India’s PTAs and their Economic Impacts: Quantitative Assessments using a Partial Equilibrium Modeling Framework

This paper has made an attempt to assess economic impacts of three preferential trading arrangements involving India, namely India-Sri Lanka Free Trade Agreement, South Asian Free Trade Agreement (SAFTA), and India-Sri Lanka Free Trade Arrangement. Based on the nature of various arrangements under each of these preferential trading systems, suitable quantifiable scenarios have been constructed to assess the potential implications. The key variables that have been of interest in quantitative exercise include, trade creation, trade diversion, and net trade effects; overall welfare effects; and the potential implications for tariff revenues. Quantitative assessments in the paper have been undertaken by exploiting a partial equilibrium model and an associated database that provides information on India’s bilateral trade flows at a highly disaggregated level and protective structures as reflected in its tariff schedule. The results suggest that in each case overall trade effects for India have been positive, i.e. in every case trade creation outweighs trade diversion. This paper has also investigated the sources of trade creation and at the same time has also identified the products causing trade diversion and their sources by rest of the world partners. This paper provides the evidence of overall positive welfare effects for India in all the scenarios considered – although in some cases the resultant welfare effects turn out to be quite low. This paper also provides estimates of tariff revenues forgone by India due to preferential treatment given to different partners. These estimates differ quite considerably and the paper has also identified the important revenue-sensitive individual commodities at a highly disaggregated level. Under each scenario analysis, this paper has also identified individual imported commodities that expand relatively rapidly following the regional/bilateral liberalization measures. In most cases, it has also identified India’s export items that stand to benefit from the reciprocal preferences received under the regional initiative.