Can India afford to stay out of FTAs?

Source: Financial Express

August 28,2014

SUMMARY

FTAs are here to stay and cannot be wished away. We need to devise ways to better manage and more effectively utilise them.

For quite some time India’s engagement with free trade agreements (FTAs) has come under scrutiny, criticism and even outright opposition from various quarters. Concerns have been expressed on the adverse impact of FTAs on the domestic industry. The Economic Survey 2010-11 observed that while there are benefits from the FTAs for Indian exports, in some cases the benefits to the partner countries are much more, with net gains of incremental exports from India being small or negative. Some FTAs are under review as it was felt that they have not been beneficial for the country.

In view of the widespread reservations against FTAs, an in-depth impact analysis of such deals would help us obtain a more objective and informed assessment of this issue. However, such exercise is constrained by serious data limitations. Statistics on India’s trade flow through the ‘FTA route’ are not available in the public domain (though last month some aggregate-level figures on our preferential imports were quoted in media reports). In the absence of disaggregated data on ‘exports or imports effected under FTA or preferential duty’, total trade statistics (MFN plus preferential) are typically used as a ‘proxy’. So, any analysis is unlikely to be robust and may not reflect the correct picture.

Ficci study and perception surveys suggest that considerable negative effects mark India’s experience with FTAs. India’s imports from major FTA partners surged by a higher margin and, as a result, India’s trade deficit with them widened. In relative terms, our FTA partners (such as South Korea and Asean) have been able to take more advantage from the trade deals and secure greater access to Indian market. For example, India’s exports to South Korea moved up from $3.4 billion to $4.1 billion between pre-CEPA (2007-08 to 2009-10) and post-CEPA (2010-11 to 2012-13) periods. In the same period, India’s imports increased from $7.8 billion to $12.1 billion. Thus, India’s trade deficit widened from $4.4 billion (pre-CEPA) to $8 billion (post-CEPA).

To cite just product-specific instances, worried over growing imports from Japan and Korea, a number of leading domestic steel makers have suggested import of steel and steel products from these countries be brought under negative list to safeguard the interest of local firms. Similarly, domestic paper industry has pointed out how the huge potential for the sector is being thwarted by the India-Asean FTA. This trade deal has provided the window to the paper industry of select South-East Asian countries to offload their substantial surplus produce in the Indian market.

Greater merchandise imports from our FTA partners and relatively modest gains in India’s merchandise exports to these markets should not come as a surprise. For one, India’s base tariff was comparatively higher than that of Asean and Korea. Thus, as our preferential tariff became lower over the years since the implementation of the FTAs, our partner countries were in a better position to augment their exports to India. On the other hand, India’s exports could not fully seize the benefits of tariff reduction in FTA partner countries because of the issues on competitiveness, systemic inefficiencies and infrastructural bottlenecks. The point is: while the reduction in India’s tariffs has increased its merchandise imports, why the offsetting gains expected in India’s services exports and higher inflow of investments have not materialised?

In addition to the sharp uptrend in imports, other difficulties arising out of FTAs include inverted duty structure. Incidence of inverted duty makes the affected sectors uncompetitive against import of finished products and discourages domestic value addition. Economic Survey 2013-14 has suggested that it needs to be avoided. Further, there is a problem of trade deflection, i.e. products from ‘third country’ entering India and getting undue duty benefits—import of China-made bicycles are routed through some neighbouring nations taking undue advantage of lower tariff under SAFTA or India-Sri Lanka FTA (0-5% duty as against the MFN rate of 30% that applies to bicycle imports from China).

It is necessary to put in place appropriate remedial measures to contain any surge in imports. According to the analysis made by the Department of Commerce, only 22% of imports from Japan are through the FTA route with accompanying duty benefits, while the corresponding figures for South Korea, Asean and Malaysia are 21%, 17% and 3.5%, respectively. On the other side of the coin, FTAs offer benefits too. India’s clothing exports to the FTA countries have increased after signing of such pacts, Apparel Export Promotion Council said in a recent statement. In a Ficci survey undertaken in October 2013, 35% of the respondents said that the India-Asean FTA in goods had a positive impact on their business through imports from Asean at zero or lower duty that helped to reduce input costs.

So, can India do without FTAs? Here we have a dilemma. On one hand, so far we have not been able to leverage our FTAs and by and large ended up as the losing partner. On the other, as suggested by many, could we really afford to stay out of the FTA landscape and do without such deals? The latter does not seem to be a smart option due to several reasons. One, FTAs are essential not only for expanding India’s market penetration but also for maintaining the existing market share in our major trading partners such as the EU. If India does not have an FTA with the 28-member bloc, then EU’s FTA partners (many of which are our competitors) will have distinct ‘advantage of lower duty’ over India in that market. Remember, Indian apparel industry has called for expediting the process of India-EU FTA finalisation, as this will help our exporters have greater market access. Two, we have to recognise that WTO talks are in a stalemate and ‘mega regionals’ such as Trans-Pacific Partnership (TPP) and Transatlantic Trade & Investment Partnership (TTIP) representing nearly half the world trade are under progress. India is not a part of either TPP or TTIP. Therefore, isn’t it imperative for India to pursue a calibrated FTA strategy supported by complementary internal reforms and enabling measures so that it does not get left out in the milieu of trade liberalisation through FTA/RTA across the globe and at the same time the country’s manufacturing sector is not adversely affected? Three, FTAs may open up doors for Indian businesses to participate in the global/regional value chains and production networks where our presence is marginal now.

Going by the global or regional trends, FTAs/RTAs are here to stay and cannot be wished away. What we need to do is devise ways to better manage and more effectively utilise our FTAs, so that Indian economy could achieve greater benefits from these deals. So, we need a comprehensive impact assessment of FTAs—it will help in consolidating/fine-tuning our strategies and adopting necessary course-corrections. We have to be careful in selecting ‘partners’ for FTAs or CECA/CEPA. It is necessary to sign such trade deals with countries having complementarities of economic or commercial interests, not on the basis of geo-political considerations only. Also, FTAs need to be entered into where there is potential for Indian business to expand and deepen market penetration in partner countries. In the ongoing/future FTA negotiations, the Indian government should take up goods, services and investment simultaneously, not sequentially. We need to ensure compliance with rules of origin and take strict measures to deny duty benefit to third country products. We have to set up a business-friendly FTA portal (with details on services and investment in easy-to-understand language). We also need to synchronise trade policy with manufacturing policy and immediately address the problem of inverted duty structure. Back-up FTAs by pushing through outstanding internal reforms are needed. Making substantial progress towards completion of the pending domestic reforms is vital for competitiveness of Indian products. This would enable us to take advantage of export opportunities and face the challenges of tariff liberalisation brought about by FTAs. The bottom line is, we need to negotiate our FTAs cleverly, but simultaneously strengthen our manufacturing base with necessary internal reforms and improvements in infrastructure.

The author is secretary general, Ficci

This entry was posted in Asean, TPP, TPP, Trade Agreements, Transatlantic Trade and Investment Partnership (TTIP) and tagged , , , , , , , . Bookmark the permalink.

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