Post on 27-Mar-2015
India’s Trade Policy ChoicesMANAGING DIVERSE CHALLENGES
SANDRA POLASKIA. GANESH-KUMARSCOTT MCDONALD
MANOJ PANDASHERMAN ROBINSON
February 2008
0
100
200
300
400
500
600
700
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Imports Exports GDP
TRADE VALUE (BILLIONS, CONSTANT 2000 DOLLARS)
Source: United Nations, UN COMTRADE database.
India’s Exports, Imports, and GDP
Key Domestic Challenges ThatAffect India’s Trade Policy Choices
• Poverty
• Agriculture and rural development
• Employment creation
To illustrate . . .
Poverty in India, 2004-2005
World Bank $1/day
World Bank $1/day *
World Bank $2/day
World Bank $2/day *
National poverty line
* Using revised PPP estimates (forthcoming)
Number of persons (millions) Percentage of population
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
0.00 0.10 0.20 0.30 0.40 0.50 0.60
Wearing apparel
Other manufacturing
Textiles
Chemicals
Minerals and metals
Trade and transportation
Services
Major Changes in Indian Exports under a Doha Agreement
CHANGE FROM BASE SIMULATION (BILLION DOLLARS)
0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70
Other manufacturing
Minerals and metals
Chemicals
Vegetable oils and fats
Oil and gas
Vehicles
Major Changes in Indian Imports under a Doha Agreement
CHANGE FROM BASE SIMULATION (BILLION DOLLARS)
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
150
200
250
300
350
400
450
500
550
600
The World Price of Rice, 1980-2006
$/TON (CONSTANT 1990 DOLLARS)
Note: Figures given are for Thai 5% broken milled rice.Source: World Bank, “Commodity Markets Briefs: Rice.”
-61%
+39%
-31%+43% -42%
+56%
Rice, 50% decrease, urbanImpact of a Decrease in the World Price of Rice on Indian Households
-----------------------------------Urban-----------------------------------------------------------------------Rural------------------------------------
25% decrease
50% decrease
Scheduled Tribes Others
Other Backward Classes
Scheduled Castes
Scheduled Tribes Others
Other Backward Classes
Scheduled Castes
CHANGE IN REAL INCOME
(PERCENT CHANGE RELATIVE TO BASELINE NOMINAL INCOME TO HOUSEHOLDS)
Rice, 50% decrease, urbanImpact of a Decrease in the World Price of Rice on the Demand for
Indian Labor 25% decrease
50% decrease
CHANGE IN DEMAND FOR LABOR (PERCENT CHANGE FROM BASELINE)
-14.00
-12.00
-10.00
-8.00
-6.00
-4.00
-2.00
0.00
2.00
Rice sector Agriculturalsector
Manufacturingsector
Services sector
Impact of a Doha Agreement compared to Impact of a Decrease
in the World Price of Rice
(PERCENT CHANGE FROM BASELINE)
Rice, 50% decrease, urbanImpact of an Increase in the World Price of Rice on Indian Households
CHANGE IN REAL INCOME
(PERCENT CHANGE RELATIVE TO BASELINE NOMINAL INCOME TO HOUSEHOLDS)
-----------------------------------Urban-----------------------------------------------------------------------Rural------------------------------------
25% increase
50% increase
Scheduled Tribes Others
Other Backward Classes
Scheduled Castes
Scheduled Tribes Others
Other Backward Classes
Scheduled Castes
Impact of a Doha Agreement on Aggregate World Prices
CHANGE IN PRICES (PERCENT)
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
Whe
at
Dai
ry p
rodu
cts
Cat
tle,
shee
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oats
Mea
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oduc
ts
Pro
cess
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ice
Oth
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ood
prod
ucts
Oil
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s
Oth
er c
rops
Ric
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Tra
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rans
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Veg
etab
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ils a
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ats
Pla
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ased
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Min
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Tex
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Coa
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Che
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anuf
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Veh
icle
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Pet
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Con
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Ser
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Woo
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Oil
and
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Raw
milk
Util
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Oth
er a
nim
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rodu
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Wea
ring
appa
rel
Impact of a Doha Agreement on the Rest of the World
CHANGE IN REAL INCOME (BILLION DOLLARS)
-2.00-1.000.001.002.003.004.005.006.007.008.009.00
Australia,New
Zealand,Oceania
China Japan Rest ofEast Asia
Rest ofSouthAisa
Rest ofNAFTA
UnitedStates
Mercosur Rest ofthe
Americas
EU SouthAfrica
Rest ofSub-
SaharanAfrica
MiddleEast,NorthAfrica
Rest ofworld
Simulation of an India-EU Free Trade Agreement
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Exports (from India to EU) Imports (from EU to India)
TRADE VALUE (BILLIONS, CONSTANT 2000 DOLLARS)
Note: In 2004, the EU expanded from fifteen to twenty-five countries. Earlier data are for EU-15; post-2004 data are for EU-25.
Source: United Nations, UN COMTRADE database.
The Evolution of India-EU Trade
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
0.00
5.00
10.00
15.00
20.00
25.00
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Exports (from India to U.S.) Imports (from U.S. to India)
TRADE VALUE (BILLIONS, CONSTANT 2000 DOLLARS)
Source: United Nations, UN COMTRADE database.
The Evolution of India-U.S. Trade
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
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Exports (from India to China) Imports (from China to India)
TRADE VALUE (BILLIONS, CONSTANT 2000 DOLLARS)
Source: United Nations, UN COMTRADE database.
The Evolution of India-China Trade
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
-0.40
-0.20
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
Doha India-EU FTA India-U.S. FTA India-China FTA
Change in Real Income for India under Different Trade Agreements
CHANGE IN REAL INCOME (BILLION DOLLARS)
-1.50
-1.00
-0.50
0.00
0.50
1.00
Doha India-EU FTA India-U.S. FTA India-China FTA
CHANGE IN REAL INCOME (BILLION DOLLARS)
Change in Real Income for Indian Households under Different Trade
Agreements
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
Doha India-EU FTA India-U.S. FTA India-China FTA
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1Change in production (billion dollars)
Change in production (percent)
Change in Domestic Production in India under Different Trade
Agreements CHANGE IN PRODUCTION (BILLION DOLLARS) CHANGE IN PRODUCTION (PERCENT)
Change in Indian Imports and Exports under Different Trade
Agreements
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
Doha India-EU FTA India-U.S. FTA India-China FTA
Imports
Exports
CHANGE (BILLION DOLLARS)
Change in Demand for Unskilled Labor under Different Trade
AgreementsCHANGE IN DEMAND FOR UNSKILLED LABOR (PERCENT)
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
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