Services, 2005-06 to 2007-08 12
Table 10. Services Exports to United States and Share in Global Indian Services Exports 13
Table 11. India’s Oil Imports and Rates of Growth (per cent) 14
Table 12. India’s Non-Oil Imports and Rates of Growth (per cent) 15
Table 13. Income Elasticities of India’s Export Demand 19
Table 14. Price and Income Elastiticities for India’s Major Export Sectors 20
Table 15. Projected Real GDP Growth (per cent), 2009 and 2010 21
Table 16. Forecast Total Merchandise Export Growth and Sectoral Export Growth,
2008-09 and 2009-10 21
Table 17. Impact of the Slowdown on Employment, 2008-09 to 2010-11 24
Table 18. Employment Multipliers Based on Input-Output Matrix of 2004 25
Table 19. Potential Gain for India from Export of New and Potential Products 28




x IMPACT OF THE GLOBAL SLOWDOWN ON INDIA’S EXPORTS AND EMPLOYMENT











FIGURES


Figure 1. Slowdown in GDP Growth Rates, 2006-2008 2
Figure 2. India’s Monthly Exports and Imports in 2008-09 3
Figure 3. Decline in Growth Rates of India’s Merchandise Exports to the World and
to the United States, 2005-2008 5
Figure 4. India’s Export Growth, 2005-06 to 2008-09 6
Figure 5. Change in Composition of India’s Export Basket, 2004-2008 7
Figure 6. Growth of India’s Exports of Services to the World and the United States, 2002-08 9
Figure 7. India’s Exports, Imports and Trade Balance, 2000-01 to 2007-08 14
Figure 8. Composition of India’s Import Basket, 2004-05 to 2008-09 15






EXECUTIVE SUMMARY xi




EXECUTIVE SUMMARY


Riding on the back of brisk growth in the global economy since 2002, India’s exports witnessed a
phenomenal threefold increase during the period 2002–03 to 2007–08. But this powerful dynamo
for employment generation is now threatened by rapid contraction in global demand and
weakening labour markets. It is a major challenge for India to implement strategies which not only
mitigate the adverse impact of the global slowdown on its exports but also build the resilience of
the economy to such future shocks. However, for designing such strategies there is a need to
assess the extent to which the global slowdown may impact total exports and, more importantly,
identify the sectors which are likely to be more adversely affected by it.

In this context, the study forecasts the impact of the slowdown in global GDP on India’s total
exports and the exports of 10 major sectors and estimates economy-wide and sectoral
employment impacts in 2009–10 and 2010–11. It also identifies vulnerable sectors with high
potential for employment generation for immediate policy interventions. Further, the study
undertakes a detailed competitiveness analysis at six-digit levels to identify new and potential
exports to regions or countries such as Western Asia, the members of the Association of
Southeast Asian Nations (ASEAN), Australia and Brazil, which are expected to recover faster than
other economies. Some short-term measures have also been suggested for cushioning the
adverse impact of the global slowdown on exporters.

Global demand plays an important role in determining the export growth of a product. The impact
of the slowdown in global demand on a country’s exports will largely be determined by the income
elasticity of demand for the product. Accordingly, the study estimates income elasticity for India’s
total exports and its sectoral components. These income elasticities, in conjunction with GDP
growth forecasts for 2009 and 2010 (provided by OECD Economic Outlook, March 2009), are used
to estimate India’s total and sectoral export growth.

The results show that India’s exports to the world are very responsive to income changes. A 1 per
cent per cent decline in GDP growth of the world will lead to a 1.88 per cent per cent decline in
Indian growth of exports to the world. Estimates of the income elasticities of 10 major export
sectors of India (which are around 95 per cent per cent of total Indian exports) show that they are
high for sectors such as petroleum products, ores and minerals, gems and jewellery, chemical
products and engineering products. Traditional export sectors like textiles leather and plantations
have relatively low income elasticity, with the lowest being for plantations.

Along with income elasiticity, price competitiveness may also determine the impact of a slowdown
on exports. If the products exported are less price sensitive, during slowdown the option of
lowering prices to maintain existing market shares may not be feasible. Sectors which have high
income elasticity but low price elasticity are therefore relatively more vulnerable sectors of the
economy in terms of the impact of a global slowdown. Two such sectors identified are gems and
jewellery and textiles. These require targeted interventions.


Forecast of Indian Exports Using the Income Elasticity of Exports



Using the income elasticities for export demand for India and the forecasted change in global GDP
growth, total export growth and sectoral export growth for 10 major sectors has been estimated for
the years 2009–10 and 2010–11 (up to December 2010). The forecast slowdown of GDP growth
as provided by the OECD, Economic Outlook (March 2009) is used.

The results show that India’s total exports will grow by -2.2 per cent per cent in 2009–10, which
implies that there will be almost flat growth, marginally tending towards a negative growth. Most of
those sectors are experiencing a negative growth rate. Positive growth in exports is forecast for
plantations, the agriculture sector and the engineering and electronics sector. It should be noted
that although positive growth rates of exports in agricultural products have been forecast, they are
much lower than the 55 per cent per cent export growth in 2007–08. The forecasts also show that
petroleum products will experience the maximum decline in export growth followed by gems and
jewellery, ores and minerals and textiles and textile products.




xii IMPACT OF THE GLOBAL SLOWDOWN ON INDIA’S EXPORTS AND EMPLOYMENT






Export growth is likely to experience a significant recovery and increase to 8.3 per cent per cent in
2010–11. All sectors are projected to experience positive export growth in this period, with sectors
such as agricultural products, plantations, engineering, chemicals and petroleum products
reaching their initial level of exports of 2007–08.

It should be noted that these estimates are critically based on the predictions for global GDP
growth in 2009 and 2010.


Impact of Global Slowdown on Employment


The predicted overall export growth for the years 2009–10 and 2010–11 and sectoral export
growth have been used to estimate the impact of the global slowdown on employment in the
economy. The estimates show that in the year 2008–09, due to negative export growth in sectors
such as textiles, gems and jewellery, ores and minerals, etc., the total job loss in India was around
1.16 million. However, the net employment created by exports in this year was positive, i.e., 1.25
million jobs created, as many sectors experienced positive export growth. Net employment is the
sum total of jobs created and lost in different sectors overtime. In the year 2009–10, export growth
is predicted to be -2.2 per cent per cent and the total job loss is estimated to be around 1.3 million.
However, since export growth is positive for some sectors like plantations and these sectors have
high employment multipliers, the net employment loss is estimated to be 0.7 million.


For the year 2010–11, estimation could be done only for three quarters, i.e., until December 2010,
as GDP growth predictions are not available beyond that period. Using the predicted export growth
of 8.3 per cent per cent, the total employment generated in the economy is estimated to be 5.22
million, indicating that the loss in employment due to the decline in exports in 2009–10 will be
compensated for in 2010–11.


Mitigating Strategies



To build the resilience of the economy to trade shocks and improve competitiveness of exports, it
would be useful for the Government to consider mitigating strategies. This study suggests five
specific mitigating strategies relating to (a) diversification of exports to new geographical
destinations and new products; (b) simplification in customs procedures for reducing transaction
costs; (c) examination of the likely impact of anti-dumping and safeguard duties imposed by India
on down-stream user industries; (d) measures aimed at assisting exporters to retain their market
presence during the crisis period; and (e) expeditious multilateral examination of adverse impact of
bailouts and stimulus packages and prompt remedies.

In markets which are expected to recover fast (ASEAN, Australia, Brazil, Republic of Korea, South
Africa and Western Asia), competitiveness analysis at a disaggregated level has been undertaken
for India with respect to the importing country and its five major trading partners. This analysis
identifies products for which India has the potential to significantly increase its exports from the
current level (potential products) or start export of new products. Around 958 products have been
identified. It is found that India has the potential to increase its exports of new and potential
products by almost 21 per cent per cent, i.e., by $35 billion.

With profit margins shrinking globally, cost competitiveness would be an important determinant for
retaining or acquiring a share in export markets. In an attempt to reduce some of the transaction
costs associated with international trade, the Government has been simplifying its customs
procedures over the past few years. While this is a continuing process, it needs to gather
significant additional momentum.

India has been a major user of anti-dumping measures over the past few years; there has been a
significant increase in the number of new anti-dumping and safeguard investigations initiated from
October 2008 onwards. In the context of the current global slowdown, it may be beneficial for the
economy as a whole if a detailed economic analysis on the likely impact of the duties on
downstream user industries is undertaken, prior to the imposition of duties.

With economic recovery predicted for 2010, it is important that Indian exporters do not withdraw
from the export market in the intervening period of downturn, if they are to take advantage of
export opportunities during the period of recovery. The Government could consider a two-pronged
approach for supporting exporters to retain their presence in foreign markets. It could support them




EXECUTIVE SUMMARY xiii






through incentives such as easing trade financing. However, as export-related incentives can be
neutralized or offset by the importing country through imposition of countervailing duty, an attempt
could be made at the multilateral level to explore the possibility of a standstill on countervailing
duties that might otherwise arise from incentives given by developing countries.

A large number of stimulus and bailout packages have been offered across the world. The
Government could consider putting in place a mechanism, at least in the short term, for constantly
reviewing the implementation of these packages and identifying measures, if any, which may have
an adverse impact on Indian export interest.

In addition to implementing the mitigation strategies outlined above, there is a need to develop and
implement long-term measures that would ensure sustained export growth which is not impeded
by adverse developments in big foreign markets.




I. INTRODUCTION 1






I. INTRODUCTION



Due to increased integration of world markets, transmission of economic crises from one country
to the rest of the world has become smoother. The larger the country, where the crisis originates,
the greater is the impact on other countries. The United States of America, one of the largest
economies in the world, both in terms of its share in world GDP (27 per cent per cent) and global
imports (17 per cent per cent) experienced the sub-prime mortgage collapse in August 2007. This
was followed by the reversal of the housing boom in other industrialized economies, which had a
ripple effect all around the world. Furthermore, integrated financial sectors unmasked other
weaknesses in the global financial system, as a result of which some of the financial products and
instruments became so complex and twisted, that as things started to unravel, trust in the whole
system started to fail. Stock markets crashed all over the world, with declines ranging from 35 to
40 per cent per cent over the past 12 to 18 months in developed countries and even more in most
emerging markets.

The crisis which emerged in the financial markets crept into the real sector of countries around the
world through different channels. Credit squeezes due to instable financial instruments and stock
market bursts led to contraction of output growth in the advanced financially integrated countries
and resulted in lower real demand for capital and consumer goods in the advanced countries.
Further, lower capital flows and investments into developing countries; lower remittances and
savings; and lower commodity prices coupled with a weak dollar aggravated the recession.

