Economy Feb 19, 2012
by KM Gopakumar
The Free Trade Agreement (FTA) between the European Union (EU) and India was one of the key issues at the 12th EU-India Summit, held in Delhi on 10 February. The present FTA, which began as a Bilateral Trade and Investment Treaty in 2007, involved several rounds of negotiations. Prime Minister Dr Manmohan Singh said in a recent statement that "there are complex issues involved, but we have both agreed to expedite discussions so that we can conclude an Agreement at the very earliest," indicating continuing discussions and negotiations in the coming days.
What do we stand to gain or lose from the FTA? Is it in our interest?
Political parties, the business community and civil society, including international groups, do not think so. An analysis of the FTA, the circumstances, additional documents and the entire process smack of an agreement that is terribly not in favour of India.
The BJP, an advocate of economic liberalisation, came out strongly against the proposed FTA. In its statement dated 6 February, BJP called upon "the government to act with due caution during the EU-India Summit and not make any legal or political commitments on the FTA without prior consultations with all political parties." Similarly, the CPI (M) urged "the government not to conclude any binding agreement with the EU until these and several other issues, critical to India's sovereign interests, are discussed by the government with representatives of all sectors who could be adversely affected."
The business community also came out strongly against the deal. The Society of Indian Automobile Manufactures (SIAM) wrote to the PM stating "SIAM is not convinced that India is going to gain anything substantial out of this FTA." There were also protests in many countries demanding that the EU withdraw its demands on intellectual property rights (IPRs) in the FTA, which would potentially compromise access to medicines in developing countries. Civil society organisations in India also voiced their concerns on possible escalation of prices of life-saving drugs.
The EU has clear strategic reasons to enter into this FTA. This is spelt out clearly in one of the EU documents titled "Global Europe: Competing in the World." This document states the need to seek external market and proposes, "...the rejection of protectionism at home must be accompanied by activism in creating open markets and fair conditions for trade abroad. ...reinforces the competitive position of EU industry in a globalised economy." The document identifies India as a potential partner for FTA.
Further, it directs the content of new FTAs stating that these "would need to be comprehensive and ambitious in coverage, aiming at the highest possible degree of trade liberalisation including far-reaching liberalisation of services and investment." Moreover, the EU wants to ensure the uninterrupted supply of raw material for its industry through FTAs.
Another document titled "The Raw Material Initiative-Meeting Our Critical Needs for Growth and Jobs in Europe" states that "the EU should promote new rules and agreements on sustainable access to raw materials where necessary, and ensure compliance with international commitments at multilateral and bilateral levels, including WTO accession negotiations, Free Trade Agreements, regulatory dialogue and non-preferential agreements." Thus it is clear that the EU would like to use FTAs to maintain competitiveness of its industry to ensure growth and jobs.
On the other hand, India's FTA engagements are missing such strategic objectives. Generally speaking, India's approach to FTA is guided by two objectives viz. economic or geopolitical. The proposed FTA is supposedly guided by "economic advantage."
India has growing trade deficit as well as current account deficit. It has a trade deficit with all its FTA partners like Thailand, Malaysia, South Korea, Japan and ASEAN, except Singapore, Sri Lanka and SAFTA. India's trade deficit with the EU is 2.1 billion and deficit in trade in services is 1.2 billion. Echoing the growing concerns, the Economic Survey 2010-11 remarks that "while India is becoming an active player in world trade negotiations and shaper of world trade policy, it is still a small player in world trade. While it is trying to gain markets and increase competitiveness in new areas, it is losing markets and competitiveness in some of the traditional areas. While it has made some forays into exports of some dynamic commodities having high shares and high growth, it has not been able to make a real dent in the trade of these big ticket items which are top on the list of world demand."
