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A free trade deal gone awry

A free trade deal gone awry

After years of hard negotiations, India and the Association of Southeast Asian Nations (Asean) had finalized a free trade agreement (FTA). The deal was to be inked in December but now, suddenly, India has developed cold feet.

As reported in Mint on Thursday, the marked deterioration in the international economic climate, continued haggling over scope and implementation details and the steady deterioration in India’s export performance may have taken their toll on the deal. The cabinet is considering the FTA, but a quick decision may be unlikely as the country is already in election mode.

Negotiations towards the FTA were launched in 2003, with both sides demanding hard concessions. India had submitted a list of 1,414 items that it wanted to exempt from any tariff cuts. Finally, the number came down to 489. Crude and refined palm oil, a major export of Malaysia and Indonesia, was another sticking point: Indonesia wanted the tariff on crude palm oil to be brought down to 20% and on refined oil to 30%. What India agreed to was substantially higher. Palm oil is on India’s list of highly sensitive commodities that includes pepper, black tea and coffee. Indian farmers, especially in the southern states, could be hit hard if these commodities swamp Indian markets. These are big-ticket export items for many Asean countries.

Then, there are implementation issues. India wants to eliminate tariffs over a nine-year period, in three phases, beginning June this year and ending in 2018. Asean wants the process accelerated and executed in two phases.

What ails such deals, especially when they include a large number of agricultural commodities, is that enough thought and effort is not made to handle domestic lobbies.

India’s agricultural pricing policies are ad hoc and subject to political interference. This, in turn, impinges on trade agreements, as is the case with the Asean FTA.

One way to smooth such agreements is to set right domestic pricing mechanisms. India certainly has not done this and is now using global economic sluggishness as an excuse to drag its feet. FTAs are long-term propositions while economic fluctuations are short-term phenomena. The two should not be mixed.

Should India go ahead with the Asean FTA? Tell us at views@livemint.com

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