The Hindu Business Line : Sign preferential pacts only if it enhances trade: Plan panel

EVEN as the erstwhile NDA Government went into overdrive in entering into regional trading agreements, the Planning Commission by way of mid-course correction, sounded the need for caution in this regard.

In its Mid-Term Appraisal document, recently approved by the Union Cabinet, the Plan panel said that in the last two years, India has joined the global trend towards intensification of economic integration arrangements and entered into a number of new free trade agreements (FTAs). This is over and above the existing preferential trading arrangements (PTAs) with a number of countries.

The Planning Commission said that while evaluating the preferential arrangements, a distinction must be made between agreements that envisage an exchange of concessions by way of preference by a few percentage points on a relatively small list of products and those in which the intention is to eventually create an FTA.

The Bangkok Agreement, the Generalised System of Trade Preferences (GSTP) Agreement, the SAPTA Agreement, the Indo-Afghanistan Agreement and the Indo-Mercosur (involving South American countries) fall under the first category, as also the proposed agreements with the South African Customs Union (SACU), the Gulf Cooperation Council and Egypt.

The difficulty with limited preferential agreements is that they do not result in trade flows of any significance, even as the multiple levels of tariffs and complex rules of origin resulting from them impose considerable additional burden on the customs administration. For these reasons, it is necessary to exercise some caution before entering into any further agreements,the Plan panel said. It said that FTAs and Customs Unions are acceptable in economic terms if the trade creation exceeds trade diversions.

That is more likely to supervene if the agreement aims at comprehensive liberalisation. One argument in favour of regional agreements is that they help to prepare the ground for most favoured nation (MFN) liberalisation.

In any case, it said, economic integration among geographically contiguous countries has become a geo-political imperative and India has to continue to pursue FTAs in the SAARC region as well as with the South-East Asian and East Asian countries.

The bigger the FTA, the greater will be the benefit for India and other partner countries, it said, adding that when negotiating FTA pacts, the objective must be to eliminate the barriers to trade comprehensively and progressively over the agreed timeframe.

Early harvest by way of elimination of duties in a short period on a limited number of products should be avoided as such a step can lead to negative protection in India on account of the existence of substantial tariffs on raw materials, intermediates and capital goods. This suggestion of the Plan panel assumes importance in the wake of protests by the domestic auto component industry, which felt adversely affected by the early harvest scheme of the India-Thailand FTA in September 2004.

For the FTAs with these countries to be successful, it must be ensured that India's MFN tariffs are not far out of line with their tariffs.

If there were tariff differentials, especially on capital goods and raw materials, countries would have access to cheaper inputs. Hence, it said that to prepare for the Indo-Asean FTA, Indian tariffs must be speedily reduced to "Asean" levels forthwith.

As these countries have resolved to eliminate all tariffs within a limited period as a part of their commitment in the Asia Pacific Economic Cooperation context, the Plan panel said that it would be necessary for India to reduce its MFN tariffs to a very low level ahead of the FTA with Asean.

It is desirable that a target range of 5 per cent to 10 per cent is set for achievement within two years with a longer period for products with high tariffs.

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