The EU (excluding the UK) is India’s largest trading partner, with total bilateral trade of around $77 billion (FY17), accounting for almost 12% of India’s total trade.
French President Emmanuel Macron’s recent visit to India has raised hopes for the revival of negotiations on a free trade pact between India and the European Union (EU). At a time when the US protectionism is on the rise, it makes sense to push forward for the early revival and conclusion of the negotiations which have been stalled for long. The EU (excluding the UK) is India’s largest trading partner, with total bilateral trade of around $77 billion (FY17), accounting for almost 12% of India’s total trade. It accounts for 14% of India’s total exports and 10% of its total imports. India’s major exports to the EU comprise of gems and jewellery, apparel and textiles, machinery, organic chemicals, automobiles, iron and steel, mineral fuels, and pharmaceuticals. India’s major imports from the EU comprise of machinery and equipment, gems and jewellery, auto, plastics and organic chemicals. Last year, the President of the European Commission Jean-Claude Juncker hinted positively and said that “it is time for an FTA between India and the EU.” Both Macron and Indian Prime Minister Narendra Modi have expressed their support to the timely re-launching of negotiations for a comprehensive and mutually beneficial EU-India Broad-based Trade & Investment Agreement (BTIA). Both NITI Aayog CEO Amitabh Kant and India’s chief economic advisor Arvind Subramanian have also extended their support for revival of the talks, highlighting trade complementarities and loss of preferential access in European markets to competitors like Bangladesh and Vietnam. Despite several rounds of negotiations which started in 2007, the proposed EU-India trade pact covering trade in merchandise, services and investment got stalled in August 2015 when the EU imposed a ban on 700 drugs clinically tested by GVK Biosciences, an Indian drug company. It would be interesting to analyse what’s holding back the conclusion of the trade pact.
Considering the significance of the services sector in its economy, India seeks improved market access Mode 1 (ITeS/BPO/KPO) and Mode 4 (movement of software professionals). There are many barriers to movement of professionals including cumbersome rules on work permits, wage parity conditions, visa formalities and non-recognition of professional qualifications. These rules also vary across different European countries that India would want harmonised and relaxed access to. India also seeks data secure status as the high cost of compliance with the existing data protection laws and procedures renders many of its backend service providers uncompetitive.
EU’s thrust areas
The EU seeks further liberalisation of FDI in multi-brand retail and insurance, and opening up of the currently closed sectors such as accountancy and legal services. European banks have been eyeing India’s relatively under-tapped banking space, but are wary of the restrictive rules on priority sector lending and obligation on financial inclusion. Brussels also wants India’s import duties on wines and spirits and dairy products substantially reduced, and also on automobiles. India maintains high duties on luxury cars where Germany is seeking better market access.
The major contentious issues that remain are the differences on intellectual property rights (IPR), investment protection and trade in agriculture and food items. India fears that any commitment over and above the WTO’s intellectual property rights (TRIPS, or Trade-Related Aspects of Intellectual Property Rights) will undermine its capacity to produce generic formulations. Further, data exclusivity measures (which allow pharmaceutical companies to exclusively retain rights to their clinical test results for a certain time period) would delay the production of generic medicines. That explains India’s strong opposition to the proposal. Moreover, India doesn’t allow patenting of incremental innovation in old drugs, often termed as ever-greening. Miffed by MNCs frequently serving arbitration notices on India for hefty compensation, New Delhi’s model act on investment protection has introduced several changes that are not to the liking of the European Commission, such as the removal of MFN clause and narrower scope of national treatment or exclusion of tax disputes from the purview of investment protection. Besides, it will allow investors to initiate international arbitration only after domestic legal remedies are exhausted. The agricultural trade is highly distorted in both the EU and India. Even though the average MFN import duty on agricultural commodities in the EU (11.1%) is much lower than in India (32.7%), the EU’s peak tariff rates on certain categories of dairy products (96%), fruits and vegetables (157%), oilseeds and fats (170%) and sugar and confectionery (127%) are more than those in India. Again, the fishery and dairy sectors in the EU are highly subsidised. There is a fear that the EU dairy products will flood Indian markets if import duties are reduced. India wants the EU to cut its agricultural subsidies while the EU has interests in India reducing its duties on dairy products, poultry, farm and fisheries. Thus, both India and the EU have strong defensive interests with respect to agriculture and food items, which would be difficult to reconcile.
To be fair, the EU does not have a single market for labour mobility. There were efforts to harmonise rules on work permits and visas across the union, but they have met with limited success. Moreover, the recent surge in populist sentiments against immigration has reduced policy space for ceding ground on Mode 4. Besides, India’s demand for greater market access in Mode 1 and Mode 4 is dependent on its ability to meet the EU’s demands in Mode 3. The lack of political will on FDI in retail and lack of willingness to open its legal services for European law firms undermine India’s negotiating capacity on critical issues. India’s automobile companies fear that reduced duties on cars under the EU-India BTIA will impact their market share and flood India with coveted European cars. Besides, European automakers will have no incentive to set up a local manufacturing base in India. This is debatable as almost all major European automakers already have a manufacturing presence in India. Can European carmakers compete in the Indian small car segment (comprising 75% of the country’s market) by producing in Europe? Studies show that it’s difficult to succeed in India without a strong dealer network and reliable after-sales service. Prohibitive duties on cars are unjustified when duties on non-car automobile segments have been substantially reduced. Besides, this also deprives consumers of making choices. Improving India’s investment climate is a better way to promote investment and job opportunities. Similarly, strengthening its IPR regime will help attract more FDI and aid R&D. India shouldn’t press on clauses like exhausting domestic legal remedies before proceeding for international arbitration under its investment rules. The, EU, too needs to be flexible on its demand for TRIP+ rules that encourage ever-greening and hurt the cause of innovation. A trade pact is about give and take. Failing to conclude the EU-India BTIA will be a lost opportunity for both the partners, especially when the US is erecting new barriers to trade. Both India and the EU have enough trade complementarities and can gain a lot by opening up their respective markets. India has also been challenged by the US on its export subsidy regime. With the eventual phasing out of export subsidy schemes, India will need preferential access to the large European market to maintain or improve its comparative tariff advantages that can come through a free trade pact with the EU.