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Indian Trade with Euro ZoneInternational Economics- WMG21

FORE SCHOOL OF MANAGEMENT

Submitted To:-

Dr. K.L. ChawlaProfessor, FORE

Submitted By:-Harsh Vyas (212011)

Rajdeep Roy Chowdhury (212025)Rishab Mehta (212028)

Sabyasachi Guha (212029)

Sunando Mukherjee (212036)



Table of ContentsIntroduction ............................................................................................................................................ 3

European Union and India ...................................................................................................................... 3

Trade Picture ....................................................................................................................................... 4

Current Trade statistics ....................................................................................................................... 5

European Union and India Free Trade Agreement (FTA)........................................................................ 6

Benefits of FTA agreement ..................................................................................................................... 7

Economical benefits ............................................................................................................................ 7

European and Indian Trade Interests ................................................................................................. 7

Issues in Europe and India FTA agreement ............................................................................................. 8

India’s Interests ................................................................................................................................... 8

EU’s Interests ...................................................................................................................................... 9

Cars and Wines/Sprits ......................................................................................................................... 9

Trade in Agricultural Commodities ..................................................................................................... 9

Reconciling the Differences .................................................................................................................. 10

References ............................................................................................................................................ 11



Introduction

With 1.2 billion people and the world’s fourth-largest economy, India’s recent growth and

development has been one of the most significant achievements. Over the six and half decades since

independence, the country has brought about a landmark agricultural revolution that hastransformed the nation from chronic dependence on grain imports into a global agricultural

powerhouse that is now a net exporter of food. Life expectancy has more than doubled, literacy

rates have quadrupled, health conditions have improved, and a sizeable middle class has emerged.

India is now home to globally recognized companies in pharmaceuticals and steel and information

and space technologies, and a growing voice on the international stage that is more in keeping with

its enormous size and potential.

India is fast emerging as a global leader, what with its vast, natural resources, and huge base of

skilled manpower. Combined with cutting edge technology, Indian trade market is making its

presence felt all across the world. Indian products and services are seen as of international standards

and globally competitive. Trade in India has made good progress on liberalizing trade regimes andcutting tariffs since the recent times, when most of the countries started with reforms.

Undertaking considerable industrial deregulation and other structural reforms, trade in India

recognizes that strong exports are critical for overall economic growth and poverty reduction.

Export-led growth has thus become a key thrust for the trade in India.

European Union and India

Considered ‘natural allies in a wide range of global issues’ by both parties, diplomatic relations

between India and the EU were established in the early 1960s. Since the 1990s, cooperationbetween the two increased and their relationship was institutionalised. In 2004, the European

Commission (Commission) proposed the establishment of ‘an ambitious strategic partnership

between the EU and India. The EU identified India as a ‘strategic partner’, as it increasingly

strengthened its position on the international scene, was booming economically and encompasses a

vast territory and population. These ‘strategic partnerships’ have become one of the key features of

European foreign policy as a way for the EU to assert itself while allowing emerging powers like India

to build up their status as global players. In the context of this partnership, the EU seeks to deepen

economic ties with India through bilateral dialogue on intellectual property rights, trade defence

instruments, technical barriers to trade and customs cooperation.

The strategic partnership called for an EU-India Action Plan. This plan was presented at the EU-India

summit in 2005. Both parties agreed to several commitments, including some aimed at developing

trade and investment since, while trade and investment flows between India and the EU have been

increasing, they remain below potential. Therefore, negotiations towards a broad-based FTA

expanded the strategic partnership.

The EU and India are committed to further increase their trade in goods and services as well as

bilateral investment through trade and investment liberalisation under the Free Trade Agreement

negotiations that were launched in 2007.



The 2012 negotiations made substantial progress and are at an important phase. The focal issues

include improved market access for goods and services package and achieving a meaningful chapter

on government procurement and sustainable development among others.

Trade Picture

India is an important trade partner for the EU and an emerging global economic power. The

country combines a sizable and growing market of more than 1 billion people.

The value of EU-India trade grew from €28.6 billion in 2003 to €72.7 billion in 2013.

