India and the European Union share an extremely important trade relationship. The value of India-EU trade has more than tripled, to €95 billion in 2013 from €28.6 billion in 2003. A free trade agreement (FTA) between the two partners would strengthen these ties and enable both economies to gain further access to each other’s markets. However, with negotiations of the Broad-based Trade and Investment Agreement (BTIA) at a standstill, the question of whether FTA discussions will eventually be concluded post-elections is an important one.
This lack of progress in the talks is unsurprising considering the fact that 2014 is an important year for both sides: European Parliament elections are to be held in May, while India began its month-long general vote in April.
Joao Cravinho, Ambassador of the EU’s delegation to India, said he believed the trade agreement could be concluded “by the end of the year or sometime early 2015,” following the formation of the new governments. But others don’t share Cravinho’s optimism. Observers such as Fredrik Erixon, director of the European Centre for International Political Economy (ECIPE), say a FTA probably won’t be concluded in the “next three to four years.”
These observers point to a host of contentious issues which are yet to be resolved. To elaborate, India wants the EU to give it greater market access in the services and pharmaceuticals sectors, provide data-secure nation status (beneficial to India’s IT sector), and liberalise visa norms for Indian professionals. On the other hand, the European Union wants India to overhaul its financial sector, cut taxes on wines and spirits, create a stronger intellectual property regime, and reduce duties on automobiles. Whether India can summon the political will to satisfy the European demands, especially in the context of the upcoming leadership change, is difficult to determine.
Among the biggest obstacles to the successful conclusion of the FTA negotiations is the Insurance Laws (Amendment) Bill 2008. The bill seeks to increase the cap on foreign investment in the insurance sector to 49% from 26%. Such liberalisation would provide the much-needed strengthening of India’s insurance sector. Although desirable, its legislative progress has been slow, mainly because of the hostility of opposition parties, such as the Bharatiya Janata Party.
With the Narendra Modi-led BJP expected to come to power in New Delhi, one might expect an insurance-sector revamp to remain a controversial issue in future negotiations. With recent statements and the release of its manifesto, however, the BJP has shown signs of relenting. In the manifesto, the BJP specifies that apart from the multi-brand retail sector, it would be amenable to allowing FDI in industries that require “job and asset creation, infrastructure and acquisition of niche technology and specialised expertise.” Furthermore, while remaining non-committal, senior BJP leader Arun Jaitley’s recent remarks describing the idea as “a proposal on a drawing board” showed that the BJP might be open to allowing more foreign investment in India’s insurance sector.
Equally polemic is the question of whether the European Union will liberalise its visa regime for Indian professionals. With over half its population under the age of 25, India’s trade policy — driven by demographic considerations — focuses primarily on job creation, rather than maintaining an export-focused orientation. India’s demographic advantages have provided it with a skilled, competitive, English-speaking workforce, which Europe may lack in the near future.
This has led India to place considerable importance to “Mode IV” liberalisation. Mode IV refers to the delivery of a service within the territory of a member, with the service provider present as a natural person. In its essence, this enables the free movement of individual professionals by committing to measures such as a relaxation of immigration norms. The Europeans, however, have been unable to reach a consolidated position on the issue, which is subject to the individual immigration policies of member states rather than of the EU as a whole. Thus, regardless of the European Parliament election results, it is highly unlikely this issue will be resolved soon.
Despite the outstanding points of contention, it is clear that the potential gains far outweigh the costs. The last Trade Sustainability Impact assessment for the BTIA was conducted in 2009 by the European Union. The study indicated that a broad FTA would be fairly beneficial for both parties. In the extended FTA, the report posited an expected gain of €4.9 billion in the short run and €17.7 billion in the long run. Furthermore, it pointed to potentially significant gains for the automobile, apparel and leather, investment, transport, and insurance sectors.
Nevertheless, it is quite likely that whoever ascends to power in New Delhi will primarily be focused on domestic politics, and the question of an FTA with Europe will receive less attention than in the past. Additionally, unless these remaining key issues are resolved through some give and take by both sides, the BTIA negotiations may remain stalled in the foreseeable future.
(Geethanjali Nataraj is a Senior Fellow at Observer Research Foundation, Delhi)
Courtesy: ORF/www.borderlex.in
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