India-EU trade and investment agreements - The way forward

There is a sense of déjà vu in the air. Of times not too far back, in 2019, when there were passionate debates about the pros and cons of free trade agreements in the context of the ongoing Regional Comprehensive Economic Partnership (RCEP) talks. Of whether India should or should not. Till finally and dramatically, India on the occasion of the signing ceremony of the mega-free trade agreement stepped back.

The trigger now is the recently concluded India-EU Leaders meeting when amongst other things the leaders "welcomed the decision to resume negotiations for balanced and comprehensive free trade and investment agreements."

There is a commitment to achieve the early conclusion of both the agreements together. And a belief that this "will enable the two sides to realize the full potential of the economic partnership." The focus of this article is on the proposed free trade agreement.

EU is an important trading partner of India. More than 11 percent of India’s trade is with the EU -- 14 percent of India’s exports go to the EU.

A whole range of products is exported from India. Textile articles, engineering goods, pharmaceuticals, ceramics, granite slabs and marble, footwear, machinery parts, rice, tea and coffee being the more important exported goods. The belief is that a free trade agreement will increase trade furthermore specifically exports.

Free Trade agreements involve both reductions in tariffs and easing non-tariff barriers (NTB). All countries resort to NTBs, as a means of ensuring the goods meet the regulatory requirements of that country. And also as a means of controlling trade.

Free trade agreements when entered between developed economies and developing economies generally work to the advantage of the former. India’s FTA’s with Sri Lanka and SAARC are a case in point. And the converse is true, as in India’s FTA with ASEAN where the trade deficit is in excess of $22 billion.

The only detailed study in the public domain about the efficacy of India’s free trade agreements (A Note on Free Trade Agreements and their Costs) by NITI Aayog has pointed out that India’s exports to FTA countries have not outperformed overall export growth or exports to the rest of the world.

Only about 22 percent of exports are to the FTA partner countries. So, while undoubtedly exports are essential and necessary, FTAs have not entirely served that purpose.

On the contrary, imports through the FTA route have increased. Nearly 30-35 percent of all imports are from FTA partners with a corresponding cost in terms of the estimated revenue impact being Rs.65,000 crore for 2019-20.

This, apart from the damage that imports at preferential rates of duty had caused to the domestic industry. The Government had also appointed experts to study separately the impact of Free Trade Agreements on goods and services, these reports are not in the public domain.

We need to keep this background in mind while we proceed to engage in negotiations for our 17^th Free Trade Agreement. The negotiations for the India -EU trade and investment agreement had commenced in 2007. The last round of discussions was held in 2013. Obviously the ‘gaps in the level of ambition of India and EU’ stalled progress.

Tariff barriers are not a barrier in exporting to the EU; we would have to reduce our tariffs a lot more. The margin of preference (the difference between the most-favoured-nation rate of duty (the import duty rate which is applied to all countries) and the preferential rate of duty), which EU imports into India would enjoy would be much more.

This brings us to the key issue: How does India capitalise on a free trade agreement? Or to put it differently, how do we make our exports competitive?

The high cost of production makes exports uncompetitive. It is essential that we focus on improving our domestic manufacturing. With easier credit, improved logistics, better infrastructure, emphasis on quality and creating a competitive environment, domestic manufacturing will improve.

Exports will follow. But it is essential that exporters are supported. The Remission scheme (RoDTEP) announced in 2020 to obviate unreimbursed costs to exporters is yet to see the light of the day.

India’s exporters will need to adapt to the demands of the sophisticated EU market. EU has in the form of specifying standards in effect created multiple NTB’s.

As the report ‘2020 National Trade Estimate on Foreign Trade Barriers’ of the United States Trade Representative brings out starkly there is no shortage of trade barriers erected by the EU:

An average MFN rate of 5.2 percent ( agricultural products at an average of 12 percent and 4.2 percent for non-agricultural products ),

the non-tariff barriers range from special measures for pharmaceutical products,

transfer pricing issues,

a special Meursing table tariff code, (EU charges a tariff based on the content of milk, sugar, protein for confectionary/baked products)

sanitary and phytosanitary barriers,

restrictions on import of chemicals and renewable fuels,

quality schemes for agricultural products,

government procurement policies that permit member states to reject bids with less than 50 percent EU content,

various barriers restricting services, including, digital trade and electronic commerce,

investment barriers.

While the report is in the context of exports from the USA, they would be similar if not more for the Indian exports. These are the challenges India negotiators will need to be very conscious about.

It is paramount that the lessons learnt in the previous FTA negotiations are not lost. Institutional memory has never been our strong point.

But the RCEP negotiations got over not too far back and could be a useful starting point. It is essential that Industry, Chambers of Commerce, Export Promotion Councils are taken into confidence and their concerns addressed.

We should never overlook the fact that India offers a significant market to the EU. At 446 million EU’s population is a fraction of our population of 1.40 billion.

Surjit Bhalla in 2019 headed a high-level Advisory Group constituted by the Ministry of Commerce and Industry for boosting India’s share and importance in global merchandise and services trade. Its aim was to increase exports from $500 billion in 2018 to $1000 billion by 2025. The group had made several important recommendations.

The report, had among other things, emphasised the need for strengthening the EXIM bank, using data analytics to build an export strategy, optimising FTA negotiations and usage. It also highlighted the need for sectoral analysis to assess the price competitiveness of Indian products and to involve industry in the process of negotiations.

We would be well advised to act on them if we are to make a success of the India-EU agreement.