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IMGXYZ1118IMGZYXIndia would be six times better off under a multilateral trade agreement in the WTO’s Doha Round than from individual free trade agreements with the EU, United States, or China, contends a new report from the Carnegie Endowment. However, by lifting agricultural tariffs under a Doha agreement, India could lose more than it gained if prices of key commodities such as rice and wheat continue to swing sharply as they have in the past.

In India’s Trade Policy Choices, Carnegie Senior Associate Sandra Polaski and co-authors A. Ganesh-Kumar and Manoj Panda of the Indira Gandhi Institute of Development Research, Scott McDonald of Oxford Brookes University, and Sherman Robinson of the Institute of Development Studies, University of Sussex, simulate the potential outcomes for India’s economy of a Doha agreement and potential free trade agreements with the EU, United States, and China.

Key Conclusions:

• India’s economy would grow most under a Doha agreement, although the gains would add a very modest 0.25 percent to the economy. Free trade pacts with China or the United States would produce even smaller gains. An agreement with the EU, India’s largest trading partner, would have a slightly negative overall impact on India’s economy.
• Dramatic swings in world agricultural prices—a common occurrence—could have much larger impacts on India if the country lowers its agricultural tariffs. A decrease of even 25 percent in the world price of rice, which has happened repeatedly, would negatively impact all but the top 10 percent of Indian households, with the poorest households losing the most.
• The EU, the United States, and China would each gain more from free trade agreements with India than would India itself, but in all cases, gains would be a modest and would represent a very small percentage of the affected economies. While China would gain more overall than India from a bilateral agreement, India would see a greater increase in exports than China.
• All of the proposed trade agreements would reduce India’s tariff revenue, which accounts for about 11 percent of the government’s total revenue. This would force the Indian government to either reduce spending or increase taxes at the expense of Indian households. An EU-India trade agreement would reduce revenue the most.
• The trade agreements would have a positive but very modest impact for India’s unemployed, currently estimated at 40.4 million. A Doha agreement, which has the most sizeable impact of the simulated agreements, would increase the demand for unskilled labor by 0.9 percent, about 4 million jobs. Job gains would be spread across a number of sectors, including transport, construction, apparel, textiles and a few agricultural commodities. Under free trade agreements with the EU and the United States, job creation would be concentrated in the apparel and textile sectors, with other manufacturing sectors actually shedding some workers.

In announcing the report, Polaski said, “The results of the study indicate that continued trade liberalization, particularly at the multilateral level, can contribute to India’s growth and development.

“However it must be recognized that the potential gains are modest and the risks are not insignificant. The simulations of world agricultural price swings demonstrate that countries like India need to preserve their ability to use tariffs and safeguards to shield key farm crops or risk deeper poverty. Balancing the defensive interests of India’s poor households with the quest for improved efficiency and market opportunities will require careful trade negotiations.”

She added “It would be necessary for India and similarly situated countries to have the flexibility to respond to agricultural price shocks based on conditions at the time of the shock, rather than having rigid or arbitrary disciplines imposed in advance.”

She also suggested that the Indian government would likely find more success in creating jobs through stimulation of domestic demand rather than through export-led growth.

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About the Authors
Sandra Polaski is a senior associate and director of the Trade, Equity, and Development Program at the Carnegie Endowment. Polaski served as the U.S. Secretary of State’s special representative for International Labor Affairs, the senior official representing the State Department on international labor matters.

A. Ganesh-Kumar is an associate professor at the Indira Gandhi Institute
of Development Research (IGIDR), Mumbai, India.

Scott McDonald is a professor in the Department of Economics and
Strategy, Oxford Brookes University, Oxford.

Manoj Panda is a professor at the Indira Gandhi Institute of Development
Research (IGIDR), Mumbai, India.

Sherman Robinson is a professor in the Economics Department, University
of Sussex and the Institute of Development Studies, Sussex.