India’s free trade agreements with other countries failed in the past because once the agreements were concluded, the government and businesses did not develop cogent strategies for utilising the opportunities they offered. The question that should be uppermost in most minds is whether lessons have been learnt from the past failures as India’s latest phase of global economic engagement gathers momentum.
OVER the past two years, the decisions of the Union Government regarding the country’s global economic integration has swung possibly more than a pendulum.
On the eve of the conclusion of the mega-regional agreement of East Asia, the Regional Comprehensive Economic Partnership (‘RCEP’), the government announced that India was withdrawing from the agreement, amidst concerns amongst domestic entities regarding enhanced imports from China. That the government had accepted the views of the domestic entities was confirmed by the Union Minister for Commerce and Industry in his statement in the country’s Parliament, where he stated that the “current structure of RCEP did not reflect … the outstanding issues and concerns of India” and its “domestic sensitivities”.
Following this decision, the government had signalled that India’s global economic engagements had taken a back seat. Atmanirbhar Bharat Abhiyan, or “campaign for a self-reliant India”, emerged as a key strategy for the revival of the economy since it was launched alongside the economic stimulus package in May 2020. “Importance of local manufacturing, local market and local supply chains” and being “vocal about the local products and help these local products become global” (“vocal for local”), was, according to the government, the centrepiece of this newly minted strategy.
This strategy raised a number of issues, at least two of which seem more relevant. The first is the feasibility of invoking the strategy of self-reliance, which was the basis of India’s industrialisation strategy when the nation was at its infancy, three decades after the country has traversed through the process of global economic integration. Secondly, though the Atmanirbhar Bharat Abhiyan speaks of “helping local products become global”, the programme could trigger the rise of inward-looking sentiments during this critical juncture when the Indian economy needs a quick turnaround.
U-turn in global economic engagements
Just over a year later, the government’s position regarding its global economic engagements took a U-turn; reviving free trade agreements’ (‘FTAs’) negotiations with the European Union (‘EU’), Canada and Australia, which had been stalled several years back, and initiating negotiations with new partners, most prominently, the United Kingdom (‘UK’). While announcing this change in policy stance, Union Commerce and Industry Minister, Piyush Goyal stated, “we are at a very positive momentum in terms of FTAs”.
Serious competing claims are currently being made of India’s negotiating capital, especially after negotiations on the two strategically important bilateral trade negotiations with the EU and the UK commenced.
The “positive momentum” was reflected in the fact that by late-2021, India was negotiating eight FTAs. The first of these negotiations were successfully concluded in early 2022, when the Comprehensive Economic Partnership Agreement with India’s third largest trade partner, the United Arab Emirates (‘UAE’) was forged. In April, India signed an Economic Cooperation and Trade Agreement (‘ECTA’) with Australia, an “early harvest agreement”, designed as the stepping-stone towards a fuller Comprehensive Economic Cooperation Agreement between the two countries.
FTAs with UAE and Australia
The India-UAE CEPA marked a departure from India’s past trade agreements in three ways. One, the negotiations were concluded less than three months. This is quite significant since India’s bilateral trade negotiations with major partners are usually been very long-drawn, and have not usually been concluded in less than five years. Secondly, the agreement covers the most number of issues and includes areas like the digital economy and government procurement, which have never been included in any bilateral trade agreement that India has negotiated thus far. The third and the most important aspect of the India-UAE CEPA is that market opening commitments accepted by India, especially in the goods sector, are substantially more than those in any other FTA.
When this CEPA would be fully implemented (after 10 years), almost 85 per cent of India’s imports from the UAE would not attract any import duties, while another five per cent of imports would have nominal import duties tariffs. Consequently, India’s average rate of import tariffs, which was over 14 per cent when the India-UAE CEPA was signed, would be reduced to 3.4 per cent. UAE, on the other hand, has agreed to eliminate tariffs on 99 per cent of its tariff lines when the CEPA in fully implemented.
India’s first FTA with a trade partner from the Middle East and North Africa is expected to provide momentum to its exports from several sectors, including textiles, leather, footwear, pharmaceutical products and medical devices, and automobiles, among others. For a start, the CEPA should help in reversing the decade-long declining trend in the two-way trade between India and the UAE, and could take the bilateral trade between the two countries to over $100 billion within five years.
One factor that the leaders of both the EU and India would have to be mindful of is the latter’s political cycle, particularly because when elections are nigh, pragmatism gives way to nationalism, making it impossible to strike trade deals.
Apart from these direct benefits, the India-UAE CEPA should also provide an impetus for strengthening India’s economic relations with other countries in the Gulf. The agreement could provide momentum to the discussions for a possible FTA with the Gulf Cooperation Council, the blueprint for which was agreed to between the two sides almost two decades back.
Although the India-Australia ECTA is being seen only as the first step towards an eventual comprehensive trade agreement, the market access commitments in the goods sector taken by the two countries are, in fact, a big leap. Australia has agreed to eliminate tariffs on 98 per cent of its tariff lines when the agreement becomes effective, while the remaining tariffs would be eliminated within five years. In contrast, India has committed to eliminate tariffs on 69 per cent of its tariff lines, while almost 30 per cent of its tariff lines are in the exclusion list. Through these commitments, India would reduce its average tariff rate from 14 per cent to just over six per cent, by when most of its tariff commitments are implemented.
