Economy

Mushrooming of free trade pacts can be detrimental

Our Bureau New Delhi | Updated on February 25, 2011

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The Economic Survey 2010-11 has pointed out that some of India's Free Trade Agreements (FTA) could result in “much more” benefits to the partner countries, while the net gains to India would be “small or negative.”

The Survey also highlighted that the “policy challenge related to FTAs / CECAs (Comprehensive Economic Cooperation Agreements) should take note of specific concerns of the domestic sector and ensure FTAs do not mushroom.”

“Instead they (FTAs/CECAs) should lead to higher trade, particularly higher net exports from India,” the Survey stressed.

This warning comes even as India has entered into many FTAs/CECAs, including recently with the 10-member Association of South East Asian Nations (ASEAN), Korea, Japan and Malaysia. India has also lined up more such pacts with the European Union, New Zealand, Canada and the Gulf Cooperation Council.

The Survey said FTAs also lead to a new type of inverted duty structure with duties for final products being lower from FTA partners compared to duties for the previous-stage raw materials imported from non-FTA countries. “This acts as a disincentive to local manufacturing which is not competitive against FTA imports because of the inverted duty structure phenomenon,” the Survey said.

It also said allowing imports at concessional duties under FTAs for items that are banned by some States needs reconsideration.

Revenue loss due to sops

The Survey also highlighted that, “Substantial revenue is foregone on account of the different export promotion schemes.”

In 2010-11, revenue foregone will continue to be significant at over Rs 50,000 crore due to enlargement of the scope of schemes under the Foreign Trade Policy 2009-14 and improvement in export promotion rates in the Duty Entitlement Passbook Scheme coupled with pickup in exports, it said.

The revenue loss from end-use exemptions will also go up with rising imports, it said. While some exemptions are needed particularly at this juncture to promote exports, there is scope for reducing the duty foregone by rationalisation and convergence of these schemes, the Survey suggested.

Stimulus withdrawal

The gradual withdrawal of stimulus measures by India and other countries is not likely to adversely affect India's rising exports, the Survey said.

Bur there is a need to be vigilant about any fallout of the financial turbulence in the periphery of the Euro zone and the new disturbances in the Middle East, it said. “Equally important is the need to guard against new protectionist measures,” it warned.

The Survey also cautioned that the continuation of inflation concerns on the domestic front would also mean that trade policy measures could be put to further test in the coming fiscal year to tackle inflation.

This could further erode the exports of the already battered agricultural export sector, it said. But the Survey said India will surpass the 2010-11 export target of $200 billion.

Stating that services trade is an uncharted territory with plenty of opportunities and challenges, the Survey said, “A more conducive environment for trade in services can be created by liberalising FDI in services.”

> arun.s@thehindu.co.in

Published on February 25, 2011

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