Structural Transformation, Trade Policies and Income Distributional Impacts: A Computable General Equilibrium Model of India

The liberalization and globalization process which India initiated in the 1990s have been carried on successfully and this has taken the economy to higher growth path of more than 8 per cent GDP growth post-2000. However, there is no substantial achievement on the income distributional front and there are no convincing studies to empirically demonstrate the impact of various domestic and global policies of India on income inequality. This study proposed to simulate alternative scenario of external shocks and counterbalancing trade policies on income accounts of different groups of households classified by consumption expenditure by rural and urban using computable general equilibrium (CGE) modelling. The data pertain to social accounting matrix (SAM) of 2006-2007 for India. Apart from policies, it is also looked at the income distributional impacts of various anticipated structural changes in the domestic economy that will influence the Indian trade. Alternative GDP growth scenarios give a clear picture that higher GDP growth does not favour agriculture sector. Rural income share has come down from 61 to 56 per cent. It has a structural bias towards urban rich. This is a challenge for planners as the real issue is how to make agriculture progress when the economy is moving towards higher growth path. Among the policy scenarios, it is found that reduction in foreign capital inflow renders biggest loss to rural areas.