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									Structural Changes in Pepper Exports from India- An Econometric Analysis
                     Dr. R.V.Sujatha1, Dr.K.Suhasini2 and Dr.Y.Eswara Prasad3
         Under the WTO regime, countries hitherto inactive in the spice trade have started
emerging as producers, posing a substantial threat to traditional exporters like India.
These new entrants have practically no domestic market, which compels them to push
their produce at cost price or even below it. Keeping this in view, an attempt has been
made to study the direction of trade of Pepper that will peer the status of Indian Pepper in
the world market and also help in formulating alternative management strategies and
polices to boost Indian pepper exports. This study is contemplated to address the
performance of Indian pepper during the two time periods viz., pre-WTO (1981-82 to
1994-95) and post – WTO (1995-96 to 2003-04).
         It can be concluded from the study that USA and USSR were the stable export
markets for Indian pepper during pre-WTO period reflected by the high retention
probabilities of 0.7170 and 0.5388 Canada had a moderate probability of retention at
0.2871. On the contrary, Italy and Germany were having a probability of zero retention
indicating that they were the most unstable importers of pepper during pre-WTO period
as well as post-WTO period. But, during post-WTO period, Canada and USA were
comparatively stable markets for Indian pepper with 0.4151 and 0.3423 retention
probabilities. The disintegration of USSR and consequent reduction in purchasing power
of these countries had led to a very low probability of retention by the earst while USSR
countries.
         Based on the results of the study, it can be suggested that there are a number of
approaches enabling the removal of impediments for the day-to-day export business apart
from quality improvement and value addition. This includes compliance with stipulations
under various WTO agreements for better market access, development of brands for
Indian products and their promotion in major markets, development of niche markets for
specified products, attracting foreign direct investments, encouraging joint ventures and
amalgamations.
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1.Research Associate and 2.Associate Professor, WTO Cell and 3. Professor & Head,
Hon.Director (CCS), Dept. of Agril. Economics, College of Agriculture, Rajendra Nagar,
Hyderabad-30, e-mail: rvs_wto@yahoo.com
Structural Changes in Pepper Exports from India- An Econometric Analysis

                     Dr. R.V.Sujatha1, Dr.K.Suhasini and Dr.Y.Eswara Prasad3

         For the agrarian economies of developing countries like India, agricultural exports

seem to be the engine of the growth of exports. Among various agricultural commodities

exported from India, Spices play vital role in exports (Kumar, 2000). Spices sector is one

of the key areas in which India has an inherent strength to dominate the global markets.

Spices contributed 1.24 per cent of India’s total export earnings of Rs. 1866 crores in

2004-05. Among the spices exported from India, Black pepper by virtue of its versatile

use in the modern world earned a reputation as ‘king of spices’ or ‘black gold of India’.

World pepper production, as per International Pepper Community (IPC) projection, of

around 3, 00,000 metric tonnes during 2003 is dominated by Asia region accounting for

65-70 per cent of total production.

         In pepper production, India ranks next only to Vietnam. India, in the past, had
almost monopolized the world pepper trade with over 80 per cent market share. But, at
present, the share has dropped to less than 50 per cent, owing to increased competition
from Vietnam, Brazil and Indonesia. Compared to the export of 42,806 tonnes of pepper
valued at Rs.884.88 crores in 1999-2000, India could export only 16,700 tonnes worth
Rs. 143.5 crores in 2003-04.Vietnam has emerged as the major producer during this
period, improving from a mere 8,600 tonnes in 1990 to 37,000 tonnes in 2001. The main
problem faced by Indian pepper is the high cost of production and low yield compared to
other countries.
------------------------------------------------------------------------------------------------------------
1.Research Associate and 2.Associate Professor, WTO Cell and 3. Professor & Head,
Hon.Director (CCS), Dept. of Agril. Economics, College of Agriculture, Rajendra Nagar,
Hyderabad-30
         Periodic surges or sharp declines in the Indian spice exports were normally

associated with fluctuations in the world pepper prices. Unlike India, other producing

countries do not have much domestic consumption and with a higher productivity and

less production cost, they have become more competitive. This has resulted in decreased

volume of exports from India.

         Under the WTO regime, countries hitherto inactive in the spice trade have started

emerging as producers, posing a substantial threat to traditional exporters like India.

