Aug 3, 2009

India-ASEAN Free Trade Agreement -- Finding Where It Hurts

The UPA-2 government is trying to pacify the agitated voices in Kerala over the Indo-ASEAN Free Trade Agreement. In the recent days we have seen aa concerted campaign in the media by the Congress party which is trying to convince the Kerala electorate about how 'useful' the FTA would be for the Kerala farmers in particular and the Kerala economy in general.

A number of newsreports and editorials have appeared in the newspapers telling us about the advantages of the India-ASEAN FTA. My colleague Bhaskar Goswami has been very keenly following the regional trade agreements, and thinks otherwise. He has answered some of the frequently asked questions or should I say he clears the mist over the some of the misconceptions that are being deliberately created.

Q: The main objective of the agreement is to "gain markets for newer products instead of the lost traditional markets". Which were the lost traditional markets we had in the ASEAN and how will India / Kerala gain in terms of new products and markets in the ASEAN ? What are the estimates and what is the reality as of now ?

Regarding traditional markets, India has been out-competed on spices and beverages (tea, coffee) by Vietnam and Indonesia. On gains, India has a negligible stake of 1 percent in ASEAN trade, and ASEAN countries already have very low import tariffs. Therefore India does not gain much from further tariff reductions by ASEAN members. The gains from trade creation are therefore limited while losses due to huge tariff cuts by India will outweigh these limited gains.

The present agreement on goods (including agricultural goods) is a red herring. The real gains that India will make will be from the upcoming agreement on services and investments. In order to get a favourable deal on this front concessions are being made on goods.

Q: As the discussions in the ASEAN progressed, trade also increased. In 2000-01, trade was worth 6.93 billion dollars, in 2007-08 it jumped to 39.04 billion dollars. When the agreement is materialsed, this will increase manifold. Can you clarify please? Can you tell how much of this trade did India actually gain in? And what is the scope of Indian exports gaining in future? On what products and which sectors gain and whose loss?

No doubt trade has increased. So has India's trade deficit (i.e. imports exceeding exports) with the ASEAN members. In 2001, the trade deficit was $3.5 bn which rose to $14.5 bn in 2007. In fact, 15% of overall trade deficit of India is on account of trade with ASEAN members. Between 2005-06 and 2006-07 India's exports to ASEAN grew at 20.67% while imports grew at 66%. This, when India has much higher tariff rates that ASEAN. Can anyone explain how will reducing import duties drastically by India with very marginal duty reduction by ASEAN help India's cause? How will India gain access in ASEAN markets for agriculture products when already there are major agri-exporters among Vietnam, Indinesia, Malaysia and Thailand?

In manufacturing, applied tariffs are much lower than agri tariffs in ASEAN and India will find it tough to compete. ASEAN countries are the world's lead exporters of light manufacturing products which India can never hope to displace. Plus, factor in China - it already has a head-start over India as it has an existing FTA with ASEAN. The Rules of Origin (ROO) have been diluted to 35%. This means that ASEAN members can add 35% value to products imported from non-ASEAN countries and sell it in India. On the other hand, India's FTAs with ASEAN members like Thailand and Singapore have ROO pegged at 40%. In fact, even the China-ASEAN FTA has a 40% ROO standard. Why did India agree to dilute its ROO norms? There are innumerable semi-processed products from China that may undergo 35% processing in ASEAN countries and be eligible to be traded in India.

Among India's exports to ASEAN countries, refined petro products stand at the top. Organic chemicals, pharmaceuticals, gems and jewelry and metal scraps follow. However, since import tariffs in ASEAN countries on these products are already quite low, there is not much scope for increasing trade.

Likely loss to be suffered in agriculture, electronics, motor car equipments, textiles, and light manufacturing goods. There are reports that India has already approached the ADB for a loan to compensate industries that are likely to be hit by the FTA. I doubt whether agriculture figures in the list.

As I mentioned earlier, it is services that gains are anticipated as India is the 10th largest services exporter in the world while ASEAN is a net importer. For the sake of comparison, the US imports $300 bn worth in services while ASEAN members import $150 bn in services! That is where India smells an opportunity and hence this sacrifice of agriculture and goods. We will have to wait for the services negotiations to be over till this comes out into the open.

Q: India stands to gain through getting markets for agri products such as oil seeds, wheat and other products such as machineries, parts, steel, steel products, meat, auto-parts, chemicals, synthetic textiles etc. How much ? What will this mean (gains / impacts) in terms of number of workers/farmers/fisherfolk etc ?

