Opinion Applaud the India-EU FTA but watch out for the fine print

But while we applaud the India-EU FTA, it is also important to recognise that the fine print and details contained in the legal provisions of the FTA could stymie India’s exports as well as development prospects. Based on the provisions contained in some of the recent FTAs of the EU and its initial demands from India in the negotiations, let us examine this crucial matter.

First, as is now well-known, under its Carbon Border Adjustment Mechanism (CBAM), the EU has started imposing a carbon tax on imports of products in six sectors. If the EU’s ability to impose the carbon tax on India’s exports has not been curtailed by the FTA, it would erode and possibly nullify the benefits in sectors such as iron and steel and aluminium exports. If, in the future, CBAM is extended to other sectors of India’s export interest, then its gains from the FTA would get commensurately diminished.

Second, India’s domestic auto and auto components manufacturers will be watching the concessions that India has granted to the EU in this sector with considerable apprehension. Reports indicate that India is likely to reduce tariffs in this sector to around 10 percent on 250,000 vehicles. What will also be crucial is the concessions granted to electric vehicles, as these would limit the growth potential of the domestic EV sector.

Third, under its FTAs with the UAE and the UK, India has progressively opened government procurement to these partners and curtailed elbow room to boost domestic manufacturing. If India has agreed to concessions similar to those granted to the UK, it would pose challenges to domestic suppliers as they would now be treated at par with EU suppliers. It is also relevant to note that while on paper, Indian exporters would have access to a huge public procurement market of the EU, the reality may be different. Many studies have now concluded that the EU purchases around 1–2 per cent of its public procurement requirements from non-EU sources. Thus, India’s exports are unlikely to get a boost by accessing the EU’s public procurement market, as these would have to compete with many other countries.

Fourth, the EU’s initial demands on India in respect of sustainable food systems (SFS) have been a matter of concern. The EU’s definition of a sustainable food system requires various economic activities therein to be profitable throughout. India’s public stockholding programme may not meet this requirement as the government procures crops at a high price and spends money from its budget on storage and distribution only to sell it at a low price. Further, India’s food system may also struggle to meet the requirement of “environmental sustainability”, especially in Punjab and Haryana. Even if the provisions on SFS are non-binding in the final agreement, it could open the doors for the EU to impose non-tariff barriers on India’s agriculture exports on grounds of not complying with its sustainability requirements.

Fifth, how India copes with the provisions in the Energy and Raw Materials chapter of the FTA will need careful attention. Based on the EU’s initial demands, some of the provisions in this chapter could prevent India from making energy goods and raw materials available to the domestic downstream manufacturing industry at prices lower than the export price, thereby creating a disincentive for enhancing value-added production in the raw material sector. Further, the EU’s initial demand included the requirement that the financial contribution of an EU entity, which has been granted an authorisation by India for mining and related activities, shall be fixed in such a manner so as not to interfere with the management and the decision-making process of the EU entity. If this has not been diluted in the final text, then it is likely to curtail the ability of India to charge reasonable prices from EU entities involved in the natural resources sector.

Sixth, it is quite probable that the FTA will replicate certain provisions on patents contained in the India-UK CETA specifying that “the preferable and optimal route to promote and ensure access to medicines is through voluntary mechanisms”. This will reinforce the message that the policy direction in future will bend decisively in favour of voluntary licensing mechanisms that favour entities in the developed countries manufacturing patented pharmaceutical products and against the policy tool of compulsory licensing. This could also be perceived as a blow to the generic pharmaceutical industry in India.

In conclusion, the value of geopolitical signaling of the India-EU FTA should not be underestimated. However, the real benefits of the FTA will be realised for India if it results in a significant boost in its merchandise and services exports and attracts substantial European investments in the manufacturing sector. While we await the text of the final agreement, it should be hoped that the issues mentioned above have been resolved in India’s favour. If not, then in the medium and long term, the FTA could have worrisome implications for India.