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India-ASEAN FTA: Implication of Phased Liberalisation

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  • Nag, Biswajit
  • Sikdar, Chandrima

Abstract

The India-ASEAN Free Trade Agreement came into effect on January 1, 2010 with respect to Malaysia, Singapore and Thailand. For the remaining ASEAN members it will come into force after they complete their internal requirements. With this background, the present study seeks to analyse the impact of this FTA on India and the selected ASEAN countries following the phased liberalization. It also aims to study the impact of the FTA on Rest of South Asia and other ASEAN members. Using the GTAP database the study conducts a number of simulations involving different scenarios of India’s trade liberalization with ASEAN region and assesses the impact of this liberalization both on the economies’ external sector and their domestic macroeconomic variables. The welfare implications of the FTA for the countries involved are also studied. The simulation results reveal that India’s gain is mainly from the allocative efficiency. However, ASEAN countries receive large terms of trade gain in Indian market. The products coming from these countries are likely to be available at a price substantially lower than the average import price at which these goods are available in India. Indian firms are also gradually substituting domestic input by foreign inputs and thereby increasing the allocative efficiency. There is a signal that this agreement will increase trade diversion and many countries including China will loose market share in India. The paper also analyses the impact on various sectors, changes in output, factor demand and factor prices. The paper argues that in the long run after full trade liberalization, India’s allocative efficiency will increase but terms of trade effect will continuously fall and remain negative. India will be able to arrest the fall in terms of trade once the gain in allocative efficiency is used to improve the productivity in the export oriented sectors and achieve economies of scale. With the assumption of economies scale in selected Indian industries, India’s welfare gain stops falling and moves upward. A simple mathematical model has been proposed to analyse this.

Suggested Citation

  • Nag, Biswajit & Sikdar, Chandrima, 2011. "India-ASEAN FTA: Implication of Phased Liberalisation," Conference papers 332153, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    • Handle: RePEc:ags:pugtwp:332153
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