Impact of ASEAN-India FTA on India's plantation commodities: A Simulation analysis

Abstract

The present study attempts a quantitative assessment of the impact of recently signed ASEAN-India FTA (AIFTA) for selected plantation commodities (coffee, tea and pepper) in India. We use partial equilibrium modeling approach (SMART model and gravity model) to simulate the likely import increase of the plantation commodities under the proposed tariff reduction schedule of the AIFTA. Overall, the results suggest that the AIFTA will cause significant increase in India’s import of plantation commodities. The increase in imports is mostly driven by trade creation rather than trade diversion. From the economic efficiency point of view, trade creation improves welfare as the new imports replace the high-cost domestic production. The analysis shows that the proposed tariff reduction may lead to significant tariff revenue loss to the government. However, the gain in consumer surplus (due to the fall in domestic price and the consequent reduction in dead-weight loss) outweighs the loss in tariff revenue leading to net welfare gain. By and large, the simulations based on the SMART and gravity models provide similar results on the magnitude of total increase in imports. The surge of new imports may have adverse impact for the livelihood of the Indian farmers engaged in the production of these commodities. Farmers will have to realign the structure of production according to the changing price signals and hence it is critical to provide adjustment assistance to the affected farmers.