Is the India-EFTA Trade Deal a Win-Win Situation?
Kotak Insights | Date 15/03/2024
16 years of negotiation and 21 formal rounds.
That’s what went into getting India and the EFTA countries shake hands on a free-trade agreement (FTA).
This development is getting the limelight for all the right reasons. It’s because the trade agreement may be instrumental in India receiving a whopping $100 billion as foreign direct investment (FDI) in 15 years with 1 million jobs!
Let us understand this trade agreement in detail and know how it could influence various Indian sectors.
The EFTA
EFTA stands for the European Free Trade Association.
It is the intergovernmental organisation of Iceland, Liechtenstein, Norway and Switzerland and it promotes free trade and economic integration between its members.
How big is EFTA?
The four EFTA States are open, developed economies with trade figures substantially higher than might be expected from a total of less than 14 million people.
In 2021, EFTA was the 10th largest trader in the world in merchandise trade and the 8th largest in trade in services. And EFTA is among the most important trading partner in goods and services for the European Union (EU). So, that says that any trade agreements with the EFTA could be a potential win-win for Indian trade as well unlocking economic benefits and improving bilateral trade relations.
The FTA
Moving on to the FTA – which stands for Free Trade Agreement. A FTA is a pact between two or more nations aimed at reducing barriers to imports and exports among them. So, under a free trade policy, goods and services can be bought and sold across international borders with little or no government tariffs, quotas, subsidies, or prohibitions to inhibit their exchange. And countries get into these FTAs to spur up the trade between them.
For instance, India has signed a couple of free trade agreements (FTAs), and six preferential pacts with its trading partners to promote exports and ensure greater market access for domestic goods and services.
But are all FTAs good for the countries in it?
The answer is a no because there may be instances where these trade agreements don’t do as much good for an economy as desired.
The upside is that a FTA could offer Indian manufacturers free access to certain foreign markets without having to pay needless custom duty. And foreign manufacturers can get the same privilege in return.
The downside is that Indian manufacturers could potentially have a lot to lose if cheap goods from foreign countries begin to flood our markets.
So far, so good.
Let’s now bring up the topic of the hour – the FTA agreement between India and EFTA.
India-EFTA Trade Agreement a Reality
On March 10, 2024, India and the EFTA signed a big deal called the Trade and Economic Partnership Agreement (TEPA). The Indian government, led by the Prime Minister, approved of this.
Here are some of the key highlights of this TEPA:
- EFTA will help bring in $100 billion investment to India and create 1 million jobs in the next 15 years. (The investments do not cover foreign portfolio investments)
- EFTA is offering 92.2% of its tariff lines which covers 99.6% of India’s exports. The EFTA’s market access offer covers 100% of non-agri products and tariff concession on Processed Agricultural Products (PAP).
- In return, India is offering 82.7% of its tariff lines which covers 95.3% of EFTA exports, of which more than 80% import is Gold. The effective duty on Gold remains untouched. Sensitivity related to PLI in sectors such as pharma, medical devices & processed food etc. have been taken while extending offers and sectors such as dairy, soya, coal and sensitive agricultural products are kept in exclusion list.
- India has offered 105 sub-sectors to the EFTA and secured commitments in 128 sub-sectors from Switzerland, 114 from Norway, 107 from Liechtenstein, and 110 from Iceland.
A Win-Win Deal?
The agreement between India and the EFTA could bring benefits to both parties.
This is because EFTA is a key group in Europe, offering opportunities to grow trade in goods and services. It's one of the top three economic block in Europe, along with the EU and the UK.
The trade agreement provides an opportunity for India to integrate into EU markets. Note that over 40% of Switzerland’s global services exports are to the EU. So, with the trade agreement, Indian companies can look to Switzerland as a base for extending market reach to EU.
The agreement will also give impetus to "Make in India" and "Atmanirbhar Bharat" campaigns.
It encourages manufacturing in sectors such as Infrastructure and Connectivity, Manufacturing, Machinery, Pharmaceuticals, Chemicals, Food Processing, Transport and Logistics, Banking and Financial Services and Insurance.
The India-EFTA deal is also expected to spur trade investments. India could see investment flow into the pharma, chemical sectors, food processing and engineering sectors. In fact, government officials have said that EFTA is also looking at joint ventures (JVs) in the above-mentioned sectors that will help India diversify imports away from China.
Lastly, TEPA would stimulate India’s services exports in sectors of key strength and interest such as IT services, business services, personal, cultural, sporting and recreational services, other education services, etc.
However, one must also note that Switzerland, which is India’s biggest trade partner among EFTA countries, has decided to eliminate import duties on all industrial goods for all countries starting from January 1, 2024.
So, the abolition of tariffs on all industrial products, including chemicals, consumer goods, vehicles and clothing is a concern for India as industrial goods accounts for 98% of India’s $1.3 billion merchandise exports to Switzerland (in FY2023). And due to this development, India’s goods could face stiffer competition despite any tariff elimination that would be part of the above deal.
In Conclusion…
As the Minister of Commerce and Industry, Food and Consumer Affairs and Textiles - Piyush Goyal said that TEPA is a modern and ambitious Trade Agreement.
This is the first time that India is signing a free trade agreement with four developed nations - an important economic bloc in Europe.
Moreover, for the first time in history of FTAs, a binding commitment of $100 billion investment and 1 million direct jobs in the next 15 years has been given.
In all, the agreement can give a boost to Make in India, provide opportunities to young & talented workforce and will provide a window to Indian exporters to access large European and global markets.
However, ensuring the deal's benefits trickle down to most sectors of the economy, mitigating the risks of increased competition, and navigating the global trade dynamics will be essential.
As India continues to assert its position on the world stage, this agreement could be a testament to its influence and the collaborative spirit of international trade partnerships.
We will be back with another exciting story next week!
Until then…
Stay Tuned!
Sources and References:
Disclaimer: The content of this blog is intended solely for educational purposes and should not be regarded as financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The securities and assets mentioned serve purely as illustrations only and should not be taken as recommendations for investment. Please note that the information presented is compiled from several secondary sources available on the internet and may change over time. We strongly advise consulting with a qualified financial advisor prior to making any investment decisions. Read the full disclaimer here.
