The Aakhya Weekly #88 | India's FTA Journey- Past Lessons, Present Successes
The Aakhya Weekly #88 | India's FTA Journey- Past Lessons, Present Successes
In Focus: The Evolution of India's FTA Approach
By Swapneel Thakur
Source: https://twitter.com/PiyushGoyal/status/1766729888436781390
India's recent free trade agreement with the EFTA, comprising Switzerland, Norway, Iceland, and Liechtenstein, is being celebrated for its focus on sustainable development, transparent trade procedures, and fostering a favorable environment for trade and investment, in line with India's commitment to inclusive growth.
The agreement is particularly notable for the EFTA's pledge to boost investments by $100 billion and create 1 million direct jobs over the next 15 years, with sectors like pharma, medical devices, and services poised to benefit directly. What sets this FTA apart is India's proactive approach, marking its fourth consecutive FTA since 2021, following agreements with Mauritius, the UAE, and Australia after a 10-year hiatus from such negotiations. Negotiations for another FTA with Oman are also progressing, potentially adding to India's expanding trade partnerships.
A renewed thrust towards negotiations
But why this thrust into fast-tracking negotiations over bilateral arrangements? A significant reason could be attributed to India's positioning in the evolving global landscape. As the world transitions towards a multipolar order, India finds itself embroiled in significant international dynamics. The escalating tensions between NATO and Russia in Ukraine, the humanitarian outcry over Western backing of Israel in Gaza, and China's assertive presence in multilateral trade platforms like the WTO underscore India's need to assert its stance.
The recent WTO's 13th Ministerial Conference (MC 13) saw China's aggressive push for the International Facilitation Agreement, which met with dissent from several nations due to its contentious clauses, further emphasizing the urgency for India to navigate these complex diplomatic waters swiftly. In this milieu, expediting negotiations over bilateral arrangements offers India the opportunity to forge deeper connections with strategic allies and expand its economic and geopolitical influence in a targeted manner. By cultivating strong bilateral ties, India can navigate the complexities of the evolving global order while advancing its national interests and securing its position as a key player on the world stage.
One could argue that the circumstances today mirror those of a decade ago, with ongoing international tensions such as disputes in the South China Sea and the Russian annexation of Crimea, along with the global push for agreements like the RCEP that India opted out of. This raises the question: why not pursue similar strategies from back then? While India did engage in FTAs, particularly with Japan, it didn't anticipate the challenges faced by its domestic industries. Despite the potential for increased investment through these agreements, many Indian businesses struggle to meet the stringent product standards demanded by countries like Japan. This results in a trade deficit, with India exporting lower-value goods while importing higher-value ones. The gap has widened over the years, not only due to manufacturing limitations but also due to the lack of an ecosystem to support the development of necessary capabilities.
Make in India and domestic push
Understandably, a significant thrust is now given to ensure the export preparedness of India's vast domestic sector. One pivotal initiative driving this industrialization agenda is the government's flagship Make in India scheme. This initiative has placed considerable emphasis on enhancing the ease of doing business, fostering innovation, and promoting indigenous manufacturing across diverse sectors. As a result, India has witnessed a surge in investments, leading to remarkable growth in manufacturing gross value added, which reached $110.48 billion in the first quarter of FY '24. Alongside these economic transformations, the government has acknowledged the pivotal role of Micro, Small, and Medium Enterprises (MSMEs) in this endeavor. Flagship initiatives such as the One District One Product- District Export Hub (ODOP-DEH), Credit Guarantee Scheme for Micro and Small Enterprises (CGTMSE), and Micro and Small Enterprises-Cluster Development Programme, along with the infrastructure-backed network by the PM GatiShakti, have played crucial roles in fostering an export-oriented economy. For example, the ODOP-DEH initiative focuses on promoting local products for export, providing MSMEs with the necessary support and resources to compete in international markets. Similarly, the CGTMSE scheme offers credit guarantees to MSMEs, facilitating access to finance and promoting entrepreneurship. Additionally, the Cluster Development Programme encourages collaboration and resource-sharing among MSMEs, enhancing their competitiveness and export potential.
India-UAE: Harnessing lessons learned from the past
In alignment with India’s other efforts, the free trade agreement between India and the UAE too is proving to be highly advantageous, as evidenced by the increase in India's exports to the UAE. From May 2021 to March 2022, exports amounted to $26.2 billion, which escalated to $28.5 billion from May 2022 to March 2023, marking an 8.5% year-on-year growth. Various sectors, notably those requiring significant labor inputs, have experienced substantial export growth due to the Comprehensive Economic Partnership Agreement (CEPA). These sectors encompass mineral fuels, electrical machinery (especially telephone equipment), gems & jewelry, automobiles (in the transport vehicles segment), essential oils/perfumes/cosmetics (inclusive of beauty/skin care products), other machinery, cereals (like rice), coffee/tea/spices, other agricultural products, and chemical products.
