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Laissez Unfaire

Outlook India

Laissez Unfaire

At the risk of destroying local industry, India has to tread the free
trade pact route

Arindam Mukherjee

11 March 2004

In the recent past, Prime Minister Atal Behari Vajpayee and his foreign
minister Yashwant Sinha have projected themselves as suave and far-sighted
trade negotiators. They contend they have moved ahead on several free
trade agreements (FTAS), which are being negotiated bilaterally and
regionally. But suddenly, there is an obstacle. Industry has put its
foot down saying, "Free is not necessarily fair". And aggressive
lobbying has ensured India is unable to finalise any of the agreements,
except the one with Sri Lanka.

Ever since the government stepped on the gas to sign FTAS with countries
like Singapore, ASEAN and Thailand, business houses have been crying
hoarse about unequal competition. While the agreements will open the
markets to foreign goods (as import tariffs will be dramatically reduced
to zero per cent over time), India will not gain much. Says T.K.
Bhaumik, a trade expert with cii: "There is a general apprehension that
FTA means liberalisation of import tariffs which may hurt the industry."
Adds Vishnu Mathur, executive director, Auto Components Manufacturers
Association (ACMA): "We are opening up our market but industry is not
getting an equal access to the markets of other countries."

One of India Inc’s primary concern is, imports will become cheaper than
’Made in India’ products. This will happen, Mathur explains, as the
finished products from FTA countries can be imported at zero per cent
duty. But Indian competitors will be at a disadvantage because they will
still need to import raw materials (say steel in the case of auto
components) at fairly high duties. In fact, the auto components sector
is likely to be one of the worst hit as Southeast Asia is a huge
manufacturing and export base for these products.

Yet another sector that’s rattled by the prospect of free trade and no
import barriers is consumer electronics. Explains Suresh Khanna,
secretary general, Consumer Electronics and TV Manufacturers Association
(CETMA): "TVs, refrigerators and ACs have been put in the early list in
the proposed FTA with Thailand for progressive duty reductions. These
are cheaper in Thailand and costlier in India because of duties on
inputs. The government has to take a fresh look at the duty structure if
it wants industry to survive."

India Inc is also troubled by the fact that a number of countries with
whom India proposes to sign the FTAS have surplus capacity. So, they
have an economic reason to sell products at cheaper prices. Industry
sources say Brazil makes 40 million compressors a year, of which
domestic demand accounts for just 40 per cent of the production. Since
the Indian market is for four million units, and the domestic capacity
is seven million, the FTA will wipe out the local manufacturers.
Batteries fall into a similar category. Says S.B. Ganguly, CMD, Exide
Industries: "The FTAS, specially the ones with Thailand and ASEAN, are a
big threat to our survival. Thailand has a 40 per cent surplus in
batteries which can be dumped in India."

Obviously, the makers of these products want India to keep certain
sectors out of the purview of the FTAS. Or include the items at a much
later date. This has become critical because countries like Singapore
and the Mercosur regional group have given huge lists of products where
duties need to be removed. While Thailand has submitted an initial list
of 84 products, Mercosur and Singapore have indicated they wish to
include 1,500 products each. Says a Delhi-based industry lobbyist, "Everyone’s
fighting to see that their products are not included at all."

The problem doesn’t lie only in the competitiveness of the nation or the
region with whom FTAS are being inked. It is also related to what is
called the Rules of Origin. Such rules ensure that goods manufactured in
neighbouring countries, say China and Korea in the case of ASEAN, do
not enter India by using Thailand or Singapore as a base merely to
benefit from concessional duties.Logically, Chinese or Korean firms can
open up offices in Thailand, take advantage of the Sino-Thai or Korea-Thai
FTAS to export there, and then use the Indo-Thai FTA to route the
products to India.

That’s where local value addition comes into play. Which implies, goods
exported from a certain destination must have a minimum value addition
in the country of origin. In case of Thailand, Indian policymakers are
keen on value addition of at least 40 per cent to minimise the Chinese
and Korean threat. But Thailand is reportedly talking of 25 per cent
which the industry feels is too low and inadequate to protect its

The finance ministry, which has been forced to reassess the duty
structure, is thus in a fix and has itself raised issues relating to
possible revenue losses because of the FTAS. The agreements would lead
to a number of tariff anomalies that will force India to further reduce
duties on several items.

In fact, the government is caught in a classic Catch 22 situation. It
cannot sign these agreements in haste because of the various concerns.
But it has to move fast along the FTA route since India is being
isolated in a world that is getting grouped into regional and cross-continent
trading blocs. At present, there are some 250 FTAS globally and this is
expected to cross the 350 mark by next year. More than 60 per cent of
world trade is done on a preferential basis through FTAS. There is
another reason too. With multilateral negotiations under wto hitting a
deadlock, the world is opting for bilateral arrangements. Says a
cautious Rahul Bajaj, chairman, Bajaj Group: "We don’t really need FTAS
but in the absence of multilateral arrangements, we need something to
hold on to."

But the speed at which the government is trying to forge these alliances
has attracted brickbats. Says Bajaj: "FTAS require a lot of time to
look into the country’s industrial needs. India should not rush into it
at the cost of domestic industry." Agrees Bhaumik: "FTAS are all about
negotiations to address all concerns and this can’t be done in a hurry."
NAFTA negotiations between the US and Mexico, signed in 1996, are still
on and the US-Israel FTA took over 18 years to fructify.

Fortunately, the lobbying seems to be working. It seems the government
is moving a bit slowly on preferential agreements. For example, the Indo-Thai
FTA, which was to be finalised this March, has been shifted to July and
may be delayed further. But industry is still keeping its fingers
crossed and hoping that the FTAS don’t turn into UTAS (Unfair Trade