One of the most important channels through which the financial crisis erupting in the United States
and in other advanced countries has been transmitted to developing countries is international
trade. Apart from the direct impact of lower demand for the exports of developing countries in
bilateral trade with advanced economies, the impact of the slowdown can be transmitted through
three other major channels of trade. Firstly, through third market effects, i.e., “echo effects”, as
referred to in the literature, which work through the trading partners of the country where the
slowdown occurs. Apart from the direct effects of lowering exports to the country experiencing the
slowdown, there is an indirect effect through lower demand from trading partners of this country as
their GDP growth also slows down due to lowering of the demand for their exports. This leads to a
second round of a slowdown of demand for exports of developing countries. Secondly, the impact
of the slowdown may be transmitted through the “supply chain effect ˮ . The international vertical
supply chains are adversely affected and developing countries which are a part of these supply
chains may feel the impact of lowering of demand for their exports to other developing countries
which in turns leads to lower exports. Thirdly, in addition to these, trade finance squeezes due to
tighter financial markets can lead to substantial supply-side effects.

However, the impact of the slowdown may be felt differently by different countries, depending on
the nature of their exportable products, the destination countries for their exports and the overall
dependence of the economy on exports. Further, the higher the income elasticity of demand for a
country’s exports, the higher will be the adverse impact of lower GDP growth of its trading
partners.

One of the unique features of the United States economy is its high-income elasticity of imports.


1


Three decades of econometric modelling
2
show that income elasticity of imports in the United


States is greater than 1. While estimates vary, it is generally found that for every 1 per cent
increase in United States income, import demand increases by 2.2 per cent. The implication of this
is clear: a 1 per cent slowdown of GDP in the United States will decrease the import demand by
2.2 per cent. This can transmit the slowdown in the United States rapidly into the countries which
have it as a major market for their exports.

India is one of the many developing countries which have relied heavily on the United States and
other advanced countries for its exports. In 2007, around 17 per cent of Indian exports sought
United States markets, while 29 per cent were directed to G7 countries


3
and around 58 per cent


were directed towards advanced countries (as defined by IMF). Given such heavy reliance on the



1
Where income elasticity of import/export is defined as percentage change in growth of imports/exports for one


percentage change in growth in incomes or GDP.
2
Magee (1975), Sawyer and Sprinkle (1996), Marquez (2001)


3
G7 countries are as defined by IMF.




2 IMPACT OF THE GLOBAL SLOWDOWN ON INDIA’S EXPORTS AND EMPLOYMENT






markets of advanced countries, the impact of the slowdown in these countries is being felt heavily
in the Indian trade sector.

While the GDP growth of the world has declined from 4.3 per cent in 2006 to 2.2 per cent in 2008,
it has declined much faster in advanced countries like the United States (from 2.8 per cent to 1.1.
per cent) and the European Union (3.0 per cent to 0.7 per cent) (figure 1).


Figure 1. Slowdown in GDP Growth Rates, 2006-2008


4.3


4.1


2.2


2.8


2.0


1.1


3.0


2.6


0.7


3.0


2.6


1.5


0.0


1.0


2.0


3.0


4.0


5.0


World United


States


Euro Area


(15)


Advanced


Economies


GDP Growth(%): 2006-2008


2006


2007


2008



Source: OECD and IMF.


Along with the global slowdown in the growth of GDP, there has also been a substantial decline in
world trade which may result in echo effects. The world real trade growth (corrected for prices)
declined from 9.5 per cent in 2006 to 6.9 per cent in 2007 and further to 2.5 per cent in 2008.
Amidst the global economic slowdown, the Organisation for Economic Co-operation and
Development (OECD) projects the global economy to grow by -2.7 per cent in 2009 and 1.2 per
cent in 2010. The United States economy is expected to experience negative growth, i.e., -4 per
cent in 2009 and 0 per cent growth in 2010. The EU area is expected to also experience a
negative growth of -4.1 per cent in 2009 with a continued negative growth of -0.3 per cent in 2010.
China is expected to grow at 6.3 per cent and growth forecast for the Indian economy is at 4.30
per cent for the year 2009.




Table 1. Snapshot of the World Economy


Real GDP (% change) 2006 2007 2008 2009P 2010P


United States 2.80 2.00 1.10 -4.00 0.00


Euro Area 3.00 2.60 0.70 -4.10 -0.30


Canada 3.10 2.70 0.50 -3.00 0.30


United Kingdom 2.80 3.00 0.70 -3.70 -0.20


Japan 2.00 2.40 -0.60 -6.60 -0.50


India 9.70 9.00 6.00 4.30 5.80


China 11.60 13.00 9.00 6.30 8.50


Snapshot of the World Economy



Source: OECD database.



Although India is expected to grow, it has not been able to remain insulated in this global decline,
especially in the trade sector. A close look at India’s trade sector indicates that in real terms growth
in Indian exports and imports in both goods and services has declined (table 2). Growth in exports
of goods in real terms declined from 17.8 per cent in 2006-07 to 5.4 per cent in 2007-08. Maximum
decline is witnessed in growth of exports of services which grew at the rate of 26.8 per cent in
2005–06, but experienced negative growth of -1.8 per cent in 2007–08. Growth in imports of goods
declined from 25.2 per cent in 2005–906 to 10.6 per cent in 2007–08. Surprisingly, growth in
private remittances in real terms has shown a marked improvement from 10 per cent in 2006–07 to
24.1 per cent in 2007–08.




I. INTRODUCTION 3






GDP growth of India was estimated to be 9.2 per cent in 2005–06, which increased to 9.7 per cent
in 2006–07 but declined to 9.2 per cent in 2007–08 and is expected to decline further to 7.2 per
cent in 2008–09 according to advance estimates.


Table 2. Growth in India’s Trade (in real terms): 2005-06 to 2007-08 (per cent)


2005–06 2006–07 2007–08


Exports of goods 17.2 17.8 5.4


Exports of services 26.8 27.4 -1.8


Imports of goods 25.2 17.9 10.6


Imports of services 17.8 24.0 -3.7


Private Remittances 12.9 10.0 24.1


Real GDP at market
prices 9.2 9.7 9.2


Source: National Accounts Statistics, CSO and RBI.

The slowdown in the trade sector post April 2008 is even more explicit (figure 2). Exports declined
continuously from July 2008 to March 2009 except in December 2008. They declined from $17.1
billion in July 2008 to $11.5 billion in March 2009, which is an almost 33 per cent decline. While
imports declined from $29.2 billion in August 2008 to $15.6 billion in March 2009, which is an
almost 47 per cent decline. However, in terms of balance of trade (BOT), the deficit reduced from
$8.7 billion in April to $4 billion in March.


Figure 2. India’s Monthly Exports and Imports in 2008-09


India's exports and Imports in 2008-09 (USD Million)


0


5,000


10,000


15,000


20,000


25,000


30,000


35,000


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M
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rc
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2008 2009


Exports of Goods Imports of Goods





Given the high dependence of the Indian economy on its external trade sector, where exports of
goods and services (less export-related imports) is around 20 per cent of GDP, a slowdown in the
trade sector can have adverse ripple effects in the economy. More importantly, it can lead to job
losses and increase the number of poor in the country. The job losses may be direct, due to
contraction in output in the exportable sectors and indirect, which may occur due to decline in
output of the sectors which provide inputs to the exportable sectors. The increase in cheaper
imports, particularly of inferior goods (whose demand increases with lowering of incomes), can
further add to contraction of output and employment in the economy.

In order to diminish the adverse impacts of the global slowdown on the Indian economy and
improve the economy’s resilience to external shocks to its trade sector, overall and sector-specific
strategies need to be designed. However, for designing such strategies there is a need to assess
the extent to which the global slowdown may impact India’s total exports and, more importantly,
identify the sectors which are likely to be more adversely affected by the slowdown. For this
purpose, the study attempts to forecast the impact of slowdown in global GDP on India’s total
exports and the exports of 10 major sectors. The global income demand elasticities for total
exports and sectoral exports to the world have been estimated using econometric models. Using




4 IMPACT OF THE GLOBAL SLOWDOWN ON INDIA’S EXPORTS AND EMPLOYMENT






these income demand elasticities, the impact of lower growth in global GDP (which have been
forecast by OECD) on Indian exports in the period 2009–2010 has been estimated. The changes
in sectoral exports have then been used to estimate the direct and indirect impact on sectoral
employment in the economy in the year 2009–2010.

An important contribution of the study is a detailed analysis of Indian competitiveness at six-digit
HS codes in markets of developing countries. The projected slowdown in developing countries is
much lower than those in the advanced economies. Therefore a significant step in terms of
mitigating the adverse impact of slowdown on Indian exports will be to diversify the export basket
and markets. The study identifies new and potential exports in countries/regions such as China,
Western Asia, the ASEAN countries, Australia and Brazil (new exports refers to products where
India has competitive advantage in a market but is currently not exporting while potential exports
refers to products where India is exporting but has the potential to increase its exports). It
estimates the likely share that India may get if it is able to diversify into new products and new
markets. Further, the study makes suggestions for mitigating the adverse impact of the global
slowdown on the Indian economy.

The study is organized as follows: section 2 discusses trends in India’s total and sectoral exports
and imports using trade data. Section 3 presents the results with respect to global income demand
elasticities for India’s total and sectoral exports and estimates the impact of lower growth of global
GDP on sectoral exports in 2009-2010 and 2010-11. Section 4 presents the estimates of impact of
predicted export growth on total and sectoral employment for the years 2008–09, 2009–2010 and
2010–11. Section 5 discusses mitigating strategies and identifies new products and new markets
for Indian exports. Section 6 identifies sectors for employment generation; section 7 concludes.




II. TRENDS IN INDIA’S TOTAL EXPORTS 5






II. TRENDS IN INDIA’S TOTAL EXPORTS


The extent to which the global slowdown may impact a country’s exports depends largely on the
number of trading partners of the country and the composition of its export basket. High
dependence on a few markets and few exportable products may increase the severity of the
impact of the slowdown on exports, both in terms of coverage and depth. In order to assess the
extent of the impact of global slowdown on India’s exports, we examine the trends over time in the
composition of India’s export basket and its direction.


2.1. Trends in India’s Merchandise Exports


Growth of India‟s Merchandise Exports



India’s global merchandise exports were growing at an impressive rate before the financial crisis
occurred in the United States. Global merchandise exports increased from $79 billion in 2004 to
$145 billion in 2007, representing an average annual growth rate of 20 per cent. However, the
slowdown in the United States economy led not only to a decline in India’s bilateral merchandise
exports to the United States but also in its exports to the world. However, the decline in the growth
rate of merchandise exports to the United States was much higher than the decline in the growth
rate of total merchandise exports to the world (figure 3). India’s global exports, which grew at 29.5
per cent in 2005, grew at a lower rate, i.e., 23.6 per cent in 2008, while the decline in the growth
rate of exports to the United States was much higher, i.e., from 32.3 per cent in 2005 to 6.15 per
cent in 2008.




