Consistency Test of Revealed Comparative Advantage Index: Evidence from India’s Agricultural Export
| Published date | 01 February 2019 |
| Author | Subhash Jagdambe |
| DOI | 10.1177/0015732518810838 |
| Date | 01 February 2019 |
| Subject Matter | Articles |
Consistency Test of
Foreign Trade Review
54(1) 16–28, 2019
Revealed Comparative
©2018 Indian Institute of
Foreign Trade
Advantage Index:
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Evidence from India’s
DOI: 10.1177/0015732518810838
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Agricultural Export
Subhash Jagdambe1
Abstract
This article analyses the competitiveness of India’s agricultural products in world
markets. Four indices of revealed comparative advantage (RCA) were used at
the four-digit level of harmonized system (HS) of classification for the period of
1996–2015. Under live animal products, 7 out of 26 products showed RCA.
For vegetable products, 21 out of 58 showed strong RCA. For products like
animal or vegetable fat and prepared foodstuff, 2 out of 16 and 9 out of 49 showed
RCA, respectively. Further, the consistency tests reveal that the indices are less
satisfactory as the cardinal and dichotomous measures but relatively satisfactory
as ordinal measure. Hence, study would propose an ordinal interpretation of
RCAs indices for better policy formulation. The study has also found the pattern
of RCA indices to be fairly stable over the years.
JEL Codes: F1, Q1
Keywords
RCA index, consistency test, agriculture, India and world
Introduction
The growth in international trade has been quite impressive in the last two-and-a-
half decades due to falling trade costs and lower trade barriers. The reduction in
trade barriers will lead a country towards its comparative advantages; it results in
1 Institute for Social and Economic Change (ISEC), Bangalore, Karnataka, India.
Corresponding author:
Subhash Jagdambe, Institute for Social and Economic Change (ISEC), Bangalore, Karnataka 560072,
India.
E-mails: jagdambe@isec.ac.in; shjagdambe@gmail.com
Jagdambe 17
more competitive pressures and the transfer of factors of production, leading to
productivity gains from trade. In the early 1990s, India introduced a series of
economic reforms to open up the economy and liberalize trade. That was expected
to change the composition of export baskets and reflect India’s comparative
advantages in the global market. Further, ‘a country’s comparative advantage in
international trade may be influenced by differential rates of change in accumulation
of production factors or due to the increased trade integration of other countries’
(Batra & Khan, 2005). However, the agriculture sector has been excluded from
these major economic reforms even though it has been playing a vital role in
India’s economic development in terms of providing employment and food and
earning foreign exchange. Keeping this issue in mind, the present study attempts
to examine the comparative advantages of India’s agricultural sector with respect
to the world.
This article is organized as follows: the first section gives an overview of the
Indian agricultural trade, second section presents a brief review of existing litera-
ture, third section discusses the data and methodology, fourth section presents the
results of the study and the last section summarizes and concludes.
Overview of Indian Agricultural Trade
Agriculture is one of the main pillars of Indian economy and provides livelihood to
more than 54 per cent of the rural workforce (GoI, 2011) and raw materials to indus-
tries. Further, balance of trade in agriculture has remained consistently favourable
over the years. Despite its falling share in gross domestic product (GDP)—from
54.66 per cent in 1950–1951 to 15.01 per cent in 2015–2016 (GoI, 2013)—it still
contributed around 11.87 per cent of the total export earnings in 2015.
In the last decade, the Indian agricultural sector has shown an outstanding
improvement in the volume of trade with the world, which has increased from
US$ 8.35 billion in 2000 to US$ 55.53 billion in 2015. It can be observed from
Table 1 that the value of agricultural exports has increased from US$ 5.26 billion
Table 1. Trends of Agriculture Trade (US$ Billion)
% Share
% Share
of Agri.
of Agri.
Total
Export
Import
Agri.
Total
Total
National to Total to Total
Agri.
Agri.
Trade National National Trade
National National
Year
Export Import Balance
Export
Import
Balance
Export
Import
2000
5.26
3.09
2.17
36.10
45.18
–9.08
14.80
6.84
2005
6.56
4.57
1.99
65.92
84.08
–18.16
10.26
5.87
2010
16.04
9.48
6.56
169.23
265.80
–96.57
9.46
3.56
2015
35.86
19.68
16.18
301.92
453.51
–151.59
11.86
4.39
Source: Author’s calculation based on WITS database.
Note: Agri.—Agriculture.
18
Foreign Trade Review 54(1)
to US$ 35.86 billion over the study period. The imports also increased from
US$ 3.09 billion to US$ 19.68 billion during the same period.
Table 1 reveals that India’s agricultural trade balance remained in favour of
India but the total national trade balance was negative and unfavourable for India
during the study period. It implies that Indian agriculture has a very important role
in reducing the total national balance of payments deficit. Additionally, percent-
age share of agricultural exports and imports in total national exports and imports
has increased over the period 2000–2015. The percentage share of agricultural
exports to total national exports decreased during 2000–2015 and afterwards,
it gradually increased to 11.86 per cent in 2015. Percentage share of imports to
total national imports also found the same pattern.
RCA: An Overview
Within international trade literature, two prominent theories on comparative
advantages are—the Ricardian theory, and the Heckscher and Ohlin (H–O) theory.
Ricardo (1817) stated that absolute production cost difference rather than
comparative cost difference is the reason for international trade. However, the
H–O theory discussed about difference in factor prices across countries as a
reason for international trade.
Balassa (1965) first empirically calculated Revealed Comparative Advantage
(RCA) index using post-trade data and modified it over the years, 1977, 1979 and
1986. The index does not determine the sources of comparative advantage rather
it tries to identify whether a country has RCA or not. The RCA index has been
widely used across the studies (Andrew, 1996; Batra & Khan, 2005; Ferto &
Hubbard, 2002; Yeats, 1985).
Balance, Forstner and Murray (1987) provided a simple theoretical relation-
ship between the theoretical notion of comparative advantage and the practical
measurement of comparative advantage that we obtain practically. The following
flow chart shows the relationship:
EC→ CA→TPC→RCA.
The economic conditions (EC) vary across countries and determine the interna-
tional pattern of comparative advantage (CA) that relies on the pattern of interna-
tional trade, production and consumption (TPC) that is used to calculate the actual
measure of RCA Index. The RCA indices, that...
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