TOPIC: IS THERE ANY DICHOTOMY BETWEEN INDIA’S NEW FTA STRATEGY AND ITS TRADE POLICY?

THE CONTEXT:In 2022, India has renewed its interest in free trade agreements (FTAs) with several economies, including the UAE, the United Kingdom and Australia. Several negotiations are going on with other countries. This shows a renewed focus on FTAs by India that was stalled for years. However, there is a view that a dichotomy exists between the FTA push and the actual trade policy of India, leading to poor implementations and outcomes of FTAs. This article examines this debate in detail.

 

SOME IMPORTANT FACTS ABOUT INDIAN FTAs

FTA SCEPTICISM

• During the period from 2004 to 2011, India has signed, ratified, and enforced 11 preferential and free trade agreements, but it has not signed even a single trade agreement after that till 2022.

FTA MOMENTUM

• So far, India has signed 13 Free Trade Agreements (FTAs) with its trading partners, including the 3 agreements signed in 2022, namely:

• • • India-Mauritius Comprehensive Economic Cooperation and Partnership Agreement (CECPA),
    • India-UAE Comprehensive Partnership Agreement (CEPA),
    • India-Australia Economic Cooperation and Trade Agreement (IndAusECTA).

ONGOING FTA NEGOTIATIONS

• • India is also aiming to reach out to the United Kingdom, the European Union, Canada, Israel, and the Eurasian Economic Union to negotiate similar trade agreements.
  • India is also scheduled to complete trade agreements with Israel and the United Kingdom by the end of 2022.
  • The Indian government is renegotiating existing free trade agreements with the ASEAN, Japan, and South Korea to resolve provisions linked to anomalies and asymmetries that have contributed to the country’s persistent trade deficit.

RATIONALE FOR NEWFOUND FTA MOMENTUM

CHANGING NATURE OF GLOBAL SUPPLY CHAIN VIS A VIS CHINA

• Developed countries, including the United States (US), the United Kingdom (UK), Europe, Australia, and Canada, are addressing supply-chain vulnerabilities and seeking strategies to lessen their reliance on China.
• This opens the door for India to establish itself as a viable alternative supplier of commodities and profit from this trend.
• This necessitates a greater economic and trade interaction with these established economies through bilateral and multilateral trade agreements in order to offer business possibilities for Indian companies.

ECONOMIC AND STRATEGIC STANDPOINT

• India is not a member of either the Regional Comprehensive Economic Partnership Agreement (RCEP) or the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
• There are also concerns about market access being eroded as a result of the cumulative impact of mega-trade agreements.
• The propensity to redirect value chains’ geography can displace Indian enterprises from established production networks.

BUYONT EXPORTS AND GLOBAL VALUE CHAIN DISRUPTIONS

• The country’s strong export performance moulds India’s increased interest in FTAs in 2021.
• A rapid increase in India’s exports has prompted authorities to believe that the country requires free trade agreements to maintain its current export pace.
• Furthermore, the global supply chain disruption caused by the Ukraine–Russia war, as well as the economic crisis in Sri Lanka, have opened up new export prospects for India in specialized industries such as agriculture and textiles.

FTA PUSH AND EXPORT GROWTH: AN ANALYSIS Just before the end of the fiscal year 2021–22, India’s yearly merchandise exports surpassed $400 billion. These exports have risen from $290 billion in 2020–21 to $417 billion in 2021–22, representing an annual growth of more than 40%. India has set an ambitious export target of $1 trillion by 2030 as part of its larger Self-Reliant India project (Atmanirbhar Bharat) . To meet this goal, it is widely believed that India should take a proactive approach to free trade agreements (FTAs) and enter into trade agreements with countries that not only contribute to improved market access for goods but also deepen strategic trade and investment linkages, making India’s supply chain much more resilient.

 DICHOTOMY BETWEEN FTAs AND TRADE POLICY

• An FTA’s foundation is an open and liberal trade policy, with FTA parties being able to reciprocate market access. This boosts bilateral trade and investment flows while also fostering stronger economic and strategic ties. For this reciprocal relationship to work, greater coherence between FTA strategy and trade policy is required. India’s newfound excitement for free trade agreements appears to be at odds with the country’s trade policy under the Self-Reliant India project, which is based on “vocal for local,” favouring domestically made items above imported ones. This is because of the tariff policy regime, the Customs (Administration of Rules of Origin under Trade Agreements) Rules (CAROTAR), 2020 for regulating imports under FTAs, and greater importance to geo-strategic interest vis-à-vis trade. Let us examine these in some detail.

TARIFF POLICY REGIME

• India has the highest average tariff of 15% in the Asia–Pacific region.
• According to the World Trade Organization (WTO) tariff profile, average import tariffs have climbed from 13.5 per cent in 2016 to 15 per cent in 2020.
• The Government of India has imposed import licencing requirements as well as a blanket ban on several products.
• Import restrictions on light-emitting diode (LED)/television and 101 defence products have been imposed.
• Aside from import tariffs, the Government of India has implemented a number of non-tariff barriers (NTBs), such as quality control orders and an import monitoring system (for example, a steel import monitoring system).

