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Intensive and extensive margins of exports: What can India learn from China?

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Lakshmi Aerath discusses India’s export performance in manufactured products during 2000–15 into changes at the intensive and extensive margins.

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The study focuses on India's export performance and identifies key strategies and policy interventions needed for achieving higher export growth, particularly in the context of the Make in India program initiated in 2014 to establish India as a global manufacturing hub. A central comparison is made with China, a successful exporting country, particularly due to its extensive trade relationships and specialization in labor-intensive manufacturing. The research analyzes India's exports of manufactured products from 2000 to 2015, breaking it down into two components: intensive and extensive margins. Results indicate that while both countries perform better in the intensive margin (referring to growth from established markets and products), China's success is primarily driven by quantity rather than price, with China's quantity margin significantly exceeding India's. Conversely, India's lack of penetration into richer markets is attributed to its specialization in skill-intensive and capital-intensive products instead of labor-intensive ones, where it holds a competitive advantage. The paper concludes that India must enhance its intensive margin by focusing on labor-intensive manufacturing to access richer markets, rather than merely diversifying exports across numerous products and markets. Policy recommendations include removing constraints and fostering integration into global production networks to fully exploit India's export potential and create employment opportunities. Ultimately, a stronger emphasis on the intensive margin is deemed more beneficial for India's export growth than broad diversification.

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X-TIMESTAMP-MAP:LOCAL=00:00:00.000,MPEGTS=900000

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The primary focus

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of the study is India's export performance,

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and, we look at what strategies

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or what policy interventions are essential to,

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for India to achieve, higher export growth.

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And, the topic of export growth is especially,

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the, the topic of,

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export growth is especially relevant in the context

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of the Macon India program that was launched in 2014

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by the government of India.

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The key objective of that program was to establish India

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as a global manufacturing hub.

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This brings us to the comparison between India and China,

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because China is already a very successful exporting

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country, particularly in manufactured products.

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Um, China's also a natural source of comparison for us

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because of the, similarities

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that these two countries share, whether it be in terms

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of the economic size

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or, the, the relative,

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factor abundance in these two countries.

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So India and China are both huge,

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labor abundant countries.

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Um, what we do here is we bring in the concept of intensive

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and extensive margins.

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So we are interested in knowing whether overall export

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growth, does it stem from, intensive margin

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or from the extensive margin,

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because these things will tell us.

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Um, two, two different things as far as,

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you know, policy is concerned.

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Uh, so if, if, say we find

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that the extensive margin contributes more

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to overall export growth, then it means

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that diversification is important.

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So it's important to diversify into newer markets,

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forge relationships with newer countries,

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and also start exporting newer products.

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Um, on the other hand, if we find

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that the relative contribution

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of the intensive margin is more, then it, it means that

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strengthening trade relationships with existing set

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of partner countries and in the existing set

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of products is more important.

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Um, so what we do in the paper is we decompose India's

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export of manufactured products for the period 2000 to 2015,

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into extensive and intensive margins.

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And then we compare and contrast the

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results, with that of China.

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Uh, doing this, we are able to understand,

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where China has done well.

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Is it because of intensive margin growth or is it

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because of diversification, the extensive margin growth?

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Um, and we are able to say the same for India.

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Where is India lagging?

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Is it because of intensive margin or, or, or

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because of, you know, less diversification?

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Um, we are also able to answer, the question,

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what has led to China's export success?

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What are some of the important reasons why China has

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Been able to,

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do exceptionally well in manufacturing exports?

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Um, what are the lessons

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that India can learn from China's experience?

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What are some of the policy measures that we can adopt,

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so that India becomes a successful exporting country?

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So these are some of the, key questions that we try

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to address in our paper.

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We use the gravity model to understand some of the, key

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determinants of export performance.

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Uh, first we, by using the gravity gravity model,

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we are able to quantify the India China gap,

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particularly along, the intensive and extensive margin.

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Um, after that, we ask the question, okay,

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what are the potential explanations for the India China gap?

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Uh, what are some of the factors, that have led

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to China's export success?

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And here we make some very important findings.

