Commerce and industry minister Piyush Goyal’s remark that Indian businesses are prioritising “small gains” over national interest, comes in the wake of insistence on import protection by sections of the industry. Such demands have often hindered the progress of India’s talks with several trading partners for bilateral free trade agreements, aimed at progressive tariff reduction/elimination. FTA are being resorted to, for the country’s faster integration with the global value chains.
The minister’s latest comments follow a series of such reprimands by him an other government functionaries of Corporate India for not being fast enough to restart the investment cycle. The firms’ extreme wariness was despite many investor-friendly policies laid out by the government, including elevated public capex, production-linked incentives and a corporate tax cut.
Industry sources, however, cite the fact that India’s existing FTAs have not yielded the desired results, and blame it on the hasty manner wherein these were signed without adequate consultations with the industry or safeguarding of domestic interest. They also stress that protectionist tendencies are being shown by many countries in recent years, and a more nuanced policy would help national objectives like promotion of “Make in India.”
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The government, trade experts note, is also cognizant of this fact, as is evident from the re-negotiations of the trade agreements signed with the Association of Southeast Asian Nations (ASEAN), Japan and Korea. In the new FTAs that are being negotiated extensive consultations are happening with the industry so that these would be balanced ones, they say.
“One reason that the FTAs have not yielded expected results is the imbalance in what India has to concede and what it gets in return. The developed countries where India is negotiating already have lower tariffs and bringing them down to zero will not bring additional gains as they will be wiped off by FTA-related compliance costs,” co-founder of Global Trade Research Initiative Ajay Srivastava said.
An industry source, however, agreed with the minister that an elbow has to be allowed to the government to conclude the FTAs. “If industry needs lower tariffs in their export markets they will also have to concede lower tariffs for imports.”
He also said a “fear of the unknown,” the lure of protection provided by higher import duties and a feeling that domestic products could become uncompetitive in the face of competition could be the reason of the reluctance of the industry.
India’s merchandise trade deficit with these partners increased significantly more than its global trade deficit and India’s exports to these FTA partners have increased at a lower rate than its imports. The Asean India Trade in Goods Agreement (AIGTA) entered into force on 1 January 2010 which created one of the world’s largest free trade areas. Since then The trade deficit with Asean widened from $ 4.98 billion in 2010-11, the first full year of operation of AITGA to $ 39.4 billion in 2022-23. This outpaces the rate of growth of India’s overall exports in the period.
Most exports to India’s FTA partners occur at zero or low Most Favoured Nation (MFN) duties, as these countries anyway keep MFN rate low. Singapore has nil duties, Japan 2.4%, Malaysia 3.5%, Vietnam 5.3%, Mauritius 1.1%, UAE 3.5%, and Australia 2.6% for every exporter. Singapore allows 99.8% of its global imports at zero MFN duty, Malaysia 82%, Japan 81%, Vietnam 61.4% , South Korea 41.7 %. This situation limits the additional market access that FTAs could provide to Indian exporters. Due to this India’s FTA utilisation remains very low at around 25%, while utilisation for developed countries typically is in the range of 70–80%.
The FTAs with the UK and European Union – that are in advanced stages – will also have the same limitations. The Trade Weighted Average MFN Applied Tariff in the UK is 2.3% for non-agriculture products and 12.8% for agriculture products. In the case of the EU the tariffs on non-agriculture products is 2.3% and agriculture products is 8.4%.
India on the other hand has trade weighted average on non-agriculture items is 9% and on agriculture the tariffs are 65%. In some items like automobiles, wines and spirits and agriculture products which are of special interest to the UK and EU the duties are 100% or more.
Under FTAs trade must be liberalised in 85-90% of the tariff lines so eliminating these duties under trade agreements gives an immediate price advantage to products from FTA partner countries.
Similarly, in the case of dairy products and other farm commodities, the potential FTA partners, like the US and EU want greater market access. New Delhi is not open to this, for fear of adverse impact on domestic stakeholders.
However, within the industry there are companies who are aggressively opening up to get the inputs and components at lower duties, director-regulatory at Nangia Anderson Mayank Arora said. Those in the opposing camp include suppliers to these Original Equipment Manufacturers and most of these are small and medium industries, he said.
Many other countries are seeking FTAs with India as high import duties make it difficult for these countries to access India’s large and rapidly growing market. Additionally, since India currently does most of its importing (over 75%) from countries it doesn’t have FTAs with, these agreements are particularly appealing as they offer a significant new market opportunity in India.
Contrary to the belief that most world trade happens through FTAs, a GTRI study shows that only 15-17% of trade is conducted this way. While 40% of global trade involves FTA partners, much of it operates under MFN duties, not FTA rules. In fact, over 50% of world trade takes place at zero MFN duty, and about 30% at low MFN duties. For instance, only 6% of India’s $14.4 billion exports to Singapore are under the preferential route. Over 70% of Indian exports enter ASEAN at zero MFN duty.
India currently has a comprehensive FTA relationship with 26 countries. It is now negotiating new FTAs with 45 countries.
However, beyond immediate trade gains through tariff reductions the FTAs offer other benefits that the government seems equally keen on. These trade agreements could help in diversifying sources of imports of machinery and inputs and with increased trade investments also follow, Arora said.
The trade agreements also open up channels of financial information exchange as was seen in agreements between Mauritius, UAE and Singapore, he added.
From: financialexpress
Financial News
