The Free Trade Agreement between India and European Union would set a predictable framework, slashing duties on over 90 percent of the bilateral trade. However, the relationship between India and EU has been underdelivered.
Rohit Sinha/ Geethanjali Nataraj
Observer Research Foundation
Multiple negotiating rounds, EU-India summits and a number of other technical meetings since 2007, have not been able to iron out differences between the 27 nation bloc and India on the India-EU Bilateral Trade and Investment Agreement (BTIA). With only a "narrow political window" of opportunity left, Commerce Minister Anand Sharma's visit to Europe must be followed closely.
An EU-India Free Trade Agreement (FTA) would have an impressive scale. India is currently the EU's 9th most important trading partner, whereas the EU is India's largest trading partner. The FTA would set a predictable framework, slashing duties on over 90 percent of bilateral trade. While the EU-India relationship has been branded a strategic partnership, set against its potential, the relationship has under-delivered.
Also read: India-EU FTA in jeopardy? Here's why
Considered 'natural allies in a wide range of global issues' by both parties, the FTA would be an important step in enhancing the EU-India relationship. India has much to gain from an FTA with the EU, particularly in regard to preferential and duty-free access to the European market.
A Sustainability Impact Assessment (SIA), commissioned by the EU, indicates that an extended (broad) FTA (including further non-trade barrier harmonization) would result in significant benefits to both partners in terms of welfare gains, production, international trade, wage and productivity increases. The welfare effect amounts to an additional 0.3 percent growth for the Indian economy in the short run and 1.6 percent growth in the long run.
However, it would take more than just a reduction in tariffs to make the FTA attractive for India. India's trade policy is fairly constrained by its concerns for the poorer parts of its demographic. In the near future, the majority of India's population will be under the age of 30, necessitating a growth strategy centred on job-creation rather than an export-led one.
India's demographic and its education system will be churning out a skilled, competitive, English-speaking work force, which Europe will be in short supply of in the near future. It is also in EU's own interest to incorporate an ambitious Mode 4 (Mode 4 refers to the supply of natural persons for providing services) liberalisation package of GATS (General Agreement on Trade in Services).
The economic benefits of the FTA are to a large part dependent on the extent to which investment is allowed to play its part. The FTA seeks to provide trade related assistance to aid India in continuing its efforts to better integrate into the world economy.
Areas such as sanitary and phytosanitary measures and technical barriers to trade (including the upgrading of laboratories and testing facilities so that these are able to provide certifications for export to Europe), the setting up of Investment Facilitation Desks, training of customs officials etc are being extended.
Indian exporters can attain higher standards with technical assistance from the EU. Moreover they are extending programmes that would look to enhance capacity of trade-related regulatory institutions and enforcement systems, to meet international standards and requirements and business needs.
An issue that is polarizing public opinion is the suspicion regarding manufacture of generic drugs. The EU had earlier demanded an exclusive chapter on data exclusivity. By gaining rights over data, innovator companies can prevent their competitors from securing marketing licenses for low-cost versions during the tenure of this exclusivity.
This would negatively impact India's pharmaceutical sector, which has been called 'the pharmacy of the developing world'. This fear should be dispelled as the EU has withdrawn its data exclusivity clause. Despite this, many protests continue amidst the fear of a hike in the price of life-saving drugs. Both partners need to treat this issue sensitively.
Considering the impact of such an agreement, the details of the negotiations have not been made public. The public has to content itself with leaked reports and drafts. This has caused much anxiety in the minds of the people and communication to the larger public needs to be boosted so as to dispel fears and clarify issues which have been addressed.
There are other issues that still need to be ironed out. The EU has pushed for hiking FDI in the insurance sector to 49 percent. Recent news reports suggest that the government is finally moving in that direction. Moreover there is reluctance on the part of the EU to negotiate terms on the issue of government procurement.
The Indian government is treading cautiously as one would not want to translate social objectives to economic costs.
The FTA must seek to build on complementarities that have surfaced as a result of the Eurozone crisis. India has witnessed a fall in its exports due to falling demand internationally and the EU is looking to boost growth.
A successful conclusion of the FTA would go a long way in building international market confidence, giving much needed stimulus to the international economy. The loss of revenue from reduction in tariffs should be viewed in gains of transfer of technology, productivity increases and greater competition.
The FTA will be India's first large trade agreement with a western bloc, consisting of 27 economies. If structured well, the agreement could power India's growth for the next decade.
The authors are with the Observer Research Foundation, an independent public policy think tank based in New Delhi