EU investment stock in India grew substantially reaching €41.8 billion in 2012.

Trade in commercial services quadrupled in the past decade, going from €5.2billion in 2002

to €22.5 billion in 2012.

India has embarked on a process of economic reform and progressive integration with the global

economy that aims to put it on a path of rapid and sustained growth. However, India and European

Union trade regime and regulatory environment remains comparatively restrictive. Both still

maintains substantial tariff and non-tariff barriers that hinder trade. In addition to tariff barriers to

imports, both of them also imposes a number of non-tariff barriers in the form of quantitativerestrictions, import licensing, mandatory testing and certification for a large number of products, as

well as complicated and lengthy customs procedures.

With its combination of rapid growth, complementary trade baskets and relatively high market

protection, India is an obvious partner for a free trade agreement (FTA) for the EU.

The parameters for an ambitious FTA were set out in the report of the EU-India High Level Trade

Group in October 2006, which was tasked with assessing the viability of an FTA between the EU and

India. Other studies have reinforced the economic potential of an FTA between the EU and India,

notably a sustainability impact assessment was carried out by the EU.



Negotiations for a comprehensive FTA were started in June 2007 and are ongoing. This would be one

of the most significant trade agreements, touching the lives of 1.7 billion people.

India enjoys trade preferences with the EU under the Generalised Scheme of Preferences.

Current Trade statistics are mentioned below



European Union and India Free Trade Agreement (FTA)

The EU-28 is India’s largest trading partner, accounting for roughly 15 percent of total trade in goods

and services. It is an important market for India’s export of textiles, apparel, pharmaceuticals, gems,

jewellery and IT. The EU is also the largest source of FDI inflows to India, accounting for over one-

fourth of the total.

A High Level Trade Group (HLTG) made up of government representatives and business leaders wasset up and issued a report recommending several liberalisation measures to be used as a blueprint

for FTA negotiations. At the end of 2006, the Commission requested negotiating mandates from EU

Member States for bilateral trade agreements with India. The FTAs were to be driven by

competitiveness and would be comprehensive and ambitious in coverage, targeting the highest

possible degree of trade liberalisation, including services and investment.

The Global Europe Strategy marked a shift in the EU’s policies towards trade by emphasising

competition and corporate-driven growth rather than development objectives. Hereby, the EU

seems to have changed the balance from providing assistance for human development and poverty

reduction projects to facilitating economic cooperation and trade.



The negotiations cover:

Access to each other's markets, for goods, services and to public procurement contracts.

The framework for investment.

The rules that frame trade, such as intellectual property and competition.

Sustainable development, growth in trade is in tandem with the environment, social andlabour rights.

Free trade agreement is divided into 4 Modes which are described below.

Mode 1: Cross border supply (IT etc)

Mode 2: Consumption abroad (tourism etc)

Mode 3: Commercial presence Investment /FDI

Mode 4: Movement of Natural Persons

Benefits of FTA agreement

Economical benefits

Economically, India and the EU are vastly different countries. While India’s population more than

doubles the EU’s, its GDP is almost a tenth of the EU’s: 1.825 trillion USD versus 16.36 trillion USD.

India’s agricultural sector is comparatively much more important, but the domestic services sector

also accounts for more than half of national GDP. In the EU, services account for 71.8% of GDP. EU-

India trade was worth nearly 80 billion euro in 2011, and shrunk to 75 billion in 2012. While India iscurrently Europe’s ninth trade partner, the EU is India’s largest trading partner. Although India’s

average tariff dropped from 79% in 1990 to 17% in 2005, current tariffs are still high when compared

to the EU’s average tariff (2%). Moreover, there are substantial non-tariff barriers to trade with

India. At the same time Indian exports face up to the heavily regulated European market, this is

complicated by divergences in the regulatory framework between EU Member States.

The first potential economic effects of an EU India FTA showed that both parties’ exports would be

boosted: Indian exports as a result of a depreciation of its currency following an increase in trade,

which would reinforce the competitiveness of Indian producers; EU exports from better access to

the Indian market.

