Millennium Post

Between cheesy and messy

As Prime Minister Manmohan Singh was busy in his talks in Germany last week, there was orchestrated pressure from various European quarters to quickly conclude the India-EU free trade agreement. European wine and Scottish whisky producers, German car makers and pan European financial service providers all demanded that India EU FTA should be concluded on a fast track. All want duty free entry of their products into India. In return, they ask for stricter intellectual property rights, opening of farm imports and no rights or freer movement of Indians in EU to provide service (mainly IT).

Even if the Europeans are in favour of giving freer movement rights to Indian service providers, a long standing demand of India from EU, no FTA should be concluded at this point of time. In fact, time has come to take a comprehensive look at FTAs and review how far it would have helped the country. May be, the FTAs might not have pushed forward India’s case any further. Rather, they have at least in some cases given free access to imports and thereby harmed the cause of Indian industry and manufacturing.

From this point of view, the Parliamentary Standing Committee attached to the commerce ministry has articulated some home truths. The Parliamentary panel has suggested that the government should not conclude a free trade pact with EU just yet. In a nuanced statement, Prime Minister Manmohan Singh has also stated that the agreement was being worked on, without committing any of India’s demands, while Angela Merkel appears to have made some sweeping statement about the negotiations being close to the finish line.

For those who remember the early days of FTA negotiations with the EU, the Europeans were definitely lukewarm to the idea of a free trade pact with India when it was first mooted. India in those days was keen to have a fast track negotiation on the agreement. This was spurned on various grounds like weak intellectual property regime in the country or India being data unsafe.

Various industry sections from European countries had come to India demanding duty free entry of their products on those days. A delegation of Scotch whisky manufacturers had come who had strongly decried the duty regime in India which pushed up the landed price of their scotch whisky in India. Knowing the predilection of Indians for the scotch, they could guess how big could be their market in India when it was slowly shrinking in Europe.

The commerce secretary at that time had a very appropriate answer to those haughty scotch makers demanding immediate scrapping of Indian imposts on the product. His suggestion was to come back to India with their strong demand after doing so in Saudi Arabia. The meeting had reportedly ended soon after.

Horse sense should direct policy matters than high philosophy. For a country suffering from record current account deficit when exports are proving to be extremely sluggish, it is foolhardy extending your import doors wider. If anything, it is time to achieve some import compression. After all, the trade deficit is expanding unmanageably and despite some reasonably steady capital inflows, the current account is showing whopping gaps.

Critics will say two things: first that a free trade agreement with the EU should actually help increase exports. Secondly, that the imports rising on account of hefty intakes of oil and gold. These are not the big import items from Europe at any rate. Let us try to take on these arguments.

First, a free trade agreement does not immediately help increase exports, but it might just as well push up imports. That has been India’s experience with countries with which FTAs have already been concluded. India has concluded agreements with ASEAN and under the Bangkok agreement a freer trade regime with particularly a set of countries, including Thailand much earlier. The result has been a spike in imports from among others Thailand.

And of what items? There were large scale imports mainly of automobile components from Thailand including, gear boxes and engine blocks from Thailand. The victim was a proposed large investment in engine blocks making factory in India which Toyota had earlier planned.

The fresh investment proposal looked unviable and unattractive in view of the duty free imports of the item from its existing plant in Thailand. Thus, the FTA created no doubt trade, which economists hail as a contribution to general welfare of the trading countries, but certainly hurt manufacturing in India. If affected employment creation in India and pushed up India’s imports rather than exports.

Secondly, even if it is true that our imports from Europe are not the major items of our basket, what is the point of increasing further the imports of cars and high fashion items from Europe without duty. The high value German car makers should come into India and produce here rather than just export their products from Germany. A free trade agreement will achieve exactly that. Rather, if India has a large market for high end German cars, they should come here to service the market. That will be value addition here than elsewhere. That is what the German car makers are doing in China. Volkswagen has its largest plant in China to tap the local market.

At the end of the day, Europe’s is a shrinking economy. One after another the EU member countries are getting bogged down with their economic crises. It is only time when the bigger ones are caught up in the process. What big imports can they at any rate make from India, apart from apparels and textiles. For pushing up exports of just shirts, tops and bed sheets, one does not need a comprehensive free trade agreement.

Say no to cheese, paneer is good enough. (IPA )
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