Multi-sectoral Analysis of Foreign Investment and Trade Liberalization in India: A CGE Modelling Approach

Abstract

India’s growth story has attracted worldwide attention, particularly because this growth has been fuelled by the wide-ranging economic reforms introduced since early 1990s. A distinctive feature of Indian liberalization was the gradual and calibrated manner in which the reforms were introduced in the various sectors of agriculture, manufacturing and services. This article is a modest attempt to capture the role played by trade liberalization and foreign direct investment (FDI) policies in growth and development of different sectors in India. We applied computable general equilibrium (CGE) modelling as our relevant methodology following Das and Chakraborti (doi:10.1007/s40622-013-0003-3), 2013. The article constructs a social accounting matrix (SAM) and attempts to analyze the impacts of reduced import tariff and increased FDI on export–import volumes of different sectors and on exchange rate, GDP, rural and urban income levels and government income under perfect competition market structure. The study reveals that reduction in import tariff increases imports leading to a depreciation of home currency and boosting exports. On the other hand, increase in FDI appreciates exchange rate, making import cheaper and so import increases in all sectors. Export becomes less profitable leading to a reduction in sectoral export.