What Drives India’s Exports and What Explains the Recent Slowdown? New Evidence and Policy Implications

The role of exports in India’s growth dynamics over the last two decades has been consistently under-appreciated. India’s export surge in the mid-2000s was a key driver of the high GDP growth experienced during that time. Conversely, the sharp fall-off in exports growth (both gross exports and domestic value addition) over much of the last six years has been an important driver of India’s GDP growth performance in recent years compared to the mid-2000s. So why have Indian exports slumped in recent years? To ascertain this, we analyze the determinants of India’s exports and estimate their “income” and “exchange rate” elasticities during 2004–17. We find that (a) both global growth and exchange rates are important determinants of India’s export dynamics, (b) these elasticities have attenuated in recent years (consistent with de-globalization and lower domestic value addition in India’s export basket), and (c) there is a significant heterogeneity of elasticities across sectors, which explains the chaning composition of India’s export basket. Against these results, our model explains the significant slowing of exports in recent years. In particular, we find that the sharp 20 percent appreciation of the real exchange rate between 2014 and 2017 has impinged on export competitiveness. We posit that the real appreciation was the inevitable upshot of the large, positive terms-of-trade shock that India experienced from lower oil prices, suggesting that India was afflicted by Dutch disease. Exports began to recover in 2018 in conjunction with some depreciation of India’s real effective exchange rate (REER).