To Look East or to West? An Analysis of India’s Trade Policy from Employment Perspective

Abstract

In the face of mounting protectionist sentiments, aggravated further due to COVID-19, India is redefining its trade policy. This is evident from the fact that India has decided to not join the mega-trade deal, Regional Comprehensive Economic Partnership (RCEP), giving in to the concern of massive trade deficit with China and other countries of the Association of South East Asian Nations (ASEAN). This stance is complete opposite to India’s ‘Look East Policy’. Instead, India is looking for closer trade ties with the United States (US) and the European Union (EU). In this context, this article evaluates the performance of India’s trade, in general, as well as with its Eastern (ASEAN, China, RCEP) and Western partners (US and EU), on its industrial sector employment. Employment is a better measure than trade deficit because employment gives a picture of both growth and distributional aspects of trade effects. Using a dynamic econometric model in a panel framework, it is found that, in general, while export intensity had favourable impact, import penetration had a detrimental impact on industrial sector employment during 1996–1997 to 2016–2017. Region wise analysis shows that trade with ASEAN has been employment enhancing while that with China had a negative impact on employment. On the East versus West looking trade policy debate, analysis suggests that the long run impact of exports, to both the West (EU plus USA) and the East (RCEP) partners, on employment is positive. Also, contrary to the mainstream view, the negative effects of imports, on industrial sector employment, from RCEP appears to be insignificant than that associated with imports from the EU plus USA. Thus, trade agreements with the EU and the US cannot be a substitute for dis-engaging with the resilient Eastern partners. Rather, India should strengthen its trade prospects with its East Asian partners and simultaneously look for export market in the West to enhance its employment creation.