These new entrants have practically no domestic market, which compels them to push

their produce at cost price or even below it. Keeping this in view, an attempt has been

made to study the direction of trade of Pepper that will peer the status of Indian Pepper in

the world market and also help in formulating alternative management strategies and

polices to boost Indian pepper exports. This study is contemplated to address some of the

export issues in Indian pepper based on the performance during the two time periods viz.,

pre-WTO (1981-82 to 1994-95) and post – WTO (1995-96 to 2003-04).

Methodology :

         The present study was divided into two periods, the first period from 1981-82 to

1994-95 termed as pre-WTO period and the second period from 1995-96 to 2003-04

designated as post-WTO period for better presentation of the results. This helps in

describing the changing direction of trade during later period over the first period so that

appropriate marketing strategies could be planned in view of anticipated changes. Also,

the analysis was carried for the whole period from 1981-82 to 2003-04 spanning over 22

years.
       The secondary data required for the study was gathered from various publications

of Spices Board, Ministry of Commerce, Food and Agriculture Organization trade year

books and also from the website of Food and Agriculture organization (www.fao.org).

Structural change in exports: The dynamics in the direction of exports and the

changing pattern in the trade of major spices from India by shift in export shares from

one country to another over a period of time were analysed by employing the first order

Markov chain model. The trend in sustaining the existing markets and the gains and

losses in the export share of spices from India by the major importing countries were

obtained from the transitional probability matrices. The major importing countries

considered for analysis of trade in pepper were USA, USSR/CIS, Canada, Italy and

Germany.

       This econometric analysis not only helps to know the trend in sustaining existing

market, but also the shift in shares from one country to another over a period of time. The

model is a stochastic process which describes the finite number of possible outcomes Si

(i=1,2,----,r)which is a discrete random variable Xt (t=1,2,---,T) and which assumes that

(a) the probability of an outcome on the t-th trial depends only on outcome of the

preceding trial, and     (b) this probability is constant for all time periods(Lee et

al.,1970).Central to Markov chain analysis is the estimation of the transitional probability

matrix P. The element Pij of this matrix indicates the probability that exports will switch

from country i to country j with the passage of time. The diagonal element Pii measures

the probability that the export share of a country will be retained. Hence, an examination

of the diagonal element indicates the loyalty of an importing country to a particular

country's exports (Atkin and Blandford, 1982).
         In the context of the current application, the average exports to a particular

country was considered to be a random variable which depends only on its past exports to

that country and which can be denoted algebraically as,

                           r
                 Ejt =      Eit-1 Pij + ejt ……………(3.3)
                           i=1


Where,
            Ejt = Exports from India to jth country during the year t
           Eit-1 = Exports to ith country during the year t-1
           Pij = The probability that exports will shift from ith country to jth country
           ejt   = The error term which is statistically independent of Eit-1, and
            r    = The number of importing countries.

         The transitional probabilities Pij, which can be arranged in a (c x r) matrix, have

the following properties

                 O < Pij < 1           ……………….. (3.4)
                  r
                  Pij = 1 for all i    ………………. (3.5)
                 i=1
         Thus, the expected export shares of each country during period t were obtained by

multiplying the exports to these countries in the previous period (t-1) with the transition
probability matrix.

         The transition probability matrix is estimated in the linear programming (LP)

framework by a method referred to as Minimization of Mean Absolute Deviation (MAD),
the LP formulation is stated as

                 Min O'P* + Ie                      ………………….(3.6)

   Subject to, XP* + V = Y
                 GP* = 1
                 P* > 0
Where,
         P* is a vector of the probabilities Pij
       O is a vector of zeros
       I is an appropriately dimensional vector of areas
       e is the vector of absolute errors (|U|)
       Y is the vector of exports to each country
       X is a block diagonal matrix of lagged values of Y, and
       V is the vector of errors
       G is a grouping matrix to add the row elements of P arranged in P*, to unity.
Results and Discussion :
       The actual proportion of exports to different countries have been consumed in

computing the transitional probability matrix for the period under study. The matrix

explains the switching behaviour of selected Indian spices among the major importing

countries over a period of time indicating the change in direction. The row elements in

the transitional probability matrix provide the information on the probability of retention

in the volume of trade and extent of loss in trade on account of competing countries. The

column elements indicate the probability of retention of trade and the gains in the volume

of trade from other competing countries. The diagonal elements indicate the retention of

Indian exports to a particular country. The results of the direction of trade in pepper are

presented below

Pre-WTO period

       The estimated transitional probability matrix is furnished in table 1. The

transitional probabilities provide a broad indication of the changes in the direction of

trade of pepper exports from India over a period of fourteen years. The major importing

countries considered for the analysis of trade in Indian pepper were USA, USSR/CIS,

Canada, Italy and Germany. The export to remaining countries was pooled under other

countries.

