India's Transition from Look East to Act East to Trade West

India's Transition from Look East to Act East to Trade West

India has been witnessing a prolonged agitation in terms of trade imbalance with its neighbour China. Also, the qualms of discarding Chinese goods indirectly have been haunting India and fuel the churning border clash between neighbouring countries, which has significantly hindered the trade deal. Presently, India is all set to discuss free trade agreements (FTAs) with the UK and with the European Union (EU) by the end of 2021. However, It is also planning to conclude a preferential deal with Canada after overlooking some initial inhibitions. Additionally, a trade pact with the United Arab Emirates is also impending.

Transition Time

Within a concise period, India has evolved to make a successful trade shift from East to West. However, this swing in focus is crucial and necessary, as various India's Asian partners have articulated the disapproval in the means of India's exit from RCEP even after several years of debate. This new transition would also have a long-term impact, and it would silhouette the decisions like India's trading partners, the country's export market and the pace of its growth. 

Commenting on India revamping its FTA strategy, B.V.R. Subramanian, Trade secretary, says, "We have to engage with the rest of the world. Without that, India will be shut out of global markets. We are not in any regional arrangement. So, where does India go if it wants to be a global economic player and a global trading power? We need to have FTAs. But at the same time, we have to do it in a balanced manner. We should buy enough but we should sell enough also." 

India’s Hindrance in the East


India's Look East policy goes way back to the 1990s, which PM Manmohan Singh launched to initiate its trade dealings with Asean, South Korea, and Japan. Fast forward to 2014, as Narendra Modi took charge as India's PM, he reframed the policy; thus, Look East became Act East. This is initiated to show the country keen interest in raising its engagement with Asian neighbours. It was expected that RCEP would turn to be the fulcrum of that engagement as it was likely to connect India effortlessly to the regional value chain. 

But, India's annual exports had been struck at around the $300 billion levels for over a decade. Even after the trade deficit with FTA partners broadened, there has been growing discomfort within the domestic industry and policy circles. This brought in the idea that the FTAs inked under Look East policy may not have delivered expected results. Furthermore, the National Democratic Alliance (NDA) government has preferred to check the existing trade deals, even hinting that it could drop some. While various other rounds of discussion have been conducted with South Korea to renegotiate the FTA, Asean and Japan have flatly combated India's demand for a discussion so far.

Mohan Kumar, chairman of the Research and Information System for Developing Countries (RIS) says, "Everything that you (India) are trying to export—pharmaceuticals, rice, buffalo meat—all of these are not like selling shoes and watches and garments. These are subject to regulatory approvals in those countries. Asean countries are very clever and misuse SPS (sanitary and phytosanitary measures) and other such technical trade barriers. Unfortunately, none of our FTAs address NTBs; they address only tariff barriers. We have been so far terrible in creating NTBs. When tariff barriers are lowered by India, any country can export anything to India. Actually, we are an open economy in that sense." 

Furthermore, the EU's emphasis on labour and environmental rules, access to government acquirement, strict intellectual property rules and cross-border data flow certainly makes it tough for India to address it.

Usually, India's utilization of its current FTAs is flat. Deloitte report 2017 states that FTA utilization is as high as 70-80 percent for developed countries; it is lower than three percent of the available opportunity in India. Complying with the rules of entry requirement is extra challenging for MSMEs in comparison with the large firms, 

Shift to West


With RCEP set aside and getting small measurable gain from the existing FTAs, India was confident that a trade package has been under negotiation with the US since 2018. However, the Biden administration makes it clear that it is in no mood to ink trade deals any time soon.

The demand for a trade deal with the EU has turned to be more critical post-Vietnam operationalized its FTA with the European grouping. Indian exporters directly compete with Vietnam in various sectors, ranging from apparel and leather goods to footwear and marine products. Garments produced in Bangladesh also have preferential access to the EU and UK markets under the generalized system of preferences (GSP) due to India's eastern neighbour's least developed country status.

The trade deals with UK and EU may not be easy. The EU's emphasis on labour and environmental rules, access to government procurement, strict intellectual property laws and cross-border data flow would not be easy for India to address. With India's shift towards data localization, discussions could be sharp. While India could try zero duty access for garments, textiles, and leather products, the UK and EU would seek market access in automobiles and alcohol. Additionally, the commerce ministry sustains that all the discussions would be carried out in parallel and would conclude the pact simultaneously; experts assume that the new arrangement would benefit the EU.

A trade expert says, "Data adequacy can't be resolved through an FTA. It can be secured (only) by having a domestic law in India which is in conformity with the EU's GDPR (General Data Protection Regulation) law." 

The new round of frenzy on integrating India with the world could be an eventual result. The sufficient precedent for India backing off from trade agreements in the past. 

Rossow, Wadhwani, Chair in US India policy studies at the Center for Strategic and International Studies (CSIS), says, "Weak trade agreements are possible, but India's eyes on stimulating (its) domestic manufacturing overrides any nascent interest in really tapping down the (existing) trade barriers with key partners. Luckily, India is a massive and developing market. So, various global manufacturers have already placed a presence to feed into the local market. But real victory would be attained by using India as a base for global manufacturing and inviting small and medium suppliers."