Country-Specific Determinants of Intra-Industry Trade in India

Date01 August 2019
Published date01 August 2019
Subject MatterArticles
Determinants of
Trade in India
Sagnik Bagchi1
Surajit Bhattacharyya2
A distinctive feature of India’s trade liberalization has been a significant rise in the
magnitude of intra-industry trade (IIT). India’s total IIT is substantially large with
high and upper-middle-income group countries and dominated by low vertical IIT.
Particularly during the second phase of economic reforms, magnitude of India’s
vertical IIT with high-income group of countries had increased; while there had been
a marginal decline in horizontal IIT. This article identifies some of the determinants
of India’s total IIT as well as vertical and horizontal IIT with her major trading
partners from 1990 to 2014. The convergence in the level of economic develop-
ment between India and her trading partner(s) positively influences total IIT and
its two broad forms. Similarity in relative factor endowments and regional trade
agreement through South Asian Free Trade Area (SAFTA) is found to promote
horizontal IIT. Having a large market size, the distortionary impact of tariff has not
been able to dampen the magnitude of India’s IIT. Relative depreciation of trading
partner’s real exchange rate enhances India’s imports and inhibits the growth of
total and vertical IIT. Geographical distance adversely affects all forms of IIT.
JEL Codes: C23, F14
Horizontal and vertical IIT, unbalanced panel, panel corrected standard errors
1 Department of Humanities and Social Sciences, The LNM Institute of Information Technology
(Deemed University), Jaipur, Rajasthan, India.
2 Department of Humanities and Social Sciences, Indian Institute of Technology Bombay, Mumbai,
Maharashtra, India.
Corresponding author:
Sagnik Bagchi, Department of Humanities and Social Sciences, The LNM Institute of Information
Technology (Deemed University), Jaipur, Rajasthan 302031, India.
Foreign Trade Review
54(3) 129–158, 2019
© 2019 Indian Institute of
Foreign Trade
Reprints and permissions:
DOI: 10.1177/0015732519851630
130 Foreign Trade Review 54(3)
On the eve of wide-scale economic reforms in the early 1990s, the New Trade
Policy (1991) integrated India with the world economy.1 India’s total merchandise
trade grew from a pitiful −8.12 per cent in 1990–1991 to 7.59 per cent in 1996–
1997 before again drastically falling in 1998 to −0.03 per cent, primarily because
of anti-dumping and countervailing measures adopted by the industrialized coun-
tries against India (Stiglitz, 2000). Until the gloomy shadow of recent past global
financial crisis of 2007–2009 grasped the world economy, India’s foreign trade
grew at an impressive average of around 28 per cent during 2002–2008.2 During
the past two and half decades, India’s international trade grew much rapidly com-
pared to the growth in world merchandise trade.3
This article focuses on India’s intra-industry trade (IIT) with her major trading
partners from 1990 to 2014. Our study contributes to the extant empirical litera-
ture in the following ways. In comparison to all other existing Indian studies, our
study considers much disaggregated data at the HS-6 digit level with a wider set
of 57 major trading partners of India over the past two and half decades. Most of
the extant literature is confined to either HS-2 digit or at best HS-4 digit level data
and dealt with much less number of trading partners for a relatively smaller time
period. For instance, Veeramani (2002) used cross-sectional data for nine industry
groups at the HS-2 digit level with 51 major trading partners. Varma (2015) con-
sidered only the food processing sector at the HS-4 digit level from 2008 to 2013
with 19 trading partners. Very recently, Aggarwal and Chakraborty (2017) exam-
ined the determinants of total IIT between India and her 25 trading partners for all
industry groups from 2001 to 2015 at HS-4 digit level.
Further, we have segregated the magnitude of horizontal and vertical IIT
(H-IIT/V-IIT) (and into low and high vertical IIT [l-VIIT/ h-VIIT]) for all the
commodity groups engaged in bilateral IIT between India and her major trading
partners to identify the dominant form.4 In doing so, we attempt to shed a deeper
light on whether India remained a vast export market for (technologically and thus
qualitatively) superior product(s) for the large MNCs of the world, or being a
third-world (developing) country, India eventually became a preferable destina-
tion for import of relatively cheaper (low technology and low quality) products.
Unlike the other available studies, we explore the country-specific determinants
for the horizontal and vertical IIT separately, for all the industry groups.
Third, we believe that our econometric estimation methodology is also an
improvement and statistically more robust than many of the existing studies. For
instance, most existing cross-country panel studies on country-specific determi-
nants of IIT ignore the assumption of cross-sectional dependence. The problem of
cross-sectional correlation of errors in (macro) panel data arises as a result of both
‘observable’ and ‘unobservable’ common effects (see Driscoll & Kraay, 1998;
Pesaran, 2015). Ignoring such cross-sectional dependence of errors in conven-
tional fixed or random effects estimation can lead to misleading inference and
inconsistent estimators. We, therefore, obtain econometrically robust parameter
estimates that are corrected for cross-sectional dependence, heteroskedasticity
and autocorrelation of order MA (q) process.

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