A second benefit a more profound FTA, technological changes, spill-over between companies, niche

specialisation and economies of scale can provide substantial gains. The positive effects of deeper

integration are more likely to clearly benefit both parties.

European and Indian Trade Interests

FTA will lead to cutting tariffs on industrial and agricultural goods are still important, market access

for services and investment, opening public procurement, better agreements on and enforcement of

protection of IPR, unrestricted supply of raw materials and energy, and, not in the least, overcoming

regulatory barriers including via the promotion of international standards.



The success of both the economies is also partly in the result of removal of unnecessarily high

barriers to EU exports while with the benefits of liberalisation also comes with responsibilities, such

as helping to maintain a global regime based on openness. Thus, the EU’s rejection of protectionism

at home must be accompanied by activism in creating open markets and fair conditions for trade

abroad. As concerns India, and in consistency with the aforementioned economic analyses, the EU

will seek the reduction or abolition of nontrade barriers in addition to traditional tariff reductions.Examples of such non-tariff barriers include: quantitative restrictions; import licensing; mandatory

testing and certification for a large number of products; complicated and lengthy customs

procedures, sanitary and live cattle and poultry; reciprocity concerning temporary admission of

products in transit; and market access restrictions to the Indian banking, retail and government

procurement sectors.

Issues in Europe and India FTA agreement

Despite several rounds of negotiations that began in 2007, the proposed EU-India Bilateral Trade and

Investment Agreement (BTIA), covering trade in merchandise, services, and investment, is still farfrom being concluded. The recent EU ban on the import of mangoes from India will further strain the

bilateral commercial relationship, which is already troubled due to a series of tax disputes involving

European companies.

Given the subdued sentiment around foreign investment and trade currently, restoring growth to its

normal level remains at the top of the Modi government’s agenda. This would require a fresh

approach toward India’s commerce and trade. It would be pertinent to analyze what is holding back

the conclusion of the EU-India trade pact, which possesses immense untapped trade and investment

possibilities.

India’s Interests

Given the contribution of the service sector to GDP (57 percent), India is seeking improved market

access in services. India’s interests lie in Mode 1 of the BTIA (Broad base Trade and Investment

Agreement), which covers information technology enabled services (ITES), business process

outsourcing (BPO), and knowledge process outsourcing (KPO), and Mode 4 which covers movement

of skilled professionals like software engineers.

Growth in India’s services sector has been exceptional, with services exports rising the fastest of the

twenty largest services exporters between 1994 and 2003 and exceeding 17% growth per year. As to

the growth of imported services during the same period, India comes second after China. The ITindustry is an important part of the services sector and its share in services exports grew from 19%

in 1997-1998 to 41% in 2006-2007. In 2007, 92% of all services exports related to software, travel,

transportation, management or architecture and engineering. India’s trade in services with the EU

amounted to more than 22 billion euro in 2011.

A recent Reserve Bank of India (RBI) survey on computer software and ITES exports shows that

Europe’s share in India’s software exports declined from 27 percent in fiscal 2008 to 20 percent in

fiscal 2013. The share of Mode-4 services in overall software service exports declined from 25

percent in fiscal 2008 to 14 percent in fiscal 2013.



Improved market access in Mode 4 will allow skilled professionals such as software engineers to

temporarily reside and work in EU countries. The barriers to Mode 4 include work permits, wage-

parity conditions, visa formalities and non-recognition of professional qualifications.

India also seeks a data secure status from the EU, as the high cost of compliance with existing EU’s

data protection laws and procedures renders Indian small and medium enterprises (SMEs) un-competitive.

EU’s Interests

The EU’s demands in India’s Mode 3 services includes further liberalization of FDI in multi-brand

retail and insurance, and presently closed sectors like accountancy and legal services. The European

banks have been eyeing India’s relatively underutilized banking space. However, the surrender of

banking licenses by Goldman Sachs, Morgan Stanley and UBS shows that the burden of priority

sector lending and financial inclusion have dissuaded foreign banks from entering India’s market.

