Make trade deals for Make in India

India’s ongoing trade negotiations must consider whether the deals will strengthen imports into the country or incentivise inflow of investment

Amongst the existing Preferential Trade Agreements (PTAs), the most commonly used by exporters and importers, are the agreements with the ASEAN region, South Korea, Japan, and South Asian countries.
Amongst the existing Preferential Trade Agreements (PTAs), the most commonly used by exporters and importers, are the agreements with the ASEAN region, South Korea, Japan, and South Asian countries.

By Manasvi Srivastava

India very recently signed a Comprehensive Economic Partnership Agreement (CEPA) with UAE, some two and a half years after it opted to sit out of the Regional Comprehensive Economic Partnership (RCEP). While the concession details under the CEPA are awaited, India is actively engaged in other discussions on trade deals, prominent amongst them being the ones with UK, USA, and EU. It will be a good idea to look at the intent, reality, and other ramifications of India’s trade agreements, especially in regard to goods. Amongst the existing Preferential Trade Agreements (PTAs), the most commonly used by exporters and importers, are the agreements with the ASEAN region, South Korea, Japan, and South Asian countries.

If we exclude nearly $84 billion from the total import bill on account of fossil fuel imports, we see that while these regions constitute a significant portion of India’s non-oil trade, the majority of trade is still outside of these regions. It is noteworthy that India has significant trade deficits with three of the aforementioned regions. Another factor to note is that three of these regions have significant manufacturing capacity and investment in their own territories. Thus, India’s ongoing initiatives in trade agreements must consider whether such deals strengthen imports into India or incentivize investment. This is all the more important as the Centre has laid out schemes like Phased Manufacturing Programs (PMPs) and Production Linked Incentives (PLIs) to encourage investment in Make in India.

Trade agreements and PMPs: The Indian government has been focusing its efforts at promoting manufacturing in India as a solution to unemployment. To this end, fiscal policies and incentive schemes have been tailored towards attracting FDI in Make in India. Under the PMP, calibrated reductions in customs duty rates on inputs and intermediate goods have been provided along with higher duty rates on finished products. However, considering that many of the finished products are covered by zero duty rates under existing trade agreements with some regions or countries, manufacturers with existing facilities in such countries may not have a compelling reason to move manufacturing to India. An illustration of this is in the recently announced PMPs for hearable devices, wearables (smartwatches) and smart meters. The rates of duty for components of these products are to increase gradually from nil to 10 or 15% over four years. The final products are chargeable to higher duty rates of 20-25%. However, two of these three products can be imported at nil rates of duty and one of them at 5% duty under the India-ASEAN trade agreement. Similar benefits exist under other agreements and may inhibit the uptake of the PMPs by multinational manufacturing entities.

Trade agreements and PLIs: In the past two years, the government has launched incentive schemes wherein based on a threshold level of capital investment and incremental production, subsidies are to be given to approved applicants. Such schemes cover 15 product categories as of now. In some cases, the attraction of incentives could score over the benefits of importing goods under low or nil rates of duty under PTAs. The proposition could become even more attractive if it is combined with certain pre-existing special governmental schemes that reduce costs and conserve cash flow. While the application window for most of the PLI schemes has closed, a few may be extended and depending on the success of current schemes, more could follow.

Trade governance: PTAs are governed by written agreements between nation states or groups of nation states and domestic laws of the signatories. However, the enforcement of the commitments thereunder, depends on the extent to which the parties honour them. Contrary to a violation of a multilateral or plurilateral agreement entered into under the aegis of the WTO, enforcement mechanisms external to the parties, do not exist for PTAs. In an ideal world, the parties would adhere to and honour everything they have signed. However, in the real world, the committed benefits could be allowed or disallowed by customs rules (for example the CAROTAR in India) and customs officials, conditional upon certifications and validations. Mechanisms exist in the FTAs themselves to solve such matters, but in a situation where entities of different sizes and economic power attempt to resolve such issues, the resolutions may not be acceptable to all parties. Better governance mechanisms are needed.

It is expected that a holistic view, keeping in mind the government’s schemes on investment and trade governance, would inform future negotiations as well as review of existing trade agreements of India.

The author is Partner (trade and customs), KPMG India

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