By Vasundhara Jain
The Indian economy was liberalized only over two decades ago and is already the 13th highest exporter of merchandise and 5th largest exporter and importer of commercial services in the world (WTO, 2011). It is labour-abundant, with a range of low, medium and high-skilled labour. As a popular destination of FDI, its production capabilities and manufacturing systems are increasing its competitiveness in global trade, even as it remains one of the fastest growing nations.
Indias top trade partners are as follows (Country Trade Profiles, WTO, 2011, pp. 84)
Figure 1: Sector wise imports and exports of India. Amount given in billions of USD. (Country Trade Profiles, WTO, 2011, pp.84)
Indias Merchandise exports amount to 305 billion US$ in exports and 462 billion US$ in imports (WTO, 2011). Let us begin the discussion with the merchandise export, minus the agricultural products.
Indias exports are concentrated in low-skilled manufactured goods while the share of high-skilled manufactured goods has barely increased since 1990s liberalization (Kowalski, P. and Dihel, N., 2009), indicating a general comparative advantage in the former. Indias main commodities imports and export profile are as follows:
As shown, Indias largest exports in 2010-11 were engineering goods. On the other hand, it imported high volumes of capital goods such as aircraft and heavy machinery. The Ricardian model describes this section of Indias trade. It predicts that trade occurs due to differences in countries technologies and their comparative advantage in producing one commodity over the other. Boeing and Airbus dominate Indias civil aircraft supply. Engine parts are imported mainly from Boeing (Singapore plant), GE, Pratt and Whitney (USA), Rolls Royce (UK). China has a comparative advantage in capital equipment as its mass production lowers costs (Batra and Khan, 2004, Pei, J., et al, 2008). These manufacturers are industry leaders with leading technology and thus an absolute advantage in technology and R&D over India. It can be argued that these countries would also outperform India in producing engineering goods due to their superior manufacturing technology. However, the inherent lack of aircraft and capital goods manufacturing technology in India gives engineering goods a lower opportunity cost of production in India. Thus India specializes in engineering goods exports and imports other capital goods.
Next, to study Indias export of petroleum products, it is crucial to begin with Indias highest import: crude oil. Indias petroleum consumption far exceeds its production, and is imported majorly from OPEC nations.
Source: US Energy Information Administration, 2011.
India is the fourth largest consumer of the worlds oil produce (US Department of Energy, 2011). The Heschker Ohlin model predicts inter-country trade occurs due to differences in factor abundance, and can be applied for natural-resource abundance (Leamer, E.E., 1995). The exchange of commodities results in an effective arbitrage of “bundles of factors (land, labor, and capital)”. As OPEC countries are rich in crude oil reserves, price of crude oil extraction (Poil) is relatively lower than the price of manufacturing alternatives. Conversely, India has small oil reserves and locating oil has a high opportunity cost (Poil is high). Thus India imports oil.
The other side of the phenomenon is that India has the sixth largest oil refining capacity in the world, to meet its energy needs. This capacity gives India a comparative advantage in refining, and relative price of refining (Prefining) is low. Under the Heschker Ohlin model, this can be depicted as follows:
International trade occurs up till the point when such relative differences are equalized, at the intersection point (A) in graph below.
For low or no exports, there is a gap in Foreign and Indian relative prices of refining and extraction (Indias Prefining/Poil < Foreign Prefining/Poil ). Indias increased exports of products from refining and imports of crude oil continue up to point A where international price differences are equalized. The result is Indias second largest category of exports: Petroleum products, which are mainly the byproducts of refining petroleum oils, lubricants, wax, plastics, detergents, solvents, and chemical inputs for petrochemicals industries. International trade in such factor endowments is called a Vent for Surplus(Thirlwall, 2003), where a country extracts gains from resources which would have been under-utilized in a closed economy with local demand.
Jewellery was the second largest manufactured export in 2011-2012. India exports 60% of worlds diamonds by value (Department of Commerce, 2013). It is important to mention here one other major import commodity for India: Gold. India is the largest user of gold; this high-profile import arises not from a popular trade theory but from the Indian households conservative sentiment to invest money in a secure commodity (Gold prices have increased for past 12 years) against economic concerns.
Vertical specialization may lead to a country having comparative advantages in different stages of production (Luthje, 2007). India has a large resource pool of the skilled labour for diamond cutting, polishing and jewellery making, which is why it imports intermediate jewels and gold and exports jewellery, with its skilled labour endowment adding trade value with such stage-wise vertical segregation based on resource endowment, the trade process fits the HO Model.
India has a comparative advantage in the world market in 1512 of 4664 commodities that it trades in (Batra and Khan, 2005). Bhagwati (1962) found that exported goods from India were more labour intensive as compared to the imported goods, evidence for Heskcher Ohlin Model to explain Indias trade specifically as a labour-abundant country. They also found that India was skill-abundant in export sectors such as mining, textiles and plantations, and we can see that the rest of India export portfolio is made up majorly of ores, textiles and agricultural produce.