Manmohan Singh deeply hurts Indian economy

Pushes for EU-India Free Trade Agreement (FTA)

Dr R Balashankar

Dangerous consequences for farmers, goods and services, investment, drugs and survival of SMEs

THE EU-India Free Trade Agreement (FTA) negotiations have reached a conclusive stage. And the Prime Minister Dr Manmohan Singh, according to reports, is pressurising the Indian side to hasten the agreement process even if it fatally affects the Indian interest in the field of agriculture, industrial production, investment, pharmaceuticals, health service and other intellectual property related issues. Dr Singh seems to be wedded to undermine vital Indian interests before he demits office.

Sources in the Ministry of Commerce confirm that India will ink the agreement, once some pending concerns regarding the service sector are agreed upon, overlooking all other crucial objections.

India’s premier milk producers’ consortium, Anand Milk Union Limited (Amul) in a letter to the Prime Minister has pointed out the disastrous consequences of the FTA deal with EU. The Parliamentary Standing Committee, The Economic Survey and various independent studies on FTA have all cautioned the government against going ahead with the negotiation. But the Prime Minister has taken an obstinate position. The official negotiators are under pressure from the UPA top brass to mortgage national interest at the altar of EU’s economic aggression.

What the developed world has lost at the World Trade Organization negotiations — after its deadlock—is eager to achieve through bilateral agreements in the enticing bracket of FTAs and India is unwittingly lured into the trap because of inadequate mass awareness and political indifference in the face of a determined regime interested only in securing excellent grades from their foreign benefectors.

What is the game all about? India launched negotiations of a bilateral trade and investment agreement with the EU in 2007. Several rounds of negotiations have taken place covering trade in goods and services, foreign investment and investor protection, intellectual property rights, government procurement and health services during this period, but no conclusion could be reached as the terms were hugely detrimental to Indian interests. The EU stood to benefit in every area, providing it with unperturbed advantages and monopoly in several areas and tariff benefits for their imports in several others without offering any compensatory incentive to India. Rather it is bound to kill Indian agriculturists because of disastrous interventions from cash rich foreign farm lobbies, further push up drug prices making health unaffordable for ordinary Indians and making investments loss making proposition here. The UPA government is undeterred and equally unconcerned about all these and the Prime Minister is pressurising Indian officials to tone down their bargain and fast track the agreement so that the Europeans will be pleased. The negotiations are slated to be concluded soon under government pressure. The negotiating texts are kept secret, but information available to Organiser raises big alarm about the adverse developmental impacts. Given India’s current account and BoP situation, opting for a negatively designed FTA are severely stunting to India’s growth potential and march towards poverty eradication.

The definition of investment in the Investment Chapter of the proposed EU agreement will include intellectual property. This would curtail India’s freedom to use of IP flexibilities like compulsory license, parallel importation etc. Inclusion of investment in FTA in the existence of inequitable bilateral investment treaties with many EU Member countries is another area of concern. These infringe on India’s sovereign right to regulate.  For instance, Article 7 of India-Netherlands BIT obligates both parties regarding the repatriation of investment and returns without any restriction. There is no exception in the treaty against this obligation. As a result, any restriction on capital movement even during a financial emergency would be held contrary to the treaty obligation and India would be liable to pay compensation to the investor. Similar provision exists in other BITs with EU Member Countries. Further, there are many such inequitable provisions contained in the existing BITs with EEU Member countries. For instance, the broad definition of investment, wider provision of fair and equitable treatment, wider scope of the agreement covering both direct and indirect investments etc. One can argue that inclusion of investment in EU FTA would give an opportunity to India to build some safeguards against the existing treaties. However, the safeguards inside the FTA are not workable as long as BITs with EU member countries are in force. Hence it is important for India to abrogate the existing BITs with EU Member countries.

Another important concern is investment provisions in FTA not only provide post investment protection but also pre-establishment rights including market access commitments. Such commitments in FTAs would lock in India and may take away the opportunity to review the foreign investment in certain sectors in certain circumstances. For instance, India is now facing challenges from pharmaceutical MNCs due to their aggressive acquisitions of Indian generic companies. This may compromise access to medicines to people of India at an affordable price. One of the most discussed policy response is to put a cap on FDI in pharmaceutical sector. Such response may not be possible if India locks in certain sectors for foreign investment without any safeguards.

The dispute settlement provision is also an area of serious concern. The scope of the investor state dispute should be limited to the provisions of the dispute settlement chapter and should not cover the violation of the provisions of other chapters of FTA. One of the important implications of such safeguards is the loss of policy space for developing countries to regulate competition to serve the development needs of developing countries. According to Prof. Ajit Singh “developing countries require special treatment in the sense of being allowed to pursue competition policies which are appropriate to their stage of development”.   Therefore it is important to ensure that competition law and policy of developing countries such as India should not be harmonised with the competition law and polices of developed countries. Until now India has not included a strong chapter on Competition in any of its FTAs. However, this is set to change with the EU-India FTA. The competition chapter in FTAs like the EU India FTA would undermine the policy space for India to provide an enabling treatment for the domestic industry.     
The inclusion of a competition chapter, with likely provisions that will be very damaging for India, is even more of a concern since, as in the case of government procurement, this will be applicable to all other FTAs with a competition chapter and all future FTAs if these include an MFN clause (unless specifically excluded). Ideally, the government should remove the competition chapter from FTAs.
Trade and Current Account Deficit

