The Hindu Business Line : Trade begins in the neighbourhood

It is time India went with tariff concessions to its neighbours and concluded a sort of a regional investment agreement within SAARC to facilitate enhanced investment flows.

EVEN as talks on agriculture hold the key to progress on other areas in the Doha Round, developing countries must sink their differences for common good at the upcoming Hong Kong Ministerial meet of the World Trade Organisation (WTO). It is in this context that the Trade and Economic Relations Committee (TERC) held a meeting in New Delhi and chalked out a roadmap for entering into free trade pacts by next year with neighbouring countries in the sub-continent, the Association of South-East Asian Nations (Asean) and the Gulf countries.

As of now, negotiations for establishing free trade agreements (FTA) are under way with a number of countries that include BIMSTEC, or the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation, covering Bangladesh, Bhutan, India, Myanmar, Nepal, Sri Lanka and Thailand, and the 15-member Asean.

With Sri Lanka, India already has an FTA and there is a proposal for a comprehensive economic partnership agreement between the two. Negotiations are in the final stages to operationalise the South Asia Free Trade Agreement (SAFTA), which is to formally come into force on January 1, 2006.

India's December 1998 FTA with Sri Lanka led to protests from indigenous industries based on cash crops, such as tea and pepper. But the duty concessions by the two countries on a range of goods boosted bilateral trade.

In 2004-05, trade between India and Sri Lanka was $1,717 million, 17 per cent higher than the $1,514.84 million in 2003-04. For 2005-06, the projections for bilateral trade are estimated to be more than the current rate of growth, at 15-20 per cent.

With SAFTA, a phased tariff liberalisation programme has been chalked out.

In two years non-least developed countries (LDCs), such as India, Pakistan and Sri Lanka, will bring down tariffs to 20 per cent while the LDCs, such as Bangladesh, Bhutan, Maldives and Nepal would lower them to 30 per cent.

Further, the former set will cut tariffs from 20 per cent to 0-5 per cent in five years, while the latter will do so in eight years after 2005.

As LDCs find even calibrated tariff reduction affecting their source of revenues, a compensation mechanism is being evolved to cushion the impact. At the instance of TERC, a study was conducted for the Textile Ministry on the effect on imports in textiles and clothing on specific duty removal under SAFTA. Noting that India maintains specific duty on 271 tariff lines in the textiles and clothing sector, the study classified these tariff lines into four categories of threats — minimal, mild, medium and severe. It recommended that the tariff lines in the first two categories be removed from the SAFTA sensitive list, that specific duty be eliminated altogether on the minimal threat category, and in three years (at 50, 75 and 100 per cent) on the mild threat category.

Further, the study recommends that specific duty be similarly removed on the seven and eight lines in the medium and severe threat categories respectively which fall in the SAFTA free list. Accordingly, a roadmap has been drawn up to address the specific duty of 271 tariff lines in a phased manner.

Even as the recommendations were made, the domestic textile manufacturers opposed removal of specific duty on textiles and clothing products by Islamabad as this was bound to intensify import competition.

If the domestic textile industry fears trouble from neighbours due to import regime relaxation, how can it aspire to become a global player? The resistance of the indigenous industry fearing import competition will deprive consumers of gains in terms of cheap imports while perversely rewarding the inefficient domestic industry.

That is why the Prime Minister, Dr Manmohan Singh, is keen on going ahead with the FTAs with our neighbours. Even as the Prime Minister frees the import regime, he should get the neighbours to invest in India and extend other concessions so that Indian companies can set up shop freely anywhere in the sub-continent.

If Indian corporates can set up businesses in South Korea, Vietnam, China, the US, Central Asian countries and Russia, they can do so in their immediate neighbourhood as well, provided they are made welcome with policy support and right facilities. Diplomacy can play an important role in this regard and the Prime Minister would do well to persuade his counterparts in the neighbouring capitals to ensure an investor-friendly regime.

Even as this exercise is undertaken, India should not lose sight of the cost disadvantages of the domestic manufacturers on account of infrastructure, power, internal freight, inverted duty structure and a non-VAT taxation regime. Also, India should guard against countries dumping their products. The Government should devise rules of origin and value addition norms so that safeguards are provided to the domestic industry.

As SAFTA is all set to be flagged off in a couple of months, attention is naturally on what South Asian countries will do to stand united at the WTO negotiations for getting the best bargain. In this regard, the Centre for Trade and Development (Centad), a non-profit organisation, has brought out a first of its kind South Asian Yearbook of Trade and Development 2005. It comprises research papers on trade-related topics relevant to South Asia.

The Centad report calls for harmonisation of tariff nomenclatures and Customs procedures, reducing or ridding tariff or non-tariff barriers and expansion of intra-regional trade and investment flows.

It firmly believes that gains from trade negotiations can be best realised by means of increased competitiveness and efficiency of the regional economies brought about by regional integration. It rightly argues that the similarity in revealed comparative advantage among South Asian countries means "making the most of the possibilities of vertical specialisation through intra-industry trade".

The private sector needs to be given adequate incentives to set up enterprises across South Asia. For this, an encouraging investment climate is essential. The report further contends that the offer of duty-free imports by India has gone some distance in opening up India's markets to both LDCs as well as non-LDCs in the region.

In sum, the rather late advent of SAARC as a regional trading agreement and of India's predominance as a trade major within it has delayed the integration of member-countries. It is time India took the bold initiative by going ahead with tariff concessions with its neighbours and concluding a sort of a regional investment agreement within SAARC to facilitate enhanced intra-investment flows.

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