On 8 May 2021, when Indian Prime Minister Narendra Modi met European Union (EU) leaders virtually, business leaders and experts across the country were following the development closely – after all the trade talks were under suspension since 2013.
Yes, finally the EU and India have agreed to restart the long-halted free trade agreement (FTA) in an effort to strengthen the economic cooperation especially amidst the fast growing influence of China. While both EU and India spoke at length to enhance cooperation across different sectors that included digitalisation and health, the Indian apparel industry would have got something to cheer about after the decision.
Many sectors such as textiles, garments and leather have been urging the Government over the last few years to sign FTA with EU, as it would help them to get an access to the EU market duty free or at lower tariffs. There’s no better way for Indian garment and textile manufacturers to closely compete with Bangladesh and Vietnam, which currently are getting preferential access.
Following the summit, Portuguese Prime Minister Antonio Costa, who holds the EU’s rotating presidency, said that Europe and India, which can boast of having two of the largest democracies in the world, can together resolve several global challenges including the current pandemic-induced challenges. Here it is important to mention that in these tough times, the EU has to date sent € 100 million aid to India – in addition to sending grants worth € 2.2 million in association with the World Health Organization.
Similarly, the Netherlands too has been keen to take forward different projects with India that also include a pilot project on pollution and waste management in a textile industrial cluster in Panipat, Haryana. The Netherlands is seen as a world leader in water use and management, especially in waste water recycling.
Further on Indian apparel sector and its interest in the EU-India FTA, ever since the talks were curtailed between the EU bloc and India in 2013, the apparel exporters have been calling upon the Government to review India’s trade pacts with the EU – India’s largest trading partner in 2018 with bilateral trade worth US $ 115.6 billion (exports valued at US $ 57.17 billion and imports at US $ 58.42 billion). In fact, in this regard, the Apparel Export Promotion Council (AEPC) had even said that India’s apparel exports could double in three years if disadvantages in the trade agreements are eliminated. With reference to this, the industry has also previously sent letters to Commerce Minister Piyush Goyal as well as Textiles Minister Smriti Irani.
Over the last decade, India signed significant trade pacts with ASEAN, Japan and Korea, but despite all that, the share of these markets in India’s exports fell during the decade to 46 per cent from 51 per cent. On the other hand, the share of traditional markets like EU and the UK in India’s exports have jumped from 38 per cent to 43 per cent – and all this without any FTA. So reviewing the trade agreement with EU remains integral. In fact, India’s untapped export potential for the EU, reportedly, stands at a whopping 90 per cent. Now that’s some percentage and can be tapped.
According to the industry body, India at present has a duty disadvantage of 9.6 per cent in the EU market, when compared with its apparel competitors like Bangladesh, Cambodia, Sri Lanka, and Pakistan. And to make matters worse, EU’s FTA with Vietnam signed last year has hit India severely. The industry believes that the EU-Vietnam FTA may hurt India’s garment industry as the FTA abolishes 99 per cent of customs duties which would enable Vietnamese services and public procurement markets to EU companies.
The clear tariff differential in the EU market will add to India’s already-stark disadvantages in other areas such as logistics costs and further erode the country’s competitiveness vis-à-vis Vietnam, believe some industry experts.
It is clear that there is now an urgent need to have a level playing field in terms of market access and margin of preference in India’s biggest global market and to correct the distortion that the apparel industry has been suffering.
Also, here one cannot overlook the numbers! Back in 2019, India’s readymade garment exports to the EU worryingly slumped from € 4.47 billion to € 4.31 billion. However, what was more worrying for the country’s apparel sector was that its competitor and neighbour Bangladesh’s exports for the same jumped from € 12.62 billion to € 15 billion during the year. Even Cambodia’s readymade garment exports grew from € 2.71 billion to € 3.30 billion, while Pakistan’s exports rose from € 2.23 billion to € 2.70 billion.
In such a scenario, EU and India’s efforts to strengthen economic relations hold lot of relevance not just for apparel sector, but for many other sectors. Here it is important to state that according to the European Commission, the EU accounted for € 96 billion (US $ 117 billion) of trade in goods and services in 2020, which is 11 per cent of India’s total, just behind China and the US.
Meanwhile, EU officials have also warned that though there is willingness to restart trade talks, there is little progress on many other areas like Indian tariffs for goods and intellectual property rights.
Back in 2013, when trade talks were suspended between India and EU, some of the major differences that had led to suspension of talks included issues related to cutting tariffs and intellectual property – in addition to some other issues. Also, EU has always been particular about including non-trade issues such as labour and environmental standards in the FTA, which India has always opposed.
It is important for India to now carefully select its new FTA partners. While the focus should be on countries with maximum trade complementarities, which makes EU a natural ally, India should also be careful and understand that EU, or for that matter UK, could also be very tough negotiators.
As they say any job well begun is half done. There’s now a lot of optimism amongst Indian apparel manufacturers and one cannot deny that there are now huge ‘positive sentiments’ in global sourcing from India and the apparel exporters are eager to capitalise on this.
Notably, the decision to resume trade talks between the EU and India comes a few days after India and the UK had pledged a ‘quantum leap’ in their relationship and distinctly stated that they plan to double their trade by 2030. While the decision is seen as a part of Britain’s efforts to bolster diplomatic and economic alliances following its EU exit, talks with India on a formal FTA may not happen anytime until this fall.
It will be interesting to see the next development in this regard, but till that happens, at least there’s some solace to see the smile back on apparel exporters’ face – hopefully it will be for a longer duration this time.