Is India-EU Free Trade Agreement Staring at an Impasse?

The government must find mutually acceptable compromises to conclude the EU-India BTIA, writes Ashok Sajjanhar

End nowhere in sight for the Broadbased Trade and Investment Agreement (Photo: Reuters)

Talks Derailed

• Latest round of talks scheduled for August 28 called off by India
• India opposes EU ban on 700 Indian pharmaceutical products
• Talks also under strain after tax disputes involving European companies
• 15% of India’s total trade in goods and services in 2014-15 from EU
• EU is the largest source of FDI inflow to India
• Failure to conclude EU-India BTIA will be a bigger loss for Europe

The India-EU Free Trade Agreement, or the Broadbased Trade and Investment Agreement (BTIA) as it is officially called, was launched with much fanfare in Brussels in June 2007. The economies of both India and EU member states were surging at that time. It was expected that concluding this agreement would provide further impetus to this expanding partnership.

The then Prime Minister Manmohan Singh declared that the two sides will work pro-actively to conclude negotiations by 2009. It was well understood that this was an aspirational deadline but it was felt that it was better to have an ambitious timeframe so that the negotiators are motivated to conclude the talks as early as possible and as close to 2009 as feasible.

However, even after more than eight years of commencement of parleys, the end is nowhere in sight. In fact, the latest round of talks that was scheduled to take place on August 28 was called off last week by India to protest the arbitrary and uncalled for ban by EU on 700 Indian pharmaceutical products.

The EU took this step for alleged manipulation of clinical trials conducted by the Hyderabad-based pharmaceutical research company GVK Biosciences.

Most of these drugs are available and have been used for several years without any complaint in several EU states. A few of these drugs are, however, disallowed in some markets. India maintains that pharmaceuticals represents one of its flagship sectors which has developed its reputation through strong research and safety protocols over the years.

Negotiations in Deep Freeze

Federica Mogherini, EU High Representative for Foreign and Security Policy (Photo: Reuters)

The immediate and significant fall out of the imposition of the EU ban is that negotiations on the bilateral FTA that were to resume later this month have been put into the deep freezer. It is unlikely to happen soon unless the EU were to make some quick amends.

India-EU bilateral ties have been under stress since the killing of two Indian fishermen off the coast of Kerala by two Italian marines in 2012. Relations became further strained when, in January 2015, the European Parliament adopted a resolution urging India to release the marines undergoing trial in India. The issue created complications when PM Narendra Modi in April 2015 decided to forego visiting Brussels as EU took an inordinately long time to respond positively to the possibility of his visit.

The EU’s delay in arriving at a decision was apparently at the urging of Federica Mogherini, the EU High Representative for Foreign and Security Policy who till November 2014 was Italy’s foreign minister. In that position, Mogherini adopted an inflexible stand against India on this issue. The marines’ case has now gone to arbitration and the decision is expected later this month.

Trade-Related Issues

The EU is India’s largest trading partner accounting for bilateral commerce of $99 billion in 2014-15 which represents roughly 15% of India’s total trade in goods and services. The EU is also the largest source of FDI inflows to India, accounting for over one-fourth of the total.

The proposed pact covering trade in merchandise, services and investment is still far from finalisation. In addition to the pharmaceutical issue and ban on mangoes imposed earlier, the bilateral commercial relationship has been under strain due to a series of tax disputes involving European companies. The major issues that are keeping the two parties apart include TRIPS, services, agriculture, wines and spirits and automobiles.

Given the significant contribution of the service sector to its GDP, India is interested in improved access in services to the EU market. India’s interests lie in Mode 1 of GATS which covers information technology-enabled services (ITES), BPO and knowledge process outsourcing (KPO), and Mode 4 which covers movement of skilled professionals like software engineers. The barriers to Mode 4 include work permits, wage-parity conditions, visa formalities and non-recognition of professional qualifications.

India also seeks a data secure status as the high cost of compliance with existing EU data protection laws and procedures renders Indian SMEs uncompetitive.

EU Demands

EU-India trade pact possesses untapped trade and investment possibilities (Photo: Reuters)

The EU’s demands include further liberalisation of FDI in multi-brand retail and insurance, and presently closed sectors like accountancy and legal services. European banks are also interested in entering India’s relatively underutilised banking space.

India’s IPR regime is perceived by the EU as another obstacle. India would not like to assume any commitment over and above the WTO’s Trade Related Aspects of Intellectual Property Rights (TRIPS) regime. European pharmaceutical firms are keen to use the provisions of “ever greening” which allows companies to renew patents on old drugs by making incremental changes. This is not permitted by Indian patent laws.

The EU would like significant reduction in India’s import duties of 60-75% on assembled vehicles. This remains possibly the most contentious issue in the negotiations. It has also sought deeper cuts in India’s tariffs on wines and spirits.

India wants EU to cut its agricultural subsidies, while the EU prefers India reducing tariffs on dairy products, poultry, farms and fisheries. The EU-India trade pact possesses immense untapped trade and investment possibilities.

The failure to conclude the EU-India BTIA will constitute a large opportunity loss, more so for Europe in its current anaemic economic state than for India whose economy is likely to surge in the coming years with fruition of several initiatives like ‘’Make in India’’. Both sides need to exhibit the political will and maturity to pull themselves out of this state of stagnation and set the trade relations on a buoyant upward trajectory.