Figure 3. Decline in Growth Rates of India’s Merchandise Exports to the World and to the
United States, 2005-2008


Growth rates of India's Exports to


World and U.S.: 2005-2008


0.00


5.00


10.00


15.00


20.00


25.00


30.00


35.00


2005 2006 2007 2008


G
ro


w
th


R
at


es


World U.S






From the above trend, two facts emerge. First, India’s export growth to the world has been more
buoyant than its export growth to the United States and second, the decline in growth of exports to
the United States began in 2006, i.e., before the slowdown. Thus, the lack of buoyancy of India’s
export growth to the United States may have cushioned and delayed some of the adverse effect of
the slowdown on India’s exports.

The quarterly trend shows that export growth became negative for the first time since 2005–06 in
the third quarter (Oct–Dec) of 2008–09 (-13.5 per cent). Further, in the last quarter of 2008–09
(Jan–March 2009) there was a much steeper fall of -27.7 per cent. The impact of slowdown was
therefore felt in India from October 2008 onwards.




6 IMPACT OF THE GLOBAL SLOWDOWN ON INDIA’S EXPORTS AND EMPLOYMENT






Figure 4. India’s Export Growth, 2005–06 to 2008–09


Figure: India's Export Growth: Quaterly


Comparisons


-40.0


-30.0


-20.0


-10.0


0.0


10.0


20.0


30.0


40.0


50.0


Apr-June


Jul-Sep


Oct-Dec


Jan-Mar


Apr-June 34.5 23.6 20.5 37.4


Jul-Sep 32.4 30.8 19.2 25.6


Oct-Dec 22.5 20.5 33.0 -13.5


Jan-Mar 10.8 16.4 41.9 -27.7


2005-06 2006-07 2007-08 2008-09





Comparing export growth in the past five years across sectors, we find that maximum growth in
exports has been in petroleum products, which experienced an export growth of 341 per cent in
2008 as compared to 2004 (table 3). Exports of engineering goods, agricultural products and
chemicals and related products have also grown significantly, i.e., more than 100 per cent in this
period. However, traditional export sectors, like textiles and products, leather and products and
gems and jewellery have witnessed comparatively lower export growth. India’s total exports
increased by 110 per cent in 2008 over 2004.



Table 3. Growth in India’s Sectoral Exports in 2008 over 2004 in 10 Major Sectors


S.No ( per cent)


1 Petroleum products 341.8


2 Engineering goods 165.3


3 Agriculture & allied products 146.2


4 Chemicals & related products 109.2


5 Ores & minerals 95.9


6 Textiles 52.9


7 Leather & manufactures 34.4


8 Plantation 33.5


9 Gems & jewellery 32.3


10 Marine products 7.4


Total 110.1




Composition of India‟s export basket



Concentration on a few exportable products may worsen the impact of global slowdown on the
exports of a country, especially if they are products whose demand is closely related to incomes, in
other words, if they are not necessity products. India’s traditional exports have consisted of items
such as textile products, gems and jewellery, tea and coffee and leather and leather products. It is
important to trace the extent of diversification of the export basket over time. The trends show that
there has been some diversification in the composition of India’s export basket over time.
However, there still remains large scope for further diversification.

As seen in table 4 and figure 5, the share of petroleum products (including rubber and plastic
products) in India’s export basket has been increasing since 2004. India exported $6.8 billion worth
of petroleum products in 2004 which increased to $23.6 billion in 2007 and further to $30.4 billion
in 2008 and its share increased from 8.6 per cent to 18.1 per cent. Interestingly, the share of
textiles, which was the predominant sector in the export basket in 2004 (16.8 per cent), has been
declining continuously and reached 12 per cent in 2008. Engineering goods, representing a very




II. TRENDS IN INDIA’S TOTAL EXPORTS 7






broad category, continues to be a sector with the highest share in India’s export basket. Its share
further increased from 19.7 per cent in 2004 to 25 per cent in 2008. The share of chemicals and
chemical products has remained the same over time (13.7 per cent) while the share of gems and
jewellery declined from 18 per cent in 2004 to around 11 per cent in 2008.

Interestingly, exports of India’s agricultural products have been rising steadily from $6.0 billion in
2004 to $14.9 billion, although their share in India’s export basket still remains low (around 9 per
cent). Although exports of ores and minerals have nearly doubled from $4.3 billion to $8.4 billion in
2008, the share of this sector in the export basket remains around 5 per cent. Marine and
plantations have a share of around 1 per cent, which has not changed over time. Plantations have
less than a 1 per cent share in India’s export basket.





Table 4. Change in Composition of India’s Export Basket, 2004–2008


S.No 2004 2006 2008


1 Engineering goods 19.70 21.79 24.87


2 Petroleum products 8.63 14.96 18.15


3 Chemicals & related products 13.72 13.67 13.65


4 Textiles 16.77 15.40 12.20


5 Gems & jewellery 17.84 12.72 11.23


6 Agriculture & allied products 7.63 6.78 8.94


7 Ores & minerals 5.42 4.78 5.05


8 Leather & manufactures 3.20 2.66 2.05


9 Marine products 1.71 1.40 0.87


10 Plantation 0.99 0.94 0.63


Total 100.00 100.00 100.00






Figure 5. Change in Composition of India’s Export Basket, 2004–2008


0%


20%


40%


60%


80%


100%


2,004 2,006 2,008


Change in Composition of India's Export Basket: 2004-2008
PETROLEUM PRODUCTS


TEXTILES


ENGINEERING GOODS


CHEMICALS & RELATED


PRODUCTS


GEMS & JEWELLERY


LEATHER & MNFRS


ORES & MINERALS


MARINE PRODUCTS


AGRI & ALLIED PRDTS


PLANTATION






The above trends in the composition of India’s export basket show that it has diversified in the past
five years, with engineering goods, petroleum products and chemical products increasing their
share in the export basket, while traditional exports like textiles, gems and jewellery and leather
and leather products losing their shares.

There exists considerable scope for further diversification of India’s export basket in terms of its
composition. A disaggregated level analysis at HS 6-digit level on the number of products
accounting for 50 per cent of the total trade brings out this point more clearly. A quinqennial
comparison over the period starting from 1996-97 to 2007-08 shows that in 2007-08 around 34




8 IMPACT OF THE GLOBAL SLOWDOWN ON INDIA’S EXPORTS AND EMPLOYMENT






products at 6-digit level accounted for 50 per cent of global exports of India. This number had
declined from around 45 products in 2000-01. There exists large scope to further diversify India’s
export basket by identifying products at 6–digit level where India may have higher competitiveness
in production.


Direction of India‟s Exports



As discussed earlier, the extent to which the global slowdown affects a country’s exports is likely to
be determined by the extent of the dependence of exports on trading partners affected by the
slowdown. Concentration of exports in a few markets which are facing a slowdown may hasten the
transmission of the adverse impact of a slowdown.

In the 1990s, more than half of India’s exports were directed towards OECD markets, with 28 per
cent directed to EU markets and around 15 per cent to the United States. Around 16 per cent went
to the Russian Federation and a similar percentage to developing countries, with Asian markets
being more dominant (table 5). However, over time there has been some diversification in terms of
the direction of India’s exports. The share of the EU has declined from 28 per cent in 1995–96 to
20 per cent in 2007–08, while the share of the United States has declined from 17.4 per cent in
1995–96 to 13 per cent in 2007–08. The share of the United Arab Emirates has increased from 4.5
per cent in 1995–96 to 9.7 per cent in 2007–08. There has been considerable increase in the
share of Asian developing countries in India’s export basket, from 23 per cent in 1995–96 to 31.5
per cent in 2007–08. The share of Africa has also increased over time. It is interesting to note that
the share of developing countries in India’s exports increased from 17 per cent in 1990–91 to 42
per cent in 2007–08.

The fact that India was able to diversify its exports to different countries has helped in softening the
impact of the global slowdown on its exports. However, the bulk of India’s exports, i.e., 33 per cent
is still directed towards the EU and the United States. There is a need to further diversify exports in
terms of new destinations.




Table 5. Share of Region/Country in India’s Exports, 1990–91 to 2007–08


Group / Country 1990–91 1995–96 2000–01 2005–06 2007–08


I. OECD 56.5 55.7 52.7 44.5 38.8


A. EU 27.5 27.4 23.4 21.7 20.2


B.
North
America 17.8 13.8


1 Canada 0.9 1.0 1.5 1.0 0.8


2
United
States 14.7 17.4 20.9 16.8 13.0


C.
Asia and
Oceania 5.1 3.3 3.1


of which:


1 Australia 1.0 1.2 0.9 0.8 0.7


2 Japan 9.3 7.0 4.0 2.4 2.2


D.


Other
OECD
countries 1.9 1.6 1.7


II. OPEC 5.6 9.7 10.9 14.8 16.5


of which:


1


United
Arab
Emirates 2.4 4.5 5.8 8.3 9.7


III.
Eastern
Europe 17.9 4.2 3.0 1.9 2.1




II. TRENDS IN INDIA’S TOTAL EXPORTS 9








of which:


1.
Russian
Federation 16.1 3.3 2.0 0.7 0.6


0.0 0.0 0.0


IV.


Developi
ng
countries 17.1 28.9 29.2 38.5 42.3


of which:


A. Asia 14.4 23.0 22.5 30.1 31.5


a) SAARC 2.9 5.4 4.3 5.4 5.7


b)
Other
Asian 17.6 18.2 24.7 25.8


B. Africa 2.2 4.8 4.4 5.5 7.6


C.


Latin
American
countries 0.5 1.2 2.3 3.0 3.2


V. Others / unspecified 2.9 1.5 4.3 0.3 0.4


Total trade 100.0 100.0 100.0 100.0 100.0


Source: Estimated from RBI “Handbook of Statistics on Indian Economy”, Directorate General of
Commercial Intelligence and Statistics.


2.2 Trends in India’s Services Exports


Growth in India‟s services exports over time




In less than two decades, India has become one of the top five exporters of services amongst
developing countries and has surpassed some the other Asian countries that had dominated the
services trade in the 1990s. India has been deemed a major exporter of services in the world with
a market share of 2.6 per cent in 2007 as against 0.6 per cent in 1995. India’s services sector has
matured considerably during the last few years and has been globally recognized for its high
growth and development. Indian services exports grew at a compounded annual growth rate
(CAGR) of 17 per cent during 1993–2000 but have grown at a much faster pace, recording CAGR
of about 24 per cent, during 2001–2008. There has been rapid growth in services exports from
2002. Exports have grown from $20.8 billion in 2002 to $90.1 billion in 2008.

The United States is one of the major markets for export of services for India. Its share in total
services exports has been around 10 per cent with the growth of services exports to the United
States being higher than that to the world since 2005–06 (figure 6).




