Home / Opinion / India’s trade pacts in a changing world

The Economic Survey 2015-16’s analysis of the impact of India’s free trade agreements (FTAs) on the economy is a valuable attempt to address a gap in the policymaking ecosystem. Its conclusion—a conditional one, for it acknowledges the need for more analysis—is unsurprising. Controlling for potential non-FTA trade growth, India’s FTAs have on the whole had significant impact, boosting trade without introducing inefficiency due to trade diversion. So far, so good. But this raises interesting questions about New Delhi’s long-standing preference for multilateral trade liberalization and the global shift to the contrary.

New Delhi’s preference for multilateralism under the aegis of the World Trade Organization (WTO) is based on two factors.

The first is the “spaghetti bowl" problem that bilateral and regional pacts present, creating a tangle of trade commitments that can both overlap and work at cross-purposes.

The second is the potential for collective bargaining at the WTO, where developing economies can push for flexibility in the rate, quantum and scope of tariff reduction.

New Delhi’s attempts to exploit that potential, however, haven’t been particularly successful. Its ratification of the WTO’s trade proposal agreement was a signifier of its failure to hold the line on the organization’s agricultural subsidy issues, crucial for domestic food security, as we have argued in these pages. That followed increasing isolation on the issue and the concurrent diplomatic risk of being perceived as the villain of the piece. As a consequence, the Doha agenda with its focus on development issues is now a relic.

The WTO’s Non-Agricultural Market Access (NAMA) negotiations—crucial, given that the vast majority of the world’s merchandise exports fall under this rubric—haven’t been making significant headway either. Initiated in 2002, they, like so much WTO business, are held hostage by the lack of progress on agricultural issues.

New Delhi’s push for greater flexibility in NAMA-mandated tariff reductions—the so-called Less than Full Reciprocity principle—is thus in limbo for the time being. Meanwhile, the WTO’s World Tariff Profiles 2015 report shows that the difference between India’s bound tariff rate (the maximum customs rate under a country’s WTO obligations) and its applied rate is substantial. This is typical of developing countries; developed economies tend to have a far smaller binding overhang. But this also means trade with a developing country is more unpredictable given the greater potential for tariff creep—another liability.

So it isn’t particularly surprising that an emphasis on bilateral and regional pacts is growing globally. The Trans-Pacific Partnership agreement is, of course, the poster child. Taken together with the Transatlantic Trade and Investment Partnership currently under negotiation, it will cover a substantial majority of global trade. New Delhi’s focus on multilateralism is both understandable and necessary. But a parallel push for bilaterals and regionals is now a necessity to preserve export competitiveness.

That means confronting a number of domestic and policy challenges. Chilean economist Alejandro Foxley has argued that bottom-up approaches with supply chains created across borders are more effective in fostering regional integration that top-down diplomatic approaches. The disappointing results of India’s trade under Bimstec—the Bay of Bengal free trade agreement—due in substantial part to poor connectivity and supply infrastructure, show the damage the lack of such linkages causes. And restrictive foreign direct investment (FDI) norms serve as barriers to the trade plus investment arrangements that typically result in greater success.

Consider the India-European Union FTA with its many setbacks; New Delhi’s inability to make concessions on FDI in multi-brand retail, accountancy and legal services comes in the way of its securing market access for services.

There are a host of other domestic inefficiencies—from a heavily distorted agricultural sector to poor infrastructure undercutting exporters and the poor regulatory regime in the drug sector that has given the EU and the US a handy weapon against Indian generics—waiting in the wings.

New Delhi faces a difficult balancing act: between trying to regain lost ground at the WTO and protecting its flanks via bilaterals; between securing trade pacts and checking the trade imbalance that has seen its existing FTAs result in a sharper rise in imports than exports; between protecting domestic industries and making the concessions that will allow it to extract its own concessions for leveraging its strong services sector. The Survey has started a necessary conversation.

Should India place greater emphasis on FTAs? Tell us at

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