When a country goes through substantial geopolitical repositioning its approach to international trade changes too, India is no exception. The current trade policy and its new found interest in signing bilateral trade arrangements are a reflection of these shared geopolitical interests. A country which withdrew from the Regional Comprehensive Economic Partnership (RCEP) negotiations in 2019 and almost had a dry period in terms of new FTAs and RTAs between 2011-2021 has suddenly become hyper active in this field. In this context, it might be useful to consider India's past experience in this field, which can guide the current negotiations. To be candid, performance of FTAs from India's point of view has been somewhat amorphous till date.
Currently India is a participant in thirteen FTAs and six somewhat limited in scope preferential trade arrangements. Our first full-fledged FTA was signed in 1998 with Sri Lanka, thereafter the number of FTAs signed went up sharply during the highdays of ‘Look East Policy’. This was followed by a lull period. There are some valid reasons for this. The basic belief was trade liberalisation would lead to trade creation. Unfortunately, between 2011-12 and 2020-21 our exports remained somewhat stagnant. Majority of our trade arrangements were signed between 2000-2010, we had trade deficit with most of them in the post FTA period barring the SAFTA group. Our trade record of enhancing exports and controlling trade deficit with Japan, South Korea and ASEAN countries have been reasonably poor.
One of the key reasons for this was, when FTAs became operational the import tariffs in many of these countries (Singapore, ASEAN, South Korea and Japan) were low, whereas the rates in India were high. So we did not get much advantage over and above our non-FTA days. Whereas for partner ASEAN countries, for Japan and South Korea the Indian import duties came down substantially leading to higher market access and greater market expansion.
Structurally, there was no complementarity between India and ASEAN external sectors. Many ASEAN countries and India have similar resource endowments and similar final product profiles. From that point of view, we are competitors for market share. Imagine what would have happened if India had opened up 80% plus tariff lines during RCEP negotiations with countries like China, our trade deficit with China would have widened up further. However, basing the assessment of the success of a FTA on trade balance alone is too restrictive. A detailed study should take into account issues like the scope of technology transfer and investment flows particularly from Japan, South Korea and Singapore. Investment flows in the post Comprehensive Economic Partnership Agreement(CEPA)/ Comprehensive Economic Cooperation Agreement (CECA) periods went up considerably. Secondly, FTAs and CEPA like trade arrangements can help in importing quality intermediate goods which can improve the final product in India. Further linking to a GVC (Global Value Chain) as an idea was quite nascent when these treaties got signed, India’s trade arrangements did not explicitly consider them. Nor did India focus on NTBs which became another deterrent for the success of FTAs. It is reassuring that FTA/RTAs with many of these countries are being reviewed and renegotiated currently.
These apart the acceptance of FTA route for business by our exporters often get affected by complex rules of origin, lack of awareness about the advantages of FTA, high compliance cost and administrative delays adding to cost. From the domestic policy point of view this is an area where reforms and awareness creation amongst exporters would be needed in the future.
It is indeed true that there is a renewed enthusiasm on the part of India for signing new trade agreements. A part of it can be linked to geopolitical interest keeping India’s emerging economic structure in mind. India’s current approach to FTAs has several components, (1) the need for renegotiating old FTAs for reasons mentioned earlier and (2) enter into new FTA/CEPA for gaining access to advanced economies and African markets. India needs to secure her raw material base for the future. From this point of view both Australia and UAE FTAs are important. Mauritius with which we signed a FTA in 2021 is a entrepôt to Africa. Finally, we are also interest in linking global value chains of the advanced countries.
For the success of FTA related export strategies we need certain domestic reforms. Growth of exports have to be buttressed by the enhanced productivity, diversification and better technology adoption in the domestic economy. PLI (production linked incentives) and domestic institutional reforms including reduction in logistics costs, better trade facilitation can play important roles. Time has come to recognise that our RCA (Relative Comparative Advantage) based product list though important would play a limited role in the future export growth. The future export will be guided by the emerging architecture of Indian industry in which engineering items like automobile components, electrical equipments, electronic items and chemicals could play a major role. The value addition in manufacturing coupled with branding would allow better price realisation. Further, linkages with global value chain can provide additional diversification opportunities.
Another area where India is expected to have competitive advantage is services, this could include not only IT and business services but also accounting and audit services, legal services, tourism including medical tourism, etc. there is a need to focus on ‘equivalence of qualifications’ and basic infrastructure needed for these industries.
From an advanced economy’s perspective a trade deal with India would be based on three considerations (a) scale, the market size is apparently huge- be it for scotch whisky or Australian wine (b) there is complementarity , structurally India’s export profile is different from that of Australia, UK or EU. There could be some product lines where this complementarity is missing e.g. dairy industry. Such product lines can be kept out of the negotiations.; (c) many are following China plus one strategy for their supply chains, Indian manufacturing provides the scope for mitigating the risk for the advanced economies. This has been particularly strengthened by India’s current geopolitical stance. From this point of view India can provide ‘friend shoring’ opportunity for trade related global investments.
Siddhartha Roy is the former Economic Advisor of the Tata Group. Currently he is the CEO of SR Associates an Economic Advisory and Strategic Consultancy enterprise.
Disclaimer: The opinions expressed in this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of Indiastat and Indiastat does not assume any responsibility or liability for the same.
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