Modi govt has learned from past FTAs. Its priority now is building a manufacturing powerhouse
With the
emergence of new geopolitical realities arising out of the unilateral
announcement of reciprocal tariffs by President Donald Trump, the US cannot
be considered a very reliable trade partner. And, even
if a bilateral trade agreement with the US is concluded, uncertainty about the country’s future actions remains.
Trump had announced a 90-day window for tariff negotiations, which ended on 9 July. He later extended the deadline to 1 August and sent letters to 14
countries informing them about new tariff rates.
India and the US are currently
holding talks over a trade agreement, with the sixth round expected to be held
in August, when American trade officials will visit India. This shows India’s importance as a trading
partner for the US.
There are other ambiguities around
Trump’s administrative actions, and no one is sure of the outcome of US courts’
and the Senate’s interventions. Therefore, prudence
demands that we go slow and wait for countries such as China, Japan, and
Vietnam to negotiate with the US. India, meanwhile, can build strategic
partnerships with other countries and blocs to prevent overdependence on the US
market. The EU is expected to be stable and
predictable in its approach, but India has to deftly negotiate the bloc’s impulse
to impose non-tariff barriers under the garb of human and labour rights,
environment, climate change etc.
The World Trade Organization
is virtually defunct and rule–based trading order looks like a thing of the
past. Every country, including India, is negotiating Free Trade Agreements
(FTAs) with multiple other nations to protect its export market. In May, India
concluded FTA negotiations with the United Kingdom, while talks with
the EU and the US are in advanced stages. However, our approach to FTAs cannot
be a simple replication of the old template and must be influenced by outcomes of
the not-so-successful past
trade agreements, such as the ASEAN-India FTA and
the Regional Comprehensive
Economic Partnership (RCEP)
negotiations.
Past mistakes
The global trade and
financial architecture that emerged in the post-World War 2 period
supported a rule-based trading system. It allowed several poor countries to
overcome the limitations of a small economy and tap into the export
market. As a result, these countries — like South Korea, Taiwan, and China —
were able to experience above–average growth rates for a long period of time.
We missed riding the bus of free trade due to earlier policy
misadventures like quota, license raj of Congress–led governments. Now our
government is committed to make India a manufacturing powerhouse, but the bus
of free trade has hit major road bumps.
India is focusing on
ensuring competitiveness of domestic industry right now, as there is absolutely
no substitute for building the manufacturing sector. Past FTAs failed to yield
much benefit because they exposed domestic industries to global
competition without strengthening the manufacturing ecosystem through
infrastructure development, availability of land and power, and ease of
compliances. India needs structural reforms to reduce input costs. The Modi
government’s focus is on slashing costs of land, power, logistics, compliances,
and raw material to enhance global competitiveness of our manufacturers.
Several steps have been taken in the last 11 years by the Centre, but a lot
remains to be done at the state–level, as most of these areas are basically
dependent on state policies.
Micro, small, and medium
enterprises (MSME) is an important sector for employment generation
and integrating our manufacturing into global and regional supply chains.
Therefore, before entering into any agreement, the government is ensuring full
support to MSMEs. The MSMEs also have a lot to do at their end, since they
face difficulty meeting international standards, which limits
their competitiveness. It is important for this sector to build institutional
capacity and technical know-how to follow global trade standards. Quality
Control Order (QCO) was brought with this intention, but it
has emerged as another challenge for Indian
industries. QCOs hinder the import of raw materials and intermediate
products required for manufacturing, creating a negative impact on the domestic
production of goods, and reducing India’s export competitiveness. Therefore,
there is a need for a more sector-specific approach to QCOs.
Our recent experiences
with custom duties have shown that there is a conflict between imposition of countervailing
duties and the interests of MSMEs. Such duties tend to favour big domestic
producer industries at the cost of MSMEs which are the users of
products that are subject to countervailing duties. So FTAs provide an
opportunity for strategic tariff reduction on intermediate goods for
the betterment of Indian industries. India will take a data-driven
approach in determining tariffs to ensure that they don’t disrupt supply chains
or discourage innovation and investment.
Agriculture sector
protection, intellectual property rights, and public procurement are critical
and form an important part
of tariff negotiation. Hence, their interest is non-negotiable.
Any concession given in these areas will be carefully evaluated and bargain
precisely measured. We know that if India gives concession to one country or
region, others would demand similar treatment and privileges. India should
not bend over backward to seek concessions for movement of its
citizens across borders as service providers. The negotiating countries use
this demand to get concessions from India. Indian talent is in huge demand
globally and other countries would anyway need Indian
expertise. Otherwise, India can harness its human resources and potential
to its own advantage.
An opportunity
Major economic decisions are not
made in the fog of uncertainty. Global economic uncertainties are not fully
comprehensible and controllable, therefore India’s focus is on reducing domestic policy
uncertainties. It will surely boost private capital formation. India also has
to attract massive foreign capital in export-oriented sectors. But this
is easier said than done. The country’s image as a destination for foreign
capital faces challenges due to certain decisions of the past government,
especially the Vodafone tax dispute. India still has significant work to do in
areas like judicial reforms for contract enforcement.
Trade considerations cannot be
fully separated from strategic considerations. The China+1 and risk diversion
strategy of global manufacturers are an opportunity for India to benefit from
current geopolitical challenges, and therefore the country’s focus in FTA negotiations is to counter China.
Since China is a major challenge for India in multiple spheres, teaming up with
countries at the receiving end of China’s irredentist and mercantilist policies
is a viable option. This also means that India should still work for
multilateral trade deals because third-world countries get a level playing
field as well as some preferential treatment under multilateral trade platforms
such as WTO.
Gopal Krishna Agarwal is the National Spokesperson of BJP.
