"more, with net gains of incremental exports from India being small or negative. FTAs also leadto a new type of inverted duty structure with duties for final products being lower from FTApartners compared to duties for the previous-stage raw materials imported from non-FTAcountries. This acts as a disincentive to local manufacturing which is not competitive againstFTA imports because of the inverted duty structure… The policy challenge related toFTAs/CECAs should take note of specific concerns of the domestic sector and ensure FTAs donot mushroom. Instead they should lead to higher trade particularly higher net exports fromIndia."Thus, these agreements also play an important role to determine the affect of depreciationon the exports supply as well as demand. They have been discussed in detail in the analysis.Thus, the exchange rate and currency depreciation is just one among various variablesinfluencing the supply of exports and thus international trade. Other factors also need to beanalyzed for the holistic and complete understanding of India’s trade pattern.2 Review of Depreciation impact on Trade balance Marshall-Lerner condition and J-curve are the two most important theories developed inassessing the impact of depreciation on trade balance. Marshall-Lerner Condition states thatd assuming perfect elasticity of supply of exports, if the sum of price elasticity of demand (? )x d d? +d? > 1 x m for export and price elasticity of demand for import (? ) is greater than 1, only then them Balance of Trade will improve with the depreciation of the currency. It can be represented asM . The depreciation affects the country in three ways: The imports become costlier and sotheir volume reduces, the exports are encouraged as they become cheaper for the rest of theworld and lesser foreign currency is earned by a given quantity of exports. Any combination ofexport and import elasticity that satisfies the Marshall-Lerner condition will cause the first twoeffects described above to outweigh the third, leading to an improved trade balance. Therefore,6 the liaison of exchange rate and trade balance is an imperative basis for the foreign policy ofany country. Marshall-Lerner Condition is the mathematical tool to analyze the efficacy ofdepreciation, whereas J-curve is the graphical representation of the response of trade balancetowards the changes in the exchange rate. It shows the balance of trade pattern of a country withthe time period. Studies have shown mixed results in this regard (Awan et.al. 2012, Perera2009, Bahmani-Oskooee and Cheema 2009, Alawattage 2005, Bahmani-Oskooee 1985). Thereexists rich heritage of empirical studies to validate this condition as represented in table 1, andfor India one major analysis – Trade Elasticities and the Marshall-Lerner Condition for India(1993-2011) was undertaken by Ritesh Pandey, 2013 wherein his results showed thatdevaluation of exchange rate leads to improvement in the trade balance. Our paper has used andextended the model developed in this study.Table 1: Review of Marshall-Lerner ConditionTitle AuthorResult ML Condition in Ghana- prior Judith Olivia Canipe Marshall–Lerner Condition not1983(2012)satisfied Estimate the relationship Adnan Ali Shahzad Satisfied for some (India wasbetween the real exchange rate(2013)not included in this study) and the balance of trade –South Asian Countries Estimation of M-L Condition Aftab and Khan (2008)Marshall – Lerner Conditionof Pakistan with 12 major not satisfied trading partners (2008) 7 A study of ML Condition for Lal and Lowinger Supported the ML condition.the selected South Asian(2002)(India was not included) countries Estimate the ML condition in 4 Bahmani-Oskooee Satisfied the J-curve and MLdeveloping countries(1985)condition 3 Objectives of the study Firstly, it deals with empirical estimation of the Marshall-Lerner Condition to verify ifdepreciation of currency can be utilized as a tool to improve the trade balance of Indianeconomy. This is done by forming an export-import model (keeping the assumption of perfectelasticity of supply of exports intact). The results showed that import and export demand arehighly elastic, thus there are no constraints from the demand side and depreciation should beable to improve the trade balance.The second objective is to depict the relationship between trade balance of India and the Indiancurrency by graphically analyzing the affect of depreciation using J-curve. According to J-curvewhen the real depreciation of the currency takes place, the trade balance will worsen initiallybut eventually it starts improving and gradually the deficit becomes zero and thereafter tradereaches surplus. However, the analysis results are contradictory to findings of first objectiveand shows that depreciation is not rescuing Indian economy and its trade balance deficit isincreasing except small decreasing trends in between. 8 Third and major objective is to identify the factors which are creating supply constraints. Since,the demand for exports is perfectly elastic (no demand constraints) as shown from firstobjective, there arises need to relax the assumption of perfect elasticity of supply of exports andunderstand the supply side of exports. In order to do so, three dummy variables are incorporatednamely Inflation, Natural Disasters and Financial Crisis in the export-import model anddiscussed among other factors which play a significant role in determining the supply of exportsin absolute and in value terms.4 Research Methodology and Empirical Findings of Marshall-Lerner Condition in India(1962-2015)Table 2: Identification and Source of VariablesVariableData for the variableSource Exports(X)Exports as percentage of GDPWorld Bank Databank ofExports,2015 Imports(Y)Imports as percentage of GDP World Bank Databank ofImports,2015 Real Exchange Exchange Rate in terms of USD World Bank Databank ofRate(ER)($)Exchange Rate ,2015 Domestic Gross National Income (GNI) of World Bank Databank ofIncome (DI)the country in USD millionGNI,2015 World Income Summation of available GNI data World Bank Databank of GNI(WI)of all countries in USD million ,2015 9 (except India)The source is kept constant to maintain the consistency of the data.4.1 Model CreationIn order to estimate the Marshall-Lerner Condition by evaluating the export and importelasticity, an e x p o r t - i m p o r t model has been formed with 2 equations. This model isrepresented as follows: log X = ß + ß log WI + ß log RER +µ --------to calculate Export Elasticity------(1) 2 3 1 1 logY = a + a log DI + a log RER + µ --------to calculate Import Elasticity------ (2)1 2 3 2 Equation (1) represents the Export equation where Export (X) is the dependent variable on theWorld Income (WI) and the Real Exchange Rate (RER) which are the independent variables.And equation (2) represents the Import equation where Import (Y) is the dependent variableon the Domestic Income (DI) and the Real Exchange Rate (RER) which are the independentvariables. Where, ß is the intercept coefficient which represents the change in the Exports1 (Dependent variable) is not dependent on World Income and Real Exchange Rate(Independent variables), ßis theslopecoefficientrepresentingtheresponsivenessof 2 Exports(Dependent variable ) with the change in World Income (Independent variable) and ß 3 theslopecoefficientrepresentingtheresponsivenessofExports(Dependent variable )iswith the change in Real Exchange Rate (Independent variable). a the intercept coefficient is 1 which represents the change in the Imports (Dependent variable ) isnot dependent on IndianDomestic Income(GNI) and Real Exchange Rate (Independent variables), a heslope 2is t 10 "