Analysing India’s FTA Policy Shifts

By Biswajit Dhar | Commentary | June 5, 2024

When analysed through its engagement in bilateral free trade agreements (FTAs), the NDA government’s foreign trade policy during its ten years in office can best be described as a story of essentially two phases of sharply contrasting stands. Soon after it took office, the government developed a strong anti-FTA bias, reflected in its clear intent to review the three major FTAs that were being implemented, with the 10-member Association of South East Asian Nations (ASEAN), Japan, and the Republic of Korea. The arguments for doing so, of course, had clear political overtones: that the previous UPA government, which had endorsed these agreements, had done so without safeguarding national interests.

The most defining moment of this phase of the NDA government’s foreign trade policy was India’s withdrawal from East Asia’s mega-regional FTA, the Regional Comprehensive Economic Partnership (RCEP), a few months after it was voted back to power. The pandemic-induced downturn seemed to deepen this isolationist strategy as the government adopted the “Atmanirbhar Abhiyan”. India appeared to be returning to its import substitution days with the adoption of the “production linked incentive” (PLI) scheme to reduce import dependence in several key industries.

However, following the post-covid recovery, the government did a sharp U-turn, embracing FTAs as strongly as it had rejected it during its first term in office. This shift in policy stance was reflected in the announcement that it was conducting negotiations for concluding FTAs with 8 countries/regions. These included those that were negotiated prior to the government taking office and were stalled prior to the 2014 elections. This newly found enthusiasm has resulted in the conclusion of two new generation FTAs with the United Arab Emirates (UAE) and the European Free Trade Association (EFTA), which comprises Switzerland, Norway, Lichtenstein, and Iceland.

The government did not merely conclude these agreements, but it did so with a completely different attitude towards domestic sensitivities. While in the first phase, it carefully safeguarded the country’s domestic interests, unacceptable compromises were made in the process of finalising the FTAs in the second phase.

The anti-FTA bias, culminating in a seemingly isolationist position, was hardly evident when the NDA government took office. During the first few months, the government endorsed the burgeoning economic relations with its partners in East Asia, which went back to the “Look East Policy” of the early 1990s, by upgrading it to the “Act East Policy”. Through this policy shift, economic relations with the East Asian countries were sought to be intensified by promoting economic cooperation, and developing strategic relationships, thereby providing enhanced connectivity in its broadest sense. More importantly, the RCEP received political backing at the highest level with India giving assurance to “exert efforts” for an early conclusion of the mega-regional trade agreement.

However, signs of strain in the process of India’s East Asian integration began to surface with the implementation of the three functioning FTAs, with ASEAN, the Republic of Korea, and Japan. The benefits accruing from these FTAs regarding merchandise trade were overwhelming against India: India faced growing imbalances on its trade account with almost all its partner countries. More worrisome was that while India’s exports could not take advantage of the market opening in partner countries, its imports from these countries escalated.

Further, India’s exports were focused more on raw materials and intermediate products, but its imports from FTA partners were largely finished products. It could thus be argued that India was exporting jobs and value addition through its trade engagements with these countries. Unfortunately, there is no evidence of changes in India’s trade in services, as disaggregated official data on services trade are not available. Services trade with East Asian partners could have improved, as India’s trade in services has always been more competitive than its merchandise trade. The non-availability of services trade data or any assessment of the trade performance of these sectors from the government contributed towards worsening perceptions regarding these agreements.

Although the government tacitly supported the RCEP, various domestic stakeholders were against this proposed agreement since they anticipated increased imports of agriculture and dairy products from Australia and New Zealand, respectively, and of manufactured products from China. There was, thus, a general view that endorsing the RCEP would be detrimental to India’s interests in agriculture and industry. With India and China face-off at the borders escalating towards the end of the NDA government’s first term in office, the decision to walk away from the RCEP negotiations became part of the government’s larger policy of disengaging from the northern neighbour.

If the NDA government’s anti-FTA bias was a surprise in its first term in office, the abrupt re-engagement with partner countries to fast-track economic integration with them was even more astonishing. In the third quarter of 2021, the government announced that India and the UAE would commence negotiations for a comprehensive economic partnership agreement (CEPA). This was the first of several broad-based agreements in which negotiations were initiated with several countries/regions, including the United Kingdom (UK) and the Eurasian Economic Union (EAEU), a grouping that includes Russia. Besides, trade talks on the long-stalled CEPA negotiations with the EU, Canada, and Australia were also resumed.

Three features of the NDA government’s engagement in concluding bilateral trade agreements distinguished this phase from those in its first term in office. First, the scepticism regarding FTAs that had dominated its earlier engagements was no longer visible. Second, the government was willing to include several “sensitive” areas such as government procurement and intellectual property rights (IPRs), which it had refused to negotiate in the past. And, finally, there was an eagerness to conclude some of the deals early, the best example of which was the CEPA with the UAE, concluded in three months.

The newly-adopted agreement with the European Free Trade Union is the most significant example of the NDA government’s changed stance on bilateral trade agreements. There are three important aspects of this. First, it is India’s first free trade agreement with an economically advanced Western country.

Second, India has agreed to include intellectual property, labour, and environmental parameters in the treaty, something that has never been done in any bilateral agreement before. In order to make any concessions on these issues, India will have to change its domestic laws — that is, this FTA will not only benefit the four countries of the European Free Trade Union, but will also benefit any other country equally in the future.

Take, for example, the commitments that the government of India has taken to amend patent law by strengthening the rights of patent holders. The chapter on Protection of Intellectual Property says, “no party shall require patent owners to provide annual disclosures of information concerning the working of a patent.” In other words, patentees would no longer be obligated to disclose whether their patented inventions are being commercially exploited in India, as required by the Indian Patent Act.

Such amendments of the key provisions of India’s Patent Act that help ensure access to medicines should have been avoided. The impact of this policy change on public health can be quite severe. When patent rights are strengthened, foreign pharmaceutical companies will tighten their control in the country’s market. This may have a negative impact on Indian generic companies, which could increase the prices of medicines in the domestic market. Most people in the country are unable to bear the burden of huge medical bills. What will happen to them if the price of medicines increases?

It is the duty of the government to protect the interests of the common man while implementing trade agreements, but, unfortunately, the government has compromised on peoples’ interests. The government should have protected citizens’ right to affordable healthcare, which the Supreme Court has interpreted as the right to life in several of its judgments, instead of compromising it through an FTA.

Biswajit Dhar is a former Professor at Jawaharlal Nehru University and presently a Distinguished Professor at Council for Social Development, New Delhi.

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