RULES OF ORIGIN

• The main objective of these rules is to restrict the potential misuse of preferential tariffs by third countries under India’s trade agreements.
•  The introduction of CAROTAR is primarily aimed to regulate the entry of third-country goods through its FTA partners.
• Under these rules, the customs officers can grant or deny the benefits of preferential tariffs to the importers if they have reason to believe that the import violates rules of origin requirements.
• Customs officers’ whims and fancies could impact the outcome, negating the potential benefits of preferential tariffs under an already negotiated and mutually approved FTA.
• Furthermore, over-reliance on customs officers’ judgement capacity may lead to a rise in rent-seeking among bureaucrats, undermining the importance of existing and future free trade agreements.
• Also, the failure to obtain the required information, which is quite cumbersome and exhaustive for compliance with RoR, may deprive the importing firm of availing of the preferential benefits, thus increasing the cost of imported products.
• It effectively undermines the market access of FTA partners negotiated under a trade agreement, thereby making its exports uncompetitive.

GEO-STRATEGIC INTERESTS

• India’s bilateral trade pacts with the UAE and Australia have strong geo-strategic and geopolitical elements, given the fact that both FTA partners are members of the two Quadrilateral Security Dialogues (QUAD).
• But, the depth and breadth of these two agreements, in terms of coverage and substantive provisions, are more or less in line with ­India’s trade agreements with Japan and South Korea.
• The AI-ECTA is an ­interim agreement and far away from its original ambition of a CEPA, which will include important areas of negotiations such as digital trade, agriculture, government procurement, etc.
• The AI-ECTA requires the ratification of the Australian Parliament, which was recently dissolved and this means that even the interim arrangement is not enforceable.
• Thus, it is held that these trade agreements, especially the one with Australia, have more strategic undertones than trade per se.(Both the countries have a raging conflictual relationship with China).

 

DEFENDING THE DICHOTOMY-IMPERATIVE OF DOMESTIC CHALLENGES

It is true that there seems to be a dichotomy in the approach to FTAs and India’s trade policy. But this must be seen in the context of India’s domestic environment and the challenges it poses. For instance, the Bharatiya Kisan Union, India’s largest farmers’ organization, has already threatened to resist the proposed FTA with Australia. Protests like these were one of the primary domestic roadblocks to India’s participation in the RCEP. Automobile makers and wine producers in India want to fight the FTAs with Australia and the United Kingdom aggressively. The Swadeshi Jagran Manch shares similar goals. The RSS has repeatedly warned the government about the negative effects of free trade agreements and advised it to avoid any such agreements. The agricultural sector will resist an FTA with Australia, while the manufacturing sector will spearhead protests against the UK–India FTA. On a strategic front, trade relations are one component of the larger strategic framework and many times such agreements are able to send out geopolitical messages to the relevant countries. And the concept of ” Early Harvest Deals” helps to achieve strategic goals along with trade, although it may be in a relatively sub-optimal way.

 

THE WAY FORWARD

FAST TRACK THE NEW FOREIGN TRADE POLICY

• The announcement of India’s foreign trade policy (FTP) has been lingering on for almost two years. The existing one has been kept extended by the Ministry, which was meant for 2015-2020.
• It is one of the most important policy documents that sets the long-term direction for exports and provides clarity regarding various policies and incentives to the Indian trade community.
• Thus, India needs to fast-track the announcement of a new FTP.

REVISITING THE CAROTAR RULES

• These rules either need to be amended or withdrawn to make sure that India’s trade policy is in consonance with its external trade engagement.
•  Otherwise, the lack of synergy between trade policy and FTA strategy not only weakens India’s negotiating capacity but also undermines the potential economic benefits of free trade

COMPREHENSIVE TRADE PACTS

• ­India’s trade pacts with the western and eastern QUAD members (the UAE and Australia) are driven by geostrategic int­erest rather than trade.
• India’s trade pacts with the UAE in general, and Australia in particular, are not comprehensive in terms of their coverage, scope, and depth.
• This is not a promising proposition and hence requires significant changes in approach to FTAs in the context of strategic objectives.

CONSENSUS BUILDING ON FTAs

• Domestic challenges need to be overcome through wide-ranging building consensus by holding stakeholder consultations in a meaningful manner.

THE CONCLUSION: Lockdowns devastated manufacturing factories and global supply systems as the COVID-19 pandemic spread throughout the world. Companies began to consider relocation possibilities for their production sites, and economies began to recognize the value of integration. India was no different. This has set in motion a slew of signing of FTAs with various countries by India. However, it is necessary to address the issues that can undermine the potential of the FTAs, and free trade should not become a casualty under long-term strategic goals.

Questions to Ponder

1. How far do you agree with the view that there exists a dichotomy between India’s trade policy and its approach toward Free Trade Agreements? Explain.
2. The general structure of India’s tariff policy displays an inward focus and is incompatible with the country’s FTA strategy, which strives to improve reciprocal market access. Discuss
3. India’s recalibrated approach towards FTAs is full of ambivalence and reflects inconsistencies with its trade-policy stance under the Self-reliant India initiative that underpins the importance of domestically produced goods over imported ones. Comment.
4. ” India’s newly found momentum for concluding a series of FTAs has less to do with trade but has more to do with geo-strategic interests”. Critically Examine.

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