India’s Trade Deal Overdrive

“YEH DIL MAANGE MORE.” Commerce and industry minister Piyush Goyal said at a press briefing after India signed Economic Cooperation and Trade Agreement (ECTA) with Australia on April 2. It was India’s second ‘early harvest’ trade deal in quick succession; an interim India-UAE Comprehensive Economic Partnership Agreement (CEPA) was signed two months prior to this. The Australia ECTA is being seen as the first step towards a bigger CEPA.

Goyal was responding to a question, ‘what next?’, as India has been in a hurry to sign trade agreements with several nations and trade blocs. Free trade agreements (FTAs) and deals like CEPA target mutual reduction or elimination of barriers to trade and investment, mainly import tariffs. “We are in very active dialogue with U.K. and Canada and have agreed with both that we can have an interim agreement faster, followed by a more comprehensive agreement. We launched negotiations (for FTA) with E.U. last year. We are also in dialogue with Israel and have received interest from Gulf Cooperation Council (GCC) for bringing all six GCC nations into a comprehensive economic partnership with us,” said Goyal. “A lot of work for our officials and a lot of sleepless nights for all of us to take the historic $400 billion-plus exports (goods) in FY22 to even greater levels,” he added. The deal with UAE is already operational. The one with Australia is expected to be implemented soon.

India has certainly shifted gears in its drive to sign trade deals. It is actively looking at signing almost every deal that has been hanging for years. For instance, Australia and India had decided to negotiate ECTA in May 2011, but there was no progress until re-launch of formal talks in 2021. A formal plan for cooperation between India and GCC (which includes UAE) was signed on August 25, 2004. Despite two rounds of negotiations, in 2006 and 2008, the deal went nowhere until last year when India and UAE fast-tracked CEPA. Talks for a Bilateral Trade and Investment Agreement (BTIA) between India and E.U. were started in June 2007 while Canada and India started CEPA negotiations in November 2010. All these are being taken up on priority, Goyal said. When India and UAE signed CEPA after three months of hectic negotiations, it was India’s first trade agreement in more than a decade after FTA with Japan in 2011. The key question is: Will the new deals bring gains that the earlier ones promised but could not deliver fully?

Why Trade Deals Matter

World over, trade agreements among large groups of nations are becoming harder to negotiate. World Trade Organization (WTO) has also been struggling to get its 164 members on board for new agreements. Recession and economic slowdown, worsened by Covid, have been forcing even free trade champions like U.S. to prefer bilateral and regional trade deals over multilateral agreements.

India’s new-found interest in trade deals is significant for several reasons. It changes India’s reputation as a slow negotiator or deal breaker in bilateral, regional and multilateral trade agreements. It also indicates confidence of Indian industry — both manufacturing and services — about taking on foreign competition. It also shows the importance India is attaching to exports for growing fast and becoming a $5 trillion economy in next five years.

However, behind this enthusiasm is a fact that India’s past experience with trade agreements has not been very positive — the deals have, more often than not, benefited the other side more (there has been a surge in imports and minimal impact on exports). Unless the loopholes of earlier trade deals are plugged, the new ones will not meet their objectives, though, to be fair to the government, it is undertaking a massive restructuring at Department of Commerce to help it carry out FTA negotiations with multiple trade partners more effectively. Goyal’s ministry claims to have gone by the new playbook to finalise India-UAE and India-Australia partnerships. Will it work? If yes, are the two deals setting a template for other FTAs? With government keen to announce an ‘early harvest’ deal with U.K. by Diwali, only thing certain at the moment is its intent to increase international engagement through more such agreements.

Pitfalls in Earlier FTAs

Five years ago, Deloitte came out with a brief which said that while FTA utilisation in developed countries is as high as 70-80%, among Indian exporters and importers, it is less than 3% of the available opportunity. This was cited as “alarming failure to utilise the benefits available to the industry through bilateral and multilateral trade agreements.” More recently, government think-tank Niti Aayog estimated that utilisation rate of Regional Trade Agreements (RTAs) by exporters is 5-25%. The report, prepared by a team led by Niti Aayog member V.K. Saraswat, said rise in India’s exports to RTA countries paralleled overall export growth. “India’s export surge could be attributed more to diversification of India’s export basket, both in terms of destination and commodities, and favourable global conditions and less to RTAs,” said the report. Reserve Bank of India’s report on Currency and Finance 2021-22, which looked at trends in trade between India and its 30 trading partners (covering 13 FTAs or other bilateral or multilateral trade agreements) from 1995 to 2020, suggests trade agreements have not had any positive and statistically significant impact on India’s exports, but have helped imports. The government has also admitted to sub-optimal benefits of past FTAs. Goyal informed Rajya Sabha in March 2020 that an internal assessment of India’s bilateral FTAs or Preferential Trade Agreements (PTAs) with Sri Lanka, Afghanistan, Thailand, Singapore, Japan, Bhutan, Nepal, Republic of Korea and Malaysia revealed 7.1% cumulative average growth rate of trade with these partners over five years. “While there has been growth in both imports and exports to these FTA partners, the utilisation rate of FTAs both for India and its partners has been moderate,” he said.

What went wrong with FTAs is fairly well known. An Exim Bank analysis published in March 2022 says margin of preference (actual tariff cuts) given by India to its FTA partners is higher than the margin of preference given by partner countries. Thus, the partners find exports to India becoming more attractive even as incentives to import dip due to low tariff differential with existing import sources. The report terms this as ‘uneven distribution of gains’. But more important than tariff differential are technical barriers to trade (TBT) such as mandatory standards, procedures and compliances which earlier FTAs could not lower. The Exim Bank report says TBTs are playing a much bigger role in restricting trade than tariffs by increasing indirect costs. Niti Aayog also points at choice of agreements.

These studies convinced the government to reach out to FTA partners and seek a review of the deals. Two reviews of India-Singapore CECA have been completed. The India-Bhutan Agreement on Trade Commerce and Transit was renewed in 2016 while India-Nepal Treaty of Trade was extended in 2016. Eight rounds of negotiations have been completed for review of India-Korea CEPA. India has also sought a review of India-Japan CEPA and India-ASEAN FTA. The big question is: If existing trade deals have not been very useful, what difference will the new FTAs make?

FTAs 2.O

Goyal sees India-Australia ECTA and India-UAE CEPA as win-win deals. He says Australia has provided 100% access to all Indian goods over five years— almost 97% trade will get access as soon the agreement comes into force. “India has also provided significant market access of 85-90% of our trade. A large part of that will begin just as the deal enters into force. Both countries have been fair and reasonable in terms of local sensitivities,” he says. The department of commerce is being restructured for greater engagement with other countries at both multilateral and bilateral levels, he adds.

The new-look department has separate wings for bilateral and multilateral negotiations and nine specialised divisions with government officers as well as private sector domain experts. There will be clarity on deliverables during every FTA negotiation as the ministry has readied a negotiation manual with 70 end-to-end SOPs (standard operating procedures) for negotiating teams. “FTA 2.O is not just about goods and services but also covers labour, innovation, anti-corruption, gender and investment initiatives,” commerce secretary B.V.R. Subrahmanyam said after the announcement of the changes, adding that “we are building capabilities to handle all this. A trade promotion body will be set up. Data analytics services will be there. We are going to create a large number of posts in missions. We have a checklist for trade negotiations; 70-plus SOPs have been developed. All directors, deputy secretaries, about 80 of them, will be trained in various aspects of negotiations. And there are implementation roadmaps.” The trade negotiation changes are already done, he says. “We have done UAE negotiations in a very short time. The Australia deal was also finished fast. Now we are negotiating India-EU FTA with much less stress. It shows our systems have improved,” he says. R.S. Sodhi, MD, Amul, vouches for the government’s approach. “Our government has been sensitive to the needs of Indian dairy farmers. Dairy products have been kept out of the FTAs. There is no need to include (milk and milk products) in FTA negotiations. Our major focus (including Amul’s) is not export markets.”

Goyal gives an example of Australian wine. “The entire industry has been consulted on multiple occasions. We protected them more than what they asked for by fixing $5 per 750 ml wine bottle as the minimum import price beyond which (tariff) concessions (on Australian wine) will start. So, there is no threat to the Indian wine industry. It will open new opportunities for upgrading our wineries and production,” he says.

India-UAE FTA also tries to stop misuse of FTA exemptions by incorporating strict ‘local value addition’ and ‘country of origin’ rules. UAE will allow tariff-free access to 99% Indian goods over 5-10 years while India will permit immediate duty-free access to 80% goods and extend it to 90% in 10 years. Such stipulations were missing from some earlier FTAs. In Asean FTA, India had cut duties on 74% tariff lines, while Indonesia gave duty-free access to 50% Indian products. Similarly, 40% value-addition in India-UAE FTA is higher than the 30% mentioned in earlier FTAs. The impact is showing, say stakeholders. The Gem & Jewellery Export Promotion Council (GJEPC) says the trade deal is behind the recent growth in gem and jewellery exports to UAE. “Indo-UAE CEPA will spur many more such opportunities for our traders, as evidenced by the immediate spike in bilateral gem & jewellery trade after the trade agreement’s enforcement on May 1 this year. Plain gold jewellery exports to UAE jumped 63% to $135.27 million in May 2022 and 59% to $116.70 million in June 2022 on a year-on-year basis,” says Colin Shah, chairman, GJEPC.

