Foreign Trade and Employment Growth in Manufacturing Sector– Implication of Indian ASEAN FTA

Loss of growth dynamism in manufacturing sectors has most often been identified as the reason behind stagnation in employment growth in India. While domestic production in manufacturing failed to generate adequate employment opportunities but jobs supported by exports from the manufacturing sector from India has been on the rise over the last two decades. Thus, the current study makes an attempt to understand the employment effect of India-ASEAN FTA on Indian manufacturing sector. Of the different Free Trade Agreements signed by India, India ASEAN Free Trade Agreement (IAFTA) implemented in 2010 involves one of the largest trade volumes. Using the CGE modelling framework of the GTAP database the study conducts simulations by calibrating the trade liberalization scenario as of 2018 between India and the ASEAN countries. IAFTA fetches employment growth in manufacturing. But the beneficiaries of this employment gain are the unskilled labour force who benefit both in terms of greater employment and higher wages. Higher usage of unskilled labour in conjunction with more imported inputs also fetches productivity gains for the country.However, skilled labour employment is hit. The producers too are negatively affected due to rising wage bills. However, the overall impact of IAFTA on the manufacturing sector’s output, employment and welfare remain positive due to the increased trade and gains from employment generation of the unemployed unskilled workforce. But to maintain this gain the higher external demand needs to be sustained.