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Modi govt gives major push to free trade pacts as exports, job creation become critical

Dismantling ‘tariff walls’ for easier access into the Indian markets is expected to be biggest challenge for govt’s FTA push, something that has haunted past administrations too.

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New Delhi: The Modi government is giving a renewed push to conclude some of the pending UPA-era free trade agreements (FTAs) and even clinch some new ones. The aim is to achieve the $2 trillion export target by 2030, and address disruptions in global supply chains created by the pandemic and the ongoing Russia-Ukraine war.

In its first tenure (2014-2019), the Modi government was reluctant on clinching FTAs even as it sought foreign direct investment (FDI) by opening up all the UPA-era trade pacts for a review to increase its exports. The existing pacts, the government believed, only encouraged more imports.

But, with increasing strategic alignment with some partner countries, particularly Australia, France and the UK, India is now focused on enhancing economic ties too, which has also been a demand of the partner countries, official sources told ThePrint.  

According to the sources, yet another reason why the government is giving a renewed push to the pending pacts is the emergence of several minilateral arrangements in the wake of the pandemic — a trend accelerated by the Russia-Ukraine war.  

Sources said India, which is not part of any mega-trade pact like the Regional Comprehensive Economic Partnership (RCEP), is now increasingly entering minilateral arrangements but there is no assured market access under such frameworks, and they are mostly focussed on ensuring smooth operation of supply chains by maintaining a security framework.

The Modi government is now going full throttle on negotiating some of the key FTAs by fast-tracking negotiations with the partner countries. All ministries concerned — Finance, Commerce as well as External Affairs — have been tasked by the Prime Minister’s Office (PMO) to clinch these deals at the earliest, the sources added.

In August last year, Prime Minister Narendra Modi gave a mandate to all Indian missions abroad to look for ways to help augment Indian exports to countries where they are based.

An official said the war has now “accentuated trade problems”, giving rise to risks such as food insecurity and high cost of energy. As a result, India is now hastening the process of FTAs so that it can lead to robust trading ties with friendly countries.

Among other things, this has been done with an eye on China. Notwithstanding the border tensions, Chinese imports to India reached nearly $100 billion in 2021. 

Also Read: ‘There’s a panda in the room’: Why Australia signed historic free trade pact with India

Some old FTAs, some new ones

Free trade pacts remove entry barriers for goods and services between two trading partners. 

Under such agreements, goods and services can be bought and sold across international borders with minimal or no government tariffs, quotas, or subsidies.

While the government has resumed talks on some of the pending FTAs from the UPA-era — such as those with Australia and the European Union (EU) — it has also started discussions on new ones, like the proposed India-UK FTAs.

In an effort to fast-track the talks, the Union commerce ministry has taken the approach of signing early harvest deals — where both parties sign an agreement on the easier aspects while the main negotiations on tariff elimination on a range of products are kept for a later period, sources said.

The first FTA signed under the Modi government was the India-UAE Comprehensive Economic Partnership Agreement (CEPA) in February 2022. The pact came into effect in May 2022.

The agreement is expected to double bilateral trade to $100 billion in the next five years, up from the current $50-60 billion, while eliminating tariffs on a range of products being exported by India and the UAE.

Following this, India and Australia signed the first part of what is now known as Australia-India Economic Cooperation and Trade Agreement (AI ECTA), a free trade agreement formerly called the Comprehensive Economic Cooperation Agreement (CECA).

The talks for the ECTA began in 2011. In April, both sides signed phase 1 of the pact as an early harvest deal — Australia was then headed for elections and it also needed an alternative market to China, its biggest trading partner.

Talks with the EU, which began in 2007 and were stalled thereafter, resumed last month.

Similarly, talks with the UK are also in full swing now. Both sides had even set a Diwali deadline for signing the deal, but sources said that meeting the timeline will be difficult now owing to the resignation of UK Prime Minister Boris Johnson.

Some of the other FTAs that are in the pipeline are with countries including Israel, Canada, New Zealand, Indonesia and Thailand.

Jayant Dasgupta, trade expert and former Indian ambassador to the World Trade Organization (WTO), said the “underlying reason in having and speeding up these FTAs is we want greater market access in complementary economies”.  

“Today you cannot rely on the WTO to give you more market access. Besides, India has realised that we need to export more not only for earning forex but also for employment generation. Without exports, no country has been able to substantially grow and grow fast,” he added.

“China is slowly throttling the supply chains and it is locating as many profitable businesses inside China as it can. Such a trend can only be addressed by India by signing more FTAs.”

Also Read: More than just whisky: Trade body explains why India-UK FTA should address trade barriers

Challenges and hurdles

According to sources, the biggest hurdle that the government will face — something that has also haunted past administrations — is that of “dismantling the tariff walls” for easier access into the Indian markets.

The government is concerned that pressure from the industry may “force” India to not go for “ambitious tariff cut commitments”, as demanded by almost all the key trading partners, including the UK, Australia and the EU, official sources told ThePrint on condition of anonymity.

Owing to the nature of FTAs, domestic industry gets exposed to massive competition, and faces the risk of losing market share.

India has the highest average tariff — 15 per cent — in the Asia–Pacific region. The average import tariffs increased to 15 per cent in 2020, from 13.5 per cent in 2016, across industrial and agriculture products, according to the Geneva-based WTO.

“The industry had opposed then (during UPA era) and they will oppose even now. But now there is much more clarity on how and why these FTAs are important in realising the full strategic value of a relationship,” said an official.

It is due to the pressure from the industry that India is believed to have walked out of the RCEP.

Australia has sought major reduction in import tariffs on their agricultural produce as well as on wines and spirits.

Similarly, under the India-UK FTA talks, one of the main demands is that of a slashing of tariffs on British whisky. Similar demands will also come up in talks for a trade deal with the 27-nation bloc EU, which will also seek tariff elimination in automobiles and auto parts.

The talks for an India-EU FTA, which began in 2007, were resumed in June 2022 after a brief hiatus under the Modi government.

Both the UK as well the EU have told India that they will not like to enter an early harvest deal but want the entire agreement to be signed in one go, sources said.

India, officials added, is negotiating different forms of tariff reduction with the partner countries. 

It has taken a two-pronged approach, where the country will reduce tariffs in a phased manner in some cases and with immediate effect — as soon as the pact comes into effect — in others.

There are several products where the government has introduced import-licensing requirements and a blanket ban on imports of many products. For example, the government has imposed restrictions on the import of light-emitting diodes (LED) television and some defence products.

According to standard tariffs, the Indian government levies a basic customs duty (BCD) on goods, along with the Integrated Goods and Services Tax (IGST) and a social welfare surcharge (SWS). While the importers can claim an input tax refund on the IGST, no claims can be made on BCD and SWS. 

India’s trading partners have, in the past, expressed concerns on the SWS, which is currently levied at 10 per cent.

“It is this inward orientation of the Atmanirbhar campaign that has got the trading partners worried and also restricts the negotiating abilities of the Indian authorities,” a source said.

There are also concerns, the sources added, regarding the “erosion of market access that India may face with the existence of major trade pacts” where New Delhi is not a party. 

This could be restrictive for Indian firms in terms of their export prospects, they said.

(Edited by Sunanda Ranjan)

Also Read: How tension with Russia & China is pushing Europe to do more business with India


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