The objective of the General Agreement on Tariffs and Trade (GATT), 1947 and the GATT, 1994, which resulted in the formation of the World Trade Organisation (WTO), is to promote international trade by reducing or eliminating trade barriers such as tariffs or quotas.
One of the foundations of the GATT is the Most-Favoured Nation (MFN) treatment, which is enshrined in Article I of GATT. This Article provides, that customs duties imposed on the importation of any product originating in one country shall be immediately and unconditionally extended to the like product originating from any other member country of the WTO.
For example, if India imposes a basic customs duty of 20% on colour TVs, then the same 20% would apply to colour TVs imported from any country which is a member of the WTO. There are 164 member countries in the WTO, as on date. Thus, India cannot say that 20% will apply to imports from Country A, but it will be 40% for imports from Country B, if both A and B are members of WTO.
However, Free Trade Agreements (FTAs) between two countries (bilateral - for example, between India and Japan) or between one country and a territory (multilateral – for example, India-ASEAN) can provide for a customs duty lesser than the MFN rate (including 0%) for the said goods originating in one country or territory of the FTA and imported into another country or territory of the FTA.
Thus, the FTA is at variance with the MFN. However, this is permitted under Article XXIV of the GATT, 1994. Paragraphs 4 and 5 of the article are extracted below:
Thus, FTAs or Comprehensive Economic Cooperation Agreements (CECAs) or Regional Trade Agreements (RTAs), etc. are permitted by the WTO. Today there is a proliferation of such FTAs.
As of 2022, India has 13 such FTAs/ CECAs, covering more than 50 countries and a few more are under negotiation.
According to the WTO, as on 1 December 2022, there were 355 RTAs in force.
To be WTO-compatible, FTAs generally have specific rules of origin which are required to be satisfied for the goods to be eligible for the preferential tariff. The preferential tariff is extended in FTAs to goods which are wholly produced or obtained in one country and exported to another. It is also extended to goods that are not wholly produced or obtained in one country provided the value added in the exporting member is above a threshold of, say, 35-40% of the FOB value of the product and there are rules specifying how the value addition is to be computed. In addition, there may be product-specific rules of origin. There are also certification procedures for the issue of a Certificate of Origin (COO) and mutual cooperation and monitoring.
Initially, FTAs were generally for goods. In recent times, FTAs have become comprehensive and cover other areas, including services, intellectual property, electronic commerce, bilateral safeguards, investments, etc.
The last round of GATT trade negotiations – the Uruguay round – took eight years from 1986 to 1994 to conclude. Thereafter, the trade negotiations have not progressed like before. Thus, FTA/ RTA/ CEPA, etc. appear to be finding more favour for the growth of bilateral/ multilateral trade.
India’s economic performance - a standout amongst large economies, clocking GDP growth over 6%, remains a mixed bag with some vital signs showing stress, whereas some others displaying buoyancy.
The Goods and Services Tax (GST), the main-themed indirect tax, returned the highest-ever collection in April 2023 at USD 22.60bn, which augurs well for the new fiscal year (April-March). Additionally, April’s manufacturing index consisting of coal output, fuel demand, and auto sales showed the economy holding firm despite global headwinds. Fortunately, the decline in crude prices to below USD 80 a barrel has been critical in providing macro stability. The forex reserves are a shade under USD 600bn and likely to remain in the comfort zone for the next five to six years, with exports expected to pick up on the back of Free Trade Agreements (FTAs) augmenting the reserves.
On the other hand, the core output of key infrastructure sectors (i.e., coal, crude oil, natural gas, refinery products, fertilizers, steel, cement, and electricity), that carries a 40% weight in the Index of Industrial Production (IIP), is trending south. Another noteworthy statistic has been declining exports, dragged down by sluggish demand, manifested by the recession in major markets. While India’s goods exports shrank 12.7% in April, the trade deficit fell to a 20-month low at USD 15.2bn, mainly on account of cooling of oil prices. Government economists opine that macroeconomic stability, the cornerstone for a sustainable growth rate, is at perceived risk from El Nino-triggered drought conditions, geopolitical developments, and global financial turmoil.
Despite the inherent weakness, manufacturing and burgeoning infrastructure growth could be the drivers to push India to remain the fastest-growing economy over the next few years. The Government has prioritised investment through Production-Linked Incentive (PLI) schemes that have been expanded beyond the initial 14 sectors to include semiconductors and solar components.
