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India sees the downside of free
trade
By Indrajit Basu
KOLKATA - While India, in its latest economic
diplomatic offensive in the region, races ahead to sign
free-trade agreements (FTAs) with Asian countries, many
in its own industry sectors are not happy with the rash
of trade initiatives.
"India, it seems, has
finally woken up to the real world of FTAs and
regionalism," said T K Bhaumick of the country's
influential industry lobby, the Confederation of Indian
Industry (CII), "which, like capitalism, is an
omnipresent reality. Yet Indian industry has
apprehensions about the possible impact of these FTAs."
Over the past year India has been in overdrive
with trade agreements with Asian countries. Last April,
India and Singapore signed a draft comprehensive
economic cooperation agreement. The two countries
announced that the final version, including an FTA-plus
agreement, would be signed within a year. Later, in
October, Indian Prime Minister Atal Bihari Vajpayee
signed a significant FTA with Thailand, which from this
March 1 will reduce tariffs considerably on a range of
Thai products. And in January, another framework
agreement on the South Asia Free Trade Arrangement
(SAFTA) was finally signed in Islamabad after years of
haggling. Finally, last week, at the ministerial
meetings of the Bangladesh-India-Myanmar-Sri
Lanka-Thailand Economic Cooperation (BIMST-EC) in
Phuket, Thailand, yet another regional trade agreement
in this part of Asia took off.
But even as the
Indian government insists that all these could turn the
country into a formidable trading partner, industry
feels that the lack of reasonably level playing fields
in the region is bound to make these FTAs cause
distortions and damage within a few countries, and
imbalances in the region.
Experts are equally
concerned about India's economic strengths vis-a-vis
other Asian countries - such as Bangladesh, Myanmar, Sri
Lanka, Nepal and Pakistan - as they are about India's
deficiencies compared with the Thai and Singaporean
economies. While some say India's unabashed exports to
poorer nations could create extreme regional imbalances,
the strength of the Thai and Singaporean economies could
jeopardize prospects of some of India's own
manufacturing sectors.
"What will smaller
countries like Bangladesh, Nepal, Bhutan, or even
Pakistan sell to India in a free-trade environment?"
queried Mahendra Lama, professor of South Asian
economies at New Delhi's Jawaharlal Nehru University,
with particular reference to SAFTA and BIMST-EC.
Indeed, regional trade is largely dominated by
Indian exports to South Asian Association for Regional
Cooperation (SAARC) member states (comprising Pakistan,
Bangladesh, Bhutan, Nepal, Sri Lanka and Maldives, which
signed the SAFTA accord). India's share of trade in
SAARC, for instance, amounts to almost 80 percent of all
trade, which is expected to be about US$6.2 billion at
the end of the fiscal year to March 2004. Comparatively,
Pakistan's share - the next-largest trading nation in
SAARC - in trade volume in the region is just $510
million. "Thus," said Lama, "lopsided trade practices
will remain, which, in turn, will defeat the very
process."
However, what could really go against
India's interests are the India-Singapore and
India-Thailand FTAs. From March 1, Thai manufacturers of
a range of items, including auto components, cordless
phones, color televisions, refrigerators and
air-conditioners among others, will be able to export
their wares into India at half the duty they had been
forking out. That's for starters: tariffs on these
products will be brought down by 75 percent on March 1,
2005. Finally, by March 2006, these products will be
imported free of duty.
Undoubtedly for Indian
manufacturers of these products it is a dramatic change.
But even as others prepare to combat the changes that
are just around the corner, it is the country's
automobile component sector that's getting a bad attack
of nerves.
"The FTA with Thailand is definitely
going to have an adverse impact on car makers in India,"
said K V Shetty, president of the Automobile
Manufacturers Association of India. And according to S M
Khurana, an auto-industry honcho, "perhaps even without
intending to, the Thai FTA could end up hurting India's
manufacturing industry".
Admittedly, for the
country's auto-component industry in particular, which
is still emerging from its chrysalis, the Thai FTA is a
serious threat. Thailand after all boasts the biggest
auto-component manufacturing base in all Asia (with the
exception of Japan) and it is a mere three days by sea
from the southern Indian city of Chennai, one of the
country's auto hubs. With duties gone, car makers would
most probably find Thailand less expensive to source
components compared with India's manufacturers.
Thailand, which dubs itself the "Detroit of Asia", has a
highly sophisticated car industry with very high
economies of scale, which makes it competitive on the
world stage. Thus Indian component manufacturers could
find themselves out on a limb: "The sudden loss of
market share in the domestic market could well put the
country's now-nascent auto-component industry's global
aspirations in jeopardy," said Kamal Sharma, the owner
Horizons International, a small-scale auto-component
unit.
The proposed India-Singapore FTA, too, has
the potential of becoming a one-way lane. It gives
Indian exporters no benefits whatsoever of tariff
preference in Singaporean markets because Singapore is
already a free-trading country. Thus India, being a
high-tariff country, would end up providing more
benefits to that country by throwing open its market to
duty-free imports from Singapore.
At the core,
apprehensions of Indian industry on the Singapore and
Thailand FTAs largely emanate from the fact that many
manufacturers are unsure about their competitive
efficiency. Moreover, as some critics add, nobody (in
India) wants competition in his own home market, which
is still protected to a great extent.
Nonetheless, proponents of the Singapore and
Thailand FTAs feel that within the Indian economy there
are considerable barriers to efficiency and
competitiveness, and to make FTAs effective the
government should ensure that necessary domestic reforms
are soon put in place. "Globalization and trade-policy
reform must go hand-in-hand with domestic reforms," said
Bhaumick of the CII. "Competitiveness is inherent in
Indian industry. While there can be many ways one can
look at FTAs, the most important point about an FTA is
that it is about integration of markets and removing of
barriers to doing business with each other. Domestic
industry's concerns about the lack of a reasonable
degree of level playing field, therefore, merit due
attention. But attention should only remain confined to
creating a level playing field."
Industry's
demands for domestic reforms are long. First on the list
is the demand for infrastructure reforms, especially in
energy (including electricity), which should be
completed at the earliest. Second, industry is demanding
urgent labor reform that will allow it to get rid of
excess labor without political or legal interference.
Also at the top are administrative and legal reforms,
and reforms at the level of state governments.
Meanwhile, industry protests over the Thai and
Singaporean FTAs seem to have already drawn government
attention. Around the end of January, the government
lowered import duties on several inputs of automobile
raw materials and intermediaries from 20 percent to 10
percent, and from 20 percent to 15 percent on a few
others that would benefit component manufacturers of TV
picture tubes, refrigeration and air-conditioning
equipment, and polymers.
And in an attempt to
appease auto-component manufacturers in particular, the
Commerce Ministry said this week that it has approached
the government seeking tax concessions for
auto-component manufacturers affected by the Thai FTA
agreement.
(Copyright 2004 Asia Times Online
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