India — Setting The Roadmap For FTAs In A Brave New World Of Trade

In 2008, when India started its negotiations with the European bloc of nations which includes Switzerland, Norway, Iceland and Liechtenstein, known as the European Free Trade Association or EFTA, the country's gross domestic product (GDP) figure was $1.224 trillion and ranked twelfth amongst its peers.

Today, India is ranked fifth with a $4 trillion economy growing at 8 per cent making it one of the fastest amongst emerging economies.

As the countries and businesses de-risk themselves from China, India is in the mood to acquire China’s market share in the global value chain which is evident by its signing of one of its most ambitious free trade agreements (FTAs) to date.

The Trade and Economic Partnership Agreement (TEPA) signed on 10 March between India and EFTA has signalled to the world that India is ready to take on commitments in areas such as intellectual property rights (IPRs), labour, environment, sustainability and gender, competition — topics it believed were not part a trading mandate of a country.

Moreover, it has signalled to the world that India is not a pushover anymore and if there must be an FTA, it will be on mutually beneficial terms.  As companies in developed countries look for markets to expand, there is no country like India whose domestic consumption is a critical factor for economic growth.

As markets in the West get saturated, market access to India is even more important and this is India’s leverage which is evident in the Investment Promotion and Cooperation chapter of the TEPA.

The inclusion of binding commitments to invest $100 billion and create 1 million jobs over the next 15 years with an FTA is a landmark development, setting a new precedent for future trade agreements.

This commitment is not only indicative of the confidence and economic ambitions shared between the trading partners but also highlights the evolving nature of FTAs from mere tools for reducing tariffs and trade barriers to comprehensive frameworks that actively promote investment, economic development, and job creation.

For perspective, EFTA states have FDI investments worth $ 10.7 billion as of FY2022. This commitment aligns perfectly with India's "Make in India" initiative, which seeks to position India as a global manufacturing hub by encouraging multinational companies to manufacture their products within the country.

The infusion of $100 billion in investments will significantly bolster this initiative, potentially leading to enhanced manufacturing capabilities, technological advancements, and increased global competitiveness for India.

For example, a company such as ABB (listed on the Swiss stock exchange) can open manufacturing units to develop EV charging infrastructure, which is critical for India’s transition towards a green economy and expanding its existing manufacturing units.

Similarly, Equinor being the second-largest gas supplier in Europe can enable India to reduce its coal dependency by investing in the exploration and operations of LNG infrastructures in India to rebalance the country’s energy mix.

Moreover, the creation of 1 million direct jobs is a significant promise, addressing one of the critical challenges faced by India: employment generation.

Given India's demographic dividend, where a large portion of its population is young and entering the workforce, this commitment can play a pivotal role in harnessing the potential of India's talented youth. By creating vast employment opportunities, the agreement supports not only economic growth but also social stability and development.

Recognising the complexity of modern financial transactions, the agreement provides a nuanced approach to classify investments as originating from EFTA. Investments funnelled through EFTA states but initiated by investors of these states, irrespective of their geographical source, qualify as EFTA-origin investments.

This acknowledgement ensures that genuine investments by EFTA entities are credited appropriately, supporting the spirit of the agreement.

However, to safeguard the integrity of the agreement and prevent exploitation, investments merely routed through EFTA states without real establishment in these states, or lacking significant business operations within them, are excluded from being considered as originating from EFTA.

This critical distinction is established to avoid the potential abuse of the agreement through financial structuring or token establishments, ensuring that the benefits of the agreement are reserved for authentic EFTA-origin investments.

Moreover, the three-tier government-to-government consultation procedure for investment promotion and cooperation underscores a commitment to transparency and accountability. By scheduling regular reviews at five-year intervals, the parties demonstrate a willingness to monitor progress actively and make necessary adjustments.

This process not only serves to evaluate the effectiveness of investment promotion and cooperation efforts but also provides a platform for recalibrating strategies in response to evolving economic conditions and unforeseen global events.

These structured review and consultation procedures ensure that both parties remain engaged in a dynamic dialogue, fostering an environment of mutual understanding and adaptability. It also builds resilience into the agreement, allowing it to withstand and adapt to economic shocks and market shifts.

If the shared objectives are not met by the final review which is after 15 years, and it's determined that the EFTA states have not fulfilled their obligations, India has the option to request consultations. This initiates a structured dialogue aimed at finding a mutually satisfactory solution.

If unresolved, India may undertake temporary and proportionate remedial measures to rebalance the concessions given. These measures are a last resort, intended to ensure that the agreement's objectives are taken seriously and that there is accountability for meeting the commitments made.

This provision serves as a safeguard, ensuring that the economic benefits envisioned by the agreement are pursued earnestly by all parties involved.

India’s recent strategic move to sign four FTAs since 2021, following a hiatus of approximately nine years with no new agreement, signifies a deliberate shift in its trade policy and international economic engagement strategy.

This is also evident with negotiations taking place with key trading partners such as the European Union, United Kingdom, Australia, Oman, and Peru — signifies India’s economic prowess and the need for countries and trading partners to gain market access to a populace of 1.4 billion; but the message is clear to the world — India is not India of 2008, where we were struggling to grow.

We are the India that is on track to become the third-largest economy with a GDP of $5 trillion.