The Aakhya Weekly #94 | From Himalayas to Andes: India and Peru Talks Take Flight

In Focus: Exploring the India-Peru FTA prospects

By Devyani Wadera

India's recent proactive approach towards Free Trade Agreements (FTAs) signals a renewed commitment to navigating global trade dynamics. After a hiatus from 2012 to 2021, this is visible in India's strides in forging FTAs with Mauritius, the United Arab Emirates, and Australia. Currently, India is engaged in negotiations with 50 nations, both bilaterally and within blocs, aiming to establish new FTAs and revitalise dormant ones. Among these efforts is the reinvigoration of negotiations with Peru, highlighting the strategic supplies India could gain, particularly natural resources like lithium, gold, copper, and zinc from the South American country. Since the inception of negotiations in August 2017, India and Peru have conducted seven rounds of talks, notwithstanding interruptions caused by the COVID-19 pandemic. The most recent round in April 2024 in Delhi saw discussions covering various issues, including the reduction or elimination of customs duties, rules of origin, legal and institutional provisions, and dispute resolution mechanisms.

The question then arises as to why this trade agreement is significant for the two countries. What does it offer for India? What concerns have emerged during negotiations, and what are the obstacles?

India’s Trade Deficit 

Over the past six decades, the diplomatic relationship between India and Peru has evolved into a promising economic partnership. From a modest $66 million in 2003, bilateral trade has surged to an estimated $3.68 billion in 2023, with India exporting automobiles, cotton yarn, fabric, and pharmaceuticals to Peru, and conversely, Peru supplying minerals such as gold, zinc, copper, and crude oil to India. However, the current trade balance is in deficit for India, with the country importing $1.385 billion more than it exports to Peru. This underscores the need for corrective measures, as various tariffs and trade barriers for India hinder the competitiveness of Indian goods in the Peruvian market, further exacerbated by Peru's numerous trade agreements with other countries, making it easier for other products to penetrate the market at lower tariff rates. An FTA between India and Peru presents a promising solution to address this trade imbalance by reducing tariffs and eliminating non-tariff barriers, facilitating increased exports from India to Peru at a more competitive rate across established and emerging sectors.

Peru: Gateway to Latin America

A comprehensive Free Trade Agreement (FTA) will not only enhance India’s trade to Peru but also holds the promise of expanding India’s trade footprint across other Latin American and Caribbean (LAC) countries. Currently, India's exports to the region stand at less than 2%, highlighting the significant untapped potential for trade growth between the two regions. India views the FTA with Peru as a strategic opportunity to capitalise on Peru’s existing preferential trade partnerships with regional key players like Mexico and Argentina. Peru's extensive network of FTAs, covering 53 countries and encompassing nearly 95% of its exports, provides India with a unique advantage. By leveraging Peru's established trade relationships and benefiting from lower tariffs, India can effectively penetrate these markets and position itself as an export hub in the LAC region. By leveraging Peru’s connectivity, India can explore new avenues for trade cooperation, and strengthen diplomatic relations across the region. 

India Eyes Peru’s Lithium

The significance of the trade negotiation between India and Peru is paramount, particularly due to the discovery of substantial lithium deposits in Peru. Situated within the Lithium triangle comprising Bolivia, Argentina, and Chile, which collectively hold around 56 percent of the world’s lithium supply, Peru has emerged as a crucial player in the global lithium market with 2.5 million tonnes, surpassing the deposits of Bolivia and Chile by sevenfold. This positions Peru as the 6th largest producer of lithium globally. Lithium, often dubbed as the "new gold," holds immense importance due to its widespread applications across modern technologies, ranging from mobile phones to electric vehicles, solar panels, semiconductors. India realises this potential and given its ambitious goals in the electric vehicle (EV) sector, securing a trade deal with Peru becomes imperative.

India's status as the largest importer of lithium batteries in the world, with a significant portion sourced from China, raises concerns, especially considering the strained relationship between India and China. Currently, Bolivia and Argentina export lithium to China for battery production, bypassing India in the supply chain. However, with a trade pact with Peru, India wishes to establish a direct link to the lithium supply chain, enabling access to raw materials. This will not only decrease India’s dependence on China but will also bolster its ‘Make in India’ initiative. Through a direct supply India can start with the production of Electric Vehicles which stands to be the biggest beneficiary from this trade agreement. India aims to increase the share of EVs in its vehicle market by 30% by 2030 and without a reliable source of lithium, achieving this target would be challenging, as the cost of production would skyrocket. Hence, securing a steady supply of lithium through a trade agreement with Peru is crucial for the growth of the EV sector in India. Furthermore, experts highlight that a trade agreement with Peru can open doors to tap into the Andean countries, including Bolivia, Colombia, Ecuador, and Venezuela. These countries, along with Chile and Peru, form the Andean Integration System (SAI) grouping and possess significant reserves of critical minerals. Access to these reserves would strengthen India's position in the global market for critical minerals and contribute to its growth.

