Searching for Growth
The European Union is India’s largest trading partner, but considering the history of India’s economic links with the members of the E.U. the volume of two-way economic flows is a very small proportion of Europe’s trade with the rest of the world. Besides, there has also been an occasional prickliness in recent years between the Government of India and the European Commission on bilateral and multilateral trade issues. The second annual India-E.U. summit in New Delhi last week was an occasion to cement the foundations of a longstanding economic relationship and at the same time to air, if not settle, the differences on trade and investment.
The high point of the meeting was the business summit which discussed the high-level “India-E.U. Initiative to Enhance Trade and Investment.” This initiative, launched during the Lisbon summit in June 2000, is meant to boost economic flows, especially E.U. investment in India. While E.U. foreign direct investment in India since 1991 is well above that of the U.S. and Japan and the majority of the E.U. investors have expressed satisfaction about their investment decisions, capital inflow from individual countries – including the majors like Germany, France and the U.K. – has been quite small. The first step of the new initiative has been to commission and discuss studies of the opportunities and bottlenecks in four sectors. But it is disappointing that the business summit saw little more than a listing of the familiar suggestions and complaints. In telecom, for instance, the demand is for India to raise the ceiling on FDI from 49 to 74 per cent. In information technology, where Indian exports to the E.U. lag far behind the U.S., the problem is a different one – stemming only in part from the Indian unfamiliarity with all but one of the E.U. languages. The Prime Minister, Mr. Atal Behari Vajpayee, in his speech to the summit, raised one issue holding up Indian software exports to the E.U.: the restrictive visa practices that discourage Indian software personnel from doing business with the E.U. An initiative by Germany last year to attract IT workers has had to be modified because the restrictions in the first offer found few takers.
The gaps between India and the E.U. are wider in trade issues. Last week’s summit came on the heels of the ministerial conference of the World Trade Organisation where the two were poles apart on what they wanted included in the negotiating agenda, though the E.U. attempted to don the robes of a friend of the developing countries. The multilateral issues have been settled for now, many would say more to the satisfaction of the E.U. than India, but a large number of bilateral differences are still on the table. The Indian complaint is that the E.U. falls back all too easily on the use of non-tariff instruments like anti-dumping duties and opaque import standards to keep a lid on India’s labour intensive exports. The E.U., in turn, points the finger at India’s high import tariffs, especially on textiles and liquor, which it says have neutralised the impact of the abolition of quantitative restrictions last April. Mr. Pascal Lamy, E.C. Commissioner for Trade, has offered to negotiate a bilateral agreement that by relaxing textile quotas would give Indian exporters greater access to the E.U. markets – the catch is that India will have to lower its tariffs on textile imports so as to give greater opportunities to European clothing exporters. While this would be similar to a deal that the E.U. recently struck with Pakistan, the problem is that it unfairly places non-tariff barriers (E.U. quotas) on the same plane as tariffs (India’s import duties). Considering that one of India’s longstanding complaints has been about the reluctant manner in which the E.U. has been meeting its commitments to remove quotas, the Government may have to think twice about responding with enthusiasm to yet another E.U. offer to accelerate the dismantling of its non-tariff barriers on textile imports.