India EU – Free Trade Agreement Talks

Why most of the countries are signing FTAs?

• Countries sign and negotiate ion FTAs for many reasons.
• By eliminating tariffs and some non-tariff barriers FTA partners get easier market access into one another’s markets.
• Exporters prefer FTAs to multilateral trade liberalization because they get preferential treatment over non-FTA member country competitors.

FTA: India – EU

• India and the EU first started negotiations in 2007 on an FTA to cover trade in goods, services, intellectual property and foreign investment. However, 13 rounds of negotiations have not yielded a treaty to regulate trade and investment between the two sides

Why in news?

• During the 13^th India-EU Summit that was held after four years and was attended by Prime Minister Narendra Modi and EU leaders, India and EU failed to declare the announcement with regard to the resumption long stalled negotiations for free trade agreements as many hurdles still remains.
• However leaders of both the sides have welcomed the re-engagement of discussions for furthering the proposal pact.
• It was expected that India and the 28 nations European Union (EU) would announce resurrection of talks, which have been on hold since May 2013 as both the sides are yet to come into a consensus on crucial issues like data security status for the IT sector.

What are the Hurdles and their Impact on India?

• First in terms of trade, the purpose of an FTA is to bring down tariff rates from the most favoured nation (MFN) rates. One of the major demands of EU is that India should lower tariffs on European automobiles and wine and spirits.

Impact:

• This will cause great trade for EU but for India it will imply more imports than exports.
• EU tariff rates are already low and thus, apart from sectors like textiles and fisheries, India’s exports to the region might not increase significantly if tariffs are cut.
• Another factor in terms of goods is the non-tariff barriers such as sanitary and phytosanitary measures. EU imposes stringent labeling requirements and trademark norms.
• Thirdly, in terms of services if India wants to benefit from a FTA with EU, then it needs strong binding promise from EU to liberalize trade in services.
• Fourthly, in terms of intellectual property (IP), the major disagreement is regarding IP protection standards.

Impact:

• India should not agree to additional protection measures as this could compromise public health and raise other compelling concerns
• Fourthly, India’s new model bilateral investment treaty (BIT) is an issue, especially for foreign investment.

Impact:

• India’s BIT model does not contain an MFN provision, excludes taxation measures, and makes it mandatory for foreign investors to exhaust domestic judicial and administrative remedies for at least a period of five years before pursuing a claim under international law.

India’s Benefit from the FTA

• India will gain a lot from an FTA with the EU with regard to preferential and duty free access to European market.
• According to a Sustainability Impact Assessment, commissioned by the EU called “Trade Sustainability Impact Assesment for the FTA between the EU and the Republic of India” an extended FTA i.e. and FTA that will include further removal of non-tariff barriers would lead to significant benefits in terms of welfare gains, production, international trade, wage and productivity increase.
• The welfare effect of the FTA will provide an additional 0.3% growth for the Indian economy in the short run and 1.6% growth in the long run.
• FTA between India and EU will boost job creation and facilitate investments.
• India’s demographic dividend will provide it with a young, skilled, competitive workforce which Europe lacks. And India needs employment opportunities to absorb this demographic dividend which an FTA with the EU can provide with.

What is the Way Forward?

• Manufacturing Sector Reform
• India has to improve its manufacturing by introducing domestic reforms.
• India’s manufacturing sector is still struggling in comparison to international market competitiveness
• Providing a more congenial and conducing environment to the domestic manufacturers will lead to production of better and competitive goods
• With a quality manufacturing sector India can afford to clear through the stringent non-tariff barriers.

Tariff  Reforms:

• India levies an average tariff of 14.1% which has to be reduced.
• India can consider a policy of setting lower tariffs for the automobile sector and can move towards stringent IPR regulation and promotion of innovation.
• This will provide the much needed mutual confidence that is needed to arrive at the India-EU FTA.

Government Initiative:

• Government has to come up with proper procurement processes.
• GOI launching long awaited economic reforms in India can be an incentive for EU firms to enter the Indian market.
• This could offset the impact of the tapering off quantitative easing, both by the US Federal Reserve and the European Central Bank by injecting appropriate capital flows in India