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Is There Any Dichotomy between India’s New FTA Strategy and Its Trade Policy?

India’s recalibrated free trade agreement strategy lacks appropriate coherence to its trade policy that vouches for domestically produced goods over imported goods. The increased proclivity towards signing the free trade agreements is more driven by its geostrategic interests and prominently addressing the supply-chain vulnerabilities.

India’s annual merchandise exports have crossed the mark of $400 billion just before the end of the financial year 2021–22. These exports have increased from $290 billion in 2020–21 to $417 billion in 2021–22, reflecting an increase of more than 40% on an annual basis. As part of its broader Self-reliant India initiative (Atmanirbhar Bharat), India has set an ambitious export target of $1 trillion by 2030 (Economic Times 2022). To achieve this target, it is widely felt that India needs to adopt a proactive approach toward free trade agreements (FTAs) and enter into trade pact with countries that not only contribute to imp­roved market access for goods but deepen strategic trade and investment linkages to make its supply chain much more resi­lient (RBI bulletin 2021; Palit 2021).

Remarkably, India’s new-found enthusiasm for FTAs is shaped by two important factors: first, the developed countries such as the United States (US), the United Kingdom (UK), Europe, Australia, and Canada are eventually addressing their supply-chain vulnerabilities and vigorously pursuing policies that reduce their dependence on China. This provides opportunities for India to emerge as an alternative supplier of goods and capitalise on this development (Banerjee 2021). This naturally creates the need to foster deeper economic and trade engagement with these developed economies through bilateral and multilateral trade deals to generate business opportunities for Indian firms (Banerjee et al 2021). Second, from an economic and strategic perspective, ­India is not a part of any of the two mega-­regional trading blocs—the Regional Comprehensive Economic Partnership Agreement (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). This shuts the door for preferential market access in these rapidly growing markets. However, India has free trade pacts with selected member countries of both these mega-regional trade agreements. But there are concerns regarding the erosion of market access due to the aggregate impact of mega-trade agreements and their ability to divert the geography of value chains, thereby displacing Indian firms from the existing production networks.

India’s renewed interest in FTAs, to a certain extent, is shaped by the buoyant export performance in 2021. A sharp rise in India’s exports has formed a view among policymakers that it needs free trade deals that strengthen the current momentum of exports (Dhar 2022). Further, the Ukraine–Russia war-induced global supply chain disruption and the economic crisis in Sri Lanka have created new export opportunities for India in specific sectors such as agriculture and textiles (S N Sharma 2022; Mishra 2022).

During the period from 2004 to 2011, India has signed, ratified, and enforced 11 preferential and free trade agreements, but it has not signed even a single trade agreement thereafter. India has walked out of a mega-regional trade agreement—RCEP—by stating its concerns over outstanding issues (Singh and Singh 2020). In the post-pandemic (COVID-19) period, the Indian economy reflected signs of recovery from the depth of the crisis, thereby changing the Government of India’s (GoI) scepticism towards FTAs (Dhar 2022). As a result, the GoI has signed FTAs with Mauritius, the United Arab Emirates (UAE), and Australia. India is also attempting to negotiate similar trade pacts with the UK, the European Union, Canada, Israel, and the Eurasian Economic Union. It is also expected that India would finalise trade agreements with ­Israel and the UK by the end of 2022 (Laksar 2022; Nandi 2022). Other than new trade agreements, the GoI is also renegotiating its existing FTAs with the Association of Southeast Asian Nations, Japan, and South Korea to address provisions related to anomalies and asymmetries that led to the consistent increase in its trade deficit (Rajya Sabha 2021). The article argues a number of key issues that exhibits a dichotomy bet­ween India’s trade policy stance and the recent thrust on engaging in various FTAs. This dichotomy is observable by India’s promising FTA partners as well, which raises concerns about India’s actual trade negotiating and diplomatic stand and the ultimate fruitfulness of the outcome.

