Revised Draft DOHA ROUND IMPACTS ON INDIA: A STUDY IN A SEQUENTIAL DYNAMIC CGE FRAMEWORK 1 Selim Raihan 2 Bazlul Haque Khondker February 2010 1 Associate Professor, Department of Economics, University of Dhaka, Bangladesh. [email protected] 2 Professor, Department of Economics, University of Dhaka, Bangladesh. [email protected] CONTENT Executive Summary 2 Chapter One: Introduction 12 Chapter Two: The Doha Round Issues for India 14 Chapter Three: Overview of Indian Economy 23 Chapter Four: Description of the Data 27 Chapter Five: Description of the Model 31 Chapter Six: The Impact of Agricultural Liberalization 35 Chapter Seven: The Impact of NAMA 41 Chapter Eight: The Impact of Full Doha Scenario 46 Chapter Nine: The Impact of Services Liberalization 52 Chapter Ten: Conclusion 56 Annex 1: Description of the India SAM 2006 59 Annex 2: Description of the India Dynamic CGE Model 91 Annex 3: Detailed Results of Agricultural Liberalisation 97 Annex 4: Detailed Results of NAMA Liberalisation 99 References 101 1 EXECUTIVE SUMMARY Background • The Doha Round of negotiations by the WTO (World Trade Organisation) Members will have profound and far-reaching impact on developing countries like India. Doha negotiations target especially agriculture and manufacturing sectors, and India, being a developing country, is likely to have important implications of such negotiations. • The general objective of this research is to examine the impact of Doha round negotiations on the economy of India. The specific objectives are to examine the impact of agricultural trade liberalisation under the Doha negotiations, to examine the impact of NAMA negations, to explore the combined effect of agricultural and NAMA negotiations, and to examine the impact of liberalisation of the domestic services sectors. • With a view to addressing these important issues, this study examines the effects of Doha agreement for India in a sequential dynamic computable general equilibrium (CGE) framework. We develop the first dynamic CGE model for India. The Social Accounting Matrix has also been updated for year 2006. The dynamic CGE model takes into account accumulation effects and thus allows long-run poverty analysis. In addition, it enables to track the adjustment path of the economy, which may include substantial effects on poverty. All these effects are analysed by comparing the business-as-usual scenario and the impacts of different policy scenarios. Issues in WTO Doha Negotiations for India • Agriculture has been at the centre stage of multilateral trade negotiations during the past 20 years. Several studies predict that, with the elimination of export and production subsidies, prices of agricultural commodities are likely to increase. Rise in prices following liberalisation will be, on the whole, welfare-enhancing for a net- exporter country, while for a net-importer country this will be translated into a terms of trade shock with adverse welfare consequences. India is a net exporter of many agricultural commodities. India was among the top 15 exporters of agricultural products and in 2007 India registered a 1.4 percent share of world exports of agricultural products. • WTO negotiations with respect to the non-agricultural commodities (all those are not covered under the negotiation on agriculture, sometimes referred to as industrial or, manufactured goods) center around the enhancement of Non-Agricultural Market Access (NAMA), and are, therefore, proceeding towards the elimination or the reduction of bound tariff rates, bringing unbound tariff rates under binding commitments which will be subject to formula cuts, and identifying and removing Non-tariff Barriers (NTBs). The important considerations under the NAMA negotiations are the extent and modalities of tariff cut for industrial goods in order to reduce and ultimately eliminate high bound tariffs rates, tariff peaks and tariff escalation. The NAMA liberalisation would have important implications for India in 2 terms of both market access in developed countries’ markets and domestic trade liberalisation in the manufacturing sectors. In 2007, India was among the top 15 exporters of manufacturing products and it registered a 1.0 percent share of world exports of manufacturing products in that year. • In present day world services sector is the fastest growing sector of the global economy and it accounts for two thirds of global output, 30 percent of global employment and 20 percent of global trade. Services sector was not included in the world trade negotiation process till the inception of Uruguay Round. Commencement of General Agreement on Trade in Services (GATS) in world trade negotiation is relatively a recent phenomenon. GATS is the first initiative with the aim of progressive liberalisation of trade in services. After the inception of GATS, services trade is getting the importance in WTO multilateral trade negotiations. Services trade liberalisation has also important