COMPARATIVE ADVANTAGES AND COMPETITIVENESS OF INDIAN AGRICULTURAL PRODUCTS EXPORTS TO ASEAN IN CONTEXT OF INDIA S LOOK EAST POLICY

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1 Int. J. Agricult. Stat. Sci. Vol. 13, No. 1, pp , 2017 ISSN : ORIGINAL ARTICLE COMPARATIVE ADVANTAGES AND COMPETITIVENESS OF INDIAN AGRICULTURAL PRODUCTS EXPORTS TO ASEAN IN CONTEXT OF INDIA S LOOK EAST POLICY Namita Kaur and Vishal Sarin* Mittal School of Business, Lovely Professional University, Phagwara , India. vishal.sarin09@gmail.com Abstract : Strengthening trade relations with East Asian countries has always been a matter of priority for two reasons. First, India want to reduce dependence on developed countries as far as her trade was concerned and second, India want to exploit large potential of growth lying with East Asian countries. In this direction, most coveted Look East Policy came into existence and India got her first free trade agreement in the form of India-ASEAN free trade agreement (AIFTA). But owing to her heavy reliance on agriculture, India never enjoyed a convincing position in agriculture products trade with ASEAN countries in particular and world, in general. This research paper measures the Indian export competitiveness vis-a-vis ASEAN countries in case of agriculture products and found that the products which India exported to ASEAN countries from showed a little change in the comparative advantage and competitiveness. Key words : Trade, Agricultural trade, Revealed comparative advantage, International trade. 1. Introduction The pattern of comparative advantage between the developed and developing countries in which former specialize in industrial production and the latter specialize in the agriculture production, has led to the phenomena of unequal exchange and adverse terms of trade for the developing countries [World Bank (2014)]. Apart from this, developing countries largely depend upon the developed countries for the disposal of about two-third of their total exports. In order to jettisoning the dependence, developing countries should chalk out a suitable strategy of economic cooperation among themselves [Madaan (1996)]. Moreover, despite the advent of technology and skill via globalization, agriculture still is the jugular vein of developing countries. Approximately 70% of the people directly rely on agriculture as a mean of living ( This high percentage in agriculture is as a result of none development of nonagricultural activities to absorb the fast growing population. In the similar vein by taking up the challenges of dependency on developed countries, in the era of globalization, India has attempted to strengthen trade and investment relationships with East Asian economies, through Look East Policy. Acknowledging the economic potential of closer linkages opportunities for deepening trade and investment ties and agreed to sign a framework agreement of ASEAN-India Free Trade Agreement (AIFTA) [Sarin (2016)]. As both sides are heavily dependent on agriculture so AIFTA will face an in-built challenge of creating competitiveness of agriculture products in trade. Initial studies revealed that terms of trade in case of agriculture, are in favor of ASEAN countries. In the context, while signing AIFTA, India excluded 489 items from the list of tariff concession (negative list), it includes 302 agriculture items, 81 items from textile and clothing, 52 items from machinery and auto and 32 items from the chemical and plastics. India demanded maximum protection in agriculture on 626 tariff lines [Sarin (2016)]. This piece of research will measure the Indian export competitiveness vis-â-vis ASEAN countries. Export competitiveness has emerged conclusively as *Author for correspondence Received January 10, 2017 Revised April 06, 2017 Accepted April 28, 2017

