Easing of regulatory barriers, not tariff elimination, likely to help India the most.
By Biswajit Dhar
India’s recently-concluded Comprehensive Economic Partnership Agreement (CEPA) with UAE is a landmark for it has several firsts to its credit. It is the first time since walking away from the Regional Comprehensive Economic Partnership (RCEP) in 2019 that India has warmed up to an economic cooperation agreement (ECA). The UAE CEPA is the first ECA that India has endorsed in over a decade, after the CEPA with Japan in 2011, and is also the first with any Gulf country. And finally, it could be the first of at least seven more ECAs that the government intends to wrap up soon. This includes the proposed early harvest deal with Australia to be concluded over the next few weeks.
Thus, there seems to be an urgency in the government to hasten the pace of negotiations on the ECAs currently on the table, and to reverse the perception that India is a slow-mover in such negotiations. At the same time, by including issues related to the digital economy and government procurement in the UAE CEPA, which it had stoutly refused to include in any of the past agreements, the government is likely signalling that it is willing to be more “flexible” in the negotiations. Whether this “flexibility” would extend to issues like labour and environmental standards that are high on the wish-list of the EU and the UK, two prospective CEPA partners, needs to be seen.
The UAE CEPA is important for at least two reasons. The first is that UAE is a gateway not only to the MENA region, but also to other parts of Africa as well. The Centre, too, has recognised the advantages that UAE could offer as a “global logistical centre with technically advanced transport and storage facilities” for distribution of pharma products, a key export item for India. UAE has its sight set on becoming a pharma-distribution hub by 2030, and this, the government believes, would help India find more market access.
The second advantage is the possibility of India reversing its declining trade relations with a country that was its largest trading partner until 2012, with total trade at $74.8 billion. UAE was also India’s largest export destination; the value of exports having peaked in 2011 at $38.3 billion. Thereafter, exports have been steadily declined. In 2021, India’s exports to UAE were $25.4 billion—lower (in nominal terms) than the exports in 2010 ($29.3 billion).
Surprisingly, the surge in exports that was seen in 2021, largely due to the pent-up demand in the wake of the Covid-pandemic, did not have any impact on India’s exports to UAE. Thus, the CEPA provides an opportunity for carefully assessing the factors that are impeding India’s market access to its once-largest export market.
The government is quite upbeat about India’s market access prospects in UAE after CEPA gets implemented on May 1. This is because UAE is offering overall duty elimination on over 97% of its tariff lines, corresponding to 90% of India’s exports in value terms. The expectations are that trade between the two countries would increase to $100 billion in the next five years, up from $68.4 billion in 2021.
The sectors that are likely to benefit from UAE’s tariff cuts are gems and jewellery, textiles, leather, footwear, sports goods, plastics, furniture, agricultural and wood products, engineering products, pharmaceuticals, medical devices, and automobiles. Currently, almost two-thirds of India’s exports to the UAE comprise of petroleum products, gems and jewellery, apparels, iron and steel, and their products, and telecom equipment. Each has a share in exports of more than 5%. It is therefore interesting to note that the government is expecting a sizeable change in India’s export basket following CEPA.
How realistic are these expectations? It may be argued that the realisation of the government’s expectations would be a function of two factors, one the preference margins that Indian products would enjoy in the CEPA regime, and two, how effectively regulatory barriers are dealt with. As regards the preference margin, or the difference between the existing tariffs (the most favoured nation or MFN tariffs) and the preferential tariffs that UAE has offered to India, it may be pointed that this would not be very large. According to the data provided by the WTO on the MFN tariffs maintained by the UAE, 87.2% of its tariff lines attract tariffs of 5% while 11.2% of the tariff lines are tariff-free.
The remaining tariff lines either attract 100% tariffs—mainly tobacco products—or are designated as “special goods” (prohibited goods). This implies that for most products, the preference margins would be no more than 5%. Moreover, UAE has already eliminated tariffs on most pharma products on an MFN basis. This, in other words, means that tariff elimination by the UAE is not likely to be a major factor for triggering the increase in India’s exports that the government expects; the key factor could be the regulatory barriers.
One positive measure in this regard is the annex on pharma included in the CEPA. The annex is intended to facilitate increased market access for Indian products, through automatic registration and marketing authorisation in 90 days for products approved by the regulators in the US, the UK, the EU, and Japan. Similar efforts are needed in the other key areas in order to provide momentum to India’s exports.
Finally, a free trade agreement with a country that is also a re-exporter can have one major problem, namely, circumvention of exports from third countries. This problem can only be overcome by an effective Rules of Origin. The CEPA includes a “contract enforcing Country of Origin”. However, this measure must be consistently monitored to assess its effectiveness.
(Author is Professor, Centre for Economic Studies and Planning, School of Social Sciences, JNU. Views expressed are personal and not necessarily that of Financial Express Online.)