Meanwhile, Foreign Direct Investment (FDI), for once, shows a downward trend, resulting in the first decline after a decade of y-o-y growth. The reasons attributable are funding winter on the back of unsustainable valuations and a broader credit squeeze in developing countries. While PLI schemes are leading investments in manufacturing for a broader basket of segments, including hardware, the gains are offset by declining investments in the software industry.
Prime Minister, Mr Narendra Modi’s cherished target for India to become a USD 5tn economy will be possible if the economy continues to grow at an average of 7.4% in real terms for the next four years. The expectations are that inflation will remain range-bound under 4% and the depreciation of the rupee limited to 2%. These parameters are ambitious and challenging, but achievable. There is also a heavy bet on the digital public infrastructure revolution and its impact beyond digital payments. Interestingly, several sectors and areas such as health, education, financial inclusion and agriculture, have benefited from digitalisation, improving transparency and accountability.
One of the present government's critical agenda items is signing FTAs with developed countries. The FTAs should facilitate India’s entry into the supply chain of multinational companies, which will also push exports significantly. The MNC pie represents nearly 50% of global exports. On the back of a strong FTA network, the Ministry of Commerce is hopeful that India will achieve USD 1tn in goods and services exports by 2030.
The latest population estimates show that India has surpassed China as the most populous country with almost 40% or 571mn young people (aged 20-44 years). The foremost question is whether India will reap the demographic dividend. In his Independence speech in 2022, the Prime Minister declared that India would achieve the ‘developed country’ status by 2047, the 100th year of its independence. To achieve this status, India’s income needs to grow at 9-10% and lose the tag of a low-income country. The Government will likely focus on seven to eight areas vital for the economy and human development. Small businesses will be a focus for job creation. Then there’s growth in manufacturing and exports. Agro, food processing and capital expenditure will also get attention, as will the ease of doing business and women’s labour force participation.
To realise the high ambition set by the Prime Minister of achieving long-term economic goals and uplifting the lives of the average Indian, a multiplicity of factors, such as good governance, a stable economic environment, the critical role of policy-making and reforms, complemented by substantial investment by the private sector, among many others, have a pivotal role to play. It is the pursuit of a full agenda that will help India realise its ambition to become a developed nation by 2047.
Between 30 March 2023 and 29 May 2023, around 81 M&A deals were announced of which 48 M&A deals were closed. The aggregate value of deals announced was USD 1,820.04mn; dominated by 59 domestic deals (USD 1,541.89mn) and 22 cross-border deals (USD 278.15mn).
In terms of sectors (considering only closed deals), the Telecommunication Services sector saw deals worth USD 100mn followed by the Consumer Discretionary sector with deals worth USD 65.65mn and the Materials sector with deals worth USD 37.8mn.
The strategic advantages of entering into Free Trade Agreements (FTAs) have resulted in the Government focusing on concluding FTAs with critical trade partners.
In the recent past, the Indian Government has reset its approach to trade, by focusing on entering into FTAs with various trading partners to promote bilateral trade. Once India decided to opt-out of the Regional Comprehensive Economic Partnership (RCEP), the focus shifted to FTAs.
It is relevant to note that the FTAs not only deal with various customs duty concessions, but also focus on various other aspects to promote trade in goods and services, such as the grant of visas, opening up of relevant sectors, removal of non-tariff barriers and ease in procedural requirements, etc. The approach of entering FTAs with important trade partners allows the Government to adopt a calibrated approach to prioritise the trade deals which can maximise the potential of the country’s trade while supporting the developing sectors of the economy with a gradual opening-up. This has resulted in the Government focusing on concluding the FTAs with important trade partners, some of which have been under discussion for a long period.
In the year 2022, India operationalised two FTAs, i.e., the Comprehensive Economic Partnership Agreement (CEPA) with the UAE and the Economic Cooperation and Trade Agreement (ECTA) with Australia.
The positive impact of the India-UAE CEPA on bilateral trade was evident from the fact that the exports from India to UAE registered a growth of 8.5% y-o-y, as compared to general growth in exports excluding the exports to the UAE, which was 3.1% for the period of May 2022 to March 2023 (i.e., after CEPA came into effect). Considering that it has only been about five months since the ECTA with Australia came into effect, the data to gauge the impact of the ECTA on Indo-Australia trade is not yet available, although the sentiments are positive.
