India-EU Economic Relations: FTA in the Offing

Recently, India and the European Union (EU) concluded another round of negotiations on the proposed free trade agreement (FTA) at Brussels. Commerce Minister Anand Sharma and EU Trade Commissioner Karel De Gucht reviewed the progress of the negotiations, which started in June 2007 and are expected to be concluded before the year-end.

The 27-nation EU is India’s largest trading partner. The bilateral trade between India and the EU has increased from $ 83.46 billion in 2010 to $ 108 billion in 2011. With the fructifying of this FTA, duties would be drastically reduced on over 90 per cent of the trade between the two. According to a FICCI report, with the formalisation of the FTA, trade is likely to exceed $ 207 billion by 2015. India already has comprehensive FTAs with other countries including Japan, Malaysia and South Korea.

India-EU relations go back to the 1960s when India was the first developing country to enter into a Cooperation Agreement with the European Community. However, it took a long time for India-EU relations to warm up. Indo-EU relations lacked interest, depth and serious commitment to take the partnership forward. It is only in recent years that there has been a change in their perceptions and desire to work closely for a multicultural and multipolar global order. India and the EU have worked closely at the World Trade Organisation’s (WTO) Doha round and both played a significant role in the formulation and adoption of the framework agreement in Geneva in July 2005. However, differences arose in areas like market access for industrial goods, services, trade facilitation and anti-dumping. At times, India is suspicious of the EU’s neo-liberal economic policy.

India became more interested in the EU as a result of its emergence as an international actor, creation of the single market and the euro (the current crisis notwithstanding), leadership role in trade, and environmental issues. On the other hand, India’s dramatic economic growth was one of the main factors that made Europe to take more interest in the world’s biggest democracy. Further, India’s emergence as a leading player in the IT revolution and rapidly growing untapped market for Europe played an additional role. With the team of PM Manmohan Singh, Montek Singh Ahluwalia and Rangarajan back at the helm of affairs, India can expect more reforms on the economic front.

These factors led India and the EU to start negotiations for a broadbased trade and investment agreement. However, there are some hiccups in finalising this free trade agreement, officially called Bilateral Trade and Investment Agreement, which seeks to liberalise trade in goods and services between India and the EU. The negotiations are stuck on issues such as reduction in tariff on cars imported from the EU. The domestic auto industry has objections on including the sector in the trade agreement, arguing that it would have an adverse effect on investments and technology inflow and the targets set under the government’s Automotive Mission Plan (AMP) would be jeopardised. The Prime Minister, Dr Manmohan Singh, in 2007 released the Automotive Mission Plan 2006-16 prepared by the Ministry of Heavy Industries and Public Enterprises which is considered to be the blue-print for the growth of the Indian Automotive Industry. However, as reported, the government may include the auto sector in the FTA, following which import duty on a specified number of cars may fall to 30 per cent from the existing 60 per cent. The government is looking at allowing cheaper import of a specified number of cars under the tariff rate quotas.

Although India accepts the EU as an economic superpower, most businessmen still think of doing business with individual member-states. They seem to be more interested in the British or German market rather than the European market. There is widespread belief that the EU is over-protectionist. A large number of tariff and non-tariff barriers have become major deterrents in doing trade with the EU. In this context, the EU’s health, quality standards and environmental and social laws are seen by many as a hindrance for the developing countries in business relations with the EU. India and the EU have been negotiating an FTA since 2007 but have not been able to finalise the accord due to differences over the EU’s attempts to link trade with climate and other issues.

•

LIKEWISE, inclusion of intellectual property rights (IPRs) is another area where consensus is yet to be achieved. It has been argued that India’s thriving generic drugs business will be jeopardised by agreeing to stricter IPR rules in the pact. Indian pharmaceutical companies and some NGOs have expressed concern that inclusion of IPR in the proposed agreement would affect the sector’s ability to produce and export low-cost drugs.

In fact in 2010, India brought a case to the WTO arguing that the EU was wrongly stopping and inspecting shipments of generic drugs in transit to developing countries. Some shipments were either destroyed or turned away rather than be allowed to continue to their final destination. India reached an interim settlement with the EU on preventing seizures of generic drugs in EU territory.

The EU further wants India to open its services sector like accountancy, insurance, banking and retail, whereas India is resisting the move to open multi-brand retail and other sectors to foreign investments as there is no political consensus on these issues.

One of the reasons that Indian exports to the EU have failed to reach their potential is the EU’s stringent work permit rules that make it difficult for Indian professionals and workers to operate from the EU countries or Indian business houses to set up offices in the EU states. The proposed comprehensive free trade agreement between India and the 27-nation EU bloc includes relaxation of visa norms for Indian professionals as well as tourists.

It is imperative to understand that though the India-EU bilateral trade may have surpassed $ 100 billion in 2011, yet there is a sharp imbalance between relative levels of trade between the two—where the EU accounts for roughly 21 per cent of India’s two-way trade, India’s share in the EU trade is less than one per cent; where the EU is India’s largest trading partner, India ranks 14th in the EU’s list. Further, there may be an increase in FDI into India from the EU, but India still receives only 0.2 per cent of the EU’s FDI flows. With this background the India-EU broadbased trade and investment negotiations began in 2007. Indian exports to the EU could double in a freer and more open environment, especially for products like textiles, garments, gems and jewellery, leather and leather products, electronics, agricultural and horticultural produce.

Hence, the EU, with its 450 million consumers and the fourth largest GNP of € 10 trillion, will remain a major attraction for India’s trade, and a source for inward foreign investment. There is immense potential to increase bilateral trade between India and the EU to $ 200 billion by 2013 from less than $ 100 billion at present which will be beneficial for both India and the EU. This calls for boosting trade and investment and strengthening economic partnership to mutual advantage. It is critical for the EU to expand its ties with India as it cannot ignore India’s role as a strategic balancer in the Asia-Pacific zone in the years to come.

Dr Bharti Chhibber teaches Political Science in the University of Delhi. She can be contacted at e-mail: bharti.chhibber@gmail.com