BW Legal World: India Rethinks its Trade Relationships: Appraising the New Outlook

It is premature to conclude whether the new trajectory on FTAs will mark a watershed moment in India’s trade partnership and business interests. Nonetheless, the intent and effort to reach greater heights in economic alliances and addressing perceptions are evident write authors Mukesh Butani & Tarun Jain from BMR Legal Advocates

By Mukesh Butani & Tarun Jain

Background 

The last few weeks have witnessed a spate of announcements that mark a significant shift in India’s free trade agreement (FTA) outlook. A Comprehensive Strategic Partnership and 2030 roadmap with the United Kingdom (UK) was announced. There is also the formal resumption of negotiations with the European Union (EU) for a wider economic framework in the backdrop of 2013 inconclusive talks. The factual position being that India has not signed an FTA since 2012. Further, media reports reveal that negotiations are ongoing to secure an FTA with the United States of America (US) and revising the existing economic partnerships with Japan and South Korea owing to the reportedly high trade deficit with these countries. These events are certainly not coincidental. The churn has an evident underlying immediate objective as also a larger thought-process. There are many overwhelming variables at play, each of which requires an analysis to appreciate the dynamics and, more importantly, to recalibrate the business opportunities that may arise as a consequence of these developments. 

Part – I: The internal variables 

Covid19: The immediate context! 

The economic impact of the pandemic is yet not measurable, though, it is evident that the rebuilding exercise would be indomitable; to say the least, besides broken families, it has shattered dreams and halted in its track aspirations of a 1.4bn strong nation. The history of India is replete with instances where the national spirit has emerged like a phoenix after every disaster. This, however, does not gauge the extent of the endeavour required for returning to normalcy. It is only by a collective effort that rising legions of insurmountable challenges can be victoried. So, we must come together and assist each other in standing on our feet to restore order. Simultaneously, pragmatism dictates that even the mildest opportunity is encashed and no avenue of growth revival left unexplored.  

It is in the aforesaid background that we contextualise the immediate rationale for India’s push to revisit its FTA position with leading trade and investment partners. The economic activity is at a low and certainly domestic consumption alone cannot propel ‘animal spirits’ amongst the market participants. In this environment, external demand is sure to have positive reinforcement and incentivize industrial activity. To illustrate, UK’s commitment to “encourage UK companies to invest in India’s manufacturing sector taking advantage of the Production Linked Incentive Scheme including in Electronics, Telecommunication equipment, automotive and pharmaceuticals manufacturing, besides avenues for FDI, is bound to increase the level of economic activity along with its offsetting benefits of job-creation, export-promotion, etc.  

In particular, the 2030 Roadmap with the UK promises to “remove barriers to trade through a balanced and beneficial market access package under the ETP including on agriculture, healthcare, education, legal services, seafarers, marine, healthcare and social security.” Almost all these are critical areas for India and an opportunity to re-brand the Indian merchandise and talent in the UK  market couldn’t have come at a better time. Setting up “bilateral Small & Medium Enterprises (SME) trade and collaborations, particularly technology sharing and financing of businesses” with the UK counterparts is expected to usher a significant thrust to the budding Indian entrepreneurs looking to expand beyond national boundaries.  

Offsetting the Aatma Nirbhar Bharat ramifications 

There are no two views that preference for local products would incentivize domestic production. However, for some reason, a perception was created that Aatma Nirbhar Bharat implies that India is opposed to the idea of free trade. This was guessed as the predominant reason for India’s 2019 rejection to joining RCEP. The increased scrutiny and denial of FTA benefits, under the customs law framework for imports, also led to an indirect messaging that India is not open to economic partnerships. The renewed push to FTA is clearly to offset the ramifications of such negative perceptions. This also aligns with the advice of the external conscience-keepers who have implored deeper economic ties with strategic partners while maintaining a strong push for the domestic industry.  

