Disagreeing to agree

Why the EU-India free trade agreement is still in the making

Written by Rajendra M Abhyankar | Published: April 20, 2013 2:45 am

Why the EU-India free trade agreement is still in the making

The free trade agreement (FTA) between India and the EU has now been seven years in the making, with regular announcements of imminent closure. The current discussions led by Union Commerce Minister Anand Sharma will,at best,only kick the can down the road. When the two sides started negotiations in 2007,the world was a very different place: the global financial crisis was still not on the horizon,nor the spectacular eurozone crash. The winding down of India’s annual growth rate,beset by governmental inaction and corruption,was also a few years off. It looked then that a preferential agreement between two large economies would be a logical and much desired corollary to their nascent “strategic partnership” adopted in 2004.

It is not surprising,and somewhat paradoxical,that amidst this slow movement on trade policy,bilateral trade and economic relations between India and the EU have burgeoned. The value of EU-India trade grew from 28.6 billion euros in 2003 to 79.9 billion euros in 2011. EU investment in India more than tripled between 2003 and 2010: from 759 million euros in 2003 to 3 billion euros in 2010. Trade in commercial services tripled during the same period,from 5.2 billion euros in 2002 to 17.9 billion euros in 2010. Despite the manifest mutual advantage of trading with each other,the slow progress on finalising the India-EU Broad-based Trade and Investment Agreement (BTIA) is indicative of a fundamental dissonance on specific trade and industry sectors as well as a flagging of political will on both sides. The EU’s economic and financial woes have revived protectionist lobbies while,on the Indian side,the falling annual growth rate amidst negative market sentiment about the government’s inability to pursue economic reforms,inflation and scams,has tarnished India’s aura.

Further,the complexity of the EU’s internal procedures has also been responsible for an excessive focus on “procedure” rather than “outcome”. That India still remains an important trade partner,with the EU accounting for 26 per cent of India’s global trade,is due to the consolidation of certain products in the trade baskets on both sides,such as automobiles and textiles,and the realisation that access to India’s expanding market immunises EU manufacturers and traders from business cycle fluctuations. On the Indian side,FTA and FTA-plus agreements with ASEAN,Thailand,Malaysia,Singapore and Sri Lanka have engendered a degree of scepticism about market access and FDI inflow — that,in its zeal for such agreements,India may have given away too much,without getting commensurate gains. Such is the feeling behind the current impasse.

The BTIA negotiations cover reciprocal market access for goods,services and public procurement contracts; a framework for promotion of inward foreign investment; WTO-compliant rules that will frame bilateral trade,covering intellectual property and competition; and growth in trade in tandem with environmental,social and labour rights. In each area,agreement still appears a bridge too far. Yet some progress has been made in dismantling trade barriers on the Indian side,for example,on cotton exports and security requirements for telecom equipment as also on phytosanitary rules.

On some others,like government procurement and the FDI cap in insurance,action awaits denouement on related bills in Parliament. Despite aggressive EU posturing on government procurement and PSU market access,there is a presumption India is unlikely to secure reciprocal gains from relaxing market access. The same sentiment of non-reciprocity in benefits rules with regard to the EU’s demands for market access on legal services and accountancy services. The EU’s inability to relax the 20 per cent trigger on the movement of Indian professionals to the EU is hardly likely to soften the Indian position.

On many dynamic sectors like automobiles,there are divergent views even within the Indian auto sector,given that Indian manufacturers have contrary interests depending on the nature and source of their foreign collaborations. It will be difficult to give facilities like tariff rate quotas to EU automobiles without having to match them for Japanese,Korean and other manufacturers. Yet,this sector promises the greatest potential for the development and manufacture of “smart” auto components,which are increasingly becoming the international norm. It makes it all the more important that both sides look for a mutually advantageous solution.

It highlights the need for a different basis on trade facilitating measures in sectors likely to be marked over time by manufacture and trade in both directions. For example,there appears to be some light on the perennial EU submission on duty reduction on wines and spirits,given that Diageo will be a major player on the Indian market through M&A operations. A similar situation may well obtain in the IT sector,where India’s submission to be graded a “data secure nation” needs due recognition. In the pharmaceuticals sector,the fear that India will allow TRIPS-plus provisions through the backdoor needs to be discounted. India is acutely conscious of the negative effect on India’s generic pharma industry,particularly HIV retro-virals,not only within the country but also in its export destinations in Africa and elsewhere. While greater market access in the EU for Indian generic pharma products is to mutual advantage and will cheapen delivery of medicines,this cannot come at the cost of IPR protection.

In conclusion,the finalisation of the broad-based FTA between India and the EU has been hampered by the continued down trend in the global and European economies. The fact that important sectors on both sides have been engaged in the negotiating process is a sign of the vitality of the bilateral relationship. A successful outcome requires the two sides eschew needless deadlines and move forward in stages. There is at present a narrowing political window,dictated by the onset of the Indian election season.

The writer is former Indian Ambassador to the EU,Belgium and Luxembourg

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