     Table 1 . Transitional probability matrix of Indian pepper exports during
                        Pre-WTO Period (1981-82 to 1994-95)
        Importing
                      USA       USSR       Canada       Italy   Germany     Others
        countries


          USA         0.7117    0.0000        0.0093   0.0308     0.0000    0.2482


          USSR       0.0821     0.5388        0.0264   0.0531     0.0369    0.2628


         Canada       0.5391    0.0000        0.2871   0.1739     0.0000    0.0000


          Italy       0.0000    0.9535        0.0465   0.0000     0.0000    0.0000


        Germany       0.0000    1.0000        0.0000   0.0000     0.0000    0.0000


         Others       0.2766    0.0931        0.0166   0.0359     0.1478    0.4299




       As evident from the table 1, the probability matrix indicated that USA and Russia

were the stable Indian pepper export markets which have been more stable during pre-

WTO period. During 1980s, USA and USSR together accounted for more than 60 per

cent of the total pepper exports from India. USA had been the most stable country among

the major importers of Indian pepper as reflected by the highest probability of retention

(0.7117) i.e. the probability that USA retained its export share from one period to another

was about 71 per cent during pre-WTO period. The share of USA in the total pepper

exports from India increased tremendously from 21.76 per cent in 1983-84 to 44.48 per

cent in 1994-95. The high retention of the USA market is reinforced by high probability

of transfer from Canada (0.5391) and others (0.2766). However, 25 per cent of USA’s

share of pepper imports from India was lost to others. There were small probabilities of

loss to Italy (0.0308) and Canada (0.0093).

       Indian previous pepper exports to the USSR/CIS was retained to the tune of 54

per cent during the pre-WTO period. USSR has lost to the tune of 8.21 per cent to USA,
2.64 per cent to Canada, 5.31 per cent to Italy, 3.69 per cent o Germany and 26.28 per

cent to others. However, it gained the entire market share of Germany (1.000) and 95.35

per cent of the market share of Italy.

       Canada had a moderate probability of retention at 0.2871. On the contrary, Italy

and Germany were having a probability of retention of zero indicating that they were the

most unstable importers of pepper during the pre-WTO period. Canada had lost its share

of 53.91 per cent to USA and 17.39 per cent to Italy, where as it gained only 0.93 per

cent from USA, 2.64 per cent from USSR, 4.65 per cent from Italy and 1.66 per cent

from others.

Post-WTO period

       A cursory look at the table 2 indicated that Canada and USA were comparatively

stable markets for Indian pepper during post-WTO period. The probability that Canada

and USA retained their import share from one year to another year was about 42 per cent

and 34 per cent respectively during 1995-96 to 2003-2004. USSR had a moderate

probability of retention at 0.2140. Italy and Germany were having a probability of

retention of zero indicating that they were the most unstable importers of pepper from

India during the post-WTO period. The disintegration of USSR and consequent reduction

in purchasing power of these countries had led to a very low probability of retention by

the erstwhile USSR countries.

       The moderate probability of retention of USA market was reinforced by the high

probability of transfer from Germany (1.00) followed by others (0.8931), USSR (0.2220)

and Canada (0.0859). However, there was a strong tendency to lose its market share to

others (0.4757) followed by Canada (0.0879), Italy (0.0515) and Germany (0.0425)

respectively. The Russia had lost its share to the tune of 0.2220 to USA, 0.1184 to
Germany and 0.4456 to others. However, it gained 10.69 per cent of the market share of

other countries. Though the other countries had very high probability of transfer from

Italy (1.00), there was a strong tendency to lose its market share to the USA (0.8931)

followed by USSR (0.1069).

