Boosting manufacturing amidst Free Trade Agreements

Dime-a-dozen economic policy pronouncements are coming out from the ministers of the new government. That can only be expected. But none is more relevant and of immediate importance than the commerce minister’s revelation that a new assessment has been ordered about India’s free trade agreements. 

Why has the decision been taken? India had quickly frozen over 20 free trade agreements (FTAs). But the end result was huge annual trade deficits running close to $200 billion. It looked as if India’s trade deals were more to encourage imports than exports.

India had entered into FTAs in rapid fire succession following the collapse of the Doha round of talks at the WTO. FTAs were fashionable in those days. USA had struck the strategy of concluding direct trade deals with select countries when it could not muscle its agenda on the multilateral forum. This way of doing deals was articulated by none other than United States Trade Representative, Robert Zoellick.

We were also not far behind and FTA talks were held with China, Japan, Korea, Singapore, ASEAN, Israel, Russia and many others. Name a country, we were holding FTA talks. Some of these were quickly wrapped up with agreements. Some are still lingering, for example, as with the European Union. 

FTAs are not just trade deals. They are much more than that. FTAs were not of much significance for reducing tariff barriers, which were already low. They were important for so much else, which was not immediately apparent. Invariably, FTAs involved synchronising investment laws between the partner countries; they involved concessions over intellectual property rights; and then, often conferred special rights for litigation in the international forum on a wide range of issues from tax conflicts to investment law interpretation. 

The implications of FTAs are coming increasingly to the fore. One important up shot is that FTAs have hit India’s manufacturing growth. A trade deal between India and Thailand had, for example, made a major investment by a Japanese automobile company into India unviable. Because the same company had an engine plant in Thailand and following an agreement it became cheaper to import engines than to set up a factory for making these in India. This is the perspective within which FTAs must be located. 

This is critical. A country’s exports will depend on its manufacturing ability. China’s huge export drive was due to its massive manufacturing capacity in everything from electrical goods to telecom equipment to small gadgets. China’s steel-making capacity of over 600 million tonnes is many times its own steel consumption. The manufacturing base produces much more than required within the country and thus provides the surplus for exports. Ours is the reverse. 

India had always run deficit in its trade account as imports had been traditionally higher than exports. Our exports are low value added, while imports are rated high.  We export iron ore to China and import telecom equipment. India exports mangoes to Japan and imports railway coaches. India exports low-end textiles rather than high value fashion garments. 

To make a breakthrough in high value exports, rather than sending iron ore or raw materials, would call for having a developed manufacturing base. India had been talking of nurturing its manufacturing industry for years now. The previous government set up a manufacturing competitiveness council and talked — for years — about formulating a manufacturing policy. Nothing much happened on the ground. 

The country’s commerce minister’s success would critically depend on the prior achievements of the industry minister. Nirmala Sitharaman being both, she should now give a little more importance to her other portfolio. This is realised by the Union finance minister, Arun Jaitley, who emphasised his priority for developing the manufacturing industry in the country. The budget should make a beginning in this respect.

The author is a Delhi-based analyst and commentator