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 1992 1994 1996 1998 2000 2002 2004

Source: United Nations, UN COMTRADE database.

 Key Domestic Challenges That
Affect India’s 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 World Bank World Bank World Bank National

$1/day $1/day * $2/day $2/day * 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 -61%

400
350
300 +39%
250 +43% -42%
-31% +56%
200
150

Note: Figures given are for Thai 5% broken milled rice.

Source: World Bank, “Commodity Markets Briefs: Rice.”
Impact of a Decrease in the World Price of
Rice, 50% decrease, urban
Rice on Indian Households
25% decrease
CHANGE IN REAL INCOME
50% decrease
(PERCENT CHANGE RELATIVE TO BASELINE NOMINAL INCOME TO HOUSEHOLDS)

Scheduled Scheduled Other Scheduled Other

Others Scheduled
Tribes Castes Backward Tribes Backward Others
Castes
Classes Classes
-----------------------------------Rural------------------------------------ -----------------------------------Urban------------------------------------
Impact of a Decrease in the World Price of
Rice, 50% decrease, urban
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 Manufacturing Services sector
sector 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 Price of
Rice, 50% decrease, urban
Rice on Indian Households
25% increase
CHANGE IN REAL INCOME
50% increase
(PERCENT CHANGE RELATIVE TO BASELINE NOMINAL INCOME TO HOUSEHOLDS)

Scheduled Scheduled Other Scheduled Other

Others Scheduled
Tribes Castes Backward Tribes Backward Others
Castes
Classes Classes

-----------------------------------Rural------------------------------------ -----------------------------------Urban------------------------------------
 -1.00
0.00
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

CHANGE IN PRICES (PERCENT)

Oil seeds

Other crops

Rice

Trade and transportation

Vegetable oils and fats

Plant based fibres

Minerals and metals

Textiles

Coal

Chemicals

Other manufacturing
World Prices

Vehicles and transport equipment

Petroleum products

Construction

Services

Wood and paper products

Oil and gas

Raw milk

Utilities

Other animal products

Wearing apparel
Impact of a Doha Agreement on Aggregate
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, China Japan Rest of Rest of Rest of United Mercosur Rest of EU South Rest of Middle Rest of
New East Asia South NAFTA States the Africa Sub- East, world
Zealand, Aisa Americas Saharan North
Oceania Africa Africa
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) Imports (from EU to India)

30.00

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 EU-
25.
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 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) 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 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 Change in production (billion dollars) 1

4.5 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