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Trade

Published on: Dec. 28, 2021, 12:56 p.m.
On the cusp of FTAs
  • The surge in Indian exports was linked to the recovery in global demand; Photo: Sanjay Borade

By Rakesh Joshi. Executive Editor, Business India

India’s exports are expected to cross $300 billion by the end of December, well on the way to reach the $400-billion target during 2021-22. The interesting thing is that imports too are growing faster and could cross $400-billion by December, widening the trade deficit. Merchandise exports touching $400 billion mean a 40 per cent annual growth which is no mean achievement, given the Covid-related concerns around certain sectors during the year. Piyush Goyal, industry and commerce minister, is now talking about the goal of achieving $1 trillion each in merchandise and services exports by 2030.

The surge in Indian exports was linked to the recovery in global demand. The World Trade Organization (WTO) predicts a 4.7 per cent expansion in the global merchandise trade volume in 2022. It is not just merchandise exports, software exports too are trickling. With the largest engineering population in the world, the software export story was seeded about four decades ago.  Exports of software services, including services delivered by foreign affiliates of Indian companies, stood at $148.3 billion during 2020-21. This was more than $145.3 billion the world's top oil exporter, Saudi Arabia, got from oil sales in 2021. Now it could get better.

New thrust

BVR Subrahmanyam, commerce secretary, says that the world respects India as a trusted global business partner. “An intense review and monitoring at macro and geographical levels are helping to find new areas of trading relationships. Various measures to improve ease of doing business, incentivisation schemes like PLIs, rationalisation of duties is facilitating the trade like never before,” he adds. 

To boost exports, the Modi government has taken several measures such as notifying Remissions of Duties and Taxes on Exported Products (RoDTEP) rates, Rebate of State and Central Levies and Taxes (RoSCTL) Schemes, releasing Rs56,027 crore against pending tax refunds of exporters and  taking steps to promote ease of doing business, launching a Common Digital Platform for Certificate of Origin to facilitate trade and increasing FTA utilization by exporters and promoting districts as export hubs by identifying products with export potential in each district.

While exports can be regarded as a macro-economic stabilizer in India like agriculture, it would be somewhat far-stretched to think of it as a permanent growth-driver, as in China, Vietnam or Bangladesh. A downturn in global growth can undermine such a strategy.  As such, the Modi government has during the year made a serious effort at putting its mark on the trade trajectory of India by rethinking  the issue of free trade agreements (FTAs), reversing a seven-year freeze. 

Early harvest deals

India is about to ink “early harvest” deals with the United Arab Emirates and Australia  that will pave the way for broader FTAs that they hope to sign next year. There is optimism all around. Former Prime Minister of Australia, Tony Abbott, now a trade envoy for his country’s government, has indicated that Indian tariffs on his country’s wines could be slashed under the interim pact. Goyal hopes to seal a free trade deal with the UAE in early 2022. Side by side, India is exploring an FTA with the Gulf Cooperation Council, the six-member grouping consisting of Bahrain, Qatar, Saudi Arabia, Kuwait, Oman and the UAE.

India is hoping to kick-start negotiations for an FTA with a post-Brexit United Kingdom in January. The UK and India have completed all the pre-launch formalities including scoping and their own process of getting parliamentary approval. The UK trade minister is expected in India shortly to launch the talks. Earlier this year, India and the European Union decided to restart long-stalled talks for a comprehensive trade and investment treaty.

Work towards an investment agreement and geographical indications agreement with the EU is already underway. Both teams have been engaged and have announced their chief negotiators. Modi had met the European leaders in Rome on the sidelines of G20 and they reiterated their desire to speed up discussions and work with India. 

During the visit of Russian President Vladmir Putin, India broached the issue of a trade deal with the Eurasian Economic Union (EAEU). Member countries of EAEU include Russia, Armenia, Belarus, Kazakhstan, and Kyrgyzstan, and the combined GDP is approximately $5 trillion. EAEU was formed in 2015, and Russia is the biggest trade partner of India. Both India and Russia have set a new trade target of $50 billion to be achieved by 2025.

