The results of this blogpost in short:
- India has been historically reserved when it comes to larger trade deals. This could be about to change.
- While TTIP and TPP would only affect India’s economy in minor ways, Asian deals like the RCEP and FTAAP could lead to significant positive income effects.
- Even though overall effects might be positive, negative effects in sectors such as agriculture could lead to immense political backlash in India
Ever since India moved on from its socialist model of economy in 1991, it has liberalized the economy in gradual steps. India’s approach to free trade agreements (FTAs) has been tepid with preferential trade agreements with immediate neighbours like Sri Lanka and Bhutan (however not with Pakistan). Championing the cause of developing countries at the WTO rounds, India has been sceptical about mega trade deals, especially with countries that are economically much more advanced than India. There had been protests, especially from small farmers when India acceded to the GATT and even the Indian president got involved in leaving agriculture out of the WTO negotiations in 2001. This shows the consensus across the board from activists to politicians to policy makers who view the new liberal market oriented approach supporting big businesses as something that India should avoid at all costs.
With more than 200 million people living below the poverty line, India has been actively supporting nutrition programs, especially for children. This basic food security policy which lets the state distort the market by purchase and delivery of food grains has been vigorously opposed at the WTO, especially in the Doha and Nairobi rounds. Not only is this politically unpalatable for almost all the political parties, but also inhumane to leave the millions to the vagaries of the market, which in India is anyway distorted due to hoarding and crony capitalism (India is ranked 9th globally in The Economist’s crony-capitalism index 2016). The Delhi government even lost the state elections due to the rising prices of onion. The previous coalition government led by the Congress party struggled to control food inflation which was one of the main reasons for their loss in union elections. Thus in a poor and price sensitive market like India, the state cannot exit the agricultural and food provision space without significant political backlash.
Given this background, the increasing number of trade deals which India is pursuing with ASEAN, Japan etc. and the proposed one with the EU, seems to be a sign of a fundamental shift in India’s trade policy. India is of course not a part of the mega trade deals like the Transatlantic Trade and Investment Partnership (TTIP) or the Trans-pacific Partnership (TPP) but has been included in the Regional Comprehensive Economic Partnership (RCEP) involving Asian countries. These kind of trade deals may affect a country’s economy in terms of real income and value added. Member states may experience gains due to trade creation, while trade diversion may negatively impact non-members. However, the latter may also see welfare gains, if they trade a lot with member states, since FTAs are assumed to increase the overall demand for goods and services in the integrated area.
Below, we look at the impact of four trade deals on India’s economy: TTIP, TPP, RCEP and the Free Trade Area of the Asia Pacific (FTAAP). Among these, India is only member to the RCEP. The analysis is based on the results of our recently released study on the “Effects of Mega-Regional Trade Agreements on Asian Countries”.
How do mega-regionals affect Indian income levels?
Even though India is not part of TTIP and TPP, which is due to the geographical scope of these two agreements, they do not negatively affect the country in terms of real income. On the contrary, India even experiences positive, though close to negligible, income gains under TTIP and TPP. As expected, India as a member of RCEP can reap income gains from this agreement. At slightly above one percent, these are moderate, though. This might be due to losses in value added in important sectors pointing to a lack of competitiveness of Indian products vis-à-vis other RCEP members. Also, the effect of trade creation between India and RCEP members might thus be dampened. Interestingly, the FTAAP yields the highest income gains for India, even though the country is not part of this trade pact. This may be attributed to several reasons: First, the FTAAP accounts for roughly 45 percent of world trade. So considerable trade-cost reductions are imposed on a substantial part of world trade, which also benefits non-member states. Second, the FTAAP has 21 potential member states and leads to considerable trade creation among them. Spill-over effects also reach the member states’ trading partners, e.g. through rising demand for imports into the integrated area and cheaper prices for exports from the integrated area.
With TTIP and TPP, trade diverting effects dominate India’s top-10 trading partners. This might on the one hand be due to trade creation among member states which trade more among each other and less with outsiders. On the other hands, India also trades less with countries not part of the two pacts, which could also be due to a generally increasing lack of competitiveness of Indian products under the TPP and TTIP scenarios. RCEP and FTAAP lead to massive trade creation between India and the member states. Imports to India are for the larger part diverted from outsiders to insiders, whereas Indian exports to outsiders in the top-10 also face significant gains.
How do mega-regionals affect different sectors of India’s economy?
As can be seen from the above tables, the rise in net imports from China is the highest under RCEP. FTAAP is actually more beneficial to Indian exports to China. Since India’s trade deficit with China already is very high and currently amounts to US$ 53 billion, policy makers have to ensure that China opens up more of its market for the Indian service sector which would benefit the forex reserve which in turn can help India strengthen its infrastructure to better meet the Chinese competition. If we look at US – India trade, FTAAP would mean much higher growth of US exports to India than of Indian exports to the US. RCEP on the other hand would be more beneficial for Indian exporters. Hence, whichever trade agreement comes into play, India would have significant trade impact with one of its major trading partners – the US or China. The question here for policy makers is which of these partners would help India in the long run, both in terms of market access for the burgeoning digital economy as well as a partner for modernizing the Indian economy which straddles decades of developmental lag in some sectors.
This issue also shows up in the impact the four trade agreements have on sectoral value added in most of India’s top-20 sectors. Agriculture, food and motor vehicles are hit the most, especially in the two agreements (RCEP and FTAAP) with many other Asian countries. This again points to a lack of competitiveness of Indian products vis-à-vis other Asian countries and probably high trade barriers in these sectors in India. Business services and mining could gain most. The first has been India’s competitive edge for quite some time (“Back office of the world”) and will most certainly remain so in the future.
Political backlash in India could be immense for any new deal
As the above analysis shows, growth in services and mining sectors would be offset by a negative impact on automotive, agriculture and food processing industries. Together, Agriculture and automotive employ close to 300 million Indians and contribute 26 percent of the Indian GDP. India needs to modernise its agricultural sector to gain scale and efficiency to be able to compete with higher mechanised and organised Asian competitors. The political impact of opening up these sectors for preferential trade could be disastrous. Experience has shown that the previous free trade agreements have not resulted in the gains which were expected and the growth in imports were much higher than those in exports (The Diplomat, Nov 2015). Indian exporters have not taken advantage of the FTAs due to an absence of awareness as well as the cumbersome bureaucracy which the implementation of such trade deals create.
Competition is needed to build a competitive economy and the government has to ensure that fair competition and a step by step opening up would help the manufacturers prepare themselves for global competition. Other industrialized countries need to understand that India is a mix of contradictions. The presence of a few highly competitive sectors like IT and Biotech does not mean that the rest of Indian economy, especially the labour intensive ones like agriculture and food processing are ready for international competition.