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The EU-India FTA (free trade agreement) negotiations have been ongoing for more than nine years. The two-way trade in goods stood at $98.5 billion in 2014-15, and India received $24.91 billion in FDI equity inflows from the European Union (EU) between April 2012 and May 2015. The EU has been India’s largest trading partner and the two-way trade is likely to swell significantly if the parties could firm up the long-pending FTA, officially called the Broad-based Bilateral Trade and Investment Agreement (BTIA).

Negotiations for an ambitious and broad-based FTA were launched in June 2007; after 12 formal rounds and several technical meetings and discussions, these were brought to a de facto standstill in the summer of 2013 due to a mismatch of the level of ambitions and expectations. Negotiations focused on market access for goods (to improve coverage of offers on both sides), services, a meaningful chapter on government procurement and sustainable development. Discussions have resumed since January 2016, with the purpose of assessing whether sufficient progress can be made in key outstanding issues before formally resuming negotiations.

At the EU-India Summit of March 30, President Jean-Claude Juncker of the European Commission took a clear stance in favour of tangible progress in the negotiations, provided there is movement on outstanding issues. In recent past, the EU considered the need to build strategic relationship with emerging economies in trade and investment under its vision “A strategy for smart, sustainable and inclusive growth — Europe 2020.” India has a lot to gain from an FTA with the EU, particularly in regard to preferential and duty-free access to the European market. However, it is evident that the negotiations have been tedious and the path to finalising the FTA is fraught with difficulties, given India’s high trade-related regulatory barriers and partial access to a few services sectors like professional services, financial services and government procurement.

There are key contentious issues. India wants the EU to give it greater market access in the services (especially Mode 4) and pharmaceuticals sectors, provide data secure nation status (beneficial to India’s IT sector) and liberalise visa norms for Indian professionals. On the other hand, the EU wants India to overhaul its financial sector, cut taxes on wines and spirits, reduce tariff on the dairy sector and create a stronger intellectual property regime and reduce duties on automobiles. With regard to the financial sector, the EU has requested for various regulations pertaining to bank branches, numerical quotas, foreign ownership, equity ceilings, voting rights and investments by state-owned companies in foreign banks in India removed, among other changes. Whether India can summon the political will to satisfy European demands is difficult to determine.

The negotiations have reached a roadblock on the question of whether the EU will liberalise its visa regime for Indian professionals. India’s demographic advantages have provided it with a skilled, competitive, English-speaking workforce, of which Europe will be lacking in the near future. Considering this, India places considerable importance to Mode 4 liberalisation. Mode 4 refers to the delivery of a service within the territory of a member with the service provider being present as a natural person. In essence, this enables free movement of individual professionals by committing to measures such as relaxation of immigration norms. Europeans, however, have been unable to take on a consolidated position on the matter, which is subject to individual immigration policies of member states rather than of the EU as a whole. It is highly unlikely this issue will be resolved soon unless both sides reach an amicable compromise.

High customs duties on European products such as automobiles and alcohol remain key issues. The Indian automobile industry is apprehensive about its level of competitiveness due to high costs of inputs, the rupee’s depreciation and the cascading effects of various taxes, apart from the economies of scale the EU auto industry enjoys. The IPR provisions in India-EU draft FTA also raise concerns as they will limit the capacities of both India and the EU to use public health safeguards and flexibilities allowed in WTO’s TRIPS Agreement. In addition, negotiations are stuck on the issue of Indian policy on government procurement. India considers government procurement a sensitive issue from a development perspective and is reluctant to make changes in its policy.

The importance of signing the India-EU FTA is immense. Against the backdrop of the changing global trade architecture, with world trade shifting towards mega trade pacts such as the TPP and TTIP, away from the MFN route, it is imperative for India to sign the FTA with the EU at the earliest. However, India has been going slow on RTAs and FTAs, as the earlier trade deals that India signed with Japan and Korea have not yielded expected results and, in fact, there has been a decrease in trade with these countries after the signing of agreements. India is seriously analysing its FTA policy, though it is fully aware of the consequences of being isolated on the global trade front if it does not act swiftly in concluding some of the FTAs pending for long.

Unfortunately, despite talks of a potential revival of the stalled EU-India FTA, the chances of it getting signed remain grim. Blockages in India’s tariff and non-tariff barriers policy and EU’s reluctance to open doors to Indian professionals in the IT sector will be hard to overcome. This FTA needs political will from both sides.

A practical solution is to find a midway wherein both the partners can relent on certain issues. For instance, India need not worry about giving access to the European automobile industry, as the Indian automobile sector is hugely competitive and has sufficient demand from within the country. Similarly, the Indian dairy sector should be able to cope with reduction of tariffs on dairy imports from the EU. For the FTA to become a reality by the end of the year, India has to adopt a flexibility approach and iron out differences on crucial issues.

This commentary originally appeared in The Financial Express.

Geethanjali Nataraj
4 July 2016

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