THE ECONOMIC WEEKLY February 22, 1964

Region-wise analysis of a country's trade and payments highlights the relatively crucial centres of its trading nexus.

The implications of a regional analysis are particularly significant for a country like India where the balance of payments deficit has set a limit to the possible rate of economic development.

It is Interesting to note the changes in the direction of India's trade over the last half decade. While the index method is useful to indicate the net extent of "trade creation ", the changing percentage shares make clear the different, significance of the "new centres" in India's trade and the Gini-Hirschman coefficients of geographical concentration measure the actual degree of dispersion achieved in trade.

Increased trade with the rupee payments agreement partners in the "Rest of Non-Sterling Area" was accompanied by a favourable movement in the balance of trade with these countries and thus, with the region as a whole. This, together with the loans received from these countries, contributed towards a smaller deficit in the overall balance of India's payments.

The trend, however, was dissimilar for the country's trade and payments with the rest of her trade partners in the Other Non-Sterling Area or in the traditional centres of her trade in the Sterling, the Dollar or in the OEEC areas.

The increasing volume of India's trade with her rupee payments partners as well as the favourable movement in her balance of trade and payments with these countries is explained by the automatic mecha­nism of trade balance stipulated under the bilateral arrangements with the agreement partners.

THE geographical pat tern of a country 's trade and payments

supplements in. an impor tan t way the in format ion re la t ing to its over­al l trade posi t ion. A region-wise analysis of the trade Hows in diffe­rent directions h ighl igh ts the c ruc ia l centres of a country 's t r ad ing nexus. Such analysis, together wi th a s imi­la r break-down of the capital ac­c o u n t t an specify the significance of different t r ad ing units in terms of their respective (merchandise and non-merchandise) payments balance in re la t ion to the country . Thus the regional account of a country 's trade and payments is useful not on ly as an explanat ion of the observed tendencies in its overal l trade, pay­ments and the net external surplus or deficit, but also for a po l icy-oriented analysis.

A regional analysis of trade and payments is p a r t i c u l a r l y relevant for a country l ike India where the balance of payments deficit has already set a l i m i t to the possible rates of her economic development. The present paper seeks to analyse the impl ica t ions of a country-wise analysis of India ' s trade and pay­ments. It can be demonstrated how the changes in the direct ional pat­tern of merchandise and non-mer­chandise transactions over the past decade imp l i ed a changed s ign i f i ­cance of some countries (and cur­rency areas) in India ' s balance of

trade and payments. The data as analysed here indicate a perceptible tendency for the country 's trade to increase in some specific direct iocs over the last h a l f decade. The above, together w i t h the contract ing, s t j -tio'nary or s l igh t ly increasing trends of her trade w i t h other areas, and tile respective unchanging and the increasing values for her overal l ex­ports and impor ts indicate a wider degree of geographic diversif icat ion. The avai lab le figures for the non-merchandise transactions (ma in ly the u t i l i sa t ion of b i la te ra l loans and their repayments) 1 increase the im­portance of the above analysis in the country-wise d i s t r i bu t ion . The finan­cial impl ica t ions of the favourable change in the payments balance w i t h specific regions do not, how­ever, indicate in any way the actual gains or economic welfare the coun­t r y could enjoy f rom such trade. The present analysis of the mone­ta ry implicat ions of the recent changes in India ' s trade abstracts f r o m a l l considerations re la t ing to the alternate welfare prospects of trade in its different directions.

I I

There has been a noticeable change in the d i rec t ion of India 's trade over the last few years and the t rend has in general been away f rom the t r ad i t iona l centres of her trade. Tables I and 2 group the

country 's trade partners into a num­ber of significant regions. It has been convenient to adapt the Reserve Hank of India 's account of India ' s regional pat tern by in t roduc ing further classification of each area in terms of the specific organisat ion of the country 's trade and payments wi th each trade partner. It is con­tended here that rupee payments arrangements have proved their wor th in s t imula t ing the country 's trade wi th the agreement partners . A dual set of cr i ter ia are used to classify the d i rec t iona l pattern of trade according to the respective geographic location and the struc­tura l pattern of India 's b i l a t e r a l commercial re la t ion w i t h each coun­t ry . The financial impl ica t ions of any trade pattern, however, as men­tioned above necessitate a supple­mentary analysis cover ing the three impor tan t aspects inc lud ing first, the net value of the trade gap w i t h each region as defined for the purpose o f the present study (Tab le I ) ; second, the relat ive volume of the loans offered from different regions and their repayment obl igat ions (Tab le 3) ; and. f inal ly , the i m p l i ­cations of the above for the region-wise and the overal l balance of pay­ments of the country (Table 1).