Recouping the RCEP losses

Much has been written about India refusing to be part of what could have been the biggest economic partnership covering almost half of global GDP. India’s rejection of the Regional Comprehensive Economic Partnership (RCEP) – the free trade agreement between the ASEAN+ Asia-Pacific nations – came under heavy criticism from every corner. India was viewed as having lost an opportunity to become part of the global value chain encompassing virtually every transacted commodity. Not all criticism is ill-founded as there is indeed increased economic activity amongst member-nations post RCEP. However, in the light of recent developments, India’s approach appears to be in favour of building strategic partnerships with defined goals and objectives, akin to playing to one’s strengths.  

Both UK and EU are tried and tested destination for Indian products. The same holds true for the US, where a trade deal to come that way. FTAs with these nations will increase market access and opportunity for Indian manufacturers and offset losses for not joining RCEP. In any case, Indian products are known to compete more on quality and skill, instead of being mass producers, which is aligned to the consumers of these economic partnerships. Second, with a country/region-specific FTA, the approach is to create specific markets and thereby customise offering. The intent to this effect was manifest in the Foreign Trade Policy Statement of 2017 which set out a detailed “market and product strategy” and distinctively targets the US, EU, South-East Asia and other markets. Perhaps, this vision can be translated in the backdrop of an enabling framework that permits India to prioritise region-specific targets.  

The third, albeit unsaid, factor is geopolitical developments with China. The underlying factor to lend thrust to  PLI and similar schemes is to attract foreign investment in specified manufacturing areas, possibly encashing the sentiments against the Asian neighbour. To quote an EU Observer,  the EU trade relationship with India is being pursued by scuttling the hitherto increasing ties with China. Political factors aside, this is a welcome development for Indian businesses which have always clamoured for increased market access in the members of the European Union. In contrast, media reports reveal that Australia, despite being part of RCEP, has been facing market-access challenges with China.

The steering role of MEA: The driver for change? 

The  NDA Government has pursued a differentiated foreign policy approach, overwhelmingly wide-ranging engagements with a diverse range of nations is evident. It is arguable whether this resulted into positive attainments for India but without doubt, there is a perceptible increase in India’s external visibility and the pace of aid in the second wave is evidentiary. The vision for the approach indeed arises from the PMO but is executed in practice by the Ministry of External Affairs (MEA). Ordinarily, foreign trade has been the domain of the Ministry of Commerce (MOC). However, taking RCEP as an example, MEA has found a greater voice in the trade negotiations. It is early to gauge the revival of FTA engagements with the role of MEA, however, it seems to have an overt stamp of economic overtures, part of the creative diplomacy being implemented upon by the MEA. Whether one treats FTAs as pushing India’s export promotion agenda or the deepening economic ties with developed nations, an overwhelming foreign policy element cannot be ignored.  

Why is the MEA variable relevant?  Trade relations are no longer viewed as a zero-sum game for the immediate agenda of economic prosperity. Economic partnership are relied upon by nations to promote strategic partnerships. Quad as an example stands out. Such wider canvass takes trade relationship beyond a situation wherein minor irritants impact trade-tie. Instead, the focus is the big picture that partners make attempts to rectify the anomalies as an attempt to enliven the trade relationship. Recent developments, if implemented, have the potential to redefine trading ties for meaningful technology transfer and human capital while reshaping the geo-economic equations for long times to come.  

From tariffs to free trade? Diluting the propositions of Make-in-India? 

The government’s policy of high tariffs on finished goods to promote domestic manufacturing is at crossroads with the underlying fundamental of FTA. To make Make-in-India a pragmatic magnet for global giants, the Government has created a tax-arbitrage between the final products while retaining a lower level of duties on parts and components. Thus, the import of finished goods turns out costlier, a trend which has continued year after year. A head-on crash is therefore imminent when the FTAs result in an import surge from the trading partners. In fact, the level of tariffs was one of the key deal-breakers for RCEP. The MOC has an uphill task on tariff. One would hope that the protectionist practices do not become roadblocks for negotiations and instead a case-by-case approach is adopted to minimise friction. Overwhelming pressure from the domestic manufacturers and vested groups will have to be assuaged and creative means of incentivising them has to be explored. The Government would also have to be mindful of other trading partners pressing it for lower tariff levels agreed in these FTAs. An acceptable calibration of the tariffs poses a practical challenge for the success of FTAs while determining the extent to which Indian businesses are permitted reciprocal market access.  

