"India 's J-curve 2003-2014 0 -20000 -40000 -60000 -80000 -100000 -120000 -140000 -160000 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 India Trade Balance -816 -149 -272 -317 -387 -743 -674 -910 -1E+ -1E+ -922 -672 Source: Author’s own calculation, World Bank database 2016 for exchange rate and net trade ofgoods and services.When the Indian currency depreciated from 8.12 Rs./$ (1979) to 17.50 Rs./$ (1990), the tradebalance deficit increased from 2258.34 USD million to 6615.56 USD million (fig 1). Similartrends are noticed in the time period 1991-2002 and 2003-2014 (fig 2 and fig3). Although therewere small phases of reduction in the trade balance deficit but in totality (1979-2014), it hasincreased by 64981.36 USD million. This analysis shows that practically J-curve is notobserved in the long-run and depreciation of the Indian currency is unable to improve the tradebalance. This can be attributed to the volatility of the exchange rate market as a result of whichthe full positive effect of depreciation on trade balance is not released and the next depreciationtakes place starting a new declining trend in the trade balance of the country. This cyclecontinues and before reaching the point of trade surplus, the trade balance again showsdownward trend.Summing up the analysis of objective 1 and objective 2, it is clear that under the assumption ofperfect elasticity of supply of exports, the depreciation should be able to improve the tradebalance of the country but it is not realistic as J-curve shows that balance of trade is not16Trade Balance (Exports – Imports)In USD millionimproving even after multifold depreciation. Therefore, the validity of this assumption iscritically analyzed in the next section.6 Research Methodology and Empirical Findings of Exports’ Supply Constraints in India(1962- 2015)This model is an extension of the model adopted in objective 1 where the entire data sourceremains same. Three dummy variables are added namely Inflation (Di) collected from OECDdatabase, Disasters (Dd) collected from the International Disaster database and Financial andother crisis (Dc) impacting the Indian Economy. Di = 0 for all non-optimum inflation rates and11 12 1 for optimum inflation rate (3% as concluded by CEPR and D H and Pai Panandiker ), Dd= 0 for non-disaster years and 1 for disaster years ( Natural, Complex and Technical disasters)and Dc =1 for non crisis years and 1 for crisis years.logX = ß + ß log WI + ß log RER + ß Di + ß Dd ß Dc + µ ----to calculate Export2 3 45+ 6 1 1 Elasticity--(3)logY = a + a log DI + a log RER + a Di+ a Di + a Dc + µ ---to calculate Import1 2 3 4 562 Elasticity-- (4)After adopting the same methodology, the export equation becomes (table 7): ^ ^ X = -2.45 + 0.20 WI + 0.44 RER + 0.011Di - 0.05 Dd – 0.01Dc (0.87)(0.07) (0.10) (0.05) (0.04) (0.02) Export Elasticity =?X/?RER=1/ 0.44=2.27 &World Income Elasticity=?X/?WI=1/0.20= 5.There is high level of regression (0.89) between the dependent variable (Exports) and theindependent variables (RER and WI) and 89% of the variations in Exports can be explained by17 them (table 7). RER and WI are positively related with the Exports showing that as theexchange rate appreciates and world income increases by 1 unit each, the exports (% of GDP)also increases by 0.44 units and 0.20 units respectively (table 7). Price elasticity of demand forexports is perfectly elastic indicating that there are no demand constraints.Table 7: Export Equation of India with dummy variables (1962-2015)Regression StatisticsMultiple R 0.947482023R Square 0.897722183Adjusted R Square 0.887068244Standard Error 0.093959791Observations 54Coefficients Standard Error t StatIntercept -2.45910182 0.877352205 -2.802867318Exchange rate 0.445298073 0.10018877 4.444590681World Income 0.2049962 0.071753959 2.856932262Di 0.01174237 0.050201834 -2.23390323Dd -0.05499149 0.044855464 -1.925970868Dc -0.0143809 0.026954201 -1.83353077818 Source: Author’s own calculation, World Bank database 2016 for exports, imports, exchangerate and GNI; Inflation from OECD database, Disasters and Crisis from EM-DATInternational Disaster Database. Table 8: Import Equation with dummy variables (1962-2015)Regression StatisticsMultiple R 0.94663745R Square 0.896122462Adjusted R Square 0.885301885Standard Error 0.091080305Observations 54Coefficients Standard Error t StatIntercept -4.3371357 0.711505828 -6.095713527Domestic Income 0.458989 0.071729183 6.398915767Real Exchange Rate 0.101947092 0.092239494 1.805243397Di -0.05358542 0.048672945 -1.800928206Dd 0.03217425 0.04114814 -1.781912526Dc 0.03102558 0.025862405 -1.999640106Source: Author’s own calculation, World Bank database 2016 for exports, imports, exchangerate and GNI; Inflation from OECD database, Disasters and Crisis from EM-DATInternational Disaster Database. After adopting the same methodology, the import equation becomes (table 8): Y= -4.3 + 0.101 RER + 0.45 DI -0.05 Di + 0.03 Dd + 0.03 Dc19 (0.71) (0.09)(0.07)(0.04) (0.04)(0.02) Import Elasticity =?M/?RER=1/0.101= 9.990 & Domestic Income Elasticity=?Y/?DI=1/0.45=2.22. There is high level of regression (0.88) between the dependent variable (Imports) and theindependent variables (RER and DI) and 89% of the variations in Imports can be explained bythem (table 8). RER and DI are positively related with the Imports showing that as theexchange rate appreciates and domestic income increases by 1 unit each, the imports (% ofGDP) also increases by 0.101 units and 0.45 units respectively (table 8). Thus, Price elasticityof demand for imports is perfectly elastic. Summing up, the Marshall-Lerner Condition is Export Elasticity + Import Elasticity = 2.27+9.99 = 12.26 (table 6 and 7). Thus, it is verified that ML is satisfied for India over 54 years(1962-2015) as it is greater than 1. This indicates that depreciation of the Indian currencyshould be able to improve the trade balance. However, the elastic exports’ demand should bemet by elastic supply of exports for the trade balance to improve. The optimum inflation ratewill be favorable and increases of 0.01 % in the exports (% of GDP), the disasters and thefinancial crisis will decline exports (% of GDP) by 0.05% and 0.01% respectively. Therefore,these factors will influence the value and volume of exports greatly (table 7). Also, theoptimum inflation will decline the imports (% of GDP) by 0.05% and the disasters and financialcrisis are positively related to imports and increase the imports (% of GDP) by 0.03% and0.03% respectively (table 8). But, India experiences non-optimum inflation rates, largeeconomic loss by natural, complex and technical disasters and unstable global financial andother markets leading to crisis which are adversely impacting Indian economy and hamperingits production and creating constraints on the exports’ supply. 20 "