India-EU FTA: Still a work in progress?
• The EU is India’s largest trading partner with trade amounting to US$ 137.5 billion including services. The European Investment Bank (EIB) has invested US$ 2.75 billion in infrastructure, renewable energy and climate projects.
• According to RBI, EU was the second largest recipient of Indian FDI in 2018 after Singapore amounting to be US$ 4.4 billion which accounts for 23%. EU-India trade in services reached US$ 37.6 billion in 2017 according to Eurostat figures.
• Both nations have been engaged in bilateral negotiations for an FTA. However, talks were discontinued in 2013 due to irreconcilable differences on trade and investment issues.
• It may not be easy to reconcile differences in negotiations. Issues on investment, e-commerce, IP and data protection may continue to cast their heavy shadow on negotiations, even if the tariff issues get resolved.
After India’s withdrawal from RCEP negotiations, the focus of attention is India’s trade agreements with the west, and EU comes up as a prominent potential partner and for good reason.
The EU represents a mega economy as a bloc with a GDP of US$ 18.8 trillion in current US$ (World Bank) and GDP per capita of € 25,000 across a market of 513 million consumers. It is also the world’s largest trading bloc. and considered to be one of the most open markets, with 70% of goods entering at low or zero tariffs. EU companies are global players and have faced up to the challenge of globalization. This can be corroborated by the fact that out of the world’s top 20 non-financial multinational corporations (MNCs) ranked by foreign assets, 12 are from the EU. The EU is the largest investor in India with US$ 81.5 billion of cumulative FDI. As per the latest figures, EU accounts for 15% of total FDI inflows into India. Currently close to 6,000 EU companies are present in India collectively providing direct employment to 1.7 million workers and indirect employment to 5 million.
Key facts on EU
|Land area||4.475 million km2|
|GDP in 2018||19.8 US$ trillion|
|GDP per capita||US$ 36,650|
|GDP growth from 2008-2018||0.9%|
|Outward FDI stocks||US$ 8.55 trillion|
|Inward FDI stocks||US$ 6.93 trillion|
There is still a large difference between the Indian and the EU economies expressed in terms of aggregate and per capita GDP. However, the strong growth recorded in India in recent years has made India the world’s seventh largest economy by nominal GDP. Indian economy almost grew more than eight times faster than the EU during the last decade. At 1.33 billion, India is also the second most populous economy. In 2018-19 India’s economy grew at a healthy pace of 6% plus giving competition to Chinese economic growth.
EU literally prides itself as being one of the most pro-free trade regions in the world. In 2015, the European Commission committed to annual reports on the region’s progress with respect to Free Trade Agreements. EU has concluded and started applying new trade agreements with Ecuador, Canada, Japan, the Economic Partnership Agreement (EPA) with the Southern African Development Community (SADC), the interim EPAs with Ghana and Côte d’Ivoire and the Deep and Comprehensive Free Trade Area (DCFTA) with Ukraine.
Recent progress is even more impressive. In 2018, 31% of EU trade in goods with world was covered by preferential trade agreements. With Japan, Singapore, Vietnam, and Mercosur this year, the figure is expected to increase further to 41%. However, the India-EU trade agreement negotiations have remained inconclusive.
An Investment Facilitation Mechanism (IFM) for promoting EU’s investments in India was set up in July 2017. Under this mechanism, the EU delegation to India and the Department for Promotion of Industry and Internal Trade (DPIIT), MOCI are holding regular meetings to assess and facilitate ease of doing business for EU investors in India. This includes identifying and putting in place solutions to procedural impediments faced by Indian and EU companies. Invest India, the official investment promotion and facilitation agency of Indian government is also a part of this facilitation mechanism. It has created a single-window entry point for EU companies that need assistance for their investments at the central or state level.
EU too remains an important investment destination for India. According to RBI, EU was the second largest recipient of Indian FDI in 2018 after Singapore amounting to be US$ 4.4 billion, which accounts for 23%. EU-India trade in services reached US$ 37.6 billion in 2017 according to Eurostat figures. Out of total services imported by EU from India, 46% comprise of other business services which includes outsourcing services. On the other hand, 84% of EU’s services exports to India comprise of telecom, IT, transport, travel and other business services.
India-EU Trade and Investment
A key EU objective in its trade relations with India is to work towards a sound, transparent, open, non-discriminatory and predictable regulatory and business environment for Indian trading and investing in EU and EU firms investing in India. Enhancing market access for Indian and EU companies will require removing existing obstacles and preventing the emergence of new tariff or non-tariff barriers. In this context, EU and India are firmly committed to work comprehensively and to respond to each other side’s key interests in trade and investment.
The EU and India also share an interest in sustaining a rule-based multilateral trading system, with the World Trade Organization (WTO) at its centre. Negotiations for a broad-based FTA (BTIA) with India were launched in June 2007. After 12 formal rounds of negotiations and several technical meetings, negotiations were brought to a de facto standstill in 2013 due to mismatch of the interests. Again, discussions have restarted with the purpose of assessing whether sufficient progress can be made on key outstanding issues before considering a possible resumption of the negotiations.
EU has been sticky on tariffs for auto and auto parts, wines and spirits, agriculture products, services and rules of origin, apart from a stronger IP regime and a chapter on sustainable development. It is also looking for a comprehensive investor-state dispute settlement (ISDS), after India cancelled 20 bilateral investment protection treaties different EU countries in 2016. India wants access for mode 4 services and status of a data secure nation, so that its software players can benefit from a reduced compliance cost. EU nations may not be very keen on allowing mode 4 access, as they are already facing a migration crisis.
India’s bilateral trade with EU
Source: ITC Trade Map
In 2018 India’s bilateral trade with EU stood at US$ 110 billion. The EU’s main exports to India are pearls and precious stones, machinery, nuclear reactors, electrical and electronics equipment, optical photo equipment, aircraft and spacecraft, iron and steel, etc. Interestingly, the top 10 among these account for three fourths of the EU’s exports to India.
It is apparent that India is not a large trade destination for the EU. However, India relies heavily on the EU for mainly machinery and nuclear reactors; optical and photo equipment; aircraft and spacecraft and vehicles other than trains. The EU may point to these sectors as showing potential for further growth during the FTA negotiations. Further, EU’s top imports from India include mineral fuels, oil, distillation products, organic chemicals, articles of apparel, accessories, etc. The share of these sectors is very small in EU’s total imports, suggesting that the EU prefers to look toward other parts of the world to fulfill its domestic demand.
At EU-India summit during October 2017, the leaders expressed their shared commitment to relaunch the negotiations for a comprehensive and mutually beneficial FTA. Drawing its inspiration from the conclusions reached at summit, the Business Support to the EU-India Policy Dialogues project aims to spur enhanced bilateral business cooperation. This project aims precisely at tapping into such business opportunities and focuses in particular, but not exclusively to areas such as environment, energy, climate, mobility, urbanisation and ICT, where we already have an advanced cooperation in the form of policy dialogues. This format of policy dialogue will bring Indian and EU’s SMEs together through joint actions, B2B matchmaking and exchanges on best practices.
Bringing Indian and European business together will compliment the dialogues and facilitate business cooperation. Also, it supports and transfer of advanced technologies and innovative practices which Indian local stakeholders need to adapt and provide better and affordable solutions.
But the prolonged negotiations between the two partners show that it will not be easy to reconcile their differences. Issues on investment, e-commerce, IP and data protection may continue to cast their heavy shadow on negotiations, even if the tariff issues get resolved. Both sides may have to adopt a highly accommodative approach to arrive at a consensus agreement.