Tomorrow's trade landscapes
As India continues to navigate its trade agreements, it must ensure that the positive developments observed in certain agreements are sustained amidst ongoing negotiations. A notable instance is the India-EU Free Trade Agreement (FTA), where seven rounds of negotiations have failed to yield consensus. The impasse primarily stems from non-tariff barriers present in sectors such as tea, agriculture, engineering, and electronics, hampering access to a lucrative market and resulting in minimal export growth over the past five years. Despite India's efforts to address these concerns, disagreements persist over the definition of non-tariff barriers, prolonging the talks. The upcoming general elections in India and European Parliament polls further complicate the negotiation landscape, potentially extending the process. Similarly, negotiations between India and the UK face hurdles in areas such as goods, services, and investment, despite both sides aiming to enhance their ￡36 billion partnership. These challenges underscore the complexities involved in India’s trade negotiations and the need for sustained efforts to overcome them to chart the next few decades of growth.
Top Stories for the Week
Bengaluru’s Water Woes and the City’s Depleting Groundwater
As per the Karnataka State Natural Disaster Monitoring Centre, the water levels in Cauvery Basin reservoirs stand at 39% of their total capacity as of 2024. The Cauvery River serves as a primary water source for Karnataka and Tamil Nadu, with the river ecosystem experiencing insufficient rainfall in recent monsoons. Currently, 223 out of 236 taluks in Karnataka are facing drought conditions, severely impacting 219 of them. The water crisis in Bengaluru has been a persistent issue, with the current situation being the grimmest in the last three decades. Experts argue that rapid urbanisation in Bengaluru has hindered rainwater percolation, leading to drying borewells and affecting over half of the city's population reliant on groundwater.
The Environmental Management & Policy Research Institute reported that pollution from industries and waste has contaminated 85% of the city's water bodies. Climate change, unplanned urbanisation, and unsustainable water use in industries and agriculture are significant contributors. Currently, a war room has been established to monitor the crisis in real-time.
In the 2024-2025 budget speech, CM Siddaramaiah announced that the BWSSB would initiate Phase 5 of the Cauvery project, aiming to provide 110 litres of drinking water daily to 12 lakh people for Rs 5,550 crore. This project is slated for completion by May 2024. Despite claims that the water shortages will be permanently resolved once the Cauvery V Stage is completed, it remains unclear whether it will be implemented in time to meet Bengaluru’s future requirements.
Cabinet Allocates ₹10,300 Crores for IndiaAI Mission
The Cabinet has approved an allocation of ₹10,300 crores for the IndiaAI Mission. This substantial funding, spread out over the next five years, is set to drive various facets of the IndiaAI Mission, including IndiaAI Compute Capacity, IndiaAI Innovation Centre (IAIC), IndiaAI Datasets Platform, IndiaAI Application Development Initiative, IndiaAI FutureSkills, IndiaAI startup financing, and Safe & Trusted AI.
The purpose of the initiative is to address the increasing needs of AI startups and research communities by establishing a large-scale computing facility. This facility will consist of 10,000 or more GPUs dedicated to AI compute infrastructure, developed in collaboration between the public and private sectors. An AI marketplace will also be set up for innovators, providing AI as a service and pre-trained models, and acting as a one-stop solution for AI resources. Further, the move aims to bolster the IndiaAI Startup Financing program, facilitating easier access to funding for emerging AI startups. Approximately ₹4,500 crore will be invested in building this computing infrastructure, while ₹2,000 crore will be set aside for financing deep-tech startups.
As part of the program, the government plans to establish three IndiaAI Innovation Centers to develop and deploy indigenous Large Multimodal Models (LMMs) and domain-specific foundational models in crucial sectors. IndiaAI Datasets Platforms will be created to ease access to non-personal datasets for Indian startups and researchers. Simultaneously, the IndiaAI FutureSkills program aims to broaden AI education by making graduate and post-graduate AI programs more accessible and establishing Data and AI Labs in various cities, including Tier 2 and 3, to offer foundational-level courses in Data and AI.
A Few Good Reads
How should Western policymakers use subsidies and tariffs to encourage drivers to switch to EVs? Probe the arguments by accessing this FT case study.
Arkoprabho Hazra and Swapneel Thakur argue that India is not Greece’s gateway to Asia in this piece.
Bibek Debroy reasons why we should not read too much into the latest data on Indians’ spending patterns.
Check out Paul Triolo's in-depth analysis of China's response to US export controls on semiconductors.
In this piece, S. Ragotham highlights a major but overlooked event in India's nuclear journey.