     Table 2 : Transitional probability matrix of Indian pepper exports during
                       Post-WTO Period (1995-96 to 2003-04)

        Importing
                      USA       USSR      Canada     Italy    Germany     Others
        countries


          USA        0.3423    0.0000      0.0879    0.0515      0.0425   0.4757


          USSR       0.2220    0.2140      0.0000   0.0000       0.1184   0.4456


         Canada      0.0859    0.0000      0.4151   0.4334       0.0000   0.0655


          Italy      0.0000    0.0000      0.0000   0.0000       0.0000   1.0000


        Germany       1.000    0.0000      0.0000    0.0000      0.0000   0.0000


         Others      0.8931    0.1069      0.0000   0.0000       0.0000   0.0000



Overall period

       As evident from the table 3, the probability matrix indicated that USA and USSR

were the stable Indian pepper export markets which have been more stable during pre-

WTO period also. Indian pepper exports were retained to the tune of about 48 per cent of

its previous export share to USA alone. However, 40 per cent of USA’s share of pepper

imports from India was lost to other countries, 7 per cent to Canada, 4 per cent to Italy

and 0.2 per cent to Germany. USA gained 19 per cent of USSR market share, 40 per cent

of Canada market share and 39 per cent of the others market share.
       Indian previous pepper exports to the USSR/CIS were retained to the tune of 42

per cent during the period 1981-82 to 2003-04. The remaining 58 per cent, 20 per cent

was diverted to USA, 26 per cent to others, 12 per cent to Germany and one per cent to

Canada. However, USSR gained entire market share of Germany (1.00), 5.07 per cent of

Italy and 4.7 per cent of others market share. Canada had a moderate probability of

retention of 0.3113. India could not retain its previous export share to Italy and Germany

during this period. Our share of Italy market was directed to others while it gained 28 per

cent of Canadian share and 4 per cent of USA’s share and 2 per cent of others’ share.

      Table 3: Transitional probability matrix of Indian pepper exports during
                        Over all Period (1981-82 to 2003-04)

        Importing
                      USA       USSR       Canada      Italy   Germany      Others
        countries


          USA         0.4783    0.0000      0.0719    0.0423      0.0018    0.4057


          USSR       0.1893     0.4168      0.0134    0.0000      0.1208    0.2597


         Canada       0.3981    0.0000      0.3113    0.2824      0.0000    0.0820


          Italy       0.0000    0.0507      0.0000    0.0000      0.0000   0.9493


        Germany       0.0000    1.0000      0.0000    0.0000      0.0000    0.0000


         Others       0.3876    0.0471      0.1235    0.0243      0.3443    0.0732



       Germany’s entire previous share of import of Indian pepper was captured by

USSR while it gained 34 per cent of others’ share and 12 per cent of USSR’s share. India

retained seven per cent of the previous exports to other importing countries and the

remaining 93 per cent was diverted to USA (39 %), Germany (35 %), Canada             (12 %),

USSR (5 %) and Italy (2 %). The others gained 41 per cent of USA’s share, 26 per cent

of USSR’s share 95 per cent of Italy’s share and 8 per cent of Canada’s share.
 Projections of export share of Indian pepper to major importing countries

        With the help of transitional probability matrix, market share proportions of

 Indian pepper exports to major importing countries were computed up to the year 2010

 A.D. and the details are presented in table 4.

        It is apparent from table 4, that the actual exports to USA increased from 29.49

 per cent in 1996 to 59.83 per cent in 2004. On the other hand, the predicted value was

 almost 49 per cent in 2004. The prediction of market share for the year 2010 is estimated

 at 49 per cent. The actual proportion of pepper exports to the USSR/CIS decreased from

 13 per cent in 1996 to 2.51 per cent in 2004. The predictions show decrease from 13 per

 cent to 4 per cent and was expected to remain the same at 4 per cent in 2010 A.D. The

 actual proportion of pepper exports to Canada slightly increased from 6 to 10 per cent

 during the study period. The predicted export share to Canada also slightly increased

 from 6 to 7 per cent and remained constant at 7 per cent until the year 2010. The actual

 and projected export share to Italy showed slight fluctuations over the study period.

