India’s Trade Policy Choices
MANAGING DIVERSE CHALLENGES
SANDRA POLASKI
A. GANESH-KUMAR
SCOTT MCDONALD
MANOJ PANDA
SHERMAN ROBINSON
February 2008
India’s Exports, Imports, and GDP
TRADE VALUE (BILLIONS, CONSTANT 2000 DOLLARS)
700
Imports
Exports
GDP
600
500
400
300
200
100
0
1980
1982
1984
1986
1988
1990
Source: United Nations, UN COMTRADE database.
1992
1994
1996
1998
2000
2002
2004
Key Domestic Challenges That
Affect India’s Trade Policy Choices
• Poverty
• Agriculture and rural development
• Employment creation
To illustrate . . .
Poverty in India, 2004-2005
Percentage of population
Number of persons (millions)
World Bank
$1/day
World Bank
$1/day *
World Bank
$2/day
World Bank
$2/day *
* Using revised PPP estimates (forthcoming)
National
poverty line
Analytical Tools and Simulations
• Computable general equilibrium (CGE)
model of global trade
• Computable general equilibrium (CGE)
model of the Indian economy
• Social accounting matrix with
considerable detail on sources of
household income
• Simulated Doha agreement and bilateral
free trade with EU, US and China
Simulation of a Doha
Agreement
Doha Simulation
• Tariff reductions for agriculture, NAMA:
– 36% by developed countries
– 24% by developing countries
• Agricultural subsidy reductions
– Domestic subsidies reduced by 1/3
– Export subsidies eliminated
• Reductions taken from applied rates
• Services trade liberalization not simulated
Macroeconomic Results for India of a
Doha Agreement
Major Changes in Indian Exports
under a Doha Agreement
CHANGE FROM BASE SIMULATION (BILLION DOLLARS)
Wearing apparel
Other manufacturing
Textiles
Chemicals
Minerals and metals
Trade and transportation
Services
0.00
0.10
0.20
0.30
0.40
0.50
0.60
Major Changes in Indian Imports
under a Doha Agreement
CHANGE FROM BASE SIMULATION (BILLION DOLLARS)
Other manufacturing
Minerals and metals
Chemicals
Vegetable oils and fats
Oil and gas
Vehicles
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
Other Doha-related Simulations
• Impact of volatility of world agricultural prices
– Rice
– Wheat
• Simulations: +/- 25%, +/- 50% change in world price
• World price shocks would affect India differently after
it reduces tariffs toward the rest of the world
• Distributional effects of agricultural price shocks
among households reveal strong risk of increased
poverty
The World Price of Rice, 1980-2006
$/TON (CONSTANT 1990 DOLLARS)
600
550
500
450
-61%
400
350
300
+39%
250
-42%
+43%
-31%
+56%
200
Note: Figures given are for Thai 5% broken milled rice.
Source: World Bank, “Commodity Markets Briefs: Rice.”
06
20
04
20
02
20
00
20
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
19
80
150
Impact
of
a
Decrease
in
the
World
Rice, 50% decrease, urban
Price of Rice on Indian Households
25% decrease
CHANGE IN REAL INCOME
(PERCENT CHANGE RELATIVE TO BASELINE NOMINAL INCOME TO HOUSEHOLDS)
Scheduled
Tribes
Scheduled
Castes
Other
Backward
Classes
Others
-----------------------------------Rural------------------------------------
Scheduled
Tribes
50% decrease
Scheduled
Castes
Other
Backward
Classes
Others
-----------------------------------Urban------------------------------------
ImpactRice,
of a Decrease
in
the
World
Price
50% decrease, urban
of Rice on the Demand for Indian Labor
25% decrease
CHANGE IN DEMAND FOR LABOR (PERCENT CHANGE FROM BASELINE)
50% decrease
2.00
0.00
-2.00
-4.00
-6.00
-8.00
-10.00
-12.00
-14.00
Rice sector
Agricultural
sector
Manufacturing
sector
Services sector
Impact of a Doha Agreement
compared to Impact of a Decrease in
the World Price of Rice
(PERCENT CHANGE FROM BASELINE)
Impact
of
an
Increase
in
the
World
Rice, 50% decrease, urban
Price of Rice on Indian Households
25% increase
CHANGE IN REAL INCOME
(PERCENT CHANGE RELATIVE TO BASELINE NOMINAL INCOME TO HOUSEHOLDS)
Scheduled
Tribes
Scheduled
Castes
Other
Backward
Classes
Others
-----------------------------------Rural------------------------------------
Scheduled
Tribes
50% increase
Scheduled
Castes
Other
Backward
Classes
Others
-----------------------------------Urban------------------------------------
-1.00
0.00
Wearing apparel
Other animal products
Utilities
Raw milk
Oil and gas
Wood and paper products
Services
Construction
Petroleum products
Vehicles and transport equipment
Other manufacturing
Chemicals
Coal
Textiles
Minerals and metals
Plant based fibres
Vegetable oils and fats
Trade and transportation
Rice
Other crops
Oil seeds
Other food products
Processed rice
Meat products
Cattle, sheep, goats
Dairy products
Wheat
Impact of a Doha Agreement on
Aggregate World Prices
CHANGE IN PRICES (PERCENT)
7.00
6.00
5.00
4.00
3.00
2.00
1.00
Impact of a Doha Agreement on the
Rest of the World
CHANGE IN REAL INCOME (BILLION DOLLARS)
9.00
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
-1.00
-2.00
Australia,
New
Zealand,
Oceania
China
Japan
Rest of
East Asia
Rest of
South
Aisa
Rest of
NAFTA
United
States
Mercosur
Rest of
the
Americas
EU
South
Africa
Rest of
SubSaharan
Africa
Middle
East,
North
Africa
Rest of
world
Simulation of an India-EU
Free Trade Agreement
The Evolution of India-EU Trade
TRADE VALUE (BILLIONS, CONSTANT 2000 DOLLARS)
35.00
Exports (from India to EU)
30.00
Imports (from EU to India)
25.00
20.00
15.00
10.00
5.00
0.00
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Note: In 2004, the EU expanded from fifteen to twenty-five countries. Earlier data are for EU-15; post-2004 data are for EU25.
