Behind FTA Policy Calibration: More Imports, Lack of Competitive Advantage

Even as the government signals a new push on the trade front by targeting bilateral early harvest agreements, India’s existing free trade agreements (FTAs), most of which were signed in the mid-2000s and are subject to a formal review process, have seen imports grow much faster than exports over the past decade.

Between FY11 and FY21, exports to nine countries and two trading blocs, with which India already has trade deals, increased by 36% to $62 billion, while imports to from these countries increased by 44% to nearly $75 billion, doubling the trade deficit to $11.8 billion. billion in FY21 vs. $5.8 billion in FY11.

The gap between export and import growth was even wider in fiscal 2019, the last fiscal year unaffected by the pandemic. Between fiscal 2011 and 2019, India’s exports to these countries increased by 57% to $72.4 billion, while imports increased by 80% to $93.2 billion.

India concluded an FTA with the United Arab Emirates last week and is currently negotiating deals with Australia, the UK, Canada, Israel and the EU.

The country has bilateral trade agreements with Japan, South Korea, Malaysia, Thailand, Singapore, Sri Lanka, Nepal, Bhutan and Mauritius. India also has a trade agreement with the ASEAN group of countries and is part of the South Asian Free Trade Agreement.

Among the countries with which India has trade agreements, major markets where exports grew on a net basis between FY11 and FY21 include Nepal, Malaysia, Bangladesh and Thailand, while growth in imports far exceeded export growth in trade with Vietnam, Singapore, Indonesia and Japan. While India’s exports to South Korea grew slightly faster than exports between FY11 and 21, the trade deficit with South Korea in FY21 was the highest among partners FTA at $8.1 billion, followed by Indonesia at $7.4 billion and Japan at $6.5 billion.

India has already launched a review of the FTA with South Korea and is working to launch a review of the FTAs ​​with Japan as well as the FTA with ASEAN. Trade Minister Piyush Goyal has previously said trade deals with ASEAN, Japan and South Korea “have failed to deliver” for India as domestic products “face challenges.” barriers” in these countries, even though they offer trading partners duty-free access to Indian markets.

In 2019, India withdrew from the Regional Comprehensive Economic Partnership (RCEP), which would involve a trade deal with 10 ASEAN members plus Australia, China, Japan, New Zealand and Korea. South, citing “outstanding issues and concerns” after the government faced a domestic backlash over the deal’s negative impact on the MSME, textile, dairy and manufacturing sectors.
Experts noted that the main cause of India’s inability to benefit as much as its trading partners from the lower tariff barriers offered by FTAs ​​was the lack of competitiveness of Indian industry.

Biswajit Dhar, a professor at Jawaharlal Nehru University, said the main issue holding back Indian export growth was competitiveness.

“The problem is one of competitiveness and that is something that has always kept us behind,” Dhar said, noting that India must seek to boost manufacturing and reduce the cost of doing business, including logistics costs.

Since 2020, India has been seeking early harvest deals as part of ongoing FTA negotiations, aimed at excluding sensitive sectors such as agriculture, including dairy, and sectors where Indian players might not be able to compete with foreign players. Early harvest systems can allow countries to exclude contentious issues and agree rapid tariff concessions in mutually beneficial areas. The upcoming early harvest program with Australia is likely to exclude wheat, dairy and beef sectors which are considered sensitive, but is likely to liberalize trade in mining, pharmaceuticals, health, education, renewable energy, railways, gems and jewelry, tourism, defense and jewelry. textiles. Experts have noted, however, that early harvest agreements can sometimes reduce the incentive to continue negotiations towards a full FTA and can also be subject to challenges at the WTO if they are not converted into agreements. that eliminate tariffs and other barriers to trade. on “substantially all trade” between WTO member countries.

Dhar said it was important for the government to ask industry about weak spots in market access in countries with which FTAs ​​are in place to boost exports. “It’s the little things that have often paid off in other countries,” Dhar said.

Pradeep S Mehta, Secretary General of CUTS International, also highlighted competitiveness as the main issue holding back Indian exports, noting the high cost of doing business in India.

“In India, electricity tariffs are among the highest in the world and we have the anomaly of industrial electricity tariffs higher than national tariffs,” Mehta said, adding that high logistics costs and the relatively lower availability of finance had also hampered Indian exports. Mehta added that the lack of competitiveness has also made Indian industry hesitant about the FTAs ​​currently under negotiation.

Mehta however noted that the government’s Rs 1.97 lakh crore production-linked incentive scheme to boost manufacturing across all sectors and the national logistics policy were steps in the right direction to boost the competitiveness of the industry. Indian industry.

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