“International Competitiveness, Trade and Finance: India”

Citation: Ganesh-Kumar, A., K. Sen and R. Vaidya. 2002. “International Competitiveness, Trade and Finance: India”. In J. M. Fanelli and R. Medhora (Eds.) Finance and Competitiveness in Developing Countries, Routledge, London.

Abstract: This study attempts to empirically assess the role of price and non-price factors, and specifically finance amongst the latter, in influencing India’s export performance at the aggregate, sectoral and firm levels. At the aggregate level, movements in the real exchange rate, and that too movements in the nominal exchange rate and not the inflation differential between India and rest of the world, is found to have a significant role in influencing India’s export competitiveness. At the sectoral level, an examination of the role of various real factors stressed in theory such as productivity, unit labour costs, quality, technological sophistication, etc., in influencing export competitiveness reveals that non-price factors may play a more important role than price factors in explaining India’s export performance. Many of these non-price factors such as quality, technological sophistication, scale of operations, etc., depend crucially on investments. In this context, the relationship between finance and investments is then assessed by estimating investment functions separately for “exporter” and “domestic” firms based on the importance of exports in their total sales with a view to test the relative importance of finance in affecting investments for these categories of firms. Investments in fixed capital are found to be constrained by the availability of internal resources of the firm and that such finance constraints are less binding for exporting firms than for domestic firms. This suggests that the financial sector reforms undertaken so far have had the desired impact of creating an enabling environment for Indian exporting firms.

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