implications for India. It appears that for almost all broad services categories, India was among the top 15 countries in the world in 2007. Overview of the Indian Economy • The structure of the Indian economy has undergone significant changes since the 1980s with the share of agriculture in GDP declining to about half in 2006. The agriculture sector, for so long the mainstay of the Indian economy, now accounts for only about 20 per cent of GDP, yet employs over 50 per cent of the population. The average rate of GDP growth since the 1980s has been 5.82 per cent per year with wide variations over different sub-periods. There have been some remarkable growth performances during the 2003 and 2006 when the GDP growth rate exceeded 8 percent level. • The growth performance over the period was underpinned by relatively steady rates of savings, investment and improvements in other macroeconomic indicators. As a share of GDP, investment increased to 34 per cent in 2006 along with increases in domestic and national savings. The changes in the external sector were significant. The share of exports of goods and services in GDP rose to 23 per cent in 2006 from only 6 per cent in early 1980s. On the other hand, the share of imports of goods and services in GDP rose from only 8.7 percent in 1981 to around 26 percent in 2006. • India undertook significant liberalisation of trade during the 1990s. Average tariff rate was as high as 100 percent in 1986, which came down to 14 percent in 2007. There has also been substantial reduction in the import-weighted average rate during this period. The highest rate of duty was declined from 335 percent in 1990-91 to 35 percent in 2000- 01. It is noted that tariffs on consumer goods were drastically reduced as compared to tariffs on intermediate and capital goods. • The trade policy reforms brought significant changes in the external sector of the economy. Compared with an average annual growth of around 5.4 per cent per year during 1980-1990, merchandise exports increased annually on average by 12.7 percent during 1991 and 2000 and the similar annual growth rate was also maintained during 2001 and 2006. In case of imports, the rates increased to around 14 per cent during 1990s compared with a 7.2 per cent growth during the 1980s. However, the growth in imports was a bit slowed down during 2001 and 2006. 3 • The trade basket, however, indicates an increasing concentration of manufactured goods accounting for 70 per cent of total merchandise exports in 2005. The shares of food and agricultural raw materials in total exports were reduced over time. In the case of imports, manufacturing accounts for slightly more than 50 percent of total imports and its share has increased over time. Fuels account for more than one third of the total imports. The shares of food and agricultural raw materials have declined over time. • Considering head count poverty ratio for rural and urban India since 1973-74, it can be seen that rural poverty has always been higher than urban poverty until late 1990s. Approximately 80 percent of the total poor live in rural areas. There has generally been a reduction in poverty over the last three decades of so both in the rural and urban areas. However, the reduction was sharp between 1993-94 and 1999-00 largely due to an increase in GDP growth rate. Interestingly during 2001 and 2006, the reduction in rural head-count poverty has been remarkable whilst the reduction in urban poverty has been rather modest. In the case of inequality, both rural and urban Gini coefficients increased in the period between 1993-1994 and 1997, and declined between 1997 and 1999-2000. Data and the Dynamic CGE Model • In this study, the dynamic CGE model is be numerically calibrated to a recent an updated Social Accounting Matrix (SAM) of India. We worked on the latest available SAM for India for the year 2004 and updated it for 2006. We have updated the SAM for 73 sectors. For the modelling purpose, we use an aggregated version of SAM that includes 29 sectors, four factors of production: skilled and unskilled labour, agricultural and non-agricultural capital. An important feature of the SAM is the decomposition of the households into nine representative groups. Households are classified in terms of location: urban and rural. In case of both rural and urban households occupation is the main criterion to differentiate household groups. • The basic structure of the 2006 Indian SAM suggests that tariff rates vary across the sectors and range from as low as 0 percent (cotton and cement) to as high as 16.1 percent (miscellaneous food). The tariff rates on paddy, wheat and oilseeds sectors are only 3.8 percent. In general, the tariff rates on agricultural products are low compared to the manufacturing products. Among the agricultural products ‘sugar’ appears to have the highest tariff rate. In the manufacturing sector textile and clothing sectors enjoy higher tariff rates.