Decomposing India's Trade Ratio: 1980–2021

Abstract

External trade balance is a critical constraint in the macroeconomic dynamics of a developing economy. Typically, external adjustment is said to occur through changes in the real exchange rate, and implicitly in the terms of trade. This article decomposes India's merchandise trade ratio into three parts, namely, change in terms of trade, relative expenditure growth and relative import intensity over the period 1980‒2021. It finds that terms of trade contribute little to the evolution of India's trade ratio since the 1990s. Instead, falling relative expenditure growth due to India growing faster than its trade partners, and rising relative import intensity due to a reduction in India's reliance on imports relative to its partners explain a large share of the change in the trade ratio post‐1991. Devaluations have not contributed to the improvement in the trade ratio while export growth and reduced domestic intensity have been critical.