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In deficit terms

Corporate India has to live in an open world. It must make trade treaties work to its benefit, writes N. Chandra Mohan.

india Updated: Oct 08, 2009 22:25 IST

‘Chinese dragons don’t breathe fire and don’t have wings,” stated a foreign ministry official in Beijing amid a growing sense of urgency to shift the focus from the disputed Indo-Chinese border to business. Closer engagement between India and China is a historic necessity. Boosting trade deserves priority as two-way volumes touched $52 billion last year. But further growth is not inevitable without sustained efforts and right policy choices, argued India’s ambassador to China in his speech to a seminar organised by apex business chambers, the Federation of Indian Chambers of Commerce and Industry (Ficci) and the China Council for the Promotion of International Trade (CCPIT).

Forging a mutually-advantageous free trade agreement (FTA) might be one such policy choice, but is extremely controversial. India Inc is edgy regarding such an agreement as booming bilateral trade has been accompanied by large and recurring trade deficits. Its concerns are that the bilateral deficit reflects the dragon’s non-transparent pricing mechanism and massive hidden subsidies. The Chinese yuan is also undervalued. For such reasons, India has been reluctant to grant market economy status to China, which is a necessary building block for an agreement.

Unfortunately, a fast-globalising India Inc doesn’t exhibit greater self-confidence with the FTAs that the country has signed with other Asian countries either or in the immediate neighbourhood. India has entered into a framework agreement for a bilateral with Thailand. A Comprehensive Economic Cooperation Agreement (CECA) with the city-state of Singapore is already operational. An economic partnership agreement with South Korea was signed last month. A week later, an FTA with the Association of Southeast Asian Nations (Asean) was inked.

Most, if not all, of these agreements face domestic opposition, including from the ruling Congress Party, segments of which feel that such FTAs don’t translate into electoral support in states like Kerala. The latter has a vibrant plantation economy and fears are rife that it might be impacted adversely by such trade deals, despite the prime minister’s recent promise of supporting modernisation of the state’s plantation industry. Domestic manufacturers, for their part, distrust these bilaterals due to the handicap of inverted duty structures where the duty on the finished product is lower than on raw materials. This acts as a disincentive as finished products can be imported at lower duties.

To be sure, economists are sceptical whether these FTAs have anything to do with free trade. Far from it, as they form an unruly mass of crisscrossing strings that Professor Jagdish Bhagwati of Yale University called a “spaghetti bowl” that hampers rather than facilitates free trade for those left out. Even if these are considered second-best options to a multilateral World Trade Organisation trade agreement, the basic point is that India is unlikely to derive much benefit from them if there is a sense of ambivalence regarding the potential gains among stakeholders like farmers and India Inc.

India Inc’s diffidence has been fueled in large measure by the skewed trade balance in favour of Thailand after the FTA came into effect in September 2004. Much of the gains have, in fact, accrued to Thailand for the 82 items that secured tariff concessions under the Early Harvest Scheme (EHS), which includes items like colour picture tubes, auto parts and electronic goods. From 2004-05 to 2007-08, Thailand's exports to India under EHS tripled to $470.5 million while India’s exports to Thailand rose by only 87 per cent to $90.7 million.

This bilateral trade pattern marks a sharp reversal from an earlier situation when India registered an overall trade surplus with Thailand till 2004-05. Under these circumstances, doubts are being fanned whether such agreements benefit India. Apex chambers like Ficci noted that in Thailand power was cheaper. Cost of capital, too, is lower. Inputs like glass parts for colour TV picture tubes can also be imported duty free while they attract a duty of 15 per cent in India. Unless these disadvantages are corrected, imports from Thailand will surge while India’s exports languish.

India Inc has similar concerns over the CECA with Singapore and fears that foreigners (read: China) will misuse such agreements as a staging ground for cheaper exports to India. It considers the city-state to be mainly a trading rather than a manufacturing hub, although it hosts 7,000 plus MNCs. Although the CECA allays these concerns with clearly laid-out rules of origin norms, Indian industry’s doubts nevertheless persist although there are huge potential gains from using Singapore as a base to expand in Asia.

Domestic opposition persists against India’s FTA with Asean although it might well result in a boom in bilateral trade that can easily cross $50 billion by 2010. Asean’s GDP of $1.5 trillion is not very different from that of India’s GDP of $1.2 trillion. The FTA is bound to open a huge market for our goods. India can benefit from services trade with Asean. This FTA, thus, is likely to be our most ambitious trade agreement as it will spur India Inc’s drive eastwards.

The upshot is that so long as we have a defensive mindset in trading off long-term benefits with short-term costs, we cannot leverage these FTAs. A closer engagement with the dragon on trade is unlikely. Neither is an economic partnership with South Korea if there is ‘Seoul Searching’ due to fears of a surge in auto part imports from that country. Indian business must be ready for a greater degree of openness to benefit from trade agreements.

N. Chandra Mohan is a Professor of Economics and International Business at the IILM Institute for Higher Education

The views expressed by the author are personal