RBI objects to bilateral trade agreements

After political opposition to bilateral trade agreements, it is now the Reserve Bank of India that is raising the red flag on treaties signed by India.

But unlike the objection by the political class, including Congress president Sonia Gandhi, to bilateral trade agreements, the central bank's concerns are grounded in a the need for a more liberal regime for the banking and financial sector.

As part of India's strategy to offset the lack of progress in multilateral talks at the World Trade Organisation, the government embarked on a series of free trade agreements, whose scope was later expanded to services, investment and even bilateral tax treaties.

While a comprehensive economic cooperation agreement (CECA) has already been signed with Singapore, similar agreements are being negotiated with countries ranging from Japan to the European Union.

RBI's latest objections, according to sources close to the negotiations, pertained to the economic partnership agreement being negotiated with Japan. The central bank had earlier protested against concessions to Singapore.

In its discussions with the finance ministry, the RBI pointed out that the proposed EPA defeats the very purpose of WTO talks, aimed at a liberal services trade framework under the Doha round of negotiations.

Taking a cue in the financial sector, banking licenses for branches and subsidiaries are being granted to various countries on a reciprocal basis. Trade agreements, however, skew the arithmetic and discriminate the allocation of branches and licenses to one particular country. The whole purpose of WTO is being defeated in this sense, sources said.

The RBI is also of the view that there are many issues in the banking and finance sector which are yet to be settled in the comprehensive economic treaty with Singapore.

A case in point is the 10 per cent stake each acquired by Temasek and Government of Singapore Investment Corporation (GIC) in ICICI Bank. The issue has become a bone of contention in both the countries.

The RBI had agreed to consider them as separate entities, as an exception, contrary to its earlier position that both were are same entities. But these two funds have now urged the government to consider them as separate entities for future investment purposes as well.

While RBI is against this proposal, the issue is creating problems for Indian banks including ICICI Bank and State Bank of India in getting a qualified full banking (QFB) license to operate in Singapore.

The RBI has urged other countries such as United Kingdom, United States and Europe to show reciprocity in granting branch licenses to Indian banks as they expect a similar treatment from India.