Regional Trade Agreements and India's Trade Efficiency: Evidence from a Stochastic Frontier Gravity Model

Abstract

This study examines the determinants and potential of India’s exports using an augmented gravity model within a stochastic frontier framework. Using panel data for India's major trading partners and SAARC countries over 2000–2018, the study estimates conventional gravity and stochastic frontier models to analyze bilateral export performance and technical efficiency. The results show that partner-country GDP and population positively influence India's agricultural exports, while geographical distance acts as a major trade barrier. SAFTA and AFTA significantly enhance exports, whereas favorable exchange rate movements improve export competitiveness. The stochastic frontier estimates reveal significant export inefficiency, indicating considerable unrealized trade potential. Technical efficiency varies across trading partners, with higher efficiency observed in developed and ASEAN markets than in neighboring South Asian economies. Although export efficiency improved modestly after 2010, substantial untapped export potential remains. The findings highlight the need to strengthen trade facilitation, improve logistics infrastructure, reduce non-tariff barriers, and enhance the implementation of regional trade agreements to realize India's export potential.