R.S. Tiwari

Pressure of Domestic Demand and Export Performance in India

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LITERATURE REVIEW AND PROBLEM SETTING

An analysis of domestic demand hypothesis has received the-due importance in the explanation of export performance in India. It is essentially important from two points. First, to determine the testable relationship between growing domestic demand and export-performance; and secondly, to infer about the existence of the potentialities of changes in domestic demand to achieve policy instruments via export expansion.

It is generally hypothesised that at a peak level of domestic demand amounts of goods and resources which would have otherwise been released for export markets and industries tend to be diverted to non-export markets and industries. And structures of costs and prices of exported goods as compared to their rivals would be too uncompetitive to stand in export markets. Hypothetically, therefore, variations in domestic demand, ceteris paribus, would result in retardations in exports (5, 6, 7, 8, 9). The above mentioned pressure hypothesis has also been ex- plained in entirely a different fashion. In this approach an increase in domestic demand leads to an increase in export performance through the inducement of productive technology. It follows that at a higher level of economic development process, an increase in domestic demand generates a higher level of local value-added. And the improvement in technology-induced within the sets of production systems tends to enhance export competitiveness of products in terms of price and quality. Thus, after certain time level, products manufactured locally tend to "spill over" from domestic market to world export markets. This hypothesis thus tentatively predicts that if ceteris paribus assumption is made then higher the level of domestic demand greater would also be the export performance (10, 11, 12, 13, 14).

In the former approach, causes of export deteriorations have been mainly associated with growing pressure of domestic demand (5, 6, 9), whereas other sets of explanatory variables viz.; time lags, waiting times and credit facilities seem to have little impact on the problem (7, 8). However, world demand and relative prices are observed to be relatively neutral in their effect (5, 6, 7, 8, 9). In the latter approach, growing domestic demand, on the other hand, enables manufactures to increase their exports through discriminatory policies, i.e., by charging higher prices in home market and competitively lower prices in the export markets (10). Domestic demand specifically related to exports positively only during the second stage of economic development process (11).

Therefore, one sort of hypothesis detects that domestic demand is inversely related to export performance, whereas, other refutes it. Taking both approaches to the problem, the relationship seems to be "indeterministic" and each approacn provides only a partial picture of the problem.

In above approach domestic demand has arbitrarily been assumed to be given over a period of time. But in fact, for understanding the nature of problem it is more important to know the specification of important factors underlying domesticdemand determination. Moreover, "deterministic models" as such do not have substantial grip into the real problem of export determination. In this context more dynamic "export deterministic models" are needed which would be able to explain meaningfully the structural requirements of import-markets, viz., per capita GDP, internal prices of identical products, population increase and internal demand patterns etc.

The problem of export performance needs a careful exarnination in India which is faced with the pressure of foreign exchange constraints. Therefore, we initially propose to examine the pressure of domestic demand hypothesis and exportperformance of bicycles product (SITC 733.1101) over the period 1960-61 to 1974-75 at 1960-61 prices.