It further states that "the policy challenge related to FTAs/CECAs should take note of specific concerns of the domestic sector and ensure FTAs do not mushroom. Instead, they should lead to higher trade, particularly higher-net exports from India (Page no. 186, Box 7.6)". According to one of the studies available in the public domain (CEPII-CIREM 2007), most gains in goods-trade were projected in favour of the EU. Projections show that the vehicle industry in the EU will gain USD 1802 million, whereas Indian car industry will gain only USD 87 million in 2020 (compared to 2006). The EU will also gain a massive USD 7947 million in industry and manufactures, while India will gain only USD 807 million. All these show that substantial gains are in favour of the EU.
It is widely believed that the FTA is proposing to remove tariffs (import duty) on 92 per cent of products to zero within seven years form the date of commencement of the Agreement. Since the EU remains India's largest trade partner, the sudden loss of tariff is expected to result in a loss of revenue and impact the ability of the Indian government to spend on social sectors.
Further, while India's average applied tariffs remain around 10 per cent in manufactured products, the EU's average tariff is 3 per cent. Hence the reduction of tariffs would give the EU an easy access to Indian markets, but the reverse flow would be highly unlikely. Moreover, the EU's high standards on many products may act as non-tariff barriers (NTBs) for Indian manufactures, and therefore the removal of tariff will not necessarily translate into ready market access in Europe. The EU is demanding a reduction of tariffs to 30 per cent from the current rate of 60 per cent (50 per cent reduction) for big cars and a complete elimination of tariffs for auto parts. It may be noted that tariffs play an important role in the establishment of car manufacturing facilities in India.
The EU is also demanding substantial tariff cuts on wines and spirits and agricultural products such as poultry, dairy and oils including olive oil. Further reduction is also demanded on processed foods, which include chocolates, biscuits, confectionary, cereal preparations, processed fruits and vegetables.
Tariff reduction on agricultural products would result in the import of the EU's subsidised agricultural products and will have serious consequences on food security in the country. It is worth noting that the FTA is not going to bring any discipline on the EU's agricultural subsidies. The UN Special Rapporteur on the Right to Food in a recent press statement has said "this FTA represents a clear risk to India's obligation to respect, protect and fulfill the right to food if sensitive agricultural sectors were opened to subsidised EU exports and European investment in retail and land. In addition, the EU wants export measures removed completely in order to get access to India's food and raw material".
Apart from the above-mentioned issues, the EU is also demanding the opening up of government procurement with regard to the public sector undertakings. Leaked documents show that India is moving towards setting the parameters of the market access package on government procurement. Similarly, the EU is demanding the highest level of protection for its investments and it also wants to renegotiate the bilateral investment treaties that India has already signed with the EU member countries. Investment protection treaties have come under attack from many scholars due to their potential to reduce policy space of countries to regulate industries, and to protect public health and environment. The EU is also demanding opening up of service sector, especially the multi brand retail services.
Another important concern is with regard to the protection and enforcement of IPRs. The EU demands for data exclusivity (DE) protection for medicines (proprietary protection for clinical trial data) and patent term extension would delay the generic introduction of new medicines. Under the DE regime, a generic company cannot obtain the marketing approval based on the clinical trial data submitted by the originator company for 10-11 years from the date of marketing approval. This would compromise access to medicines in India as well as in many other developing countries. In India, annually 45 million people are pushed to impoverishment due to catastrophic payment on medicines. Similar, DE demands on agro-chemicals would create monopoly in pesticides and increase prices.
Despite the serious implications of the FTA, there hasn't been sufficient transparency on the content and the process of negotiations. State governments and the parliament are not informed or consulted on the implications of FTA. On the other hand, the EU parliament is updated periodically and the parliament's ratification is mandatory to put the FTA into operation. Further, the political direction on FTA is not coming from the cabinet, but from a nine-member committee known as the Trade and Economic Relations Committee (TERC). TERC is headed by the prime minister and out of nine members only four, including the prime minister, are accountable to the parliament. Transparency and accountability are clearly missing from the FTA negotiation process.
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