Introduction
The India-EU Free Trade Agreement (FTA) has been on the anvil for long. In fact, the Indian and German governments are meeting this week in New Delhi to iron out the differences to ensure that there is progress towards striking a deal. To place the whole issue in a context, it is well known that two blocs are at the center stage of world politics and economics - the US and the EU along with the rising power in Asia, China. The US has assumed the mantle of the world monitor and holds strong positions on matters relating to politics and trade.
The EU, on the contrary, has made an impact more because of its strategic trade-policy initiatives and policies of neo-protectionism. It has largely been held responsible for the failure and slow progress of the Doha round of negotiations. However, India has strived to maintain good relations with the EU and the ongoing negotiations to sign an FTA are a proof of that. An FTA with the EU is important to India to gain, at least to some extent, preferential and duty-free access to the European market.
India-EU FTA
Having established diplomatic relations in 1963, this year (2013) marks 50 years of India-EU relations. However, most of this period witnessed largely unsubstantial relationships
2 despite having cordial relations. The relations grew quantitatively and qualitatively only in the 1990s. The change began with India's liberalisation policies of the 1990s, which accelerated EU-India trade. The EU and India issued a joint diplomatic statement in 1993 and signed their first cooperation agreement in 1994. Since then, trade between them has grown steadily. In 2002, India was the EU's 15
th largest trading partner. In 2012, it grew to be the 8
thlargest partner. If trade between India and all EU member-states is added together, the EU is India's largest trading partner.
At the 6
th EU-India Summit in 2005, a roadmap for strategic partnership in the form of a Joint Action Plan was agreed upon, alongside a commitment to review its implementation annually. Now the area where progress has been achieved include trade, science and technology, especially space and biotechnology, some areas of security (counter-terrorism, cyber-crime, piracy), energy, development and some aspects of multilateral institution building, such as creation of participation in new multilateral forums.
To further improve the progress, a Sustainability Impact Assessment, commissioned by the EU, examined three possible FTA scenarios: a limited FTA, an extended (deep) FTA and an extended (broad) FTA (including further NTB harmonization). From the CGE (Computational General Equilibrium) analysis, the report concludes that every scenario leads to larger welfare gains for both the EU and India than the baseline scenario (which includes a notional WTO Doha round completion). The extended FTA brings India and the EU the greatest benefits in terms of welfare gains, production, international trade, wage increases and productivity increases. The welfare effects amount to an additional 0.3% growth for the Indian economy in the short run and 1.6% growth in the long run. The EU's large economic base means that the changes are too small to lead to significant changes in percentage GDP growth
3 .
In the above backdrop, it is important to understand the issues of contention between India and EU that come in the way of signing an FTA.
Issues of Contention
- Labour standards and GATS Mode 4 liberalisation
India's trade policy is fairly constrained by its concerns for the poorer part of its population. More than half of India's population is under the age of 25, necessitating a growth strategy centred on job-creation rather than the one centred on export-led one. These demographics and its education system have provided India with a skilled, competitive, English-speaking work force, of which Europe will be short in the near future. This adds to why tariff reductions alone will not make the EU-India FTA sufficiently economically interesting for India
4 . A much deeper agreement covering services and investment and other areas of cooperation is needed.
Services sector of the Indian economy is of crucial importance to the country. It constitutes approximately 55% of GDP, totaling approximately 725 billion euro. It also accounted for 93 billion euro of exports in 2010. India's trade in services with the EU amounted to 19 billion euro in 2010. The structural elements of the Indian economy mean India is particularly interested in the liberalisation of services under Modes 1 and 4 of GATS. GATS define four modes of services supply, according to which commitments are made by WTO Members. While Mode 1 concerns services supplied from the territory of one Member into the territory of another, Mode 4 refers to the supply of services by a service supplier of one Member through the presence of natural persons of that Member in the territory of another. Practically, the liberalisation of Mode 4 service supplies facilitates the free movement of independent professionals -like software engineers -by committing to measures such as more relaxed visa requirements or labour market tests by which the presence of certain foreign service suppliers are regulated. As India's skilled services labour force is growing very fast, India puts a stronger emphasis on better market access for services suppliers through Mode 4 liberalisation than market access for goods in trade negotiations.
- Intellectual property rights and generic medicines
A second contentious issue relates to intellectual property protection. Leaked draft agreement suggests that provisions could go beyond WTO obligations under the Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement
4. India has always taken positions in the World Intellectual Property Organization (WIPO) and the WTO, indicating that it was not willing to commit to an agreement beyond TRIPS. Moreover, in the past, the EU preferred to seek compliance with TRIPS and other intellectual property conventions rather than press for deeper commitments in its FTA negotiations.
