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India on Sunday (March 10) signed a trade agreement with the four-nation European Free Trade Association (EFTA), an intergovernmental grouping of Iceland, Liechtenstein, Norway and Switzerland. The deal brings in $100 billion in investment over 15 years, with the EFTA looking at joint ventures that will help India diversify imports away from China. Here, we explain its significance for India.
Over 64 countries, including India, are headed into elections this year, which could mean a long pause in free trade agreements (FTAs) for India and its trade partners. However, time is running out as the global supply chain is fast undergoing a reset with investment, for the first time in the recent past, moving away from China.
While India is seen as a top contender by global inventors, the Vietnam-led Association of Southeast Asian Nations (ASEAN nations) and North American nations like Mexico are also emerging as favourable investment destinations. A delay in streamlining investment flows and renewed attempts at global integration may turn out to be a missed geo-political opportunity.
While the India-EFTA trade deal has been inked, major deals such as India’s FTA with the UK and EU still run the risk of political uncertainty.
India runs a trade deficit with most of its top trade partners, except for the US. This is also true in the case of FTAs that India has signed in the past, especially with ASEAN nations. While the ASEAN FTA did help India secure intermediate products, India’s increasing average tariffs (18 per cent) have meant that India’s FTA partners have better access to the Indian market after tariff elimination. Average tariffs in developed nations hover around 5 per cent.
The India-EFTA deal is also expected to widen the trade gap. Even as the legality of the $100 billion investment commitment by EFTA remains unclear, such investment could help India generate economic activity and jobs in exchange for giving market access to EFTA.
Moreover, India could see gains in the services sector and the deal could help India power its services sector further.
The funds from the EFTA region include Norway’s $1.6 trillion sovereign wealth fund, the world’s largest such ‘pension’ fund, which posted a record profit of $213 billion in 2023 on the back of strong returns on its investments in technology stocks.
The Indian Express earlier reported that India could see investment flow into the pharma, chemical sectors, food processing and engineering sectors. Government officials said that EFTA is also looking at joint ventures (JVs) in the above-mentioned sectors that will help India diversify imports away from China.
Currently, India’s imports of chemical products from China in FY23 alone stood at a massive $20.08 billion. It imported $3.4 billion worth of medical and bulk drugs worth nearly $7 billion from China, as per commerce and industry ministry data.
Switzerland, which is India’s biggest trade partner among EFTA countries, decided to eliminate import duties on all industrial goods for all countries starting from January 1, 2024.
The abolition of tariffs on all industrial products, including chemicals, consumer goods, vehicles and clothing is a concern for India as industrial goods accounts for 98 per cent of India’s $1.3 billion merchandise exports to Switzerland in FY2023. India’s goods will face stiffer competition despite any tariff elimination that would be part of the deal.
Think tank Global Trade Research Initiative (GTRI) said that exporting agricultural produce to Switzerland remains challenging due to the complex web of tariffs, quality standards, and approval requirements. EFTA has not shown any inclination to make agriculture tariffs zero on most basic agricultural produce.