Presently, India is in active negotiations for the FTAs with the UK, the EU and Canada. The status of negotiations of each of these FTAs is as under:
In addition to the above, negotiations for the India-GCC FTA should commence soon, apart from re-initiating negotiations for the India-Israel FTA.
With ‘Make in India’ – An initiative by the Government of India to promote the country as the most preferred global manufacturing destination, gaining momentum, the industry needs to maximise a multitude of opportunities available under the FTAs. The industry should also adequately present to the Government, the areas of importance for negotiating future FTAs with respective trade partner/s. The Government in turn should ensure stability in norms and incentives to augment investments in India and mutual cooperation with the trading partners.
As part of the ‘Make in India’ initiative, India has set an ambitious export target of USD 2tn by 2030. Pursuant to the disturbances caused in global trade due to the COVID-19 pandemic and the Ukraine conflict, the Indian Government sought to capitalise on emerging opportunities by enhancing manufacturing facilities in India and being an important part of the alternate supply chains. The increased focus of the Indian Government on entering into Free Trade Agreements (FTAs) with key trading partners is dovetailing well in this endeavour of the Government.
FTAs refer to the agreements between India and other countries/ regional blocs to reduce or eliminate trade barriers through mutual recognition to enhance trade Under FTAs, the customs duties on imports made from the partner countries are exempted/ charged at a lower rate, various non-tariff barriers and procedures are relaxed, exports between partner countries are becoming competitive and efficient, and bilateral trade is witnessing increased growth. Recently, the focus on FTAs has increased, with agreements with the UAE and Australia coming into effect over the last year and various other FTAs with key trading partners, such as the UK, the EU, Canada, etc. under negotiations.
One of the important outcomes of the FTAs is the creation of global supply chains, where companies can plan their procurements in a way that takes advantage of the FTAs and optimises the customs duty outgo. Countries with FTAs with important trading partners also become manufacturing hubs for supplying to these trading partners, leading to an increase in economic activity, creation of employment opportunities and growth in the economy. Apart from this, the FTAs also help open the hitherto untapped markets for domestic manufacturers, encouraging their growth.
While FTAs lead to the creation of global supply chains, they have their share of complications. Exporters need to properly track the value addition in a country, which can be a complex exercise in some industries, especially when the product being exported has multiple components. In addition, for Indian importers, there is an additional requirement of documentation under the Customs Administration of Rules of Origin under Trade Agreements Rules, 2020 (CAROTAR Rules). Under these rules, Indian importers need to ensure that the imported goods meet the rules of origin criteria (value addition norms, etc.) prescribed for availing benefits under the FTA. However, in many cases, the details to assess the fulfilment of relevant criteria for being eligible to claim benefits under FTA are not available with the Indian importers and they rely on the Certificate of Origin issued by the relevant authority in the exporting country to claim benefits under FTAs. While the Central Board of Indirect Taxes and Customs (CBIC) has issued various clarifications on the same, including that the provisions of the FTA would prevail over CAROTAR Rules, the provisions in the rules remain and importers look forward to engaging with the Government to resolve the issues and help economic growth.
In summary, the FTAs can help in growing the manufacturing sector of a country by opening various markets and allowing the procurement of key inputs at a lower cost. FTAs also help in the growth of services trade by opening up various services sectors, consequently, resulting in economic prosperity.
As reflected in its recent FTAs with the UAE and Australia, and the ongoing negotiations with the UK, the EU, Canada and other countries in the West, the way India looks at international trade is changing. This is in contrast to the hitherto followed ‘Look East Policy’ and is a future-minded move to diversify and modernise trade dynamics, support domestic manufacturing and service industries and inch closer to the export target of USD 2tn by 2030.
India’s Finance Minister Nirmala Sitharaman speaks about the growth and resilience of the Indian economy, India’s manufacturing plans within the international trade context and the view of trade vis-à-vis the modern sense of globalisation. She also speaks about India’s recent series of completed FTAs and ongoing negotiations.
Here's a snippet from her recent interaction at the American think-tank Peterson Institute for International Economics in Washington
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