This study examines the effects on CWM when there is a slowdown of the Indian economy. As there have been a range of estimates and these were repeatedly revised downwards, it was difficult to work with a single number. The study uses a general equilibrium model from the Global Trade Analysis Program (GTAP). It also uses the database from this program for performing the scenario analysis. Two kinds of GTAP, i.e. comparative static and dynamic models have been used. In addition, the study has conducted a qualitative assessment of the likely effect of the slowdown in India on CW countries, using inter alia data on India’s trade developments till May 2020.
The comparative static GTAP analysis examines the impact of India’s slowdown in 2020 on CW countries. The range of estimates of India’s GDP growth in 2020 used in this report are 2% (optimistic), -1.5% (mildly pessimistic) and -5% (most broad assessment of the worst case scenario). There is in addition a best case scenario based on the situation continuing as if the 2020 slowdown had not occurred. For this, the study relies on India’s GDP growth estimate for 2019-2020, i.e. 4.2% assessed by both the IMF and the World Bank. The dynamic GTAP assessment is conducted by establishing a counterfactual to assess the trade loss compared to a situation if there has been no slowdown in 2019 or 2020. For this purpose it uses the GDP growth projections of the World Bank before and after the slowdown, i.e. forecast made in January 2019 and the current forecasts of India’s GDP growth. These comparisons are made for the period 2019-20 to 2021-22.
Past experience of 2008 and 2009 provides little guidance on what is to be expected in the COVID scenario. India made a quick bounce back from the financial shock of 2008-2009, and belied the IMF and World Bank expectations of a slow recovery. This year, the lockdown has been very severe in India and the adverse effects on the industry and the core sectors have been dramatic to say the least. While the key reason for the economic collapse in 2008-2009 was external to India, the COVID crisis combines both external and internal factors as well as the complications due to the danger of infection with close contact.
The CW as a whole and almost all CW groups considered in this study are very important markets for India, accounting for 20% of its total value of exports. Within this group the share of CWSSA is the highest. The product profile of India’s exports shows that it exports largely labour intensive goods to developed CW, and capital and skill intensive products to SSAs and LDCs. In terms of India’s imports, minerals and metals are the most important imports from all groups of CW countries. Among the CW groups SSA and LDCs are most reliant on India, as around 15% or more of their imports come from India in five of the seven GTAP product sectors studied here. Developing LDCs rely significantly on India for about 4 of the 7 GTAP sectors. Developed CW are not reliant on India as for most products imports from India are insignificant.
As far as investment is concerned, FDI inflows from CW into India far exceeds FDI outflows from India. However, India provides about 40% of the global FDI inflow into CW, while the share of CW in India’s FDI inflows is around 20%. India’s largest share (50%) of outward FDI goes to developed CW and 60% of FDI inflows comes from developed CW. The same trend can be observed in services as for outward FDI. The largest exports to all CW groups are for financial, insurance and business services. The other important categories of services exports from India are transport and information and communications. Unlike goods, India’ import of services from CWM is far lower than its exports. Surprisingly unlike exports from India of tourism services, this sector is an important sector for import of services into India across all country groups, especially for SSA.
The impact of India’s slowdown will be felt differently by various CW groups. The trade and investment effects of the difference in the best and the worst case scenario are uniformly negative on all groups but are strongest for India’s exports to LDCs and SSA, and for India’s imports from developed CW. With the large base of India’s exports to developed countries and the small base to SSA, the decline of exports to the developed CW would hit the Indian economy more. Post COVID recovery will be the slowest in exports to SSA and LDCs and quickest in the case of exports to developed countries. India’s imports from developed CW to India would decrease the most and that from LDCs the least.
Even if the Indian economy sees a small positive GDP growth of 2% in the COVID period (2020), muted expectations will dampen trade and investment recovery. Interestingly outward investment falls when India’s growth rate rises, and inward investment rises by one and a half times the growth rate. The opposite result takes place when the growth rate declines, i.e. an increase in outward FDI from India, and a decrease in inward FDI.
Asymmetric responses are expected in the positive and negative growth scenarios. When the positive growth rate of 4.2% is considered, then the impact on trade is relatively smaller than the decline in trade with a negative growth rate of -3.2, for example. It cannot be emphasised enough that all these changes estimated through a GTAP model relate only to an Indian slowdown. While India is slowing down so are the others. Hence supply and demand bottlenecks will be encountered in all the CWM which will change the outcomes considerably. However, modelling these changes is beyond the scope of this study which is focused on assessing the effects of India’s slowdown on the CW groups. There is however a qualitative discussion in this study of the product categories and CW countries most likely to be adversely affected due to a decline in India’s growth rate. This qualitative discussion considers India’s imports and exports till May 2020 and the kind of trade relationships CW countries have with India, thus providing a broad basis for a larger consideration of the changes taking place at present.
To alleviate the trade and investment declines especially for CW LDCs and SSA, transparency of trade restrictive measures should be requested for all CW countries. In addition export credit should be eased and transport restrictions lifted with proper precautions. Policies to encourage high value, low volume tourism should be encouraged. The rules of business have changed structurally and the CW has to adapt to this changed environment.