EU presses India for a free trade agreement

Council President Herman Van Rompuy (left) shakes hands with Indian Prime Minister Manmohan Singh (center) in presence of  European Commission President José Manuel Barroso. From the 12th annual summit between the EU and India, held in New Delhi on 10th February 2012. (Council of the European Union photographic library).

Council President Herman Van Rompuy (left) shakes hands with Indian Prime Minister Manmohan Singh (center) in presence of European Commission President José Manuel Barroso. From the 12th annual summit between the EU and India, held in New Delhi on 10th February 2012. (Council of the European Union photographic library).

India is the most populous democracy of the world and over the past thirty years had to overcome a universe of political and economic problems. For decades the country followed an inward looking politico-economic strategy, keeping its trade and investment borders almost shut to the rest of the world. Its vast size permitted that up to a point in time.

The European Union as the largest trading block of the globe has being following very closely the internal developments in the Sub Continent.

EU-India diplomatic relations were established in the 1960s, and expanded in 1994 with the Cooperation Agreement that opened the door to political dialogue and economic and sectoral exchanges, which have since evolved through annual Summits and regular meetings at ministerial, senior official and expert-level.

During the globalisation 1990s India tried to follow the rest of developing counties in opening its economy to the world, without much success. This was felt after the turn of the millennium and the New Delhi government was forced to embark on a programme to open the country to foreign trade and investments, in order to catch up with the other populous emerging economies.

To achieve this India is now applying a slow process of economic reforms and progressive integration with the global economy, that aims to put the vast country on a path of rapid and sustained growth. However, India’s trade regime and regulatory environment still remains comparatively restrictive (low rating in World Bank’s Ease of doing business Index).

India still maintains substantial tariff and non-tariff barriers that hinder trade with the European Union. In addition to tariff barriers to imports, India also imposes a number of non-tariff barriers in the form of quantitative restrictions, import licensing, mandatory testing and certification for a large number of products, as well as complicated and lengthy customs procedures.

FTA with the EU

With its combination of rapid growth, complementary trade baskets and relatively high market protection, India is an obvious partner for a free trade agreement (FTA) for the EU.

The parameters for an ambitious FTA were set out in the report of the EU-India High Level Trade Group in October 2006, which was tasked with assessing the viability of an FTA between the EU and India. Other studies have reinforced the economic potential of an FTA between the two sides, notably a sustainability impact assessment was carried out by the EU.

Negotiations for a comprehensive FTA started in June 2007 and are still on-going. This would be one of the most significant trade agreements, touching the lives of 1.7 billion people. India today enjoys trade preferences with the EU under the Generalised Scheme of Preferences.

Not everybody is happy however with the prospect of a swift conclusion of the FTA between the two sides. There is a lot of criticism over the long-term implications of an opening of the Indian economy to EU products and investments. The obvious danger is that the relatively old fashioned structures of the Indian agricultural and industrial sectors would not sustain the pressure. It is not the same though with the services sector, where India seems to have secured some advantages, mainly in the ICT sector. But is this enough to maintain the balance?

Latest developments

Last week an Indian high ranking delegation landed to Brussels, under the Indian Minister for External Affairs, Salman Khurshid. EU High Representative Catherine Ashton after meeting with the Indian dignitaries said, “Our relationship, founded upon close cultural and historical ties, has become both wider and deeper since the Strategic Partnership was established in 2004…And as we have discussed today, we are also committed to ensuring that we conclude our Free Trade Agreement as rapidly as possible… So, Minister we took stock today of where we are, we look forward to the Summit that we will have this year”.

This was a very clear statement by Ashton showing EU’s eagerness to conclude negotiations for an FTA. The target is obviously to have it pompously signed during the next Summit.

Since 2007 intense bilateral negotiations have been pursued with the aim of concluding this ambitious and comprehensive Free Trade Agreement. Five years after the negotiations are still ongoing. That is why the EU is pressing hard for a conclusion.

The EU is India’s largest trading partner. Total two-way trade in goods in 2011 was €79.8 billion, with EU goods exports to India of €40.4 billion and imports from India of €39.4 billion. This represented a year-on-year increase of 17% on 2010. Trade in goods between the partners has more than tripled from €25.6 billion in 2000.

In 2011, EU-India total trade in services amounted to €20.4 billion. The EU has in recent years been the biggest external investor in India, with a cumulative volume of about €33.6 billion between 2000 and 2011. The EU is also the most important destination of outward investment from India.

EU’s grievances

The European Commission’s Trade and Investments Barriers Report, published in March 2012, points out that some progress has been made to dismantle trade barriers in India. Two such barriers were fully removed in 2012, namely the export restrictions on cotton and security requirements for telecommunication equipment. Progress has also been achieved with regard to sanitary and phyto-sanitary rules.

However no positive movement has been seen in the area of equity caps (agreement for an up-front premium, paid at specific time period if a stock market tops a predetermined level). India’s industrial policies contain trade-restrictive elements. The report also identified India’s national manufacturing policy as a key priority for reform.

EU-India trade negotiations presently cover, the crucial issue of access to each other’s markets, for goods, services and to public procurement contracts, the framework for investment, the rules that frame trade, such as intellectual property and competition.

In short not a few issues remain on the table before an FTA can be concluded. As a result the target for a swift termination of talks before the Summit looks very optimist.

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