Has India achieved its Potential Efficiency in Merchandise Exports?

India transformed itself from an agricultural to a services economy skipping the intermediate
industrial-manufacturing stage. It is argued that the industrial and manufacturing sectors got
neglected and most of the human capital was concentrated in the services sector. Recently
Varghese (2018), in his report submitted to the Department of Foreign Affairs and Trade of the
Commonwealth of Australia, remarked that till 2035 India will be in the list of top three
economies and will be in Asia’s top three trading partners for Australia. Accordingly, India
needs to improve its performance of the manufacturing sector to realise the potential noted by
Varghese and to make use of its demographic dividend. In this context, the research questions
addressed in this paper are: What is the current efficiency level of India in exporting the
merchandises; What constraints does India have to overcome to improve its export efficiency;
and Has the governance structure of the ‘majority government’ played an effective role in
rigorous opening up to improve its export efficiency. The empirical analysis will use the
database of the World Bank, Reserve Bank of India archives, World Integrated Trade Solution
(WITS hereafter), the Heritage Foundation data set, and Statista covering the period from 2001
to 2019. The results indicate that the gap between India’s actual Merchandise exports and
potential Merchandise exports is still quite large, around 20% on average. The empirical
analysis has identified lack of human capital in the form of weak tertiary enrolment, lack of
physical capital in the form of poor infrastructure along with lack of effective opening up of
the economy for attracting Foreign Direct Investment (FDI hereafter), and a committed governance structure in the form of a ‘majority government’ to implement policies effectively,
as important factors to close the gap between the actual and potential exports.