Multi-sectoral Analysis of Foreign Investment and Trade Liberalization in India: A CGE Modelling Approach

Abstract

India’s growth story has attracted worldwide attention, particularly because this growth has been fuelled by the wide-ranging economic reforms introduced since early 1990s. A distinctive feature of Indian liberalization was the gradual and calibrated manner in which the reforms were introduced in the various sectors of agriculture, manufacturing and services. This article is a modest attempt to capture the role played by trade liberalization and foreign direct investment (FDI) policies in growth and development of different sectors in India. We applied computable general equilibrium (CGE) modelling as our relevant methodology following Das and Chakraborti (doi:10.1007/s40622-013-0003-3), 2013. The article constructs a social accounting matrix (SAM) and attempts to analyze the impacts of reduced import tariff and increased FDI on export–import volumes of different sectors and on exchange rate, GDP, rural and urban income levels and government income under perfect competition market structure. The study reveals that reduction in import tariff increases imports leading to a depreciation of home currency and boosting exports. On the other hand, increase in FDI appreciates exchange rate, making import cheaper and so import increases in all sectors. Export becomes less profitable leading to a reduction in sectoral export.

Impact of removing industrial tariffs under the European–Vietnam free trade agreement

“…Impact of removing industrial tariffs of production. Our results (Table VIII) show that government revenue decreases with lower tariff revenue earnings, and that coincides with the study of Ganguly and Das (2017). In this study, the positive EV index reflects the positive prospect of the economy when Vietnam joins the EVFTA.…”

“…5.1.4 Effect on government income and social welfare. Once the tariff rates of the industrial sector decrease to 0 percent, the income of government from tariffs accordingly reduces by 90.6 percent, while the revenue from income tax and production tax increases by 9.13 and 3.34 percent, respectively, due to the rise of household consumption, and the factors Ganguly and Das (2017). In this study, the positive EV index reflects the positive prospect of the economy when Vietnam joins the EVFTA.…”

“…To explore the influences of tariff reduction on the economy, various studies have recently employed the CGE model, which is very effective in studying the impact of climate change, tax policy or tax reform on the economy. There are papers that utilized the static CGE model (Dasgupta and Mukhopadhyay, 2017;Ganguly and Das, 2017;Jean et al, 2014;Khorana and Narayanan, 2017;Shaikh, 2009;Todsadee et al, 2012); meanwhile, others 3 Impact of removing industrial tariffs employed a dynamic CGE model to measure the impacts of the FTAs (Itakura and Lee, 2012;Thu and Lee, 2015). Ahmed and O'Donoghue (2010) utilized Pakistan's social accounting matrix (SAM) data for the year 2002 and developed a CGE model to evaluate the effect of slashing tariff rates on the macroeconomic and welfare indicators of Pakistan.…”

Impact of Logistics Performance on Trade with Specific Reference to Garment Sector in Cambodia, Bangladesh and India

“…The FDI was largely directed to mining sector which is highly capital-intensive and it was suggested to encourage FDI inflows in the mineral-rich country. Similarly, in case of India, trade liberalization and FDI inflows played a great role in the development of agriculture, manufacturing and services sectors of India (Ganguly & Das, 2017). A decrease in import tariff increases imports and boosts exports, while an increase in FDI increases imports in all sectors and exports become less profitable and hence declines.…”