Safeguards in FTAs sought

India must incorporate special provisions for the chemical, petrochemical and textile sectors in its free trade agreements (FTAs) with other countries as a steady decline in tariffs in these sectors is exposing domestic players to unfair competition, says a draft report on FTAs prepared by the Indian Institute of Foreign Trade (IIFTA).

"The steady decline in tariffs is exposing the disadvantaged textile, chemical and petrochemical industries in India to unfair competition. Such economic disparities must be addressed while preparing the blueprint

for FTAs," says the report, titled 'India's approach to FTAs'.

According to the report, one of the major impediments to allowing free flow of imports into India is the distorted and incomplete value-added tax (VAT) structure in India which exposes industry to unfair competition.

Existing local levies such as sales tax and octroi are not fully countervailable when imports arrive into India.

"India should be extremely careful while signing any tariff concessions through these FTAs until the VAT system is complete," it suggests.

Citing the instance of naphtha, the principal feedstock for a large number of chemicals including petrochemicals and synthetic fibres, the report says, "The import duty on naphtha is 10 per cent. The import duty on crude oil, from which naphtha is produced, is again 10 per cent. Under such circumstances it is difficult to imagine how FTAs will benefit the entire chemical sector where the total domestic investment is over Rs 60,000 crore".

The draft report has also warned that the China-Association of South East Asian Nations (Asean) FTA, if it materialises by 2010, could have repercussions on the Indian economy.

"The possibility of Chinese products coming into India through Singapore cannot be denied," it says.

The report says China's emergence as a global manufacturing base has resulted in most Asean economies experiencing a severe hollowing out of their industries. China is the world's biggest producer of crude steel, accounting for 15 per cent of the world output. With a 23 per cent market share, it is also a leading manufacturer of synthetic textiles.

Referring to textiles, the report says the product has been treated differently in almost all the FTAs, as this is a very sensitive sector in most countries.

"In the context of India, the sensitivity is much higher, as the employment in the textile sector, both direct and indirect, is reportedly over 20 million. In view of this, we need to have more stringent rules of origin and safeguard provisions for the textile chain," the report adds.