Trade Liberalisation and Regional Disparities: Evidence from a Multi-Regional General Equilibrium Model of India

Recent focus on poverty alleviation under the United Nation’s Millennium Development Goals has led to a renewed interest in understanding the link between trade reforms and regional disparities, particularly, within emerging and developing countries. India makes a fascinating case study to understand this linkage as it has the largest concentration of poor people in the world despite being one of the world’s fastest growing economies and also trade reforms were carried out in the early nineties (Topalova, 2008). In this study, in contrast to the partial equilibrium framework adopted in the existing literature, we identify and quantify the regional impact of trade liberalisation within a general equilibrium framework and develop the first ever single-country multi-regional computable general equilibrium (CGE) model for the Indian economy. In addition, this model incorporates economies of scale and imperfect competition. Overall, our results suggest that, in the short-run, trade liberalisation has a beneficial impact on the rich and fast growing middle income states and marginal or negative impact on the poor states. Thus, in the short-run, trade liberalisation would tend to widen the gap between the rich and the poor states in India. We suggest that trade reforms should be complemented by other policy measures that would promote regional equality.