Negotiations toward a major trade agreement between India and its largest trading partner, the EU, seem to be back on track. Broad structural and political reforms, however, will likely be needed in India for an agreement to stick.

The long-pending Free Trade Agreement (FTA) between Indian and the European Union is now being brought back on the track. If successful, it is expected to increase the bilateral trade between the two partners from the current nearly 100 billion euros to 200 billion euros.

This agreement is important for India, given the EU’s status as India’s largest trading partner. It forms an important market for India’s exports of textiles, apparel, pharmaceuticals, gems, and IT services, and is the biggest source of FDI inflows into the country. From its position, the EU wants greater market access in India, especially in agricultural products, automobiles, wines and spirits, and banking and legal services.

An uninspiring history

The EU-India negotiations on the Bilateral Investment Treaty began in 2007, but have been stuck over economic deadlocks relating to policy/political paralysis.

First, India’s tax system poses massive hurdles to successful implementation. The EU wants India to cut taxes on automobiles and wines. But India claims that the central taxes are already low. This, however, does not solve the problem for the EU as it, then, has to bear the tariffs imposed by individual states, making the overall costs massive.

The imposition of the pending Goods and Services Tax – which will impose a uniform tax code throughout the country and create a single market – in the Indian Parliament would have alleviated this problem. But thanks to persistent political opposition by the states and political parties, the fate of this structural overhaul hangs in delicate balance.

Second, given a broad history of commitment to economic self-sufficiency in both finance and economics, India has been reluctant to meet the EU’s demands to lower the tariffs on automobile imports, in order to insulate domestic businesses against potential risks arising from deregulation. The government’s latest ‘Made in India’ campaign is unlikely to help in the details of this issue, as it only sends a positive signal to investors at a general level.

Third, India’s approach towards civil society is well known. Even though there has been outrage over the Modi government’s crackdown on Greenpeace and other NGOs for violating the Foreign Contribution Regulation Act (FCRA), the process was started by the previous UPA-II regime. And yet, one of the key demands of the EU is to have conducive civil society norms in order to maintain certain environmental and social standards in a monitoring role.

Fourth, other purely trade-related provisions also face clear political risks. India mainly seeks market access through Mode 1 and Mode 4 viz. IT-related services, such as outsourcing and mobility of its skilled professionals across Europe, are difficult propositions given the EU’s changing politics over the linked issues of immigration and unemployment.

On the other hand, the EU seeks liberalization of FDI in multi-brand retail, which is highly unlikely to happen with the present government. The BJP’s – the ruling party – major vote-bank consists of small traders, whose interests will likely be jeopardized with FDI in retail. It also seeks access to India’s banking sector – again a politically controversial proposition, given the dominance of Public Sector Banks in India’s banking culture.

Finally, for India, what has increasingly become a highly controversial provision is the one relating to Intellectual Property Rights, in which India is unwilling to make any commitment above the WTO’s Trade Related Aspects of Intellectual Property Rights. This even led to protests in 2013 by public health activists and HIV patients.

New political change

The negotiations have recently received a new push. This can be understood through the Modi government’s changed political position and strategy on two counts:

Policy intent: The widely publicized ‘Made in India’ campaign, launched by the current government when it came to power last year, has been aggressively marketed among investors in almost all of Narendra Modi’s foreign visits. The government has also displayed intent on its implementation.

Reports on the assessment of the Modi government’s one year in office show that, by far, the infrastructure sector has been the largest recipient of central government funding, especially the railway modernization project, which has attracted a lot of foreign investment. This display of intent on the part of the Indian government to undertake economic restructuring has boded well with the trade agreement negotiations.

The EU ambassador, Joao Cravinho, recently commended the opportunities offered by this programme, in principle, in that it will open up space for providing new technologies and technical expertise to Indian and EU manufacturers based in India.

Moreover, if successful, the policy thrust of the new government will go a long way in avoiding the loophole whereby the weaker partner bears the trade gap in large volumes of trade. Besides this, the current government has also committed to not impose retrospective taxation, an action of the previous UPA-II government that was widely criticized by investors.

Strategic re-orientation: Besides investor-friendly policy restructuring, at a more political level, the Modi government has adopted a different tactical approach on two counts.

One, by getting key legislations passed in the Parliament, and adopting an ‘ordinance route’ on other investor-friendly measures, the government has signaled that it is walking the talk and also intends to do so in future. Two, by beginning to court individual European countries – including recent bilateral visits to France and Germany – the government has given a push to the trade agreement with the EU.

Politically, such a strategy displayed that India may adopt a policy of privileging individual European countries, thereby marginalizing the importance of engaging with the EU as a whole. This strategy has gone a long way in sending out a deliberate political message to the smaller EU members, who might be excluded in case of bilateral rather than EU-level engagement.

Thus, it is clear that the negotiations are unlikely to work out if the core political risks are not dealt with first. India needs a more radical structural policy overhaul in several of its sectors, as well as positive mobilization of the opposition parties, to give this trade agreement a realistic chance.