India’s free trade pact with the United Arab Emirates (UAE), its third largest trading country in recent times after the US and China, is a watershed. It marks a return to an outward economic orientation through the FTA mode after a conscious policy to shelve it for many years. As an assessment by NITI Aayog has pointed out, India ended up on the losing side in the ASEAN FTA signed a decade ago. In November 2019, India walked out of the RCEP, fearing an ASEAN-like impact. Given this history, it does not come as a surprise that the Comprehensive Economic Partnership Agreement with UAE (which aims at raising bilateral trade from about $60 billion at present to $100 billion in five years) is accompanied by an explanation on how the mistakes of the past have been avoided. India has been promised tariff free lines on 90 per cent of its exports by value ($26 billion of total merchandise exports of $29 billion), apparently much higher than access provided in the past by ASEAN countries. Even though UAE’s average tariffs are in the region of 5 per cent (15 per cent in India’s case), zero duty is expected to boost India’s labour intensive exports — chiefly textiles (helping India compete with Vietnam and Bangladesh), gems and jewellery, pharmaceuticals, plastics, automobiles, leather and agriculture goods. This will eventually extend to 97 per cent of India’s exports by value, covering electronics, cement and ceramics. With a diversified trade base, the 3.3 million diaspora, India’s largest, can continue to be a robust source of remittances.
While the export projections look rosy, less is known so far on the import front, save India’s assurance that sensitive items such as dairy and plantation products have been kept out. Also, tariff rate quotas (a hike in tariffs after a certain quantity of imports) will be applied if needed. Interestingly, India ran a trade surplus with the UAE till 2018-19, which has since turned into a deficit, and a pretty large one since 2020; the deficit of $9 billion till October this fiscal seems like a record. With UAE being a re-export hub, concerns over rules of origin cannot be wished away. More clarity is needed with respect to the deal’s provisions on government procurement. The implications of throwing open public procurement to one country, on the MSME sector as well as on WTO negotiations, should be considered. The same holds true for IPRs and investment rules which have been outside the ambit of multilateral talks but are figuring in FTA-type deals.
It would seem that an effort here is to strike a balance between two aspects: opening up the economy and inviting competitive forces through FTAs; and trying to set up scale through PLIs and industrial parks, with protection through higher MFN tariffs. India has decided to go on a CEPA drive. UAE was among the eight such deals in the pipeline. As the Centre has said with respect to the UAE accord, it is possible to protect the country’s interests while opening up markets. But this statement will be put to a stern test in the deals with the EU and Australia, both of which are under negotiation now.