Assessing Trade Creation and Diversion Effects in India’s SAFTA Engagement: A Gravity Model Approach

Abstract

To foster deeper economic integration across South Asia, the South Asian Free Trade Area (SAFTA) was instituted, with India assuming a central role in advancing trade relations among SAARC member states. This study examines the trade creation (TC) and trade diversion (TD) effects resulting from India’s participation in the SAARC nations under the SAFTA framework. Employing the gravity model framework developed by Anderson and van Wincoop (2003, American Economic Review, 93(1), 170–192), the analysis is conducted on a panel comprising 28 countries—including India, seven SAARC partners, and 20 India’s major trading counterparts during the 1988–2023 period. To overcome the limitations inherent in traditional gravity specifications, the model incorporates multilateral trade resistance terms and employs the Poisson Pseudo Maximum Likelihood (PPML) estimator to handle zero trade flows and ensure robust estimation effectively. Findings indicate the coexistence of TD and TC effects in terms of imports. These outcomes suggest that SAFTA’s destination-specific liberalization policies—particularly tariff concessions granted to Least Developed Countries (LDCs)—have positively influenced regional trade dynamics. However, gains from reciprocal liberalization appear uneven, diminishing with greater geographical distance among members. Thus, the findings contribute significantly to shaping informed trade policy frameworks across the region.