Is India on the cusp of a flurry of free trade deals?

India has shown little enthusiasm for free trade deals since Prime Minister Modi took office, but as trade imbalances rise, his government appears to be changing course.

Calls to boost India's manufacturing sector will require more foreign investment, say experts, and free trade deals can help with that [File: Dhiraj Singh/Bloomberg]

Bengaluru, India – At a giant liquor store in Bengaluru, most aisles were packed, as residents of India’s tech hub stocked up for year-end celebrations. But one part of the shop was empty: the section where imported wines, subject to prohibitively high tariffs that can run up to 150 percent, were stacked.

That could soon change. India and Australia are on the cusp of inking an “early harvest” deal before the end of the month that will pave the way for a broader free trade agreement (FTA) that they hope to sign next year. Former Prime Minister Tony Abbott, now a trade envoy for the Australian government, has indicated that Indian tariffs on his country’s wines could be slashed under the interim pact.

The talks with Australia reflect a broader urgency that many experts say has previously been missing on the part of the Indian government when it comes to embracing FTAs and a more open global trade regime.

India is hoping to kick-start negotiations for an FTA with a post-Brexit United Kingdom in January. Commerce Minister Piyush Goyal has said New Delhi hopes to seal a free trade deal with the United Arab Emirates in early 2022. Earlier this year, India and the European Union decided to restart long-stalled talks for a comprehensive trade and investment treaty. Meanwhile, India has also initiated talks with Canada for an FTA and is exploring one with the Gulf Cooperation Council, a six-member grouping consisting of Bahrain, Qatar, Saudi Arabia, Kuwait, Oman and the UAE.

All of this contrasts with the sceptical eye that the government of Prime Minister Narendra Modi came into office with back in 2014, when it announced a review of all earlier FTAs signed by India, arguing that some of those had not helped the country.

Gantry cranes at the Jawaharlal Nehru Port in Navi Mumbai, Maharashtra, India [File: Dhiraj Singh/Bloomberg]

The only FTA signed by India over the past seven years has been with the 10-member Association of Southeast Asian Nations (ASEAN) in 2015 – and the two sides had already completed most of the groundwork before Modi took office. In November 2019, India walked out of negotiations on the Regional Comprehensive Economic Partnership (RCEP), leaving a collective of the 10 ASEAN states, China, Japan, South Korea, Australia and New Zealand to sign on without New Delhi. The RCEP is the world’s largest trade deal and comes into effect in January.

“It was a blunder to stay out of the RCEP,” said Pradeep S Mehta, a veteran trade analyst who has served on multiple advisory panels of the World Trade Organization. “If the government is genuinely changing course on free trade, that would be welcome. It’s about time.”

Growth vs inequality

In some ways, India’s quandary over FTAs mirrors heated debates on globalisation across the world in recent years. On the one hand, India’s economic growth really took off after it opened itself up to international investments in the 1990s. But the forces of globalisation — everywhere — have also deepened inequality and left local manufacturers vulnerable in the face of cheaper imports from abroad.

“FTAs are clearly a very important element of global trade, but you have to guard against lowering tariffs too much for the import of foreign products,” TP Sreenivasan, former Indian permanent representative to the United Nations, told Al Jazeera. “Because you can get flooded by their goods and that hurts domestic industry.”

But the data shows that avoiding free trade deals has not necessarily made Indian manufacturers more competitive. In fact, India’s trade imbalance has grown, with net imports going up from $137bn in 2014-15 to $161bn in 2019-20.

the data shows that avoiding free trade deals has not necessarily made Indian manufacturers more competitive [File: Arko Datto/Bloomberg]

India and Australia started talks on an FTA in 2011. A decade later, without that deal, India remains a net importer from Australia. With the UAE, things have gotten worse. India used to be a net exporter until 2019-20 — now it imports more than it sells to the Middle Eastern country. That widening gulf between exports and imports appears to have prodded the government into rethinking its approach, say analysts.

To be sure, FTAs are not necessarily a fix for a country’s trade imbalance. Earlier FTAs with countries like Japan and Malaysia were focused more on goods than on services, which are India’s strength, said Debashis Chakraborty, associate professor at the Indian Institute of Foreign Trade in Kolkata.

But staying out of FTAs is not the solution either, he warned. Take the RCEP. “Entry into that agreement now would have given India the chance to play at the high table and set the rules for the region,” Chakraborty told Al Jazeera. “If we join 10 years later, we would not be able to dictate terms. We will need to accept what is already decided.”

A key argument against joining the RCEP was the fear that it would allow China greater access to the Indian market without adequate reciprocal gains. But Mehta pointed out, in an interview with Al Jazeera, that even without the RCEP, China is by far India’s single biggest source of imports.

Lines in the sand

Not everyone agrees that the government has shifted its approach. Sreenivasan, the former diplomat, said earlier delays in FTA negotiations were often the result of the other country dragging its feet.

But India too has often drawn a line in the sand and then refused to budge. Between 2016 and 2018, India’s bilateral investment protection treaties with 23 EU countries expired. The EU kept pleading with India to agree to stopgap extensions, but India allowed those pacts to die — elevating the risk of investing in India — while instead negotiating for a pan-EU deal that is yet to be finalised.

By refusing to join the RCEP, India could again be shooting itself in the foot, cautioned Chakraborty. Modi’s political slogans of Make in India and Aatmanirbhar Bharat (self-reliant India in Hindi) — calls to build the country’s manufacturing capacity — depend on an increase in foreign investment into the country. But the 15 members of the RCEP will find it easier to shift businesses within the trade grouping because of shared rules than to invest in an external nation like India, which will likely lose out on future investments.

“If we are looking at the global production network that is working out across Southeast Asia, the RCEP would have been a good opportunity to get seamlessly integrated into that system,” said Chakraborty.

While there is no evidence the Indian government is changing its thinking on the RCEP, the rush to push through bilateral FTAs with a host of nations suggests a recognition that the Modi administration’s earlier approach was not working.

For India’s wine connoisseurs, that could mean a particularly merry Christmas.

Source: Al Jazeera