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Perspectives: Why India wants deals with Europe

India’s approach to trade policy is no longer quite the outlier of recent years. But to ensure freshly announced trade talks with the country succeed, the EU and the UK need to step up their understanding of what drives India and perhaps start approaching the country differently.

It’s been a week of major announcements on trade policy relations between Europe and India. The UK and India started by announcing a number of initiatives including the launch of talks on a new Free Trade Agreement in the autumn. A few days later an EU-India summit delivered the revival of long stalled FTA talks, alongside separate talks on new investment and GI agreements.

The announcements were welcomed, albeit with considerable scepticism. India’s last significant free trade agreements were completed ten years ago with Japan and Malaysia. New Delhi recently decided against joining the Regional Comprehensive Economic Partnership fearing an influx of imports particularly from China.

Earlier this year the chair’s report on their WTO Trade Policy Review stated: “Members noted that India’s trade policy had remained largely unchanged since the previous Review, with continued heavy reliance on instruments such as the tariff, export taxes, minimum import prices, import and export restrictions, and licensing.” India remains protectionist in policy and obstructionist in negotiation.

Yet there may just be an opportunity. India is increasingly concerned by the strength of China, and Prime Minister Modi needs to show successes given the domestic Covid crisis and stuttering economic growth. The export-to-GDP ratio has risen since the early 1990s to be broadly similar to China, but with much stronger emphasis on services exports, which grew to 3.5% of global total by 2018.

These circumstances have opened the door – slightly – to negotiations. For any agreement to be successful, however, the EU or UK will need to show a much deeper understanding of what drives India than they have in the past.

People first

People is India’s number one priority.

It is well known that India prioritises temporary movement of professionals – Mode 4 – and visas in trade talks, but the driver for this is often ignored. India will be the world’s most populous country by 2027 according to UN projections. The priority is to ensure some form of food and job security for a population of 1.4 billion.

Extensive intervention in the agriculture sector, 20% of India’s GDP, is designed to deliver this security. There is a widespread belief, even among domestic commentators recognising the suboptimal nature of intervention, that developed countries want to undermine India’s farmers while keeping their own subsidies.

There has been a long term distrust of free markets. Reducing tariffs should lead to more efficiency, but if that also leads to fewer jobs it would be a problem, on top of lost foreign exchange revenues which shouldn’t be underestimated in importance. Labour intensive jobs are much preferred to capital intensive ones. Arguably the US and EU are both moving in this direction, which might even strengthen Indian resistance to change.

Of course, India still wants visas for those working in their successful services sector. But that can’t be at the expense of a greater number of domestic jobs lost.

The quest for inward investment

People may be a priority, but India still wants to trade. More particularly, it wants the inward investment to be able to produce and export goods.

There have been many initiatives over the years to encourage greater and more modern manufacturing, even a degree of self-sufficiency, but these have only ever been partially successful. Infrastructure in various ways remains problematic, as is the various ways in which the government intervenes in the market. This is not the most stable of business environments to operate within, as various European companies such as Vodafone can testify.

Even areas of strength are relative and problematic in trade terms. India’s manufacturing of generic drugs is widely regarded, but pharmaceuticals exports are still only roughly on a par with those of the UK. Potential for growth could be stymied by concerns about quality, some level of dependence on China for active pharmaceutical ingredients, and risks of signing up to restrictive conditions in trade deals.

A desire to find their own path also showed in investment protection. India terminated a large number of Bilateral Investment Treaties in 2017, but has developed a new model agreement, and more recently concluded a new agreement with Brazil. This excluded investor-state dispute settlement. Instead it focused on dispute prevention in line with the Brazilian approach. Investment is a priority, but not if it comes at the risk of reducing regulatory control.

Trust

Suspicion of governments including their own is a constraint, but also now the opportunity.

Indian officials are renowned as difficult negotiators at both bilateral and multilateral levels. They frequently appear to lack trust in other countries, which are seen as not treating India with the respect it deserves.

There is a parallel to the way those same officials are regarded domestically, which is with a great deal of suspicion.

India ranks about half way in the Corruption Perceptions Index, a vibrant media and electoral process having been helpful in preventing worse. But it is widely assumed that officials may be rewarded by those businesses they are helping, which in turn limits the ability for compromise. The long standing UK issue of a 150% whisky tariff is more complex than the simple protectionism often presented, encountering domestic players and serious community concerns over alcohol.

Suspicion is also a factor in regional politics and India’s relationship with geopolitics. There are ongoing tensions and low level conflicts with two neighbours in particular, Pakistan and China, and concerns that both are treated too well by the west. The China-Pakistan Economic Corridor and particularly Chinese involvement in the port of Gwadar heightens the concern.

That Indian concern over China and domestic jobs is now being equally reflected in the EU, UK, and US helped facilitate the announcements of the last week. There are already good trade relationships and no shortage of Indian diaspora to encourage talk of deals. Such agreements still look hugely problematic though.

All in all: India’s trade politics do not tally well with traditional tariff cutting agreements. Perhaps for both the UK and EU this is an opportunity to find a new approach.

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David Henig runs the column ‘Perspectives’ on the politics of global trade for Borderlex. He is also a UK director at the think tank ECIPE.

Views expressed by columnists at Borderlex are strictly their own.

One Comment

  1. euadvisory@skynet.be

    Fully agree that a different approach is needed if a successful agreement is the objective.
    I question whether it at all is worth looking at such an agreement as being a Preferential Trade Agreement requiring substantially all tariffs to be eliminated.
    Is this really realistic for India? Is this really a need for the EU? I doubt it!

    A strong cooperation agreement and a serious effort to facilitate trade breaking down NTBs would in my view be a realistic target bringing the parties closer during the next decade.

    Morten Petersen

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