Financial Express | Wednesday, May 17, 2006
Congress chief Sonia Gandhi’s letter to the PM on the possible downside of the India-Asean FTA has sparked off a debate. How far should India accommodate Asean’s interests? fe takes a look
Vulnerable stakeholders have to be protected
The Framework Comprehensive Economic Cooperation Agreement between India and Asean was signed on October 8, 2003. It envisages a free trade agreement (FTA) in goods, services and investment. Several concerns have been raised on the Indo-Asean CECA, particularly on whether it would adversely affect Indian agriculture and small -scale producers.
India is more competitive than Asean in most agriculture products. However, agricultural imports into India from Asean constitute more than one-third of all imports from Asean. Palm oil alone accounts for 20% of India’s imports from Asean.
Though Asean may have little diversity in agriculture, it is one of the world’s most efficient producers of spices, rice, plantation crops and palm oil. India’s imports of these products from Asean have been growing consistently despite applied tariffs being in the range of 70-100%. A full liberalisation of import tariffs on these crops would lead to import surges that would impose severe costs on producers -many of whom are marginal farmers.
GTAP analysis suggests that if full liberalisation were undertaken, the edible oil sector in India would be the hardest hit-production displacement would also take place in spices, tea and coffee. Hence, it is imperative to ensure that these agricultural products are protected.
Given the FTA obligation to liberalise ‘substantially all trade’, it may not be legally tenable or politically possible to designate as ‘sensitive’ those agricultural products that already occupy a significant proportion of bilateral trade like palm oil. Offering limited concessions through tariff rate quotas would be a more feasible option in such cases. Alternatively, India could seek milder concessions through preferences or a much longer schedule for tariff reduction. Given, the international volatility in the prices of spices and plantation crops, it would also be important for India to negotiate appropriate safeguard measures, based on both price and quantitative triggers.
The competition that the FTA with Asean will bring on Indian manufacturing will drive product prices down. This has mixed implications for the SSI. It could save on costs as it will be able to source industrial inputs like petrochemicals, synthetic fibers/ yarns and certain non-ferrous metals, at cheaper rates.
The FTA could also pose challenges to India’s small-scale sector, on account of advantages that Asean producers enjoy due to scale, technology and investment in sectors like electronics and machinery products, auto-components and motor vehicles and even in certain sub-segments of fabric and clothing manufacture, many of which are produced by SMEs in India. Given the high employment and backward integration associated with such sectors , the FTA could impose severe adjustment costs. Hence, it would be essential that vulnerable products of such industries are captured in the sensitive list.
If the FTA is to deliver gains to the SSI, it is imperative that it be used to only protect the interests of the most vulnerable stakeholders, like small farmers, SSIs and employment-intensive industries. GTAP simulations suggest that while both India and Asean secure welfare gains from the FTA, Asean’s gains are significantly higher. The maximisation of gains and mitigation of adjustment costs, would largely depend on the ‘sensitive list’.
Strict and effective implementation of the rules of origin by customs authorities would be important given the concerns that have arisen during previous FTA implementations. The success of the CECA to India will also depend on how it is able to leverage its concessions in goods with market access to Asean’s services market. Investment by Asean countries in India could also help secure developmental gains.
The writer is trade officer with Unctad. Views are personal