Dichotomy

The foundation of an FTA lies in an open and liberal trade policy where the FTA partners could reciprocate market access based on their comparative cost advantage and trade specialisation. This augments the growth of bilateral trade and investment flows and fosters deeper economic and strategic relations. This reciprocal relationship hinges on greater coh­erence between FTA strategy and trade policy. India’s new-found enthusiasm for FTA seems conflictive with its trade-policy stance under the Self-reliant India initiative, whose genesis is on “vocal for ­local,” thereby promoting domestically produced goods over imported goods. This is because of the tariff policy regime, the Customs (Administration of Rules of Origin under Trade Agreements) Rules (CAROTAR), 2020 for regulating imports under FTAs, and greater importance to geostrategic interest vis-à-vis trade.

Tariff Policy

India’s import policy has marked a major change over the past few years. According to the World Trade Organization (WTO) tariff profile, India has the highest average tariff of 15% in the Asia–Pacific region; the average import tariffs have increased from 13.5% in 2016 to 15% in 2020. An increase in import tariff(s) is being recognised both in industrial and agriculture products. Figure 1 demonstrates the average import tariffs on industrial products increased from 10.2% in 2014 to 11.9% in 2020, while in agricultural products, it has ­increased from 32.7% to 34%. However, the average import tariffs on industrial and agricultural products have slightly come down in 2020 but it is still higher compared to 2016 and 2017. The GoI has introduced import-licensing requirements and a blanket ban on imports of many products. It has placed import res­trictions on the import of light-emitting diode (LED)/television and 101 defence products (Kaushik 2020). Besides import tariffs, the GoI has introduced a number of non-tariff barriers (NTBs) that incl­ude quality control orders and an import monitoring system (for example, a steel import monitoring system).

The standard tariff analysis is based on an applied tariff that includes basic customs duty (BCD). But, in practice, the importing firm has to pay additional ­duties and taxes other than the BCD. In the pre-goods and services tax (GST) era, the total duties included components like special additional duties (SAD), countervailing duty (CVD), education cess, etc. These duties have now been merged with the Integrated Goods and Services Tax (IGST) Act, 2017 and the total duty levied on imported goods includes BCD, IGST, and social welfare surcharge (SWS). Imp­orted goods are also subject to anti-dumping and safeguard duties on a case-by-case basis. In this context, it is pertinent to state that the total duty to be levied on imports is significantly higher than the BCD, reflecting the overall high import tariff structure due to IGST and SWS. This is quite opposed to what is reflected in the most favoured nation (MFN)-applied average tariffs. However, it needs to be understood that for the IGST paid, input tax credit (ITC) can be taken and utilised to pay taxes, such as CGST/SGST/IGST. But, the importing firm cannot get the refund of BCD and SWS. Therefore, SWS, which is 10%, is an additional burden besides the complex procedures of paying IGST and taking the refund. The overall structure of India’s tariff policy reflects inward orientation and is not in consonance with its FTA strategy that aims at improving market access on a reciprocal basis. It also weakens the negotiating capabilities of Indian policymakers in FTA negotiations.

CAROTAR, 2020

The GoI vide its notification dated 21 August 2020 introduced the CAROTAR, 2020 (Ministry of Finance 2020). The main objective of these rules is to restrict the potential misuse of preferential tariffs by third countries under India’s trade agreements. It is pertinent to mention that the introduction of CAROTAR is primarily aimed to regulate the entry of third-country goods through its FTA partners. These rules have far-reaching implications for imp­orted goods from our FTA partners and potentially undermine the benefits of preferential tariffs.

Under the CAROTAR, 2020, the GoI has introduced amendments in Section 28DA of the Customs Act, 1962, which states that customs officers hold the exclusive right to give or deprive the benefits of preferential tariffs on imported goods if they have any “reason to believe” that the origin criterion, stipulated in a negotiated trade agreement, is not followed. It is worth explaining that the term “reason to believe” is open for interpretation. Therefore, this amendment is indicating that the outcome could be shaped by the whims and fancies of the customs officers, thereby undermining the potential benefits of preferential tariffs under an alr­eady negotiated and mutually agreed FTA (Singh and Singh 2020). In addition, the over-reliance of the act on the judgmental capacity of the customs officers is also leading to a possibility of growing rent-seeking attitude among bureaucrats, which would adversely undermine the significance of the existing and future free trade deals.

