Determinants of India’s Exports

Abstract

The objective of this paper is to examine the key determinants of India’s exports. The estimated equations show that the two variables influencing India’s export demand are the real effective exchange rate and world exports. The time trend variable which was introduced to take care of the stationarity problem and India’s GDP which is a proxy for availability also are statistically significant. Equations were also estimated at a disaggregated level of commodity groups. The article also focuses on measuring the relative contribution of the variables. For this, a new methodology is proposed. World exports which emerges as the dominant variable is however exogenous to Indian policy makers. This leaves nominal exchange rate as the tool available to policy makers. In the market determination of exchange rate, besides current account deficit, capital flows also play an important part. There is need to moderate the impact of large capital inflows on exchange rate through appropriate intervention so long as we continue to have current account deficit. An appreciating currency will erode the competitiveness of exports. Truly speaking, the critical factor is not so much exchange rate as competitiveness. In this context, maintaining domestic price stability and improving the productivity, particularly of the traded goods sector are equally important.