Analysis: EFTA Can Help Boost India’s Global Relevance

Analysis: EFTA Can Help Boost India’s Global Relevance

Signing of these free trade agreements can be considered as work in progress towards making India a strong global economic power

Madan SabnavisUpdated: Friday, March 15, 2024, 10:56 PM IST
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Representative Image | Valdas Miskinis/Pixabay

Free trade agreements (FTAs) bring a lot of value to all countries concerned as they provide mutual benefits. That is the basis of drawing up any such agreement which is supposed to be a win-win situation for everyone. The World Trade Organization (WTO) was to be the largest effective such agreement where all countries agreed to the terms of engagement. But this did not work out as there can never be common grounds for over 150 countries which want to further their interests. The reducing importance of the WTO has been accompanied by more free trade agreements being signed by nations with common interests. FTAs are more manageable as there are fewer players involved. India’s recent trade agreement with four European countries in the European Free Trade Association can be looked at against this background.

Countries like Switzerland, Iceland, Norway and Liechtenstein do not really matter much if one looks at the total trade involved with India which is between $ 20-30 bn a year with wide fluctuations. Switzerland is probably the most important one in terms of trade relations. Hence, while it is possible to say that India will gain more from imports coming in as duties would be lowered over time, there may be limited advantage when it comes to our exports given the quantity involved and the size of these economies.

The agreement however has an interesting take on foreign investment which is being targeted at $ 100 bn over 15 years. This is a goal and not commitment, as investment decisions are taken by private parties and not governments. Therefore this would be more of an aspiration number rather than a certainty. Hence there can be an upside to the overall flow of FDI to the country though the amount may not be really large to begin with. Switzerland is the biggest investor among the four nations.

If the immediate gains are minimal and the medium term flows of investment would be based on interest of private investors, how should this agreement be interpreted? This agreement along with other discussions being held on other issues with other countries should be seen as the major effort being put by the government to internationalise the country. This is a medium-term goal which has seen several steps being taken.

To begin with there was the use of rupees to settle payments for oil with Russia. This may not have taken off fully given the complexities involved when it comes to international payments system. But the first step is essential to make a start. As the economy grows in strength and becomes a vital part of global supply chains, it may be expected that there will be more acceptance of the rupee for settlement of transactions. Once accepted by a set of countries for payment of exports, these countries could use the rupee to settle other payments amongst themselves just like how the dollar and euro are used.

Second, there have been agreements signed for use of UPI in foreign countries. Countries that have embraced different forms of Indian payment systems include France, UAE, Saudi Arabia, Bahrain, Singapore, Maldives, Bhutan, and Oman. This implies that Indians will now be able to make payments through UPI, etc. in these countries. At one level it may be argued that this is no different from using debit cards that are already accepted worldwide. But the fact that an indigenously designed effective payments system is being welcomed in other countries is a major victory for our financial system. In fact, this can be one of the more positive outcomes of the various Summits like the G-20 which bring such issues to the table.

Third, the RBI has also been working towards popularising the Central Bank Digital Currency (CBDC) within the country which over a period of time can be considered for settling international transactions too. The thought is still in its infancy but the future direction is clear.

Therefore, signing of these free trade agreements can be considered as work in progress towards making India a strong global economic power. India has vindicated the inherent strengths of the economy repeatedly post covid and remains the fastest growing economy presenting a plethora of opportunity for investors. The FDI rules have been relaxed to a large extent in almost all sectors and foreign investors can take a significant (49%) if not majority stake in most industries. Hence, these free trade agreements are more effective in furthering trade and investment as it involves a closed user groups with similar interests.

Specifically the EFTA would push up exports of textiles, pharmaceuticals, chemicals, and machinery. At the micro level the companies especially in the SME segment could leverage such opportunities. In terms of imports there would be a push to luxury items from Switzerland and Norway in particular which will have good demand as tariffs are lowered and rationalised. Indian will also have more access to processed foods and beverages. The quantum of trade may not be too significant to either propel exports or increase imports to the level of concern. But this will be a good signal to other countries to also explore options of having similar arrangements with India.

Hence the EFTA has to be viewed against a broader framework of making India globally more relevant. Trade and investment is a good starting point from where there can also be exploration of acceptance of the rupee for such transactions as economic relations. Post Russia-Ukraine war there is a growing debate on the use of alternative currencies as the dollar has become politically a risky currency for some countries, which includes China. Making the rupee international will help to widen the global currency basket which is dominated by the dollar, euro, pound and yen (which cover over 90% of trade transactions and forex reserves).

It may also be expected that further deepening of such trade relations can now be established with other members of the EU as well as other Asian nations so that there are enhanced global relations.

The author is Chief Economist, Bank of Baroda and author of ‘Corporate Quirks: The Darker Side of the Sun’. Views are personal

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