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by Ranja Sengupta, Research Fellow, Centad
(with inputs from Abhilash Gopinath, Consultant, Centad and Anurag Srivastava, programme
Support Coordinator, Centad)
ECORYS, Netherlands, conducted a study of the trade sustainability impact of the EU-India
FTA on both the Indian and the EU economies. Cuts International and the Centre for Trade
and Development (Centad) provided some case studies for this report.
The study considered three FTA scenarios pertaining to varying depths of liberalization
ranging from a limited FTA, an extended (deep) FTA and an extended (broad) FTA plus
(including further NTB harmonisation). Based on CGE modeling of the economies as a
whole as well as some specific sectors, the study assesses economic, social and
environmental impacts on the two economies. The analysis on FDI in the service sector is
supplemented by a Gravity analysis. The following sectors and horizontal issues have been
covered by the study: Grains (including rice), Motor vehicles & Automotives, Textiles &
clothing, Finance & banking services, Other business services, Investment conditions,
Technical regulations for industrial products (TBT), Sanitary & phytosanitary measures
(SPS), Trade facilitation, Intellectual property rights (IPR). The study made forecasts for both
short and long term impacts. While the short run referred to a period of one to three years,
where capital is taken to be immobile, the long term refers to any period beyond which
capital is free to move.
The draft version of the final report suggests that “the extended FTA will bring India and the
EU by far the most benefits in terms of economic, social and environmental gains: welfare
gains, production, international trade, wage increases, health effects, productivity increases,
employment generation and poverty reductions. The social effects are ambiguous at points
and some of the environmental effects are ambiguous or negative” (TSIA for the EU – India
FTA – Final Report, ECORYs, Page. 15).
According to the report, the overall gains for EU seem to be positive, though small. The study
draws attention to four major conclusions. Firstly, the more ambitious the scenario, the larger
the positive welfare gains are, both for India and the EU. Secondly, in the short-run, the most
beneficial scenario can also be the most costly in terms of regulatory approximation,
investments in new and upgraded standards and production methods and sector re-allocations
(e.g. SPS standards in meat and animal fats, certification trainings and agreement, border cost
reductions). Several of these types of costs carry over to the long run. Thirdly, even though
the overall effects are (small but) positive, it is clear that some sectors gain and some lose,
and within the sectors, some people gain and some lose – preventative, mitigation and
enhancement measures should be used to address this. Finally, negative third country effects
(e.g. for Bangladesh, Pakistan, Sri Lanka) as a consequence of the EU-India FTA are found
to be very small.
The gravity analysis adds to the general equilibrium results in that the analysis shows the
impact of restrictions in FDI in services on trade flows. From Table 1.2 of the draft report, it
can be seen that the FDI restrictions have a very significant impact on services trade, of up to
18.6% in transport services and other business services and up to 18.1% in insurance
services.
The study also includes a poverty analysis which is based partially on the CGE results,
partially on other studies done using household survey data in India. This shows that the FTA
will be reducing poverty overall and this result also holds after disaggregating poverty into
urban and rural poverty. In the more limited scenarios, rural poverty declines faster
(relatively) than urban poverty. This result is reversed if we look at the more ambitious
liberalization scenarios. The aggregate poverty results, based on price, wage and income
effects, are presented in table 1.3 in the report.
Centad has contributed two case studies for the Indian economy for this report. The first is on
the impact of liberalizing FDI in Telecommunications and the other on liberalization of
services for the IT sector. Both case studies found the impact of the FTA on these sectors to
be largely positive. The Indian telecommunications sector is already largely open in terms of
FDI and offers huge development potential. FDI in this sector has already grown pretty fast.
Removal of barriers is likely to accelerate further the pace of FDI inflows into this area with
positive impact on domestic connectivity which will be the major benefit for India. For the IT
sector, liberalisation of NTBs in Mode 3 and Mode 4 which create the biggest barriers for
India’s entry to EU services, are seen to be major sources of gain for India. Increased FDI by
the EU in this sector is seen as a major benefit which has been targeted by the Government of
India. However, Centad’s contribution to the TSIA remains limited to these two case studies
and does not extend to the larger part of the report.