The CAROTAR stipulate that the “origin-related information” needs to be in form I for every shipment for a period of at least five years from the date of ­import clearance and submit the same to the proper officer whenever required. It is important to note that the origin-related information is very exhaustive and dem­ands complete information regarding the origin of goods such as wholly obtai­ned, regional value content, change in tariff classification, and change in chapter. It further states that the importing firm needs to provide detailed information regarding the value of content, components used in manufacturing, and other costs (labour cost, the materials used, overhead expenses, etc) if the imp­orted goods are from a non-originating material.

There could be a possibility that exporting firms may refuse to provide sensitive price information concerning used raw materials and intermediate inputs used in such exportable manufactured products. The information sought under form I, about the non-originating material used in exportable products, is exh­austive, necessitating the specific details, which may be difficult to collect in a highly dispersed global value chain-led manufacturing operations. This is bec­ause value chains are spread in different geographical areas and collecting the information related to raw materials and intermediate suppliers of the whole value chain is a very challenging task.

Further, the issue becomes even more complicated if the exporting firm refuses to share the information of the whole value chain, creating problems for the importing firm to prove that goods are “substantially transformed” to qualify for the preferential benefits. The failure to obtain the required information may deprive the importing firm of availing the preferential benefits, thus increasing the cost of imported products. In other words, it effectively undermines the market access of FTA partners negotiated under a trade agreement, thereby making its exports uncompetitive.

The CAROTAR introduced new regulatory guidelines for the treatment of identical goods. It states that if the imp­orting firm fails to meet with the origin criterion stipulated in the rules of origin (RoO) chapter of a trade agreement, the principal commissioner of customs holds the right to consider or not to consider the claims of preferential tariff, filed ­before or after such determination, for identical goods imported from the same exporting and importing firm. This rule poses significant implications to both importing as well as exporting firms.

To understand this, let us take an example in the case of a trade transaction under the Australia–India Economic Cooperation and Trade Agreement (AI-ECTA). As per the rule, if an Indian firm is importing goods from a supplier based in Australia throughout the year and an issue arises concerning compliance with the origin criteria of certificate of origin (CoO) due to some reason(s) for a particular imported consignment, it should not be penalised for all the consignments that have been imported from a supplier in Australia before the determination of a specific issue with CoO. This rule could potentially undermine the right of the exporting firm to get preferential market access under the AI-ECTA. The problem could get further escalated into a complex situation for a supplier based in Australia that supplies identical products to different importing firms in India. The inability to comply with the origin criteria in the case of one specific consignment will contribute to cascading deleterious effects on Australian suppliers to claim preferential benefits.

The introduction of CAROTAR, 2020 is a unilateral measure by India on imported goods under FTAs. They place several stri­ngent regulatory compliances on imports, which may potentially deprive exporting firm(s) to leverage the benefits of preferential market access. These rules are fundamentally against the objectives of the trade agreement for which it was signed. India’s stance to place stringent checks on imports may instigate its FTA partners to undertake similar measures, which will ultimately lead to trade protectionism, thus benefiting the business interests of other countries. It is pertinent to state here that India’s FTA partners have already expressed their concerns at the WTO regarding the additional documentary and regulatory com­pliance to determine the origin of imported goods. FTA partners such as ­Japan, South Korea, Indonesia, Malaysia, and Sri Lanka have stated that this could potentially emerge as non-tariff barriers, thereby affecting their exports to India (Mishra 2021). The nature and content of the CAROTAR may be the bone of contention for India’s ongoing and future FTA deals.

Geostrategic vis-à-vis Trade Interests

India’s bilateral trade pacts with the UAE and Australia have strong geostrategic and geopolitical elements given the fact that both FTA partners are members of the two Quadrilateral Security Dialogues (QUAD). The QUAD is a strategic and security dialogue among countries that share more or less common strategic and security concerns. The western QUAD consists of Israel, India, the UAE, and the US, while the eastern QUAD consists of Australia, India, Japan, and the US. India’s signing of the FTAs with important geopolitical partners such as the UAE and Australia is abruptly changing its conservative “protectionist” image that has developed due to its decision of walking out of the RCEP.

