Our Bureau

New Delhi, Oct 26

THE Government's announcement to initiate free trade agreements (FTAs) with neighbouring economies, including ASEAN and Gulf countries, by 2006 has given Indian industry cause for concern.

The industry is of the opinion that the external reform process of the country is progressing at a faster pace then the internal reform process, which would be disadvantageous for local manufacturers.

Domestic companies say that the FTAs inked without providing a "level playing field" would discourage investment and inflow of new technology into the country.

In the case of auto components, the industry is of the opinion that there is a cost disadvantage vis-à-vis other countries, for instance, in the case of Thailand after the Thai FTA.

Studies carried out by the Auto Component Manufacturers Association (ACMA) along with McKinsey and ICRA have revealed that Thailand has a cost advantage of around 18-20 per cent over India in auto components.

This is principally due to higher power costs here, the value-added tax regime not being fully implemented, and the import duty on raw materials being higher.

"When a FTA is signed with a country having the same ambitions as India - for example, countries such as China, Thailand, and India are battling it out for the same space in the auto components domain - we must ensure that the domestic industry is competitive," said Mr A.K. Taneja, President of ACMA.

There are already indications that various vehicle manufacturers are seriously looking at sourcing components from Thailand and are waiting for a further reduction in duty.

In the consumer electronics domain, a few companies have already closed their plants in India (such as Sony) and put off plans for local manufacturing, as sourcing from Thailand became more cost-effective.

Meanwhile, textile industry players said that FTAs with least developed countries such as Bangladesh could result in cheaper fabrics and garments entering the country.

"The real worry could be for the Indian powerloom and the decentralised sector players, who might not be able to face up to competition from manufacturers from Bangladesh and other LDCs," a Confederation of Indian Textile Industry (CITI) official said.

According to industry players, since in case of the SAFTA and BIMSTEC groupings, 60 per cent of the overall consumers - with 75 per cent of the purchasing power - are in India, FTAs with member countries do not really offer much for Indian players in terms of markets abroad but are loaded heavily in favour of the industry in the other member countries.

The chambers, meanwhile, seemed positive about the Prime Minister's statement on FTA though at the same time Assocham cautioned that the Government should settle the issue of Rules of Origin of goods while charting out the FTA.

The PHDCCI said that the FTAs should be signed after taking the industry into confidence and taking into consideration the competitiveness of the Indian industry.

(This article was published in the Business Line print edition dated October 27, 2005)
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