India trade deal: India’s rise as global power has given birth to its own set of problems. In a way, they are good problems, but more than required tolerance is self-destructive. For instance, countries are lined up for Free Trade Agreements with India. Being in high demand, it is proving hard for Indian policymakers to chalk out their priorities. The flurry is good, but a word of caution is always needed in such circumstances.
India-UAE trade deal
Over the last few years, FTAs have dominated the corridors of the Commerce Ministry Section of the Central Secretariat. In February last year, India and UAE signed a free trade agreement called Comprehensive Economic Partnership Agreement (CEPA).
The agreement provides duty-free access to the Emirates market for 90 per cent of our exports, totalling $26 billion in goods and services. Bilateral trade between both countries is expected to surge from $60 billion to $100 billion in the next 5 years. 15 per cent of it is slated to be in the service sector, a hallmark of trade between two mature economies. In India, 10 lakh new jobs are expected to be on the horizon.
India-Australia trade deal
Two months after the UAE trade deal, India and Australia signed a blockbuster deal with much fanfare. The agreement is known as the India-Australia Economic Cooperation and Trade Agreement (Ind- Aus ECTA). It is significant because the agreement officially marks the entry of the Indian economy into the big league. Australia is one of the world’s few officially developed economies in the pre-covid world. An FTA with Australia received far more attention, particularly in the zealous western media and even academia.
Technically, the deal is a huge win for India. India was looking for a prosperous market with which to trade, and Australia is charging no duty on 96.4 per cent of our exports. These include textiles, leather, furniture, and sporting goods, among other things. Duties on the remaining 113 export items will be phased out in the near future.
In terms of imports, India has made certain that its milk, chickpeas, grains, dairy products, medical devices, and a few other products are protected from competition from Australian products. Shrewd Goyal also obtained a favourable position for India’s steel, garments and aluminium industries as a result of the transaction.
Other FTAs on cards
Apart from UAE and Australia, many other deals are also on table. For one, India and the Gulf Cooperation Council (GCC) have already signed a framework agreement for exploration of the viability of a FTA. GCC is India’s largest trading bloc. It consists of Saudi Arabia, the United Arab Emirates, Bahrain, Qatar, Oman, and Kuwait. India conducted $154 billion in trade with the GCC in FY22. Early trends indicate that trade in this financial year will be 40 per cent more than the last.
GCC is not the only bloc looking for an FTA with India. The European Union, the world’s largest bloc of nations acting as one, is another contender. The bloc of 27 nations has been wanting an FTA with India since 2007. For 6 long years, these countries and the UK could not come up with a consensus and 2013 was the last year in which negotiations took place before 2022. In fact, in 2016, the Modi government had decided to do away with the already existing Bilateral Investment treaty with 23 countries of the EU block.
In the same continent, countries like Switzerland, Norway, Iceland, Liechtenstein and not to forget the United Kingdom are other countries wishing FTA with India. The English case is particularly peculiar. The island nation left the EU for some autonomy from economic compulsions of the EU and now it is competing with the EU for an FTA with India.
Other countries wishing to join hands with India include the USA, its junior Canada, Israel, Russia and other states of Eurasian Economic Union.
To deal with such a sudden burst, the Commerce Ministry has 9 sections, each having both public officials and experts from the business sector. There are already 70 complete Standard Operating Procedures. 80 Directors and Deputy Secretaries have received training to handle these FTAs’ intricate nuances.
While all of these deals add a feel-good factor to nationalist section, a vigilant bunch is also worried about their impact on India’s economy. The reason behind it is that India has not been able to take full advantage of such trade deals in the past.
Checking the effectiveness of FTAs
Including UAE and Australia ones, India has 14 FTAs in operation. Sri Lanka, Bhutan, Nepal, Thailand, Singapore, Japan, Malaysia, Mauritius and South Korea are some other countries in that league. Apart from them South Asian Free Trade Area (SAFTA), Asia Pacific Trade Agreement (APTA), SAARC Preferential Trading Agreement (SAPTA), India-MERCOSUR PTA, Global System of Trade Preferences (GSTP) are some other trade agreements with FTA like structures.
