The sharp increase in India's exports of over 20 per cent this year is certainly good news. But whether this growth is sustainable or not depends upon what explains it and that remains a puzzle.

The mystery is that this has happened in a year when world GDP and trade are not buoyant and the Indian rupee is appreciating against the US dollar.

The first obvious explanation is the low base effect or the decline in exports last year. During April-December 2001, exports had fallen by nearly 2 per cent.

Had they risen by the targeted 12 per cent, growth this year would have been lower. In other words, the 20 percent would have been down 10- 12 per cent and exports would have appeared to be on track, rather than sharply up.

Newspaper reports of an astounding export growth to China of 86 per cent dominated the media. This further raised questions about the composition and sustainability of India's export growth.

But before we look at this in some detail, we should note that it is significant that India's exports to other major trading partners and regions also grew.

For instance, exports to the US, which receives one-fifth of India's total exports, grew at 30 per cent. Exports to Europe, where a fourth of India's exports go, grew at 15 per cent.

West Asia which gets 12 per cent of India's exports, saw an export growth of 36 per cent. Since these constitute the bulk of India's exports, total export growth was high.

Asia, excluding West Asia, constitutes about 30 per cent of India's total export market. Though mainland China has a share of only 3.3 per cent in India's total exports, a large share of India's exports to Hong Kong (with a share in India's total exports of 4.3 per cent), Singapore (2.9 per cent), Taiwan (1 per cent) also go to mainland China. It would not be inaccurate to assume that 8-10 per cent of India's exports are going to China!

If these are growing as sharply as reports suggest, it is good news for India. However, we need to be careful before interpreting the data.

Since exports to China have, in earlier years, been taking place through the port of Hong Kong, the development of new ports in China has resulted in the shift of this trade from Hong Kong to China.

Since trade data (DGCIS) is available for Hong Kong and China (as also for Taiwan) separately, looking at only the figures for China gives us an over-estimate.

So, for instance, if we look afresh at the April-December 2002 figures we find that due to the fall in India's exports to Hong Kong, export growth to Hong Kong and China taken together rose by only 23.8 per cent.

Note that this figure is slightly lower than growth to India's other export destinations. And, indeed it is much lower than the much publicised and misleading 86 per cent growth!

It is also revealing to look at how grossly inadequate it is to look at just the figures for China. Indian exports to China in April-December 2001 were worth $676 million.

To Hong Kong, from which estimates suggest that over three-fourth of imports are destined for China, the corresponding figure was $1669 million.

This year (April-December 2002) exports to China increased to $1260 million. Hong Kong's share stands lower at $1643 million. This is still more than our export figures for mainland China. The same trend can be observed for the past three years.

While growth to China has been strong, when we combine the figures for Hong Kong and China, export growth has been much more moderate at 14 per cent in 2000-01 and a decline of nearly 5 per cent in 2001-02.

What do these figures indicate about India's balance of trade with China? Again we look at India's imports from China and Hong Kong. Here we only refer to official trade, of course, as data is not available for illegal trade.

Accounts suggest that this trade, which takes place through India's porous borders with Nepal and Bangladesh, is quite significant, but unfortunately there is no reliable data source for this.

In the period April-December 2002 imports from China and Hong Kong grew at 38.6 per cent, faster than the growth of Indian exports.

Interestingly, the balance of trade has been in India's favour as India's exports to China and Hong Kong in April-December 2001 stood at $2345 million, while imports to them were $1972 million. The balance of trade surplus declined this year due to the higher growth in imports, but remained positive.

India exported merchandise worth $2903 million while importing $2732 million.

What does India export to China? The country-wise commodity composition figures available are for 2001-02 and there may have been some changes in the trade basket in the last one year.

The main cause of concern for the last three years has been that the share of value added goods in the basket of India's exports to China remains low. So, for instance, iron ore constitutes India's biggest export item to China.

On the other hand, imports from China as well as from Hong Kong were dominated by imports of electronics. But, again, if we look at India's exports keeping in mind that a significant part of goods destined for China are showing up as exports to Hong Kong, we see that Hong Kong is India second biggest export destination for manufactured goods.

In 2001-02 India exported manufactured goods worth $2298 million to Hong Kong and $463 million to China. Ores and mineral exports to China and Hong Kong are at a lower figure of $1238 million.

In recent months reports of exports of steel and pharmaceuticals to China have increased. The construction boom in China could be offering new avenues for Indian industry.

Even though a large part of the export boom to China is not really a boom but only a shift from Hong Kong to China, the country's needs for products it does not produce in adequate amounts could provide a potential to Indian exports.

However, as Western companies relocate production to China, it would not be surprising to see India importing less from the US and EU and more from China.

Also, if Indian companies start relocating to China at a much larger scale than has happened in the last couple of years, then again the trade surplus could easily change into a deficit.

But then, perhaps, looking at only merchandise exports is looking at a partial picture. After all, it is the service sector in which India's productivity is rising.

While India loses competitiveness in merchandise production and export to China, it is likely to retain its competitiveness in software exports that far exceed those of China.

The author is at ICRIER. These are her personal views.

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