Post Global Financial Crisis Export Inefficiencies of India: a Baseline for Post COVID Analyses

Abstract

During crises, governments resort to extraordinary fiscal and financial measures to mitigate the recessionary impacts of crises. These macroeconomic intervention measures along with aggregate demand and supply shocks and policy choices would affect the exporting environment of a country through many channels. Therefore, to analyze any post COVID pandemic inefficiencies generated due to the government’s policy choices to minimize the impact of COVID, it is important to distinguish the already inherent inefficiencies in the exporting environment to provide a baseline line for comparative purposes. This study investigates the prevalence of inefficiencies during the post GFC period (2010-18) in India. A stochastic frontier gravity model is employed to determine the existence of inefficiencies, its pattern over time and the level of efficiency with respect to each partner country. The first stage found that inefficiencies were already present in the post GFC period, which has increased over time. In the second stage, structural equation modelling was employed with each country efficiency level as dependent variable and five dimensions of the Economic Freedom Index (EFI) as explanatory variables for India and at an aggregate level for importing countries. The second stage found that sound money dimension of EFI affected adversely the exporting environment of India during the period of analysis, which can be mainly attributed to the November 2016 sudden implementation of the demonetization policy by the Indian Government without any prior arrangements for smooth transition to the post policy change situation.

Keywords: export inefficiency, international trade, stochastic frontier, gravity model, exchange rate, India, Post GFC, Post COVID

JEL Classification: E00, E01, E02, E23, E32, E31, E43, E51, E64, F00, F10, F13, F16, F34, F41, O24, O38, O53, P24, P27