10 IMPACT OF THE GLOBAL SLOWDOWN ON INDIA’S EXPORTS AND EMPLOYMENT






Figure 6. Growth of India’s Exports of Services to the World and the United States,
2002-2008


0.0


10.0


20.0


30.0


40.0


50.0


60.0


70.0


80.0


2002-03 2003-04 2004-05 2005-06 2006-07 2007-08


Growth of India's Export of Services to World and


U.S.


Export of


Services to


World


Export of


Services to


U.S.




Slowdown in the United States has led to lower growth of services exports to the United States as
well as to the world. India’s export of services to the United States grew at a rate of 76.2 per cent
in 2005–06 as compared to the previous year, but declined to 34 per cent and further to 31 per
cent in 2006–07 and 2007–08. Growth of exports of services to the world has declined marginally
from 28 per cent to 22 per cent in this period. Interestingly, the share of the United States in India’s
exports of services has not changed much over time. Its share increased from 10.7 per cent in
2006–07 to 11.6 per cent in 2007–08 (table 6).



Table 6. India’s Total Exports of Services to the World and the United States


Export of total
services ($ millions)


Export of services to the
United States ($ millions)


Share of the United
States in total
exports of services (
per cent)


2000–01 16 268 1 955 12.0


2001–02 17 140 1 692 9.9


2002–03 20 763 1 875 9.0


2003–04 26 868 2 212 8.2


2004–05 43 249 3 359 7.8


2005–06 57 659 5 917 10.3


2006–07 73 780 7 919 10.7


2007–08 90 077 10 443 11.6
Source: Bureau of Economic Analysis and RBI.


Composition of India‟s Services Exports



India’s export basket has not diversified very much over time, as around 40 per cent of exports
have consisted of software services since 2000–01. Export of software services has grown at a
compound rate of growth of 26 per cent as compared to 24 per cent of total services (table 7).
Apart from software services, travel and transportation services constitute the export basket, with a
share of around 12 per cent and 11 per cent respectively in 2007–08.




II. TRENDS IN INDIA’S TOTAL EXPORTS 11






Table 7. Composition of India’s Exports of Services


CAGR 1993-


2000
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08


CAGR 2000-


2008


Travel 4.56% 3,497 3,137 3,312 5,037 6,666 7,853 9,123 11,349 15.85%


YoY Growth 15.18% -10.29% 5.58% 52.08% 32.34% 17.81% 16.17% 24.40%


Transportation 2.53% 2,046 2,161 2,536 3,207 4,683 6,325 7,974 10,014 21.96%


YoY Growth 19.86% 5.62% 17.35% 26.46% 46.02% 35.06% 26.07% 25.58%


Insurance 9.29% 270 288 369 419 870 1,062 1,195 1,639 25.29%


YoY Growth 16.88% 6.67% 28.13% 13.55% 107.64% 22.07% 12.52% 37.15%


G.N.I.E 52.75% 651 518 293 240 401 314 253 330 -8.14%


YoY Growth 11.86% -20.43% -43.44% -18.09% 67.08% -21.70% -19.43% 30.43%


Miscellaneous of which: 31.99% 9,804 11,036 14,253 17,965 30,629 42,105 55,235 66,745 27.09%


YoY Growth -3.44% 12.57% 29.15% 26.04% 70.49% 37.47% 31.18% 20.84%


Software 6341 7556 9600 12800 17700 23600 31300 40,300 26.01%


YoY Growth 19.16% 27.05% 33.33% 38.28% 33.33% 32.63% 28.75%


Total 16.91% 16,268 17,140 20,763 26,868 43,249 57,659 73,780 90,077 23.85%


YoY Growth 3.56% 5.36% 21.14% 29.40% 60.97% 33.32% 27.96% 22.09%


Invisibles by Service Export of Transactions



*G.N.I.E: Govt. Services not included elsewhere, figures in $millions.
Source: www.rbi.org.in.


The major drivers of sustained year-on-year growth rates registered by aggregate Indian
exportable services have been earnings from travel, transportation and miscellaneous services,
which accounts for both software and non-software services.




 Travel, which is represented by foreign tourist arrivals and foreign exchange earnings,
registered a higher year-on-year growth rate of 24.40 per cent in 2007–08 as compared to
the previous year's growth rate of 16.17 per cent. Foreign tourist arrivals during 2008 were
5.37 million as compared to 5.08 million during 2007. Foreign exchange earnings in dollar
terms during 2008 were $11.7 billion as compared to $10.7 billion in 2007. During April–
September 2008, travel services registered a 22 per cent growth rate as compared to 24
per cent in the same period a year previously. However, the impact of the global financial
meltdown is evident in the latest numbers released by the Ministry of Tourism, which
reports foreign tourist arrivals at 1.461 million in 4Q 2008–09, 13.75 per cent lower as
compared to 1.694 million in 4Q 2007–08. Also, foreign exchange earnings during the
same period were lower at $2.7 billion as compared to $ 3.9 billion from January to March
2008.


 Exports of transportation services have slowed down in the past few years registering
25.58 per cent year-on-year growth in 2007–08 as compared to a growth rate of 46.02 per
cent in 2004–05 and 26.07 per cent in 2006–07. Transportation was the only service
recording a higher growth rate of 38 per cent in April–September 2008 from a 10 per cent
growth rate in April–September 2007.


 Insurance services registered a higher year-on year growth rate of 37.15 per cent over the
previous year's growth rate of 12.52 per cent. During April–September 2008, insurance
services observed a meagre 1 per cent growth rate as compared to a 29 per cent growth
rate in April–September 2007.




 Non-software services, under miscellaneous receipts, recorded a fall in the year-on-year
growth rate from 29.34 per cent in 2006–07 to 10.49 per cent in 2007–08.
Communication, business and financial services were the major contributors to the decline
in non-software services. Although communications and financial services recorded
positive growth rates in 2007–08, the growth rates were substantially lower than in the
previous year and similarly the decline was also attributable to a major negative growth
rate recorded in the export of business services. This slowdown was the result of the
banking, financial services and insurance sector being at the core of the global economic
slowdown. However, services such as construction, news agency, royalties, copyrights
and licence fees and personal, cultural recreational services registered higher year-on-
year growth rates in the non-software category.




12 IMPACT OF THE GLOBAL SLOWDOWN ON INDIA’S EXPORTS AND EMPLOYMENT






Table 8. Miscellaneous Receipts, Non-Software, 2005–06 to 2007–08


2005-06 2006-07 2007-08


Communication Services 1,575 2,099 2,436


YoY Growth 33.27% 16.06%


Construction 242 332 780


YoY Growth 37.19% 134.94%


Financial 1,209 2,913 3,085


YoY Growth 140.94% 5.90%


News Agency 185 334 643


YoY Growth 80.54% 92.51%


Royalties,copyrights and license fees 191 97 157


YoY Growth -49.21% 61.86%


Business Services 9307 19266 16624


YoY Growth 107.01% -13.71%


Personal, Cultural, Recreational 189 173 559


YoY Growth -8.47% 223.12%


Others 5607 1042 335


Total 18,505 26,256 24,619


YoY Growth 41.89% -6.23%


Miscellaneous Receipts:Non-Software



Source: www.rbi.org.in.


 Amongst the export of business services, business & management consultancy, as well as
architectural, engineering and other technical services registered the largest decline. Trade-
related services recorded a substantial increase of 137 per cent over the previous year.





Table 9. Miscellaneous Receipts, Business Services, 2005–06 to 2007–08















Source: www.rbi.org.in.



The non-software category recorded a 16 per cent growth rate in April–September 2008 from the
corresponding period a year previously. All services under the non-software category recorded
positive growth rates but of importance were the construction and personal, cultural & recreational
services registering the highest year-on-year growth rate of 45 per cent and 52 per cent
respectively. Business services recorded a moderate 14 per cent year-on-year growth rate in
April–September 2008.


 Under miscellaneous receipts, the export of software services has been a major
contributor to the growth of exportable services, accounting for 45 per cent of total
services export in 2007–08. During April–September 2008, software receipts stood at
$21.9 billion, showing a lower growth of 22.3 per cent than that of 26.3 per cent in same
period a year earlier. It should be pointed out that cost-cutting becomes a top priority in
times like the current economic deterioration which could mean a reduction in IT spending
by advanced economies with negative implications for the growth of Indian software
exports.


2005-06 2006-07 2007-08


Trade Related 521 939 2,223


YoY Growth 80.23% 136.74%


Business and Management Consultancy 2,320 7,346 4,215


YoY Growth 216.64% -42.62%


Architectural, Engineering and Other Technical 3,193 6,134 3,287


YoY Growth 92.11% -46.41%


Maintenance of Offices 1,577 2,334 2,867


YoY Growth 48.00% 22.84%


Others 1696 2513 4032


YoY Growth 48.17% 60.45%


Total 9,307 19,266 16,624


YoY Growth 107.01% -13.71%


Miscellaneous Receipts: Business Services




II. TRENDS IN INDIA’S TOTAL EXPORTS 13






 In addition, the banking, financial and insurance, sector which has been the epicentre of
this global financial crisis accounts for approximately 50 per cent of the revenues of IT &
ITeS providers which makes IT & ITeS highly vulnerable to the current global slowdown in
terms of delayed decision-making and reduction in IT spending by customers of front-line
IT companies.




Direction of India‟s exports of services



Exports of services from India have been oriented mostly towards the EU25 and United States in
the developed world. India’s country-wise exports of services show that the United States and the
United Kingdom are the two most important destinations for service exports. The EU and South-
East Asia are relatively less important destinations. According to the Economic Survey 2007–08,
India exports travel services mainly to the EU and transportation services to South-East Asia.

Around 13 per cent of total Indian services exports were oriented towards the EU25 in 2003.
However, the share had come down to 10 per cent in 2005. The United States accounted for about
8.7 per cent of India’s total services exports in 2005. Interestingly, the share of the United States
had gone up to around 10.7 per cent in 2007 (table 10).




Table 10. Services Exports to United States and Share in Global Indian Services Exports


Year
Exports to United States


($m)
Share of United States in total


exports (per cent)


2003 2 000 7.4


2004 2 886 6.7


2005 5 057 8.8


2006 7 693 10.4


2007 9 664 10.7


2008 12 141 -


Source: Bureau of Economic Analysis.


Although the impact of the global slowdown on India’s exports of services has not been as deep as
the impact on goods, and services exports are still recording positive export growth, the increasing
legislation and inbuilt conditions in the stimulus packages offered for revival in the developed
countries may lead to an escalati0n in the impact of the slowdown on services exports over time.


For example, under the American Recovery and Reinvestment Act (ARRA), 2009, the United
States Government has restricted the companies taking advantage of bailout packages from
replacing American laid-off workers with low-cost H1 B visa professionals. Currently, the cap for
H1 B visa holders stands at 65,000 a year, of which approximately 40,000–45,000 holders are IT
professionals of Indian origin. This will have an adverse impact on services exports under GATS
Mode 4.


