FTA with EU, potential minefield for beleaguered India

India's goods exports to the EU have fallen in the last couple of years

The latest EU-India Summit, held over internet on Saturday, had a very unique feature. While in the past the Summit has involved Indian Prime Minister, the head of European Council, the head of government of the country that holds the presidency of the EU at the moment of the summit as well as the head of the European Commission. However, this time around besides the usual participants, heads of governments of all other EU nations, 27 in all, also participated in the Summit.

Some observers said that this was an indication of growing interest of the EU in the Indo-Pacific. However, geopolitics is much more complex than a unidimensional response to any such question, especially when it comes to increasing interest in India. More often than not, the real reasons for higher interest in India lie less in what India has to say or what India needs, but much more to do with what India has to offer as a market.

Of late, the EU finds itself in a tough place. On the one hand, its ties with its second largest trading partner, China, are worse than it has been in living memory, with both the sides warring on various issues like banning Chinese telecom giant Huawei from 5G in Europe and the latest spat on treatment of Uighurs in China. Another key dispute between the two sides is the aggressive posturing by China in the South China Sea. The EU has also become increasingly worried about the implications of the Chinese Belt and Road Initiative and to counter it, the EU signed an agreement with Japan to undertake similar projects overseas.

Even as it fights a multi-front battle with China, the EU is still struggling to come to terms with Brexit, that remains a work in progress as far as the future economic relationship with the United Kingdom is concerned. The economic cost of the divorce that both the sides have to incur will become clearer only in a couple of years after the economies return to a semblance of post-pandemic normalcy.

In view of these issues, it is evident that the EU should be focused on India and try to expedite the bilateral free trade agreement that has been under negotiations for well over 15 years now. In 2013, the talks were frozen as the two sides could not overcome differences on several issues including import tariffs, patents, data security, mobility for workers and market access.

There were signs of movement on the talks last year, as the global economy was buffeted by the pandemic. In July 2020, Indian commerce minister Piyush Goyal said talks could resume. After a flurry of exchanges, the talks have finally been announced. However, reaching an agreement is easier said than done. In the past too, each time, the two sides began discussions on the deal with a lot of gung-ho and set an extremely ambitious deadline of concluding it within a couple of years. However, the negotiations hit a roadblock pretty soon as the two sides have a large basket of goods and services that they would like to protect from competition and the business and political lobbies on both sides are strong enough to derail any ambitious deals that could be seen to be hurting its domestic industry.

While the EU wants India to lower dramatically its import duties on a variety of products like automobiles, agricultural products, luxury items as well as alcohol, India has been asking the EU to open its own markets for greater Indian exports. India has also accused the EU of resorting to non-tariff barriers in imports of agricultural and marine products as well pharmaceutical exports from India.

India has also asked the EU to liberalise the movement of professional Indian workers, mainly in the ITES industry, within the EU in order to make the Indian IT companies more efficient in handling service requests from their clients. Data privacy rules in India and the EU are also at two opposite ends of the spectrum and would need reconciliation, especially with the EU’s GDPR and India’s insistence on foreign companies hosting user data within Indian borders. The EU has also been pushing India to open its services sector – mainly advocates and accountants – to foreign players.

Good wines, fast cars

One of the key demands of the Europeans has been that India slash its duties on wines, that range from over 40 pc to 150 pc. The EU has been asking India to make this zero within five years, a demand that India has rejected. Instead, India has suggested variable duties on wines, with duty cuts being more focused on the expensive wines. India had also offered lower duties on whiskey that is bottled in India, something that neither the British nor Irish manufacturers are too keen on.

The other major demand of the EU has been for India to drastically reduce customs duty that is currently more than 100 pc and much higher for luxury cars. On top of that there is GST which is about 50 pc on luxury vehicles. Automotive is likely to be extremely tricky as India has a large automotive industry, which is not only the largest manufacturing industry, but also the biggest employer in the domain. Moreover, the Indian automotive industry has been bleeding red for the past three years, with the pandemic delivering a knock-out punch. In such a situation, if the government agrees to a dramatic cut in duties, it will lead to loud protests. An indication is that the import duty on auto components had been hiked by 15 pc in the last budget presented earlier this year.

Thus a total policy reversal or at least a dramatic cut in duties is unlikely until the Indian industry recovers, which may yet be 2-3 years away.

India needs to push for its industry in many sectors, notably farming, marine exports as well as pharmaceuticals, in each of these India has been facing severe challenges, mainly in form of non-tariff barriers. There have been instances of sudden changes in EU import norms in farm or marine products, leading to large-scale rejection of Indian consignments. Moreover, in the name of health safety, the EU has also blocked consignments of Indian drug exports to third nations that simply transit through EU’s ports.

EU keen on standalone investment pact

The EU India FTA negotiations have meandered for so long that with changing scenarios, the EU has insisted on broadening or narrowing the agenda. For instance, in 2006, it began as a pure free trade deal, but over the years as there was no progress, the EU insisted on adding investment protection to the negotiations especially since the highly controversial move by Indian government of imposing retrospective and punitive taxes on two European firms – telecom major Vodafone and the energy giant Cairns.

Since then, the EU members had been pressuring the European Commission to negotiate investment agreement with India to protect their investments, with a strong dispute settlement mechanism. This is something that India has so far not been too keen on. The EU had also made a vocal objection in 2015 when Indian government had unilaterally terminated all 57 bilateral investment treaties (BITs), including several with EU members.

The new model presented by India at end of 2015 is radically different to what the EU would want in terms of investment protection for its companies.

If India can hold its ground and fight for a fair deal, both the negotiations are likely to be long drawn out. In the final analysis, India would do well to ensure that its negotiators should aim to protect the interests of Indian businesses rather than please the international community or simply to fall in line, as India did very foolishly in a WTO Ministerial in Nairobi in Kenya in 2015, where then then commerce minister Nirmala Sitharaman crumbled under international pressure and gave away vital interests of Indian farmers. Six years on, millions of farmers are still paying the price for this blunder. One would hope that her successor Piyush Goyal would be more on the ball and do a better job of protecting Indian interests.