CEPA, CECA, FTA: India’s New Trade Dictionary – Analysis
By Gayatri Bhumralkar*
The year 2022 has seen two milestones for India’s global trade engagement. In March, India surpassed an ambitious target of $400 billion in exports for the first time. And the country signed trade deals with two important trading partners, the UAE and Australia, and is negotiating one with the U.K.
The increased exports are progress but an under-achievement for a country that once commanded 20% of global trade before the British Raj, and is still significantly below its current trading potential, as estimated by the International Trade Centre, Geneva.[1]
India’s commerce minister Piyush Goyal sees the gap and announced an ambitious target of achieving $2 trillion in exports by 2030 and $7.5 trillion by 2047. This requires 20% annual growth in exports for the next decade – a long shot when compared with actual export growth of 3% per year in the previous decade.
The only way to achieve this ambitious export target is to focus on fundamentals, i.e.
a) drastically reduce the time taken by commercial courts to settle disputes.
b) successfully implement the 461 Districts as Export Hubs policy.[2]
c) expand the scope of the Production Linked Incentive scheme[3] beyond the 14 existing sectors till 2030.
d) Introduce export schemes that will not provoke retaliation or disputes in WTO.[4]
e) create an international-level quality control framework for manufacturing exports.
f) develop mechanisms for constant improved of competitiveness of services exports.[5]
g) necessitate Indian missions abroad to focus on trade and commerce, in line with their international counterparts. [6]
This is required as India steps into new trade pathways. Foreign trade agreements are one of the key means to increase exports. After years of procrastination, India is now on an FTA signing spree, with three signed, and 14 under negotiation (see table).
Table – Recent FTAs of India
| Status of FTA | Country | Year signed or proposed | Projected trade |
| Signed | Mauritius | 1 April 2021 | Not Estimated |
| UAE | 18 Feb 2022 | $100 billion in goods and$15 billion in services by 2027 | |
| Early Harvest | Australia | 2 April 2022 | $45-$50 billion by 2027 |
| Under Negotiation | UK | March 2023 | $100 billion by 2030 |
| Canada | Early 2023 | $11.1-$13.1 billion by 2035 | |
| EU | End 2023 | $ 230 billion by 2027-28 | |
| Israel | End 2024 | Not estimated | |
| Proposed FTA with countries | Peru, Iran, Thailand, Indonesia, New Zealand | Formal negotiations yet to commence | Not estimated |
| Proposed FTA with groups | Gulf Cooperation Council, Europe, Eurasian Economic Union, South Africa Customs Union, BIMSTEC | Formal negotiations yet to commence | Not estimated |
An analysis of the benefits of India’s new trade agreements with the UAE, Australia, and potentially the U.K., is below.
India-UAE CEPA
Name: India-UAE Comprehensive Economic Partnership Agreement (CEPA)
Signed: 18 February 2022
In effect from 1 May 2022
India and the UAE signed the trade agreement after 90 days of negotiations – a record for the shortest time taken to conclude an agreement. A CEPA is more comprehensive and ambitious than an FTA because it includes services, investment, IPR, government procurement, disputes, and regulatory aspects of the trade. An FTA, in contrast, focuses only on goods.
Benefits for India: At present, the UAE is India’s third largest trading partner with bilateral trade of $59 billion in 2019-20. But India has been at a disadvantage, as most of its exports – worth $ 29 billion – did not have zero-duty access, unlike other developing countries, resulting in declining exports to that country. The CEPA corrects this imbalance, and exports from India to the UAE became duty-free in May. The CEPA target of bilateral trade in goods is set at $100 billion and trade in services at $15 billion by 2027.
The CEPA attempts to go beyond the oil trade between the two countries and expand into gems and jewellery, textiles, leather, footwear, sports goods, plastics, furniture, and engineering products.
