Opening up procurement

UAE trade agreement took a welcome new direction

As the Union Ministry of Commerce negotiates a slew of intermediate or “early harvest” trade deals — one with Australia is reportedly ready to be announced shortly — greater attention should be paid to the ways in which the Comprehensive Economic Partnership Agreement (CEPA), which was signed between India and the United Arab Emirates last month, broke new ground for Indian trade policy, with major implications for Indian companies. The deal, for example, covers regulatory harmonisation as well as tariff-based trade issues — a departure from India’s past positions. Although such “behind the border” harmonisation has become commonplace in trade agreements globally, Indian negotiators have generally frowned on them — until now. The CEPA includes a provision that pharmaceutical products from Indian companies that have satisfied high regulatory bars in countries in the West are to receive time-bound regulatory nods by the UAE authorities.

Even more impactful, perhaps, are elements dealing with opening up public procurement in both jurisdictions. The CEPA says that companies from the UAE will be given “national treatment” status, which means they will everywhere be treated on a par with Indian companies when it comes to providing goods or services to the Indian state. This opens up the proportion of national output that is provided through the government-contracting system to Emirati companies and suppliers — and perhaps others, as well. Not only will other trading partners seek similar treatment for their companies in future trade deals, but some existing agreements — such as with Japan — might automatically extend the scope of national treatment to those countries’ companies, now that India has granted it to the UAE.

This is not a negative development from the point of view of either the Indian government or the Indian citizen — or Indian companies, for that matter. A larger set of implementers for government contracts will only increase efficiency and reduce costs, to the benefit of the exchequer and the end-user. Competitiveness within the economy will increase, providing the right incentives to Indian companies. In turn, these more competitive companies will be able to bid for projects in other jurisdictions, expanding their top line. Their shareholders should be happy at the new growth potential that has opened up.

However, it is true that this reform moves in the opposite direction of other aspects of India’s trade policy in recent years, which has tended towards closing off government contracting through local sourcing requirements, as well as towards raising tariffs across the board in a manner that creates a high-cost domestic economy and reduces global competitiveness. It is unfortunate that even the CEPA contains many carve-outs, however. While protection for micro, small, and medium enterprises is certainly justified, other carve-outs such as for construction and infrastructure are not a good idea since these particularly are the areas where foreign finance and expertise are needed to supplement Indian scarcity. Developing competitiveness in infrastructure provision will also allow Indian companies to participate more effectively in a global public infrastructure market that will only grow, given recent financial commitments by the United States and the European Union to spending on the sector in the developing world. The government must take the excellent logic underlying the partial opening up of public procurement in this agreement and extend it to other trade negotiations as well as to more sectors of the economy.