‘Free trade’ with EU could go wrong

Why is the BJP-led NDA government so keenly pursuing the previous United Progressive Alliance’s unfinished agenda of having a free trade agreement (FTA) with the European Union (EU)? It is no secret that the EU has been trying to access India’s burgeoning consumer market. India stands to gain little from such an arrangement. With its limited and mostly low-cost, low-technology small-value-added export basket, India can at best make only a tiny inroad into the EU market known for its preference to high-quality products at competitive prices. On the contrary, EU, a hub of global high-technology products from automobile, transport and power equipment to wine and hi-fashion, can flood the Indian market with its world class wares and unsettle the current trade balance between the two markets.

Presently, EU is a major foreign direct investor in India and earns substantially from annual dividends and royalty incomes among others. In terms of trade, India enjoyed a small favourable balance, last year. Why does India want to blow it off? Can an FTA with EU produce adverse side-effects in India’s trade relations in the region and diplomatic equation with Russia? Prime Minister Narendra Modi and Commerce Minister Nirmala Sitaraman must think before getting into such an agreement. The impending India-EU summit in Brussels can’t water down or ignore India’s declared position on environment and IPR protection, BRICS declaration, including its stand on Ukraine and Syria, and the block’s trade cum economic sanctions against Russia.

German chancellor Angela Merkel wants Prime Minister Modi make the Indian side sign up the agreement. Some 15 rounds of talks on the proposed FTA have already taken place since Sonia Gandhi-led UPA government moved the matter eight years ago. The German chancellor is already believed to have personally put it across to the Indian prime minister. Now, it is for India’s commerce minister to finalise the deal and deliver. However, the summit talks are unlikely to stay restricted to FTA issues alone. In fact, the FTA talks could open directly or indirectly a host of other seemingly non-related issues concerning India’s economic and diplomatic engagements in West Asia and Europe with particular reference to Russia, India’s close ally facing a host of US-led EU sanctions on its Ukraine policy and actions. The US and EU are certainly not comfortable with the latest reality of the BRICS bank that threatens to break the IMF-IBRD duopoly over the world in due course.

Typically, the specific conditions under Article XXIV of the GATT permitting FTAs are: FTA members shall not erect higher or more restrictive tariff or non-tariff barriers on trade with non-members than existed prior to the formation of the FTA; elimination of tariffs and other trade restrictions be applied to “substantially all the trade between the constituent territories in products originating in such territories; “elimination of duties and other trade restrictions on trade within the FTA to be accomplished within a reasonable length of time,” meaning a period of no longer than 10 years. FTAs, normally cover trade in goods (such as agricultural or industrial products) or trade in services (such as banking, construction, trading etc.). FTAs can also cover other areas such as intellectual property rights (IPRs), investment, government procurement and competition policy.

Taken as a single unit, EU is India’s largest trading partner in goods and services, including financial and technical. On the other hand, India is EU’s ninth largest trade partner. It is said that the proposed FTA could double the trade between the two. And, that could only be at India’s cost since the country is yet to establish itself as a major manufacturer-exporter of goods and services as well as financial products, including banking and insurance. India exported goods worth $49.3 billion in 2014-15 to EU and imported products worth $48.3 billion. Trade between the two partners has been hovering around $100 billion for the past five years, with the best year being 2011-12, when it rose to about $110 billion. India’s exports to EU fell 4.5 percent in value, accounting for 15.9 percent of the country’s total exports for the year. The main items of export include petroleum products, textiles, apparels, footwear, gems and jewellery and machinery and transport. The FTA is unlikely to raise the export of such items beyond a small extent. The EU is also one of the largest investors in India and its largest source of technology transfer.

For almost two years, there were no serious talks on the FTA from either side. The two sides are now expected to resume negotiation in August to ostensibly boost two-way commerce and investment. It would be a ‘full-fledged round’. The talks, formally known as the Broad-based Trade and Investment Agreement (BTIA), could, in a way, also dislodge Prime Minister Modi’s pet ‘Make-in-India’ initiative, involving at a good majority of the 28-nation EU block. Earlier, EU wanted India make tariff cut on a host of products, including automobile, liberalise its participation in the services sector, including retail and legal, and include labour-related aspects. EU, however, did not accommodate India’s small demands of ‘data-secure nation’ status and immigration quota for market access to Indian IT companies.

In the past, India did not appear to be good bargainer in international agreements on trade and services. As a result, despite a huge and growing internal demand for goods and services, India produced little to bridge the demand-supply gap. The average international trade gap has been over US$ 100 billion. It is met through borrowing. Despite a fall in the overall value of foreign trade in 2014, mainly due to the fall in oil prices, India’s foreign borrowing is going up, far exceeding its Reserve Bank’s foreign exchange reserves. At end-December 2014, India’s external debt stock stood at US$ 461.9 billion, showing an increase of US$ 15.5 billion over the level at end-March 2014. The rise in external debt was due to the long-term debt such as commercial borrowings and NRI deposits. The RBI’s forex reserves stand at only around $355 billion.

 The continuous inflow of ‘hot foreign money’ into India’s stock market provides little comfort to RBI’s exchange reserves. India needs to stand on its feet to grow its domestic market and bridge the trade gap. IPA