Moreover, with these trade deals, India is conveying a hint to its strategic partners that its non-committal position on the Russia–Ukraine War should not be viewed as if it is shifting toward a Russia-led alliance (Singhal 2022). The India–UAE Comprehensive Economic Partnership Agreement (CEPA) is part of a larger strategic context aligned with the western QUAD constituting Israel, India, the UAE, and the US as key strategic partners (Palit 2022b; Ghosh 2022). The CEPA agreement with the UAE paves the foundation for deeper ties with the Western neighbours that serve its interests of getting into trade agreements without China’s presence. This agreement could also serve as a template for a full-fledged trade agreement with the Gulf Cooperation Council, which would further deepen India’s economic and strategic integration with Gulf economies.

Similarly, AI-ECTA is an interim trade agreement, aimed at boo­sting bilateral trade and investment ties. The agreement is part of a broader geostrategic context in which India and Australia want to reduce their dependence on China. Australia’s economic and trade ties with its largest trading partner China, have entered in worst phase due to political meddling and sparring over the origins of COVID-19 (K Sharma 2022). This was further aggravated by the Chinese restrictions on Australia’s exports such as barley, grain, beef, coal, wine, and sugar. Likewise, India’s widening trade deficit with China, coupled with a military stand-off at the Himalayan border, have compelled the Indian policymakers to reconsider its economic and trade partnership with China and identify a new strategic trade partnership. This reflects a strong convergence bet­ween India and Australia’s strategic interests that underpins the importance of balancing relations with China. It is not only on the bilateral front that both countries are working towards addressing their geostrategic challenges. India, Australia, and Japan have laun­ched the Supply Chain Resilience Initiative (SCRI) in 2021 to manage their supply chain risks by mapping out economic and trade complementarities (Hindu Business Line 2021; Palit 2022a).

India has tried to strike a balance in its geostrategic interest vis-à-vis trade interest, by setting up ambitious goals for promoting bilateral trade with the UAE and Australia, thereby expanding economic and trade ties. But, the depth and breadth of these two agreements, in terms of coverage and substantive provisions, are more or less in line with ­India’s trade agreements with Japan and South Korea. The AI-ECTA is an ­interim agreement and far away from its original ambition of a CEPA, which will include important areas of negotiations such as digital trade, agriculture, government procurement, and deeper regulatory disciplines. Both coun­tries have agreed to constitute a team for CEPA negotiations, once the ECTA is signed. There is, however, no clue whether these talks would be subject to ECTA’s ratification. Interestingly, the operative element of “entry to force” is subject to its app­roval in the Australian parliament, which got officially dissolved on 11 April 2022, thereby putting the ECTA on a ventilator. Without the ratification of the ECTA in the Australian parliament, the agreement would not be able to materialise even as an interim arrangement. This demonstrates that the AI-ECTA is a mere manifestation of the geostrategic interest rather than trade interest.

Further, the announcement of India’s foreign trade policy (FTP) is lingering on for almost two years. The Mini­stry of Commerce and Industry has again extended the FTP for six months without recognising the fact that it is one of the most important policy documents that sets the long-term direction for exports and provides clarity regarding various policies and incentives to the Indian trade community. The prolonged delay in India’s FTP itself reflects that ­India’s renewed interest in FTA is conditioned on geostrategic interest rather than trade interest.

Conclusions

India’s recalibrated approach towards FTAs is full of ambivalence and reflects inconsistencies with its trade-policy stance under the Self-reliant India initiative that underpins the importance of domestically produced goods over imported ones. The persistent increase in import tariffs and the introduction of the CAROTAR to regulate imports from FTA partners square off its efforts in India’s new-found enthusiasm for FTA strategy aimed at promo­ting India’s exports through better market access. These rules either need to be amended or withdrawn to make sure that India’s trade policy is in consonance with its external trade engagement. Otherwise, the lack of synergy between trade policy and FTA strategy not only weakens India’s negotiating capacity, but also undermines the potential economic benefits of free trade. Finally, ­India’s trade pacts with the western and eastern QUAD members (the UAE and Australia) are driven by geostrategic int­erest rather than trade. India’s trade pacts with the UAE in general, and Australia in particular, are not comprehensive in terms of their coverage, scope, and depth. They seem to be aimed at add­ressing the supply-chain vulnerabilities associated with China.

References

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Dhar, Biswajit (2022): “India’s Renewed Embrace of Free Trade Agreements,” East Asia Forum,
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Mishra, R Asit (2021): “FTA Partners Upset Over
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Updated On : 11th Jun, 2022
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