India’s trade dynamics under Covid-19: Trade openness and value chain participation

By Prof Utpal K De, Dr Simi Mehta*

The topics of wide debate and discussions of recent times have been revolving around the impacts of ongoing pandemic Covid-19 and consequences of various policy measures including the locking and unlocking of the economies, compensatory government measures vide cash transfers and other social safety nets, changing fiscal and monetary instruments for trade facilitations.

It is needless to say that all these phenomena have changed the life and livelihood of people drastically and still the population are in a precarious situation and looking towards suitable solutions to the current uncertain employment and income scenario. Not only the fact that India has been reeling under recession since last February as revealed by the drastic contraction of GDP (by 23.9%) in the first quarter of 2020-21, followed by significant contraction of the economy by 7.5% in the second quarter; there was a drastic fall in GST collection in the wake of lock-down and consequent fall in production and business activities.

However, the collection of GSTs again moved above Rs 1 lakh crore mark in the following quarter. The government expenditure pattern has been changed. Large-scale closure of several production and business units for several days has caused severe unemployment and fall in expenditure capability of a large section of population, that has further impact on trade.

Though, the pandemic brought misfortune to many, it has been proved to be a boon for those involved in production and businesses of medical kits, sanitizer, musk, biochemicals etc for the new norm of livelihood and for those trading in electronic items and accessories, internet facilities required to support mostly newly designed online education, as well as partly for the remote business and banking systems. Hence, the earning of those limited business or trade players have increased significantly amidst economic recession, which is exemplified by the elevation of Reliance chief in the world ranking of riches.

International trade has reached its lowest excepting the transaction of essential items like medicines, medical equipment and the like. The imports during April-May 2020 declined faster than that of exports and that led to temporary rise in foreign exchange reserve. It is of course not a necessary indication of development as many of the capital goods and sophisticated technology have not arrived to the required places, though a part of import bill has been saved due to less crude oil import.

Closure of transportation has not only affected the earning of people involved in transport and communication, it also disturbed market linkage and widened agricultural price variations between production source and end users. Tourism and hospitality sector have reached its two decades lowest point. For reduction in both earning of people (and thus spending capability in general) and production activities, there is a downward spiral movement in the market from both demand and supply sides.

Education and learning have changed to online mode for the closure of educational institutions for some uncertain period. This in turn caused expenditure on electronic equipment and internet data-pack to rise in both quantity and price. On the other hand, the earning of electronic and software business houses has been multiplied.

Trade Situation and The Result of Gravity Model

The picture above displays drastic fall in both export and import with declining openness of the economy. However, the percentage distribution of India’s export and import with countries across the world reveals concentration of trade with top three partners (USA, China and UAE) has been increased during Covid-19 time. The trade openness and GVC backward participation model shows severe adverse impact of Covid-19 on the growth of export and import across the countries that calls for urgent strengthening of supply chains.

However, it is expected to have a positive relationship between GVC participation and export growth, both in terms of forward and backward participation. A significant positive relationship is also expected between trade openness and export growth, which was true in the pre-Covid-19 period as per the estimation of De and Kumarasamy. With the outbreak of the pandemic, quarter-on-quarter export growth diminished, which is also supported by the augmented Gravity model estimation. Despite ongoing pandemic, through various trade facilitation attempts and regional integration, volume of trade especially with south Asia and ASEAN countries is expected to rise significantly by 2025.

Openness, Trade Cost and Regional Integration for Promotion of Trade

Using various regression models, it has been found that both geographical distance and cultural and historical distance have statistically significant positive influence on trade costs. Whereas, cultural and historical distance variables like common border (contigij), common official language (Languageij) and common colony (Colonyij) have statistically significant negative influence on trade costs. A shared language and colonized country could facilitate better reduce bilateral trade costs. Therefore, countries by engaging in regional trade agreements (RTAij) would reduce trade costs for Indo-Pacific and all countries.

The positive and significant relation between tariff and trade costs is an indication that despite several efforts taken globally in terms of bilateral and multilateral trade agreements, there is still a need to further reduction in the tariff rate to effectively minimize the trade costs.

The indicators of infrastructure variables such as shipping connectivity (LSCIij), port infrastructure (QPIij) have significant negative impact on trade cost implying that better infrastructure development at port and maritime connectivity would reduce trade costs. Similarly, border compliance measures like time to export (TEBCij) has positive and statistically significant impact, which is an indication that longer the time to export, higher would be the trade costs, due to delay in export related expenditure like storage and labor charges.

In the case of trade facilitation implementation measures, it is found that significant improvement in trade facilitation measures in the reporting country would facilitate the traders to promote export to the partner countries.

Further analysis involving gross domestic product, trade costs variable has been done to understand the impact of digital trade facilitation on India’s exports to ASEAN, Indo-Pacific and all countries. It has ben found that GDP has strong positive impact implying that a higher level of income in both exporting and importing country indicates a country’s ability to produce more export and also higher level of demand for export goods. Whereas, the higher trade costs have significant adverse impact on the volume of bilateral trade.

On the other hand, a regression analysis reveals that implementation of trade facilitation measures affect reporting countries’ export positively. Facilitation measures like digital trade facilitation, customs electronic data clearance of export and import through single window system and participation in WTO Trade Facilitation Agreements have significant favorable impacts that helps in promoting export trade of the reporting countries.

Remarks

Overall, promotion of trade openness and value chain, with a focus on strengthening the supply chain and connectivity, skilling, improve logistics services are the keys for progress of trade. Also, trade facilitation measures are warranted for enhancing trade flows that may focus on digital trade facilitation and reforms, paperless trade, etc. Further, effective implementation of WTO TFA matters on multilateralism is seen for accelerating regional integration and trade facilitation.

Here, India may play a strong role in mediating global rules-based trade arrangements. In order to achieve that, India must reform the domestic policy to push manufacturing competitiveness, promoting global and regional value chain to benefit from tariff liberalisation. Focus should be given to MSMEs to make it simple and business-friendly for the promotion of India’s exports.

*Excerpt based on the lecture delivered by Prof Prabir De of RIS, New Delhi, and Dr Durairaj Kumarasamy on Changing Dynamics of India’s Trade’ in the Covid-19 Era under EconDevDiscussion series on The State of Economic Development in South Asia organized by South Asian Studies Center at Impact and Policy Research Institute and Counterview

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