Welfare Implication of India-ASEAN FTA:An Analysis using GTAP Model

The welfare effect under GTAP model computes a money metric equivalent of the utility change. This is calculated by measuring ‘equivalent variation’ (EV) which summarizes the regional welfare changes resulting from any policy shock and is given in dollar values (US $ million). In GTAP, this money metric change is broken into different components, each of which relates to a quantity change interacting with a distortion in the model. Considering the welfare decomposition effect under multiple regions as proposed by Huff & Hurtel (2001), the current study gives an insight into the sources of welfare gain under various simulations describing stages of India-ASEAN FTA. ASEAN is so far the biggest bloc with which India has an operational FTA. Almost 9% of India’s trade is with ASEAN as a group. In thiscontext, the paper makes an attempt to assess the welfare implication of this agreement considering various implementation stages.It has been noticed that relatively bigger ASEAN members will derive more benefits in terms of welfare growth. India will have higher benefits only when the agreement gets fully implemented. ASEAN members will gain from higher ‘terms of trade’ effect while India’s gain mainly will be from the resource reallocation and change in domestic production activities reflected through ‘allocative efficiency’. However, the overall gain gets dampened due to the presence of negative ‘terms of trade’ in India’s welfare equation. India’s import demand of several intermediate as well as final goods will remain high and ASEAN will have advantage to supply these at a higher price yet lower than average prevailing import price in India which will lead to negative ‘terms of trade’ effect for India. The value of ‘allocative efficiency’ for India increases significantly once there is full liberalization. With full liberalization India extends tariff concessions for large number of products which are otherwise included in its negative list and not allowed any concessions. This adds to allocative efficiency- firstly due to removal of protection from several inefficient production processes and second due to increased import taxes contributed by increased imports of many of the products otherwise featuring in the country’s negative list.Once we incorporate imperfect competition and presence of increasing return to scale in selected sectors in India, ‘scale economy’ effect, ‘profit shifting’, and various tax contributions will lead to more welfare gain in India. This indicates that with the presence of imperfect competition, profit shifting will allow India to invest in capital goods and technology leading to high ‘scale effect’ and thereby to increase exports further to ASEAN. The study brings up a very crucial issue that the gain from FTA with ASEAN hinges on India’s big firm’s ability to reduce average cost bringing better technology and quality inputs. This will improve production system in India which in turn will further boost the export sector.