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Published on: July 27, 2020, 12:11 a.m.
Opening up
  • The Mudra port. Photo credit: Sanjay Borade

By Rakesh Joshi. Executive Editor, Business India
I

ndia is making a fresh start on opening up its trade to “select” global competition by reviving old negotiations for a free trade agreement with the European Union and working out a “limited trade deal” with the United States. New Delhi is also looking at a preferential trade agreement with the United Kingdom with the ultimate goal of a free trade agreement. And commerce minister Piyush Goyal recently called for a “dedicated India-France engagement” which could make the 2022 bilateral trade target of $15 billion “more ambitious”.

The intentions may be right this time around but the question being asked is: can the government go the whole hog?

India’s compulsion to get its exports going has many triggers, the key being the Covid-19 recession and China’s recent aggressiveness. The Modi government now believes that the recent border skirmish with China has given India a clear choice on matters of trade, commerce and technology, and that is to go with the US and Europe to counter China.

The turnaround in approach, if it plays out fully, will be dramatic.

During the last six years, the Modi regime has ignored trade as an essential component of economic growth, rebuffing bilateral and multilateral agreements to cater to the demands of domestic lobbies. As a result, exports have faltered under Prime Minister Narendra Modi’s watch. The botched introduction of the goods and services tax (GST) also took a heavy toll on India’s exports. Merchandise exports as a proportion of gross domestic product (GDP) for 2017-18 hit its lowest in 15 years at 11 per cent. This was too low compared to other emerging economies. However, the government now appears to be realising that in today’s fragmented world, the power of any aspiring global player depends on the number and quality of bilateral and multilateral relationships.

If India is to become a $5 trillion economy by 2024, the performance of the manufacturing sector will be key. However, the sector is held back by its low integration in global value chains.  A big reason for this is our historical inward-looking industrial policies starting from import substitution, the Licence Raj, and state-led industrialisation. Also, because of India’s large market, policies are focused on the domestic market without considering the employment and technological benefits of being part of a larger value chain. India needs to attract more lead firms transferring technology and establishing supply chains. This strategy will boost exports as well.

However, such a strategy comes with caveats. V. Anantha Nageswaran, member (part-time), Economic Advisory Council to the Prime Minister, points out that India will have to follow a policy of whittling away unwanted rules if it is to emerge a manufacturing hub and an exports powerhouse, as even local businesses are struggling with legislative and compliance burdens.

Also, such dominance cannot be achieved in three to six months. “In a situation of weak global growth, and everybody trying to re-shore production and becoming very nationalistic, to expect exports to be a growth driver as it was between 2003-08 is a pipe dream,” he said. As such, the current situation is about grabbing market share because the pie is not growing. If bilateral or multilateral arrangements help or are the only recourse, the government should accept the new reality.

According to Nageswaran, Indian policymakers should support exports but need to insist on a quid pro quo where the help accorded is tied to certain performance milestones like the way East Asian countries do.

RCEP rebound

Having walked out of the Regional Comprehensive Economic Partnership (RCEP),   the mega trade deal between the member-states of the Association of Southeast Asian Nations (Asean) and its FTA partners, India had to sooner than later come to terms with the harsh fallout of this momentous decision. The 16 countries negotiating the RCEP together account for a third of the world gross domestic product (GDP) and almost half the world’s population. RCEP’s share of the world economy could account for half of the estimated $0.5 quadrillion global (GDP, PPP) by 2050. (One quadrillion is equal to 1,000 trillion.)

India stayed away from RCEP because of the fear that its industries would be unable to compete with China and Chinese goods would flood Indian markets. Farmers’ lobbies were also worried given that they would be unable to compete on a global scale. However, a section of industry felt that being part of RCEP would have allowed the country to tap into a huge market. Some like pharmaceuticals, cotton yarn, and the services industry were confident of making substantial gains. But India decided against joining the 16-nation grouping.

There appears to be some rethinking now about persisting with a protectionist streak which may result in India ending up being totally isolated. So, talks between India and the EU on a comprehensive FTA, officially dubbed as the Bilateral Trade and Investment Agreement (BTIA), which have been stalled since May 2013 due to differences on several matters, have got a new lease of life recently. In a new initiative to revive talks on the FTA at the virtual India-EU summit, the two sides announced a high-level dialogue between commerce minister Piyush Goyal and EU trade commissioner Phil Hogan. “We have been at it too long. It is time to leverage each other’s strengths and push better economics between India and the EU,” says former Indian ambassador to Brussels, Manjeev Singh Puri.

