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India’s Growing Enthusiasm For Free Trade Agreements

The negotiations for free trade are part of India’s broader strategy to establish balanced trade partnerships with major economies and revamp existing trade pacts to improve trade and investment

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In May 2022, Union Commerce and Industry Minister Piyush Goyal said that a free trade agreement (FTA) between India and the United Kingdom (UK) could be ready by Diwali without needing an interim early harvest agreement. 

The prominent Hindu festival, Diwali, usually falling in October, was set as the timeline for a draft FTA after British Prime Minister Boris Johnson discussed it with Prime Minister Narendra Modi during his visit to India last month.

"Foreign Trade Agreement (FTA) talks and discussions are part of India’s strategy to sign “fair and balanced” trade agreements with key players in the world economy. With the objective to renegotiate existing pacts with important countries so as to improve the extent of India’s international trade," said Sharad Chandra Shukla, Director, Mehta Equities. 

The negotiations for free trade are part of India’s broader strategy to establish balanced trade partnerships with significant economies and revamp existing trade pacts to improve trade and investment. Experts noted that FTA is the need of the hour considering the economic recovery in times of geopolitical and economic crisis around the world. 

"The current FTA surge is as much about geopolitics as they are about good economics. India has always wanted multilateral trade agreements so that it facilitates trade across the globe but our approach in the past has been very puritan and selective. Though initially not very keen on bilateral or regional trade agreements, we realised that many countries were doing it and India was being left out," said Abhay Sinha, Director General, Services Export Promotion Council (SEPC). 

After a gap of eight years, India and the European Union (EU) on June 17 officially resumed negotiations on the proposed agreements. On this, Goyal said that implementing these pacts will help discover the significant untapped potential for boosting economic ties between the two regions.

Talking about the delay, Pradeep Multani, President, PHD Chamber of Commerce and Industry said, "The reason for the delay in the process is due to negotiations on the bilateral investment treaty with the EU followed by liberalisation of services (mode1 and mode4), particularly in the movement of skilled professionals. Furthermore, the EU puts non-tariff barriers on Indian agricultural exports in the form of severe sanitary and phytosanitary measures, allowing the EU to exclude numerous Indian agricultural items from entering its markets, as well as duty reductions on automobiles, wines and spirits."

Apart from that, a major issue is how business is transacted in India. When it comes to labour, it is on the concurrent list. That is, the states make their own rules. So, a set of conditions agreed upon by the centre in its agreement with the EU may not be binding for states who can overturn it.

"Most businesses in India are in part undertaken by small and medium enterprises. Whereas in the EU, there are more organised players. Rules of the organised players cannot be imposed on smaller producers. Since the burden of compliance falls on the enterprise, it is natural that the Indian side is hesitant to make a commitment," said Vijay Singhania, Chairman, TradeSmart. 

Multani said that the EU has demanded the lowering of tariffs on wines, spirits, dairy and automobiles, and this could result in European imports flooding the market without any reciprocal access to the European market and an adverse impact on investment and the “Make in India” campaign. 

Similarly, a reduction in tariffs in agriculture and labour-intensive sectors of India such as; leather products, poultry, coffee, tea, sugar, cereals, fruits and vegetables, textiles, footwear, and sports goods would have a negative impact on India's exports.

FTAs with UAE and Australia

Post the conclusion of the G7 Summit, Prime Minister Narendra Modi made a brief stopover at Abu Dhabi on his return from Munich and met President of the UAE Sheikh Mohamed bin Zayed Al Nahyan. Both leaders reviewed various aspects of the India-UAE Comprehensive Strategic Partnership which they have carefully nurtured over the past few years. 

"FTAs are beneficial for both the parties involved and are expected to yield results from the initial stages of implementation of the FTA.  With the world looking at alt China approaches for sourcing goods, India stands to benefit a lot from it. Integrating our trade into global supply chains and regional production networks in the Asia Pacific, will help catapult the Indian economy to a higher growth trajectory," said Sinha. 