India’s intellectual property regime (IPR) is another impediment . Any commitment over and abovethe WTO’s Trade Related Aspects of Intellectual Property Rights (TRIPS) will undermine India’s

capacity to produce generic formulations. It is feared that data exclusivity protection measures

(which allow pharmaceutical companies to exclusively retain rights to their test results for a certain

period) would delay the supply of Indian generic medicines. That explains India’s opposition to the

proposal. European pharmaceutical companies are wary of India’s patents law which prevents “ever

greening” – a provision that allows companies to renew patents on old drugs by making incremental

changes.

Cars and Wines/Sprits

Again, India has reduced duties on parts and components, and other vehicles, but maintains highimport duties on assembled vehicles: 60 percent (75 percent in cars with a freight on board (fob)

value above $40,000 and an engine capacity of 3000 cc for petrol and 2500 cc for diesel). This

protectionism remains the most contentious issue in the BTIA negotiations.

The EU also seeks deeper cuts in India’s tariffs on wines and spirits. They feel that high effective

duties and additional state-level taxes inflate the price of imported liquor in India. However duties

on wines and spirits are a critical source of tax revenue for the government.

Trade in Agricultural

Commodities

Agricultural trade is highly distorted in both the EU and India. Even though average most favourednation (MFN) import duties on agricultural commodities in the EU (13 percent) are much lower than

in India (33 percent), the EU’s peak tariff rates on certain products such as dairy (650 percent), fruits

and vegetables (156 percent), and sugar & confectionary (133 percent) are more than those in India.

Again, the fishery and dairy sectors in the EU are highly subsidized. There is a fear of EU dairy

products flooding Indian markets after the FTA is signed. India wants the EU to cut its agricultural

subsidies, while the EU has interest in India reducing tariffs on dairy products, poultry, farms and

fisheries. Thus, both India and the EU have strong defensive interests with respect to agriculture

trade negotiations.



Reconciling the Differences

To be fair, the EU does not have a single market for labour mobility. Regulations related to work

permits and visas differ between members. There were efforts to harmonize the EU market through

various directives, but they have met with limited success. Moreover the EU’s unemployment

problems have reduced policy space for Mode 4 commitments.

India’s demand for greater market access in Mode 1 and 4 remains dependent on its ability to meet

the EU’s demands in Mode 3. Strong opposition and a lack of political will on FDI in retail and

insurance undermines India’s negotiating capacity.

Car manufacturers in India, primarily of Japanese and Korean origin, fear that reduced duties on cars

under the EU-India BTIA will impact their market share and flood India with European cars.

Additionally, there are fears that European automakers will have no incentive to set up a local

manufacturing base in India. This is debatable though, as almost all major European automakersalready have a manufacturing presence in India.

It is matter of research that European carmakers compete in India’s compact car segment

(comprising 80 percent of India’s auto market) by producing in Europe. Studies show that it is

difficult to succeed in India without a strong dealer network and reliable after-sales service. A

prohibitive duty on cars looks unjustified when duties on non-car automobile segments have been

substantially reduced. This also deprives consumers of choices.

Improving India’s investment climate is a better way to promote investment and jobs. Similarly, an

exclusive right to the commercial exploitation of patents incentivizes research and development and

brings in FDI. Thus, India needs to strengthen its IPR regime.

A trade pact is about give and take. Failure to conclude the EU-India BTIA will constitute a large

opportunity loss, while trade pacts such as the Trans-Pacific Partnership (TPP) and the Transatlantic

Trade and Investment Partnership (TTIP) (which together account for two-thirds of global GDP and

one third of global imports) are moving global trade away from MFN routes toward

bilateral/regional routes. They are setting new trade rules that would be far more difficult to comply

with. This calls for taking a long-term view of India’s trade policy options while negotiating its trade

pacts.



References

European Union website

http://eeas.europa.eu/delegations/india/eu_india/trade_relation/index_en.htm

Asian Development Bank

http://aric.adb.org/fta/india-european-union-free-trade-agreement

World Bank

http://www.worldbank.org/en/country/india/overview#3

http://www.indiatradepromotion.com/an-overview-of-the-trade-agreements.html