 Similarly, the actual and projected export proportion to Germany remained constant

 around 3 per cent with slight fluctuations over the study period. The actual export share

 to other countries declined from 40 per cent in 1996 to 22 per cent in 2004. The predicted

 export share declined from 40 per cent to 31 per cent and was predicted to remain at 31

 per cent till 2010. Thus, in most of the cases, the projected share coincided or was close

 to the actual share indicating a good fit of the model.

Conclusions:

        It can be concluded from the results that USA and USSR were the stable export

 markets for Indian pepper during pre-WTO period reflected by the high retention

 probabilities of 0.7170 and 0.5388 Canada had a moderate probability of retention at
 0.2871. On the contrary, Italy and Germany were having a probability of zero retention

 indicating that they were the most unstable importers of pepper during pre-WTO period

 as well as post-WTO period. But, during post-WTO period, Canada and USA were

 comparatively stable markets for Indian pepper with 0.4151 and 0.3423 retention

 probabilities. The disintegration of USSR and consequent reduction in purchasing power

 of these countries had led to a very low probability of retention by the earst while USSR

 countries.

        Based on the results of the study, it can be suggested that there are a number of

 approaches enabling the removal of impediments for the day-to-day export business apart

 from quality improvement and value addition. This includes compliance with stipulations

 under various WTO agreements for better market access, development of brands for

 Indian products and their promotion in major markets, development of niche markets for

 specified products, attracting foreign direct investments, encouraging joint ventures and

 amalgamations.




References:

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 Gemtessa, K. . 1991. “An Analysis of the Structure of Ethiopian Coffee Exports”. An
     unpublished M.Sc. (Agri) Thesis, submitted to University of Agricultural Sciences,
     Bangalore
 John,K.C. 2003. Spices export from India. Economic and Political Weekly.1832-1834
Mahesh,N, 2000 “Economic Constraints Facing the Indian Tea Industry: Strategies for
   Post WTO      era”, An unpublished Ph.D. Thesis, submitted to University of
   Agricultural Sciences, Bangalore.
Mandanna P K, Urs D S D and Achoth L 1998 Structural change in India’s tobacco
   exports : A Markov chain approach. Tropical Agricultural Research 10: 134-142.
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Veena, U.M. 1992. “An econometric analysis of Indian coffee exports”. An unpublished
   M.Sc. (Agri) Thesis, submitted to University of Agricultural Sciences, Bangalore.
Table 4.Actual and projected export share of Indian Pepper to major destinations
                                                                                                          Quantity : Share in percentage

                    USA                     USSR                Canada                   Italy                  Germany                Others
 Year
           Actual      Projected   Actual      Projected   Actual   Projected   Actual        Projected     Actual   Projected   Actual    Projected

 1996      29.49         29.49     12.64         12.64     5.63        5.63     8.28           8.28          4.15       4.15     39.80       39.80

 1997      53.09         53.08     6.96           6.96     4.93        4.93     3.96           3.96          2.75       2.75     28.31       28.31

 1998      45.45         48.17     8.76           4.52     5.02        6.71     5.06           4.87          3.51       3.08     32.19       32.63

 1999      47.73         50.29     4.82           4.45     6.08        7.02     4.08           5.39          3.95       2.58     33.34       30.24

 2000      57.14         48.39     6.44           4.19     5.48        7.33     3.47           5.63          2.60       2.66     24.86       31.76

 2001      47.19         49.15     3.11           4.29     7.42        7.30     5.32           5.67          3.47       2.55     33.88       31.00

 2002      50.18         48.64     1.40           4.23     8.68        7.35     7.36           5.70          2.12       2.60     29.64       31.44

 2003      32.57         48.90     1.29           4.27     10.08       7.33     7.01           5.69          3.41       2.57     45.62       31.20

 2004      59.83         48.75     2.51           4.25     5.33        7.34     4.73           5.70          5.37       2.58     22.22       31.33

 2005                    48.82                    4.26                 7.33                    5.69                     2.58                 31.26

 2006                    48.78                    4.25                 7.33                    5.69                     2.58                 31.29

 2007                    48.80                    4.25                 7.33                    5.69                     2.58                 31.27

 2008                    48.78                    4.25                 7.33                    5.69                     2.58                 31.27

 2009                    48.78                    4.25                 7.33                    5.69                     2.58                 31.27

 2010                    48.78                    4.25                 7.33                    5.69                     2.58                 31.27

								
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