An FTA with EU might harm India’s economy

Given duty cuts on automobiles, dairy products

After several rounds of negotiations for a Free Trade Agreement now officially called Bilateral Trade and Investment Agreement (BTIA) between the European Union and India, a possibility of reaching consensus seems bleak in view of the EU seeking a green signal on contentious issues such as duty cut on automobiles, wines and spirits and movement of professionals. EU wants tax reduction in dairy products and a strong intellectual property regime. 

Though India has moved ahead on many issues such as permitting 49 per cent FDI in insurance, 100 per cent FDI in telecom and easing of foreign investments norms in the banking sector which EU had demanded in the proposed agreement, over the past decades EU has been raising several issues be it import of tea from India, hand-knotted carpets and even wooden products. India’s export of Alphonso mangoes to the EU suffered due to stringent non-tariff barriers.

Undoubtedly, the EU is India’s number one trading partner with 13.5% of India’s overall trade with the world in 2015-16. While the value of EU exports to India grew from Eu21.3 billion in 2005 to Eu37.8 billion in 2016, the value of EU imports from India also increased from Eu19.1 billion in 2005 to Eu39.3 billion in 2016.

Trade in services increased from Eu 5.2billion in 2002 to Eu 14 billion in 2015 over a period of 13 years.

EU investment stocks in India showed an increase to Eu 38.5 billion in 2014, up from Eu 34.7 billion in the previous year, roughly an increase of four billion.

Looking at these figures, the impression is that the BTIA will benefit India in a big way, but the truth seems to be otherwise. Dairy products from EU could flood India in a big way, killing the cottage industry in India. A lowering of tariffs may well result in greater trade with the EU, but for India this may mean more imports than exports. There will be a greater opening in the Indian market for European goods than in the European market for Indian goods.

EU tariff rates are already quite low and thus, apart from sectors like textiles and fisheries, India’s exports to the region might not increase significantly even if tariffs are cut.

Who is going to control the sanitary and phyto sanitary conditions when it comes to import of wines and beer from EU? Will it not be the EU itself which will certify these products? One needs to look around for the credibility of such certifications keeping in mind what happened when the German car manufacturer Volkswagen cheated by installing faulty chips in their cars and managed to sell hundreds of thousands of their cars in India. No compensation has been given so far to the Indian customer.

Car manufacturers in India, primarily Japanese and Koreans, fear that reduced duties on cars under the EU-India BTIA will impact their market share and flood India with European cars. 

If a duty cut on automobiles, wines and spirits and dairy products is agreed to by India, not only will these products flood the Indian market, their quality will also be controlled by the European manufacturers and their favourite companies. 

Can it be forgotten that the deadly mad cow disease spread out from Europe allegedly due to cow feed made out of animal flesh leftovers?  If this is the state of affairs in Europe, what can India expect when it cuts duty on dairy products, wines and beer? Certain chemically contaminated wines from Europe could find place on shelves in the Indian market.

Moreover, Modi government’s ambitious program of ‘make in India’ could be adversely affected with such duty cuts, if allowed to EU as imports from Europe will swell in a big way crushing the domestic produce.

Imports of plant and animal products into EU must comply with maximum residue levels

(MRLs) set by the European Commission to protect consumers from exposure to unacceptable levels of pesticide residues. The list of products to which the MRLs apply includes animal products, fruits, vegetables, cereals, spices and certain edible plants.

India wants the EU to cut its agricultural subsidies, while the EU has interest in India reducing tariffs on dairy products, poultry, farms and fisheries. Thus, both India and the EU have strong defensive interests with respect to agriculture trade negotiations.

For the EU, greater access to the Indian market is critical in view of the economic slowdown in Europe.

In goods trade, the real issue for India is non-tariff barriers such as sanitary and phyto-sanitary measures and technical barriers to trade.

Given the high unemployment rates in the EU due to economic slowdown, one is not sure to what extent the EU is willing to make commitments to liberalise trade in services.

Negotiations for the proposed Broad-based Trade and Investment Agreement have witnessed many hiccups with both sides having major differences on crucial issues, chances of an agreement appear bleak.

 

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