2 160 Ms. Namita Kaur and Vishal Sarin an important part of export strategy of any nation. Competitiveness has been defined as the aptitude of the firms to face competition and survive while facing it, i.e., ability of the firms or companies to sell products that meet demand requirements of quantity, price and quality and side by side guarantee profits for the concerned firm or company [Latruffe (2010)]. Accordingly from the said definition, it can be generalized that export competitiveness may be in simpler terms the competitive structure of exported goods of any nation in the world market. In other words, it is how exports of any nation maintain their base in the world market in terms of price or quality and simultaneously prove profitable for the concerned nation. To capture the market a nation should be much competitive with respect to her rival nations. Through reduction of tariff rates, quotas, preference granting and similar policies some how benefitted the countries in export exploitation, but still they are not able to compete in the world market due to certain barriers they face like poor factor conditions, infrastructure, logistics in efficiencies and information and coordination failures which prevents them from exploiting the benefits of intra as well as inter industry trade [World Bank (2014)]. 2. Review of Literature Chongvilaivan (2008) suggests that the landmark agreement between India and ASEAN States is expected to constitute a tremendous free trade bloc, a large market of 1.5 billion people, with a combined GDP of $1.2 trillion. The work explains that India s attempts at paving the way towards duty-free trade with ASEAN nations were motivated by its fears that it might miss the boat of globalization and that it has to catch up with China s ties with ASEAN. Six years of sluggish, pains taking negotiations on the India-ASEAN FTA have proved that India has a long way to go to match China s engagement with ASEAN. This work leads the readers to question whether the India-ASEAN FTA is welfare enhancing for both signatories? While the author points out that free trade may not always be beneficial for everyone he sheds light on a roadmap towards a successfully concluded FTA, by 2018, which will bring about substantial tariff reductions on India s sensitive lists, from 90 to 45 per cent for refined palm oil, from 80 to 37.5 per cent for crude palm oil, from 70 to 50 per cent for pepper, and from 100 to 45 per cent from coffee and tea. Second, a bilateral agreement like the India-ASEAN FTA has often led to overlapping Rules of Origin (ROO), either subtle or glaring. Inconsistency in ROOs increases administrative cost, adds regulatory complexity and ultimately becomes a non-tariff barrier to trade. In such a scenario both India and ASEAN may fail to tap benefits from further tariff reductions. The India-ASEAN FTA that successfully liberalizes trade in service and investment will therefore provide economic opportunities for companies in ASEAN countries to strengthen their competitiveness in the global market by fragmenting their production and establishing industrial clusters. Limaye (2008) reflects upon India s ties with Southeast Asian countries and with ASEAN through The main subject of discussion between India and ASEAN was the ASEAN-India Trade in Goods Agreement. The year long talks stumbled on the issue of tariff on palm oil and refined palm oil in the case of Malaysia and Indonesia and duty cuts on pepper and black tea in the case of Vietnam. However, the key issues such as conclusion of an FTA, the year ended without success, though India participated in the bilateral summits both as an ASEAN Dialogue Partner and as a member of the East Asia Summit, which was convened following both ASEAN summits. Despite indications of growth in India-ASEAN trade, what is worrying for India is that it is falling steadily behind China. The study also mentions a report by the Federation of Indian Chambers of Commerce and Industry (FICCI) on India- ASEAN trade. The statistics suggests, in the decade between 1997 and 2006, India s share in ASEAN trade has moved marginally up from 1 per cent to 1.6 per cent, whereas during the same period, China s has gone up from 3.7 per cent to 11.4 per cent. Another concern for India is that imports from ASEAN are much higher than exports to ASEAN following an overall pattern in India s international trade. Pal and Dasgupta (2008) draw conclusion out of their detailed study of India s tariff profile that in short term AIFTA exhibits no gains to India. Rather India stands at receiving end in case of agricultural products. Study perceived that agreement may make strategic sense in long run, especially if India wishes to become a hub for service export, as agreement on goods may not yield desired result, as most of the ASEAN countries offering low average MFN applied rate than India, which may not be good proposition for Indian export.

