Going past barriers

During Prime Minister Manmohan Singh’s visit to Germany last week,efforts were made to push forward the Bilateral Trade and Investment Agreement (BTIA) between India and the EU. Though the two sides could not reach an agreement,as there are issues on which mutually acceptable compromises need to be found,this was an important step towards further trade and financial integration of the Indian economy. Such an agreement will likely see a reduction in tariff rates and non-tariff barriers to increase exports and imports in many sectors and will thus increase trade,investment and competition. Even though some industries may appear to lose in the short run,the country’s consumers would gain and greater competition will make the industry healthier in the long run.

Since the WTO process,or the multilateral trade liberalisation process,is nearly dysfunctional today,India has been liberalising vis-a-vis trading partners through free trade agreements. There are gainers and losers in a bilateral FTA,and the government will need to find the right balance. In the case of an FTA with the EU,the domestic automobile industry opposes the reduction of tariffs on the imports of cars from the EU based on the infant industry argument. Indian consumers suffered many decades of a constricted automobile industry in the 1960s and 1980s. Those who stand to gain from trade liberalisation rarely voice their interests. This is why the government needs to go ahead with reducing trade barriers. That has been a way to get improvements in technology and to modernise the economy. India wants greater access to services,where Indian exports of call centre services and skilled workers will gain from BTIA.

Contentious items like tariff reductions on agricultural products can be kept out of the agreement as today the EU is more focused on investment. The BTIA will be the first FTA in which India is planning to agree not merely to a trade liberalisation,but also a liberalisation of investment. EU pressures on India to increase FDI in insurance may be hard to deal with,not because the government does not support it but because an amendment to the insurance act needs to be passed by Parliament. Other measures,such as liberalisation of regulations for foreign banks,do not need to wait for parliamentary approval and they should be set in motion.