Source: United Nations, UN COMTRADE database.
Macroeconomic Results for India of
an India-EU FTA
Macroeconomic Results for the EU of
an India-EU FTA
Simulation of an India-U.S.
Free Trade Agreement
The Evolution of India-U.S. Trade
TRADE VALUE (BILLIONS, CONSTANT 2000 DOLLARS)
25.00
Exports (from India to U.S.)
Imports (from U.S. to India)
20.00
15.00
10.00
5.00
0.00
1991
1992
1993
1994
1995
1996
Source: United Nations, UN COMTRADE database.
1997
1998
1999
2000
2001
2002
2003
2004
2005
Macroeconomic Results for India of
an India-U.S. FTA
Macroeconomic Results for the U.S. of
an India-U.S. FTA
Simulation of an India-China
Free Trade Agreement
The Evolution of India-China Trade
TRADE VALUE (BILLIONS, CONSTANT 2000 DOLLARS)
14.00
Exports (from India to China)
Imports (from China to India)
12.00
10.00
8.00
6.00
4.00
2.00
0.00
1991
1992
1993
1994
1995
1996
Source: United Nations, UN COMTRADE database.
1997
1998
1999
2000
2001
2002
2003
2004
2005
Macroeconomic Results for India of
an India-China FTA
Macroeconomic Results for China of
an India-China FTA
Comparison of the Impact
on India of Different
Trade Policy Choices
Change in Real Income for India
under Different Trade Agreements
CHANGE IN REAL INCOME (BILLION DOLLARS)
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
-0.20
-0.40
Doha
India-EU FTA
India-U.S. FTA
India-China FTA
Change in Real Income for Indian Households
under Different Trade Agreements
CHANGE IN REAL INCOME (BILLION DOLLARS)
1.00
0.50
0.00
-0.50
-1.00
-1.50
Doha
India-EU FTA
India-U.S. FTA
India-China FTA
Change in Domestic Production in India
under Different Trade Agreements
CHANGE IN PRODUCTION (BILLION DOLLARS)
5
4.5
CHANGE IN PRODUCTION (PERCENT)
Change in production (billion dollars)
1
Change in production (percent)
0.9
4
0.8
3.5
0.7
3
0.6
2.5
0.5
2
0.4
1.5
0.3
1
0.2
0.5
0.1
0
0
Doha
India-EU FTA
India-U.S. FTA
India-China FTA
Change in Indian Imports and Exports
under Different Trade Agreements
CHANGE (BILLION DOLLARS)
4.00
3.50
3.00
Imports
Exports
2.50
2.00
1.50
1.00
0.50
0.00
Doha
India-EU FTA
India-U.S. FTA
India-China FTA
Change in Demand for Unskilled Labor
under Different Trade Agreements
CHANGE IN DEMAND FOR UNSKILLED LABOR (PERCENT)
1.00
0.90
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
Doha
India-EU FTA
India-U.S. FTA
India-China FTA
Conclusions
• Multilateral liberalization through the WTO’s
Doha Round would produce larger gains for
India than bilateral agreements with any of
its major trading partners.
• Gains (losses) in real income to the Indian
economy from either multilateral or bilateral
trade agreements are modest, ranging from a
gain of $1.2 billion under the Doha simulation
to a loss of $250 million under the India-EU
FTA.
Conclusions, continued
• Indian exports and imports increase under all
simulated agreements, with the strongest increases
under an India-EU FTA, followed by a Doha pact.
• However total domestic production increases very
modestly, ranging from an increase of 0.52% under a
Doha agreement to 0.34% under an India-EU FTA to
0.14% under an India-China FTA.
• The three bilateral agreements result in losses for
Indian households as a group, while Doha produces
small gains ($530 million, 0.17%) for households.
Conclusions, continued
• Volatility in world agricultural prices would
affect India more strongly after a reduction in
tariffs toward trading partners.
• Decreases in the world price of rice have a
negative effect on Indian households similar
in magnitude to the positive impact of the
entire Doha agreement.
• Agricultural price decreases would worsen
income distribution and could significantly
increase rural poverty.
Conclusions, continued
• In the Doha Round, India’s attention to its defensive
agricultural interests is warranted.
• “Special products” designations and a special
safeguard mechanism would be needed tools to shield
poor households from world agricultural price
volatility until other sectors grow sufficiently to
absorb their labor.
• Employment creation will receive only a mild boost
from trade liberalization. Domestic demand and labor
policy will continue to be the main determinants of job
creation.
Conclusions, continued
• Services liberalization could add to India’s
potential gains; however few offers on services
of interest to India have been tabled in the
Doha Round.
• In negotiations with the EU, significant
services liberalization would be required for
India to experience net gains in real income to
the overall economy, as well as to offset losses
to households.
Conclusions, continued
• Given the low incomes of most Indian
households and high levels of poverty, even
short-term welfare losses are not to be taken
lightly.
• Both Doha and bilateral pacts require careful
negotiation if India is to realize the modest
gains on offer and avoid risking large negative
effects on the households of the poor.
Thank you for your
attention