The Print - 13 October 2021
Trade imbalances, then pandemic — why Modi govt changed strategy on free trade agreements
By Pia Krishnankutty
India is in the midst of fast-tracking its free trade agreement (FTA) negotiations with several countries and groupings such as Australia, the United Kingdom and the European Union, as it chases an ambitious target of $2 trillion in exports, comprising $1 trillion in merchandise exports and $1 trillion in services, by 2030.
Two weeks ago, India and Australia announced they would finalise a free trade agreement by the end of 2022. The negotiations had begun in 2011, but missed several deadlines.
The developments are part of the Narendra Modi government’s current approach to FTAs, which is in stark contrast to its earlier strategy, when it actively shunned them.
When it first assumed power in 2014, the Modi government began reviewing all existing trade pacts. Some of those that came under that review were pacts with Singapore (signed in 2005), South Korea (2010), Malaysia (2011), Japan (2011) and an FTA for goods with the ASEAN grouping (2010).
By October 2014, then-commerce minister Nirmala Sitharaman said with the review process being almost finalised, it was found that some FTAs were benefiting partner countries as opposed to India.
And while the government signed pending agreements on services and investments with ASEAN that year, in 2015, it set up another committee, under then-chief economic adviser (CEA) Arvind Subramanian, to review the other existing FTAs.
A year later, a government meeting of various ministries, chaired by then-finance minister Arun Jaitley, was held to discuss the preliminary findings of a report on these pacts.
Analysts say that the government’s current approach to FTAs could have been prompted by huge trade imbalances and the pandemic.
According to data from the commerce ministry, between 2014-15 and 2019-20, India’s total exports went up from $310.33 billion to $313.36 billion — a less-than-one per cent increase.
During the same period, India’s total imports increased from $448.03 billion to $474.70 billion — a 5 per cent increase.
India’s trade deficit also grew in this time, from $118.37 billion in 2014-15 to $161.34 billion in 2019-20.
Walking out of RCEP, struggling to build trade ties with US
The Modi government’s stand on FTAs had more or less remained unchanged right up to the Covid pandemic.
In November 2019, PM Modi announced that India will not be joining the ASEAN-led Regional Comprehensive Economic Partnership (RCEP) on the grounds that it would affect livelihoods in the country. Shortly after, Commerce and Industry Minister Piyush Goyal announced that India will be reviewing the RCEP pact to “correct the asymmetry” in its trade with some ASEAN countries.
The Modi government’s first term was also marked by “a visible pivot” towards a more intense trade and investment relationship with the US, noted a report by Mumbai-based foreign policy think-tank Gateway House. The report, however, pointed out that similar to what happened in other trade talks, India failed to utilise its most competitive trade advantage — services.
“India signed a Free Trade Agreement (FTA) with ASEAN for goods first, and then followed it up five years later with an FTA on services. In the interim, India suffered a negative trade balance… if India had signed an FTA for both goods and services simultaneously, the outcome might have been different,” it added.
Revisiting pending FTAs
The government now appears to have revisited that strategy.
At the G20 ministerial meeting in Italy Tuesday, Goyal reportedly met with nearly 15 foreign ministers to advance India’s trade position. This is an extension of how the Modi government started this year, revisiting pending FTAs with the likes of Australia, the UK, the EU and the UAE. In some cases, it has been open to interim trade deals or mini-deals.
New Delhi plans to finalise an interim deal with Canberra by Christmas this year. In the case of the UK, services account for 71 per cent of its GDP, so it plans to launch FTA talks with India next month, and has its eyes on an early harvest deal by March 2022.
India has also resumed Broad Based Trade and Investment Agreement (BTIA) negotiations with the EU, in the pipeline since 2007, and hopes to open new markets and expand opportunities for Indian and EU businesses.
‘Disproportionate trade, pandemic’ behind new strategy?
According to Ajay Sahai, Director General and CEO of the Federation of Indian Export Organisations (FIEO), a trade promotion body under the Ministry of Commerce, this change in the government’s FTA strategy could have been prompted by many factors.
“In all our FTAs, a clear trend has emerged that the export market has not grown in the proportion that imports from these countries have grown. That may have prompted the change in strategy,” Sahai said.
Asked if the Covid-19 pandemic has played a role, he said, “Today, China Plus One is becoming a strategy for all countries. India has emerged on the radar of business companies as an alternative to China.”
The China Plus One strategy refers to investors and countries not relying solely on China for manufacturing.
Dhiraj Nayyar, chief economist at Vedanta Resources and chairman of Assocham’s National Council on Trade, explained that India’s trade suffered in early years as it partnered with competitive countries.
“The early FTAs that India signed were with more competitive countries, especially when it came to manufacturing. The reason why our exports didn’t grow is not because firms weren’t performing, but because the infrastructure and policy environment were not giving adequate support,” Nayyar told ThePrint, adding that India’s FTAs tended to focus more on goods than on services, even though the latter was its strength.
“We chose the wrong countries and wrong terms. Now, we’ve chosen the right ones, like the EU and US,” he added. “They are high-cost economies for mass manufacturing that are now looking for an alternative to China. India might have an opportunity but so do Vietnam and Bangladesh.”