NEW DELHI: The liberalised trade deal with the UAE is India’s first in well over a decade (the last one was with ASEAN in 2010). Diplomats and trade experts say it will boost the confidence of negotiators going forward, also given that there is political will to lock up free trade agreements with the Gulf Cooperation Council (six Arab states including Saudi Arabia, Kuwait, Qatar and Oman) and Australia (where Commerce Minister Piyush Goyal is calling for an interim deal this year).
But some advise caution, warning that much will depend on how the deal with the UAE pans out. It comes into force in May and, perhaps, by the year-end there should be enough indication as to whether Indian industry is able to take advantage of it.
The key issue here is the Indian industry’s inability to take on foreign competition. Prof. Biswajit Dhar of Jawaharlal Nehru University argues that “competitiveness has been something that has always kept us behind.”
The inability to compete is partly because government policies make it so. As a senior foreign ministry official pointed out: “We should ensure raw materials and intermediates enter the country at 5 per cent tariff. But we also need to understand and identify what those raw materials and intermediates are”.
India is the world’s sixth largest producer of rubber (produced 67,000 tons last year) and that’s not enough to feed domestic tyre manufacturers and others. But there’s 25 per cent tariff on imported rubber, making exports of finished products uncompetitive. Steel is another case in point. Until last year, imported steel required to make finished products faced tariffs of 10.5 to 12 per cent. It was then brought down to 7.5 per cent but anti-dumping duties on imported Chinese steel added to the cost of local finished products, making them in some cases as much as 40 per cent higher than other producers globally.
Such policies don’t help MSMEs, so the government steps in with sops, subsidies and loans that only add to the cost. Domestic consumers also suffer. Little reason why the cost of doing business in India is high.
India produces only one-third of the cooking oil it consumes, so it makes no sense to impose high tariffs. In the case of palm oil, it takes seven years for a plant to mature, so import tariffs can come into force closer to that period. Yet for a long time, imported palm and soya oil faced tariffs of over 34 per cent. It was only in 2020, to combat inflation, that refined palm imports were placed in the free category.
India also loses out because of inadequate value addition. The UAE (and Singapore) are well known for this. So whether it’s rice or pepper, both imported from India, are re-packaged and exported at a significant mark-up. India exported over four lakh tons of apples last year but this could go up significantly if the apples were cut and packaged properly. There’s a huge market for such products in West Asia.
“Clearly the orientation has to change,” a Commerce Ministry official pointed out, “at the higher levels of government people are aware that these measures are making the economy lopsided and inefficient.”
The point to note is that India needs to move faster. The UAE will use this deal with India to push the case for investment from Europe and the U.S. Abu Dhabi is already moving to address any doubts about its credibility as a financial and trading centre. It is emulating another city state, Singapore, by seeking to ensure all business transactions are transparent and above board and there is no scope for money laundering or other illegal activities. It is becoming very service oriented and is targeting value addition of key exports.
There’s little doubt that India’s exports will go up as a result of the deal with the UAE, but so will Abu Dhabi’s, through value addition and service efficiencies.
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