3 Comparative Advantages and Competitiveness of Indian Agricultural Products Exports 161 Pal and Dasgupta (2009) studied the impact of India-ASEAN trade in goods agreement on India s plantation sector, marine products and light manufacturing sector. They suggested that plantation sectors such as tea, spices, coffee and rubber would be negatively affected. The marine products, textiles, garments, and auto components industries are also likely to face stiff competition in short term. In long term, there are inter-sectoral trade offs as far as impact is concerned. Thus, the total welfare gain will crucially depend on the redistributive measures adopted by the Government of India. Pradnya (2009) highlights the salient features of economic relations between India and the five major countries of the ASEAN since The work examines trade and investment relations and other economic relations such as shipping, tourism and banking. The study speculates on some prospective areas of expanding economic cooperation between India and the ASEAN countries. An assessment of the economic relations between India and the ASEAN countries leads to the conclusion that there is tremendous scope for expanding economic cooperation among these countries in the coming years, especially in the area of investment cooperation involving export of Indian technology, consultancy and management and banking services. Ghuman and Madaan (2009) found that India s trade relations with ASEAN have strengthened since 1991, as a part of her Look East Policy. Her complementary economic structure with ASEAN involves mutual gains. The increase in India s trade performance with ASEAN was more than with the rest of world during post WTO period. Further, the growth of India s exports to ASEAN was better than with the rest of world during the post WTO period. The WTO displayed a higher destabilizing effect on India s exports to ASEAN as compared to its exports to the rest of world. The trade dependence between India and ASEAN countries has been increased over the period. India s trade dependence on ASEAN was much more during They suggested that India s policy of liberalization and openness has helped in strengthening India s trade ties with ASEAN. Harilal (2010) made a study that assessed the likely impact of the India-ASEAN agreement on the economy of Kerala in the southern India. In fact, southern India, particularly Kerala and South-East Asia have many features in common. This is especially true in the case of the agricultural and allied sectors and the agro-based industries. The agro-climatic conditions and cropping patterns are almost the same in the two regions. On the basis of India s tariff schedule and the provision for rules of origin (ROO) under AIFTA, the study concluded that AIFTA would be detrimental to the interest of tropical commodity producers in Kerala. This is due to the competitive nature of the production structure of Kerala vis-à-vis the ASEAN members. Veeramani and Saini (2010) carried out a quantitative assessment of the impact of AIFTA on selected plantation commodities, i.e. coffee, tea and pepper, in India. A partial equilibrium modeling approach (SMART and gravity models) was used to simulate the likely increase in imports of the plantation commodities by India under the proposed tariff reduction schedules of the India-ASEAN FTA. The result suggested that AIFTA would lead to a significant increase in such imports by India, driven mainly by trade creation rather than trade diversion. The analysis showed that the proposed tariff reductions under the India-ASEAN trade agreement might lead to a significant loss of tariff revenue for the Government of India. However, the gain in consumer surplus (due to falls in domestic prices and the consequent reduction in dead-weight loss) would outweigh the tariff revenue loss, leading to a net welfare gain. However, Veeramani and Saini (2010) only discussed and analyzed the likely impact and welfare implications of the AIFTA for India for some selected plantation commodities only, using a partial equilibrium model to do so. 3. Methodology and Database In order to measure the competitiveness of country s export an improvised technique based on revealed comparative advantage (RCA) has been used in the following way. The RCA index categorizes industries according to their ability to compete within a specific market. A high value of RCA index would indicate relative inter-industrial export specialization. The RCA can be presented as: RCA X X ia it X X where, X ia = value of exports of commodity by country i; X it = value of total exports by country i; wa wt

4 162 Ms. Namita Kaur and Vishal Sarin Table 1 : Category-wise Trade Product Groupings for Agricultural Products. Classification-wise Category Product Groupings CP EP1 EP2 TP WP1 WP2 Total Foodstuffs: HS Textiles: HS Vegetable Products: HS Bulk commodities Chemicals & Allied Industries: HS Animal and Animal Products: HS Foodstuffs: HS Vegetable Products: HS Processed products Vegetable Products: HS Produce/horticulture products Chemicals & Allied Industries: HS Raw Hides, Skins, Leather, & Furs: HS Animal and Animal Products: HS Foodstuffs: HS Textiles : HS Vegetable Products: HS Semi Processed products Grand Total Source: Author Calculation Notes: Competitive Positioned commodities, TP = Threatened Product, EM (TI) = Emerging Product Tier I, EM (Ti1) = Emerging Product Tier II, WP(TI) = Weakly Positioned commodities (TI), WP(TII)= Weakly Positioned commodities (TII). X wa = value of world exports of commodity a and X wt = value of total world exports. In general, the higher the RCA index of a product, the greater is the country s comparative advantage in that product line. It is important to note that RCA indices are quite robust and insensitive to changes in growth and business cycle differences across trading partners. These changes influence the numerator and denominator in the RCA formula. Similarly, the indices are not sensitive to the height of market access barriers, as long as these barriers are across the board, against all exporters of a particular product line. Yet, they are sensitive to discriminatory market access barriers against exports of a particular country. The RCA indices can also be used to gain further insight to target those industries that currently exhibit revealed comparative disadvantage, but have potential to achieve export competitiveness over time. This can be achieved by categorizing a country s export structure, based upon HS 4-digit product lines into four product broader product groups based upon their relative RCA profile. In the order of their relative comparative advantage position, these groups are: (a) Competitively Positioned Product Lines: These product lines have RCA i greater than unity and show consistent improvement over time owing to favorable external and internal conditions. The result criterion used to select products under this category is : RCA index is greater than one in the average time period of i.e. RCA i(avg ) >1. Difference between RCA index of product line i in average difference and its last three years average RCA s is positive, i.e., RCA i (avg ) - RCA i(avg ) > 0. (b) Threatened Products Lines : These product lines have RCA s greater than unity, but the indices are declining over time due to an adverse domestic environment and/or global competitive pressures. The decision principle to select products under this group is as follows: RCA i(avg ) > 1 for the concerned product line.

