Are India's existing FTAs as detrimental to its interest as RCEP?

The basic building bloc of the proposed RCEP - the Asean FTA - continues to be one-sided

The government has claimed that other nations' insistence on tariff removal and access to India's vast untapped domestic market, without offering anything in return, ultimately forced India out of the Regional Comprehensive Economic Partnership (RCEP) deal. But New Delhi's existing trade deal with the Association of Southeast Asian Nations (Asean) bloc, on which RCEP is based, shows these aren't new complaints, say experts.

The Asean-India Free Trade Agreement (AIFTA) with the 10-nation Asean bloc came into effect on January 1, 2010 amid much fanfare. "It was India's second deal with a regional bloc and Prime Minister Manmohan Singh was confident of its success as a trade deal, given that India's manufacturing base is larger," says senior trade policy expert and professor at Jawaharlal Nehru University Biswajit Dhar. He had worked on the deal and said Manmohan was sure it would become a diplomatic success as well, since the bloc was an integral part of his government's 'look east' policy.

The first such deal - South Asian Free Trade Area - between the fledgling economies of the South Asian Association for Regional Cooperation grouping in 1993, had consistently given handsome trade surpluses to India owing to its manufacturing footprint and geopolitical clout in the region. However, ease of doing business had expanded across the borders to the extent that as of 2019, it is mostly in the news for nations re-routing their restricted goods through the bloc to India. A case in point is Malaysian palm oil, which the domestic edible oil industry claims was being shipped through Bangladesh and Nepal to circumvent New Delhi's move to stop imports of the commodity from that country.

But the Asean deal was expected to be much more beneficial to India as middle-income nations across the region were expected to grow fast and needed a steady source of industrial and consumer inputs. However, India's exports to Asean took a hard knock as the bloc continued to drift towards China, having inked a similar deal with Beijing back in 2002.

Devil in the details

Under the initial agreement, Asean member states and India agreed to open their respective markets by progressively reducing and eliminating import duties on 76.4 per cent of all goods. Back then, India had offered around 9,000 products for the complete elimination of tariffs, excluding about 10 per cent of its exports from tariff reduction. Experts have pointed out that Thailand, the Philippines, Myanmar, Brunei and Vietnam have excluded more of their exports as compared to India.

However, old Commerce Department hands believe the deal has been instrumental in connecting Indian businesses to their South-East Asian counterparts and failed solely because of poor logistics. "China has the South China sea strategically straddling the region, whereas India has to cover two countries just to reach the nearest nation in the grouping," a senior foreign affairs ministry official said.

Exports to the Asean nations stood at $37.4 billion in 2018-19, up by nine per cent from the previous year. Imports, on the other hand, were much higher at $59.31 billion, rising by 25 per cent from the previous year’s $47.13 billion. Official data shows that sectors where trade deficit had worsened account for 75 per cent of India’s exports to Asean, while trade-surplus sectors have shown only a marginal improvement in certain areas. Figures from the last Budget showed India’s revenue foregone because of the trade agreement with Asean has more than doubled to nearly Rs 26,000 crore in 2018-19.

“The government would critically analyse a wide number of tariff lines while discussing future revisions to the deal and industry bodies may be asked to provide their inputs,” a senior government official said, referring to the ongoing exercise to review the agreement in full. Industry bodies have also pointed out that India has RTAs separately with Malaysia and Singapore, even as they remain part of the broader AIFTA, forcing the domestic market to reduce import tariffs further.

While India has recently secured contracts to send refined petroleum to Singapore, critics have argued for long that New Delhi did not rectify its skewed deal, fearing Singaporean investors would move away. The tiny city-state is India's second-largest source of Foreign Direct Investments (FDI), totaling $88 billion since 2000.

On the other hand, internal studies at the Commerce Department showed that palm oil, crude, plantation products like rubber and mining goods from Malaysia have continued to enter the Indian market at preferential rates.

Inherent aversion to FTAs

According to a study by the NITI Aayog, the utilisation rate of regional trade agreements (RTAs) by Indian exporters remains critically low at 5-25 per cent. "The lack of awareness about available benefits remains endemic among a large section of exporters. However, successive governments have also failed to systematically approach the issue. Other economies generally ask their industries to push out goods in certain sectors, evaluating a relative advantage," said Ajay Sahai, Director General of the Federation of Indian Exports Organisations.

All this has led to calls for a more stringent review of existing FTAs with South Korea and Japan, which haven’t been able to reduce India’s trade deficit with them. "Following the AIFTA, the trade deals with Japan and Korea are currently India's biggest trading arrangements. India’s tariff rates have declined from 11.4 per cent to 7.5 per cent for the FTA with Japan, and from 11.1 per cent to 8.3 per cent for the Korean FTA. This has had implications for the domestic industry," the NITI Aayog study said.

Subsequently, the government started reworking tariffs since 2018, when it raised tariffs on an unprecedented eight separate occasions. More than 700 products across six categories, including electronics, textiles and machinery, saw duties being hiked.

An analysis by online resource databank South Asia Monitor recently showed that import duties on manufactured products have risen from 11 per cent in 2017 to 14 per cent on average in 2018. For agricultural commodities, the hike has been from 33 per cent to 39 per cent during this period.

The state of India's largest trade deals : Imports leap while exports crawl
Trade deal	Exports in first year	Exports in 2018-19	Absolute growth*	Imports in first year	Imports in 2018-19	Absolute growth*
Asean (2009-10)	18.1	37.4	19.3	25.7	59.3	33.6
Singapore (2005-06)	5.4	11.5	6.1	3.3	16.2	12.9
Malaysia (2010-11)	3.8	6.4	2.6	6.5	10.8	4.3
Korea (2009-10)	3.4	4.7	1.3	8.5	16.7	8.2
Japan (2010-11)	5.0	4.8	-0.2	8.6	12.7	4.1
Figures in $bn; * At current prices unless indicated; Source: Commerce Department