Export Subsidies in India's textile sector

As mentioned in an earlier post, countries follow export-oriented or import-substituting industrialisation. India has followed a mix of both over the years and has been more towards the former in recent years, due to tariff reduction commitments as a result of multi-lateral trade negotiations amidst other free trade agreements, etc. The main policy of export incentivisation is just subsidizing exports. This is prominent in key sectors such as textiles. However, World Trade Organization (WTO) recommends all members to phase out their export subsidies. 

Now our policy-makers face a dilemma. Should we just remove them all abiding by WTO commitments or keep protecting the exporters? While this may render the export-oriented industries susceptible to tighter competition in their import markets, productivity improvements could help offset such disadvantages. More specifically, the money saved by the government by cutting subsidies can be used to increase productivity by better infrastructure, etc. A paper I wrote with Vasundhara Rungta, which is forthcoming in the journal Margin, explores the interaction between these two different aspects to evaluate the economy-wide impact of the export subsidy reforms and productivity improvements in Indian textile and clothing sector. 

Our analysis stands on various policy simulations applying the general equilibrium model of the Global Trade Analysis Project. The welfare impacts of the removal of the Indian textile and clothing subsidies in millions of US dollars shows that India is expected to encounter a loss of about 71.5 million US dollars, while the other Asian countries may gain about 218 million US dollars. In a different scenario, we simulate the impact of a complete phase out of subsidies provided to the textile and clothing industry of India and a simultaneous increase in total factor productivity growth to 3.5 %. This leads to a net positive welfare change! We conclude that merely removing subsidies is not enough as the policy makers often worry. Investments in total factor productivity should come about simultaneously, probably by employing the surplus funds from saved subsidy payments into areas like Research and Development (R&D) and infrastructure, in enhancing total factor productivity. This conclusion may be qualitatively generalised for any sector in the world which is examined for export subsidy reforms, but similar economy-wide studies are recommended for specific cases.