In case of wheat, Thailand imports around around 9 lakh tonnes of wheat each year which is primarily sourced from the USA. This is likely to change as Thailand has sealed an FTA with Australia, another major wheat exporter. Does the government honestly believe that India can compete with subsidised wheat exports from the USA or a low cost producer like Australia?

Another wheat importing country is Vietnam where India already controls around 42% of wheat market therefore the scope of expanding exports is limited. Philippines imports wheat for animal feed and USA dominates the supply chain. Australia meets 70% of wheat requirement of Malaysia. Given these realities, I certainly do not share the optimism especially when wheat prices in India today are ruling much higher than international prices.

On oilseeds, India does stand to gain, especially on exports of oil cakes and castor oil. But then India is already a world leader in this sector and irrespective of ASEAN it has a good market. In fact, I don't know what would be the gain stipulated by the government on oilseed be when it is the cheaper imports of palm oil from Malaysia and Indonesia that is known to have destroyed India's domestic edible oil production capacity, which means destroying oilseeds production.  

Exports of meat, especially halal, can go up if India expands its domestic processing facilities and matches ASEAN sanitary and phytosanitary standards.

I am not so sound on non-agri goods hence would not like to comment on them. However ASEAN is a major exporter of light machinery and India does not stand a chance against them.

Q: Indian markets will also open up for ASEAN agri products, and Indian markets are prepared for that. But traditional agriculture, fish product markets will not be open, because for this the ASEAN has agreed upon a negative list. In fact, this is the first time that ASEAN countries has agreed upon on a negative list for any country, can you qualify/counter this ?

This is being economical with truth. While ASEAN does not have a negative list, it does have a sensitive and highly sensitive list. For instance, China has 400 items on the sensitive list of its FTA with ASEAN of which 160 is on the highly sensitive list. Duty on sensitive products in the China-ASEAN FTA will come down to 0-5% by 2015 and that for highly sensitive items will be slashed by 50% by 2018.

It is interesting that GoI does not talk about the sensitive list of ASEAN. While GoI has not put this list in the public domain, ASEAN's stand is well known. It wishes to maintain the sensitive/ highly sensitive list that prevails in its FTA with China. Under that, ASEAN has earmarked around 2,200 items under the sensitive/ highly sensitive category. So, who gains more from protectionism?

Q: A 'negative list' is a protective wall, and no tarif reduction is needed for it. 489 products are in this list, 302 are agri products, Copra, Coconut oil, Coconut, Rice, Rubber, some fish types like Mathi , Chemmeen, Crab, milk and milk products, honey, cashew, banana, pineapple, mangoes, orange, vanilla, jathi, coriander, jeera, ginger, turmeric, tapioca etc are in the negative list. Is this true, fully? How effective this is? And what does this mean to the Kerala farmer ?

India has 489 tariff lines under the negative list which includes 302 agricultural items, 81 items from textiles and clothing, 52 items from machinery and auto, and 32 items from chemicals and plastics. In addition, there are 22 other items from various other sectors. For products that are not on the negative list, duties will be reduced in a phased manner and the duty will be brought down to zero by 2019. On 5 items - tea, coffee, pepper, crude palm oil and refined palm oil - are on the highly sensitive list and will undergo partial duty cut in 2009. Duty on tea and coffee will be brought down to 45%, pepper to 50%, for CPO and RPO it will be brought down to 37.5% and 45% respectively.

Yes, the list does cover these items. However, coconut oil has a close substitute in palm oil. Cheap pepper meant for oleoresin extraction will find its way into the open market.

Q: Coffee, Tea, Pepper etc are in the highly sensitive list. This is a great precaution that has been provided for Kerala. What do you say? How ?

On pepper, bound tariff will be reduced to 50% by 2019. At present, India's import duty for pepper under HS 0904 is 70% plus other duty and tax as laid down by Customs. How can the govt. say that a 20% duty cuts under ASEAN for pepper will not impact Kerala farmers? Besides, the argument that inferior pepper is imported from Vietnam for manufacturing oleoresins is partly true. Back in 2005, Sri Lankan pepper flooded North Indian markets and depressed domestic prices forcing the govt. to enforce a quota regime. These imports were not for oleoresins but sourced from Indonesia and sold in markets for consumption by households. Even while the official stand is that 75% of pepper imports go into oleoresins while 25% (which too is quite high in volume terms and in turn depresses price) reach open markets, the fact remains that except EOUs engaged in oleoresin extraction, most processors leak cheap imported pepper into the domestic market. In my opinion, roughly 50% of pepper imported for oleoresin production for re-exporting finds its way out into the market. That is the primary reason for pepper prices remaining depressed despite a quota cap on Sri Lanka FTA imports. Import tariffs for both coffee and tea (presently 100%) will be brought down to 45% by 2019. Will that not hit the tea and coffee plantations? Or does the government feel that in 10 years it would be able to match productivity levels of ASEAN countries and out-compete them?

