Economic Effects of Tariff Liberalization of Prospective India-GCC FTA: A Computable General Equilibrium Analysis

Date01 August 2019
Publication Date01 August 2019
AuthorShahid Ahmed,Saba Ismail
Economic Effects of
Tariff Liberalization of
Prospective India-GCC
FTA: A Computable
General Equilibrium
Saba Ismail1
Shahid Ahmed1
The trade relations between India and the Gulf Cooperation Council (GCC)
countries have been intensified during the last two decades. The GCC has
emerged as one of the largest trading partner of India. This article attempts to
investigate the result of tariff liberalization on welfare, output, employment and
the potential trade flows between India and the GCC region using the GTAP-
model. The study reveals that tariff liberalization has positive effects on India and
GCC countries, with no or nominal negative effect on the rest of the world.
Overall results show that India’s trade relation with GCC countries is increasing
continuously, but still there is a lot of untapped potential to bring the welfare
gains for both trading partners. Finally, the study concludes that the proposed
economic integration in terms of FTA between India and GCC will be mutually
beneficial and welfare enhancing, and a case of a win–win situation.
JEL Codes: F1, F13, F14, F17
Indo-GCC trade, computable general equilibrium model, economic integration,
1 Department of Economics, Jamia Millia Islamia, New Delhi, India.
Corresponding author:
Saba Ismail, Department of Economics, Jamia Millia Islamia, New Delhi 110025, India.
Foreign Trade Review
54(3) 224–252, 2019
© 2019 Indian Institute of
Foreign Trade
Reprints and permissions:
DOI: 10.1177/0015732519854934
Ismail and Ahmed 225
India has enormous untapped potential and vital interest in its western neighbour-
hood. Until the last decade or so, the relationship between India and the GCC
countries was being driven almost exclusively by their economic interests—
energy trade and migrant labour. Now, however, the agendas of emerging new
powers like India and China are expanding, including the Middle East. Specifically,
India–Gulf Cooperation Council (GCC) ties will be among the most important
relationships for both sides in the coming decades (Pethiyagoda, 2017). This is the
region from where India gets more than two-thirds of oil and gas supplies while
GCC countries get a significant portion of agricultural supplies from India. It is to
be noticed that the burst of sustained GDP growth that India has experienced dur-
ing the last two and a half decades has strongly correlated with the growth of
trade, and more specifically with increased exports.
In April 2015, the Government of India unveiled a new Foreign Trade Policy
(FTP), which targets to expand India’s share of global trade from 2.1 to 3.5 per
cent and nearly double its exports to US$900 billion by 2020. However, the
proposed targets of exports growth are not easy to attain as exports had shown
downward trend during 2014–2015 and 2015–2016 due to a dramatic decline in
global demand, moderation in commodity prices and a poorly diversified export
basket. Cumulatively, for the fiscal year 2015–2016, exports were down by
15.85 per cent in dollar terms at US$261.14 billion against US$310.34 billion
for 2014–2015. Cumulative imports for 2015–2016 were worth more than
US$379.59 billion, which was 15.28 per cent less than US$448.03 billion worth
recorded for 2014–2015. However, there are positive trends in the last few
months, but these volatile circumstances have provided an opportunity to look
at the new markets and take stock of the remarkable development of India’s
relations with the GCC countries. Economic and trade relations have been the
most dynamic and significant component of the changes that have taken place
in these relations since early 1990s (Calabrese, 2017). As a consequence, the
Gulf has emerged to be of vital strategic importance for India in terms of energy
security, trade, investment and remittances.
India and the GCC have signed the Framework Agreement on Economic
Cooperation in 2004 to enhance and develop economic cooperation between
them on the basis of equality and mutual interest. Article 2 of the Agreement
emphasizes on the ways and means for expanding and liberalizing their trade
relations including initiating discussions on the feasibility of a free trade area
between them, considering their international obligations and principles of the
WTO. One of the mammoth steps in this regard was the signing of the Delhi
Declaration in 2006. It targeted many important areas of trade and endeavoured
to improve the trade relationship in the field of education, health, energy and
political cooperation on various local and global matters as well as on science
and technology. The 2010 Riyadh Declaration was an add-on to the previous
declaration. It paved the way for India to take a giant leap in taking the relation-
ship with Saudi beyond oil and trade in order to engage the partner nation in a
strategic partnership. However, the progress on FTA front was sluggish until the

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