The ECORYS study’s achievement is its coverage. While covering analysis on both the
overall economies as well as specific sectors of key relevance, the study attempts to include
analysis of economic, social and environmental impacts of all. Accordingly, apart from
broader economic indicators like national income, employment, real wages, a wide range of
variables like inequality, poverty, health, carbon emission are included.
But where the study falls short is to bring the results together in a comprehensive manner and
use these meticulously for drawing its policy recommendations. From the Indian perspective
at least, the situation that is facing us is one so complex that more layered and nuanced
approaches remain a must for addressing key policy issues.
For example, the study does mention that gains will be unevenly distributed and its inequality
results clearly show a rise as a result of the FTA. But while its summary conclusions
highlight the positive impact on poverty (mainly working through the increase in income) the
adverse impact of inequality is not comprehensively included. The point is that the
distribution of the economic gains, if any, remains a critical issue in India which is already
facing rising inequalities as a result of its past economic policies and the nature of its
economic growth. The question of income distribution is addressed even by the World Bank
now as one of the critical issues which can severely hamper the pace and nature of poverty
reduction itself. Therefore the inequality impact needs to be addressed and incorporated into
the results for poverty reduction itself.
The impact on employment has been a critical area of concern with this FTA. While the
report suggests that unemployment will not go up significantly because of the pull-push
effects, it makes a visible attempt to address the issue of uneven distribution of employment
and suggests retraining and skill upgradation so that workers can shift easily from the loss
making sectors to sectors like services and some sectors of manufacturing like textiles and
garments, which will be the gainers. However, as the skill base is very low in India, the
question of bridging mismatch in skills is a complex one and surely one that cannot be solved
in the short run. Given the fact that nearly 40% of our adult population is illiterate, and fewer
have specific training for specific jobs especially in the service sector, this shifting between
sectors is unlikely to be very quick. And the fact that agriculture will likely be a loser which
currently hosts huge numbers of uneducated unskilled workers who are not easy to shift to
sectors like services which requires a high level of skills, is a major area of concern.
In addition, India does not have a social security net, unlike the EU, which can support its
workers while their skills get upgraded and before moving from their current employment to
other sectors. The critical issue remains that of development and that India’s human
development level is so much lower compared to the EU that it does not have the backup to
bear the heavy costs of shifts. With its huge mass of poor people coupled with high
inequality, the chances of its vulnerable population not being able to last out the shifting
process is very high. There is also a high chance of increasing poverty during this transition
phase which will also be aggravated further by the rise in inequality.
In the field of employment, there may be additional complexities. The sectors to benefit, like
leather and textiles, directly depend on the informal sector and unorganized and unskilled
labourers. Increase in labour standards and other standards will cause heavy damage to
millions of workers. According to the industry, these sectors can’t upgrade their labour
standards even in long term plan. The Indian textile sector also needs to upgrade its skill level
as at the moment it represents the bottom of the pyramid in skill use but this is also difficult.
While inequalities in work conditions and pay and the informal conditions of work needs to
be seriously addressed, it must be simultaneously recognized that upgrading labour standards
is costly and also erodes the cost advantage in terms of competition from other countries
producing similar products which are not incorporating similar labour standards. An FTA,
with its limited global scope, is not be the ideal medium for addressing such issues.
Another key issue remains that of agricultural subsidies. Krishan Bir Choudhury, President,
Bhartiya Krihak Samaj raised this question in relation to the report. The report does not
adequately answer the question whether these will be cut by EU or not and if these are not
cut, the impact on India’s farmers are not very clear according to the report. It is interesting to
note, however, that the report does consider a cut in agricultural subsidies in its deepest
liberalization scenario and finds the maximum benefits for India under this scenario.
The other problem is posed by the current global financial and now real-economy crisis.
Sectors like the textiles, which is supposed to be a major beneficiary and employment creator
if the FTA goes through, is currently suffering from the fall in demand from its global trading
markets in developed countries. In the current context, at least over the next few years while
the developed world is tipped to be in recession, the benefits from the export market in the
EU may be severely limited. At the same time, its exporters will be aggressively looking for
external markets in our economy and increase import competition. Therefore India may lose
at least in the short run because of the global crisis. In addition, finding enough justification
for financial liberalization and allowing free entry into India’s financial and banking sectors
is now a highly contentious issue. The current global financial crisis and its specific effects
could not be addressed in the report as it was planned and most of the research was
undertaken before the crisis broke.