It wasn’t like that before. When the Modi-led government came into office in 2014, it announced a review of all earlier FTAs signed by the predecessor UPA government, arguing that some of those had not helped the country. The only FTA signed by India over the past seven years has been with the 10-member Association of Southeast Asian Nations (ASEAN) in 2015 – and the two sides had already completed most of the groundwork before Modi took office.

RCEP walkout

 In November 2019, India walked out of negotiations on the Regional Comprehensive Economic Partnership (RCEP), leaving a collective of the 10 ASEAN states, China, Japan, South Korea, Australia and New Zealand to sign on without New Delhi. Many thought that Modi was shooting himself in the foot. His political slogans of Make in India and Aatmanirbhar Bharat (self-reliant India) – calls to build the country’s manufacturing capacity – depend on an increase in foreign investment into the country. But a dominant section of the Indian industry was against the deal.

The world’s largest trade deal comes into effect in January 2022. The irony is that the 15 members of the RCEP will now find it easier to shift businesses within the trade grouping because of shared rules than to invest in an external nation like India, which will likely lose out on future investments. Also, India’s trade deficit with RCEP countries almost runs into $120 billion and could further go up. 

 “It was a blunder to stay out of the RCEP,” adds Pradeep S Mehta, a veteran trade analyst who has served on multiple advisory panels of the World Trade Organization.  He welcomes the move to explore the space for newer FTAs. “If the government is genuinely changing course on free trade, it would be welcome. It’s about time.” Some well-wishers of India like Japan are trying to persuade the PM to renegotiate India’s entry into the grouping.

Modi’s quandary over FTAs till now has mirrored heated debates on globalisation across the world in recent years. On the one hand, India’s economic growth really took off after it opened itself up to international investments in the 1990s. But the forces of globalisation – everywhere – have also deepened inequality and left local manufacturers vulnerable in the face of cheaper imports from abroad.

“FTAs are clearly a very important element of global trade, but you have to guard against lowering tariffs too much for the import of foreign products,” says TP Sreenivasan, former Indian permanent representative to the United Nations. “Because you can get flooded by their goods and that hurts the domestic industry.”

But the data shows that avoiding FTAs has not necessarily made Indian manufacturers more competitive. In fact, India’s trade imbalance has grown, with net imports going up from $137 billion in 2014-15 to $161billion in 2019-20 and now even more.

Rationale for FTAs

But now, the government appears to have realised that FTAs are important for two reasons. First, if Make in India is to succeed, then one will need FTAs to find shelf space for Indian products; Second, the Production Linked Incentives announced by the government across 13 sectors (the latest being on semi-conductors) just cannot work unless our industry has access to critical sub-components for manufacturing. That is the reason why the government in December announced post-haste that an FTA with Taiwan, a leader in semi-conductors, was also on the cards. 

The only country India is guarded about when it comes to the talk about FTAs is the United States. India’s exports to the US in 2020-21 were valued at $51.62 billion and imports at $28.88 billion, resulting in a trade deficit of about $23 billion for the US. Goyal says both countries have just extricated their trade talks from morass of recriminations and negotiations. A clear outcome of the recent talks is that the baggage of the past has been buried. 

The government has its own reasons for dragging its feet over the FTAs till now. S. Jaishankar, foreign minister, says that India is very prudent about new trade deals because such pacts signed over the past 25 years affected domestic supply chains and had not provided adequate benefits to Indian businesses.

Jaishankar said he works closely with Goyal and finance minister Nirmala Sitharaman on such issues. India’s priorities for FTAs reflect strategic convergences and domestic business comforts. “I would hope very much that in a few years from now, we will end up with a better set of FTAs,” he said. The industry and exporting community would also be hoping so.

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