Utpal K De, Simi Mehta
Changing Economy under Covid-19
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 facilitation.
It is needless to say that all these phenomena have changed the life and livelihood of people drastically. Still, the population is 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 one lakh crore mark in the following quarter. The government expenditure pattern has been changed. The large-scale closure of several productions and business units for several days has caused severe unemployment and a fall in expenditure capability of a large section of the population, which further impacts trade.
Though the pandemic brought misfortune to many, it has been proved to be a boon for those involved in the production and businesses of medical kits, sanitizer, musk, biochemicals, etc. for the new norm of livelihood and those trading in electronic items and accessories, internet facilities required to support mostly newly designed online education, and the remote business and banking systems. Hence, the earning of those limited business or trade players has increased significantly amidst the economic recession, exemplified by Reliance Chief’s elevation 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, leading to a temporary rise in foreign exchange reserve. Of course, it is not a necessary indication of development as many of the capital goods and sophisticated technology have not arrived at the required places. However, a part of the 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, but it also disturbed market linkage and widened agricultural price variations between the production source and end-users. The tourism and hospitality sector has reached its two decades lowest point. There is a downward spiral movement in the market from both demand and supply sides to reduce both earning of people (and thus spending capability in general) and production activities.
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.
The Trade Situation and The Result of Gravity Model
The picture above displays a 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 the concentration of trade with the top three partners (the USA, China, and UAE) has been increased during Covid-19 time. The trade openness and GVC backward participation model shows the severe adverse impact of Covid-19 on export and import growth 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 forwarding 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 pandemic outbreak, quarter-on-quarter export growth diminished, which is also supported by the augmented Gravity model estimation. Despite the ongoing pandemic, through various trade facilitation attempts and regional integration, trade volume, 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 a 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 a statistically significant negative influence on trade costs. A shared language and colonized country could facilitate better reduce bilateral trade costs. Therefore, countries 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 indicates that despite several efforts taken globally in terms of bilateral and multilateral trade agreements, there is still a need to reduce further the tariff rate to minimize the trade costs effectively.
The indicators of infrastructure variables such as shipping connectivity (LSCIij) and port infrastructure (QPIij) have a 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 a positive and statistically significant impact, which is an indication that the longer the time to export, the 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 been found that GDP has a strong positive impact implying that a higher level of income in both exporting and importing countries indicates a country’s ability to produce more export and also a higher level of demand for export goods. Simultaneously, the higher trade costs have a 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.
Overall, the promotion of trade openness and value chain, focusing on strengthening the supply chain and connectivity, skilling, and improving logistics services, are the keys to trade progress. Trade facilitation measures are also warranted for enhancing trade flows that may focus on digital trade facilitation and reforms, paperless trade, etc. Further, effective implementation of WTO TFA 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. To achieve that, India must reform the domestic policy to push manufacturing competitiveness, promoting global and regional value chains to benefit from tariff liberalization. The focus should be given to MSMEs to make it simple and business-friendly to promote India’s exports.
The write up is an 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 on November 19, 2020.
YouTube Video for Changing Dynamics of India’s Trade under Covid-19: Trade openness and value chain participation
Picture Courtesy: Business Today