Another concern is the pace of liberalization proposed by the FTA. One important
contribution of the report is that it clearly points out a need for phased liberalization where
sectors and related employment has time to adjust and adequate skill building and other
measures can be put in place. But the current 7 year period suggested under the negotiations
certainly does not appear to meet that recommendation.
The loss in revenue is another critical area of concern which has currently been a major
obstruction to the negotiations. According to Rajan Ratna, Professor, Centre for WTO
Studies, Indian Institute of Foreign Trade, New Delhi, the report does not address the issue of
the loss of revenue for the Indian government which it uses to fund many development needs
and which is a critical tool for boosting the economy particularly in the context of the current
crisis. The loss of this revenue will substantially undermine the use of budget revenue to fund
critical development activities. The report does project a rise in incomes but unless these
yield higher taxes in the long run, it does not necessarily boost the spending ability of the
government.
The health sector results in the report also need to be interpreted carefully. While the general
results are shown to be positive the sector specific results may differ. For example, the report
shows that there will be a strong negative impact on health in the textile sector which is
otherwise one of the largest gainers. The fact that there may be increased access to FDI in the
health sector may not solve the problem of health for vulnerable population as these will most
likely be services with high user fees, and therefore may be inaccessible to the poorer
population, until these and other gainful sectors increase broad based employment and
incomes. What India needs is public expenditure on health and currently this is only 20.8% of
total expenditure made on health and major expenditure has to be covered by private sources.
A broad concern with the report is that the policy recommendations do not necessarily follow
clearly from the results, especially on IPRs, competition law etc. For one, the rules,
regulations and laws in India are in a much more nascent stage compared to the EU, for
example in the field of competition law. So how will this mismatch work out in the FTA?
Competition policy, including competition laws, is applicable in a well developed capitalist
economy. Whether the Indian economy, with a strong public sector and 40% poor people, can
adopt such a policy remains a big question. In the field of IPRs which the report recommends,
there may be other critical issues which the Indian government will need to address. In the
North South debate, India led the South bloc, along with Brazil and South Africa, on issues
including IPR, standards etc. The position here was defensive rather than positive. Therefore
following the policy proposal may considerably undermine India’s credibility in its other
alliances.
Even if tariffs are reduced to zero, trade restriction based on SPS/TBT criteria will act as a
non tariff barrier particularly in leather, textiles, agro based industries etc. This also brings us
to the question of ‘convergence’ of EU and Indian standards which is suggested by the report.
This is difficult to attain in practice as EU standards are very high. As EU will not lower its
standards, the only way left is to raise Indian standards to EU levels. So ‘convergence’ is a
misnomer. In any case raising Indian standards to EU levels is both costly and ridden with
practical difficulties at least in the short run and even medium term.
Harmonization is another related issue. Ajay Kumar, Consultant (Economics), Confederation
of Indian Textile Industry agreed with the report that the Indian textile industry expects to
make huge gains if the FTA goes through as they will get a large export market. This is very
important as the domestic market is now exhausted. But the problem is that the EU member
countries have different NTBS in place which makes it difficult for exporters. Therefore, to
make the gains real, the NTB issue needs to be addressed seriously. In any case, in the light
of the fact that the current crisis has adversely affected jobs n the export oriented textile
sector already, the optimism regarding employment growth after the FTA is signed may need
to be re-examined more closely, especially in the context of future crises.
In addition, several other questions can also be raised. While the study provides a lot of
policy prescriptions for India, there are not any for the EU. It would have been ideal to
combine both and evaluate the joint impact in terms of costs and benefits. The policy
recommendations are also very broad and general, and do not necessarily from the sector
specific analyses that this study undertakes. The policy recommendations need to be more
detailed and take sector specific details into account.
Finally, the debates on this FTA within the Indian civil society and academia do not seem to
have been suitably captured in this study. Most of the above issues have been raised by the
Indian civil society for some time now but despite significant efforts from ECORYS, the
complexities of the negotiations and the grey areas do not seem to have been adequately
captured in the results and the policy recommendations stemming from the study.
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