India's Export Potential to the Gulf Cooperation Council: A Gravity Model Exploration

Abstract

This paper explores India's export potential to the six-member countries of Gulf Cooperation Council (GCC) with which a Free Trade Agreement (FTA) is currently under negotiation. Augmented gravity model is used to analyze India's export flows, and the coefficients thus obtained are incorporated to predict India's export potential to the GCC. The model is estimated using the Ordinary Least Square (OLS) technique with panel data. The workhorse gravity model shows that the magnitude of India's export potential is highest with Oman (3.7 times), followed by Qatar (2.7 times), Bahrain (1.5 times), and Kuwait (1.2 times). Moreover, when the RTA (Regional Trading Arrangements) dummy takes the value of one, the results show sharp increase in the magnitude of export potential. However, all the model specifications, consistently show no export potential with United Arab Emirates (UAE), and Saudi Arabia. This implies that currently India is overtrading with UAE and Saudi Arabia, as they are the two largest trading partners of India in the GCC and India's export basket to these two countries is not diversified and is confined to limited number of items. In addition, the models using time-specific fixed effects also exhibit favorable trends of India's export potential to the GCC. (ProQuest: ... denotes formulae omitted.) Introduction The most astounding aspect of the current global economic environment has been the process of intense integration of economies precipitated through gradual acceleration of multilateralism and emergence of regionalism, primarily facilitated by the growth of Regional Trading Arrangements (RTAs) and bilateral Free Trade Agreements (FTAs). The studies show that FTA framework injects a new dynamism into consideration of the liberalization of trade in goods. In committing to this agreement, countries recognize that multilateral trade negotiations are the most effective mechanism to achieve trade liberalization and thereby promote national and regional economic development. Each country does, however, recognize through their existing bilateral free trade agreements with the other selected trading partners, the potential for World Trade Organization (WTO)-consistent free trade environment to deliver welfare at a more rapid pace. To a great extent, such agreements can, in turn, support and reinforce multilateral liberalization in the WTO. This is clearly evident in the Asian region, the current epicenter of the global economy, though regionalism is a belated development in comparison to other regions. Like other parts of the world, all the vibrant economies in Asia are currently negotiating and/or finalizing various RTAs and bilateral FTAs, with the sole aim of expanding the horizon of their national economies through synergizing complementarities in a win-win proposition. India is no exception. Since the opening up of its economy in the beginning of the 1990s, India has marched great strides to be one of the fastest growing economies of the world owing to the substantial structural economic reforms, especially visible in its trade policy regimes. The forward growth momentum and its structural components have induced India to be aligned with other liberalized countries in order to be fully integrated with the global economy. As a result, in recent years, India has signed a number of bilateral PTAs/FTAs. Towards this aim, there are intentions of accelerating the process forward by entering into similar agreements with the Gulf Cooperation Council (GCC), comprising six countries, namely, Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE). The GCC has emerged as a major trading partner of India. It has vast potential as India's major trade and investment partner for the future. The GCC countries collectively host the largest expatriate Indian community. The bilateral trade relationship has witnessed impressive growth in recent years; GCC is now India's second-largest merchandise trading partner and India is GCC's ninth largest trading partner. …

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