Similarly, the British Government has raised the minimum requirement to enter Britain under the
Tier 1 category from a graduate degree with a minimum salary of £17,000 to a master’s degree
with a minimum salary of £20,000. The ban by the United States and a restrictive employment
policy by the United Kingdom will on an aggregate level affect Indian export of services under
GATS mode 4 and possibly restrain the new employment generation for the Indian IT and ITeS
sector.




14 IMPACT OF THE GLOBAL SLOWDOWN ON INDIA’S EXPORTS AND EMPLOYMENT






2.3. Trends in India’s Imports of Goods and Services

Since 2001–02 onwards, India’s merchandise imports have always been higher than its
merchandise exports, leading to a negative trade balance which has grown over the years (figure
7). Not only are imports higher than exports, they are also growing at a much higher rate. In 2008,
India’s exports grew by 23.7 per cent while its imports grew by 38 per cent.




Figure 7. India’s Exports, Imports and Trade Balance, 2000–01 to 2007–08


India's Exports, Imports and Trade Balance:2000-01 to 2007-08


-200000 -100000 0 100000 200000 300000


Exports,


f.o.b.


Imports,


c.i.f.


Trade


balance


2007-08(P)


2006-07(PR)


2005-06


2004-05


2003-04


2002-03


2001-02


2000-01





In terms of services, however, export growth is much stronger than import growth which has led to
an ever-growing positive trade balance in India’s services trade. This reflects the importance of
services sector in India’s total trade.

Within merchandise imports, oil imports are much higher than the non-oil imports.


 Oil imports. Since October 2007, there has been a steady rise in imports of oil. However,
much of this increase can be attributed to the increase in oil prices. After July 2008, there
was a drastic decline in India’s oil imports on account of the fall in prices. Volumes of oil
imports grew at almost 212 per cent in 2008–09 over 2004–05 (table 11). The rate of
growth of oil imports in each financial year over the previous financial year remained
greater than 30 per cent except in 2008–09 (17 per cent).





Table 11. India’s Oil Imports and Rates of Growth (per cent)


FY Oil imports ($ millions)
ROG ( per
cent)


2004–05 29,844


2005–06 43,963 47.31


2006–07 57,099 29.88


2007–08 79,715 39.60


2008–09 93,176 16.88





 Non-oil imports. India’s non-oil imports have increased steadily over time (table 12). Non-
oil imports grew at almost 138 per cent in 2008–09 over 2004–05. However, in 2008–09
the growth rate fell from 33.8 per cent in 2007–08 to 13.16 per cent.




II. TRENDS IN INDIA’S TOTAL EXPORTS 15






Table 12. India’s Non-Oil Imports and Rates of Growth (per cent)


FY Non-oil imports ($ millions)
ROG ( per
cent)


2004–05 81,673


2005–06 105,203 28.81


2006–07 128,505 22.15


2007–08 171,940 33.8


2008–09 194,584 13.16




Within the import basket, the composition of imports between oil and non-oil imports does not
seem to have changed much over time for India (figure 8).



Figure 8. Composition of India’s Import Basket, 2004–05 to 2008–09


0


20,000


40,000


60,000


80,000


100,000


120,000


A
p


r-


J
u


n
e


J
u


l-


S
e


p
O


c
t-


D
e


c
J


a
n


-


M
a


r


A
p


r-


J
u


n
e


J
u


l-


S
e


p
O


c
t-


D
e


c
J


a
n


-


M
a


r


Non Oil Imports Oil Imports


India's Oil and Non-Oil Imports


2008-09


2007-08


2006-07


2005-06


2004-05





Conclusions from Trends


1. The financial crisis in the United States which began in the second quarter of 2007,
adversely affected India’s merchandise exports to the United States with negative effects
becoming pronounced from October 2008 onwards. A likely explanation for this lag is that
India’s exports to the world had grown at a much higher rate as compared to exports to the
United States since 2005. Also, the share of the United States in India’s exports has
declined over the years which has reduced the dependence of India’s exports on the United
States market.

2. India’s export basket in terms of its composition has diversified over time and the share
of traditional exports has declined in the export basket. This has led to reduced dependence
on a few exportable products and helped moderate the impact of the reduced demand of
exports. However, there exists large scope for further diversification.

3. Overtime, the significance of South-South trade for India is increasing, with the share of
developing countries increasing from 17 per cent in 1990–91 to 42 per cent in 2007–08. In
particular, the direction of India’s exports is slowly shifting towards Asian developing
countries. However, developed countries, like the EU and the United States, are still India’s
major export markets.

4. In terms of exports of services, there has been an exponential rise over time with CAGR
of about 24 per cent during 2001–2008. The United States remains the major export market
for India’s services and software exports remain the major exportable service with a 40 per
cent share.




16 IMPACT OF THE GLOBAL SLOWDOWN ON INDIA’S EXPORTS AND EMPLOYMENT






5. The major drivers of sustained year-on-year growth rates registered by aggregate Indian
exportable services have been earnings from travel, transportation and miscellaneous
services, which accounts for both software and non-software services. Growth rate of
exports has drastically fallen in all these services since 2007–2008 but has remained
positive.

6. India’s import growth has declined during the slowdown but the decline has been lower
than the decline in exports. Non-oil import growth declined from 29 per cent in 2005–06 to
13 per cent in 2008-09 while oil imports declined from 47 per cent in 2005–06 to 17 per cent
in 2008-09. Unlike the growth rate of exports, the growth rate of imports has remained
positive



The trends in India’s exports and imports indicate that the impact of the slowdown on India was felt
with a lag probably due to diversification over time in India’s exports, both in terms of composition
and direction. However, there is a large scope for further diversification, both in terms of
composition and direction of exports. Around 30 per cent of exports are still directed towards
developed countries, which need to be diversified to developing countries. The share of fewer
commodities in the top 50 per cent of India’s exports at 6-digit level in 2007 as compared to the
earlier period reflects the need and scope for further diversification.




III. IMPACT OF THE SLOWDOWN ON INDIA’S EXPORTS 17






III. IMPACT OF THE SLOWDOWN ON INDIA’S EXPORTS


Global demand plays an important role in determining the export growth of a product. With a rise in
global incomes, demand for normal and luxury products rises while for inferior products it may
decline. Income elasticity of demand


4
for luxury products is expected to be greater than one, while


for normal goods it is expected to be between 0 and 1. The kind of products a country exports, i.e.,
the income elasticity of demand of the product, is an important factor which determines the impact
of a slowdown on the country’s exports. Along with income elasiticity, price competitiveness may
also determine the impact of a slowdown on exports. If the products exported are less price-
sensitive, then in the case of a slowdown the option of lowering prices to maintain market shares
may not be feasible.

Econometric estimation of the price and income elasticity of imports has been the subject of a
large literature


5
both for developed and developing countries. Apart from price competitiveness,


many other factors may affect demand for a product, e.g. income of consumers, tastes and
preferences, etc. Income elasticities of demand are said to capture market sensitivity to non-price
factors (Fagerberg, 1988 and Meliciani 2001). Most empirical studies find that the exports of
developing countries, especially in Asia, have low price elasticities but high income elasticities
(Goldstein and Khan, 1985; Marques and McNeilly, 1988; Feenstra, 1994, Senhadji and
Montenegro, 1999).

The empirical evidence of low price elasticity and high income elasticity of export demand in
general has important implications for exports of developing countries. Firstly, this suggests that
the export growth of developing countries is highly dependent on the economic performance of
developed countries. Secondly, it implies that the developing countries may have limited feasibility
of using price competition to maintain or increase exports.

It has been recognized in the literature that the higher the income elasticity of the export demand,
the more powerful will exports be as an engine of growth.


6
Senhadji and Montenegro (1999) found


that the Asian countries had the highest estimated values for income elasticity among the
developing and industrial countries. This advocated the view that exports had been a powerful
engine of growth in the Asian region. This has an important implication: the higher the income
elasticity of export demand the more severe will be the impact of a slowdown of incomes/GDP on
the exports and growth of developing countries.

To estimate the extent of the impact of the slowdown of global GDP growth on India’s exports, the
study estimates income elasticity of export demand for India’s total exports and its sectoral
components. The elasticities indicate the extent to which India’s exports will increase/decrease in
response to changes in global demand captured by changes in global GDP growth. These income
elasticities are then used with GDP growth forecasts for 2009 and 2010 (provided by OECD
Economic Outlook, March 2009) to arrive at the estimated impact on India’s total and sectoral
export growth to world.


3.1 Methodology and Data



For assessing the impact of the slowdown on India’s exports, we estimate the standard export
demand equation for India using data for 1970 to 2008. According to the standard export demand
function, exports depend on price competitiveness, as measured by the real exchange rate, and
global income as measured by global GDP. For India, many of the tradables comprise low-
technology products, such as leather footwear, gems and jewellery, marine products, etc.,
therefore there is a strong possibility of these being highly differentiated products, with close



4
The income elasticity of demand measures the responsiveness of the demand of a good to the change in the


income of the people demanding the good. It is calculated as the ratio of the percentage change in demand to the
percentage change in income. For example, if, in response to a 10 per cent increase in income, the demand of a
good increased by 20 per cent, the income elasticity of demand would be 20 per cent/10 per cent = 2.
5
See, for example, Malley and Moutos (2002), Erkel-Rousse and Mirza (2002), Caporale and Chui (1999), Hooper


et. al. (1998).
6
See Huuthaskker and Magee (1969), Goldstein and Khan (1985).




18 IMPACT OF THE GLOBAL SLOWDOWN ON INDIA’S EXPORTS AND EMPLOYMENT






substitutes available. Demand for these products is therefore expected to be price-sensitive. Firms
offering a lower relative price would be able to sell more than their competitors.

To measure relative price, it is necessary to look at price and exchange rate data. The volume of
exports depends on nominal exchange rates after adjusting for the domestic level of inflation


7
by


which we arrive at a real effective exchange rate (REER). While considering exports, a country’s
REER would preferably reflect not only its price competitivess vis-à-vis the importing country but
also its price competitiveness versus competing exporters to the same country. In other words,
relative exchange rate index construction for exports involves the added complication of taking
third party competition into account. This approach has been followed by a number of studies (e.g.
Spilimbergo et al. 2003, Wijeweera et al 2008).

To capture the relative difference in international and domestic market prices, a ratio of world GDP
deflator to India’s GDP deflator is used. Real exports are arrived at by deflating nominal exports
with an export unit value index (source: Reserve Bank of India). World GDP in real terms captures
the income effect. This is a standard proxy for capturing income effect. The model estimated is
therefore as follows:


LNEXPINDIAt
d


= α
1
+ α


2
LNGDP WORLDt + α


3
LNREERt + u


t ………………(1)


t = 1970 to 2008

Where LNEXPINDIA is log of real exports of India to the world; LNGDP WORLD is a log of real world
GDP and LNREER is a product of thr effective exchange rate and relative prices proxied by a ratio
of world GDP deflators and India’s GDP deflator. The data for world GDP at current and constant
prices is taken from the World Bank World Development Indicators; the exchange rate is taken
from the ERS International Macroeconomic Data Set; and India’s merchandise export is taken
from World Integrated Solutions (WITS; COMTRADE).

