Broad-based Trade & Investment Agreement (BTIA)

Dark Clouds Bury Silver Lining

Trade

October 28, 2015

/ By

Biz@India

September 2015



An imminent relaunch of negotiations runs into a fresh roadblock. Can the European Union and India get through the multitude of differences to sign a deal?

After a hiatus of nearly two years, trade negotiators from India and the European Union were to get together in New Delhi on August 20 for the resumption of negotiations over the Broad-based Trade and Investment Agreement (BTIA), as the free trade deal has been christened.

However, towards the end of May, in a sudden move, India called off the resumption of talks. India was angered by a recent ruling of the European Union banning over 700 generic pharmaceutical products from India, citing certain clinical trials which the EU said had been distorted.

For India, the ban on the pharmaceutical products was latest in the string of protectionist measures taken by the European Union and as India sees pharmaceutical as one of its avant garde sectors for exports and definitely a key subject of the BTIA talks.

Changing equations

The setback to the BTIA is a severe one. Most analysts had predicted an immediate revival of the negotiations, with leadership in both, India and the EU, pushing for the talks to begin soon and for them to conclude within a set time frame, impatient with the hitherto slow pace as the two sides began discussing a deal way back in 2007.

At the time, both sides had set themselves a target of winding up the discussions by 2012. However, as we approach the end of 2015, the deal seems as distant as ever, even though the ground realities have changed so significantly on both the sides as to warrant a quick wrap up of the discussions.

The continued economic turmoil in the world, this time fuelled by the slow down in China and the bursting of its stock market and real estate bubble. China’s troubles have led to downward revision of not just its own economic growth in 2015 but also for other parts of the world, including India, which has seen its growth projections for the current year drop from 7.5 pc at the beginning of the year to 7 and with some predictions that it could be closer to 6.5 pc finally.

India is looking to boost domestic investment as well as attract greater foreign direct investments (FDI) and has taken some initiatives in this direction, with the launch of Make in India and Smart City campaigns, the two areas where European businesses have the capacity and even desire to get engaged with India. However, the continued last mile problems in doing business and the uncertain fate of economic reforms, even under the business-friendly Narendra Modi government, have failed to attract much attention from foreign businesses, including the Europeans.

The EU is in no better shape. Its economy, which had been scraping the bottom since the crash of 2008, was finally all set to go beyond 1.5 pc this year. But the Chinese tsunami has ensured that the EU nations would be lucky to go past 1 pc. In its meeting in early September, the European Central Bank once again lowered projection for growth not only in 2015 but also for 2016, indicating the steep road ahead for the eurozone.

Besides the economic worries, the EU has also been beset with socio-political crisis for the last year or so due to large-scale, unprecedented inflow of migrants, primarily from Africa and Middle East. With the European television channels beginning every day with news of a fresh disaster involving a ferry carrying migrants from the African coasts, caught in the death trap laid by human traffickers, who have seen their business boom to unprecedented levels thanks to the continued battles in places like Syria, Iraq, Libya, sub-Saharan Africa as well as Afghanistan etc.

These incidents have brought the problems of large-scale migration to the EU to the fore and has led to a hardening of attitude in several European capitals. Already since 2008, the European political scenario has taken a hard right turn and immigration is one of the top five concerns across all the 29 member states of the EU.

Moreover, the situation in the EU has also come a long way since the talks began eight years ago. Today, the EU has become a 29-member union, with more countries in the queue to join, China has become a major trading partner for India and India has emerged as the world’s third largest economy in terms of purchasing power parity.

Hurdles then & now

Despite the passage of eight years since the launch of negotiations, the major issues blocking the deal are the ones that were known to be the deal breakers right at the beginning. The Europeans want India to significantly lower import tariffs on automobiles, alcohols and spirits, open its financial services sector as well as public procurement. India on the other hand wants the EU to ease mobility of Indian nationals across the EU, make business visas easier, recognise India as a data secure country to permit Indian ITeS and BPM companies to gain greater traction in the EU, besides seeking greater access to the EU markets in various categories. Over time, with the boom in the Indian economy and the changing food habits and the retail distribution in India, the EU has also added easing FDI in retail and a greater access to the Indian food and agricultural markets.

Neither the European Union nor India have been able to satisfy the demands of the other side for the deal to progress ahead. India did slash tariffs on automobile imports and eased import and distribution of alcohol and spirits, but the EU wants it to go much further in both, something that India is not willing or able to, mainly to protect its own automobile and beverages industries. On the other hand, the EU has refused to cede to Indian demands on data secure status or to ease mobility of Indian professionals in the EU region, citing that visas were national subjects and not something that Brussels could decide.

Hence, several rounds of negotiations and even high level meetings have failed to get around these hurdles and the deal seems more or less to be at the same place where it first encountered hurdles.

Heat at home

The task of the two sides to negotiate and reach a settlement is made harder by the severe domestic environment in India and the EU, which has not been helped by the global financial crisis of 2008. Despite all the attempts by the new government led by Prime Minister Narendra Modi, the reforms that the Europeans and other foreign players want in India continue to be stalled as the new opposition – the Congress – has learnt rather well from the its predecessor – ironically, Modi’s BJP – on how to stall the Indian Parliament and thus block the entire reform process.

 

The Europeans want India to significantly lower import tariffs on automobiles

The Europeans want India to significantly lower import tariffs on automobiles

Thus, none of the changes that foreign investors were expecting and seeking have really translated into realities on the ground even 16 months after the new government took charge in New Delhi. On the extremely controversial land acquisition reforms bill, which the new government had tried to push down the Parliament’s throat in a rush and in face of severe opposition, in late August, Narendra Modi himself surrendered and let a Presidential decree lapse after having been pushed for over a year.