India has been facing a serious problem of rising trade and current account deficits. India’s trade deficit has been on a rising trend since 2003-04 and stands at a phenomenal 189.76 billion USD in 2011-12 (RBI). This is a significant 10.92 per cent of the GDP. According to The Economic Survey 2012-13, the trade deficit of US $ 167.2 billion for 2012-13 (April-January) was 7.9 per cent higher than the US $ 154.9 billion in 2011-12 (April- January). According to projections for 2013-14 made by the Commerce Ministry in its Report on “Strategy For Doubling Exports in Next Three Years: 2011-12 to 2013-14”, India will see a trade deficit of 281.8 billion USD under a “business-as-usual” scenario which will be a huge 11.5 per cent of the GDP.  It is evident that India’s trade policy needs to address this weakness.

Contrary to popular belief oil (POL) category accounts for about 30 per cent or less of India’s imports. India’s current account deficit, which includes trade in services, is also rising continuously. Compared to 2.66 billion USD in 2000-01, it now stands at 78.155 billion USD in 2011-12 (RBI estimates). This deficit stands currently at 4.50 per cent of the GDP. So the belief held in some circles that India’s services trade surplus will more than balance the deficit in goods trade is turning out to be unfounded. The steep rise in goods (merchandise) trade deficit has made it increasingly difficult for services trade surplus to make up as the service trade surplus stood at only 33 per cent of the merchandise trade deficit in 2011-12.
Trade Deficit

With the exception of Singapore and Sri Lanka, India has a trade deficit with all its existing FTA partners such as ASEAN, Malaysia, South Korea, Japan and Thailand. With South Korea and Thailand, the deficit has been continuously increasing India also has a trade deficit with most of its proposed FTA partners. With the EFTA countries and Australia, its deficit is pretty large.

With the EU, it has had a trade deficit over several years, with only 2010-11 showing a surplus. If India-EU FTA becomes a reality, all projections show that the commodity trade deficit will go up in agricultural and industrial segments except for pockets like textiles and garments and leather.
The quick succession of FTAs is not reversing this deficit in its trade balance but may be aggravating the situation further. India’s approach to trade policy seems to have been guided more by diplomatic proclivities than sensitive economic interest. In national interest there is a case for initiating an impact analysis of signed FTAs, by an independent body on a mandatory basis so that existing FTAs can be reviewed and the FTA strategy revisited.
The Economic Survey has admitted in its last year’s report that FTAs have not been helping India. It admits, “while it benefits for Indian exports, in some cases the benefits to the partner countries are much more, with net gains of incremental exports from India being small or negative. FTAs also lead to a new type of inverted duty structure with duties for final products being lower from FTA partners compared to duties for the previous-stage raw materials imported from non-FTA countries. This acts as a disincentive to local manufacturing which is not competitive against FTA imports because of the inverted duty structure. …… 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”. (Economic Survey 2010-11)
Clearly, India has to take positions that enable it to defend its development policy space. The FTA should ensure access to jobs and incomes (by ensuring the growth and competitiveness of its industry and agriculture), medicines and treatment, food security and sovereignty, basic natural resources like land, water and energy, of broad sections of the population, especially to the country’s poor, marginalised and the vulnerable.
North-South FTAs  do not make Economic Sense:

The developed countries already have low tariffs in most products so India can actually get access without an FTA. The average applied tariffs of most of its future northern partners range between 1.4 to 13.9 per cent in agricultural products with the exception of  Switzerland and Norway, which have much higher tariffs. In industrial products, the duties range between 0.5 to 4 per cent. In comparison, India’s average applied tariffs, even after significant reductions, are 31.4 and 9.8 per cent  in agricultural and non agricultural products respectively.
Moreover, 68.9 per cent  of India’s agricultural exports and 64.3 per cent  of its non-agricultural exports to the EU already enter duty free (WTO, India Tariff Profile 2012, data for 2010). If we look at India’s future likely Northern FTA partners, a high percentage of products and global imports are already allowed to enter at zero or low rates of duty, especially in non-agricultural products. Similarly, 83 to 95 per cent of non-agricultural products can enter these markets (65.3% in EU) either duty-free or at less than 5% duty. In comparison, India allows only 5.9 per cent and 3.1 per cent of its agricultural or industrial goods respectively at zero-duty.

In effect, the possibility of a gain just from tariff reduction is huge for the partner but very limited for India. Moreover, in the segments that are duty free, India, even with an FTA, will be at par and not better-off than present suppliers. But it is the subsidies, non-tariff (such as standards) and process barriers that actually block Indian exports to these developed countries. This is even more so in the case of agricultural goods. But these are hardly addressed under the FTAs. Subsidies cannot be discussed and though the easing of standards and processes may be discussed, getting Mutual Recognition Agreements (MRAs) on these is much tougher. So on the whole, India’s additional market access may be marginal but India may have to significantly open its markets by reducing tariffs and give up other restrictions such as on exports under these FTAs.