Muhammad Wasama Khalid
EU-India Free Trade Agreement (FTA) has borne the brunt of an intense scholarly argument since it brings out a better asymmetry in the trade relationship between the two countries. Even though the EU has particularly had long history of practicing a high degree of protectionism, in protecting its markets regarding pricing and access to products via elaborate frameworks of regulation and non-tariff barriers, the agreement will subject India to significant pressure in its domestic industries.
Despite the appearance of a victory of free trade, the FTA is an unequal compromise where India has to pay more than its weight in terms of competition as European firms have the advantage of enjoying their home country protection.
The EU-India FTA suggests dropping tariffs valued at EUR 4 billion per annum of European products that were imported into India. Such tariff cuts are supposed to make the trade flows easier and to be beneficial to both the sides, but in reality, the potential entails a significant threat to the already fledgling and fragile industries in India.
By opening up Indian markets to foreign competition posed by European companies, which are highly advanced and many of which enjoy government subsidies, India risks having a drastic competitive imbalance on the enterprises.
As an example, there will be cuts in the machinery, chemicals, and pharmaceutical sectors up to 44, 22, and 11 percent tariffs respectively. As much as these concessions are meant to ensure that the European products are more price-competitive in India, they can have catastrophic consequences to the local manufacturers who will not be able to compete with them in terms of high operational efficiencies, economies of scale and complimentary support offered by the state to their European counterparts. The overall impact is the possible undermining of Indian products, which would trigger the destruction of many of the small and medium-sized enterprises.
The Indian tariff cuts are matched by the fortification of a package of non-tariff barriers in the European Union, thus making it difficult to access Indian businesses. The cumulative impact of these succinct limitations, extensive regulatory systems, strict quality standards, and mandatory environmental and sustainability practices is that the levels of compliance become relatively difficult to meet, especially among small and medium-sized businesses.
The resultant asymmetry can be seen as India is gradually opening up its own domestic markets, whereas European companies are facing relatively few obstacles accessing the Indian market, in part, owing to the selective regulatory stance of the EU.
Another area of concern that stands saliently is the imminent adoption of the Carbon Border Adjustment Mechanism (CBAM) of the EU which is due before 2026. CBAM, intended to impose a carbon tax ranging between 20 and 35 percent on imported Indian steel and aluminum, is expected to reduce profit margins and put the job security of people in export-driven manufacturing industry in India under threat.
This development poses a huge threat to a developing economy like India which up to now is highly export-oriented in its growth curve. It will become quite difficult to these fiscal burdens to be able to remain competitive in the world markets as Indian manufacturers of steel and aluminum will face, whilst European manufacturers are enjoying positive state subsidies and relatively lax environmental laws.
The influx of low-cost imports of Europeans is already facing the Indian industries especially within automotive, luxury goods and electric vehicle (EV) categories. It is paradoxical that the potential cut of automobile tariffs by Free Trade Agreement to 110 to down to 10-40 per cent introduces a dilemma; the prospect of affordable cars on Indian consumers chips with an existential threat to the newly opened luxury and EV India sectors. When market control is vested in the possession of European incumbents, local manufacturers have no hope of being sidelined too soon into the market before they can reach sufficient size to be competitive.
This dilemma is particularly true of the automotive industry, since India has in recent years developed a local EV sector. The chances of exposure to an unhindered European competition is the exposure of these developmental gains so as to render India dependent on imports instead of making it an independent international player.
The Make in India program is aimed at reducing the import reliance, as well as, to promote local manufacturing capacity. Conversely, the EU India Free Trade Agreement seems to be acting the other way around as it erases tariffs imposed on European commodities thereby exposing India to European markets more.
In its turn, this may leave India as a consumer of the European products instead of a producer of its own and is a serious blow to the long-term economic independence, hurting the local industries and enhancing the dependence on imported products. This melancholy vitiates the major goal of being self-reliant and localized production.
The FTA does not only threaten the domestic industry but also destroys the sovereignty of the Indian economy. Although European businesses are welcomed into the Indian market, the offer is made without guaranteeing Indian companies of the same.
The Indian products are still dominated with high regulatory and non-tariff barriers and many of the Indian products are still not accessible by the European market. The Indian manufacturers face two-fold problems: cheap European products can get into India, but Indian products cannot be sold in the European markets as they would be too expensive, due to the high level of control and environmental regulations.
One major problem that results out of the FTA has been related to the effects on the small and medium-sized enterprises in India (SMEs), which are the core of its manufacturing business area. They are unprepared to address the newly introduced environmental and sustainability requirements by the EU, and the costs related to complying with them are prohibitive in nature, especially to the companies that are already limited by the lack of access to capital and technologies.
This means that most of the Indian SMEs will be effectively locked out of the European markets, as they will not be able to meet the necessary certifications, not to mention that they will not be able to meet the high standards of the regulations.
European companies, in their turn, have an established set-up and economies of scale, advanced technology, and improved access to capital. This inequality in abilities confirms the unfairness of the FTA and worsens the gap in the economies of India and the EU.
Muhammad Wasama Khalid is pursuing a MPhil degree in International Relations from National Defense University (NDU). He has a profound interest in history, politics, and current affairs. He tweets at @WasamaKhalid and can be reached at Wasamakhalid@gmail.com.