Empirical evidence suggests that India’s exports react favourably to devaluation or depreciation.
Following the devaluation of the rupee in 1991 there was a spurt in export growth. Studies have
reported that the price competitiveness of India’s exports is an important determinant of the
volume of exports and that rupee depreciation can have a significant positive effect on its current
account balance (Joshi and Little, 1994; Srinivasan 1996; Banik 1999). It is therefore expected that
the price elasticity given by α


3
will be negative.



Apart from relative prices, global GDP is also considered to be an important variable for estimating
export demand functions. As stated above, many studies have found income elasticity, which is
given by coefficient of LNGDP WORLDt i.e., α2


will be positive.



We have followed the standard procedure in the literature to check for unit roots in each series
before estimating a model that involves time series data. If there is a unit root, then that series is
considered to be non-stationary. The stationarity of each series is tested by the following unit root
tests: (a) Augmented Dickey-Fuller test (ADF test); and (b) the Phillips-Perron test (PP test). Since
regressions have been run for aggregate exports as well as sector-specific exports, we have
undertaken the tests separately. The results of these are reported in the annex. We find that most
of the series used are stationary at levels. Wherever we found that the series contains the unit root
in levels, but no unit roots in first differences, we have used the popular Engle and Granger (1987)
method to estimate the export demand functions. According to Engle and Granger (1987), it is
possible to have a linear combination of these non-stationary variables that is stationary. Two
estimation steps are carried out. First, the best possible linear equation – as shown in equation (1)
– is estimated and residuals are collected. Then a unit root test is used to test whether residuals
are stationary. We find that they are stationary, which implies that there exists a long-run
equilibrium relationship and therefore a meaningful regression estimate can be carried out.



7
Real exchange rate (R) = nominal exchange rate (e) × foreign price (p*)/domestic price (p). The nominal


exchange rate is measured as domestic currencies per unit of foreign currency.




III. IMPACT OF THE SLOWDOWN ON INDIA’S EXPORTS 19






3.2 India’s Income Elasticity of Total Exports

To estimate the impact of the slowdown of world GDP growth on India’s export growth, we
estimate the above equation (equation 1). Similar equations have been estimated to arrive at price
and income elasticities of India’s exports to the United States, the G7 countries, advanced
economies (as defined by IMF) and the ASEAN 5. The results are reported in table 13.




Table 13. Income Elasticities of India’s Export Demand


Countries Price elasticity for exports Income demand
elasticity for exports


World -0.54* 1.88*


G 7 countries -0.21* 1.06*


USA -0.36* 2.48*


ASEAN 5 -0.42* 1.11*


Note: G7 countries are as per the IMF definition. * Denotes significant at 1 per cent.


The results show that India’s exports to the world are much more responsive to income changes
as compared to price changes, although both factors are found to be significant. A 1 per cent
decline in GDP growth of the world will lead to 1.88 per cent decline in India’s growth of exports to
the world. However, much higher price competitiveness is required to increase exports. It should
be noted that the price elasticity, inter alia, captures the effect of depreciation of the currency and
lowering of relative prices. This implies that to compensate for the loss in export growth, it will be
very difficult to increase India’s export growth through improvements in its price competitiveness. A
10 per cent reduction in prices will lead to a 5.4 per cent increase in exports.

Income elasticity of India’s exports is found to be highest with respect to the United States, i.e.
2.48, which implies that a slowdown in the United States with respect to GDP growth will have a
more significant impact on India’s export to the United States as compared to a decline in the
growth of world GDP. The income elasticity with respect to ASEAN 5 countries is found to be 1.11,
which is comparatively lower than the income elasticity of India’s exports with respect to world and
the United States This implies that a slowdown in growth of ASEAN GDP will have a lower impact
on the export growth of India to ASEAN 5 as compared to the world.

India’s exports are found to be more price elastic with respect to ASEAN 5 as compared to the
United States and the G7. This indicates that with respect to ASEAN 5, India is exporting much
more differentiated products with close substitutes as compared to other developed countries.
Although earlier studies have found a much higher price elasticity for India (e.g. Srinivasan 1996),
more recent studies have found lower price elasticity (e.g., Banik 2008). An apparent reason for
this is a change in the composition of India’s exports from price-sensitive items to less price-
sensitive items such as chemicals, engineering goods and petroleum products. An important
implication of this is that a slowdown in ASEAN 5 countries may have a less adverse impact on
India’s export growth, therefore exploring further export opportunities in these countries could be
considered.


3.3 India’s Income Elasticity of Sectoral Exports

Following a similar methodology to that outlined in the earlier section, income and price elasticities
are estimated for 10 major Indian export sectors to the world. Detailed results with respect to the
stationarity of the series and other test statistics are presented in the annex. The price and income
elasticities are reported in table 14.




20 IMPACT OF THE GLOBAL SLOWDOWN ON INDIA’S EXPORTS AND EMPLOYMENT






Table 14. Price and Income Elasticities for India’s Major Export Sectors


Price elasticity
(1)


Income elasticity
(2)


1 Textiles and textile products -0.29* 1.16*


2 Ore & minerals -1.27* 4.85*


3 Leather and leather products -0.88* 1.25*


4 Marine products -0.47* 1.26*


5 Plantations -1.05* 0.33*


6 Chemicals and chemical products -0.23 2.55*


7 Petroleum products -1.30 5.40*


8 Engineering and electronic products -0.56* 2.28*


9 Agriculture and allied products -0.71* 1.38*


10 Gems & jewellery -0.92* 4.11*


Total Exports -0.54* 1.88*


Note: * Denotes significant at 1 per cent.


The results show that the income elasticity of total Indian exports is very high, i.e., 1.88. Estimates
of the income elasticities of 10 major Indian export sectors (which are around 95 per cent of India’s
total exports) show that they are high for sectors such as petroleum products, ores and minerals,
gems and jewellery, chemical products and engineering products. India’s traditional export sectors,
like textiles leather and plantations, have relatively low income elasticity, with the lowest being for
plantations. This also explains the shift in India’s exports away from traditional exports and the
growing diversification of the export basket in the period 2000-2007 in which global GDP grew
consistently.

Two observations can be made here. First, India’s exports of textiles are not high value added
exports, since as people's incomes rise, their demand for India’s textiles does not grow as
significantly as their demand for other products exported by India. Improvement in brand names
and quality is needed for increasing the income demand elasticity for textiles. The same is true for
leather and leather products. For both textiles and leather exports, price elasticity is low which
implies that improving cost competitiveness or lowering prices may not be a feasible option for
boosting exports of these sectors during a slowdown.

Second, exports of products like plantations are not expected to be income elastic as their demand
may not be linked to people's incomes. However, price elasticity is found to be very high for
plantations, which implies that lowering their prices and improving their cost competitiveness can
boost their exports during a slowdown. High price elasticities are also found for ores and minerals.
Lowering their prices to boost exports during a slowdown can be considered as a mitigating step.
However, price elasticities are not found to be a significant factor in export growth for petroleum
and chemical products and these are the products which are increasing their share of India’s total
exports.

An important implication of these elasticities is that during a slowdown in growth of global GDP,
sectors with higher income elasticities will experience a higher decline in their export growth. But if
the price elasticities are also high then these sectors can lower their prices to improve exports, but
such an option may not be available to products with high income elasticity but low price elasticity
like gems and jewellery and textiles. These sectors are relatively more vulnerable sectors of the
economy in terms of impact of global slowdown.




IV. FORECAST OF INDIA’S EXPORTS USING INCOME ELASTICITY OF EXPORTS 21






IV. FORECAST OF INDIA’S EXPORTS USING INCOME
ELASTICITY OF EXPORTS




Using the income elasticities for export demand for India and the forecast change in global GDP
growth, India’s total export growth and sectoral export growth for ten major sectors has been
estimated for the year 2009–10 and from April 2010 to 2010 December 2010. The forecast
slowdown of GDP growth as provided by OECD Economic Outlook (March 2009) is used. The
slowdown in GDP growth projected by OECD is as follows:


Table 15. Projected Real GDP Growth ( per cent), 2009 and 2010


2006 2007 2008 2009 2010


World 4.3 4.1 2.2 -2.7 1.2


USA 2.8 2 1.1 -4 0


Euro Area 3 2.6 0.7 -4.1 -0.3


Japan 2 2.4 -0.6 -6.6 -0.5


Source: OECD Economic Outlook (March 2009).


According to the projections, global GDP growth is expected to decline from 2.2 per cent in 2008 to
-2.7 per cent in 2009 but it is expected to revive in 2010 to 1.2 per cent. However, positive GDP
growth is not forecast for developed countries like the United States, the eurozone and Japan in
2010.

The results of the estimates are presented in table 16. The results show that total exports will grow
by -2.2 per cent in 2009–10, which implies that there will be almost flat growth, marginally tending
towards negative growth. Most of the sectors experience a negative growth rate. Positive growth in
exports is forecast for plantations, the agriculture sector and the engineering and electronics
sector. It should be noted that although positive growth rates of exports in agricultural products has
been forecast, it is much lower than the 55 per cent export growth in 2007–08.





Table 16. Forecast Total Merchandise Export Growth and Sectoral Export Growth,


2008–09 and 2009–2010


Export
growth in
2007–08


Export growth
2008–09 over
2007–08


Export growth
2009–10 over
2008–09


Projected export
growth 2010
over 2009


Textiles and textile products 15.7 -8.9 -3.6 4.6


Ore & minerals 30.4 -12.3 -4.9 26.6


Leather and leather products 16.3 2.5 -1.6 5.7


Marine products -2.6 -4.4 -0.1 5.3


Agriculture 55.6 2.6 1.5 14.6


Plantation 11.6 54.6 14.2 14.3


Engineering & electronics 26.6 22.0 0.4 9.5


Chemicals & products 21.5 9.7 -4.3 8.1


Gems & jewellery 23.3 -4.9 -11.1 15.3


Petroleum products 52.0 4.7 -11.8 21.2


Total sectors 29.1 3.40 -2.2 8.3




The forecasts show that petroleum products will experience the maximum decline in export
followed by gems and jewellery, ores and minerals and textiles and textile products. Total exports
grew by 3.4 per cent in 2008–09, declining from 29.1 per cent growth in 2007–08. The predicted
export growth in 2009–2010 is -2.2 per cent, which is predicted to increase to 8.3 per cent in
2010–11 (April to December). The estimates show that all sectors experience a positive growth in
exports if global GDP growth is positive, as predicted by OECD.