MRAs to Aid Services

Introduction of Mutual Recognition Agreements (MRAs) is also making FTAs more balanced by taking care of TBTs. Sunil H. Talati, chairman, Services Export Promotion Council (SEPC), gives an example. He says Australia and U.K. are the two most important countries for enhancing services exports and MRA is going to play a big role here. “As a chartered accountant, I can tell you that there is tremendous scope for outsourcing accounting and auditing services from these countries. FTA should enhance outsourcing of accounting, auditing and legal services. There is an MRA between ICAI and Australia & U.K.,” he says. He says the impact of FTAs should begin to be seen towards the end of this financial year (FY23). “Our target is to cross the minister’s target of $350 billion services exports (most of it from IT services).We are focusing more on education, medical value travel, film industry (technical side like animation) and engineering and architecture services. MRAs (in education, medical services, etc) will help”, he adds.

The government’s current approach to trade promotion also seems to be more rounded. Many see Production Linked Incentive (PLI) scheme as an indirect way to build export competitiveness among manufacturing industries. Goyal recently asked exporters to take advantage of PM Gati Shakti, National Single Window System for Business and Ease of Doing Business initiatives to improve export competitiveness. Schemes for services sector are also in the offing. “One such scheme is the ‘Heal in India’ portal, a one-stop destination to avail medical services from India,” says Dilip Jose, MD & CEO, Manipal Health Enterprises. “A medical traveller can get information at one authentic place without searching for individual hospitals. If government filters service providers on the basis of capabilities, infrastructure, clinical talent and past record, that will be an added feature,” says Jose. According to him, the initiative can create new markets for India’s healthcare industry.

Cautiously Optimistic

Despite Goyal’s enthusiasm for the $5 per bottle threshold for concessional tariff on imported Australian wines, the international wine and spirits industry is far from happy. Neither Indian wine industry nor importers expect the FTA to have a major impact. The India-Australia FTA is a very small step in the right direction, says Nita Kapoor, CEO, International Spirits and Wines Association of India. According to her, 70% Australian wines are not going to get any benefit because of the threshold. For the rest, India is not a big wine market. “We don’t see an immediate advantage. The Indian wine market in 2020 was tiny with 2.8 million cases. Next year, it shrunk to 1.8 million cases due to Covid and other disruptions. Who is going to benefit (from the $5 threshold)? Not India, not Australia. What are the other advantages? Will it benefit agriculture? Will it create employment? Will there be capacity building? Who is going to invest? In wines, we are not going to see any bilateral benefits,” says Kapoor. The international spirits and wine industry is also keenly watching the India-UK FTA as U.K. is expecting the current 150% tariff on scotch whisky to come down considerably. “Like imported wines, scotch whisky gets disproportionate attention and any insistence (by India) on retaining high tariffs may be counterproductive,” says Kapoor. “The protectionism went a little out of context in ECTA, please don’t do it in the India-UK FTA,” she adds. It will be interesting to see E.U.’s reaction if India’s latest FTA template is modelled on ECTA.

Still, FTAs are not about one industry segment. If one sector benefits, some other may lose out. It is for negotiators to decide which sectors deserve more protection. Rajiv Nath, forum coordinator, Association of Indian Medical Industry, says they agree on duty reduction on items where imports are negligible and exports are substantial. In India-UK FTA, the association wants inclusion of MRAs on regulatory approval and certification of medical devices. It has also shared country-specific inputs for negotiations with Israel and Canada.

The biggest worry if India-UAE and India-Australia FTAs become templates for new negotiations is India’s decision to make government procurement a part of FTA texts. With India’s public procurement as high as 20% of its GDP, Indian industry is concerned about its impact on domestic businesses. While UAE, primarily a trading nation, may not be a threat to Indian businesses supplying goods and services through government tenders, this may not be the case with manufacturing and technology powerhouses like U.K. and E.U. But the government seems to be confident that Indian industry can fight global competition and win government orders. But review of FTAs, once signed, is not easy. It’s better to be cautious, even if the deal takes time. That flexibility, while retaining some bit of India’s legacy image as a tough negotiator, may help the country see its trade engagement with major partner countries zoom with minimal damage to domestic industry. A mutually beneficial India-UK FTA is important, not a Diwali deadline.