Part – II: Forging external relationships

Analysing the fine-print of the India-UK 2030 roadmap 

The UK of today is different from its colonial past. Just out of the shadow of the acrimonious divorce from the EU, the UK leadership now appears keen to demonstrate that Brexit does translate into a renewed economic vigour and prosperity for Her Majesty’s subjects. The UK as an active member of the EU was constrained in its economic ties with India, but no more. In fact, given the large contours set out in the 2030 roadmap, the relationship would go beyond a vanilla FTA and instead, as christened, is a ‘strategic partnership’. The vision document seeks to ‘connect’ the two nations and their people across a variety of levels through increased interaction and mobility at a political and diplomatic level and others through increased comingling for purposes such as education, research, innovation, connectivity and even culture. ‘Trade and Prosperity is a distinct cornerstone of the 2030 roadmap. It encompasses FTA conclusion within 2021, removal of barriers to trade, including for legal services (where already significant synergies exist), ensuring market access to businesses, and increased cooperation in the service sector. 

Its ‘financial cooperation’ promises a “UK-India Partnership on Infrastructure Financing and Policy, to support India’s ambitious plans for delivering inclusive, resilient and sustainable infrastructure under the National Infrastructure Pipeline.” Amongst others, this pillar seeks to encompass UK financial services aligning to promote India’s GIFT City. Increased push for bilateral investment by 2030 includes UK companies being encouraged to invest in PLI sectors and Indian companies for UK listing, etc.  

Re-energising the EU relationship 

India and the EU have also launched a ‘connectivity partnership’ which is expected to “catalyse private and public financing for connectivity projects.” Unlike the India-UK bilateral partnership, the India-EU initiative goes beyond as it expects to “foster new synergies for supporting connectivity initiatives in third countries”, including in the Indo-pacific and is nothing short of a strategic relationship between India and EU. The  joint communique stands out for two new agreements – FTA and an investment protection agreement – being simultaneously negotiated   “to realise the full potential of the economic partnership.” 

An FTA with the EU is not one FTA. Instead, by default, it is 27 FTAs as it gives India access to 27 jurisdictions that are seamlessly connected and stand out for shared values and systems. The gains from market access to Indian businesses, both in goods and services, would be unparalleled. The other announcement in the investment protection agreement is intriguing. India has not found many buyers for its revised 2016 Bilateral Investment Protection model which has been criticised as devoid of meaningful protection to foreign investors. An endorsement by the EU though appears a tough-bargain given challenges arising from past investment treaties and the enforcement of retrospective amendments against Vodafone and Cairn being cited as examples to reflect upon India’s inability to fulfil fair and equitable treatment obligation.  

Revisiting the existing trade relationships  

India signed a comprehensive economic partnership with Japan in 2011. It reportedly resulted in increased imports from Japan but did not translate into material gains for Indian exports with the trade deficit reportedly rising each year. Similar is the situation with South Korea. The Government has therefore been in negotiations with an intent to upend the lopsided trading relationship. An increase in bilateral cooperation in security, defence and Quad, etc. are few other examples that reveal that India’s take on global economic policy is witnessing the transformation and undergoing a material change in outlook and external engagements, including revisiting the existing relationships.  

Conclusion  

It is premature to conclude whether the new trajectory on FTAs will mark a watershed moment in India’s trade partnership and business interests. Nonetheless, the intent and effort to reach greater heights in economic alliances and addressing perceptions are evident. It is now up to Indian businesses to identify opportunities to take advantage of the strategic push exerted by the Government. Relationships forged during times of adversity are far-enduring and long-lasting. In any case, there is hardly a choice for the entrepreneurs than to look beyond their local markets and look at overseas markets which allow them access to a larger consumer base and better yields. 

The authors are Partners, BMR Legal and acknowledge the contribution of Senior Associate Madhura Bhat, BMR Legal.