India gets the wrong end of trade deals

Business Standard, January 08, 2013

By Purna Chandra Jena

India’s trade competitiveness has declined in recent years, especially with those countries or regional entities with which it engages through preferential trade agreements (PTAs). Export and import data till September 2012 show that the country has not been able to reap optimal benefits from such arrangements. In fact, PTAs have facilitated more imports than exports for India – especially owing to low-tariff rates of partner countries – and show no signs of reduction. Given that most countries are moving towards bilateral or plurilateral agreements, India cannot afford to remain oblivious to this trend. Therefore, India needs to be more cautious in analysing its costs and benefits when signing such trade agreements in the future.

For instance, India signed comprehensive economic cooperation agreements with Japan, South Korea and Malaysia recently. Statistics reveal that the growth of Indian imports is substantially higher than its export growth. The commerce ministry’s export-import databank shows that India’s exports to Japan in 2011-12 increased 24 per cent over the previous year, whereas imports from Japan grew 40 per cent. Again, India’s exports to South Korea grew 17 per cent in 2011-12 over the previous year, while Indian imports from South Korea increased 25 per cent in the same period. Overall, India’s exports to the world grew 22 per cent in 2011-12, while imports increased substantially by 32 per cent.

The trade figure for 2011-12 essentially reveals that one unit of Indian export can buy 0.63 units of imports in value terms, which is less than the previous year’s figure of 0.68 units. Interestingly, in 2003-04, India’s export-to-import ratio was 0.82. Given such weak performance of India’s global exports as well as exports to its PTA partners, the government should revisit these trade agreements and make a better cost-benefit analysis, so that a balanced approach can be taken while negotiating such agreements.

While signing new agreements, particularly, with developed countries, India needs to set its benefits clearly, given the existence of factors like low average tariff rate and exchange rate. For example, in the Indo-Japan comprehensive economic partnership agreement, the exchange rate and low average tariff rate of Japan have played significant damage to Indian export interest.

India and the Association of Southeast Asian Nations (Asean) jointly celebrated their 20 years of mutual association in New Delhi from December 20 to 22, and the Indo-Asean service and investment free trade agreement (FTA) talk was finalised. Both parties are expected to sign the pact in August 2013. It is a hard fought diplomatic gain and it supplements India’s Look East policy. The new arrangement between India and Asean will open many avenues for India in terms of free flow of services and investment to the region, and Asean member countries will simultaneously get the benefit of the vast Indian market for investment and services. That also helps the signing of a similar bilateral deal with Thailand, which was stuck owing to the non-conclusion of the Indo-Asean service and investment FTA. It is believed that India and Thailand may sign an agreement soon to open up respective markets for professional workers. India is a labour-surplus country; and if this agreement is finalised, our professionals may earn some foreign exchange to partially balance the trade deficit — which was estimated at $129.5 billion* between April and November, 2012-13.

India is facing challenges in its exports to Asean, primarily owing to vast trade complementarities in goods that exist between them. India has revealed comparative advantages and competitiveness in services like computer and information technology, and financial services and education. Hence, opening up services trade with Asean will be beneficial.

Also, in the long run, India needs to diversify its trade portfolio, which will increase its competitiveness by broadening the productive base, particularly, in the manufacturing sector that has a lot of untapped potential. To become competitive in exporting goods to world markets, India should put all exports under a special focus market scheme. Given all the concerns, an additional institutional mechanism should be created to supplement this scheme. Dedicated research needs to be conducted to provide initial inputs to the industry for exploiting these markets. Many additional incentives, such as road shows and exhibitions, have to be undertaken in those markets in which India is facing competitive pressures from other nations. In addition, a special export task force should be created by the commerce ministry.

Also, Market Development Assistant and Market Development Initiative (MDI) schemes, which are run by the commerce ministry, should be considered business as usual. Small exporters with certain export capacity (in value terms) should be involved into the schemes. It will help them get first-hand experience by visiting foreign markets with Indian delegates. To get improve exports instantly, incentives should be given to exporters under MDI or some new schemes. Adequate and timely credit should be provided to exporters on a priority basis, as and when necessary. Trade deals work best when domestic markets are adequately supported.
The writer is Assistant Policy Analyst at CUTS International, Jaipur. These views are personal

This article can also be viewed at: