India’s trade negotiations should not lose momentum
Reasonable tariff reduction requests by trade partners should be met for us to close deals quickly
India has fast-tracked its trade negotiations recently, giving priorities to making India a bigger player in global value chains. A comprehensive agreement with the UAE was signed in a record time of 90 days. In our Economic Cooperation and Trade Agreement (ECTA) with Australia, we for the first time made commitments on wine, paving the way for liberalization of sensitive products imported from the UK and EU. Yet, Australian industry is unhappy and the ECTA has not yet been approved by Australia’s parliament. An India-UK interim deal may also be pushed beyond Diwali. Are our trade negotiations losing momentum?
In partner countries, industries are not happy with fast-track, low-ambition trade deals. India is seen to be extremely restrictive in its commitments on sectors of their export interest. For example, in alcoholic beverages, UK companies are among the biggest investors and largest suppliers of whisky and intermediate products used for manufacturing in India, yet we have made no commitment to open up the market even after four rounds of negotiations. There is a growing anxiety in the UK industry that tariff reduction in whisky may not be a part of the interim trade deal, and without tariff reductions for over 70% of the UK’s agri-exports, there may not be any gains for it.
While the UK hardly has any customs duty for alcoholic beverages, India’s basic customs duty of 50%, plus an agriculture infrastructure development cess of 100%, is among the highest globally. This 150% duty and cess on intermediate products is adversely impacting ‘Make in India’. Duties can be zero on ingredients and raw materials that are not made domestically. This will reduce manufacturing input costs, lead to more investments and create jobs. Duty reduction in bulk imports will facilitate value addition in the country. Indian firms are exporting products like cakes and biscuits to the UK and EU from their manufacturing units in countries like the UAE. If intermediate dairy products are allowed at lower tariffs, such products can also be manufactured in India for export.
Will tariff reduction on final products adversely impact Indian industry?: One of our reasons for high tariffs is to keep the domestic market closed to foreign competition. However, in the case of products like whisky, at present less than 2% of the bottled-in-origin products are imported into the Indian market. Even if tariffs fall to zero, Indian firms can offer competitive prices and imports will not exceed 5%, according to stakeholders in the Icrier-Trade Promotion Council of India consultation in 2022. Similar responses were obtained for the automobile and auto-component sectors vis-a-vis the UK. In products where India has a strong manufacturing base and cost competitiveness, tariffs can be brought down in a phased manner.
Cross-bargaining could lead to deadlocks: Export industries in sectors like textiles and apparel have asked zero-for-zero tariffs with markets such as the UK. Others in products like alcoholic beverages are confident that a tariff reduction will not adversely impact their market share, but they want to use the trade agreement to arm-twist the UK to relax a maturation requirement for a minimum period of 3 years. They argue that due to the warm climatic conditions of India, whisky manufactured here matures faster than in the UK, and if a 3-year period has to be adhered to, there will be considerable evaporation of spirits, resulting in a significant loss of alcohol, pushing up the cost for domestic manufacturers. This argument does not consider that parts of India in the Himalayan region have similar climate as in the UK.
The UK imports Indian-made spirits at zero duty that are sold as ‘Indian spirits’. Indian companies want it sold under the name ‘Indian whisky’. Scotch whisky is a geographical indication (GI) product. Sometimes molasses is used instead of grains to make whisky; some stakeholders want the UK to change its food safety regulation to allow molasses. For exports like basmati rice, grapes and mangoes, Indian producers are working hard at adhering to importing countries’ food safety requirements. In others like alcoholic beverages and dairy products, some stakeholders want importing countries to relax their food safety standards and GI requirements. This is making our trade negotiations difficult. Delays in deal will be at the cost of our exporters, who are facing competition from other developing countries like Vietnam, which enjoy zero duty.
The way forward: In any trade deal, there are stakeholders with different interests. Indian policymakers may examine different views put forth by producers, user industries and consumers, and then take decisions that benefit the country. Intermediate products, GI products and products where India has an export interest or cost competitiveness over its trading partners can be liberalized. Tariff liberalization can be done in a phased manner, so that it does not hurt the domestic industry. In addition, rules-of origin and trade remedial measures should be carefully drafted. Markets like the UK and EU are key export markets with which trade agreements can lead to a significantly positive trade balance if smartly designed. India can work with free trade agreement partner countries to enhance collaboration, capacity building and business-to-business partnerships so that Indian companies are able to export much more to these markets. With political uncertainty in partner countries, it is time for India to demonstrate its interest in closing trade deals by acceding to partner country requests in some high-tariff areas such as alcoholic beverages and automobiles.
Arpita Mukherjee is a professor at the Indian Council for Research on International Economic Relations
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First Published:19 Jul 2022, 09:56 PM IST
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