The larger context

By writing to the government on the issue of free trade agreements (FTAs), and having the fact leaked to the media, Congress President Sonia Gandhi has certainly focused attention on the issue. Though her communications to the commerce and other economic ministries, as also subsequently to the Prime Minister's Office, do not suggest that she is wholly opposed to the concept of either FTAs or regional trade agreements (RTAs), the fact is that she has not endorsed them, either. Instead, she has focused on the potentially adverse impact of these FTAs on not just agriculture and farmers but on the manufacturing sector as well. This comes after the government has already worked out FTAs with key countries in the neighbourhood, including regional trading blocs; perhaps the Congress president had not focused on the issue earlier, or complaints about the impact of the FTAs have reached her. Equally significant, therefore, is the stout defence of FTAs by Prime Minister Manmohan Singh, who clearly has a different perspective on the issue. In his address at the Asian Development Bank's annual meeting in Hyderabad last week, Dr Singh was forthright in saying that the government would go ahead on FTAs with China, Japan, South Korea and the Association of South-East Asian Nations (Asean). Going a step further, he even looked forward to extending the free trade regime to all the major Asian economies, including, possibly, Australia and New Zealand as well.

Dr Singh is right on the larger picture, but Mrs Gandhi has a valid point on the detail. India's limited experience of FTAs with countries like Nepal, Sri Lanka and Singapore has not been devoid of problems. Sectors like edible oil, tea, coffee and pepper have felt the pinch of the FTAs, owing largely to the mismatch of third-country tariffs between India and the counterpart country, and the low value-addition specified in the FTAs for qualifying as a home-country product. This has sometimes allowed goods imported at zero duty from third parties by (say Nepal) to land in India without much value-addition, and therefore to harm domestic producers, who may have had to pay a higher duty on their component or raw material imports. Of course, one solution is to simply lower India's tariffs further, since they continue to be higher than in the surrounding region, as also the rest of the world.

The other issue is the one raised by Mrs Gandhi, regarding the ability of domestic sectors to withstand competition. Mrs Gandhi's suggestion that FTAs be carefully scrutinised before being inked is unobjectionable. The equally important point, though, is that such caution ought not to be stretched to the extent of appending long negative lists to FTAs. That would defeat the very purpose of an FTA. The larger point would be that Indian agriculture needs substantial protection against imported competition only because it has not seen the kind of reform programme that industry has gone through; Indian farm productivity standards are simply too low, and need to be improved. Why doesn't Mrs Gandhi write to the Prime Minister on that, and demand agricultural reforms?

Meanwhile, it should be kept in mind that the Doha round of negotiations is going nowhere, and may well be aborted""for the first time since these rounds began half a century ago. The future of today's relatively free global trading system is not in question, but further opening up may be possible only through bilateral and regional arrangements, and this perhaps explains why the Prime Minister has defended FTAs and RTAs so vigorously. Other countries have come to the same conclusion. Going by the World Trade Organisation's reckoning, the number of RTAs is approaching 300. Therefore, India cannot and indeed ought not to shun this path. At the same time, it should incorporate some safeguard measures on the lines of the ones that have already figured in WTO negotiations. Such an approach will provide the flexibility, sans the disadvantages of a rigid negative list, to tackle unexpected adverse outcomes following the signing of any FTA.