India’s Trade Policy Choices

1. India’s Trade Policy Choices SANDRA POLASKI A. GANESH-KUMAR SCOTT MCDONALD MANOJ PANDA SHERMAN ROBINSON MANAGING DIVERSE CHALLENGES February 2008

2. India’s Exports, Imports, and GDP TRADE VALUE (BILLIONS, CONSTANT 2000 DOLLARS) Source: United Nations, UN COMTRADE database.

3. Key Domestic Challenges That Affect India’s Trade Policy Choices • Poverty • Agriculture and rural development • Employment creation To illustrate . . .

4. 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 National poverty line * Using revised PPP estimates (forthcoming)

5. 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

6. Simulation of a Doha Agreement

7. 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

8. Macroeconomic Results for India of a Doha Agreement

9. Major Changes in Indian Exports under a Doha Agreement CHANGE FROM BASE SIMULATION (BILLION DOLLARS)

10. Major Changes in Indian Imports under a Doha Agreement CHANGE FROM BASE SIMULATION (BILLION DOLLARS)

11. 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

12. The World Price of Rice, 1980-2006 $/TON (CONSTANT 1990 DOLLARS) -61% +39% -42% +43% -31% +56% Note: Figures given are for Thai 5% broken milled rice. Source: World Bank, “Commodity Markets Briefs: Rice.”

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

14. Rice, 50% decrease, urban Impact 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)

15. Impact of a Doha Agreement compared to Impact of a Decrease in the World Price of Rice (PERCENT CHANGE FROM BASELINE)

16. Rice, 50% decrease, urban Impact of an Increase in the World Price of Rice on Indian Households 25% increase 50% increase CHANGE IN REAL INCOME (PERCENT CHANGE RELATIVE TO BASELINE NOMINAL INCOME TO HOUSEHOLDS) Other Backward Classes Scheduled Tribes Scheduled Castes Other Backward Classes Scheduled Tribes Scheduled Castes Others Others -----------------------------------Rural------------------------------------ -----------------------------------Urban------------------------------------

17. Impact of a Doha Agreement on Aggregate World Prices CHANGE IN PRICES (PERCENT)

18. Impact of a Doha Agreement on the Rest of the World CHANGE IN REAL INCOME (BILLION DOLLARS)

19. Simulation of an India-EU Free Trade Agreement

20. The Evolution of India-EU Trade 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.

21. Macroeconomic Results for India of an India-EU FTA

22. Macroeconomic Results for the EU of an India-EU FTA

23. Simulation of an India-U.S. Free Trade Agreement

24. The Evolution of India-U.S. Trade TRADE VALUE (BILLIONS, CONSTANT 2000 DOLLARS) Source: United Nations, UN COMTRADE database.

25. Macroeconomic Results for India of an India-U.S. FTA

26. Macroeconomic Results for the U.S. of an India-U.S. FTA

27. Simulation of an India-China Free Trade Agreement

28. The Evolution of India-China Trade TRADE VALUE (BILLIONS, CONSTANT 2000 DOLLARS) Source: United Nations, UN COMTRADE database.

29. Macroeconomic Results for India of an India-China FTA

30. Macroeconomic Results for China of an India-China FTA

31. Comparison of the Impact on India of Different Trade Policy Choices

32. Change in Real Income for India under Different Trade Agreements CHANGE IN REAL INCOME (BILLION DOLLARS)

33. Change in Real Income for Indian Households under Different Trade Agreements CHANGE IN REAL INCOME (BILLION DOLLARS)

34. Change in Domestic Production in India under Different Trade Agreements CHANGE IN PRODUCTION (BILLION DOLLARS) CHANGE IN PRODUCTION (PERCENT)

35. Change in Indian Imports and Exports under Different Trade Agreements CHANGE (BILLION DOLLARS)

36. Change in Demand for Unskilled Labor under Different Trade Agreements CHANGE IN DEMAND FOR UNSKILLED LABOR (PERCENT)

37. 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.

38. 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.

39. 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.

40. 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.

41. 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.

42. 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.

43. Thank you for your attention