Land acquisition is one of the biggest challenges, alongside labour reforms and also implementing other reforms which would help in making doing business in India an easier prospect.

In addition, India’s challenges are many. With 65 pc of its 1.25 bn people under 25, India needs to ensure that it has proper education and employment opportunities for each of its young population. For employment, India also sees opportunities in other countries, notably the EU, which face another sort of demographic challenge – not enough young people entering the work force and hence they could look at migrations as an option. However, this long term necessity of the EU has become a taboo due to the record unemployment created by the 2008 crisis. The on-going migrants’ crisis has made this task even more difficult to achieve.

Free movement for goods, services & people

But India has been keen to ensure that the final BTIA agreement includes provisions for free movement of people. India is particularly interested in the liberalisation of services under Modes I and IV of GATS. As India’s skilled services labour force is growing very fast, India emphasises better market access for services through Mode IV liberalisation over market access for goods in trade negotiations.

Mode IV refers to the delivery of a service within the territory of a member, with the service provider present as a natural person. In its essence, this enables the free movement of individual professionals by committing to measures such as a relaxation of immigration norms. This was reiterated by finance minister Arun Jaitley at the meeting of G20 finance ministers in Ankara on September 4.

According to the Reserve Bank of India, Europe’s share in India’s software export declined from 27 pc in FY08 to 20 pc in FY13. Moreover, the share of Mode IV services in overall software service exports declined from 25 pc in FY08 to 14 pc in FY13.

 

India has strong defensive interests in the negotiations when it comes to agriculture

India has strong defensive interests in the negotiations when it comes to agriculture

India says that improved market access in Mode IV will allow skilled professionals such as software engineers to temporarily reside and work in EU countries. The barriers include work permits, wage parity conditions, visa formalities and non-recognition of professional qualifications.

The Europeans, however, have been unable to reach a consolidated position on the issue, which is subject to the individual immigration policies of member states rather than of the EU as a whole.

Indian ITeS firms are also outraged that the EU continues to refuse a data secure status to India, casting doubts over the security of private individuals’ data to be shared with Indian ITeS companies, thus severely limiting their business prospects in Europe.

“Our companies handle equally sensitive data from all over the world, including the United States and other developed nations. So, if those countries can trust us with their data, why can’t the Europeans?’’ asks an Indian official of the ministry of commerce and industry, which is leading the negotiations with the EU on the BTIA. He goes on to add that by not giving data protection status to India, the EU may simply be protecting its own domestic ITES industry.

India’s Intellectual Property Rights regime is another impediment as the EU wants India to go further than what it has signed on at the WTO. India fears that any commitment over and above WTO’s intellectual property right rules will undermine India’s capacity to produce generic formulations. Also, data exclusivity protection measures (that allows pharmaceutical companies to exclusively retain rights to their test results for a certain time period) would delay the supply of generic medicines. That explains India’s opposition to the proposal. European pharmaceutical companies are wary of India’s patents law which prevents evergreening, which allows companies to renew patents on old drugs by making incremental changes.

The EU has been insisting that India further liberalise its Mode III services, including FDI in multi-brand retail and insurance and presently closed sectors such as accountancy and legal services. European banks have been eyeing India’s relatively undertapped banking space. However, the surrender of Indian banking licences by Goldman Sachs, Morgan Stanley and UBS shows that the burden of priority sector lending and financial inclusion has discouraged foreign banks.

India is also keen that the EU abolish non-tariff barriers such as standards and mutual recognition of licensing requirements. Indian businesses have accused the EU of using terms like sustainable development, human rights, child labour and working conditions as import barriers and that these are being used increasingly in a rampant fashion.

Barricading the Farms

Another hurdle is agriculture, a key sector for both, even though less than 2 pc of EU’s population depends on farming as means of livelihood, compared to over 60 pc of Indian population that lives off the land. The EU has a highly protected agricultural sector and India has strong defensive interests in the negotiations not just with the EU but even at the World Trade Organisation talks where India has blocked a deal on trade facilitation agreement unless the WTO members recognise India’s right to provide food and farm subsidies for as long as it deems fit.

While the talks may be blocked, the market is anyway moving ahead. Even if the current European agricultural imports from India are over five times larger than its exports to India, the import of European foods, especially processed foods has picked up pace in the last decade as the modern Indian consumer develops a taste for international cuisines. Thus, high tariffs on both sides seem to cancel each other out for the moment, but for either side to agree to cut duties would seem politically impossible to carry through.

The third issue is the reluctance of the Indian government to negotiate procurement issues. This is a priority issue for the EU and a bone of contention between the parties.

The EU has complained that the Indian public procurement practices are often not transparent, discriminate against foreign companies while giving preferences to the locals. India is reluctant to agree to bring public procurement on board as it accounts for nearly 13 per cent of India’s GDP.

A distant dream

So, whenever the two sides do manage to sit across the table and relaunch negotiations, it would be an uphill task to wind up the negotiations in a reasonable time frame.

The initial signals from the Modi government, much before the outbreak of fresh hostilities, was that India would have liked to conclude and sign the FTA before the end of 2015. Currently, however, the scenario looks abysmal. Hence, not many are optimistic about an early conclusion to the negotiations. “It is not likely to happen in the next three to four years,” says Fredrik Erixon, director of the European Centre for International Political Economy (ECIPE).

In the interim, both sides will have to trudge along with their trading and business, hoping that an agreement would come along sooner than later.

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