So, all of these have been beneficial for India? Not really. And to be frank, we need to blame ourselves for it. When such FTAs are signed, the assumption is that the majority of benefits will go to the manufacturing sector of both countries. Unfortunately, even if that was the case, India traditionally just didn’t have a robust manufacturing sector to take advantage of the situation. The Government’s own Economic Survey says that the average share of manufacturing in India’s GVA has been 16.3 per cent over the last decade.
The number doesn’t put India in either emerging and developing economies or advanced and developed nations. For advanced and developed nations like Germany, the US, South Korea and Japan, the corresponding figures are 19,11,25 and 21 per cent. One may argue that America scores less on that front and that’s true. But that is because, US has moved beyond manufacturing and is centred more on services, a hallmark of a fully developed economy.
Compare it with those of China, Turkey, Indonesia, Russia and Brazil. Share of manufacturing in their GDP is 27,19,20,13 and 9 respectively. China is an outlier in developing nations.
Now, if India goes on to chalk out FTA with them, it is not tough to ascertain who will win more from it. According to a Deloitte report, Indian traders have been a net loser on every other FTA in the past. They have been able to utilise only 3 per cent of available opportunities in the past. The best estimate in favour of Indian traders is that of 25 per cent.
Even that sounds too much, given the past records of India. For instance, the liberalised trade has resulted in massive imports of palm oil imports from Malaysia and Indonesia.
The South Korean blunder
Situation is South Korea is much worse, something which was recently highlighted by Commerce Minister Piyush Goyal. Goyal seems to have a distaste of how India’s trade with South Korea has shaped after the Comprehensive Economic Partnership Agreement (CEPA) was signed in 2009. Speaking at the valedictory function of the three-day Asia Economic Dialogue, Goyal said that Kia and Hyundai have played a major role in India’s trade deficit with developed part of Korean Peninsula.
Quote, “They have enjoyed the benefits of our free-trade agreement with Korea and Japan and continue to import indiscriminately. The small investment of half a billion or a billion dollars, has cost India very dear in terms of billions of dollars of trade deficit. So, they have cost us dearly, and I don’t mind saying it publicly.”
The maverick Minister does not fully blame the trade deal or South Korean government for it. Let’s understand it through the disparity in steel trade between both countries. According to 2021 data, South Korea exported iron and steel worth $2.45 billion to India. The corresponding number for India’s imports to South Korea is a meagre $554.93 million.
To put it simply, India exported to South Korea only 22.6 per cent of iron and steel it availed from South Korea. Even the case with Articles of iron and steel is not different. Compared to India’s exports of $37.60 million, South Korea’s export to India was clocked at $401.57 million. That is nearly a 1000 per cent difference.
Mr Goyal says that this gap is due to nationalist sentiments in South Korea, or even Japan for that matter. Blaming Indian businesses for excessive emphasis on profits, Goyal said, “The Korean and Japanese governments don’t stop any steel export from India to Korea. But we can’t sell even a ton of steel in both these countries due to their highly nationalist spirit. We, unfortunately, don’t have that in India. If we can save 10 paise, we are happy to import from anywhere and anybody. We are happy to import from China, if we can make 2% more profit in our business. It’s very unfortunate and sad.”
Crediting national spirit in Korean business, Goyal added, “No government stops it. And when we talk to the government, they say there’s no barrier from their side. But there is that national spirit that businesses demonstrate to support their own industry. But look at us!”
Time to get vigilant
It’s true and is substantiated by numbers too. In the initial years of CEPA, India mainly imported capital goods from South Korea. These goods are key catalysts in manufacturing. The trend has only declined and now finished goods dominate the imports chart, rather than capital ones. It had its effect on the trade deficit too as for the major part of 12 years after the deal with South Korea, bilateral trade deficit of India has only widened.
With so much failure on the back, it is always wise being cautious. Yes, it’s true that the India of the 2020s is not the replica of a weak state, but prevention is always better than cure.
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