After a long hiatus, the Government appears to have worked itself into a renewed frenzy to conclude trade deals with a number of countries notably UK, Australia, UAE, EU and possibly the USA. Given our past experience of negotiating trade deals with ASEAN, Japan and Korea and the last minute withdrawal from the RCEP negotiations, the outcome of the current rounds of FTA being negotiated is anybody’s guess.
The dilemma for our policy makers has essentially centred around balancing between domestic policy and electoral compulsions on the one hand and our obligations under WTO and other multilateral/ bilateral engagements on the other. The demand for legal guarantees of minimum support price, when seen in the context of our WTO obligations, is only the latest of a series of issues which have contributed to our dilly-dallying approach to trade deals.
The necessity of integrating into global supply/value chains is certainly not lost on our policy makers which make the call for import substitution and protectionism under “Atmanirbhar Bharat” appear somewhat contradictory. The general ambivalence towards trade deals can best be viewed through the prism of our past experience with such agreements. However, the point that is often lost is that the problem did not lie with the FTA mechanism se but with the way these deals were negotiated.
The general consensus is that our manufacturing sector lost out heavily in these trade deals because of a surge in imports from these countries. This was particularly true in sectors like steel and aluminium. Further, while India did offer duty concessions on goods, it was not able to extract similar concessions when it came to services in the FTAs with Japan and Korea. Issues like investments and mutual recognition agreements for technical standards were completely left out of the negotiations.
Another issue which is intrinsic to such trade deals is the difference in levels of cost competitiveness between Indian manufacturers and their counterparts in partner countries. Differing levels of competitiveness essentially boils down to both environmental factors (such as inadequate infrastructure, land acquisition issues, labour laws and other factors affecting factor pricing) as well as the inability of the domestic industry to scale up and invest in R&D and innovation.
The question is whether schemes like PLI can help the industry become more competitive and thus better placed to face competition from other countries if tariff lines are opened up for concessions? So far what we have witnessed are the PLI schemes announced for around 14 sectors and increase in import duties on certain products to incentivize local manufacturing.
It may not be possible to frame a black and white response to the aforementioned question. The fact is that while the PLI scheme is bringing in investments, it does not completely address the cost gap with countries like Vietnam and Bangladesh which have majorly displaced India from export markets in competing industries. However, by acting as a trigger for investments, these schemes may help the industry to scale up and innovate and thus leave them better prepared to face competition.
However, it is the emphasis on import substitution (as an objective) which is the disturbing feature of such schemes. Levying heavy import duties on parts and components may be done to incentivize local manufacturing and promote value addition within the country. However, it makes sense only when there is well developed eco-system within the country. Otherwise, having a PLI scheme for the end product and simultaneously levying import duties on the components (when there is no eco-system within the country) may end up as a self defeating exercise. Parts and components manufacturing (to promote local value addition) relocate to India only when the market size is big enough to justify such investments and the business environment promotes competitiveness and innovation. Having deterrents like high import duties may do little to build up the ecosystem of parts and components within the country. If the business environment does promote innovation and competitiveness, value addition will take place within the country even if the domestic market size is limited because a competitive manufacturing landscape fosters exports on a massive scale. Vietnam is a classic case in the point.
This brings us back to the original question of what can be really expect from the current round of trade deals which are currently under negotiation. To begin with, one really needs to temper the expectations that one may harbour from such a deal. However, the following points are pertinent from the perspective of any proposed trade agreement:
1. It is important to link trade and investment and all our negotiations must be viewed through this prism. COVID may have thrown a temporary spanner in the works but global supply chains are resilient enough to bounce back and we may not see nationalisation of supply chains in the long run that is currently being envisaged. China may have increased regulatory oversight over tech companies and resorted to wolf warrior diplomacy but this hasn’t exactly resulted in a massive relocation of manufacturing facilities from China to India. We now have to look at FTAs as a way to bring in investments.
2. Issues related to environment and labour may soon become technical barriers to trade and an excuse for partner countries to resort to protectionism. Suitable safeguards need to be built into FTAs so that Indian exporters are not adversely affected by such measures.
3. India already has one of the highest rates of import tariffs amongst large economies and this duty regime surely needs to go. Building robust supply chains within the country is paramount but protectionism is surely not the way to go about achieving this objective.
4. You cannot be Atma –Nirbhar in all products and attempting to so would be foolish, especially in the context of a resource scarce country like India. It would be best to restrict such an exercise to those sectors where we either have the competencies or have the capability to build up those competencies in a short frame of time. Tariff concessions must be negotiated accordingly.
5. Negotiate aggressively for market access on services because that is where our true strength lies.
6. Frame Rules of Origin carefully so as to avoid their misuse and also to avoid creating unnecessary confusion in the wake of overlapping trade agreements.
7. Technical barriers to trade can become a major impediment and hence it is necessary to build in all possible safeguards especially in the context of Mutual Recognition Agreements for technical standards, institutions & testing and certification procedures.