India and FTAs: the next manufacturing hub?

Need for an alternative answer to China

Ever since the lockdown in China due to Covid-19 virus, global markets have been volatile fearing significant disruptions in their supply chains. According to Dun & Bradstreet, around 51000 companies, including dozens of Fortune 500 companies, have directly lost two or more suppliers from China. Economists have warned that this outbreak could cost the world more than $1.1 billion in lost income. 

India is likely to lose bilateral trade worth $87 billion. China is amongst India’s largest trading partners, a potential breakdown in this ecosystem would adversely impact the Indian economy. This brings into question the wisdom of having one country as the manufacturing hub for the entire world. 

In a globalised economy, future disruptions in supply chains cannot be ruled out.  To avoid being left at the mercy of a single supplier, countries will now seriously consider diversifying their sources.  This presents countries like India an opportunity to expand its presence in the lucrative global manufacturing ecosphere. However, India is not the only option for the world as countries like the ASEAN bloc, Brazil and Mexico are increasingly meeting the demand. 

India, itself is heavily dependent on Chinese supply hubs for its pharma industry, solar panels and smartphone manufacturing. It too needs to prioritise and nurture certain key sectors to protect itself from such disruptions.   

India’s experience with FTAs 

While India continues to participate in spirited trade with other major players like the USA and the European Union, we lack an FTA that could seal the deal for us. The EU is our largest trading partner; not having a free trade agreement with them makes little sense. India needs to expose its industries and manufacturers to direct competition from other countries so that they match up to world standards. For too long, the Indian industry has existed under the umbrella of state protectionism.

However, it should not be done in a rush, India loses much more by rushing into an FTA than by not getting into one. For example, there are many sticking points with the EU which need to be resolved before a deal is struck. The EU wants the high tariffs on Agri and dairy products to go, disputes with the companies to be referred to international arbitration, stricter environmental guidelines and lower tariffs for beverages and alcoholic drinks.  India looks for increased access to labour markets and a market share for the burgeoning pharmaceutical industry. An agreement that accommodates everything would hurt India in the long term as Indian farmers and dairy sector would face stiff competition, and they constitute a significant portion of our labour force.

The way ahead for India

India's journey to becoming a manufacturing hub must start from letting go of its protectionist measures such as high tariffs, strict regulations and outdated labour laws. However, the inclusive policies of any government mean that it has a responsibility towards the vulnerable sectors, especially the farmers. 

For a start, India must improve its tax structure, to attract investors and increase Foreign Direct Investment. Logistics in India are outdated, and the sector costs come up to 14 percent of India’s Gross Domestic Product. To bring down this cost, India needs to invest in better ports, roadways, railways, and a trained manpower to run them as world-class facilities. Once it has created the most conducive environment for investment, India would be better placed to negotiate a net positive FTA with the USA, Canada, Mexico and EU.