Compelling reasons

There are other compelling reasons why India needs to get its act together on trade. The need to emerge as a weightier trading player on the world stage was driven home by India’s conspicuous absence in the upcoming election to the post of Director-General, Word Trade Organisation. In contrast, even the African continent has three candidates in the fray. Also, as India takes on a role as a non-permanent member of the Security Council, heads the executive body at the World Health Organization and prepares to take over the presidency of the Group of 20 in 2022, it needs to gather more economic heft to be taken seriously.

Another compulsion is the emergence of Vietnam, a strong competitor of India, which has already signed a similar agreement with the EU, which is likely to be operational by August 2020. The FTA abolishes 99 per cent of customs duties, eliminates bureaucratic hurdles by aligning regulatory standards for goods like cars and medicines, and ensures easier market access for both European and Vietnamese companies.

“The EU is the largest market of our exports accounting for 18 per cent of our exports. Vietnam is a close competitor of India in the market as our exports to the EU stood at $58.4 billion, while Vietnam’s exports were $52.2 billion in 2019,” S.K. Saraf, president, FIEO, said in a letter to commerce minister Piyush Goyal.

With the signing of the EU-Vietnam agreement, Vietnamese products will get further edge in the EU markets as the landed price of their products would become cheaper as compared to Indian products. “This does not augur well for many Indian products, particularly apparels, footwear, leather goods, furniture, tea, coffee and marine products. Since India is gaining traction in electrical and electronics goods, concession to goods manufactured in Vietnam will pose a challenge to our products,” says Saraf.

Turning to Washington

India has also turned its attention to the US, which is now its top trading partner with bilateral trade in 2019-20 touching $88.75 billion. The US is also one of the few countries with which India has a trade surplus which increased to $17.42 billion in 2019-20.

Goyal, who has been in regular dialogue with US Commerce Secretary Wilbur Ross, recently said in a webinar that he plans to “quickly wrap up the first immediate aspects of the trade deal that is already in discussion and look forward towards a more detailed and all encompassing trade agreement between the two countries.”

India is demanding exemption from high duties imposed by the US on certain steel and aluminium products, resumption of export benefits to certain domestic products under their Generalised System of Preferences (GSP), and greater market access for its products from sectors like agriculture, automobile, auto components and engineering. On the other hand, the US wants greater market access for its farm and manufacturing products, dairy items and medical devices, data localisation, and cut on import duties on some information and communication technology (ICT) products.

A senior official of the commerce ministry engaged in the negotiations revealed that the trick is to ensure that markets of both the countries are available to all friendly countries and nations which gives equal access to Indian products. In areas like solar PV, lithium storage batteries, mobile, auto components, and ACs, India can engage with the US and expand trade and business so that it cannot have to overtly dependent on only one geography (implying China).

In seeking to forge a trade deal with the US, India is cashing in on the goodwill generated by the speed with which it responded to the phone call from Trump to Modi to provide the anti-malarial drug hydroxychloroquine (HCQ) to the US to fight the Covid-19 pandemic. “This has given the two countries enough confidence and built an important foundation,” says Taranjit Singh Sandhu, India’s ambassador to the US.

UK in reckoning too

The UK is the top trading partner for India within the EU with total trade in 2018-19 at $9.3 billion. After exiting the EU, the UK has formally entered a 11-month transition period. As per the arrangements, this is the period when the UK will be free to negotiate trade arrangements with third countries. For instance, a UK-EU trade deal was to be negotiated that will set the terms of exchange of goods and services and investments between the two. However, the process has been derailed by the Covid-19 pandemic.

India had earlier been negotiating a broad-based trade and investment agreement (BTIA) with the UK as part of the EU. Although talks on India-EU BTIA started in 2007, it has been stuck in issues including market access for automobiles and alcohol and inclusion of labour and environment matters in the pact. The two countries were working in areas such as market access and regulatory norms that were permissible while the UK was still a part of the EU.

However, in preparation for Brexit, three new bilateral working groups were set up to tackle barriers to trade in food and drink, healthcare and data services last July when Goyal visited London to participate in the Joint Economic and Trade Committee (JETCO) meeting.

The three new business-led working groups are run by the UK-India Business Council (UKIBC) together with the Confederation of Indian Industry (CII) and Federation of Indian Chambers of Commerce and Industry (FICCI).

Richard Heald, group CEO of the UKIBC, says, “In my view, a comprehensive deal is not going to happen any time soon. However, businesses tell me that they would prefer smaller, incremental, trade agreements that remove tariff and non-tariff barriers. The JETCO provides the framework, and for such agreements, I am hopeful that we will see success in the near future.”

Why EU matters

As a bloc of countries, the EU is India’s largest trading partner, while India is the EU’s ninth biggest trading partner. Ahead of the summit, EU officials had in private expressed concerns about a “protectionist” tone to Modi’s “Atmanirbhar Bharat” slogan, but in the talks that followed Modi conveyed that the programme was aimed at “integrating domestic production in India to global supply chains.”

“Prime Minister’s statement that Atmanirbhar Bharat would be open to the world should be music to the ears of European companies,” says Vikas Swarup, secretary (west), ministry of external affairs.

Ironically enough, the move to reopen negotiations comes at a time when EU is seeking to diversify its supply chains to cut reliance on other nations for crucial assets such as medicines. Europe, for instance, does not produce even one milligram of paracetamol. Following the outbreak of Covid-19, the demand for paracetamol and HCQ was met by India which lifted the export ban. But this doesn’t mean that India will have a walkover.

With concerns escalating over the reliance on international sourcing for crucial products, especially against the backdrop of a worsening trade conflict between the US and China, calls to re-evaluate supply chains are growing louder.  The re-evaluation by the group of 27 countries will mark a shift similar to moves made after the oil crisis in the 1970s when Europe faced high prices amid fuel shortages.

 

The fresh India-EU trade talks are expected to focus on industrial goods; agricultural tariffs and services; access to each other’s markets for goods and services, and to public procurement contracts; the framework for investment; rules on intellectual property and competition; and commitments on sustainable development issues such as environmental, social, and labour rights. Some of the areas have already been covered in the past. A fresh impetus from both sides will be required to reinvigorate investment; rules on intellectual property and competition; and commitments on sustainable development issues such as environmental, social, and labour rights.

Mega initiatives

The proposed FTA is important for both the EU and India. Three “mega-initiatives” will eventually dominate the global trade landscape: the Transatlantic Trade and Investment Partnership (TTIP), the Trans-Pacific Partnership (TPP), and the RCEP. The TPP was the centrepiece of Barack Obama’s strategic pivot in Asia. Though the US under Donald Trump has pulled out of the TPP, the parallel negotiations on these mega-agreements have added pressure to raise the pace of the EU-India FTA talks.

Should either TTIP or TPP be finalised in the absence of an EU-India FTA, Indian goods may face difficulties in accessing European markets. The mega-regional initiatives encourage the creation of global value chains in which production is split across countries to exploit each nation’s comparative advantage, driving down costs while raising standards. At present, India is hardly integrated into the value chains of European companies, and the mega-agreements could divert investment away from non-members, with potentially devastating effects for India.

The FTA is also important for India from the perspective of investment flows and technical cooperation. But to agree on the FTA despite the differences between the EU’s and India’s negotiating agendas in a tough economic climate, both partners will need to show the same determination as others have shown in negotiating mega-regional agreements. The challenges and constraints are not insurmountable. Trade experts feel that given both sides’ reluctance to agree to the other’s demands, they should begin by negotiating less difficult sectors. This will demonstrate willingness to get back to the negotiating table and send a clear signal that both sides want to talk further.

Sticking points

Sunil Prasad, secretary general, Europe India Chamber of Commerce (EICC), the apex trade body promoting Indian businesses in the EU, admits that there are sticking points for India in the trade discussion like free movement of workers and the EU’s periodic crackdown on generic drugs meant for third countries but transiting through European ports. “But I understand that both parties realise the realities of the issue and I am hopeful that they shall come up with some useful solutions. What they have not been able to do for all these years, the impact of Covid-19 will help them do now. Europe will need healthcare professionals to help them cope with the post-pandemic effect and here is an area which can serve as a catalyst. Today, no country speaks of banning drugs but co-operating. The seizure of Indian shipment of drugs in the past was a “misunderstanding” and a lack of knowledge on part of the EU.”

But, as observers say, for a deal to happen, it is important for India to overcome its siege mentality, commit to institutional reform, and confront domestic vested interests. The bulk of the reform needs to happen at the state government level, and the Centre and the states will have to commit themselves to work on certain identified areas to help manufacturing. Land, labour, education and health are the broad areas which are calling out for a joint action by the Central and state governments, while the states need to specifically tackle issues around floor space index and making land conversions from agricultural to non-agricultural easier. Reaching an agreement that will bring mutual benefit to both India, on the one side, the US, the EU and the UK on the other. It will be a hard journey, but, despite several missed deadlines, the goals are surely not out of reach.

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