22 IMPACT OF THE GLOBAL SLOWDOWN ON INDIA’S EXPORTS AND EMPLOYMENT







However, although many sectors show positive export growth rate in 2008–09, a close
examination of quarterly trends reveal that this positive export growth masks the decline in export
growth during October 2008–March 2009. For example, sectors such as leather and leather
products and petroleum products experienced a negative export growth of 10 per cent and 28 per
cent. In 2010–11, sectors such as agricultural products, plantations, engineering, chemicals and
petroleum products are expected to reach the initial level of exports in 2007–08.




V. IMPACT OF THE SLOWDOWN ON EMPLOYMENT THROUGH INTERNATIONAL TRADE 23






Box: Methodology for Estimating Impact on Employment


Using the latest available input-output matrix for India for the years 2003–04, the
impact of a predicted change in exports on employment has been estimated for 10 major


sectors of the Indian economy for the years 2008–09, 2009–2010 and 2010 (April to
December).


Using the actual sector-wise exports for the years 2006–07 and 2007–08, provided by
RBI, the change in exports has been calculated for subsectors of the input-output


matrix. Using a Leontif inverse matrix, the change in output across different sectors


consequent to change in output for each sector (due to change in exports) has been


estimated. Applying the labour coefficients across the sectors, total employment change


(which is direct as well as indirect) is arrived at for each sector. These are further


summed up to arrive at the change in total employment and the change in employment


for 10 major sectors.


The estimated impact on employment for a sector includes both a direct increase in


employment of the sector caused by exports and an indirect increase in employment


which is generated because of the rise in exports of other sectors which use the sector’s
output as inputs. For example, employment in agricultural products may rise because of


increase in their exports and also because of increase in demand for their products as


exports of processed food products and textiles and textile products increase.




V. IMPACT OF THE SLOWDOWN ON EMPLOYMENT
THROUGH INTERNATIONAL TRADE




The predicted overall export growth for the years 2009–2010 and 2010–11 and sectoral export
growths have been used to estimate the impact of the global slowdown on employment in the
economy. The methodology adopted for this is described in the box below.




The results are presented in table 17. The estimates show that in the year 2008–09, with export
growth of 3.4 per cent, the total job loss in India due to lower export growth was around 1.16
million. However, since the impact of the slowdown on India’s exports was strongly felt only after
September 2008, the net employment created by exports in this year was positive, i.e., 1.25
million. The net employment is the sum total of jobs created and lost in different sectors over time.
In the year 2009–10, export growth is predicted to be -2.2 per cent, and the total job loss is
estimated to be around 1.3 million. However, since export growth is positive for some sectors like
plantations and these sectors have high employment multipliers, the net employment loss is
estimated to be -748 thousand.


For the year 2010–11, estimation could be done only for three quarters, i.e., until December 2010,
as GDP growth predictions are not available beyond that. Using the predicted export growth of 8.3
per cent, the total employment generated in the economy is estimated to be 5.22 million. No job
losses are expected as all sectors are expected to experience positive export growth.


Sector-specific employment changes are reported in table 17. In 2008–09, job losses are likely to
arise in sectors with negative export growth like textiles and textile products, ores and minerals,
marine products and gems and jewellery. In 2009–2010, most sectors are predicted to have job




24 IMPACT OF THE GLOBAL SLOWDOWN ON INDIA’S EXPORTS AND EMPLOYMENT






losses, except for agriculture and plantations, for which positive export growth has been predicted.
Maximum job losses are likely to occur in the gems and jewellery sector followed by ores and
minerals, textiles and textile products and petroleum products. For the year 2010–11 (until
December), we find that there is employment generated due to changes in exports in all sectors.


Table 17. Impact of the Slowdown on Employment, 2008–09 to 2010–11


Employment
projection in
2008–09


Employment
projection in
2009–10


Employment projection
in 2010–11
(until December 2010)


Ores and minerals -373,023 -440,961 936,824


Textiles & products -559,621 -253,810 260,172


Leather & products 30,787 -21,102 54,784


Marine products -16,498 -96 16,484


Agriculture 373,148 159,070 2,468,094


Plantation 1,275,376 422,672 561,494


Engineering and
electronics


665,445 -24,927 332,997


Chemicals & products 45,114 -29,856 49,504


Gems & jewellery -217,151 -505,023 465,005


Petroleum products 33,749 -54,045 79,445


Net employment 1,257,327 -748,078 5,224,802


Job loss -1,166,293 -1,329,820




During 2010–11 (until December 2010) with all sectors likely to experience positive export growth,
the declining trend in employment would be reversed. In sectors such as ore and minerals, leather
and leather products, engineering products, chemicals and petroleum products, the additional
employment generated due to export growth in 2010–11 is likely to compensate for job losses due
to a decline in exports during the preceding two years. However, in respect of the textile sector and
gems and jewellery, export growth during the nine months of 2010–11 would not be sufficiently
buoyant as to compensate for job losses during the preceding two years.




VI. IDENTIFICATION OF SECTORS FOR EMPLOYMENT GENERATION 25






VI. IDENTIFICATION OF SECTORS FOR EMPLOYMENT
GENERATION



One of the immediate policy actions which may be required to mitigate the impact of the global
slowdown on employment is to identify the export sectors which have large employment
multipliers. An employment multiplier of a sector gives an estimate of aggregate direct and indirect
employment changes (in person years) resulting from increase in one unit of output of the sector.
The indirect employment changes occur due to backward and forward linkages of the sector in the
economy. Thus, employment multipliers will indicate the extent of economy-wide employment
generated.

Using the latest available input-output matrix, employment multipliers have been generated for the
10 major sectors, which are as follows.




Table 18. Employment Multipliers Based on Input-Output Matrix of 2004




Employment Multiplier


Plantation 2.15


Agriculture 3.20


Marine products 0.56


Ores and minerals 2.00


Leather & products 1.11


Gems & jewellery 0.50


Textiles & products 1.22


Chemicals & products 0.36


Engineering and electronics 0.38


Petroleum products 0.26




As seen in table 18, the employment multiplier for the agricultural sector is the highest at 3.2,
followed by ores and minerals. However, the employment generated in the economy will depend
on the value of exports of the sector and its employment multiplier. Sectors with high employment
multipliers which may not be able to regain their export growth to the initial level of 2007–08 in
2010 are textiles and products (1.22); leather and products (1.11); and gems and jewellery (0.5).







VII. CONCLUSION AND MITIGATING STRATEGIES 27






VII. CONCLUSIONS AND MITIGATING STRATEGIES




Riding on the back of brisk growth in the global economy since 2002, India’s exports witnessed a
phenomenal threefold increase during the period 2002–03 and 2007–08. This powerful dynamo for
employment generation is now threatened by rapid contraction in global demand and a weakening
labour market. It is a major challenge for India to properly manage the fallout from the current
global slowdown on its export sector and limit the adverse consequences for the employment
situation in the country.

As estimated in this paper, India’s export growth during 2009–10 over the previous year is likely to
be flat, tending towards the negative side (-2.2 per cent). However, in conjunction with recovery in
demand in developed economies, India’s export prospects are likely to improve during the period
2010–11. Exports in sectors such as textiles and clothing, ores, marine products and gems and
jewellery are likely to decline significantly during 2009–10, as compared to the previous financial
year. Relatively high employment – output multipliers in these sectors is likely to result in high job
losses. The position of export-related employment is likely to improve during April–December
2010, due to improved export performance in sectors such as chemicals, petroleum products, and
engineering and electronic products. However, additional employment created due to export
growth during this period in textiles and gems and jewellery will not compensate for job losses in
these two sectors for the preceding two years.

Overall, it is apprehended that the contribution of the export sector in generating employment in
India is likely to remain under stress till 2009–2010 with improvements in the year 2010–11. The
net employment loss is estimated to be around 748,000 in 2009–2010, with exports generating
total employment of 5.2 million in the year 2010–11 (until the third quarter).

To build the resilience of the economy to trade shocks and improve competitiveness of exports, it
would be useful for the Government to consider mitigating strategies. This study suggest five
specific mitigating strategies relating to (a) diversification of exports to new geographical
destinations and new products; (b) simplification in customs procedures for reducing transaction
costs; (c) examination of the likely impact of anti-dumping and safeguard duties imposed by India
on downstream user industries; (d) measures aimed at assisting exporters to retain their market
presence during the crisis period; and (e) expeditious multilateral examination of the adverse
impact of bailouts and stimulus packages and prompt remedies.

(a) Diversification of exports: identifying new markets and new products

Despite targeted efforts by the Government for seeking new geographical destinations for exports,
the European Union and the United States continue to be the main destination of India’s exports.
These two main markets account for nearly 30 per cent of exports, although the share of the
United States has reduced gradually over the years. While demand in most countries has been
adversely affected by the current global slowdown, the extent and timelines for recovery vary
considerably. On the basis of available forecasts, it is likely that countries/regions such as Western
Asia, ASEAN, Australia and Brazil are likely to witness a faster recovery than other economies.
These countries can provide viable and sustainable alternative markets for reducing India’s
overwhelming reliance on the EU and the United States for its exports. There is a need to develop
and implement measures that would ensure sustained export growth which is not impeded by
adverse developments in big foreign markets or in respect of a few products.

In each of the importing destinations (ASEAN, Australia, Brazil, Republic of Korea, Western Asia,
and South Africa) a competitiveness analysis of India, the importing country and five main
exporting countries has been undertaken for identifying products in which India has the potential to
significantly increase its exports from the current level (potential products) or start exporting new
products.


8
Around 958 products were identified. As shown in table 19, India has the potential to


increase its exports of new and potential products by almost $35 billion.



8
Bilateral and global RCAs (revealed comparative advantage) have been used for the competitiveness analysis.




28 IMPACT OF THE GLOBAL SLOWDOWN ON INDIA’S EXPORTS AND EMPLOYMENT






Table 19. Potential Gain for India from Export of New and Potential Products


Country
Estimated value of new


exports of India (in $bns)
Estimated value of potential


products exports of India (in $bns)


Australia 1.98 2.19


Brazil 3.36 0.19


Republic of
Korea 6.55 1.45


United Arab
Emirates 0.70 2.70


Malaysia 3.65 0.80


Philippines 2.20 1.05


Thailand 2.60 0.85


Singapore 0.85 2.52


South Africa 1.35 0.20


TOTAL 23.24 11.95




As a first step in harnessing this potential, it may be useful for industry and the Government to
identify specific reasons as to why India’s comparative advantage in these products has not
translated into export gains. As India is in the process of negotiating free trade agreements with
most of these countries, this opportunity could be used to address border and behind-the-border
trade-related constraints identified in the importing country. Early conclusion of free trade
agreement negotiations and implementation of the agreement with some of these countries could
provide India with attractive markets for reducing the risk of overall exports being adversely
affected by developments in a few big markets.

For India to again achieve the export growth witnessed prior to the global slowdown, the need to
preserve the existing market access in big economies becomes extremely important. While an
early and satisfactory conclusion of the Doha Round would help in this regard, it is also essential
to be vigilant that non-tariff measures do not act as a disguised trade restriction.

