Indias Trade Policy Choices

MANAGING DIVERSE CHALLENGES

SANDRA POLASKI A. GANESH-KUMAR SCOTT MCDONALD MANOJ PANDA SHERMAN ROBINSON

February 2008

Indias Exports, Imports, and GDP

TRADE VALUE (BILLIONS, CONSTANT 2000 DOLLARS)

700

Imports
600

Exports

GDP

500

400

300

200

100

0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Source: United Nations, UN COMTRADE database.

Key Domestic Challenges That Affect Indias Trade Policy Choices

Poverty Agriculture and rural development Employment creation To illustrate . . .

Poverty in India, 2004-2005

Number of persons (millions) Percentage of population

World Bank $1/day

World Bank $1/day *

World Bank $2/day

World Bank $2/day *

National poverty line

* Using revised PPP estimates (forthcoming)

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)

600 550 500 450 400 350 300 250 200 150
+39% -61%

-31%

+43%

-42% +56%

80

82

84

86

88

90

92

94

96

98

00

02

04 20

19

19

19

19

19

19

19

19

19

19

20

20

Note: Figures given are for Thai 5% broken milled rice. Source: World Bank, Commodity Markets Briefs: Rice.

20

06

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) 50% decrease

Scheduled Tribes

Scheduled Castes

Other Backward Classes

Others

Scheduled Tribes

Scheduled Castes

Other Backward Classes

Others

-----------------------------------Rural------------------------------------

-----------------------------------Urban------------------------------------

Impact of a Decrease in the World Price Rice, 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) 50% increase

Scheduled Tribes

Scheduled Castes

Other Backward Classes

Others

Scheduled Tribes

Scheduled Castes

Other Backward Classes

Others

-----------------------------------Rural------------------------------------

-----------------------------------Urban------------------------------------

0.00
CHANGE IN PRICES (PERCENT)

1.00

2.00

3.00

4.00

5.00

6.00

7.00

Wheat Dairy products Cattle, sheep, goats Meat products Processed rice Other food products Oil seeds Other crops Rice Trade and transportation Vegetable oils and fats Plant based fibres Minerals and metals Textiles Coal Chemicals Other manufacturing Vehicles and transport equipment Petroleum products Construction Services Wood and paper products Oil and gas Raw milk Utilities Other animal products Wearing apparel

-1.00

Impact of a Doha Agreement on Aggregate World Prices

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

30.00

Exports (from India to EU)

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.)

20.00

Imports (from U.S. to India)

15.00

10.00

5.00

0.00 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: United Nations, UN COMTRADE database.

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)

12.00

Imports (from China to India)

10.00

8.00

6.00

4.00

2.00

0.00 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: United Nations, UN COMTRADE database.

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) CHANGE IN PRODUCTION (PERCENT)

5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 Doha India-EU FTA

Change in production (billion dollars) Change in production (percent)

1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

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 WTOs 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, Indias 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 Indias 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