Although these tariff commitments look conservative, in effect, India has agreed to provide significant market access by agreeing to immediately eliminate tariffs on 85 per cent of imports from Australia worth almost US$ 9 billion, over the period 2018-20. India has agreed to eliminate tariffs on a number of products of export interest to Australia, including sheep meat, wool, barley, cotton, hides and skins and certain metallic ores, and has slashed tariffs on lentils, almonds, oranges, mandarins and pears.
India expects its bilateral trade with Australia to double within the next five years. This could happen if India is able to expand its presence in Australia in pharmaceuticals, cotton and textiles – areas in which it has competitive edge – and in electronics products, like mobile phones, which have lately seen robust exports from India.
As mentioned above, the India-Australia ECTA is only the first step towards a comprehensive economic partnership agreement. The two countries have indicated an early conclusion of the comprehensive deal, without specifying the timelines for doing so. There is one question mark, though. Serious competing claims are currently being made of India’s negotiating capital, especially after negotiations on the two strategically important bilateral trade negotiations with the EU and the UK commenced.
Upcoming FTAs with UK and EU
These negotiations have gathered considerable momentum over the recent months. The India-UK FTA is expected to be completed before the end of the current year; a time table that looks challenging given the range of issues on which the two countries would have to find common ground. The EU-India trade agreement has a longer timeframe (until the end of 2023) for completion, which seems ideal to address the significant differences in position between the two countries that had emerged when the two partners were engaged in the negotiations in the past.
India should also be wary of the considerable emphasis that is being given to strengthening labour rights in the on-going discussions on IPEF, both by corporate interests and members of the US Congress.
One factor that the leaders of both the EU and India would have to be mindful of is the latter’s political cycle, particularly because when elections are nigh, pragmatism gives way to nationalism, making it impossible to strike trade deals. In fact, the India-EU trade negotiations have already experienced the downside of the political cycle in 2013, when the negotiations had to be suspended.
Indo-Pacific Economic Framework
In this complex matrix of India’s global economic integration, the government’s recent decision to join the United States’ (‘US’) initiative to launch the 14-member Indo-Pacific Economic Framework (‘IPEF’) seems to be a leap of faith. At this juncture, IPEF is no more than an American initiative to bring together its allies in the Indo-Pacific region, and has been compared with one of former US President Barack Obama’s pet projects, the Trans-Pacific Partnership, which was spiked by his successor Donald Trump immediately after he took the reins in Washington. The IPEF reignites the twin ambitions of the US to provide economic leadership and to challenge China’s hegemony in the region.
At its launch, IPEF was proposed as an elaborate framework of rules covering four pillars, namely, fair and resilient trade, supply chain resiliency, clean energy decarbonization, and tax and anti-corruption. It is not clear whether the twelve original signatories to the IPEF were fully in the know of the details that were unveiled at the launch of the initiative, for there is no record of any prior discussion. However, evidence is available that suggests that Washington, D.C. has been carefully constructing the framework ever since US President Joe Biden had first spoken about it in October 2021 during the East Asia Summit, in the presence of all IPEF signatories except Fiji.
What could India expect from IPEF? While endorsing IPEF, Prime Minister Narendra Modi had spoken of India’s aspiration to participate more substantially in the supply chains in the region. However, this would have its challenges. For instance, while addressing the needs of the digital economy, the US has emphasised the importance of “high-standard rules … on cross-border data flows and data localization”.
On this issue of data localisation, the Union Government has not yet taken a clear position. In 2019, its likely preference was revealed in the Draft National e-Commerce Policy, wherein it had backed restrictions on cross-border data flows. The key challenge for India is to sustain this diametrically opposite view to an uncompromising position of the US on data localization.
India should also be wary of the considerable emphasis that is being given to strengthening labour rights in the on-going discussions on IPEF, both by corporate interests and members of the US Congress. In a Senate Finance Committee hearing in April, US Senator Elizabeth Warren, one of the more vocal voices within the Democratic Party, extolled the US Trade Representative, Katherine Tai, who would be leading the discussions on the “fair and resilient trade” for “incorporating strong, enforceable labor and environment standards to demonstrate [US’s] commitment to the importance of these areas in [US’s] competitiveness and in [US’s] terms of trade.” How would India’s preference for a “flexible labour market” gel with the regime that the US is proposing for IPEF?
What explains this shift in India’s policy?
Anyone observing India’s current efforts to forge economic integration agreements with its partner countries can hardly believe that two years back there was an all-pervasive scepticism against these agreements. Major sectoral interests had persuaded the government to take more than a step back from global economic integration, and the government, on its part, adopted policies to discriminate against imports, including through the adoption of the Atmanirbhar Bharat Abhiyan. How did all this scepticism become passé?
Anyone observing India’s current efforts to forge economic integration agreements with it partner countries can hardly believe that two years back there was an all-pervasive scepticism against these agreements.
An overriding factor, in my view, is robust export performance that the country had witnessed during the 2021-22 fiscal year. Exports crossed the psychological threshold of US$ 400 billion for the first time in this period, and this led to the expectation that India’s agriculture and industry would make the most of market access opportunities offered by the FTAs, including those in the pipeline.
In the past, India had failed to increase its exports to the Association of Southeast Asian Nations, South Korea, and Japan, its major FTA partners, resulting in the downbeat sentiments against FTAs in general. The reason for the failing was that once FTAs were concluded, the government and businesses did not develop cogent strategies for utilising the opportunities they offered. The question that should be uppermost in most minds is whether lessons have been learnt from the past failures as India’s latest phase of global economic engagement gathers momentum.