Navigating Gold Tariffs

Another significant issue under negotiation between India and Peru pertains to customs duty concessions on gold, which constitutes a substantial portion of India's imports from Peru, amounting to nearly 80%. Currently, a total of 15% tax is levied on gold imports, comprising a 10% basic customs duty and a 5% agriculture development tax. This levy poses a challenge for India due to the high value of gold, making it difficult to reduce import duties. For Peru, gold represents its highest exported product to India, and a reduction in import duties would translate into increased exports and profits for the country.

However, the likelihood of a duty cut appears slim, as evidenced by India's recent trade deal with the EFTA bloc (comprising Switzerland, Iceland, Norway, and Liechtenstein). Despite Switzerland's substantial gold exports to India, accounting for 80% of its exports, India only agreed to a 1% concession on the bound rate of 40%, maintaining the effective tax at 15%. This precedent suggests that India may be reluctant to significantly reduce tariffs on gold imports, even in the context of trade negotiations with Peru. While Peru may seek greater concessions to enhance its export potential, India's stance on maintaining import duties on high-value products like gold could remain firm, considering various economic and policy considerations.

What’s next?

These elements emphasise the importance of the FTA and the negotiation issues between India and Peru. The next negotiation is scheduled for June 2024 in Lima. India is keen on expediting the deal's closure within the next few rounds, with many experts noting that the trade deal is on the Modi government’s 100-day agenda should the party return to power post-elections. The trade deal holds great potential for India and Peru, with further chances of India making a significant pivot toward Latin America. 

Top Stories of the Week

Ethylene Oxide Contamination Sparks Concerns: FSSAI Initiates Quality Checks on Leading Spice Brands MDH and Everest

Food Safety and Standards Authority of India (FSSAI) has initiated quality checks on products of leading spice brands MDH and Everest due to complaints regarding elevated levels of ethylene oxide, a hazardous pesticide. This development comes in response to concerns raised regarding the safety of certain spice mix products marketed by these brands.

On April 5, the Centre for Food Safety in Hong Kong issued a public advisory urging caution regarding the consumption of certain products from MDH and Everest. Specifically, the advisory targeted MDH's Madras Curry Powder, Sambhar Masala Mixed Masala Powder, Curry Powder Mixed Masala Powder, and Everest's Fish Curry Masala. These products were identified to contain ethylene oxide levels exceeding permissible limits set by regulatory standards. As a precautionary measure, the CFS instructed vendors to remove the affected products from their shelves immediately to prevent further exposure to consumers. After the advisory by Hong Kong's CFS, the Singapore Food Agency (SFA) took decisive action by ordering the recall of Everest's Fish Curry Masala, which had been imported into Singapore. The SFA's directive required the importer, Sp Muthiah & Sons Pte. Ltd., to initiate the recall process promptly. 

Ethylene oxide is classified as a known human carcinogen by both the United States Environmental Protection Agency (USEPA) and the International Agency for Research on Cancer (IARC). Prolonged exposure to ethylene oxide has been linked to various forms of cancer, including lymphoma, leukemia, and breast cancer. 

Challenges in India-Maldives relations to persist with Muizzu’s landslide in local polls

The recent landslide victory of Maldivian President Mohamed Muizzu's ruling coalition in the Maldives election, securing 70 out of 93 parliamentary seats, poses a significant challenge to the future of India-Maldives relations. Muizzu has actively promoted an 'India Out' campaign and initiated measures to reduce Maldives' reliance on India. Additionally, a recent shift towards China, including prioritising a visit to China over India and signing 20 agreements to enhance bilateral ties, raises questions about the trajectory of the India-Maldives partnership.

India has long considered the Maldives a crucial ally, primarily due to their joint efforts in countering piracy, illegal fishing, and maritime terrorism. The relationship dates back to 1965 when India was the first nation to recognize the Maldives, providing various benefits such as education, medical assistance, and leisure opportunities to Maldivians. Moreover, both countries played significant roles in SAARC, granting India important diplomatic leverage. Any shift from this partnership could endanger regional security and open avenues for China to extend its influence. China's increasing presence in the Indian Ocean, especially through infrastructure projects and collaborations with nations like the Maldives, has raised concerns in India. Any perceived alignment with China might escalate tensions and intensify the competition for influence in the area

To address these challenges, India must explore new avenues to reaffirm the importance of their relationship for regional stability and prosperity. It is imperative for both nations here, to maintain open communication and cooperation on shared interests such as maritime security and economic development, despite recent political shifts. Collaborative efforts are essential to ensuring a constructive and mutually beneficial relationship amidst evolving geopolitical dynamics.

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