The region-wise breakdown of India 's trade and payments and the more specific .sub-division according to the organisat ional pat tern of

Regional Pattern of India's Trade and Payments Sunanda Sen

February 22. 1964 T H E E C O N O M I C W E E K L Y

trade and payments conforms p a r t i -c u l a r l y w e l l to the current exchange practices of the country . Thus since the restoration of the conver t ib i l i t y of the s t e r l ing in December 1958, I n d i a d iv ided her trade partners for purposes o f currency prescript ions into the f o l l o w i n g three groups: the S t e r l i ng Area , the B i l a t e r a l Account A r e a and the Conver t ib le Account Area 4 .

The Bi la te ra l Account Area rovers

not o n l y the eight trade partners in East Europe and the USSR but also Afghanistan and N o r t h Korea , and fur ther , Burma , Pakistan and the U A R for the settlement of the trade in some specific commodit ies . The Conver t ib le Account Group log ica l ly includes a l l other countries outside the S te r l ing Area . Thus India ' s pay­ments agreement partners in the Ster l ing Area ( B u r m a and Pakistan} and in the Rest of Non-S te r l ing Area

(USSR, East Europe, U A R and Afghan i s tan) belong to the B i l a t e r a l Account g roup . Of these payments w i t h the e ight State- t rading coun­tries are settled in f u l l t h rough the Bi la te ra l Accoun t o n l y .

The present classification, how­ever, has not in t roduced any fur ther specification of different regions ac­cord ing to the pat tern of trade agreements. The d i s t inc t ion bet­ween trade-agreement countr ies and

T H E E C O N O M I C W E E K L Y February 22, 1964

non-agreement countries is re la t ive ly less precise in terms of the actual appl icat ion of trade controls in Ind ia and the l ist type of trade arrangements were useful in creat ing a congenial atmosphere for such trade between Ind ia and her agree­ment partners.5

Table 1 gives an account of the d i rec t ional pattern of India 's trade over the six years f rom 1956-57 to 1961-62. The per iod also marks the beginning of both the capital -based (and thus the impor t - in ten­sive) Second P l a n and of an orga­nised effort in regard to trade po l icy . Thus by 1956-57 the policy-makers realized the necessity of supple­ment ing their expor t promot ion drives by d i sc r imina t ing in favour of the more p romis ing regions. The trade and exchange restrictions app l ied before 1956-57 hard ly i n ­troduced any fur ther d iscr iminat ion w i t h i n the currency areas dist in­guished for the purpose and the conclusion of trade-quota arrange­ments w i t h par t icu la r countries set tire m a x i m u m (and in a few cases the m i n i m u m ) l i m i t s for the licens­i n g authorit ies in either country . S i m i l a r l y the restricted convert ibi­l i t y of non-resident currency hold­ings under the Exchange Settlement type of payments arrangements con­c luded by I n d i a 6 since 1953 d id not i m p l y any de facto d i sc r imina t ion in favour of such agreement partners in the soft-currency area (such agreements d id not cover any conn. t r y in the hard currency a rea) .

However, the gradual changeover to arrangements w i t h more specific account ing provis ions since 1956-57 impl ied an important step towards

d i sc r imina t ion in favour of trade partners w i t h rupee payments p r o v i ­sions. The significant volume of loans f rom these countries and the balance s t ipulated in the accounting mechanism led to an automatic in-crease in both the direct ions of India ' s trade w i t h these countries.