5 Comparative Advantages and Competitiveness of Indian Agricultural Products Exports 163 Table 2 : Reveled Comparative Advantage Profile for all agricultural trade products and per cent change from Commodity Description Change (%) Total Reported Product Lines All Agriculture Products Total Product Lines with RCA> Total Product Lines with RCA< Total Reported Product Lines Chemicals & Allied Industries Total Product Lines with RCA> Total Product Lines with RCA< Total Reported Product Lines Raw Hides, Skins, Leather, & Furs Total Product Lines with RCA> Total Product Lines with RCA< Total Reported Product Lines Animal and Animal products Total Product Lines with RCA> Total Product Lines with RCA< Total Reported Product Lines Foodstuffs Total Product Lines with RCA> Total Product Lines with RCA< Total Reported Product Lines Textile Total Product Lines with RCA> Total Product Lines with RCA< Total Reported Product Lines Vegetable Products Total Product Lines with RCA> Source: Author s calculation. Total Product Lines with RCA< Difference between RCA of product line i in (RCAi) Average (2012,2013,2014) and its last average RCA s is negative, i.e., RCA i(avg ) - RCA i(avg ) < 0. (c) Emerging Products: Tier I and Tier II: These product lines exhibit RCA indices that are less than unity, (revealed comparative disadvantage) but their relative global position in the exports market is improving. These product lines signal promise for future export potential. To provide a meaningful analysis, the Emerging Product Group is sub-divided into two groups in terms of their RCA position within this broader group. The selection criterion used to group these product lines is given as: Tier I It includes those product line where, Tier II RCA i (avg ) <1, but equals to or > 0.5 in the average period of Difference between the RCA averages of and is positive for the concerned product lines i.e., RCA i(avg ) - RCA i(avg ) > 0. It includes product line where, RCA i(avg ) < 0.5. Difference between the RCA averages of and is positive for the concerned product line, i.e., RCA i (avg ) - RCA i(avg ) > 0. (d) Weakly Positioned Products : Tier 1 and Tier II RCA indices of these product lines are less than unity and declining due to non-conducive global and domestic factors. The Weakly Positioned Product

6 164 Ms. Namita Kaur and Vishal Sarin Fig. 1 : Classification wise log movement of RCA. Group is sub-divided into two groups based on their relative level of revealed comparative disadvantage. The selection criterion used to group these products is as follows: Tier I It includes the product lines that exhibit as; RCA i (avg ) < 1, but equal to 0.5 or > 0.5 in the same period. Difference between the RCA average of and is negative for the concerned product line, i.e. RCA i(avg ) -RCA i(avg ) < 0. Tier II It includes product line where, RCA i(avg ) < 0.5. Difference between the RCA averages of and is positive for the concerned product line, i.e., RCA i (avg ) - RCA i(avg ) < 0. The above framework has two advantages. First, it identifies the strengths and weaknesses of ASEAN exports profile as at Average. Second, it allows an evaluation of the degree of competitiveness of ASEAN exports in the world markets. The data set used in this study is exports data ( ) at HS 4-digit drawn from UNCOMTRADE. The data set comprises four product categories made up of 207 commodities. Agriculture commodities were broadly classified into four categories like Bulk commodities, processed products, Semi Processed products and Produce/ Horticulture commodities as per the classification provided by United Nation Commodity Trade Statistics Database. 4. Results Analysis If we compare the revealed comparative advantage data of Indian agriculture products exported to ASEAN countries advantage point then Fig. 1 reveals that there has been no drastic changes has taken place in the comparative advantages being enjoyed to India s agriculture exports. Animal and animal products, vegetable products has shown a constant RCA over the period of 15 years i.e. from 2001 to Foodstuffs shown some improved results on RCA front whereas raw hides, skins, leather & furs had fallen RCA during period and later found regaining the old position but with a word of cautious. Textiles, which was India s flagship product in agricultural products exports showed fluctuations over the period of 15 years. India s textiles export to ASEAN countries has always been subject to competition from other competitors. In depth analysis would help us to know that how many product line at 4-digit level are competitive. Table 1 commodity classification is based on category suggested by United Nations Commodity Trade Statistics Database (Table 3). Commodities classification based on Harmonized System is imposed on the category classification, hence overlapping of broad category would be visible in the table. Table 1 elaborates that Indian agriculture export to ASEAN

