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India’s international trade approach
In an economically interconnected and technology, India needs to have an open mind on trade
India’s international trade posture appeared to turn protectionist.
The first is the Union Budget announced by the Finance Minister on February 1.
The second when India declined to attend a meeting of trade negotiators in Bali (February 3-4) that was discussing the next step in the Association of Southeast Asian Nations (ASEAN)-led Regional Comprehensive Economic Partnership (RCEP) trade agreement.
Problem with FTAs
Durning Budget the finance minister made several references to the problems with free trade and preferential trade agreements (FTAs and PTAs), raised tariffs on the import of more than 50 items, and changed the Customs Act provisions.
It has been observed that imports under Free Trade Agreements (FTAs) are on the rise.
Undue claims of FTA benefits have posed a threat to the domestic industry.
The consequence of the changes will be to put Indian importers on notice and discourage imports in general.
Trade deficits
The government’s problem with FTAs was a key theme in its decision to walk out of the RCEP negotiations (of 16 countries) in November 2019.
Prime Minister Narendra Modi and members of cabinet cited the rise in trade deficits with FTA partners.
The government says it will now review all those agreements, in particular TAs signed with the 10-nation ASEAN grouping (FTA), Japan (Comprehensive Economic Partnership Agreement, or CEPA) and South Korea (CEPA), and wants to “correct asymmetry” in negotiations with new partners.
The case of the Comprehensive Economic Cooperation Agreement (CECA) being negotiated with Australia.
India and Australia began CECA talks in 2011.
Tough road ahead
A similar scenario awaits the announcement of the India-United Kingdom FTA talks.
The government’s decision to scrap all bilateral investment treaties with 57 countries including EU nations, and bringing in a new Bilateral Investment treaty (BIT) model in 2015.
The decline of multilateralism, accelerated by retrenchment of the U.S. and China have all meant the World Trade Organization (WTO) has lost steam as a world arbiter.
This leaves states that are not part of arrangements without a safety net on dispute settlement mechanisms.
The government has invoked the massive $57-billion trade deficit with China to explain protectionist measures.
India has its own trade surpluses with smaller economies, particularly in the neighbourhood, where Indian exports form more than 80% of total trade with Nepal, Bangladesh, Bhutan and Sri Lanka, respectively.
Even with Pakistan, before India cancelled most favoured nation (MFN) status and Pakistan suspended all trade, in 2019, India’s exports stood at about $2.06 billion of a total of $2.55 billion.
Rise of regional agreements
It is clear that most of the world is now divided into regional FTAs, including the North American Free Trade Agreement (NAFTA) for North America, the Southern Common Market (MERCOSUR for its Spanish initials) for South America, the EU, the Eurasian Economic Union (Russia and neighbours), the African Continental Free Trade Agreement (AfCFTA), the Gulf Cooperation Council (GCC) FTA in West Asia, and now the biggest of them all, RCEP, which minus India, represents a third of the world’s population and just under a third of its GDP.
India’s strength in the services sector and its demand for more mobility for Indian employees.
India’s demographic might be certainly attractive for international investors, but only if that vast market has purchasing power and is not riven by social unrest and instability.