Economic reforms since 1991 have been strongly associated with external trade liberalisation. As officially stated, the chief purpose of this was to bring domestic relative prices into line with world prices, thereby supposedly creating conditions for greater efficiency and competitiveness of domestic production. This in turn was supposed to generate more rapid increases in exports, which were then expected to shift the economy towards more labour-intensive forms of production.

Until a few years ago, it seemed that these expectations were not met, as the rate of growth of exports (in US dollar terms) in the 1990s was only marginally higher than that of the 1980s, and significantly lower than in the ''closed economy'' days of the 1970s. However, very recent increases in export growth since 2001, resulting in rates of export expansion of around 20 per cent per year and increases in India's (admittedly small) share of world trade, have created great optimism about export potential.

As Chart 1 shows, exports have indeed increased at a relatively rapid rate in the very recent past. However, it should be noted that imports have increased at an even more rapid rate, so that the aggregate trade balance has deteriorated very sharply, and in the current year it is estimated to cross $30 billion.

(The increase in import values is usually blamed on oil prices; however, non-oil imports have increased at an even more rapid rate in value terms. Trends in imports will be examined in a subsequent MacroScan.)

What is interesting about the recent export expansion is that it also marks a further diversification in terms of commodity composition, in rather unexpected ways. Chart 2 compares the two periods 1987-88 to 1989-90 and 2002-03 to 2004-05.

The process of global integration and the effects of the WTO agreements were expected to cause particular increases in India's exports of agricultural goods, textiles and garments, leather and gems and jewellery.

However, it is apparent that all of these categories have actually declined in share of exports. Instead, chemicals and engineering goods show substantial increases in export shares. The other surprise comes in the export of petroleum goods, when the thrust of Indian policy has been to increase domestic processing of such material for domestic consumption.

Clearly, therefore, the important thrust in exports has come from certain categories of manufacturing goods. Overall, however, even the manufacturing trade balance gone increasingly into deficit in recent years, as Chart 3 indicates. From a surplus in 2000-01 (which is incidentally a year of relatively poor performance in exports) and balance in 2002-03, the manufactured goods trade deficit alone was more than $14 billion in 2004-05.

However, it is certainly the case that manufacturing exports have increased quite sharply since 2000-01, and so this deserves further examination. Chart 4 shows that this has not necessarily been the result of massive undercutting in price terms, at least as far as overall manufacturing exports are concerned. While some degree of inverse relationship is apparent between the quantity of export and the unit values, in general there is an increasing trend for both. Also, while the unit values have not reached the peaks achieved in the late 1990s, the period after 2000, both the quantum index and the unit value index have been rising.

This is certainly good news, and if it suggests that Indian manufacturing has reached a new stage where it is internationally competitive without having to resort to major price competition, then it is even better news. But to come to such an assessment we would need to examine the patterns of exports more closely in terms of which commodities are showing the most rapid increase.

As we have already noted from Chart 2, even in manufacturing, the recent increase has not come from those sectors which were expected to benefit from greater openness, such as textiles and garments and gems and jewellery, which have declined in terms of share of total exports. Rather, engineering goods and chemical products have emerged as the biggest gainers in recent times. It is therefore worth examining the composition of engineering goods exports, to see which have been the dynamic sectors.

Chart 5 provides a glimpse into exports of various categories of engineering goods since 1987, in terms of millions of US dollars. This provides an interesting picture which is somewhat at variance with the image that is sought to be created by current press reports.

It is generally thought, for example, that the recent increase in exports is because of greater exports by the automobile sector, as India emerges as one of the developing country car exporters based on local assembly using components made here but mostly abroad. However, in fact India remains one of the small exporters in this area, although clearly there may be scope for expansion here. In fact, as Chart 5 shows, while exports of transport equipment have increased in recent years, this increase has not been all that dramatic. In fact, the share of transport equipment in total engineering goods exports has come down from an average of 21 per cent in the mid-1990s to 15 per cent in the most recent three-year period.

This is also true of exports of electronic goods, whose share in the engineering exports category has come down from an average of 15 per cent to around 11 per cent in the most recent period. The share of machinery and instrument has remained broadly stable at around 22 per cent.

The biggest increase – and the real source of the recent expansion in aggregate export increases in this sector – has come from iron and steel, which has increased its share of exports in this sector from just 7 per cent at the start of the 1990s to 15 per cent in the mid 1990s to 22 per cent in the most recent period. This reflects the recent surge in demand for steel worldwide, which is the result of large demand emanating from China in particular. The other important exporting sector is metal manufactures, and here too the export increase is the result of changing conditions in the world market.

Significantly, therefore, the bulk of the increase in ''engineering goods'' exports is accounted for by exports of bulk intermediates like steel which are going to booming East Asian markets. This may or may nor reflect enhanced industrial competitiveness of India in general – certainly on the basis of this evidence alone, it would be hard to come to such a conclusion.

The pattern is corroborated by changes in India's direction of trade in the recent past, as shown in Chart 6. Between the late 1980s and the most recent three-year period, there have been substantial shifts in the direction of exports. While the US had broadly maintained its share of around 18 per cent of India's exports, there is evidence of some shifts and substantial geographical diversification in terms of other regions.

The largest decline, predictably, is in exports to Russia, whose share has fallen from 14 per cent to only 1 per cent. But even the European Union is less significant, and other developing countries have emerged as more significant markets. The good news is that Africa and Latin America have emerged as export markets of some significance, unlike in the past.

The biggest increase is to other developing countries in Asia, most particularly PR China, Hong Kong China and Singapore. Since the latter two are essentially zones of re-export within the region, exports to these two areas reflects the growing pattern of intra-regional trade based on industrial relocation through geographically dispersed production, as well as the growing demand for raw materials and intermediates emanating from East Asia in general.

Of these, by far the most significant is China. While India currently has a trade deficit with China, from where final manufactured goods are imported into the country, it has a reasonably large trade surplus with Hong Kong, which routes many of these exports through to mainland China. It has a similarly large trade surplus with Singapore, which is also dominantly a re-exporter to the region and elsewhere. Of course it is good news that India is getting integrated to these production chains in Asia; the only concern here is that these chains themselves are still ultimately dependent upon demand from the US which still acts as the basic engine of growth for East Asia.

Clearly, therefore, important changes are taking place in both the rate and pattern of India's exports. However, the evidence thus far is not enough to allow for the conclusion that there has been a significant increase in India's external competitiveness. In fact, since so much of the export growth has come from iron and steel and chemical products, it may just reflect the greater dynamism of other economies in East Asia which are importing these at more rapid rates.