When India and the 10-member Association of South East Asian Nations (ASEAN) signed an historic free trade agreement in Bangkok on Thursday, it marked the culmination of six years of hard-fought bilateral negotiations. It also reflects the new Indian government's resolve to push ahead with reform-oriented decisions even when faced with powerful opposition at home, in this case from India's critical farm sector.
This is the second regional trade agreement in a week that commerce minister Anand Sharma has signed since taking charge less than three months ago, the first being a comprehensive economic partnership agreement (CEPA) with South Korea on August 7. The new government's energy to forge ahead with regional trade agreements may not mean a reduced commitment to resuming the multilateral path at the WTO, as may seem to be the case due to the continuing gridlock on the Doha round. It may, in fact, signal a new maturity to make some hard decisions at a time when it is preparing to host an "informal" WTO ministerial in September. "Since India is in favor of universal free trade, it has forged ahead in all directions," says S.K. Mohanty, senior fellow at the Research and Information System for Developing Countries, a New Delhi-based think-tank. But, he says, "at the policy level in India, there is complete consensus that the multilateral process is better than the regional."
Despite the left's complaints that India is opening up at a time when the rest of the world is putting up protective barriers, trade experts say India could not have afforded further delay in coming to an agreement with its Southeast Asian trade partners without losing competitiveness in the long run. The ASEAN block has a collective GDP roughly equal to India's $1.1 trillion and opens up a market of 600 million consumers close to Indian shores. What's more, China already has a significant presence in the market, having signed an agreement with ASEAN nations in 2002 which stipulates that 90% of goods traded mutually should be duty free by next year.
Few will argue that Indian negotiators have shown great savvy. India is the only country to sign a trade pact with ASEAN that has continued to maintain a so-called "negative list" goods on which no tariff reductions are mandated. Most products of concern to India's farm lobby, such as rubber, are included in this 489-item list. Other sensitive items such as palm oil, pepper, tea and coffee have been placed on a "highly sensitive list," calling for tariff reductions up to 35-40% by 2019. In addition, the base year for tax cuts has been set as 2005, when Indian tariffs were as high as 100% on coffee and black tea and 70% on pepper, so tariffs will remain fairly high even after the mandated reduction. Failure to sign an agreement so carefully negotiated would have also been a diplomatic setback, hurting India's standing at the WTO.
India now goes into September's WTO meeting with two new trade agreements in its corner, a bureaucracy demonstrably skilled at negotiations and a policy apparatus clearly more favorable to open trade and willing to making hard domestic decisions. This last bit is especially crucial, as many segments in India are highly skeptical over what they may have to give away on the agriculture front at the WTO. Like all developing nations, India worries about opening up this crucial sector, which accounts for 60% of all employment, to heavily subsidized and hence much cheaper crops from developed nations against which India's mostly small farmers cannot compete. Mohanty says Indian policymakers over the years have focused more on managing the social issues arising out of market opening-induced labor displacement and loss of livelihood instead of keeping tariff barriers high. "India is now in a better position to address this problem with greater maturity," he says. In the case of the ASEAN agreement, for instance, Prime Minister Manmohan Singh decided to go ahead and sign the treaty while tasking a committee to assuage the concerns of the farm sector, instead of letting the deal drop.
Trade talks are about give and take, and with the government standing firmer on reform-oriented measures, India may now be more inclined to give some on the agricultural front provided it gains in services, the mainstay of its economy. A change of stance by India, which has come to represent the developing countries' block resisting reduction of agricultural tariffs, is crucial for the deadlock to be broken. All eyes are now on the "informal" ministerial that New Delhi hosts in September.