Trade and Access to Credit in Import Destinations
Plurilateral negotiations of trade have been an essential model for global trade growth. Most emerging economies are part of various multilateral trade agreements, except for India. To remedy this situation, policy-makers in India have a strategy to strengthen partnerships with several countries with weaker trade relationships with India than the potential. African countries remain the most important amongst them. Africa’s trade finance issues remain one of the most critical hurdles in India-Africa trade(WTO, 2013). However, the empirical literature on the connection between credit access and trade is limited. In this study, we attempt to fill this gap by examining the impact of credit access in Africa on the exports from India to African countries. We employ the widely used gravity equation for this paper, propounded by seminal papers such as Tinbergen(1962).
The equation we estimate is as follows: Exportsₙₛ = A + XB +YC + e.
Where,
Exports’ ₙ’ is the value of exports from India to an African country’ ₛ.’
A B and C are the estimated parameters.
X is the set of all gravity model variables used in general in the literature (GDP of the source and destination, per-capita income of the source and destination, geographical, political, and cultural distance between the two countries, etc.)
Y is the set of all credit access variables including Commercial bank branches (per 100,000 adults), Domestic credit to the private sector by banks (% of GDP), Real interest rate (%), Risk premium on lending (lending rate minus treasury bill rate, %), Domestic credit provided by financial sector (% of GDP), Private credit bureau coverage (% of adults), Public credit registry coverage (% of adults), Credit depth of information index (0=low to 6=high).
We estimated many different variants of the model shown in the equation and showed the results for three different variants. The first model has all variables explained. The second model excludes all credit variables. The third model excludes the variables capturing credit access, for which some extrapolation was needed. Accounting for credit access that improved some estimates shows that given better credit access, even poorer countries in Africa can import more from India than the more affluent countries. It is discovered that credit access in the export destinations is crucial for exports into them.
In the end, the significant policy inference is that trade partners of Africa, in this case, India, need to be proactive in enhancing trade finance and credit access in these countries to benefit both the African countries and their export ambitions.