India risk: Alert - Optimism rises over prospects for India-EU FTA
January 21st 2013 / Printer versionFROM THE ECONOMIST INTELLIGENCE UNIT
As India continues moves to gradually open its economy and seeks large-scale investment funding, its interest in free-trade agreements (FTAs) is growing. Already key deals have been struck with Japan, Malaysia, and South Korea, and attempts are under way to hammer out agreements with Thailand, Israel, Australia, and notably the EU. The Bilateral Trade and Investment Agreement (BTIA) with the EU, estimated to have the potential to double two-way trade by 2015, has been a protracted affair. Negotiations began in June 2007, but with the EU’s chief negotiator, Ignacio Garcia Bercero, in Delhi this week, some have argued that resolution might just be possible this year, two years earlier than initially billed.
The EU is India’s largest single trading partner, and there are significant gains to be made from formalising this trading pact. Global financial problems aside, two-way trade continues to steadily increase. According to Indian official figures, in 2010, this stood at US$83.3bn, rising to US$110.26bn in 2011.Furthermore, although India’s GDP growth rate has moderated, it is expected to pick up from 2014 onwards and remains one of the fastest-growing emerging economies. India is also particularly attractive to trading partners for its rising middle class and sheer numbers, particularly of young people.
For India, the advantages are clear: the BTIA would provide greater access to this large and growing market for both its products and citizens. As part of the agreement, it is expected that India’s skilled professionals will be given access—albeit temporary—to the EU for work. Indeed, the FTA under discussion could arguably be viewed as more a trade and services agreement (although India describes it as a "broad-based trade and investment agreement").
Access denied?
There is however a number of key areas that require movement before any deal can progress. Overall, access is the key stumbling block, with the two sides at odds over the degree to which India should open its market. In particular, the EU is seeking greater access to the banking sector, legal services, insurance, and retail. In addition, it wants to see a sharp reduction in tariffs on goods, particularly in areas like cars, spirits and wine.
The 27-nation bloc will have been heartened that the Indian government last year made considerable progress in opening up areas like retail, including implementing a controversial 51% ceiling in multi-brand retail for foreign companies—albeit these changes are subject to some onerous conditions. IKEA of Sweden’s application to open stores in the country has proven a significant test case, with the approval by the Overseas Investment Board on January 21st seemingly a potential major development (IKEA had previously had to adjust it proposal, after, among other things, being barred from operating cafes in its stores). In addition, while this policy was agreed at a federal level, India’s state governments have the power to choose individually whether they follow suit, with many opting against the move. Further progress is promised, but given the central government’s relatively weak position and with an election cycle in the offing, its delivery is questionable.
At the federal level the government is operating as a minority coalition after a key partner, All India Trinamool Congress, withdrew its support last year over Congress’s reform moves. Although this has yet to slow the pace of reform attempts, it will no doubt make implementation more difficult as the government has tolook to other parties and independents in a bid to garner sufficient support to push through legislative changes.
Reform inches forward
As a result, over the course of 2013, reform moves are expected to slow further as the country gears up for general elections. Congress is seeking a third consecutive term in office. To succeed it needs to use the next 18 months to cultivate, and in some areas, pacify its core constituency, as well as try to rebound from the shadow of corruption. At the latest, the next elections will be held in mid-2014, and, despite the coalition’s vulnerability, the present disarray of the opposition means it is unlikely to capitalize on government weakness and force early elections. Whether much will be achieved in the interim remains a source of considerable debate, although recent fuel pricing reform offers encouragement.
The fact remains that the lure of increased trading ties and foreign investment is strong. India’s focus on infrastructure development requires large-scale funding, and improving economic ties with other nations and trading blocs, supports this policy. In this respect, India’s recent trade negotiations with the Association of South-East Asian Nations (ASEAN) may serve as a cautionary tale. Here, after protracted negotiations, the final agreement—specifically focused on services and investment—failed to reap the dividends that India had anticipated. Ultimately India had to settle for far more limited access to services, particularly when compared to the access ASEAN has offered to Australia and New Zealand. Furthermore, restrictions on the movement of Indian professionals, particularly in IT, remain significant.
An India-EU summit is due later this year, at which both sides will aim to make progress on the BTIA. The agreement has developed to the stage where it is unlikely be shelved whichever party takes power in 2014. However, it is possible that some areas will need to be revisited, particularly the proposed cap on Indian migrants to countries such as the UK. Nevertheless, the current government remains positive about its overall prospects.
The Diplomat
What’s Holding Back the India-EU FTA?
India must conclude its FTA with the EU to stay competitive amid larger regional and bilateral FTAs.
By Ritesh Kumar Singh & PrachiPriya
June 17, 2014
The EU-28 is India’s largest trading partner, accounting for roughly 15 percent of total trade in goods and services. It is an important market for India’s export of textiles, apparel, pharmaceuticals, gems, jewelry and IT. The EU is also the largest source of FDI inflows to India, accounting for over one-fourth of the total.
Despite several rounds of negotiations that began in 2007, the proposed EU-India Bilateral Trade and Investment Agreement (BTIA), covering trade in merchandise, services, and investment, is still far from being concluded. The recent EU ban on the import of mangoes from India will further strain the bilateral commercial relationship, which is already troubled due to a series of tax disputes involving European companies.
