Officials from the British High Commission, DGFT, Chief Ministers and Ministers of States, industry associations participated in these events. The coming into force of the agreement was hailed as a ‘historic milestone and a testament to the elevated India-UK bilateral relationship’. Bengaluru had the honour of receiving India’s first tariff-free import consignment of Scottish Salmon (as against the 33% tariff it was being subjected to previously) valued at US$800 (surely, we could have had a more meaningful item of import!).
The real gains of any modern trade agreement go beyond tariffs. As has been pointed out, UK is India’s sixth largest investor contributing around 5% cumulative FDI equity inflows into India since April 2000. The CETA should give a significant boost to more investments given the terms of the agreement. The Double Contribution Convention (DCC) will be a significant gain for Indian professionals working in UK; it exempts them from contributing to the UK social security system for up to 5 years. With trade expected to double there are a lot of expectations on the ‘new generation’ trade agreement.
Even as we celebrate the trade agreement it is important that we take a step back to do a sober analysis. Trade experts Jayant Dasgupta and Abhijit Das have highlighted Britain’s Department of International Trade Report which estimates that by 2040 CETA would cumulatively increase India’s bilateral export of goods and services by ₹12.55 lakh crore. This would translate into a small annual increase. On the contrary Britain’s exports would touch ₹20.1 lakh crore. This is because of the large difference between India’s tariff structure and that of Britain’s; nearly 53% of imports into Britain from across the world, including India’s, were already enjoying a duty-free regime. And because of this we give in much more in every FTA than what we get.
A collateral damage of this is that every free trade agreement (FTA) has resulted in the trade deficit increasing. Imports are much more, since trade partners gain a significant advantage. And our exporters will also have to face a much stricter regulatory regime. All this has meant that Indian exporters have traditionally never enthusiastically used the FTA route; the Indian exporter believes that the costs of complying with the FTA requirements are not worth the trouble. What is lost in the euphoria is also the fact that increased imports under the FTA route also impacts GST revenue. IGST revenue from imports after all have consistently formed a major part of the overall GST revenue. An increase in duty free FTA imports means lesser GST revenue.
Yet another unintended consequence of all FTA’s including the India-UK is another issue which is also prevalent in GST — that of inverted duty structure. While in GST this has meant accumulation of credit, in the FTA this has meant that the final products attract nil duty while the inputs which go in the manufacture of these goods are charged higher. This goes in the face of our ‘Make-in-India’ initiative. Ajay Srivastava , another trade expert, has in an insightful piece pointed out that this in effect makes it more attractive for Indian manufacturers to shift their manufacturing activity to other countries and export the finished product to India. This will be an unfortunate fall out.
The India-UK CEPA with its wide swathe of activities which it covers will force domestic laws to align themselves with the requirements of the agreement. Environment, labour, IPR, gender related requirements, digital trade, government procurement are all areas where we may have to look at our legal position. Dasgupta and Das have gone to the extent of suggesting that India by agreeing to domestic laws being subject to joint monitoring and scrutiny have in effect ceded sovereignty for little obvious gains. Similarly, they have pointed out that the CETA forces India to restrict ability to access in advance source code when regulating AI while making India make more government data available in the public domain. While all these may not be a bad thing, it opens the gates for competition.
It is essential that we accordingly prepare our domestic industry. Nowhere will this be more critical that the fact that even government procurement has been opened under the India-UK CETA. Legally guaranteed large-scale access has been given to UK firms to participate in the portal. UK Firms can now qualify as ‘Class II Local suppliers’ with a minimum local (UK) content of 20% which can go up to 49%. This is an extraordinary concession— only the second after Japan to be given this concession.
It is essential that CETA benefits are closely monitored. If any course correction is needed, we should not hesitate to negotiate and carry them out. Domestic ecosystems should be strengthened. We need to constantly look at our import duty structure—the MFN rates need to be brought down so that the tariff advantage of FTA’s is reduced if not obliterated.
The last word to the Chief Economic Adviser Anantha Nageswaran who has extolled the virtues of competition. Protection, he points out does not build strong industries; it preserves weak ones. He goes on to say that an industry that is never made to face a better product never has to make one. This is true— the danger, of course, is that in the process domestic industry may stop manufacturing and merely start acting as traders using the FTA route.
—The author, Najib Shah, is former Chairman, Central Board of Indirect Taxes & Customs (CBIC). The views are personal.