International Research Journal of Education and Technology

Trade reforms formed an integral part of the comprehensive programme of structural reforms initiated in India in 1991-92. These reforms have led to a perceptible change in the performance of the external sector in India. This is evident from the increase in trade to GDP ratio in India. However, India’s share in world trade is still very low and appears unimpressive when compared with other Asian countries such as China, Malaysia, Korea and Thailand . India’s share in world trade is less than one per cent. In comparison, China corners about 5 per cent of world trade and Korea has a 2.5 per cent share in total world trade There is, therefore, a clear need to enhance the volume of India’s trade with the rest of the world. In this context an estimation of India’s trade potential is appropriate.

This paper aims to estimate trade potential for India using the gravity model approach. The gravity model is the workhorse of the applied international trade literature. Gravity model is one of the most popular empirical tools for modeling bilateral trade flows. The Gravity model, as in physics, analyses trade between countries through the geographical “distance” between the countries and their economic “size”. Untapped trade potential is indicated in case India’s trade with any country is less than that predicted by the gravity model. The policy implications associated with the findings of untapped trade potential would extend from the necessity of country specific trade promotion and bilateral integration to the need to anticipate relevant distributional changes due to the effect of the expansion in bilateral trade flows in the near future.

Keywords: gravity model, international trade, India, trade potential.