"Socio-Economic Challenges in the IndianExport Sector (1962-2015): An EmpiricalStudyAbstractThere has been a growing concern regarding the exports and imports of India and theincreasing trade deficit. The obvious solution lies in depreciation of rupee to improve tradebalance. But, Indian rupee has depreciated (USD) 17% from January 2013 to March 2016,leading to decline of 27% in exports. Thus, mere depreciation is not coming to rescue theIndian economy and other factors are playing a major role in determining the impact ofdepreciation on India’s International Trade. This study attempts to answer that candepreciation be used as a tool to improve trade balance and if yes then why is it not improving.This is done by empirically estimating the Marshall-Lerner Condition (1962-2015) and J-curve(1979-2014).Export –import model has been used to determine the export and import elasticityand the results show that depreciation shouldimprove the trade balance (under the assumptionof perfect elasticity of exports’ supply) but J-curve contradicts it. Hence, factors affectingexports supply (inflation, natural disasters and financial crisis) are discussed. The studyconcludes that increasing trade balance deficit even after depreciation is due to the exportsupply constraints rather than slowing of demand for exports as demand for exports is highlyelastic.Keywords: Depreciation, Empirical study, Export and Import Elasticity, International Trade,Supply constraints, Trade Balance1 1 IntroductionThe rationale of this study is to understand the significance of depreciation on Indian economyand its trade balance; also identifying and determining the impact of various factors on exports’supply.The exchange rate of India has depreciated from 8.125 Rs/ USD (1962) to 61.02 Rs/USD (2014)and trade balance deficit has increased from 2258.34 USD million to 67239.7 USD million asper World Bank Data bank. In the last decade (2004-2014), the Indian currency depreciated from45.31/USD to 61.02 /USD with an increase in trade balance deficit of noteworthy 349.45%.India’s external sector has exhibited remarkable resilience and dynamism in the recent years.Also, the fact that Indian rupee in terms of USD has depreciated 17% from January 2013 toMarch 2016, even then the total exports have shown a declining trend from $30.5 billion to$22billion (27%) in the same time period. These trends indicate that along with depreciationother factors are significantly impacting the Indian Economy and its exports sector’ restrictingfull positive impact of depreciation.India’s trade (% of GDP) has increased from 11.10% (1960) to 42.41% in 2015 and this openeconomy is more prone to be affected by the international economic affairs. Exports of India invalue displayed an upward trend from $18.26 billion (1991-92) to $46 billion (2001-02) majorlydue to the shift of reforms and policies to integrate with the world economy. During this decade,there has been a positive trend except 1996-99 and 2001-02. This is due to the Asian Crisiswhich reduced the export growth from 20.5% (1995-96) to -3.9% (1998-99) to -1.7% (2001-02).2 However, India recorded a double digit growth rate of 20.4% (2002-03) and was at the peak of30 % (2004-05). This was attributed to various factors including the depreciation of rupee. Since,India is highly dependent on the imported crude oil consumption (75%) and so any change in theinternational oil market will definitely have an impact on the Indian economy as occurred in1970 oil crisis and 2008-09 and annual average growth rate was recorded at an all time low of13% (2008-09) and turned negative -20.3 (2009-10) Also, the rupee appreciated from Rs. 46.54/USD (2006) to Rs.39.37/USD (2008). This led to imbalance of demand supply in the foreignexchange market, finally leading to slowdown of exports. In this way, the international subprimecrisis of 2007 and oil crisis of 2008 led to a sharp shrinkage in the demand for Indian exports andthereby impacting the Indian economy negatively and increased the trade deficit. Domesticdemand also displayed a declining trend in industrial and services sector as seen in the GDPgrowth. The global crisis 2008 has led to dual unfavorable effect in terms of reducinginternational financing and trade credit and thus leading to decline in global demand. The growthin merchandise exports was 3.6% in USD terms and 16.9% in INR terms (2008-09) as comparedto 28.9% and 14.7% respectively (2007-08). This significant difference in growth in terms of theUSD and INR was on account of the depreciation of rupee vis-à-vis US dollar during the year(India Budget, 2009). The year 2015 has witnessed a weak global demand which resulted in thedecline of Indian petroleum