Indian companies like Reliance, Tata Motors, Larsen & Toubro, Oberoi group, Essar Steel, and Zuari Agro Chemicals have collectively invested $350 million in October 2022 in the UAE, of which Reliance alone has invested $284 million in financial services. CEPA allows Indian companies to treat the UAE as a hub for sourcing India’s capital goods and intermediates for further value-added exports to other destinations in Africa and Europe.
Benefits for UAE: UAE will gain favourable tariffs for key export sectors like crude oil, natural gas, unworked diamonds, and gold over the next five years. Since these are essential imports for India, the reduction in import duty will be beneficial for both countries. Since 2015, UAE companies like Mubadala, Lulu Group, and DP World, have invested $1.5 billion in India in the information and communication technology, retail, logistics, and food sectors. Both India and the UAE will be allowed to access government procurement contracts in each other’s countries.
India-Australia CECA
Name: India- Australia Comprehensive Economic Co-operation Agreement (CECA)
Signed: Interim trade deal signed on 2 April 2022.
This agreement has been long-awaited: India and Australia have been negotiating a trade deal since 2011. Talks were suspended in 2015 due to a stalemate on dairy products from Australia and the entry of services professionals from India.
The Covid-19 pandemic made both countries realise the necessity of looking for trade partners beyond China. Keeping aside past disagreements, on 2nd April 2022, an interim trade deal Economic Cooperation & Trade Agreement (ECTA) was signed within less than two years of negotiations. Final talks will conclude by the end of 2022 and a Comprehensive Economic Cooperation Agreement will be signed.
This is India’s first trade agreement with a developed country in the last decade, and this is significant.
The pact will eliminate the 4%-5% tariff on most Indian exports like engineering, textiles, apparel, gems, and jewellery, leather, and footwear, and provide a level playing field as with other major exporters to Australia. The agreement will remove technical barriers to trade (TBT) such as sanitary and phytosanitary restrictions which put unreasonable hygiene and quality standards on agricultural products.
Benefits for India: This offers opportunities to India’s manufacturing sector, particularly micro, small, and medium enterprises (MSME) which are keen on the Australian market for exports of gems and jewellery, automobiles, textiles, footwear, and leather products. Automobiles and textile sectors can leverage India’s Production Linked Incentive scheme to increase production.
In services, Australia has agreed to a post-study work visa for up to four years for Indian students; temporary entry and temporary stay commitments for up to four years for intra-corporate transferees, contractual service suppliers, and independent executives; work and holiday visa arrangement for young professionals; and a quota of 1,800 per year for Indian chefs and yoga instructors.
Benefits for Australia: Coal comprises 70% of India’s imports from Australia, and its 2.5% tariff is eliminated, as are duties on Australian raw materials like wool, sheep meat, and critical minerals. Sensitive items from Australia like wine or cotton, onions, cashews-in shell, and cherries, whose import can hurt domestic producers, will have reduced tariffs in phases between three and ten years.
India-UK FTA
Name – India- UK Foreign Trade Agreement (FTA)
Negotiations: five rounds of negotiations concluded
As the political upheaval in the U.K. has ended with the appointment of new Prime Minister Rishi Sunak, the next rounds of negotiations of the India-U.K. FTA have resumed. The India-UK FTA is more services based and will include elements like sustainability[7], labour[8], supply chain resilience, and digital trends like unhindered data flow. As illustrated in Roadmap 2030[9] for bilateral relations, the two countries are strategically converging on shared interests like people-to-people connectivity, health, climate, defence, trade, and investment. This agreement can be a benchmark for India’s upcoming bilateral trade deals with other developed countries particularly the EU with which India has started the third round of negotiations.
Benefits for India: India wants easier access for its students, skilled workers, and specialists (legal, and medical professionals, IT workers, and financial experts). It is pitching for recognition of Indian higher secondary school certificates and maritime education as well as the opening of the healthcare sector for nurses and allied health professionals.