(b) Simplification in Customs Procedures for Reducing Transaction Costs

With profit margins shrinking globally, cost competitiveness would be an important determinant for
retaining or acquiring a share in export markets. A part of the cost-cutting efforts are linked with the
Government’s initiatives aimed at facilitating trade. In an attempt to reduce some of the transaction
costs associated with international trade, the Government has been simplifying its customs
procedures over the past few years. While this is a continuing process, it needs to gather
significant additional momentum, if India’s exporters are to cut costs further, enhance their
competitiveness and retain or increase their market share in foreign markets. Using the costs and
procedures involved in importing and exporting a standardized shipment of goods, the World Bank
report Doing Business 2009 states that India has slipped 9 ranks in respect of trading across
borders. This report suggests that considerable procedural improvements related to international
trade remain to be undertaken, as India’s exporters require twice the number of documents for
exports as OECD countries. Similarly, the time required for export and import continues to be
considerably higher in India compared to OECD countries. The possibility of further simplification,
at least in these two areas in the short term, merits the close attention of the Government.

(c) Examining the Likely Impact of Anti-Dumping and Safeguard Duties on Downstream
User Industries Prior to the Imposition of Duties

While India has been a major user of anti-dumping measures over the past few years, there has
been a significant increase in the number of fresh anti-dumping and safeguard investigations
initiated from October 2008 onwards. Many of the products currently under investigation are
chemicals and other intermediate products which are inputs for downstream industry. The
imposition of anti-dumping and safeguard duties on products which are inputs for subsequent
stages of industrial production, would increase the overall cost of production. The duties would
also adversely affect export prospects, if the duties are imposed on imported inputs used for
producing export-oriented goods. While the underlying anti-dumping and safeguard investigations
are required to be undertaken in accordance with the requirement under relevant domestic law, the




VII. CONCLUSION AND MITIGATING STRATEGIES 29








possibility of not imposing the duty on account of consumer interest does exist. In the context of
the current global slowdown, it may be beneficial for the economy as a whole if a detailed
economic analysis on the likely impact of the duties on downstream user industries is undertaken,
prior to the imposition of the duties. In case the economic analysis estimates a considerable
increase in production costs, particularly of exports, the option of not imposing the duty on grounds
of consumer interest could be considered by the Government. This would prevent the possibility of
India’s exports becoming uncompetitive on account of anti-dumping and safeguard duties on
imported inputs.

(d) Measures Aimed at Assisting Exporters to Retain their Market Presence During the
Crisis Period

With economic recovery being predicted for 2010, it is important that India’s exporters do not
withdraw from the export market in the intervening period of downturn, if they are to take
advantage of export opportunities during the period of recovery. Government could consider a two-
pronged approach for supporting exporters to retain their presence in foreign markets. On the one
hand it could support exporters through incentives such as easing trade financing. However, as
export related incentives can be neutralized or offset by the importing country through the
imposition of countervailing duty, an attempt could be made at the multilateral level to explore the
possibility of a standstill on countervailing duties that might otherwise arise from incentives given
by developing countries. As an alternative, the WTO Subsidies Committee could consider the
possibility of increasing the threshold level of subsidization, below which no countervailing duty
would be levied. This option could represent a balance between the interests of exporters and
domestic industry in the importing country.

(e) Expeditious Multilateral Examination of the Adverse Impact of Bailouts and Stimulus
Packages and Prompt Remedies

Many developed and some developing countries have implemented bailout and stimulus packages
for countering the adverse impact of the global slowdown and stimulating domestic demand. The
Government could consider putting in place a mechanism, at least in the short term, for constantly
reviewing the implementation of these packages and identifying measures, if any, which have an
adverse impact on India’s interests. While India could consider resorting to the WTO dispute
settlement mechanism for seeking redress against the identified measures, this is a time-
consuming process which could take up to two years and hence is not likely to provide prompt
relief to India. The Government could consider a multilateral solution to this problem, whereby
WTO members would agree that the Subsidies Committee constitute a group of experts
(comprising legal experts and economists), which would examine the complaints against specific
measures in the bailout and stimulus packages and give its findings expeditiously, say within three
months of the matter being referred to it. The specific measure would need to be modified or
withdrawn promptly, if the group of experts finds that adverse effects have arisen due to the bailout
and stimulus packages.

In addition to implementing the mitigation strategies outlined above, there is a need to develop and
implement long-term measures that would ensure sustained export growth which are not impeded
by adverse developments in big foreign markets. The current global slowdown will have a silver
lining if the opportunity offered to diversify exportable products and markets and enhance
competitiveness is fully utilized by Indian industry.


***




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ANNEX 33






ANNEX


Results of Stationarity Tests



1. Stationarity Test for Logexports Deflated by Export Unit Value Index


MacKinnon approximate p-value for Z(t) = 0.9924

Z(t) -0.145 -4.260 -3.548 -3.209

Statistic Value Value Value
Test 1% Critical 5% Critical 10% Critical
Interpolated Dickey-Fuller


Dickey-Fuller test for unit root Number of obs = 38


. dfuller lnrealexpgs, trend lags(0)




2. Stationarity Test for Exports to ASEAN5.


.


MacKinnon approximate p-value for Z(t) = 0.8901

Z(t) -1.291 -4.362 -3.592 -3.235

Statistic Value Value Value
Test 1% Critical 5% Critical 10% Critical
Interpolated Dickey-Fuller


Dickey-Fuller test for unit root Number of obs = 27


. dfuller lnagdpcon, trend lags(0)


MacKinnon approximate p-value for Z(t) = 0.8901

Z(t) -1.291 -4.362 -3.592 -3.235

Statistic Value Value Value
Test 1% Critical 5% Critical 10% Critical
Interpolated Dickey-Fuller


Dickey-Fuller test for unit root Number of obs = 27


. dfuller lnagdpcon, trend lags(0)


MacKinnon approximate p-value for Z(t) = 0.5047

Z(t) -2.174 -4.362 -3.592 -3.235

Statistic Value Value Value
Test 1% Critical 5% Critical 10% Critical
Interpolated Dickey-Fuller


Dickey-Fuller test for unit root Number of obs = 27


. dfuller lnexpaseanuvdef, trend lags(0)






34 IMPACT OF THE GLOBAL SLOWDOWN ON INDIA’S EXPORTS AND EMPLOYMENT






3. Stationarity Test for Exports to G7


.


MacKinnon approximate p-value for Z(t) = 0.1905

Z(t) -2.244 -3.736 -2.994 -2.628

Statistic Value Value Value
Test 1% Critical 5% Critical 10% Critical
Interpolated Dickey-Fuller


Dickey-Fuller test for unit root Number of obs = 27


. dfuller lnreerdef, lags(0)


MacKinnon approximate p-value for Z(t) = 1.0000

Z(t) 0.915 -4.362 -3.592 -3.235

Statistic Value Value Value
Test 1% Critical 5% Critical 10% Critical
Interpolated Dickey-Fuller


Dickey-Fuller test for unit root Number of obs = 27


. dfuller lnreerdef, trend lags(0)


MacKinnon approximate p-value for Z(t) = 0.7291

Z(t) -1.748 -4.362 -3.592 -3.235

Statistic Value Value Value
Test 1% Critical 5% Critical 10% Critical
Interpolated Dickey-Fuller


Dickey-Fuller test for unit root Number of obs = 27


. dfuller lngdpg7, trend lags(0)


MacKinnon approximate p-value for Z(t) = 0.5047

Z(t) -2.174 -4.362 -3.592 -3.235

Statistic Value Value Value
Test 1% Critical 5% Critical 10% Critical
Interpolated Dickey-Fuller


Dickey-Fuller test for unit root Number of obs = 27


. dfuller lnexpg7uvdef, trend lags(0)




4. Stationarity Tests for Sectors


.


MacKinnon approximate p-value for Z(t) = 0.0612

Z(t) -3.332 -4.270 -3.552 -3.211

Statistic Value Value Value
Test 1% Critical 5% Critical 10% Critical
Interpolated Dickey-Fuller


Dickey-Fuller test for unit root Number of obs = 37


. dfuller lnmarinedefuv, trend lags(0)


MacKinnon approximate p-value for Z(t) = 0.7503

Z(t) -1.701 -4.270 -3.552 -3.211

Statistic Value Value Value
Test 1% Critical 5% Critical 10% Critical
Interpolated Dickey-Fuller


Dickey-Fuller test for unit root Number of obs = 37


. dfuller lnplantdefuv, trend lags(0)


MacKinnon approximate p-value for Z(t) = 0.0489

Z(t) -3.419 -4.270 -3.552 -3.211

Statistic Value Value Value
Test 1% Critical 5% Critical 10% Critical
Interpolated Dickey-Fuller


Dickey-Fuller test for unit root Number of obs = 37


. dfuller LNTEXTDEFUV, trend lags(0)





MacKinnon approximate p-value for Z(t) = 0.5178

Z(t) -2.150 -4.270 -3.552 -3.211

Statistic Value Value Value
Test 1% Critical 5% Critical 10% Critical
Interpolated Dickey-Fuller


Dickey-Fuller test for unit root Number of obs = 37







ANNEX 35








.


MacKinnon approximate p-value for Z(t) = 0.8392

Z(t) -1.470 -4.270 -3.552 -3.211

Statistic Value Value Value
Test 1% Critical 5% Critical 10% Critical
Interpolated Dickey-Fuller


Dickey-Fuller test for unit root Number of obs = 37


. dfuller lnagri, trend lags(0)


MacKinnon approximate p-value for Z(t) = 0.9876

Z(t) -0.374 -4.270 -3.552 -3.211

Statistic Value Value Value
Test 1% Critical 5% Critical 10% Critical
Interpolated Dickey-Fuller


Dickey-Fuller test for unit root Number of obs = 37


. dfuller lnengdefuv, trend lags(0)


MacKinnon approximate p-value for Z(t) = 0.4806

Z(t) -2.216 -4.270 -3.552 -3.211

Statistic Value Value Value
Test 1% Critical 5% Critical 10% Critical
Interpolated Dickey-Fuller


Dickey-Fuller test for unit root Number of obs = 37




5. Stationarity Tests for REER


MacKinnon approximate p-value for Z(t) = 0.2532

Z(t) -2.660 -4.260 -3.548 -3.209

Statistic Value Value Value
Test 1% Critical 5% Critical 10% Critical
Interpolated Dickey-Fuller


Dickey-Fuller test for unit root Number of obs = 38




6. Stationarity Tests for Log Global GDP


MacKinnon approximate p-value for Z(t) = 0.0941

Z(t) -3.153 -4.260 -3.548 -3.209

Statistic Value Value Value
Test 1% Critical 5% Critical 10% Critical
Interpolated Dickey-Fuller


Dickey-Fuller test for unit root Number of obs = 38


. dfuller lnggdp, trend lags(0)







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