Given the subdued sentiment around foreign investment and trade currently, restoring growth to its normal level remains at the top of the Modi government’s agenda. This would require a fresh approach toward India’s commerce and trade. It would be pertinent to analyze what is holding back the conclusion of the EU-India trade pact, which possesses immense untapped trade and investment possibilities.
India’s Interests
Given the contribution of the service sector to GDP (57 percent), India is seeking improved market access in services. India’s interests lie in Mode 1 of the BTIA, which covers information technology enabled services (ITES), business process outsourcing (BPO), and knowledge process outsourcing (KPO), and Mode 4 which covers movement of skilled professionals like software engineers.
A recent Reserve Bank of India (RBI) survey on computer software and ITES exports shows that Europe’s share in India’s software exports declined from 27 percent in fiscal 2008 to 20 percent in fiscal 2013. The share of Mode-4 services in overall software service exports declined from 25 percent in fiscal 2008 to 14 percent in fiscal 2013.
Improved market access in Mode 4 will allow skilled professionals such as software engineers to temporarily reside and work in EU countries. The barriers to Mode 4 include work permits, wage-parity conditions, visa formalities and non-recognition of professional qualifications.
India also seeks a data secure status from the EU, as the high cost of compliance with existing EU’s data protection laws and procedures renders Indian small and medium enterprises (SMEs) un-competitive.
EU’s Interests
The EU’s demands in India’s Mode 3 services includes further liberalization of FDI in multi-brand retail and insurance, and presently closed sectors like accountancy and legal services. The European banks have been eyeing India’s relatively underutilized banking space. However, the surrender of banking licenses by Goldman Sachs, Morgan Stanley and UBS shows that the burden of priority sector lending and financial inclusion have dissuaded foreign banks from entering India’s market.
India’s intellectual property regime (IPR) is another impediment. Any commitment over and above the WTO’s Trade Related Aspects of Intellectual Property Rights (TRIPS) will undermine India’s capacity to produce generic formulations. It is feared that data exclusivity protection measures (which allow pharmaceutical companies to exclusively retain rights to their test results for a certain period) would delay the supply of Indian generic medicines. That explains India’s opposition to the proposal. European pharmaceutical companies are wary of India’s patents law which prevents “ever greening” – a provision that allows companies to renew patents on old drugs by making incremental changes.
Cars and Wines/Sprits
Again, India has reduced duties on parts and components, and other vehicles, but maintains high import duties on assembled vehicles: 60 percent (75 percent in cars with a free on board (fob) value above $40,000 and an engine capacity of 3000 cc for petrol and 2500 cc for diesel). This protectionism remains the most contentious issue in the BTIA negotiations.
The EU also seeks deeper cuts in India’s tariffs on wines and spirits. They feel that high effective duties and additional state-level taxes inflate the price of imported liquor in India. However duties on wines and spirits are a critical source of tax revenue for the government.
Trade in Agricultural Commodities
Agricultural trade is highly distorted in both the EU and India. Even though average most favored nation (MFN) import duties on agricultural commodities in the EU (13 percent) are much lower than in India (33 percent), the EU’s peak tariff rates on certain products such as dairy (650 percent), fruits and vegetables (156 percent), and sugar & confectionary (133 percent) are more than those in India.
Again, the fishery and dairy sectors in the EU are highly subsidized. There is a fear of EU dairy products flooding Indian markets after the FTA is signed. India wants the EU to cut its agricultural subsidies, while the EU has interest in India reducing tariffs on dairy products, poultry, farms and fisheries. Thus, both India and the EU have strong defensive interests with respect to agriculture trade negotiations.
Reconciling the Differences
To be fair, the EU does not have a single market for labor mobility. Regulations related to work permits and visas differ between members. There were efforts to harmonize the EU market through various directives, but they have met with limited success. Moreover the EU’s unemployment problems have reduced policy space for Mode 4 commitments.
India’s demand for greater market access in Mode 1 and 4 remains dependent on its ability to meet the EU’s demands in Mode 3. Strong opposition and a lack of political will on FDI in retail and insurance undermines India’s negotiating capacity.
Car manufacturers in India, primarily of Japanese and Korean origin, fear that reduced duties on cars under the EU-India BTIA will impact their market share and flood India with European cars. Additionally, there are fears that European automakers will have no incentive to set up a local manufacturing base in India. This is debatable though, as almost all major European automakers already have a manufacturing presence in India.
Could European carmakers compete in India’s compact car segment (comprising 80 percent of India’s auto market) by producing in Europe? Studies show that it’s difficult to succeed in India without a strong dealer network and reliable after-sales service. A prohibitive duty on cars looks unjustified when duties on non-car automobile segments have been substantially reduced. This also deprives consumers of choices.
Improving India’s investment climate is a better way to promote investment and jobs. Similarly, exclusive rights to the commercial exploitation of patents incentivizes research and development and brings in FDI. Thus, India needs to strengthen its IPR regime.
A trade pact is about give and take. Failure to conclude the EU-India BTIA will constitute a large opportunity loss, while trade pacts such as the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) (which together account for two-thirds of global GDP and one third of global imports) are moving global trade away from MFN routes toward bilateral/regional routes. They are setting new trade rules that would be far more difficult to comply with. This calls for taking a long-term view of India’s trade policy options while negotiating its trade pacts.