7 Comparative Advantages and Competitiveness of Indian Agricultural Products Exports 165 Table 3 : Description of trade product groupings for agricultural products. Bulk Produce/ Semiprocessed Processed commodities horticulture products products products Description HS code* Description HS code* Description HS code* Description HS code* Coffee Planting material Live animals Fresh, chilled meats Tea 0902 Cut flowers/ Pig fat 0209 Processed -210 plants meat Mate 0903 Vegetables Hairs Dairy products Wheat 1001 Roots, tubers 0714 Animal products Eggs and products Rye 1002 Coconut Dried, shelled 0713 Honey 0409 beans Barley 1003 Brazilnut Coffee husks Other animal 0410 products Oats 1004 Cashewnuts Grain flours, Processed groats vegetables Corn 1005 Other nuts Starch Processed fruit , 08025, Rice 1006 Fruit Inulin Frozen fruit Sorghum 1007 Fresh/dried Wheat gluten 1109 Coffee 09012, fruit Other grains 1008 Pepper Copra 1203 Processed grains 1107 Soybeans 1201 Vanilla 905 Soy flour and 1208 Other 1212 meal vegetables Peanuts 1202 Cinnamon Sowing seeds 1209 Fish and 1504, animal oils Oilseeds Cloves 0907 Roots, seeds 1211 Prepared meats cut/crushed Cotton linters Nutmeg Straw, husks, 1213, 1214 Sugar, fodder sweeteners Cocoa beans 1801 Mace Gum, lac, plant 1301, 1302 Chocolates 1806 extracts Tobacco Cardamoms Furnishing Flour material preparations Cotton Other seeds Animal fat , Pasta , 1506 Hemp 5302 Other spices Vegetable oils Tapioca Spice mix , Inedible fats, 1518 Other oils preparations Hops 12101, Crude glycerol 1520 Prepared vegetables Table 3 continued...

8 166 Ms. Namita Kaur and Vishal Sarin Table 3 continued... Stone fruit Wax 1521 Prepared fruit Sugar beets Degras 1522 Extracts, essences, broths Sugarcane Sugar Beverages Cocoa products Vinegar 2209 Grain products Tobacco products Oilseed cake Other products 3502 Plant waste 2308 material Pet food 2309 material Glycerol/ 2905 sorbitol/mannitol Special plant oils , Proteins/gelatins /starches Amylaceous substance Fatty acids, alcohols Hides, skins Fur 4301 Silk Wool Flax 5301 *The International Harmonized Commodity Coding and Classification System (HS) was established by the World Customs Organization. HS is an international standard for world trade at a 6-digit level of detail. For example, 10 = cereals, 1005 = corn, =other corn. Source: United Nations Commodity Trade Statistics Database (U.N. Comtrade). countries is broadly classified into bulk commodities, processed products, produce/horticulture products, and semi processed products. 194 agricultural commodities India exported to ASEAN countries out of which 22 belongs to bulk commodity category, 70 were from processed products, 26 and 76 were of produce/ horticulture products and semi processed products, respectively. In case of bulk commodities 11 were competitively positioned during , but 8 to the product lines under bulk commodity category falls under threatened product list and out these 6 commodities were from vegetable products and 2 were from textile. In case of processed products, 35 products were competitively positioned, only 1 was emerging products and 32 were threatened products out 70 products under processed product category. Indian agricultural exports to ASEAN countries dominated by processed and semi-processed products that amounts to 146 products lines out of 194 total products trade in agriculture between India and ASEAN. Hence, India s agriculture exports to ASEAN countries is dominated by processed and semiprocessed products. 65 products of this category falls under competitively positioned products, but 73 products are having threatened products category, which shows an ominous sign for the export of processed and semi-

