RCEP debate: Issue of diminishing returns from FTAs plagues India

The government says the pressure to remove tariffs and provide access to India’s vast untapped domestic market, without getting much in return, ultimately forced India out of the Regional Comprehensive Economic Partnership (RCEP) deal. The fear is not unfounded, say experts, as New Delhi’s existing free-trade agreements (FTAs) suffer from the same issues, leading to disproportionate growth in imports while exports rise slowly.

This is true for each of the five largest trade deals currently in force, with growth in imports, in most cases, increasing at double the pace of rise in exports, they say.

“New Delhi’s trade exposure to these nations has reached high levels and trade policy will need to consider how to raise exports further and at the same time add new markets,” said Sachin Chaturvedi, director-general of Research and Information System for Developing Countries (RIS), a foreign trade think tank.

As of last financial year, almost 20 per cent of all outbound trade reached these nations while 22 per cent of imports were sourced from there.

Experts point to India’s FTA with the 10-nation Association of Southeast Asian Nations (Asean) bloc as a classic example. The Asean-India FTA (AIFTA) came into effect on January 1, 2010, with much fanfare. “It was India’s second deal with a regional bloc and (then) Prime Minister Manmohan Singh was confident of its success as a trade deal given India’s manufacturing base being larger,” said senior trade policy expert and professor at Jawaharlal Nehru University Biswajit Dhar.

The first such deal — South Asian FTA (SAFTA) — between the fledgling economies of the South Asian Association for Regional Cooperation grouping in 1993 had consistently given handsome trade surplus to India owing to its manufacturing footprint and geopolitical clout in the region. Ease of doing business had expanded across the borders to such an extent that as of 2019, SAFTA is mostly in the news for nations rerouting their restricted goods through the bloc to India. A case in point is domestic industry complaining last month about Malaysia shipping palm oil through Bangladesh and Nepal to offset New Delhi’s move to stop imports.

But India’s exports to Asean took a hard knock as the bloc continued to drift towards China, having inked a similar deal with Beijing in 2002.

Devil in the details

Under the initial agreement, Asean member states and India agreed to open their respective markets by progressively reducing and eliminating import duties on 76.4 per cent of all goods. Back then, India had offered around 9,000 products for complete elimination of tariffs, excluding about 10 per cent of its exports from tariff reduction. Experts have pointed out that Thailand, the Philippines, Myanmar, Brunei and Vietnam have excluded more of their exports.

However, old commerce department hands believe the deal failed solely because of poor logistics. “China has the South China sea strategically straddling the region whereas India has to cover two nations just to reach the nearest nation in the grouping,” said a senior foreign affairs ministry official.

Exports to Asean stood at $37.4 billion in 2018-19, up by 9 per cent from the previous year. Imports, on the other hand, were much higher at $59.31 billion, rising by 25 per cent from the previous year’s $47.13 billion. Official data shows that sectors where trade deficit has worsened account for 75 per cent of India’s exports to Asean, while trade surplus sectors have shown only marginal improvement in certain areas. Figures from the last Budget showed India’s revenue foregone because of the trade agreement with Asean has more than doubled to nearly Rs 26,000 crore in 2018-19.

“The government would critically analyse a wide number of tariff lines while discussing future revisions to the deal and industry bodies may be asked to provide their input,” a senior government official said, referring to the ongoing exercise to review the agreement in full. Industry bodies also say India already had separate pacts with Malaysia and Singapore even as they remain part of the broader AIFTA, forcing the domestic market to reduce import tariffs further.

While India has recently secured contracts to send refined petroleum to Singapore, critics have argued that New Delhi did not rectify its skewed deal in fear of Singaporean investors moving away. The tiny city-state is India’s second-largest source of Foreign Direct Investment (FDI), totalling $88 billion since 2000.

On the other hand, internal studies at the commerce department showed that palm oil, crude, plantation products like rubber and mining goods from Malaysia have continued to enter the Indian market at preferential rates.

Aversion to FTAs

According to a study by the NITI Aayog, the utilisation rate of regional trade agreements (RTAs) by Indian exporters remains critically low at between 5-25 per cent. “The lack of awareness to available benefits remains endemic among a large section of exporters. However, successive government has also failed to systematically approach the issue. Other economies generally ask its industry to push out goods in certain sectors, evaluating a relative advantage,” said Ajay Sahai, Director General of the Federation of Indian Exports Organizations. 

All this has led to calls for a more stringent review of existing FTAs with South Korea and Japan, which haven’t been able to reduce India’s trade deficit with these nations.

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