Why can’t India and the EU sign an FTA?

Author: Geethanjali Nataraj, ORF

The India–EU FTA has been on the anvil for a long time, with no major breakthroughs in sight. A week-long intergovernmental meeting in Delhi from 13–15 May failed to iron out differences and ensure progress towards striking a deal.

India has a lot to gain from an FTA with the EU, particularly in regard to preferential and duty-free access to the European market. A Sustainability Impact Assessment, commissioned by the EU, indicates that an extended (broad) FTA (including further non-tariff barriers to trade harmonization) would result in significant benefits to both parties in terms of welfare gains, production, international trade, wage increases and productivity increases. The welfare effects amount to an additional 0.3 per cent growth for the Indian economy in the short run and 1.6 per cent growth in the long run.

India and the EU have a substantial trade relationship that is growing rapidly. In 2002, India was the EU’s 15th-largest trading partner; by 2012, it was the 8th. If trade between India and all EU member-states is totalled, the EU is India’s largest trading partner. Given this context of growing trade and benefits to be had all-round, it is odd that the two powers have not made more progress towards an FTA. So what are the issues of contention between India and the EU that stand in the way of an FTA?

First, India’s trade policy is influenced by demographics. More than half of India’s population is under the age of 25, necessitating a growth strategy emphasizing job creation and not just export promotion. These demographics and its education system have provided India with a skilled, competitive, English-speaking work force, something which Europe will be short of in the near future. Making gains from this workforce through trade requires more than tariff reduction, which is why tariff reductions alone will not make the EU-India FTA sufficiently interesting for India. Consequently, negotiations included provisions for the abolition of non-tariff barriers such as standards and mutual recognition or licensing requirements.

India is particularly interested in the liberalization of services under Modes 1 and 4 of GATS. As India’s skilled services labour force is growing very fast, India emphasizes better market access for services suppliers through Mode 4 liberalization over market access for goods in trade negotiations.
Second is Agriculture, a key sector for India from the perspective of ensuring equity and growth from the FTA. The EU has a highly protected agricultural sector and India 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 the EU to cut tariff and subsidy support to its agricultural products for fear of EU exports displacing Indian agricultural products once an FTA is signed. This issue could prove a significant stumbling block in the ongoing negotiations.

The third issue is the reluctance of the Indian government to negotiate government procurement issues. This is a priority issue for the EU and a bone of contention between the parties. The EU has complained that the ‘Indian government procurement practices are often not transparent, discriminate against foreigners and often give preferences to the locals’. But given 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. India is also discussing a ‘data secure’ status for the country. At present, India is not considered data secure by the EU. This obstructs 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 increase operating costs and affects competitiveness.

Finally, there is a range of smaller matters that could derail negotiations if not managed well. These include further opening up India’s insurance sector and increasing the foreign direct investment limit to 49 per cent. A call from the EU for India to reduce its import duty on passenger cars is also contentious.

Negotiating a resolution to these issues is in the interests of both India and the EU. But the hurried pace of negotiations is becoming a cause for worry. In negotiating any bilateral trade agreement with the EU the Indian government should tread cautiously so as to safeguard domestic concerns and the public interest. The FTA will be the first of India’s large trade agreements with a western bloc, with 27 economies. If structured well, the agreement could push India’s growth for the next decade. If structured poorly, it could derail it for just as long.

Geethanjali Nataraj is Professor and Senior Fellow at the Observer Research Foundation, New Delhi.