The India–EU FTA and Its Potential Impact on India’s Dairy Sector: A Quantitative Analysis

Published date01 February 2022
Date01 February 2022
Subject MatterOriginal Articles
The India–EU FTA and
Its Potential Impact
on India’s Dairy Sector:
A Quantitative Analysis
Anwesha Basu1
The present study attempts to quantify ex-ante the impact on trade flows, rev-
enue and welfare of the India–EU FTA on India’s dairy sector. In light of the fact
that the EU is the world’s largest exporter of dairy products and India’s dairy sec-
tor is highly protected, it is important to assess the potential impact that an FTA
with EU can have on this sector. Using a partial equilibrium set-up, our simulation
results reveal that the estimated increase in India’s imports of dairy products is
mainly driven by trade creation rather than trade diversion, implying that the FTA
does not promote inefficient dairy trade at the cost of other countries outside
the trade bloc. We augment our analysis using the gravity model to estimate
the potential increase in dairy sector imports due to trade liberalisation. PPML
estimates suggest that a 10% decline in tariff rates leads to a 3.4% increase in the
value of imports. While the estimated increase in dairy imports is significant, our
analysis indicates that the increased value of imports, expressed as a fraction of
India’s domestic output of dairy products, would still be less than 1%.
JEL Codes: F13, F14, F17
India–EU FTA, SMART model, gravity model, dairy industry
Original Article
1 Indira Gandhi Institute of Development Research, Mumbai, Maharashtra, India.
Corresponding author:
Anwesha Basu, Indira Gandhi Institute of Development Research, Gen. A. K. Vaidya Marg, Goregaon
East, Mumbai 400065, Maharashtra, India.
Foreign Trade Review
57(1) 7–26, 2022
© 2021 Indian Institute of
Foreign Trade
Reprints and permissions:
DOI: 10.1177/00157325211050763
8 Foreign Trade Review 57(1)
Since the seminal work of Viner (1950), trade theory has shown that the net welfare
effect of a trade agreement is ambiguous. Viner introduced the now very familiar
concepts of trade creation and trade diversion to explain that in order to analyse the
net welfare effect of a customs union, it is necessary to quantify the relative impor-
tance of these two forces. Literature has not managed to reach a consensus regard-
ing the effects of a free trade agreement (FTA). Baldwin and Venables (1995) point
out that in most cases trade agreements lead to welfare gains for the participants
and adverse spillovers to the rest of the world, if any, are small. Others (Bhagwati,
1999; Bhagwati & Panagariya, 1999) are of the view that preferential trade agree-
ments deter multilateral liberalisation since they have strong trade diversion effects.
As theoretically it lacks unambiguity, in order to gauge the potential welfare impli-
cations of an FTA it is important to empirically analyse which of the two forces
(i.e., trade creation or trade diversion) is predominant.
In this article we attempt to quantify the potential impact of the FTA on India’s
dairy industry that the country is currently in the final stages of negotiating with the
European Union (EU). The dairy industry in India has recently garnered attention
due to their opposing stance on the India–EU FTA. There are fears that liberalising
the dairy sector would result in the domestic market being flooded with signifi-
cantly cheaper imports from the EU. The present study attempts to quantify ex-ante
the impact on trade flows, revenue and welfare in a scenario where India frees its
dairy segment to the EU. We do this in a partial equilibrium set-up using the single
market partial equilibrium simulation tool (SMART) developed by the UNCTAD
and the World Bank (Jammes & Olarreaga, 2005) followed by estimating a gravity
equation for bilateral dairy sector exports to assess the impact of tariff changes.
India currently has a total of 43 trade agreements that are either in effect, or
under negotiation, or proposed and under study.1 Out of these, only 13 are
currently in effect, the last one having been finalised almost a decade back. The
negotiations for the India–European Union Trade Agreement were launched in
2007. Post multiple rounds of discussions, negotiations were stalled in 2013 due
to disagreements between the parties concerned. In May 2021, after a gap of eight
years, India and EU announced their decision to resume talks. In light of the fact
that the EU is the world’s largest exporter of manufactured dairy products, India’s
dairy industry expressed concerns regarding imports from EU flooding the
domestic market. It therefore becomes important to assess the potential effect that
an FTA with EU might have on India’s dairy sector.
Cheese has particularly been a major point of concern of the domestic dairy
lobby since the EU is the largest exporter as well as producer of cheese globally.2
The concerns of the dairy industry regarding cheaper imports of milk products
from Australia and New Zealand were also a major issue in the negotiations of the
Regional Comprehensive Economic Partnership (RCEP) Agreement, which India
recently opted out of. According to import data obtained from UN Comtrade
Database (accessed using World Integrated Trading Solution (WITS) platform),
only 0.02% of India’s total imports in 2019 were dairy products. This indicates
that India’s dairy imports are not a very significant part of its import basket and

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