India's manufacturing weakness hits free trade agreement ambitions

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Tripura, in India’s North East region, is the country’s second largest producer of rubber. But exporters from Tripura have to lug the rubber sheets out to neighbouring states to send it across the border to Bangladesh. This is despite Tripura having more than one trading station with Bangladesh, says Jayanta Choudhury, senior lecturer teaching rural development at Tripura University.

There are problems of reciprocity with Bangladesh too, but the cumbersome rules for rubber export from Tripura that if sorted  would add to the state’s economy handsomely, has been in vogue for decades. 

The rules demonstrate why India, despite its booming economy, scores so low in global trade coming in at 20th position (WTO data).

The key lesson from free trade agreements (FTA) is they offer preferential access to the markets of other countries than is possible through the WTO framework. “Big, medium, small – all countries are searching for such access across the world”, says Amitendu Palit, Senior Research Fellow and Research Lead (Trade and Economic Policy) at the Institute of South Asian Studies, Singapore.

But as a “trade purist”, India showed no interest in developing these platforms till the late nineties. “It was only after the Uruguay round of trade negotiations when we saw other countries setting up trade arrangements did India sign its first FTA with neighbour Sri Lanka”, says Ashok Sajjanhar, former Indian Foreign Service officer. The Ambassador, who has done stints in Europe and Asia, said the string of agreements has shown Inda has made little use of its FTAs.

India’s unwillingness to engage in FTAs is also dictated by the puny size of the domestic manufacturing sector at less than 18 per cent of the GDP. Most products are not competitive abroad as stand-alone brands. “It is largely on account of our own product deficiency. We can use FTAs only if our producers can tap the global value chain. Else its no good,” said former commerce secretary Rajiv Kher and now distinguished fellow, RIS.

The deficiency could have been made good by undertaking what Palit calls “comprehensive approach on potential FTA partners in alignment with national interests – both economic and strategic”, but ministers scared about backlash from both industry and labour signed on the documents with hardly any conviction. This made it easy for the customs department under the finance ministry to set up stiff terms. “Customs duties are an important source of revenue which is difficult to compromise on. With persisting fiscal stress, it made our reluctance to give up tariffs and offering of greater market access much more than just a domestic industry issue, said Palit.

Yet, as commerce secretary, Rita Teotia says India’s trade is balanced with those countries with which there are no agreements. She says FTAs with countries like Australia or New Zealand offer little benefit for India as their interest is limited to only a few tariff items. When India sails out to do FTA with partners like Korea or EU, the lack of competitive advantage of Indian manufacturing makes the process unequal. So, there is no reason to rush to sew up preferential trade agreements. Kher says “India must finalise trade agreements with Eurasia, Iran, some African nations such as Kenya and Ethiopia, and Latin American countries such as Peru, post haste”.

But the commerce ministry would rather not walk on any FTA as of now. Her bleak assessment is shared by most in the industry. This is despite the risk posed by the threatened walkout from WTO by the USA under President Donald Trump that is making others work on mutual trade arrangements that would survive the collapse of the global trade architecture.

Abhijit Das, head and professor at the Centre for WTO Studies, said FTAs also agreed, adding it makes little sense for India to keep engaged on FTAs. Except for India-EU FTA, which would have helped the textiles, he supported Teotia’s position that none of the other FTAs would help India.



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