India, look ahead: A two-pronged strategy for boosting trade

Financial Express, India

INDIA, LOOK AHEAD

A two-pronged strategy for boosting trade

India should have trading agreements with more countries and ensure Safta becomes a strong RTA

Jayanta Roy

16 November 2005

The current state of play in the Doha Round negotiations underlines the importance of stronger bilateral and regional trading agreements for India. As of now, India has concluded trading agreements with Sri Lanka, Thailand and Singapore. In the regional context, Safta and Bimstec are yet to really takeoff. There are agreements in the pipeline with Asean, the GCC and, possibly, Korea. India has also benefited from joint study groups constituted with China, Korea and Japan. Bilateral dialogue has also intensified with the US and the EU.

The focus now should be on concluding meaningful agreements with important countries and regional trading groups after carefully studying the cost-benefit of each agreement. Simultaneously, India should take the lead in making Safta a strong regional trading agreement. The Prime Minister, in a recent trade and economic relations committee (Terc) meeting, emphasised this path. Our trade policy should develop this two-pronged strategy.

The first component of the strategy is to benefit from our recent experience with trading agreements and to chart a plan to extend the coverage of countries. The long-term goal for India should be to lead the efforts towards formation of a strong Asian Economic Community that includes Asean, Japan, China, India and Korea. A prerequisite of that is to sign agreements with all the countries constituting it. An FTA with Asean is in its final stages, an agreement with Korea is also in an advanced stage and work has begun to explore the possibilities of a trading arrangement with Japan. The strategy with China emphasises the removal of all impediments to rapid trade and investment expansion and then studying the impact of an FTA on industry and the economy before initiating a dialogue on the modalities of a trading arrangement. Simultaneously, India should initiate talks on an FTA in services with the US, an FTA in goods and services with the EU and make Ibsa fully operational.

The key lessons emerging from India’s experiments with trading agreements are:

- India should focus on having trade agreements with important countries
- Services should figure prominently in all agreements, particularly Modes 1 and 4
- Our long-term goal should be the formation of an Asian Economic Community
- Detailed analysis of the effects of a possible FTA on sectors and economy as a whole must be undertaken prior to signing an agreement. This was probably not done in a systematic manner in our initial FTAs.
- Trade facilitation concerns, including mutual recognition agreements on standards, customs collaboration agreements, and expansion of transport links, have to be urgently addressed to remove all non-tariff barriers with each other.
- Domestic investment climate in India must be improved to encourage a larger flow of direct foreign investment.
- Services should feature prominently in all agreements, especially Modes 1 and 4 of Gatt to reflect India’s dynamic comparative advantages.
- Successful agreements need the highest-level political attention in order to induce institutional improvements, such as commitments to tariff reduction, customs cooperation, etc. Terc is the right vehicle for it. The ministry of commerce and industry should serve as its secretariat, with a beefed-up trade policy department.

The second part of the strategy calls for a strong Safta, with India taking the lead in that effort. South Asia, as a region, has performed poorly in trade as compared to other regions or its potential. Over the past two decades, exports from South Asia have merely doubled, in contrast to East Asia’s exports that grew by 10 times over the same period. The main reason is stagnancy of intra-regional trade in South Asia, that has remained at 2% of its total trade volume since 1980.

India should draw a lesson from the determined manner in which China has taken over as a superpower in East Asia from USA. India should play a similar role in South Asia, since it accounts for 80% of South Asia’s GDP and is the best performer in the region, with the second highest GDP growth in the world. It just needs to win the confidence of its neighbours.

Diplomacy alone will not be sufficient. It has to be backed by actions to boost trade. For this, we need to move simultaneously on two fronts-a regional initiative to improve trade facilitation and India opening its markets to its neighbours without reciprocity, by allowing duty-free imports from Safta countries.

The government should immediately begin to implement this two-pronged trade strategy.

The writer is principal advisor, CII. These are his personal views

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