Emphasising the big opportunity created by free trade agreements with UAE and Australia, Goyal recently suggested that the artisans could be provided with a platform in the Dubai Expo Centre for showcasing their products and organising buyer-seller meets.

"The trade agreement will help to diversify and strengthen supply chains, expand economic prospects for Indian firms, and significantly benefit the people. Both the partners would like the trade negotiations to be broad-based, balanced, and comprehensive, with a focus on fairness and reciprocity," said Multani.

Goyal said the increase in exports of handicrafts from 25,680 crore in 2020-21 to Rs. 33,253 crore in 2021-22 shouldn’t be the benchmark as the sector has a tremendous capacity to strengthen its export targets further. 

Also, Indo-UAE bilateral trade in FY 2021-22 was about USD 72 billion. UAE is India’s third-largest trade partner and second-largest export destination. UAE FDI in India has continuously increased over the past few years and currently stands at over USD 12 billion.

The Ministry of Commerce and Industry has identified areas of growth in exports and intends to push 31 commodities through 200 countries with a targeted USD 400 million in exports for FY22 and USD 1 trillion in goods exports and USD 700 billion in services exports by FY28.

"Over the last 10 years, the value of exports has remained constant, but export incentives have trebled. 70 per cent of India's exports comprise only a 30 per cent share of the world’s traded commodities, indicating the need to shift the focus from low-value products and export of raw materials to high-value products," said Singhania. 

Singhania further said that these agreements will help push targeted incentives to help increase exports. Products that are only made in India have a very good potential of capturing the export market. These include products like Basmati rice, Darjeeling Tea, Chanderi Fabric, Mysore silk, Kullu shawl, Kangra tea, Thanjavur paintings, Allahabad Surkha, Farrukhabad Prints, Lucknow Zardozi and Kashmir Walnut wood carving.

Fast-track FTA negotiations 

India and Australia have recently signed a historic interim Economic Cooperation And Trade Agreement (INDAUS ECTA), which is expected to give a huge boost to India’s exports down under. And the India-Australia ECTA is the first agreement that India has signed with a large developed economy after CEPA’s with Japan and South Korea. India-Australia needs to fast-track this interim agreement to sign the final CECA at the earliest (Comprehensive Economic Cooperation Agreement). 

Presently, India is negotiating about 20 FTA out of which six are on the fast track and the others are on the back burner, according to experts. India is going to fast-track trade deals with at least half a dozen countries, including the United Arab Emirates, United Kingdom, European Union, Canada and Australia over the next few months, Singhania informed. 

Talking about what India needs to do to fast-track the process as far as FTA negotiations, Sinha said, "As India brings its economy to the centre stage globally, balancing domestic and global expectations with long-term and swift actions is the way forward. It is said that a good trade policy begins at home. India has to set its domestic economy in order and instil confidence in its industry and amongst exporters to become globally competitive."

Sinha also added that the biggest hurdle currently is to appease the domestic lobbies, especially in the agro and dairy sectors. Domestic lobbies will want to keep their products out of deals with states having competing suppliers. This approach would require immense and sustained political, intellectual, and administrative efforts.

Meanwhile, India’s overall exports (merchandise and services combined) in May 2022 are estimated to be USD 62.21 billion, exhibiting a positive growth of 24.03 per cent over the same period last year, said the Ministry of Commerce and Industry. 

The merchandise exports in May 2022 were USD 38.94 billion, as compared to USD 32.30 billion in May 2021, a growth of 20.55 per cent. The estimated value of services exports for May 2022 is USD 23.28 billion, a growth of 30.32 per cent vis-a-vis May 2021.

The ministry said that India’s overall exports (merchandise and services combined) in April-May 2022 grew 25.90 per cent to USD 124.59 billion over the same period last.

India's May trade deficit widened to USD 24.29 billion from USD 6.53 billion a year ago, a government statement said.