Evaluating India’s deal with the European Free Trade Association

On 10 March 2024, just before the announcement of the India’s election polling dates, New Delhi signed the Trade and Economic Partnership Agreement (TEPA) with the European Free Trade Association (EFTA), comprising four European countries, namely, Iceland, Liechtenstein, Norway, and Switzerland. The free trade agreement (FTA) negotiations between India and EFTA countries began in 2008. The agreement was finally signed after 16 years and 21 formal rounds of negotiations. It will come into effect after ratification by respective governments, which may take some time.

After walking out of the China-led Regional Comprehensive Economic Partnership (RCEP) Agreement in 2019, India announced its intention to selectively engage with trade partners, which are the key export markets or can bring in investment and create employment. Within two years, India signed trade deals with Mauritius, Australia, the United Arab Emirates (UAE) and, more recently, with the EFTA. The India-EFTA TEPA is India’s first FTA with European countries. It aims to increase bilateral investments to US$100 billion and create one million direct jobs within 15 years of the implementation of agreement.¹

Despite being touted as a modern and ambitious trade agreement by the government and many experts, TEPA falls short of expectations in terms of scope, coverage, and depth of commitment. A more comprehensive agreement, coupled with domestic reforms, could have improved India's prospects for attracting investment and positioning itself as a key player in global supply chains.

Limited in scope, coverage, and commitments 

Most of the trade agreements of the EFTA countries are low in ambition and focused on limited areas of their export interest, in terms of their scope and coverage. These trade agreements can be customized to the needs of the trade partners. The TEPA follows similar trends. It is a low ambition agreement, not only compared the ones that India is negotiating with the United Kingdom (UK) and the European Union (EU) but also with respect to the recently signed India-UAE Comprehensive Economic Partnership Agreement (CEPA). For example, TEPA does not cover chapters like the one on digital trade and e-commerce, or bilateral cooperation in pharmaceutical products or the micro, small, and medium enterprises (MSME), which are part of the India-UAE CEPA.² In fact, the exclusion of e-commerce and digital trade, which are covered in over 100 FTAs, is unique to this agreement. The text of TEPA chapters is customized to take care of the domestic sensitivities of India. For example, the chapter on trade and sustainable development (TSD) in TEPA, unlike the TSD chapter of the EU’s trade agreements, does not include enhanced enforcement or dispute settlement mechanisms. Further to address India’s concerns, the chapter includes a prohibition on the use of environmental and labor measures as a disguised restriction on trade.

Limited coverage of goods and services may adversely impact trade diversification  

In goods, the EFTA countries have near-zero autonomous tariffs, while tariffs in India are very high on products that are exported from EFTA countries. While TEPA tries to address this problem, it fails to address the core issue in the India-EFTA bilateral trade, which is the lack of product diversification. The TEPA focuses on eliminating duties in a limited number of products such as pharmaceutical, machinery, watches, fertilizers, medicines, chemical products, and minerals, which are being exported by EFTA member countries to India. Duty reductions are country-specific – for example, India offered duty reductions on chocolates and wines to Switzerland and not to Norway. India offered concessions on roughly 82.7% of its tariff lines, covering 95.3% of EFTA exports to India. At present, over 80% of the EFTA exports is gold, in which India provided a concession of 1% on the bound duty rate, but the applied duty remains unchanged.⁴

India’s trade in goods with EFTA has halved in a decade, from US$34.49 billion in 2012-13 to US$18.67 billion in 2022-23.⁵ This is primarily due to a lack of product diversification. Organic chemicals, and precious and semi-precious stones accounted for 33% of India’s exports in 2012-13, which increased to 52.39% in 2022-23. Precious and semi-precious stones⁶ are India’s major import from EFTA, accounting for 89.6% in 2012-13 and 77.6% in 2022-23 of the imports. Imports may not have diversified due to high tariffs in India. India has an average MFN applied tariff of 39.6% in agricultural products and 14.7% in non-agricultural products. Tariff reduction by India in products of export interest to EFTA may help to diversify imports after the implementation of the TEPA. However, the large exclusion list may reduce some of the benefits of the tariff reduction. Products like dairy, fresh fruits; electrical machinery and equipment⁷; aircraft, and spacecraft⁸ are on the exclusion list for Switzerland, Iceland, and Norway, while precious and semi-precious stones⁹ are on the exclusion list for Norway and Iceland and Chocolate and chocolate products¹⁰ are only on the exclusion list for Norway. A number of agriculture products are excluded to address political pressure of farmer movements and to protect certain companies in sectors like dairy.¹¹ The country-specific exclusion list makes it difficult for the businesses to understand and use the trade agreement to develop supply chains.

Similarly, the Intellectual Property Rights (IPR) chapter allows both trading partners to give due consideration to ratify or accede to further key IPR agreements. It also includes the principles of national treatment and MFN. These are interesting ways of drafting the text. In such cases, the benefit of a future trade agreement like the India-EU agreement can be extended to the TEPA. However, the lack of regulatory commitment reduces the gains of this agreement, and exporters will continue to bear the cost of regulatory compliance.