India's pharmaceutical sector, sometimes called 'the pharmacy of the developing world', produces generic medicines that are being used by many aid organisations. For instance, nearly 80% of generic medicines for the treatment of AIDS are sourced from India. As a result, the cost of treatment fell significantly from 10,000 to 100 USD per person per year
5 . Considering India's track record in upholding patents, it is believed that pharmaceutical companies have been pressuring the EU to demand stricter rules on intellectual property protection, extracting commitments that go beyond WTO obligations
6. Such commitments could include the so-called data exclusivity protection measures, according to which pharmaceutical companies can exclusively retain the rights to their test results for periods of up to ten years (delaying generic medicines), or a practice referred to as 'ever-greening', in which slight alterations to medicine are sufficient to allow a new patent (prolonging intellectual property protection). Aid organizations such as Oxfam, Médecins Sans Frontières and Unitaid have voiced concerns regarding such provisions in the EU-India FTA. The Trade SIA report on the EU-India FTA recognised this concern by stating that commitments should not impair the capacity to promote access to medicines in line with TRIPS flexibility, and by explicitly reiterating that foreign pharmaceutical companies would be legally allowed to charge higher prices to recuperate research and development costs. The Commission responded to civil society concerns by issuing a Q&A document on access to medicines in the negotiations. The document states that the intellectual property provisions in the FTA will not weaken 'India's right and capacity to manufacture and export life-saving medicines to other developing countries facing public health problems.' It adds that, although the Commission believes in the importance of data exclusivity, it will be flexible and will take into account the position of India as producer of essential generic medicines
7 .
- Reluctance to negotiate government procurement
This is another priority issue for the EU and a bone of contention between the partners. The economic rationale for negotiating government procurement follows from, first, the obligations of non-discrimination and transparency, and second, the perceived benefits of improved market access through exports, lower procurement costs, efficient resource
allocation and overall efficiency gains
8. The EU has complained that the 'Indian government procurement practices are often not transparent, discriminatory against foreigners and often give preferences to the locals'
9 . Given the fact that government procurement accounts for nearly 13 per cent of India's GDP, the Indian government insists it will not include public procurement in the EU-India FTA agenda. The Indian government perceives that negotiating government procurement will undermine its policy to support the medium and small sector. Besides, India also sees this as a restriction on its ability to procure from local firms in remote areas as part of its policy for balanced regional development
4.
The risks associated with this measure are that social objectives could be translated into economic costs. First, it may result in possible reductions of domestic procurement supplies. Second, this will have a knock-on impact in terms of employment generation in India when it opens up government procurement to more competitive foreign suppliers
4. The huge administrative cost involved in enacting the necessary legislation and creating institutions to implement stated obligations are clear in the reluctance shown by the Indian negotiators. For the EU, 'the inclusion of procurement is essential for the balance of the agreement and the FTA without procurement is not on the negotiating table'
10 .
This again is a major stumbling block in the ongoing FTA negotiations.
- Subsidised agriculture and diary sector
Agriculture is another key sector for India, mainly from the perspective of ensuring equity and growth from the FTA. The EU has a highly protected agricultural sector and India obviously has strong defensive interests in negotiating an FTA with the EU. At the moment, European agricultural imports from India are over five times larger than its exports to India, even though EU tariff rates on such imports are relatively high. India wants EU to cut tariff and subsidy support on its agricultural products, for fear of EU exports displacing Indian agricultural products. This issue could prove to be a significant stumbling block in the ongoing negotiations.
- India is also pitching for "data secure" status for the country. India is not considered data secure by the EU, thereby obstructing the flow of sensitive data, such as information about patents, under data protection laws in the EU. The EU law mandates that European countries doing outsourcing business with countries that are not certified as data secure have to follow stringent contractual obligations, which increases operating costs and affects competitiveness11 .
- Further opening up of the insurance sector by India, hiking the FDI limit to 49 per cent and reducing import duty on passenger cars, etc. are also contentious issues.
Conclusion
The hurried sense of negotiations that is taking place is becoming a cause of worry. In negotiating any bilateral trade agreement with the EU, the Indian government should tread cautiously so as to safeguard the domestic concerns and public interests at large. The FTA will be the first of India's large trade agreements with a western bloc -- with 27 economies. If structured well, the agreement can push up India's growth for the next decade.
Though Indo-EU trade relations have always been cordial and the two meet regularly at annual trade summits and pledge to enhance trade and investments, the reality is starkly different. And, given the long on-going negotiations for an FTA and the number of contentious issues on board from both the sides, one wonders whether India-EU relations are at the crossroads.
1. Geethanjali Nataraj is a Senior Fellow and Rohit Sinha a Research Assistant at Observer Research Foundation, New Delhi.
1. Radha Kumar, 'The EU and India: Common Interests, Divergent Policies',
European University Institute Working Papers 2013/14.
2. European Commission, 'Commission services position paper on the Trade Sustainability Impact Assessment for the FTA between the EU and the Republic of India', March 2010.
3. Jan Wouters et al, 'Some Critical Issues in EU-India Free Trade Agreement Negotiations'. Working Paper No. 102; Leuven Centre for Global Governance Studies, February 2013.
4. Boseley, 'Does EU/India free trade agreement spells the end of cheap drugs for poor countries?' (2012) The
Guardian
5. Jan Wouters et al, 'Some Critical Issues in EU-India Free Trade Agreement Negotiations'. Working Paper No. 102; Leuven Centre for Global Governance Studies, February 2013.
6. Ibid.
7. Sangeetha Khorana and Nicholas Perdikis, 'EU-India Free Trade Agreement: Deal or No Deal'".
South Asia Economic Journal, 2010 11:181.
8. EU Market Access Database 2006, 'India: Procurement Discrimination'. Brussels: European Commission.
9. European Commission,
'EU-India FTA Negotiations: EC Key Messages', Brussels: January-February 2008.
10. Deepak Rao, 'What to expect from the India-EU FTA'.
Gateway House; May 2, 2013.
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