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We find that China's exchange rate policy is not the prime

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reason for its export success,

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particularly along the intensive margin

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and the quantity margin.

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Um, neither is it due to, the volume

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of FDI inflows into China.

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Uh, the key reason for China's export success,

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and the India China gap is China's

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export orientation

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and trade relationships with the richer country markets

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or the, the traditional developed, country markets.

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So this is what we find in our regression analysis.

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We find that across all product categories within

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manufacturing, whether it be chemicals,

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missionary transport equipment, any manufacturing,

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product category that you take, across all of these,

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you see the India China gap is widest,

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along the intensive margin, not the extensive margin.

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Um, the, along the extensive margin.

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Although China does better than India,

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the difference is not as much.

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Um, if you look at the intensive margin gap there, you see

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that China does better than India by about four times.

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So to understand the reason for this,

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what we do is we further decompose,

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intensive margin into price and quantity margin.

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So intensive margin growth can be,

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because of a price increase or a quantity increase,

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or a combination of both.

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So what we do is by analyzing

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the export unit values, and,

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and, looking at the price margin, what we find is that,

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on average, both Indian products

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and Chinese products are sold at a price lower than that

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of the rest of the world.

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But the key point here is

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that Chinese products are sold at a price even

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lower than that of India.

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Uh, which means that, China's

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Price margin is not the reason for its high,

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intensive margin growth.

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It's the quantity margin

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that's playing the, the important role.

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And, the India China gap,

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if you look at the quantity margin there, you'll see

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that China does about nine times better than India.

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So that's where you, you find the stock contrast

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between these two countries.

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What what happens in India is that India is unable

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to achieve higher intensive margin growth despite having a

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higher price margin because of very low levels

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of quantity margin.

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And also the quantity margin is not growing at all

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during our period of analysis.

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What we find in the paper is that China's,

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export orientation with high income countries is,

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the key reason for, the higher intensive margin growth

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and the quantity margin, growth.

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India, on the other hand, has failed to,

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exploit its export potential in richer country markets

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because of the, distorted pattern of specialization.

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You know, this idiosyncratic pattern of specialization

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that India has been engaging in.

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Uh, so if you look at India's pattern of specialization,

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you see this move away from,

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labor intensive manufacturing

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and a bias towards skill intensive,

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capital intensive commodities.

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Um, whereas China,

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because of, its integration

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with the global production networks and, and

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because China is this assembly hub for manufacturing,

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by specializing in labor intensive commodities, which is

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where its true, comparative advantage lies,

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China thus is able

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to penetrate deep into the richer country markets, which is

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where there is, a demand for these kind of products.

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India, on the other hand,

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because of lack of specialization in labor intensive

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commodities, has failed to,

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penetrate into the richer country market.

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So here we, use this, categorization

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where we decompose,

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manufactured products into different categories based on the

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factor intensities,

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and that's how we come up with this finding.

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What we understand from, our, research is

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that for India to boost its exports,

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India must focus on the intensive margin.

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Uh, only then will it be able to,

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penetrate into the richer country markets, which means

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that there needs to be a reorientation in its trade

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specialization pattern.

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Uh, India must focus on labor intensive manufacturing,

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which is where its comparative advantage lies.

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Um, so the, the point that we are trying

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to make in the paper is that all

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of the extensive margin is important,

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going by the estimates.

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We find that for both India

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and China, it's the intensive margin

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that has contributed more to,

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Uh, overall, export growth for, for China.

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So there needs to be, we, we need

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to rethink about the policy focus on export diversification.

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Um, what, what we need to do is,

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rather than spreading your exports thinly across several

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markets and products,

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that doesn't really serve the purpose if there is no

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substantial increase in volume.

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So that's why we, we say that, you know,

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intensive margin growth is more important than

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export diversification.

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Uh, so what policy needs to do is,

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remove constraints

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and create an environment which, will enable India

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to integrate more into the global production networks,

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by which it can then u utilize economies of scale,

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specialize in labor intensive commodities,

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and, you know, thereby create jobs.

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And there are a lot of other spillover

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effects by, by doing this.

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So contrary to general perception,

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there is a tremendous potential if India were to

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intensify its trade relationships

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with richer country markets.

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