Context: India reiterated its commitment to conclude FTA with UK during meeting the visiting Secretary of State for Foreign, UK.
What is a free trade agreement?
- Free trade agreements (FTAs) are arrangements between two or more countries or trading blocs that primarily agree to reduce or eliminate tariff and non-tariff barriers on substantial trade between them.
- FTAs, normally cover trade in goods (such as agricultural or industrial products) or trade in services (such as banking, construction, trading etc.). FTAs can also cover other areas such as intellectual property rights (IPRs), investment, government procurement and competition policy, etc.
India has signed free trade agreements with many individual countries and trade blocs like India-ASEAN FTA, India-Japan CEPA, SAFTA with SAARC countries etc.
FTA with UK and EU have been languishing over many years as Indian industry resisted competition and sough higher level of protection. This came in the backdrop of poor performance of India’s exports with the countries with which it has signed similar FTA deals before. The Asian Development Bank has estimated India's utilization of its trade agreements to be below 25%, one of the lowest rates in Asia.
Reasons for low utilization of FTAs:
- Inverted duty structure:
- When taxes on input items are higher compared to the final product, it affects the competitiveness of exports. This situation is detrimental to industries that heavily rely on imported raw materials or components, such as the engineering sector.
- Free trade agreements signed in the past, especially the trade deals with the Association of Southeast Asian Nations (ASEAN) countries, South Korea and Japan led to higher imports and minuscule gains on the export front.
- E.g., GST rates for ferrous and non-ferrous metals is 18 per cent but the products that use these raw materials (agricultural implements/ manually operated hand tools) attract a GST lower than 18 per cent.
- Non-tariff barriers:
- Non-tariff barriers could come in the form of regulations, standards, testing, certification or pre-shipment inspection that are aimed to protect human, animal or plant health and environment.
- Indian agri-exports are routinely subjected to high non-tariff barriers in the form of standards. Export growth of chilies, tea, basmati rice, milk, poultry, bovine meat, fish, meat, fish and dairy products also face barriers. These products face Sanitary and Phytosanitary (SPS) measures.
- Rules of origin:
- Rules of origin (ROOs) are used to determine if products are eligible for duty-free or reduced duties under the FTA rules even though they may contain non-originating (non-FTA) components.
- The rules of origin for the India-ASEAN FTA are very strict. This makes it difficult for Indian exporters to export products to ASEAN countries and benefit from the tariff reductions under the FTA. On the other hand there are a number of alleged instances where merchandise is being re-routed from China, via ASEAN countries with minimum value addition, thereby misusing the India-ASEAN FTA.
- Low Awareness: Lack of awareness among exporters about the provisions and benefits of FTAs can hinder their ability to take advantage of preferential tariffs and market access opportunities.
- Changing export composition: Indian exports have become more income sensitive rather than price sensitive. So reduced tariffs won’t help India much. As per UNCTAD, 1% decline in world GDP growth lead to 1.8% decline of India's exports.