It is clear f rom Table 1, that there has been a remarkable in­crease in the volume of India 's trade w i t h the Rest of Non-S te r l ing Area. Thus the respective figures for exports and imports increased by more than 138 per cent and 108 per cent over the per iod 1956-57 to 1961-62. This has been accompani­ed by a favourable change in the balance of India 's trade wi th the payments agreement countries in the region. The average trade surplus recorded d u r i n g I.95JJ-59 to 1960-61 was as high as Rs 6.7 crones and if compared favourably wi th the ave­rage of Rs 15.1 crores deficit for 1956-57 to 1957-58 and 1961-62. On the other hand, trade w i t h , espe­c ia l ly exports to, the S ter l ing , D o l l a r and OEEC regions d id not expand by any significant m a r g i n . The stationary level of exports to the S te r l ing Area was combined wi th a dec l in ing value of impor ts and the result has been a decline in the value of India ' s net trade deficit w i th the region. Trade wi th Do l l a r and the OEEC areas, however, was marked by increase in the value of India ' s impor ts f rom these regions and fluctuations or near-stagnation in the level of exports and hence larger deficits. The conclusion of b i l a t e r a l trade agreements w i th the ma jo r i ty of the OEEC countries d id no t introduce any par t icu la r trend distinct f rom above.

I t is possible to work out the logical implicat ions of a Frisch-type of d i sc r imina tory t rade-matr ix in the Ind i an context. Thus the coun­try-wise d i s t r ibu t ion of trade re­veals a favourable t rend in some directions and the index number variat ions may usefully represent the extent of trade creation or trade-diversion over the per iod. It has been shown elsewhere how the use of d i sc r imina tory rupee pay­ments arrangements had been res­ponsible for creation of trade w i th the agreement partner. 7

The changing significance of different regions in India 's trade can be i l lus t ra ted by the changing percentage shares of different coun­tries. Thus the shares of the U S S R and the East European countries in total exports increased from 3.02 per cent du r ing 1956-57 to an ave­rage of 7.70 per cent for 1959-60 to 1960-61 and to 9.60 per cent for 1961-62. Th is was accompanied by a d i m i n i s h i n g percentage figure for her exports both to the 'non-agree­ment countries ( i n c l u d i n g the cru­cial t r ad ing par tners in Europe and in the Pacific Area) and to the trade and payments agreement countries in Asia whi le the figures for ex­ports to the agreement partners in West Europe showed a moderately upward t rend.

The above trends in the pa t te rn applied more in regard to India ' s import- t rade and the share of the USSR and East Europe in total im­ports increased from an average of 4.30per cent for the five years bet­ween 1956-57 to 1900-61 to 7.92 per cent for 1961-62. S i m i l a r l y , the unchanging or even the dec l in ing

Table 1: India's Trade with Different Regions. 1956 —57 to 1961 62 (Rs Crores)

Sources : (1) Reserve Bank of India Bulletin, November 1962. (2) Data compiled from the Monthly Statistics of the Foreign Trade of India.

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February 22, 1964 THE ECONOMIC WEEKLY

shares of the agreement and the non-agreement partners in Asia were accompanied by decline in the per­centages of India 's imparts f rom the non-agreement region outside the USA. The above, however, was ac-companied by significant increases in

the percentage shares of West Eu­rope and USA in to ta l impor t trade. The a v a i l a b i l i t y of loans f rom these countries made it possible for India to u t i l i se these countries as import­ant sources of cap i ta l goods imports .

The changing share of the differ­

ent regions in India 's tota l export and impor t trade can be clearly demonstrated by the appl ica l ion of Gin i -Hi r schman indices of geogra­phic concentrat ion. 8 The index is useful not on ly as a measure of the extent of dispersion of the geogra-

phica l pat tern of a country 's trade but also as a basis for approxima­t i n g both the possible range for the coefficients r e l a t ing to the commo­d i t y concentration and the size or the stage of development of the country . s

The indices calculated for the eight-year per iod from 1954-55 ind i ­cate a definite change in the geo­graphic concentration of India 's export trade. W h i l e the variat ions in the concentration index f o r ex­ports for the three years between 1954-55 to 1950-57 can largely he explained by the changing share of the U K in India 's total export, trade d u r i n g these years, the decli­n ing trend for the index since .1957-58 must be accounted for by the diversif icat ion of trade brought about by bi la tera l arrangements. The concentrat ion, whi l e general ly, " l o w " for the per iod as a whole, declined further.

February 22, 1964

Indices for the geographical con­centra t ion of India 's impor t s showed sl ight variat ions on ly over the per iod, fol lowed by a sudden in­crease for 1960-61. This can be explained by the figures for India 's impor ts f rom the U K and the U S A d u r i n g the par t icu la r year.

