India is seeing a growing imbalance in its trade with Asean, Japan and South Korea because its businesses have been failing to take full advantage of free trade agreements. Low awareness among businesses of the potential of FTAs is one reason, and the government has decided that education is the answer.
The Commerce Ministry has been organising outreach programmes across the country to tell entrepreneurs about how to utilise FTAs to increase their exports as well as imports for value addition.
The programmes are being organised in association with Confederation of Indian Industries (CII), Federation of Indian Chambers of Commerce & Industry (FICCI) and Federation of Indian Exports Organisations (FIEO). Two sessions have been held in Kolkata and Bengaluru (Bangalore), the capitals of West Bengal and Karnataka states respectively. Four others are scheduled between now and Feb 27 in Indore, a mega city in Madhya Pradesh; Hyderabad, the capital of Andhra Pradesh; and Vadodara, an industrial city in Gujarat.
The Commerce Ministry felt compelled to act after it reviewed India's performance with respect to some of the FTAs the country has entered. They included the India-Thailand Early Harvest Scheme (EHS), India-Singapore Comprehensive Economic Cooperation Agreement (CECA), India-South Korea Comprehensive Economic Cooperation Agreement (CECA), India-Asean Trade in Goods (TIG) Agreement, India-Malaysia Comprehensive Economic Cooperation Agreement (CECA), and the India-Japan Comprehensive Economic Partnership Agreement (CEPA).
A separate analysis was carried out by the National Centre for Trade Information (NCTI) and the World Trade Organisation (WTO) on trade in products for which preferential tariffs exist under the India-Asean, India-Japan and India-Korea trade pacts.
The analysis looked at the composition of exports and imports using the Comesa (Common Market for Eastern and Southern Africa) classification. It noted that imports of intermediate and capital goods were in line with expectations where preferences had been granted while imports of consumer goods registered no significant increase. This showed that India was yet to become a supplier of raw material.
According to an FTA impact paper prepared by the Commerce Ministry and seen by Asia Focus, though preferential imports increased in the last five fiscal years (2009-10 to 2013-14) they were still not very significant.
They ranged between 3.4% of total imports under the India-Malaysia agreement to 22.4% of imports under the India-Japan pact in 2013-14. This is a clear indication that preferential imports under the FTAs have not contributed to the increase in trade deficits with some markets, particularly Asean, Japan and Korea.
There was a time when the prevailing view in the Commerce Ministry was that the FTAs were detrimental to Indian interests. However, now it has been found that more than 80% of the imports took place without India's partners having applied for FTA benefits. The impact paper concludes that the utilisation rate of FTAs by Indian entrepreneurs — exporters as well as importers — is dismal.
The outreach programmes are expected to create an enabling environment for proper utilisation of the FTAs. As well, they are expected to encourage small and medium enterprises to increase exports, emphasise imports for value addition, and also encourage Indian industrialists to invest outside of the country.
"The objective is to reach out to all stakeholders, explain the rules, regulations and procedures to them and let them flag the problems," Pranav Kumar, director of international trade policy in the CII, told Asia Focus. The outreach programmes would also explore ways to attract investors from outside to manufacture in India, he added.
Commerce Ministry officials, speaking on condition of anonymity, said one factor that could improve utilisation of FTAs was better price competitiveness by Indian industries. They say the country has been losing price competitiveness in some traditional strengths such as textiles, clothing, leather, engineering, machinery and other industrial products. The officials said the causes included "weak trade-related physical infrastructure", "deficiencies in customs procedures and trade logistics", "inadequate communication infrastructure" and "lack of a uniform system of indirect taxes".
Price competitiveness in agriculture and processed products, gems and jewellery and base metal products, on the other hand, has increased in recent years.
The officials said India's reasons for entering into FTAs with other countries were diversification and expansion of its exports, access to raw materials, intermediate products and capital goods for stimulating value-added domestic manufacturing.
They claimed that the FTAs with Asean, Japan and South Korea were also a part of geopolitical strategy and a perfect fit with the "Look East" policy. The trade pacts are expected to provide more foreign investment which would help expand manufacturing in the country and thereby generate new employment opportunities.
Besides the goods FTA with Asean, which has been in effect since January 2010, India has signed a services and investment FTA with Asean. It has already been ratified by four of the 10 Asean members and is expected to take effect by July this year.
Indian exports declined in December last year after registering healthy growth for most of the current fiscal year that began on April 1. Exports in December 2014 were worth $25.4 billion, down 3.8% from $26.4 billion in the same month in 2013. As a result, the country will need to export products worth $33 billion every month for the remainder of the fiscal year to achieve its target of $340 billion. Imports also declined in December 2014 by 4.78% in dollar terms compared with December 2013.
The trade deficit for the first nine months of fiscal 2014-15 was estimated at $110.05 billion, slightly higher than the deficit of $107.08 billion recorded in the corresponding period of 2013-14.