India-EU FTA: A parting kick from UPA?

Barring a few exceptions India has a chronic trade deficit with most of its existing FTA partners as it is with most of its proposed FTA partners, says M R Venkatesh.

In a way it is stunning, why even unprecedented. In a News Release dated 26th March 2013, the Gujarat Co-operative Milk Marketing Federation Limited – popularly known by its brand name Amul - requested Commerce Minister to be “careful while negotiating in the interest of farmers of India” and “strongly opposed to provide any kind of advantage in import duty on dairy products.”

Why should one of India’s most competitive, efficient and professional organization be mistrustful of the government, warn it to be careful and oppose its moves?

The answer to this question dates back to 2007 when India and EU launched negotiations for a bilateral trade agreement. Since then several rounds of negotiations have taken place covering various aspects of trade and commerce.

These negotiations are expected to be concluded soon – possibly as early as next week. Though the negotiating texts are secret, broad contours of information available raise significant concerns. That explains our paranoia in the first place.

Let us not forget that for past year or two, experts have been pointing to the debilitating impact of India’s trade deficits. This has been on a rising trend since 2003-04 and stands at a phenomenal $190 billion in 2011-12. This is approximately 11 % of the GDP and implies a growth rate of 56 percent over the previous year.

The trade deficit for 2012-13 is no better. The 2012-13 Economic Survey indicates a trade deficit of $167 billion for 2012-13 (April-January) indicating an increase of 8 percent as compared to the corresponding ten month period of 2011-12.

According to projections for 2013-14 made by the Commerce Ministry in its Report on “Strategy For Doubling Exports in Next Three Years: 2011-12 to 2013-14”, India will see a trade deficit of $282 billion under a “business-as-usual” scenario which is expected to be 11.5% of our GDP. 

India’s current account deficit, which nets income from services against such trade deficit, is also rising continuously. Compared to $2.66 billion in 2000-01, it now stands at $78 billion in 2011-12. The current account deficit for 2012-13 is estimated to be in excess of 5 percent of the GDP.

This emerging scenario has belied the assumption held in higher echelons of the Indian government that we are an emerging super power in services. In my humble opinion we are not. While that may by itself be a matter of intense debate, the fact remains that service exports are unable to keep pace with our trade deficits.

This makes the government desperate. Consequently, it is constrained to allow volatile and capital flows of doubtful origin to fund current account deficit. Beggars cannot be choosers. Can they? This has added to the financial fragility of the nation and is reflected in rupee exchange rate volatility. 

The only way out of the conundrum is to increase exports and simultaneously bring down our imports as a share of our GDP. Elementary economics suggest that to do either we need to improve our competitiveness. Sadly the government is missing this fundamental point. And that is the crux of the issue.

India’s Flawed FTA Policy

India’s FTA policy seems to be oblivious of this fundamental fact. Barring a few exceptions India has a chronic trade deficit with most of its existing FTA partners as it is with most of its proposed FTA partners.

With the EU, the story is no different. India has a consistent trade deficit over several years with EU. If UPA government foolishly proceeds and consummates the India-EU FTA, the trade deficit will go up significantly in agricultural, commodity and industrial segments with possibly some gains in some usual suspects like textiles, jewelry and leather.

Once the FTA becomes operational, experts opine that the EU could flood the Indian market with dairy products, poultry, farm and fisheries, some of which are of strategic importance for India.  This will directly compromise India’s agricultural sovereignty and its food security.

It may be pertinent to note that as the WTO negotiations hit a road block we seemed to undertake the FTA route to our trade nirvana. However, experience of the past decade suggests that the plethora of FTAs are not reversing this deficit but in effect aggravating the situation. Needless to emphasize our FTA policy should be revisited.

But does FTA with developed countries make any economic sense? Let us examine.

The developed countries already have low tariffs in most products. To that extent FTA for India makes little or no sense. And if India can sign one, so can other countries and thereby negate the advantage.

Now let us examine the matter in greater detail. The average applied tariffs in EU range between 1.4 to 13.9 percent in agricultural products and 0.5 to 4 percent in industrial products.
In comparison, India’s average applied tariffs, even after significant reductions, are 31.4 and 9.8 percent in agricultural and non agricultural products respectively.

In short, the possibility of a gain just from tariff reduction is huge for the partner but very limited for India. Yet the UPA seems to be insisting on an FTA with EU.

Unchartered Areas

But there is another dimension to this argument. These FTAs are increasingly getting into areas of intellectual property rights commitments, government procurement, and competition policy. Interestingly, these contentious issues have stalled Doha Round of negotiations for years within the WTO.

In short, wherever WTO fails, the route seems to be FTAs. What is forgotten in the melee is that such agreements threaten policy instruments of various developing countries. This in turn erodes our sovereignty.

In contrast to this possibility, the EU is well protected from such external interventions. Let us not forget that even though the EU has low tariffs, it provides very high domestic subsidies to its agricultural producers which work both as a protective barrier in its domestic market, as well as a competitiveness enhancing instrument for its exporters.

Our negotiators fail to understand that these subsidies are trade distorting, affect international prices and thus reduce competitiveness of our producers. Indian exports also face high non-tariff barriers (NTBs) like sanitary and phyto-sanitary [read hygiene] standards as well as technical barriers in EU, making exports to EU extremely difficult.

Given the tariff and NTB structures between the two partners, the EU obviously has much more to gain in terms of tariff reduction while India’s gains lie in sorting out the NTBs and in the removal of EU subsidies – a fact lost on our negotiators.

However, EU negotiators have repeatedly argued that the issues of NTBs [being multilateral] are not to be discussed under any bilateral agreement. Consequently, they opine that these can be negotiated only at the WTO level. Interestingly, India opposes such policies at a multilateral level! 

In case of manufactured products the story is no different. We will continue to be handicapped by market access into the EU – not through the tariff barriers but because of NTBs which we are incapable of even comprehending much less negotiating at a bilateral level with EU. Of course, there could be some gains, but these will be marginal. Crucially, the loss outweighs the gains.

Since infrastructure in India including that of marketing, storage and transportation are weak, entrepreneurs feel their competitors in the developed countries have huge advantage in terms of basic facilities. In addition they get significant support from the government. Unless this is set right, it is futile to talk of FTA.

And precisely to mask this failure the UPA is embarking on such adventures

There is another yet another critical point that remains unanswered. As India contemplates legislating the Food Security Act, experts point to the lack of farm production to meet its target. In such a scenario, where is the question of exporting? In the alternative is the success of this legislation depending on benevolence of Europeans to export subsidized farm products into India?

Either way, a disaster waiting to explode in our faces!

Interestingly, a Report of the European Commission on the EU-Korea FTA concludes “the first signs are promising” and “the EU has benefited significantly and its exports to Korea are on the up.” [EU Exports to Korea increased by 37 percent while EU’s imports have marginally increased by 1 percent]

Remember, Korea is no underdeveloped country. And if this can happen to Korea, what could be the fate for an underdeveloped, under prepared and under governed country like India?

Trade, as we all understand, is between equals. Put differently, if there is a theoretical chance that trade may bring in some benefits to both the parties; it is surely a worthwhile try. Unfortunately the EU-India FTA is doomed to fail even at the hypothetical level. Why then go through this elaborate charade?

Naturally questions arise. So why is India embarking on this suicidal mission? What are its compulsions? Whose interest is our government trying to protect? Is this a parting kick of a government on the way out?

Let us watch out for the next Amul advertisement.

The author is a Chennai-based Chartered Accountant. Comments can be made to mrv@mrvv.net.in