Transcription
"Make in India" is considered a dream project of the Indian government. Then why is India entering into agreements with other countries, after which it becomes more profitable for businessmen to import goods from abroad and sell them? Are India's Free Trade Agreements, or FTAs, harming our country's manufacturing instead of strengthening it? Hello. My name is Niharika Yadav, and in today's episode of Vichaariki, we are seeking answers to these very questions. The answers will be found in an opinion piece published in The Indian Express titled "Four Challenges That Demand Attention in India's FTAs." It has been written for you by Ajay Srivastava, founder of GTRI, or Global Trade Research Initiative. You can read it in the June 9th edition of The Indian Express newspaper.
On June 1st, the India-Oman agreement came into effect. Under this, Oman has completely removed the customs duty on Indian textiles, garments, and handicrafts. This will give Indian exporters duty-free entry into the Omani market. This will increase trade and strengthen India's commercial access to the markets of the Gulf countries and East Africa, bypassing the Strait of Hormuz. This was a Free Trade Agreement, or FTA. An FTA is an agreement made between two or more countries, under which they reduce or eliminate tariffs and regulations on each other's goods and services. This makes trade between countries easier and cheaper. Obviously, this increases trade. Buyers get more choices, and exporters get new markets. So, after the Oman agreement, India now has a total of 27 FTAs with various countries. Not only this, nine more new agreements with 42 countries are on the verge of completion. When all these agreements are finalized, 69 countries in the world will become India's FTA partners. This will account for about 75% of our country's total exports.
This network sounds very impressive, but as India expands the scope of these agreements, some big and serious challenges are repeatedly surfacing. For instance, why has India's trade deficit suddenly increased so much with the countries with which it has entered into Free Trade Agreements? Foreign companies are fully benefiting from these agreements with India. But why are our Indian exporters unable to benefit from them? What is the inverted duty structure that has broken the back of Indian companies? Is the slogan "Make in India" now changing to "Make in ASEAN, Sell in India"?
First, let's understand why India's trade deficit is increasing even after Free Trade Agreements. According to data, comparing before the implementation of FTAs – that is, the years 2007, 2009, and recent years – India's trade deficit with ASEAN countries has increased by 381%. With Japan, it has increased by 318%, and with South Korea, by 268%. In comparison, India's trade deficit with the rest of the world has increased by only 142%. Why has this happened?
In fact, most of India's partner countries are already very open economies, where under MFN rules, or Most Favored Nation rules, normal taxes are very low. Now, what is this MFN? According to World Trade Organization rules, the normal or standard tax that any country imposes on goods coming from other countries is called the MFN tariff. This is the tax that applies equally to every country without any special agreement like an FTA. For example, in Singapore, this normal MFN tax is almost zero. While in Japan, Australia, Malaysia, and UAE, it is less than 4%. Conversely, India's average MFN tax is around 12.6%, and on some items, it goes up to 150%.
Now, the result is that when India reduces its tax under a Free Trade Agreement, foreign companies get a huge price advantage in selling goods in the Indian market. For instance, if India reduces its tax by even 50%, it becomes very cheap for foreign companies to sell goods in India. But on the other hand, Indian exporters do not get any new advantage in the markets of those countries because the normal MFN tax there was already almost zero or very low.
Now let's understand why Indian exporters are not benefiting from FTAs. In fact, when the normal MFN tax in the partner country is already zero, then there is no separate advantage in sending goods there under an FTA. And in countries where this normal tax is slightly higher, like 1 to 3%, the cost and hassle of paperwork are much greater compared to the marginal savings. As a result, only 20 to 30% of India's total exports can utilize the benefits of FTAs. On the other hand, because India's normal MFN tax is quite high, when India reduces it under an FTA, foreign companies get significant savings.
Here, let's understand what an inverted duty structure is. In simple terms, when the tax on raw materials is high and the tax on finished goods made from that raw material is low or zero, it is called an inverted duty. Let's understand this with an example. If an Indian company imports steel or aluminum from abroad, it attracts a normal MFN tax of 7.5% to 10%. But finished machinery, industrial equipment, and engineering products made from the same steel and aluminum enter India duty-free under many FTAs. This results in foreign companies buying cheap raw materials at global rates, manufacturing machines, and selling them in India without tax. Meanwhile, our Indian manufacturers have to bear the burden of high input costs. A significant imbalance is being seen in the chemicals, plastics, rubber, and textile sectors due to this. The taxes on raw materials and inputs used in these, such as caustic soda, soda ash, polypropylene, PVC, etc., are increasing the production cost for companies in India. And on the other hand, many finished products from these very sectors are imported into India duty-free from abroad.
Overall, our current tax structure only protects producers of basic raw materials but puts those who make finished goods at a heavy disadvantage. In such a situation, it becomes difficult to achieve the goals of "Make in India" by adding more value within the country. In such a scenario, the question arises: is the slogan "Make in India" now changing to "Make in ASEAN, Sell in India"?
As we have explained all the reasons, ASEAN countries are now becoming the biggest suppliers to the Indian market. ASEAN is a group of 10 Southeast Asian countries, including Indonesia, Malaysia, Singapore, Thailand, Philippines, Vietnam, Brunei, Cambodia, Laos, and Myanmar. India also has a Free Trade Agreement with ASEAN countries. Chinese companies have invested heavily in countries like Vietnam, Thailand, and Indonesia to take advantage of this opportunity. Not only this, some Indian companies have also started their factories and joint ventures there so that they can take advantage of the low production costs there and the duty-free entry into India under FTAs. A similar trend can now be clearly seen in many major sectors like electronics, steel, chemicals, plastics, consumer goods, and engineering products. Obviously, in such a situation, not only investment but also jobs are starting to move out of the country. In short, these FTAs encourage companies to "Make in ASEAN, Sell in India" instead of "Make in India."
In such a situation, the question arises: what should be done next? Ajay Srivastava says that until the Indian government aligns the taxes on industrial inputs and raw materials with its FTA agreements, these agreements will not benefit us. This will weaken our domestic manufacturing and the entire supply chain of the country. Besides this, we need to further strengthen our manufacturing base. FTAs are not a magic wand. If they are implemented without improving our tax policies, we will remain just a large market, not a manufacturing hub.
What is your opinion on this? Do let us know in the comment section. For more such news, keep watching The Indian Express Hindi. Thank you.