The recent letter from the parliamentary standing committee on commerce asking the government not to ink a free trade agreement (FTA) with the European Union (EU) till it assesses the impact of other FTAs on domestic industries has compounded some prevailing misgivings and perpetuated some continuing misunderstandings about such pacts. Many Indian companies - and some partly owned by non-European foreigners, such as Maruti - have also voiced concerns, saying they would be threatened by increased competition. Many argue that the negative aspects of free trade are more pronounced when a level playing field between the two parties is missing owing to a disparity in efficiency of production systems or other factors.
It is being loudly argued that, of the half a dozen trade agreements signed in the past decade, most have benefited the other party's producers more than they have helped India - or so is the interpretation of the big jump in imports that followed these agreements, one not matched by a commensurate increase in exports. The FTA that is being negotiated with the EU, which is by far India's biggest potential trading partner, is thus causing disquiet. Fears are widely disseminated that the government, in its bid to expedite its conclusion, is conceding more than it is getting in return. Various concerns have been expressed on behalf of farmers, dairies, workers and a wide range of industries.
The problem is that this misses the essential point about FTAs. Since most of these anticipated detrimental consequences of freer trade are primarily caused by domestic sectors' lack of competitiveness, these accords are actually an important opportunity for domestic industry to put its own house in order and increase efficiency. Liberalised external trade does open up Indian markets to foreign suppliers, but it also allows domestic industry to better understand the global marketplace. It provides domestic sectors with easier access to capital goods and services to align their operational proficiency with global standards. Further, it will help increase pressure on a complacent government to reform in such a way that doing business in India becomes easier. And consumers, of course, will benefit from increased competition as well as from cheaper imports of a wide variety of products.