The changes in the di rect ion of trade and, more pa r t i cu l a r l y , the net trade deficit w i th each region may be compared to the net non-merchandise earnings (on account of donations. loans and their re­payments) . I t is in terest ing to note in Table '5 that even the large loans and donations the count ry received f rom the Do l l a r area ( m a i n l y the U S A) were insufficient to cover her large trade-deficit w i t h this area du r ing the per iod. The value of loans f r o m the OEEC and the Ster­l i n g area countries ( m a i n l y the U K ) were even less adequate to compen­sate for the discrepancy in the cur­

rent account transactions and the net result had taken the f o r m of a cont inuing pressure on India 's over­a l l balance of payments.

This is in sharp contrast w i t h the state of India 's net payments balance wi th the Rest of the Non-Ste r l ing Area over the last few years. As noted above, the trade between India and her payments agreement partners in the region

Table 2 : Geographical Concentration of India's Trade, 1954-55 to 1961-62

Note : Indices are calculated from the figures available in Monthly statistics Relating to the Foreign Trade of India.

Table 3 : Loans and Amortisations f rom Different Regions

(Rs Crores)

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T H E E C O N O M I C W E E K L Y

February 22, 1964 T H E E C O N O M I C W E E K L Y

increased remarkably over the last half decade. Such increase had also been accompanied by a favourable t rend in India 's balance of trade. The balance of merchandise transac­tions w i t h the region changed from a deficit of Ks 73.0 crores for 1951).

59 to a surplus of Rs 16.8 crores in 1959-60; and to smal l deficits of Ks 3,5 crores and Rs 12.7 crores in the next two years. Such change, together w i t h the -balance of loans uti l ised in each year (after deduc­t i n g the charges on account of inter­

est payments and amor t i sa t ion)

contr ibuted towards a smal le r defi­

c i t in the overa l l balance of pay­

ments over the pe r iod . The tenden­

cy, as can be noted f r o m Tab le 3,

was p a r t i c u l a r l y i m p o r t a n t for the

THE ECONOMIC WEEKLY February 22, 1964.

last three years beg inn ing f r o m 1959-60.

A considerable p o r t i o n of India 's trade is s t i l l w i t h the t rad i t iona l centres; the rate of increase of such trade in the Rest of Non-Ster l ing Area far exceeded the s imi la r rates in the other regions. S i m i l a r l y , whi le the value of loans ut i l i sed f rom the OEEC and, more par t icu­l a r l y , the D o l l a r areas were con­siderably higher than the s imi l a r figures f rom other regions, the balance of loans over repayments was inadequate to cover the respec­tive trade deficits w i t h either the D o l l a r or the OEEC area for the years between 1956-57 to 1959-60, The state of trade and p a y m e n t balance, as noted above, was com­pletely different in the Rest of Non-Ste r l ing Area. ft is significant to note that even w i t h the re la t ively higher ra t io of repayments to the total of loans ut i l ised f rom these countries, the net sum received d u r i n g the last three years was more than adequate to cover the i m ­balance in the merchandise ac­counts, 10

Further , the smal l trade deficit w i t h the region, as noted above. was accompanied by higher values of both expor ts and imports w i th the payments agreement countries. The loans avai lable in the region also flowed f rom the agreement partners and it is possible to ex­p la in the simultaneous increase in trade and the favourable,,change in the trade-balance w i t h the group of countries by the mechanism of auto­matic balance s t ipula ted under these Offset Settlement arrangements.

One may even emphasise the use­fulness of extending such relations to the rest of India 's trade partner-. Countries in the Do l l a r area are general ly u n w i l l i n g to extend s imi la r payments relat ions on a bilate­ra l basis; the West European conn-tries also have shown a s imi la r i n c l i n a t i o n to reduce restr ict ion on their trade and payments . I nd i a may, however, extend her Bi la tera l Account Area by conc lud ing pay­ments arrangements w i t h other countries in the Conver t ib le Account or the Ster l ing Account areas.