Another issue in evaluating the trade agreement for services is the lack of bilateral services trade data by sector and sub-sector. According to the Organisation for Economic Co-operation and Development (OECD) Services Trade Restrictive Index (STRI),¹² and other studies like the United States Trade Representative’s (USTR) National Trade Estimate Report on Foreign Trade Barriers 2023¹³, India has more market access and national treatment-related restrictions compared to those of the EFTA countries. There are restrictions and conditions on FDI in service sectors, such as retail or insurance. The Trade in Services chapter does not go far in liberalizing FDI inflows. It, however, includes disciplines that aim to ensure the competitiveness of EFTAs’ services suppliers in India. There are provisions for mutual recognition agreements (MRAs) for professional services such as nursing, chartered accountants, and architects, but there are no time-bound commitments to sign MRAs. As of date, though there are provisions for MRAs in India’s trade agreement, there are hardly any success stories aside from an MRA in nursing with Singapore. 

Attempt to link trade and investment to meet domestic sensitivities in India 

The Indian government has presented the TEPA as an agreement which will bring in investment, create jobs, provide exporters access to quality inputs, and give further impetus to the Atmanirbhar Bharat and Make in India initiatives. One core concern of Indian domestic lobbying groups with respect to trade agreements is that tariff reductions can worsen the trade deficit for India.¹⁴ While the trade deficit has declined from US$31.74 billion in 2012-13 to USD$14.81 billion in 2022-23, there remains a fear that tariff reduction under the agreement may increase the trade deficit. Further, the inflow of investment from EFTA countries into India has traditionally been low. Between 2000 and 2023, FDI equity inflow from EFTA countries to India was US$10.83 billion, which was only around 1.62% of the total FDI equity inflow.¹⁵ Switzerland, though the largest investor within EFTA in India, does not rank among the top 10 source countries.

Conclusion

India has been selectively launching FTAs with key trade and geo-strategic partners with an overall objective to develop resilient supply chains and get more investments. The trade agreements are customized to make them look economically beneficial for India, yet they remain low ambition with limited coverage, and hardly any WTO plus provisions or regulatory commitments.

The TEPA broadly follows a similar pattern. Nevertheless, with high tariffs in India, tariff reductions on exports with likely strong demand, such as watches, chocolates, or Norwegian salmon, will significantly boost exports from the EFTA region to the large and fast-growing Indian market. Indian companies can play a key role in the supply chains of companies from EFTA countries. While the India-EU trade agreement will take some time to firm up, TEPA is seen by many experts as a gateway for Indian exporters to access the European market. However, a deeper agreement along with domestic reforms may have helped India to play a bigger role in resilient value chains, attract more investment, and create jobs.

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[1] https://pib.gov.in/PressReleaseIframePage.aspx?PRID=2013169 (last accessed on March 20, 2024).
[2] https://commerce.gov.in/international-trade/trade-agreements/comprehensive-economic-partnership-agreement-between-the-government-of-the-republic-of-india-and-the-government-of-the-united-arab-emirates-uae/ (last accessed on March 20, 2024)
[3] https://commerce.gov.in/international-trade/trade-agreements/india-efta-tepa/ (last accessed on March 20, 2024) and https://www.efta.int/sites/default/files/documents/legal-texts/free-trade-relations/india/EFTA-India%20Trade%20and%20Economic%20Partnership%20Agreement%20-%20Chapter%20by%20Chapter%20Factsheet.pdf  (last accessed on March 20, 2024)
[4] https://pib.gov.in/PressReleaseIframePage.aspx?PRID=2013169 (last accessed on March 20, 2024)
[5] Compiled from Export Import Data Bank, Ministry of Commerce and Industry, available at https://tradestat.commerce.gov.in/eidb/ (last accessed on March 20, 2024)
[6] HS code 71081200
[7] HS code 85171810 to HS code 85279900
[8] HS code 88
[9] HS code 71031031 to HS code 71031090
[10] HS code 18069010
[11] See https://foreignpolicy.com/2024/03/13/india-efta-free-trade-deal-protectionism/ (last accessed on March 20, 2024)
[12] https://www.oecd-ilibrary.org/trade/oecd-services-trade-restrictiveness-index_b9e5c870-en (last accessed on April 17, 2024)
[13] https://ustr.gov/sites/default/files/2023-03/2023%20NTE%20Report.pdf (last accessed on March 20, 2024)
[14] https://foreignpolicy.com/2024/03/13/india-efta-free-trade-deal-protectionism/ (last accessed on March 20, 2024)
[15] Compiled from Table No. 3 Country-wise / Year-wise FDI Equity Inflow from January, 2000 to December, 2023, FDI Newsletter Vol. XXXII No. 3, January 2024,  Department for Promotion of Industry and Internal Trade (DPIIT), available at https://www.dpiit.gov.in/sia-newsletter/fdi-newsletter-vol-xxxii-no-3-january-2024 (last accessed on March 20, 2024)

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