9 Comparative Advantages and Competitiveness of Indian Agricultural Products Exports 167 processed products. 6 products were falling into weakly positioned product category and only 2 products were appearing in emerging products category. Overall, 93 products were competitively positioned and 89 products were lying under threatening product category and a few commodities were categories under emerging product category. To check the robustness of the competitive methodology as discussed under methodology and database part, Revealed comparative advantage (RCA) were verified on tariff lines too, as given in Table 2. Almost 194 product lines used to be exported by India to ASEAN countries during 2001 and figure remain unaltered despite India s Look East Policy framework, and same products line were also trade in 2015 too. There was 9.5 per cent increases in the products lines of agriculture products have RCA >1, which should be treated as a positive sign, in similar vein there were 29 per cent fall in the commodities having RCA<1, hence overall view is in favor of agriculture export to ASEAN countries as Indian agri-products are having favorable RCA in last 15 years. Chemical & allied industry and raw hides, Skins, Leather and Furs remain stagnant as there were no change in the RCA of any of the product lines. In case of animal and animal products India used to export 32 products from 2001 to 2015 and only 4.3 per cent increase in the commodities where RCA was greater than one. Category like foodstuffs and vegetables products showed promising sign where an increase of 17.9 and 15.3 per cent were found in product lines having RCA greater than one. In case of Foodstuff category 53.8 per cent fall was noticed in those commodities whose RCA was less than one. Vegetable products category found a fall of per cent in same category. Table 2 also reveals that textile products are losing their competitive advantage, as far as their exports to ASEAN countries were concerned. Those product lines, under textile category, which were having RCA greater than one in 2001, also found sharp rise in textile commodities having RCA less than one. This shows the fall of textile product, once were the important component of Indian agriculture export to ASEAN countries. 5. Conclusion Hence, it shows the lack of diversification and quality improvement in the agriculture export of India towards ASEAN countries, which reflects a myopic policy opinion on the part of Indian exporter or it also clears the role of government in agriculture export. Stagnation in comparative advantages as clarify the reasons why Indian agriculture export has not been on positive note, as far as India s Look East policy is concerned. Acknowledgements We would like to show our gratitude to Prof. Davinder Kr. Madaan, Punjabi Univ., Patiala for sharing their pearls of wisdom with us during the course of this research. We are also immensely grateful to reviewers for their useful and precious comments. References Chongvilaivan, A. (2008). India s Ties to ASEAN Must Look Beyond Trade in Good. The Nations, 4th November. Ghuman, R. S. and D. K. Madaan (2009). India-ASEAN Trade Relations during Post-WTO period. Sen, R. K. and J. F. Raj (Eds.), WTO and Asian Union, Deep and Deep Publications, pp Harilal, K. N. (2010). ASEAN-India Free Trade Area-Noise of Dissent from Deep South. State Planning Board Occasional Paper, Kerala State Planning Board, Thiruvananthapuram, India. Latruffe, L. (2010). Competitiveness, productivity and Efficiency in the Agricultural and Agri-Food Sectors. OECD Food, Agriculture and Fisheries Working Papers, No. 30. OECD Publishing. Limaye, S. (2008). India-Asia Pacific relations: Consolidating Friendships and Nuclear Legitimacy. Comparative Connections, January, pp Madaan, D. K. (1996). Indo-Bangladesh Economic Relations and SAARC. Deep and Deep Publications, New Delhi, pp Pal, P. and M. Dasgupta (2008). Does a Free Trade Agreement with ASEAN make Sense? Economic Political Weekly, November 15, pp Pal, P. and M. Dasgupta (2009). The ASEAN-India Free Trade Agreement: An Assessment. Economic Political Weekly, XLIV(38), Pradnya, P. (2009). India-ASEAN Economic Relations. Indian Institute of Management, Ahmadabad, Working Paper Series 108, pp Sarin, V. (2016). India-ASEAN Trade and Economic Relations, New Century Publications, New Delhi, p. 6 Veeramani, C. and G. K. Saini (2010). Impact of ASEAN-India FTA on India s Plantation Commodities: A Simulation Analysis. Indira Gandhi Institute of Development Research, Working Paper World Bank (2014). Data online