WITH the good news from the 17th SAARC (South Asian Association for Regional Cooperation) meeting in the Maldives about the future effective implementation of the South Asian Free Trade Area agreement, trade relations among member-countries will get a big boost. India's export growth has slowed down from 36.5 per cent in September 2011 to only 12.4 per cent in October. A few weeks ago the Minister of Commerce said the European Union-India Free Trade agreement was also at an advanced stage of negotiations. EU-India trade is of greater importance for India than the trade with SAARC countries as the EU is one of the biggest trade partners and investors in this country.
Prime Minister Manmohan Singh had expressed the hope at a summit in Brussels in December 2010 that the FTA would come through by 2011-end. But it hasn't. What ails the FTA? The EU-India FTA negotiations were launched in July 2007. Till 2009, the EU, a bloc of 27 countries, was India's largest trading partner while India was the EU's eighth largest trading partner. In 2010, however, the UAE and China became India's biggest trading partners. The total trade (exports and imports) with the EU increased by 28 per cent to 67.78 billion euros in 2010. In the area of FDI, flows from the EU, however, declined from 3.4 billion euros in 2009 to 3 billion euros in 2010.
Specific areas covered by the FTA include trade in services, goods, investments, trade facilitations, public procurement, technical regulations, intellectual property rights (IPR) and geographical indication, competition policy and dispute settlement. Market access for goods and services forms the core of any FTA in which tariffs are removed among members but are maintained against the outside world.
India advocated an asymmetrical deal in which the EU would eliminate 95 per cent of tariffs, leaving India at the 90 per cent level - a fair request reflecting the differences in the levels of development between the two parties. The EU brought out an "exclusion" list that included 226 products, mostly chemicals, petrochemicals, plastics, ceramics and glassware.
India proposed an exclusion list of about 150 agricultural goods and 250 manufactured products. The agricultural goods included processed good, dairy products, sugar, fruits and vegetables, meat products, maize, honey, mushrooms, egg products, coriander seeds, vanaspati and cocoa powder. The manufactured goods included some textiles and clothing, textile machinery, rubber, cars, commercial vehicles and two-wheelers, paper and paper board, furniture, chemicals, machinery and appliances, fish and fish products, wines and spirits.
Many Indians have been worried that the EU is pressing too hard on IPR issues which will curtail the production of cheap generic drugs, specially AIDS drugs which India exports to Africa. The EU's demand for stronger IPR protection through "data exclusivity" requirement would force drug companies seeking approval from the national health authorities to produce a generic copy of a medicine, not to use the drug manufacturer's previously existing data on its safety and effectiveness. It would thus require generic drug companies to conduct expensive clinical trials before producing generic medicines, a limitation that could significantly curb the number of generic products.
The EU's insistence has been based on the fact that it takes companies a long time to develop new drugs. Enhancing generic production can undermine the incentive of original researchers, increasing the supply of cheap medicines in the short run but curtailing innovative research in the long run.
In India, the availability of cheap medicine is important for the poor as most of the rural indebtedness is due to borrowing on account of illness in the family. It would further limit the ability of the government to issue compulsory licensing of medicines. Fortunately in July 2011, it was announced that data exclusivity will not be part of the prospective EU-India free trade agreement.
Another point of contention is the temporary movement of Indian skilled labour to the EU under the FTA as it has raised fears of competition in the EU labour market from Indian IT and other service personnel. The EU is also seeking the liberalisation of legal, accounting, banking, insurance and retail services. In banking services, there are fears in India that foreign banks may not like to go to rural India and serve the poor. Similarly, opening up of retail trade will jeopardise the livelihood of 12 million small retailers.
India should also be concerned with the proposed inclusion of "legally binding clauses on human rights, social and environmental standards and their enforcement with measures in the event of infringement." India had objected to these clauses in the past at the WTO. Now with the FTA, these will become binding automatically. Also in food security, there are fears that freeing agricultural imports will lead to a surge of heavily subsidised EU produce into the Indian markets and will adversely impact the livelihood of marginal farmers.
In addition, the European automotive industry has declared that it supports an EU-FTA provided it meets various criteria, including no diversion from the "zero for zero" tariff agreement. According to them, India has remained inflexible on the abolition of its automobile tariffs. It applies peak import tariffs of 60 per cent on cars but 10 per cent on trucks and buses, and 7.5 per cent to 10 per cent on parts and components. EU members want that the FTA should ensure that all non-tariff barriers are also eventually eliminated in full. India is afraid that if it lowers duties on cars and automotive parts, Japan and South Korea would press for similar concessions. Problems are being faced in the area of tariffs on wines. India is reluctant to lower the duties on wines and spirits as they are regarded as "sin goods".
India is also concerned about the Singapore issues being included which focus on government procurement, investment and competition policy. These three issues were insisted upon by the EU for inclusion within the WTO. But developing countries, including India, had objected to this and these issues were finally removed. Now they have again been introduced in the FTA. Insistence on a competition policy may lead to creating a favourable climate for EU-based multinational corporations. The EU may want to attempt to harmonise India's competition law with EU competition law which may not be in sync with India's own development needs. The dispute settlement clause is controversial as it would enable private foreign companies to sue the government. Also, the investment provisions in the FTA would allow foreign firms to acquire land, minerals, water and other resources freely which may create problems.
Lastly, there is need for greater transparency in the negotiations and there has to be more sharing of information with civil society groups and the general public. There has to be more public debate on the pros and cons of the proposed FTA.
(Dr. Jayshree Sengupta is a Senior Fellow at Observer Research Foundation.)
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