Free trade agreements of India: A policy analysis

Abstract

After the economic reforms of 1991, there has been gradual integration of Indian economy with international market based economy. Growth of economy is required for country like India to generate employment, provide sustained means of livelihood and raising millions of Indian to minimum decent standards of living. (ii) In the growth of the economy, import and export play a crucial role. Trade Policy is an important policy tool available with the Government that determines not only what the country imports and exports but also what it produces and who is going to benefit from these activities. Free Trade Agreements (FTAs) are now the favourite vehicles to achieve trade policy goals. In the present globalised context, FTAs have also become an important geopolitical tool to determine bi-lateral and multilateral relations of country both in economic sphere and geo-political sphere. (iii) Since the beginning of this millennium, India also has experimented with FTAs and first FTA with Sri Lanka came into effect in March, 2000. Thereafter, till 2011 India has signed 10 FTAs, few with our south Asian neighbours and other significant FTAs with ASEAN, Singapore, Japan, South Korea, Thailand and Malaysia. (iv) However, our experience with FTAs has not been very encouraging. While India has gained in expanding trade activities but its imports have expanded far rapidly vis-à-vis only incremental increases in exports. As a result the trade deficit of country has increased particularly trade deficit with ASEAN, Japan, Korea, Singapore, Malaysia with which we have free trade agreements has continuously increased over the year. (v) India has not signed any new FTA with any country after 2011. Though, 21 FTAs with countries and country groups are at various stages of negotiations and one FTA with Mauritius likely to come into effect in this year. So what should be the way ahead in the background that India has not benefitted from these FTAsa) No new FTA? or b) Review of FTAs to thrash out unfavourable causes? Or/and c) Selective signing of new FTAs with countries having markets with export potential? (vi) To determine the way ahead, the problem that why India has not benefitted from Free Trade Agreements has been analysed in this Policy Paper, with the help of trade data for various countries and Geographic regions including ASEAN. Countries have been analysed with reference to commodities/ products they trade in. (vii) At the outset trading partners have been categorised on the basis of basket of trading goods i.e trading partner that substantially offer one or two products that comprise 80-90% of their export goods (eg Gulf countries, Indonesia, Malaysia, Switzerland) and second category of countries that offer multi-product basket of export goods (eg. Japan, Korea, China, Vietnam, EU, USA etc). Separate approach is required for multi-product nations and single product nations. (viii) As India also offers multi product export basket, an attempt has been made to see whether there is commonality in export basket of India and other country or they offer different set of products. If commonality is more, there are chances of rivalry and competition and any trade partnership may hard to flourish. Such countries may be considered as competitors and FTA with such countries which offer competing or substitutable products may not be advantageous prima-facie. So a comprehensive approach may be required that may include elements beyond just trading in goods with competitors. With such competitor countries we may focus on agreement to gain unlimited barrier free access in services sector because in services sector we have inherent competitive advantage. (ix) On the other hand if product baskets of two countries is distinct and they can satiate each other’s requirement or complement each other, then chances of flourishing of balanced trade brightens between these countries. Such countries may be considered as complementors. With complementing trade partners particularly those with 1-2 product countries e.g Petroleum producer countries of GCC or edible oil suppliers like Indonesia, we provide very large market. In lieu of assured large market like India, we may leverage it to gain barrier free access to our goods and services in their markets under FTA. So, strategically FTA with complementors and particularly with countries with small export product basket may be our priority. The diversity of products in our export basket and the size of our market is our strength and it should be judiciously leveraged to boost our exports in the partner countries. (x) Investment is also an important dimension of International trade. If we take example of Japan and South Korea, we have comprehensive trade pact (CEPA) with both the countries, but we also have significant trade deficit of order of 8 Billion USD and 10 billion USD with these countries. However, apart from traditional import and export, both of these countries have made substantial investment in manufacturing sector and infrastructure sector in India. This investment has helped in expansion of our growth, generating employment and also helping in boosting our exports to third countries. So the argument is that if there is bilateral trade deficit, there investment in the country to an extent offsets deficit in bilateral trade. As investment, is key to employment creation, a distributive effect of growth, India should prioritise FTA with countries who have willingness to invest in manufacturing sector to boost employment and export both. (xi) The concluding view is that in this interconnected world, trade agreements are a reality and to not have FTAs is like putting own self in isolation. But entering into FTA needs a careful strategy based on the profile of specific country/ group. The criteria discussed above 5 can be used as basic framework to develop country specific strategy while negotiating / reviewing FTA. Following can be basic yardsticks to develop country specific negotiation strategies- It can be beneficial to have trade agreements with countries offering complimentary products and need goods (eg petroleum) and having narrow product basket. We provide very large market and we have multiple product export basket. In lieu of assured large market like India, we may leverage it to gain barrier free access to our goods and services in their markets under FTA. In case of competitor countries offering similar and substitutable product and with multi product basket, the partnership can be beneficial only if we leverage market access to India with barrier free unlimited market access to our Services Industry sector. A FTA with democratic countries, countries with transparent trade practices and business mechanisms may be preferred. Priority must be accorded to have trade agreements with countries/ regional groups which are ready to invest and manufacture in India for global consumption