India’s Trade Policy Choices

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 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 Castes



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

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Cat

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Mea

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oduc

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Pro

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Oth

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ood

prod

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Oil

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Oth

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rops

Ric

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Veg

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ats

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ased

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Min

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Tex

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anuf

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Veh

icle

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Pet

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Oil

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Raw

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Util

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Oth

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rodu

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Wea

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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)


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.


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)



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)



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


-1.50

-1.00

-0.50

0.00

0.50

1.00



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


0

0.1

0.2

0.3

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0.5

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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


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


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.


• 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.


• 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.


• 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.


• 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

Documents

India’s Trade Policy Choices