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India’s global trade potential: The gravity model approach
Estimating potential trade partners for India
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Overview
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Papers by Same Organization
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The comprehensive programme of trade liberalisation initiated in India in July1991 has led to a perceptible change in the performance of the external sector. But even though current account deficits have fallen sharply, reserves are accumulating and the trade to GDP ratio has increased, India still needs to enhance its volume of trade with the rest of the world. In this regard, this paper undertakes an estimation of India’s global trade potential and is therefore topical. It uses an augmented gravity model equation with maximum possible geographical coverage of world trade flows to analyse the world trade flows and once the coefficients obtained, they are used to predict trade potential for India. Bilateral trade in the model is explained using variables that are representative of geographical, cultural and historical proximity of bilateral trade pairs along with their economic size. In the process the model estimates the most natural trading partners for India and also identifies countries, regions and regional groupings in Asia with maximum potential for expansion of trade with India. The potential direction of trade indicated by the findings in this paper assumes great importance in the context of India’s ongoing efforts of bilateral and regional integration. The augmented gravity model specification in this paper indicates:
- a higher economic size of a country pair and geographical proximity positively influence bilateral trade flows
- alternative measures of GNP in terms of current dollar value and purchasing power parity do not alter either the sign or significance of different explanatory variables
- historical and cultural similarities also impact positively upon bilateral trade
- India’s global trade potential reveals that the magnitude of India’s trade potential is maximum in the Asia-Pacific region followed by Western Europe and North America
- the potential for expansion of trade is highest with countries like China, United Kingdom, Italy and France but also countries like Georgia, Turkmenistan and Uzbekistan
- for the region as a whole, however, estimates show that India has exceeded its trade potential
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India
Senior Fellow, Indian Council for Research on International Economic Relations (ICRIER), India
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