Evaluation of India's Proposed Regional Trade Agreements With Major Economies Using General Equilibrium Analysis

Introduction

Trade always have unequal impact on returns to factors of production. We need to undertake a holistic view and understand economic wide impact of external liberalization. Besides economic concerns, safeguarding security interests are primary factors if we need to look east and act east. India gains the most in terms of welfare when we align with the east. We need to go beyond our discussion of getting constrained by trade deficits with the countries and study economy wide impact of liberalization measures. Maybe trade deficits have to be reflected in changes in our exchange rates. The best strategy remains Liberalize Multilaterally.

After doing more than 500 simulations in GTAP10, it seems very clear that India has comparative advantage in unskilled and skilled labor and capital-intensive goods in form of textiles and light manufacturing. We have heavy disadvantage in terms of natural capital as a group including forestry, fishing, coal, oil extraction and construction. Returns to land sometimes comes positive sometimes negative when we align with ROW because of heavy subsidies provided by developed and developing countries alike. We also gain in terms of meat and meat products, dairy products, rice and motor vehicle production. We also have advantages in transport and communication and other services. In South Asia, we gain in terms of utilities also. Next set of reforms need to take care of regulatory burdens and promote competition as far as trade in services and investments are concerned.

We have negative trade balance of merchandise where we export 323 billion US dollars in 2019 but import 478 billion US dollars of merchandise from the world. This shortfall is met by positive trade balance in terms of exports of services of the level of 321 billion US dollars and imports of 188 billion dollars, but not enough to cover up for having net current account deficit. This current account deficit is more than matched by capital account surplus, leading to a BOP surplus. The latter has led to appreciation of Indian rupee. What is surprising to note is that we have Capital account surplus at the time of pandemic. Second, all GTAP simulations of trade Liberalization show that India’s trade balance falls negative with external Liberalization, meaning that our exchange rate may be overvalued and may see depreciation in coming months. What is disturbing is however to note that exports are not increasing while tariff increase has led to constrains on imports and especially intermediate imports where such protectionism in the economy may force other countries to adopt tit for tat strategy of imposing duties on our products. We need to focus on three E’s, Electronics, Engineering and Electrical products and boost trade in services and investments. For latter regulatory burdens and competition need to go up with fall in non-tariff barriers. Our manufacturing, trade and MSMEs trade all are intertwined with each other. Our overvalued exchange rate and lower growth in pandemic may be the reason that we saw our PCY fell below that of Bangladesh.

Non-tariff measures in India product wise distinguished by technical and non-technical or price measures. Footwear, fuels and wood faces price measures in India like licensing, quotas, paratariffs, anti-competitive export measures. Animals, chemical, hides, vegetables and skin imports face TBTs and SPS non-tariff measures. AMS command is used in GTAP to account for NTMs in the general equilibrium model. The NTMs data comes from UNESCAP, WTO designed TINA and WITS platforms. Textile and clothing face both price and non-price measures to safeguard our economic interest. NTMs and NTBs have very thin line separating them, meaning when NTMs are used as protectionist device they become barriers and therefore are subject to discussion. Stones, plastics and rubber imports faces more price measures. Anti-Competitive measures include state trading enterprises for importing and measures affecting competition. SPS includes registration requirements for importers, tolerance limits for residue and restricted use of substance, prohibitions and temporary geographic prohibitions. TBT includes licensing, marking and packaging requirements, and other prohibitions.

Many economists suggest that free trade improves welfare, yet we systematically measure it and see if India will profit by these FTA's. These agreements are strategically significant to India as they grant free access to these markets for Indian products.