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After hectic last-minute negotiations, India and the four-nation region of EFTA (European Free Trade Association) have come together in the newly inked Trade and Economic Partnership Agreement (TEPA). The negotiations took 16 years, resulting in a great deal of interest in what it finally contained.
How India would balance its tariff reduction commitments with countries that have no tariffs on a large swathe was a question that was being looked at with interest. India’s free trade agreements (FTA) have primarily covered only tariff reduction. Since India’s customs tariffs are the highest amongst all of its trading partners, the mercantilist formula of calculating benefits obtained versus that granted basis tariff reduction commitments was never going to be in India’s favour.
EFTA to boost foreign investment in India
It is in this perspective that TEPA is unique. In exchange for significant tariff reduction, the EFTA countries will work towards increasing foreign direct investment in India by private investors of the EFTA states by $50 billion within 10 years from the entry into force of TEPA. There will be an additional $50 billion investment in the succeeding 5 years. Further, in the same period of 15 years from the entry into force of TEPA, the four European countries will also aim to facilitate generation of 1 million jobs in the form of direct employment stemming from the foreign direct investment made.
This investment promotion provision has been questioned on its feasibility. Examination of an investment promotion commitment in a trade agreement may be attempted from two perspectives –economic and legal. Whether the economics of the participants enable such a commitment and legally what else should be included.
Investment eligibility, protection
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To count as eligible investment, it must be private direct investment. The investments routed from outside the EFTA bloc will also be taken into account, if it is shown that the investment is being made by investors of Switzerland, Lichtenstein, Iceland and Norway. Whereas investments coming from these countries of other parties that are either not established in an EFTA nation or are established in an EFTA country but have no substantial business activities in either of the four countries will not be considered as an EFTA investment. The agreement provides for review of the investment commitments and a three-tier government-to-government consultation process. However, if no mutual solution is arrived at by the parties, then India can undertake temporary and proportionate remedial measures to rebalance the concessions given to the EFTA States in the Schedule of Commitments for the Goods Trade. An investment protection agreement will also be finalised.
Amongst other recent international agreements, the Regional Comprehensive Economic Partnership (RCEP) has provisions that deal with investment promotion and investment facilitation. This provision does not have investment targets but stresses on facilitation of investment and lays down the administrative provisions with a focus on procedure for investment approval, setting up points of contact and a complaint mechanism to deal with issues related to the investment. RCEP includes provisions that bind liberalisation at the status quo levels but also binds parties to any autonomous liberalisation that they may introduce at a later point. However, in the EU-Kenya FTA, which was inked in December 2023, also includes investment promotion and lists down the areas in which the parties would promote investments. These include enhancement of institutional capacities, supporting the establishment of one-stop shops, supporting establishment of financial frameworks for SMEs, etc. Arguably, the provisions in the TEPA go a lot farther by tying down the EFTA countries to a binding number.
Catalyst for innovation, growth
In calculating the $100 billion in investment commitment, it has been noted that during the past few years India has achieved gross domestic product growth at 9.5 per cent in US dollar terms. Private direct investment from EFTA has hit 13 per cent growth rate. On this basis a growth rate of 3 per cent is what is required to hit the $100 billion target over 15 years. Put in these terms the commitment does look feasible. Currently, the investments made by EFTA companies stand at around $11 billion, with 91 per cent of this coming from Switzerland alone.
EFTA nations are some of the most open: Switzerland had a trade openness of 76 per cent in 2023 and Norway had 56 per cent. The TEPA can be the vehicle to usher in a new wave of investments in cutting-edge, sunrise and innovative sectors. For example, Norwegian company Statkraft's existing ventures in hydropower and green hydrogen projects with Deendayal Port Authority are noteworthy. Looking ahead, companies like Greenstat and Alma Clean Power could offer expertise crucial for India's green transition. India can also learn from the country’s strength in carbon capture and storage technologies. As for Switzerland, more than 300 companies are already present in India. Swiss investments and capabilities in robotics, automation, and precise instruments could speed up India’s industrial transformation and companies like Tomra and Cambi could contribute significantly to India’s waste management and SDG-related growth.
In a way this agreement is coming at the right time to test India’s recent initiatives. Given the pressure to meet their investment commitments, EFTA nations are more likely than not to fairly evaluate them. It will be interesting to see in what form does this provision gets included in the EU and UK FTAs.
(Sen is partner, tax and economic policy group at EY India. Sandhu is manager –tax.)
Disclaimer: These are the personal opinions of the writers. They do not necessarily reflect the views of www.business-standard.com or the ‘Business Standard’ newspaper
Disclaimer: These are the personal opinions of the writers. They do not necessarily reflect the views of www.business-standard.com or the ‘Business Standard’ newspaper
