The India- European Union Free Trade Agreement (FTA) has been much talked about in recent times. Some argue that it would facilitate trade among the EU and India, thereby creating inflow of a variety of commodities and services which could enhance investment at a time when the Indian economy is in doldrums. However, some contend that it is likely to have a negative impact on the economy, in particular the agricultural sector. This post explores arguments from both perspectives and discusses the possible implications the FTA could have on the Indian economy and what it could mean for India’s trade relations with the EU.
India has currently been involved in around 30 FTAs, both with developed and developing nations, and most of these agreements are “goods (commodity) agreements” (Sengupta 2011) The India-EU FTA is a more ambitious agreement as it seeks to enlarge trade relations in a variety of sectors and products. Negotiations between India and the EU to facilitate a FTA began as early as 2007 to improve market access to a variety of commodities and a host of services. In 2012, these negotiations went to the next level at the India-EU Summit held at New Delhi. As of 2013, negotiations still continue.
Supporters of the Agreement contend that it is in conformity with the benefits of economic liberalisation policy of India. Free inflow of goods and commodities will provide consumers with more choice enhance competition and bring down the price of goods, thus eventually work as a motivating factor leading to the growth and development of industries.
Some believe that the Agreement would enhance India-EU trade relations, which have previously been left undelivered. India is the EU’s 9th most important trading partner and the EU is the largest trading partner for India. Technical assistance from the EU would result in higher standards among Indian exports, thereby improving their quality. Technical transfer of technology would enable Indian manufacturers and further Indian exporters to use newer and more effective methods of technology to improve the quality of imports. For example, under the India-Sri Lanka FTA put in force in 2000, both India and Sri Lanka have gained from exchange in high-technology industries which was of immense benefit for both. (Click here and here.)
It is contended that the talks between the EU and Indian delegations were largely biased towards corporates. A newspaper report suggests that information was withheld from the public, but shared with corporate lobby groups highlighting the lack of transparency in the talks. The same report also criticises the move of the government to go ahead with a trade agreement of such a nature with the argument that Western corporates are merely using India to escape the chaotic environment of the EU and American markets. The biggest criticism to the India-EU FTA is that it would seriously hamper the Indian agricultural sector. Prabhakaran Nair contends that while the EU seeks to enhance and support its farmers, allowing a wide range of European agro-products pose serious threats to farmers’ livelihoods. He further argues that the FTA will erode protective measures that India has undertaken so far for the benefit of the agricultural sector. Moreover, he points out that trade asymmetries show that there is little benefit that India can gain from such an agreement. India is set to benefit US $ 83 million in agro and agro based products whereas the EU will benefit from a whopping US $321 million. The gap is wider in case of primary products, where the expected benefit for the EU is US $ 5,128 million whereas India will receive a negligible US $ 39 million.(Click here)
The FTA also poses threats to India’s pharmaceutical industry, which has otherwise grown considerably since liberalisation. It is contended that influx of foreign-made drugs would seriously hamper domestic drug manufacturers. However, some contend that certain drugs, which were earlier not available in India for treatment of certain life threatening diseases could now be accessible at reasonable prices. There has been public discontent with the demands of the EU with regard to public health and access to medicine. (Click here.)
The possible implications of the India-EU FTA lead us to examine the importance of enhancing free trade and reduction of protectionist barriers vis-à-vis consideration of possible repercussions from such free operation of trade. This invariably brings us back to the age old debate on safeguards and FTAs. The 1994 Agreement of Safeguards allows the regulation and imposition of safeguards as a right of WTO member nations to protect its domestic industries from serious harm as a result of trade concessions and surges in imports. Trade liberalisation does result in affecting the livelihoods of some sections of society and thus placing safeguards on trade is crucial in ensuring that such impacts are substantially minimised. Safeguard measures also provide a ‘breathing space for corporate entities, governments and workers to formulate effective economic policies in line with free trade. (Matsushita, Schoenbaum&Mavroidis, 2006)
If India goes ahead with the Free Trade Agreement with the EU, the implications will be much larger than its current Agreements with other nations and regions. For example, the EU FTA will have the largest impact on the agricultural industry. Unlike other FTAs that India has signed, this agreement focuses on the trade in primary products, emphasised on agriculture. Agriculture is the backbone of the Indian economy and a majority of the labour force is engaged in this sector. Unfortunately, the agreement also does not take into account the socio-economic conditions of the labour force in this sector. Primary products produced by European manufacturers are substantially different and are measured on a distinct quality scale. The agricultural sector still needs to be protected by trade barriers and has not yet reached a stage where it can effectively compete with foreign players. Moreover, as Nair points out, the benefit for India in agriculture and agro-based products are much less than what the EU stands to gain. Therefore, exposing a fledgling sector to a highly competitive market will only spell doom for the millions of poor farmers across the nation. In such a scenario, there is an ardent need to provide for safeguards for these poor farmers, and ensure that their livelihoods are not lost.
A country is not prohibited from imposing safeguard provisions in its FTA, although it would be invalid if it substantially hampers all trade. (Choi 2003) In the present case, there are certain sectors in the Indian economy which require safeguards- such as the agricultural and pharmaceutical sector, and other sectors that do not, such as the information technology sector. It is important to ensure that safeguards are provided to those sectors which are in need of such protection. Therefore, within the ambit of Article 19 and 24 of the GATT, the safeguards would not hamper all trade and it would result in a win-win situation for both. India is one of the most frequent WTO nations which use safeguards (Choi 2011) and must not hesitate to place crucial provisions in the EU-FTA as well. Global safeguards system (GSGs) in FTAs allow for acceptance of safeguard provisions in cases of balance of payments situations. (Choi, 2011) Given India’s current economic crisis, it can invoke GSGs to protect interests of farmers.
The provisions of the Agreement will no doubt have a great impact on the nature of India’s policy making and development pattern. What India needs is to push for is stronger provisions on investment, as it has done in its earlier FTAs. (Sengupta 2011) Investment in sectors such as agriculture and pharmaceuticals could work wonders for both the sectors. However, in case of agriculture, certain additional precautions must be undertaken to protect the interests of the farmers and their welfare considering the harsh realities that they face. More importantly, India should not end up as an “exit market” for European corporations to dwell on till the European markets recover. In light of these concerns, it is important to negotiate adequate safeguards within the FTA to prevent serious injuries to domestic industries. It is also important for the FTA to be fair and transparent, and measures must be undertaken to prevent lobbying by influential corporate entities to seek undue and unfair advantages. The agreement must be available to the public to formulate its opinion. Thus, while the India- EU FTA faces many challenges necessitating further dialogue, India must not back away from the potential gains that the Agreement could entail. However, it must push for safeguard measures that will enable it to enhance trade relations with the EU as well as ensure that the growth and development of its domestic industries is not seriously injured.
This post has been written by Meenakshi Kurpad, member of SITC and a 3rd year student of West Bengal National University of Juridical Sciences, Kolkata. The author would like to thank Mr. Sandeepa Bhatt for his valuable comments and guidance for the post.
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