New Delhi needs trade pacts with the US, the UK, the EU, ASEAN, Japan, Korea and others to become part of the global value chain and realise the potential of the Modi government’s Atma Nirbhar Bharat initiative. A step-by-step approach may be a good way of getting there.
Last week, UK and India tied up the Enhanced Trade Partnership (ETP) during the visit to New Delhi of Britain’s International Trade Secretary Liz Truss. The ETP will “significantly raise the volume of trade and investments between India and Great Britain, a senior Indian government official said.
This is a kind of “limited trade deal on the lines of the one being negotiated with the US”, the official added. In times to come, it will be seen as the first step towards signing of a free trade partnership that has been held up for long.
Just to recap, India and the US were on the verge of finalising a limited trade deal covering about 200 items in the final days of the Donald Trump administration. This was basically an instrument to pluck the several low hanging fruits in bilateral trade relations, while leaving several more contentious issues to be resolved later.
The Indian government is now waiting to hear from the Biden administration on the issue. Senior government officials, trade experts and former diplomats are confident that such a limited trade deal will be a good first step towards a full blown free trade agreement (FTA) between the two countries.
Then, following the UK and the European Union finalising a trade deal, experts said India should aggressively pursue FTAs with both or risk losing out big time in what are its oldest and largest trading partners, respectively.
"Now, we should push the FTA negotiations with both the EU and the UK. Indian competitors like Vietnam have greater duty advantage in sectors like apparel and marine goods… There is not much gain for Indian goods (from the UK-EU deal), but we can gain in services sector in both the UK and EU markets. We will gain more in the UK market as we are English speaking country," Ajay Sahai, Director General of the Federation of Indian Export Organisations (FIEO), the apex body of Indian exporters, told the media.
Several experts pointed out that India should particularly push for access to both the UK and EU markets in services like IT, engineering, research and development (R&D) and architecture, among others, as the UK-EU trade agreement does not cover services.
However, a paper titled “A note on free trade agreements and their costs” by Dr V.K. Saraswat , Prachi Priya and Aniruddha Ghosh for the government of India’s think tank, the NITI Aayog says there is a need to review the benefits FTAs have provided stakeholders such as Indian industry and consumers before entering into any trade deal.
That’s because India’s overall experience of signing FTAs or Regional Trade Agreements (RTAs) with its trading partners has not always met its initial expectations. The NITI Aayog paper notes the following points:
• India’s exports to FTA countries have not outperformed overall export growth or exports to the rest of the world
• FTAs have led to increased imports and exports, although the former has been greater
• India’s trade deficit with ASEAN, Korea and Japan has widened post-FTAs
• According to Economic Survey 2016-17, FTAs have had a bigger impact on metals on the importing side and textiles on the exporting side
• A 10 per cent reduction in FTA tariffs for metals increases imports by 1.4 per cent
• India’s exports are much more responsive to income changes as compared to price changes and, thus, a tariff reduction/elimination does not boost exports significantly
• Utilisation rate of RTAs by exporters in India is very low (between 5 per cent and 25 per cent).
This, despite the fact that India is among the more open economies in the world – its overall foreign trade (imports and exports) adds up to about $850 billion or close to 30 per cent of its GDP.
But to fully take advantage of the diversification of exports, both in terms of products and geography that have taken place since the 1990s, India must, according to the International Monetary Fund (IMF), ensure structural transformation.
“… future growth and export performance depend on:
(i) diversification across destinations, products, and services
(ii) composition of the export basket measured by technological content, quality, sophistication, and complexity of exports and
how closely related a country’s goods and services exports are to globally-traded products and services,” the IMF working paper states.
Trade analysts say India should review and assess its existing FTAs in terms of benefits to various stakeholders like industry and consumers, trade complementarities and changing trade patterns in the past decade before getting into any multilateral trade deal.
A comparative analysis of trade figures with countries and blocs with which India has FTAs/RTAs and those that it doesn’t shows that export growth to both sets of countries since 2006 is more or less the same – about 13 per cent year-on-year. The conclusion one can draw from this is that FTAs/RTAs signed by previous governments have not really helped India increase its exports.
Then, trade with China, with which India does not have a free trade agreement, has grown from a mere $1.8 billion in 2000 to $75 billion – or almost 10 per cent of India’s external trade – now. During this period, India’s annual trade deficit with its larger and more industrialised northern neighbour jumped from a very manageable $0.6 billion to an unsustainable $50 billion. This accounts for a third of India’s overall trade deficit of $152 billion.
Signing FTAs with the 10-nation ASEAN bloc, South Korea and Japan have not helped either. The overall trade deficit with these countries have soared five times from $5 billion in 2005-06 to $24 billion in 2017-18.
The quality of trade has deteriorated as well. The United Nation’s Harmonised System of Product Classification groups products into 99 chapters and 21 sections such as textiles, chemicals, vegetable products, base metals, gems and jewellery, etc.
An analysis of India’s trade data with these countries shows that its trade balance has worsened (defined as an increase in deficit or a decrease in surplus) in as many as 13 of the 21 sectors, which accounts for 75 per cent of India’s exports to the ASEAN nations.
Then, there is also the issue of countries like China taking advantage of India’s FTAs with ASEAN to circumvent the rules of origin to push Chinese products into India via dummy factories in third countries, violating the rules on value addition that exist to prevent the misuse of these provisions.
The Modi government’s mission of Atma Nirbhar Bharat (Self-Reliant India) lays special stress on making India an international manufacturing hub and an integral part of the global supply chain. To integrate India into this system, it will have to sign new or renegotiate existing FTAs with major trading partners such as the UK, the US, the EU, the ASEAN , Japan, Korea, Africa and other countries/blocs.
There is no question that India needs trade deals with all these partners, especially the US, the UK and the EU at the earliest. But trade negotiations have been carrying on for years without much progress. The renegotiation of existing FTAs with ASEAN has also been pending for long.
A way forward could be to sign partial or interim trade deals on a limited number of products and services in the immediate future and leave the more contentious issues to be resolved after more detailed negotiations later.