India is increasingly emphasising on a self-reliant economy.
In this context, forging stronger ties with the European Union (EU) region could help India strengthen manufacturing and revitalise exports.
What is the priority now?
The Atmanirbhar Bharat programme and the Budget 2021-22 have called for bolstering supply chains and achieving self-reliance.
A self-reliant India, however, cannot be economically insular.
Realising the vision of a self-reliant India would entail localising an increasing share of value added along supply chains.
This has to happen with investments and phase-wise reduction of import tariffs with strategic partners such as the European Union (EU).
How is India’s export potential?
India has an untapped export potential of $39.9 billion in the EU and Western Europe.
The top products with export potential include apparel, gems and jewellery, chemicals, machinery, automobile, pharmaceuticals and plastic.
India benefits from tariff preferences under the EU’s Generalized System of Preferences (GSP) for several of these products.
In fact, India is among the major beneficiaries of the EU’s GSP.
India’s exports under the GSP valued at nearly $19.4 billion in 2019.
This accounted for nearly 37% of India’s merchandise exports to the EU.
What are the emerging challenges?
There are several products where India has export potential in the EU.
But these have “graduated” or are at the brink of “graduation” under EU GSP.
Product graduation applies when average imports of a product from a beneficiary country exceed 17.5% of EU-GSP imports of the same product from all beneficiary countries over 3 years.
Some of India’s exports are already out of the ambit of EU-GSP benefits.
These include products such as textiles, inorganic and organic chemicals, gems and jewellery, iron, steel and their articles, base metals and automotives.
There is also a likelihood of losing EU-GSP benefits in other categories such as apparel, rubber, electronic items, sports goods and toys due to product graduation.
In apparel, India’s exports to the EU were valued at $7 billion in 2019, of which nearly 94% was under EU-GSP.
This shows the impact that the graduation may have on apparel exports.
Meanwhile, India’s competitors in apparel exports such as Bangladesh would continue to receive tariff benefits in the EU under ‘Everything but Arms Initiative’.
Another competitor, Vietnam, concluded a free trade agreement (FTA) with the EU in 2019.
So, there is clearly a declining preferential access and the plausible erosion of competitiveness in the EU market.
So, India strongly needs to deepen trade and investment ties with the EU region.
What should the approach to FTAs be?
India’s negotiation for a Broad-based Trade and Investment Agreement commenced in 2007.
But this is yet to materialise due to lack of concurrence in areas like automotives and dairy and marine products.
India’s cautious approach to FTAs derives from its past experience of an unequal exchange of benefits in several FTAs signed by the country.
Therefore, a thorough assessment of the benefits from FTA for domestic producers is warranted.
There should be due consideration to the impact on sensitive sectors.
Possibility of inclusion of safeguards such as sunset clause on concessions for some items should also be considered.
Further, there should also be provisions for aspects such as investment and non-tariff measures (NTMs).
China has already negotiated a comprehensive agreement on investment.
India also needs to negotiate on investment-related aspects with the EU to enhance bilateral investments.
It should foster stronger value chains especially in technology-intensive sectors in which the EU has a comparative advantage.
As far as NTMs are concerned, India faces as many as 414 NTMs in the EU, in a wide array of sectors.
FTAs have some institutional arrangements for NTMs.
India should critically review the availability of such arrangements in its negotiations, as also their operationalisation and effectiveness.
What is the favourable way forward?
Post-Brexit EU finds itself in the midst of a growing need for recalibrating ties with its partner countries.
So, forging stronger ties with the region through a mutually beneficial agreement could help strengthen Indian manufacturing and revitalise the exports.
