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INDIA is lately witnessing a fresh surge of caution and criticism against free trade agreements (FTAs). Both the Finance Minister and Central Bank Governor have lately advocated restrain in signing fresh FTAs with different jurisdictions.

The Parliamentary Standing C ommittee (PSC ) on Commerce is also expected to advice prudence in signing FTAs in a report focused on FTAs to be presented to Parliament in the near future.

Yet another indicator of the growing reservations over FTAs is that Tariff Commission is currently undertaking an ‘Impact Assessment of FTAs/PTAs in capital goods sector', apart from initiating three separate studies on the Impact Assessment of FTAs with ASEAN,Thailand and Singapore.

Much before FTAs became the trend in global trade, India signed its first trade agreement named Bangkok agreement in July 1975 under which trade agreement in which tariff preferences were granted on a limited number of items.

India signed its first FTA with Sri Lanka, signed in December 1998 and implemented it in March 2000. India has so far signed 10 FTAs with different countries and regional associations and five preferential trade agreements with individual nations or a group of countries.

Indian Government is currently negotiating new FTAs as well as discussing expansion of existing ones with 17 jurisdictions including European Union and Gulf Cooperation Council.

We need to elaborate on such concerns voiced by these and other important entities before discussing specific issues under FTAs that have rattled domestic industry and its sympathizers.

Addressing a conference of bankers on 15 th November 2013, Reserve Bank of India Governor, Raghuram G. Rajan, stated: "While we should not enter into free-trade agreements that give foreign manufacturers an undue advantage, that is no reason for us to now respond by giving

domestic manufacturers protection."

Ten days prior to this, Finance Minister P. Chidambaram reportedly advocated that India should not rush into signing fresh FTAs and instead first give a leg-up to domestic manufacturing. Chidambaram's stance at a meeting of Trade and Economic Relations Committee (TERC ) was shared by National Manufacturing Competitiveness Council Chairman V. Krishnamurthy.

Formed in May 2005 under the aegis of Prime Minister's Office, TERC serves as an institutional mechanism for evolving the extent, scope and operational parameters of our economic relations with other countries in a coordinated and synchronized manner.

A news report in an economic daily says that the Finance Ministry has mooted scrutiny of model text of FTAs to prevent misuse of these agreements by trading partners. It thus wants customs authorities to be empowered to swiftly act against any misuse of FTAs by any entity.

The internal reverberations over FTAs seem to be striking a chord with the leading industry associations.

In April this year, Commerce PSC Chairman Shanta Kumar, requested Prime Minister to not to rush through the EU-India Broad based Trade and Investment Agreement (BTIA) before PSC submits its report on FTAs to Parliament.

In his letter to the Prime Minister Dr. Manmohan Singh, Mr Kumar said, "I urge you not to conclude the EU-India Broad based Trade and Investment Agreement (BTIA) immediately and to kindly ensure that the Agreement is signed only after the C ommittee present/lay its Report on the subject to the Parliament."

PM's office has been getting negative inputs on FTAs in the past too from different quarters. It is here pertinent to quote domestic chemical industry's association named Indian Chemical Council (ICC ).

In its Inputs on chemicals sector requested by PMO on C hemicals Sector in September 2009, ICC lamented: "Free Trade Agreements signed so far has not resulted in any advantage to Indian chemical industry, while other countries that have (sic) signed FTAs with India are benefited much more."

Associated Chamber of Commerce and Industry of India (Assocham), for instance, has released a study that calls for prudence in signing FTAs.

In a study titled ‘Free Trade Agreements: Boon or Bane of India?' released on 7 th November 2013, Assocham says: "There is an urgent need for the government to revisit its strategy of FTAs, bring greater transparency and involve more effective administrative process in their design and implementation to make FTAs more beneficial for India."

It is the lack of transparency in negotiating FTAs and monitoring them that have turned the national opinion against such agreements. There are indeed no takers for more FTAs line of approach advocated by the Minister for Commerce and Industry, Anand Sharma, and Deputy Chairman of Planning Commission Montek Singh Ahluwalia.

The Government has never published a white paper or released an independent exhaustive study on impact of FTAs and preferential trade agreements (PTAs) signed over the years.

The Government has not even cared to make public impact studies on FTAs that it periodically assigns to Tariff Commission (TC ) or any other entity.

The studies conducted by TC or outsourced by TC to different institutes over the years include: FTA Study on Rules of Origin : A Road Map for India prepared; Impact of FTAs on Petrochemical and Plastic Industry; Impact of Early Harvest List of Framework Agreements for Free Trade with ASEAN countries.

As much as 50% of the 46 companies that have trade relations with Association of South-East Asian Nations (ASEAN) countries covered by a survey believe that FTAs in goods have had no impact on their exports or an adverse impact.