Notes 1 Complete, data relating to the capital

account transactions with each coun­try or region are not published by any official agency, However, loans or donations received and the amount

repaid constitute an important pa it of the total non-merchandise trans­actions. It is interesting to note that a com-modity-wise breakdown of India's trade with different regions reveals an increasing ratio of raw materials and capital goods to the total of her imports from a number of industri­alised trade partners. While the prices paid for the capital goods were generally not comparable, the export prices were not unfavourable for shipments in any particular direction. At the same time, the new centres of trade often provided an outlet to India's traditional exports. Thus the change in the regional pattern of India's trade over the past decade was hardly associated with any per­ceptible Joss in the country's econo­mic welfare. The change was also associated with higher values of loans from the "new centres" of her trade and these loans were attractive in terms of their relatively low rales of interest.

The above findings have been in­corporated in an unpublished thesis by the present author.

3 The same also applies to the thesis referred to above.

' I M F , "Annual Report o n Exchange Restrictions 1959" pp 156-157.

5 The extent of discrimination was relatively less important in the diffe­rent commercial practices adopted by India since Independence. While the scarcity of hard currency re­sources leil to the imposition of a number of restrictions over current and capital account transactions with the dollar area, the gradual recovery of the hard currency position and the overall scarcity of foreign cur­rency led the country during the second half of the fifties to impose more specific but non-discriminatory controls in her trade and payments practices. Export promotion was one of the important objects of the bila­teral trade agreements concluded by the country and the supplementary payments arrangements with specific agreement partners discriminated in favour of such countries by stipulat­ing a special arrangement for finan­cing the trade.

6 The Exchange Settlement type of bilateral payments agreements con­cluded by India between 1953 and 1956 specified the use of the rupee (convertible) or sterling both as the unit for operating the account and for settling the net bilateral balance at the termination of the agreement. The payments agreements concluded or renewed after 1957, however, did not generally permit a settlement of the net bilateral balance in any con­vertible currency (like sterling, gold, or rupee convertible into sterling). Thus, while the rupee (inconvertible into any other currency) was the unit of account for the bilateral pay­ment arrangements concluded by India during the later years, the bilateral balance in either direction

was subject to an offset arrangement and it could only be settled by an additional shipment of commodities in the other direction. For the classi­fication of bilateral payments agree­ments into Exchange Settlement and Offset Settlement arrangements, see M N Trued and R F Mikessell, "Post­war Bilateral Payments Agreements", Princeton, 1955, pp 6-7 and 44-47.

Also for a classification of India's bilateral payments agreements, see Sunanda Sen, "Rationale of India's Payments Agreements", Arthaniti, January 1962.

7 The trade-creating prospects are clear when the indices rise in some speci­fic regions, remain constant or de­cline in others, and lastly, show an

.unchanging or an increasing trend for the total. The above applies to India's export trade in relation to the "new centres", the traditional centres and to the world as a whole.

See Sunanda Sen, op cit. The argument has been more fully deve­loped in the unpublished thesis re­ferred to earlier,

8 A O Hirschman, ''National Power and the Structure of World Trade" Berkeley and Los Angeles, 1945, Ch V I .

The positive relation between the coefficient of geographic concentra­tion and the coefficient of commo­dity concentration has been worked out by Michael Michaely for forty-four countries on the basis of 1954 data. The hypothesis regarding the relation between the coefficient of geographic concentration, the size and the stage of economic develop­ment of a country has been worked out by Simon Kuznets. See Michael Michaely, "Concentration in Inter­national Trade", Amsterdam 1962, Chapters I I , I I I , V I I . Also, Simon Kuznets "Economic Growth of Small Nations'' in "Economic Consequen­ces of the size of Nations'' edited by E A G Robinson, London. I960, pp 21-22.

9 Countries with highly concentrated trade are defined as those whose geographic concentration of exports and/or imports are above 40. Michael Michaely, op cit p 24.

110 The period of amortisation is rela­tively short for the loans India has received from the USSR and the East European countries (in the Rest of Non-Sterling Area). With interest rates comparable to those charged for such loans from the Sterling or the Dollar area countries, the "debt-service ratio1' was accord­ingly higher for the loans India re­ceived from the above-mentioned countries. The "debt-servicing burden" has been defined by D Avramovie and R Gulhati as the percentage share of external earnings absorbed by service-payments. See Dragoslav Avramovie and Ravi Gulhati, "Debt-servicing Problems of Low Income Countries 1952-1958", Baltimore, 1960, p 47.

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February 22. 1964 T H E E C O N O M I C W E E K L Y