Why India backtracked on free trade deals

FTAs are feared to hurt Indian small businesses

After a decade of skepticism over free trade agreements, India has signed a slew of new deals with a number of countries to lower trade barriers, eliminate tariffs and gain preferential access to global markets.

Earlier this year, the country implemented a comprehensive economic partnership with the United Arab Emirates and signed an ambitious trade pact with Australia, pledging to cut tariffs by 85%. Advanced negotiations are also underway to sign Free Trade Agreements (FTAs) with the UK and the EU.

These agreements should cover a range of products and services from textiles to alcohol, automobiles, pharmaceuticals as well as topics such as the movement of workers, the enforcement of intellectual property and the protection of data.

Piyush Goyal, Minister of Trade

Trade Minister Piyush Goyal bullish on FTAs

Indian and British officials are working “intensely” to conclude a “majority of full and balanced FTA talks by the end of October 2022”, the UK said in a statement last week.

The relaunch of FTA negotiations with the EU after a long wait reflected a “new India that wants to engage with the developed world as a friend, from a position of fairness”, the minister said last month Indian Trade, Piyush Goyal.

This renewed zeal marks a sharp break with India’s apprehension of trade liberalization for much of the past decade.

In 2019, India withdrew from the Regional Comprehensive Economic Partnership (RCEP), billed as the world’s largest trade deal between China and 14 other Asian countries, after participating in negotiations for seven years.

Delhi feared the deal would reduce duties on imported goods by 80-90% and further deepen India’s significant trade imbalance with China, exposing domestic producers to greater foreign competition.

People shop at a crowded marketplace in Connaught Place, the commercial business district, on the eve of World Population Day in New Delhi, India, July 10, 2022. World Population Day is an annual event, observed on July 11 each year, which aims to raise awareness of global population issues

India’s large middle class makes it an attractive destination for foreign businesses

The government’s assessment of India’s existing FTAs ​​and preferential trade pacts is also not favourable.

According to NITI Aayog, India’s public policy think tank, as bilateral trade with partner countries like Japan, South Korea and the ASEAN region has increased following the signing of agreements trade, imports rose more sharply than exports, leading to “adverse gains” for India’s trading partners.

That is why India’s approach this time is to achieve a “fair and balanced” FTA with complementary economies, less about competition and more about collaboration, according to Goyal.

But achieving that balance might be easier said than done.

In Akluj, in the western Indian state of Maharashtra, Fratelli, one of India’s largest winemakers, has been producing wine for 15 years.

Gaurav Sekhri, who co-founded the brand, says the business has grown by 30-40% in the past two years as Indians start to develop a taste for wine.

Jewelry workshop in Jaipur, Rajasthan on March 02, 2017 in India.  (Photo by Frederi

Experts say a balanced approach is needed to ensure Indian small businesses are protected

But as India ramps up free trade talks with countries like the UK and EU, it worries about increased competition from cheaper imported brands as the sector is set to mature. .

Mr Sekhri expects the terms of the UK-EU deals to be similar to those of the FTA signed with Australia, where duties on wines over $5 have been reduced from 150% to 100%, with further gradual reductions over the next decade.

He says the industry needs some protection because consumers will be more inclined to choose non-Indian wines at the same price as they are perceived to be of higher quality.

“Also, the lifespan of our vineyards is less compared to European vineyards. And for that reason alone, our costs will be higher and protection will be needed,” adds Mr. Sekhri.

Indian woman sewing textiles at Dastkar women's craft co-operative, the Ranthambore Artisan Project, in Rajasthan, Northern India

The textile sector is one of the main sources of employment in the country

But opposition to trade liberalization is moderate.

Textile and apparel companies, which recorded the highest exports on record in the last fiscal year, are excited about the prospect of lower tariffs on their goods.

Mumbai-based Milaya Embroideries, which produces clothes for global fashion brands like Dolce and Gabbana and Emporio Armani, is currently being hit with a double whammy of tariffs – while importing raw materials from Europe and exporting finished garments to the mainland.

Garment makers have also lost markets to countries like Vietnam, which recently ratified its FTA with the EU. For them, the imperative to act is greater.

“It is much cheaper for European companies to place orders with Vietnamese suppliers because they do not have to pay duties. While the duties are between 9% and 16% for imports from India. I think we will see a lot of customer demand if duty rates are reduced,” said Shashank Jain, COO of Milaya Inc.

For India and its partners, the reasons for the renewed interest in these trade negotiations are as much strategic as economic.

India’s annual merchandise exports crossed the $400 billion mark in the last financial year – an annual jump of 40% – reduced “hesitancy to provide additional market access”, Biswajit Dhar said , professor at the Center for Economic Studies and Planning, Jawaharlal Nehru. University.

But also, as countries like Britain seek to extend their supply chains to the Indo-Pacific in a post-Brexit world, and as global companies adopt a strategy in which they avoid investing solely in China and are diversifying into alternative markets, Delhi has been presented with a rare opportunity to integrate globally.

Amitendu Palit, a senior research fellow at the National University of Singapore, says increased collaboration between countries like India, Australia, Japan and the United States reflects their growing concern over China’s control over supply chains and its ability to disrupt them.

But experts also worry about the “dichotomy” between India’s free trade strategy and its overall trade policy.

“(The) newfound enthusiasm for the FTA seems to conflict with its trade policy stance under the self-governing India initiative, the genesis of which is ‘vocal for local’, thus promoting goods produced locally compared to imported goods,” said Surender Singh researchers. and Suvajit Banerjee recently wrote in Economic and Political Weekly.

A view of the newly opened wine and liquor store at Geeta Colony on December 16, 2021 in New Delhi, India.  (Photo by Sonu Mehta/Hindustan Times via Getty Images)

Indian winemakers fear entry of cheaper foreign brands will hurt their profits

India has undertaken more than 3,000 tariff increases which affected 70% of imports, according to Arvind Subramanian, a former government economic adviser.

This “lack of synergy” between trade policy and free trade strategy “not only weakens India’s negotiating capacity, but also undermines the potential economic benefits of free trade,” Singh and Ms. Banerjee.

Ironing out these inconsistencies will be essential. The timing will also be decisive.

The deadlines set for concluding these agreements are ambitious. India can ill afford to lose momentum as by the middle of next year the election cycle will begin.

“Once you lose momentum, it can be very long,” warns Mr Dhar.

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