Q: The tariffs for the products in the highly sensitve list will be reduced step by step but even after 10 years it will not be reduced to zero. The protection will continue. For example for palm oil it is currently 80 % and in 2019 will only be reduced to 37.5 %, for coffee and tea its now 100% and it will come down to 45%, for pepper from 70% to 50%". How true is this ? How effective is this ?

The reason for Kerala's worry are on two fronts which I am afraid nobody is properly articulating. One is lower levels of productivity. With the exception of rubber, productivity of all plantation crops in Kerala are lower than that of ASEAN members. The second issue is that of cost of cultivation which is way higher than what prevails in ASEAN countries. In such a scenario, how will Kerala farmers compete against cheap imports?

This is being economical with the truth... a bit of political savvy-ness by GoI. What Chandi is referring to are the applied tariff rates and not the bound rates. For palm oil, the bound tariff is 300% which will now come down to 37.5%. The bound tariff for tea is 150% which will come down to 45%. Bound tariff for raw coffee (neither roasted nor decaffeinated) stands at 100% while that for all other forms of coffee is 150%, which will come down to 45%. Bound tariff for raw pepper (neither crushed nor ground) stands at 100% while that for crushed or ground is 150%, which will be brought down to 50%. At WTO negotiations, all tariff cuts are based on bound levels and not applied levels. So why is not the same yardstick applied here?

Q: This is an opportunity for a comprehensive change in the agriculture sector in Keala and India. The Indian agri products must get prepared to compete with the ASEAN countries. Intensive efforts will be taken in these 10 years to increase productivity. A massive effort is going to be taken to make the agriculture, fisheries sector competetive to any country in the world. The PM has declared that a special high-level committe will be setup for this. Kerala will be supported by the Centre with financial, technical and all sorts of support. What is all this? How will it change things? How possible is this? Any strong data-based argument for this ?

The Centre has launched a few schemes: Department has Commerce launched a Rs. 1,400 cr scheme for improving social infrastructure in tea gardens. The govt. and industry will share the cost on a 50:50 basis. Tea Gardens of Tripura, Cachar valley and Tamil Nadu have been identified under this scheme. The GoI has also announced a Rs. 4,900 cr Special Purpose Tea Fund (SPTF) as a 15 yr productivity boosting programme. Last year the Coffee Board proposed a Rs. 105 cr scheme to replant 45,000 hectares of coffee plantations. Similar schemes are in the pipeline for coffee and pepper as well. I have no clue how these schemes are actually working on the ground.

Q: Then, what is the amount of subsidy and support that some of the competing ASEAN countries get for the crops like tea, pepper, coffee, palm oil, rubber etc ? Comparatively, what is it in India ? What is it in terms of productivity? Are we comparable and will we ever achieve it ? 

Direct and indirect subsidies in ASEAN countries are way lower than what prevails in India.

Productivity of all plantation crops except rubber are much higher in ASEAN countries than India. Pepper productivity in Kerala is around 320 kg/ha, while Vietnam produces 1.2 tonnes and Indonesia 2.3 tonnes from the same area. Productivity of coffee in India stands at 765 kg/ha while Vietnam produces 1.7 tonnes/ ha.


Anonymous said...


GMW said...

One argument that the govt puts forth is that,by attracting more food grain imports Govt will be able to check the price of food grains.How would you react to this statement ?.It is a fact,apparently, that due to less importance (as evident frm increasing farmer suicides yr after yr) to Agriculture sector,it is facing a serious threat in India.Unless Govt ensures it has a grip on the markets it would result in serious trouble,right ?

Anonymous said...

By the way Kerala gets treated it would become a state which is a centre of origin of Pepper, bereft of Pepper and a state taking its name from the coconut tree ("Kera"= means Coconut), a misnomer. Unless remedial actions are taken for increasing the productivity, there would be farmers sucide and economic downturn in Kerala's economy. Where are the massive interventions required for restructuring the Plantation areas of Pepper, coconut, Tea and coffee? I could not understand the lehargy of Politicians, administrators, agriculturists and scientists in focussing this issue.

Savan Mohamed said...

It is true that the tea,coffee,pepper and coconut plantations in Kerala will be hit by 2019. I feel, it would be very difficult to improve productivity with the existing cost of labor, shortage of land and unionism. It might bring down commodity prices but who will ensure quality?. A well writtenb blog. Congrats.