Commerce dept rebuts DIPP, pushes for FTAs

Written by Arun S | Updated: Jul 24 2014, 07:19am hrs
Free Trade agreementSays they don?t hurt local industry; help global integration
Rebutting the department of industrial policy and promotions (DIPP) contention that import surges due to bilateral free trade agreements (FTAs) harmed Indias manufacturing sector, the commerce department, part of the ministry to which the DIPP belongs, has said India needs to persist with the strategy of embracing such pacts to integrate itself more seamlessly to the world trade order.

Click here for graph

In a letter to DIPP secretary Amitabh Kant, who has been vocal against FTAs and comprehensive economic partnership agreements (CEPAs), Rajeev Kher, his counterpart in the commerce department, said that instead of attacking (past) FTAs without any factual basis, it is better for the government to look ahead and use such partnerships for the benefit of Indian manufacturing industry. Citing an internal analysis of the department, Kher said despite the extant pacts with Japan, South Korea, Asean and Malaysia, 80% or more of imports into India from these countries/ regions have taken place through the ordinary (most favoured nation) route, sans any duty benefits that the respective FTA/CEPAs allow.

Kher is also learnt to have said India cannot afford to keep itself out of the global trading order, thereby losing the advantages of being part of the emergent regional value chains. The letter, officials said, could also be sent to the commerce and industry minister Nirmala Sitharaman.

Of course, the commerce department also recognises that Indias success in foreign trade will hinge on improving the competitiveness of its exports and attracting investments. Infrastructure bottlenecks need to be removed in order that Indias ranking in the list of countries on the ease of doing business index can be improved.

As per the commerce departments analysis, only 22% of imports from Japan are through the FTA route (with attendant duty benefits), while the corresponding figures for South Korea, Asean and Malaysia are 21%, 17% and 3.47%, respectively.

Factors including high transaction costs in obtaining the certificate of origin (to prove that a particular item is wholly produced, processed or manufactured in a particular country) as well as difficulties in meeting the stringent value-addition norms could be the reasons for these imports not getting the duty benefits under the concerned FTA.

The commerce department is now compiling data on how Indian exports have fared under these FTAs/CEPAs with these countries/blocs.

On the DIPP's claim that FTAs are leading to an inverted duty structure (where the duty on the final product is nil or low while raw materials/intermediates have a high duty), thereby disincentivising local manufacturing and domestic value addition, the commerce department is learnt to have said that most segments affected by an inverted duty structure are outside the FTA ambit.

The recent Union Budget proposed to address the inverted duty issue and reduced the basic customs duty on some products.

In addition, the commerce department has now recommended the removal of inverted duty structure (owing to FTAs) on plastic machinery, injection moulding machine and related products as well as pressure vessels and reactors.

Besides, the department said FTAs help manufacturers import many intermediaries and capital goods at low/nil duties, in turn aiding manufacturing in the country.

The DIPPs argument is based on the wrong assumption that all imports are finished goods. Also, there is no data on manufacturing on harmonised system (HS) code basis and item-wise. We only have data on imports HS code-wise, and without such specific data on manufacturing, it will not be possible to establish what DIPP is trying to say, an official said.