Released by Federation of Indian Trade and Industry (FIICCI) in October 2013, the Survey captioned ‘Business Beyond Barriers' notes this stance is partly due to the FTA is restricted to 'goods', a area where India's manufacturing sector is unable to capitalize and partly due to lower import duties offered by ASEAN to China through the China-ASEAN FTA.

This is one of the common problems that India companies are bogged down in enhancing the exports under different FTAs.

An Indian consumer protection advocacy institution CUTS International has thus suggested that 'Impact of third-party FTAs (that is between two or more countries with which India has significant trade relations but does not have a free trade agreement) on the Indian economy should be analysed. Given the limited nature of our negotiating capital, such analyses will help optimising our trade negotiations and drawing more benefits from them."

In its submission to PSC which had sought public comments on FTAs in January 2013, CUTS also recommended that "the government should revisit these trade agreements through cost-benefit analyses including sustainability impact assessment of FTAs being negotiated or to be negotiated and regulatory impact assessment of existing FTAs. While negotiating new agreements, particularly deeper FTAs with developed countries, India needs to set its targets clearly and take steps for improving its domestic preparedness, particularly those of regulatory bodies."

Another specific issue that is common to all Indian FTAs is the inverted duty structure (IDS). It is characterized by lower Custom duty on import of finished goods than duties on imported raw materials/components, thereby putting domestic manufacturers at a disadvantage against competition from imports.

The Government has been saddled with IDS problem for almost a decade. It is here pertinent to quote a Commerce Department's memorandum dated 7 th August 2006.

It notes: "India is participating in a number of Regional Trading Arrangements (which includes FTAs, PTAs, CECA, CEPA etc.) either bilaterally or in a regional grouping. With the implementation of tariff concessions under RTAs, it has been observed that in some cases while the finished product is being imported at a lower duty (due to tariff preferences), the related raw material or input is imported at a higher rate of applied MFN duty. The situation gets aggravated if the related inputs/ raw materials cannot be sourced from the RTA partner and the industry needs to import from other country on payment of higher duty, leading to inverted duty structure. Unless corrected, it is recognized that the inverted duty structure would put an additional burden on the Indian manufacturers making them cost ineffective."

The problem of IDS keeps propping up due to changes in tariff under different foreign trade agreements and under annual Indian budget. IDS woes persist in several industries especially engineering industries that involve use of many components and assemblies.

"Rationalize inverted duty structures when finalizing FTAs in the future" says a recent report captioned ‘ Achieving High Performance in Turbulent Times- Creating Advantage from Adversity' prepared by Accenture for Automotive Component Manufacturers Association of India

(ACMA).

As put by a Strategy Paper on Galvanizing Machine Tools Industry in India through Technology Development prepared by Department of Heavy Industry (DHI) in October 2011 "During recent years a number of FTAs/PTAs (Preferential Trade Agreements) have been signed with foreign countries whereby the import duty on machine tools imported from these countries is gradually reduced to zero. This places domestic producers at a disadvantage due to high input costs, high interest rate and the incidence of 7.5% custom duty on imported parts. This in fact leads to a situation of inverted duty structure detrimental to the competitiveness of domestic manufacturers."

The Paper has also pinpointed the risk of misuse of bilateral FTAs by third countries. It says: "despite stipulations of local value addition in the partner countries to qualify under FTA/PTA, there is likelihood of machines manufactured in other countries being diverted via these countries to take advantage of the lower duty. Free import does not encourage transfer of technology and local manufacturing/value addition. This stunts the growth and development of the industry."

This brings us to the perplexing issue of in monitoring the rule of origin (ROR) that varies from FTA to FTA.

Confederation of Indian Industry (CII) and Ernst & Young thus last month mooted harmonization of the various ROOs for the same product under different FTAs.

A White Paper by CII-EY team contends that harmonization would help companies plan their production and sourcing chains. Moreover, this would also help customs officials in the smooth application of ROO and thus avoid problems resulting from varied ROOs.

The Paper titled ‘Evolving global tax policy trends: Outlook for India' has dwelt on ROOs under a section captioned ‘India's Free Trade Agreements: trends and challenges."

The biggest challenge India faces on FTA front is its inability to widen, deepen and strengthen its manufacturing base to make it capable of seizing fully the export opportunities.

Land acquisition woes, environmental agitations, multi-tiered and sequential approval system for projects, rampant corruption and certain other problems have not only slowed the growth of manufacturing sector but also eroded its global competitiveness.

It thus makes sense for Indian Government to go slow on FTAs and give highest priority to making domestic manufacturing a robust sector. It also needs to put its act together to improve the competitiveness of both agriculture and services sector, apart from reviving environmental litigation-ruined mining sector.

 

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