Indian companies have a social security compliance burden in both India and the U.K. Currently, Indian companies pay $605 million annually as social security benefits for their 50,000 Indian employees in the U.K. A totalization agreement that removes the dual social security tax burden between the two countries, will be signed under the India-U.K. FTA[10].
Benefits for the U.K.: Post-Brexit ‘Global Britain’ strategy aims to increase the U.K.’s trade ties with the world. It recognizes the Indo-Pacific region as the world’s growth engine and aims to enhance trade ties with it.[11] Doubling bilateral trade with India to $100 billion is part of the plan.
In the goods trade, the U.K. wants reduced tariffs on whiskey and cars. Tata Motors is a major FDI investor in the U.K. If the tariffs on imported luxury cars like Jaguar and Land Rover are reduced to 30% from the existing 60% to 100% in India, the parent company Tata Motors will gain – as will the U.K.
Conclusion
Although late to global trading regimes, these three agreements align India with other emerging markets with duty-free access to developed country markets.
However, signing of FTAs on its own will not be enough. Only 5% to 25% of India’s exports are routed through existing trade agreements compared with developed country averages of 70%-80 percentage. Slow progress in harmonising standards and certification issues, complex rules of origin, lack of clarity in information on FTAs, higher compliance costs, and administrative delays continue to dissuade Indian exporters from using preferential routes.
*About the author: Gayatri Bhumralkar is Research Assistant, Economics & Trade, Gateway House.
Source: This article was written for Gateway House: Indian Council on Global Relations.
References
[1] Export potential map, International Trade Center, Geneva. https://exportpotential.intracen.org/en/
[2] Government of India has prepared action plans for 461 districts. Each district’s potential products/services for exports have been identified and an institutional mechanism is being set up in each District in the form of District Export Promotion Committees (DEPCs). https://exporthubs.gov.in/
[3] $24 billion outlay from 2020-2025 for 14 sectors https://www.investindia.gov.in/production-linked-incentives-schemes-india
[4] Merchandized exports scheme faced retaliation in WTO. Govt. of India has replaced this scheme with the ‘Remission of duties and Taxes on export products’ (RODTEP) and Rebate of State and Central Taxes And Levies (RoSCTL) Schemes
[5] https://pib.gov.in/PressReleasePage.aspx?PRID=1784206 The Champion Services Sector Initiative has an outlay of $600 million for 12 sector . The action plan includes improving ease of doing business, strengthening physical and digital connectivity, identifying new sectors with untapped potential for value addition, employment generation and harmonizing the Indian standards with international standards for delivery of services.
[6] In August 2021, Indian Prime Minister Narendra Modi interacted with heads of Indian missions abroad and urged them to have constant communication with Indian exporters, to function as a bridge between the commerce ministry and different countries https://pib.gov.in/Pressreleaseshare.aspx?PRID=1743434
[7] Sustainability in FTA refers to promoting trade in low carbon goods and services and adhering to government commitments in low carbon development, avoiding industries that increase pollution and damage environment. For further details please refer to https://www.leidenlawblog.nl/articles/sustainable-development-in-indias-ftas
[8] Labour clauses in FTA refers to commitments of human rights at work, adherence to international labour standards, labour cooperation, consultation, and conflict resolution mechanisms. For further details please refer to https://www.ilo.org/global/standards/information-resources-and-publications/free-trade-agreements-and-labour-rights/lang–en/index.htm
[9] For further details please refer to – https://mea.gov.in/bilateral-documents.htm?dtl/33838/Roadmap+2030+for+IndiaUK+future+relations+launched+during+IndiaUK+Virtual+Summit+4+May+2021
[10] CII report discusses the issue of Indian companies’ social security compliance burden in detail. https://mooreks.co.uk/wp-content/uploads/2020/09/India-Group-social-security-report.pdf
[11] Global Britain in a competitive age, page 66:The Indo-Pacific tilt: the Framework https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/975077/Global_Britain_in_a_Competitive_Age-_the_Integrated_Review_of_Security__Defence__Development_and_Foreign_Policy.pdf