Do strategic interests rule over economic gains in India's new trade pacts?

While the commerce ministry expects the utilisation rate of the current round of trade deals to be higher, the choice of partners shows a close fit with India's geopolitical ambitions

After a long hiatus, India has begun to engage with trade pacts. To what extent are these deals weighed on economic considerations and how much are they more like strategic alliances?

In 2022, India has concluded a Comprehensive Economic Partnership Agreement with UAE, a more limited Economic Cooperation and Trade Agreement with Australia. That is not the end of ambition. A Free Trade Agreement is due to be signed with Israel in June and before the financial year is over, and at least one more trade agreement shall come up with possibly the UK.

“These are strategic, no doubt about that,” said former commerce secretary, Rajeev Kher. It is a thought closely aligned with that of Robert Zoellick, former US Trade Representative and World Bank President, who famously argued that a US-Australia free trade agreement (signed in 2002) would “strengthen the foundation of our security alliance”.

The biggest demonstration of their nature is India having lowered its protection bar to allow companies from UAE to bid for government contracts. It is a demonstration of cooperation to draw investments inwards at a massive scale. “Remember, for various reasons, India cannot sign a trade deal with the US. For those companies, UAE has become the springboard to tap into India’s infrastructure opportunities,” an official in the commerce ministry said.

No trade deals were signed by India after the Narendra Modi-led government came to power in 2014, till the general elections of 2019. Soon after the government won the popular mandate once again, India spectacularly refused to join the Regional Comprehensive Economic Partnership to create the largest trade group in the world, comprised of 16 nations. India withdrew just hours before the agreement, in November 2019. External affairs minister S Jaishankar put it bluntly last year: “You can’t have a tense high friction border and have great relations in all other parts of life, it doesn’t work like that.” Trade, in other words, has to follow the flag.

There were concerns, in any case, with how the earlier trade pacts had impacted India. An oft-quoted assessment by the government in 2019, showed cumulative growth in trade with partners over the last five financial years was just above a modest seven per cent. While both exports and imports grew with these "FTA partners”, the utilisation rate has been “moderate” across sectors.

It is this context which makes a study of the current trade deals useful. While the commerce ministry under Piyush Goyal shall expect the utilisation rate of the current round of trade deals to be higher, the choice of partners shows a close fit with India's strategic interests. The connection has not escaped most observers.

Jayant Dasgupta, India’s former ambassador to the WTO said “in the case of Australia, our co-membership of the Quad, of Supply Chain Resilience Initiative would definitely have been taken into consideration. (Similarly) with Israel, our dependence in matters of advanced avionics and Intel sharing with respect to islamic terrorism would have given an added push”.

India’s trade data shows the overlapping trend, very clearly. Among the top 25 countries which are India’s top trading partners (March 2019), ten enter the list as suppliers of mineral commodities, both POL and coal.  Leaving those aside, the five nations with which India has a more rounded trade relations, not one are the ones with whom trade deals are on the hot plate now.

India’s top trade partners (as of 2019) were the US, China, Singapore, Germany and Korea, in that order. While India has a Comprehensive Economic Partnership Agreement with both Singapore and Korea, they have slid low in terms of the priorities of the commerce ministry. For instance with Korea the volume of trade is $13.7 billion in FY21. But while both ministers, when they met in January this year, said they wished to reach $50 billion of trade by 2030, Indian officials were not hopeful. According to them, Indian businesses have gained far less from the trade deal than what Korea has harvested. So there is a “need” for up-gradation of the pact in a way that favours India and reduces the trade gap.

It is not sure if the new trade deals being hammered out will avoid this asymmetry. But it is sure India will expect, as Zoellick said, those would improve the security alliance between India and each signing partner.

This is the reason why India has championed a deal with the UK, even though it ranks 14th as India’s trade partner, or eighth, if one excludes the commodity exporters.

If trade was the sole necessity, going by the country wise rank, the US and China should have been sitting with India’s commerce ministry officials now. A former aide of a commerce minister said a future trade deal with the US will go way beyond trade. Issues like labour, environment standards et al will crop up, the former official said, which is possibly the reason why India is not keen to enter into one, now. It is not a strategic fit.  

“The UAE Agreement is a good example of diplomacy and economic considerations overlapping.  When geo-political considerations are added to the mix there is a further impetus – as we are seeing in the ECTA Agreement signed with Australia and the FTA signed with Israel. All these agreements will benefit the economy as well as create a global alliance of like-minded countries who will build a robust trade network”, said Suhail Nathani, Managing Partner, Economic Laws Practice.

Yet, in what order should the economic and strategic issues enter the negotiations--in terms of priorities? The choice of partners could be based on many factors including strategic considerations. But the negotiations thereafter have to be on sound economic logic, keeping commercial interests in view,” said Abhijit Das, Head and Professor, Centre for WTO studies. Dasgupta agrees. “Strategic considerations will always be a factor in deciding whether we go in for an FTA. However, they cannot outweigh economic considerations or other factors”. He lists the other factors as "coherence in governance", TRIPS++ commitments, Investor State Dispute Settlement system and so on.

India seems to have followed this tactic, as its choice of partners to sign the trade deals show. Australia, for instance, exports about six per cent of its products and services to India, whereas India does only about one percent. In trade parlance, it would imply, Canberra needed to offer a larger set of goodies to India, than vice versa. Kher says the negotiations began when he was in Udyog Bhawan as commerce secretary. “Australia is a mineral exporter and that of education. While it has offered quite a bit, I really did not see what more value add does a trade deal provide India with? But New Delhi has reckoned an alliance with Canberra is a good fit. Significantly, the negotiations had begun over a decade ago in 2011, but were restarted in September 2021.

Again, with Israel, the same dynamics are at play. Israel has some of the best agro-technology to offer but as Kher said, those could have been secured through specific collaborations rather than a trade deal. Nathani added, “All these agreements will benefit the economy as well as create a global alliance of like-minded countries who will build a robust trade network.”

“Typically, economic considerations are the first priority, especially if the other country is not a direct competitor in many areas but has a complementary economic structure,” said Dasgupta. He however acknowledged that trade deals sit most comfortably when the two sides are not only friendly countries, but also “with whom they have strategic ties”.

The biggest fit, all of them agree, is the India—UAE trade agreement. Dasgupta, who was India’s Permanent Representative at WTO described  the UAE agreement “as a door opener to the other 5  Gulf Cooperation Council countries and also a means of ensuring our energy security as well as to tackle the OIC. Nathani added, Indian qualified nurses will be able to work in UAE without requiring any further certifications.  Even other non-tariff barriers get addressed – both under the UAE and Australian agreements Indian pharmaceuticals get priority access/fast tracked if the drug is approved in other jurisdictions such as the US and EU.

Taking a more longer-term view, Dr Harsh Vardhana Singh, India’s former deputy  director general at the WTO said strategic interests have always coloured India’s choice of FTAs. He said the agreements with Sri Lanka, Nepal and Bhutan emerged from the same principles. Recounting his experience with the Trans Pacific Partnership, he said “politics is always involved”. It has got stiffened as India’s walk away from RCEP showed.