exports by 18% in volume terms as compared to 2012. India is surely a beneficiary by adopting outward-looking policies which is accompanied by theunfavorable impact of opening the economy as discussed above, and in order to curb them,various fiscal and monetary expansionary policies have been undertaken, and as by-product theinflation also increases which inturn negatively affects the growth of the country by distortingthe prices and creating instability in the international market. Also, a higher inflation leads to3 pressure on the competitiveness of Indian exports as the cost of production overpowers thebenefits of depreciation and it is no longer profitable for the producers whose profit margins hasreduced to produce more goods to meet the exports’ demand. A producer limits his productionby producing sufficient to meet the domestic demand. Containing inflation, thus, is importanteven for improving the external balance position. However, various studies argue that inflationadversely affects the growth only if it crosses a threshold limit and have favorable impact belowthis optimum inflation rate (Sarel 1997, Bruno and Easterly 1998). CEPR reports that 171 emerging and developing economies targeted inflation rate of 3% in the last decade .Upto 3%level of annual inflation (CPI) is considered necessary for the growth of the Indian economy, but2 if it increases more than that it will hamper the growth . OECD data for India’s inflation revealsthat only 4 years recorded an optimum inflation which is 1968, 1970, 1978 and 2015. All otheryears have higher rates of inflation leading to crowding out some positive effects of depreciationand thus reducing the exports. 3 Additionally, inflation is also the result of decline in production. The GAR 2015 , by the UNOffice for Disaster Risk Reduction (UNISDR) disclosed that average annual economic loss inIndia due to disasters is estimated to be $9.8 billion of which more than $7 billion attributed tofloods. This disturbs the demand-supply stability and leads to increase in price level. A ThomsonReuters Foundation report said about each year disasters hit 4.8 million Indians (2015), but by4 2030 that could rise to about 19 million if preventive steps are not taken . As per, World5 Resources Institute (WRI)"India has more of its annual GDP exposed to river flooding eachyear, on average, than any other country. Its current $14.3 billion (2015) exposure could increaseto about $154 billion by 2030.” WTO reports that India was number 2 in terms of naturaldisasters (358) in the time period 1962-2004. The global economic losses due to natural disasters4 have increased over time, and are likely to increase in the foreseeable future, especially in thedeveloping countries (Botzen and van den Bergh, 2009; Intergovernmental Panel on ClimateChange, hereafter, IPCC, 2012). Adverse climatic conditions have led to 1% loss of GDP fordeveloping nations during 2001-06, whereas it was 0.3% for low income nations and less than0.1% for high income nations (IPCC, 2012). Around 2,682 extreme events have occurred in Asiaduring 1970-2012, resulting in 0.92 million deaths and US$ 798.8 billion (adjusted at 2012prices) of economic damages. Most of these disasters were attributed to incidence of floods andcyclonic storms, i.e., 45% and 35%, respectively (WMO, 2014). The total damage costs due tonatural disasters in India were US$ 2.92 billion during the 1970s. The extent of damage costsincreased in the subsequent decades from US$ 5.92 billion during the 1980s to US$ 18.41 billionand US$ 23.74 billion during 1990s and 2000s, respectively (EM-DAT). The total economicdamages due to extreme events were US$ 48.06 billion during the period 1980-2010 that is anaverage of $1.55 billion per year which accounts for about 2% of India’s GDP (Padmanabhan2012). This provides grounds that effect of disasters on the Indian economy should be analyzedas it greatly impacts the production and supply of exports.These have direct impacts on the exchange rate as well as the indirect impacts on the productionand supply through various channels including trade policies, negotiations, free tradeagreements, etc. India records free trade, preferential access and economic cooperation with 54individual countries. Also, there are bilateral trade agreements with 18 groups/ countries.6 7 However, it is argued widely (G Pramod Kumar 2014 , Asit Ranjan Mishra 2016 , Kirtika8 9 Suneja 2016 , Nirmala 2016 ) that most of the FTAs exist due to geo-political reasons rather10 than commercial gains. India's Economic Survey (2010-11) notes : "While there are benefitsfrom these FTAs for Indian exports, in some cases the benefits to the partner countries are much5 "