Curious Case of Bilateral Trade Data Mismatch between India & the USA : Theory & Evidence

The United States has been India’s most dominant trade partner for quite some time now. Given trade data are of mirror type and can be easily crosschecked, a rule based routine check finds a huge discrepancy both in export and import values between bilateral trade statistics of these two countries. India’s export values are consistently underreported while imports data show both over and underreporting between 1960 – 2017. As India’s trade misreporting follows a systemic pattern, we enquire further first by building a simple analytical framework relating the trade misreporting to several trade, exchange and capital related policy restrictions that still prevail in India. Next we test the results of the analytical models empirically with the help of ARDL bounds testing method. Among the variables, forward premium plays the most important role in influencing the export mis-invoicing, followed by interest rate differential in short run whereas taxes on export has a pivotal role in long run. The combination of tariff, interest rates and forward premium also affect import mis-invoicing even though individual effects are absent. Finally, using VAR model our exercise finds a string causal relationship between export mis-invoicing and import mis-invoicing with the later affecting the former