India needs to actively encourage Foreign Direct Investment (FDI) in Petrochemical sector rather than Free Trade Agreements (FTAs) to utilize India's growing demand to create value within the country rather than outside, noted a latest update from FICCI. As India's demand is expected to steadily grow in the foreseeable future, it can be an engine for creating new employment opportunities in the country if foreign participation in India is through the FDI route rather than the trade route.
The organization noted it in a white Paper titled Impact of Free Trade Agreements on Indian Petrochemical Industry. Despite being an enabling industry, the petrochemical industry in India is subjected to certain structural disadvantages which inhibit its competitiveness. Factors like high cost of capital, lack of adequate infrastructure, place domestic petrochemical manufacturers at a significant disadvantage compared to their counterparts elsewhere.
In the past few years, India has concluded and operationalized FTAs with various countries. However, majority of the agreements concluded by India have not benefited the Indian chemicals and petrochemicals industry. The focus of these agreements had been reduction / elimination of tariff without adequate attention paid on other factors impacting trade. As a result, in most of the cases, Indian export to these countries had gained relatively less as compared to import thus widening the trade gap.
The threats from FTAs have a multi-dimensional adverse impact on the domestic petrochemical sector for items which are currently being imported. While demand-supply gaps exist for key petrochemicals in the country, domestic investors are skeptical of investing in India as these gaps are being fulfilled by trade partner nations. Tariff concessions on FTAs may jeopardize the financial viability of the new investments
made in petrochemical industry.
The paper further recommended constitution of a permanent FTA Regulatory Board headed by a senior government official. The board will be entrusted with the responsibility of reviewing existing FTAs taking into account the sectoral sensitivities and formulating the approach for FTAs under negotiation. The board necessarily needs to have representation from the industry to provide a holistic view.
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Petrochemical industry is an "enabler" industry which is used in virtually all sectors of the economy including agriculture, infrastructure, healthcare, automobile, packaging with present capacities of more than 40 million MT, which is comparable to any major sector in the country. It contributed to nearly 2% to India's GDP in 2017. Considering the vital role played by the petrochemical industry in economic growth and development, it is proposed that petrochemical industry be designated as a "core industry" and accorded the importance it deserves.
India should carefully evaluate tariff rationalization of free trade agreement before getting into any proposed negotiation, as liberalizing trade against major exporters and established industries will enable partner nations to gain preferential access to the Indian market. Hence, FTAs should be signed keeping in mind, the preferential access of domestic industry to foreign markets and various products and services of high export potential.
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