This week India is hosting the 19th round of negotiations for the Regional Economic Comprehensive Partnership (RCEP), a free trade agreement that will cover trade in goods and services, economic and technical cooperation, intellectual property rights, competition policy and boost investment for sixteen member countries in Asia.
As RCEP parties are being pushed to cover at least 90% of all tariff lines, Indian media and government officials have argued that signing the RCEP will compound the adverse impact that previous FTAs, like the ASEAN-India Free Trade Area (AIFTA), have had on India’s agricultural sector. As a result, they believe India should proceed with caution when negotiating duties concessions during the RCEP talks.
While India may face competitive challenges from RCEP, the idea that (i) duty concessions under AIFTA led to higher import penetration from ASEAN firms and (ii) these higher imports had negative effects on the Indian agricultural industry, is miplaced.
While agricultural imports from ASEAN have continued to steadily increase, the AIFTA did NOT provide duty concessions that could exert such an impact on domestic agriculture nor did it significantly alter the pre-FTA import flows from ASEAN.
India’s position when negotiating duty concessions for its agricultural sector has remained highly protective under both World Trade Organization (WTO) and India’s existing FTA commitments.
This was the case with AIFTA, in which despite the elimination of tariffs for about four thousand products, sensitive and high growth industries were included under the Sensitive (tariffs to be reduced to 5%) and Exclusion (no elimination of tariffs) lists; both of which largely cover agricultural products.
More specifically, at the time of implementation, the number of products under the Exclusion/Sensitive lists was higher than the number of tariff lines for ASEAN and world imports into India. These duty concessions signaled an implicit protection against the future engagement or the expansion of agricultural imports.
In other words, India essentially put nearly all agricultural items that might have been imported from ASEAN countries into categories that did not receive tariff reductions. Hence, whatever increased import competition Indian agricultural producers have faced from ASEAN competitors in the wake of AIFTA cannot have been the result of duty reductions produced by the FTA itself.
Despite this, some have continued to claim that increasing ASEAN imports, especially of coffee, rubber, tea and pepper, have damaged India’s plantation sector. However, while ASEAN agricultural imports have indeed increased, the AIFTA only provided a limited, if any, reduction of tariffs. Most duty concessions on selected agricultural products failed to have a significant impact since (i) most of these products were placed under the Exclusion and Sensitive lists and (ii) many of these imports, like natural rubber and dry pepper, already enjoyed duty free concessions for value added-exports.
For instance, in the case of coffee, tea, spices, vegetable fats and natural rubber, the number of tariff lines under the Exclusion/Sensitive lists was higher than the number of tariff lines that were offered full duty concessions; implying a limited reduction in tariffs from already existing levels. Therefore, and despite India’s increasing trade deficit with ASEAN, tariff reductions under AIFTA have not had a significant effect on import trends.
Since most of the increasing market penetration from ASEAN firms cannot be attributed to duty concessions under AIFTA, these could be better explained by patterns in trade flows between India and ASEAN since the early 2000s.
Agricultural trade increased by $65 billion from 2000 to 2008. During the period, imports for which India had a declining or insignificant share and for which ASEAN’s exports to the world had been raising like fish, spices and edible vegetables, steadily increased. Thus, it seems imports for selected agricultural products were already rising well before AIFTA implementation.
In fact, because India has not opened up the agricultural sector for sensitive areas in the past, the competitive challenges arising from RCEP could be present. But the agreement is likely to include flexibilities and staging categories that allow time for adjustment.
It is important to evaluate an obvious tendency to blame FTAs like AIFTA and even the WTO for some of India’s domestic inefficiencies, especially in the agricultural sector. This is especially important now when the country is undergoing a major agrarian crisis and farmers and landless agricultural labourers in several states are protesting and demanding that both prices and assistance bonds are increased.
It seems clear that high tariff barriers for sensitive agricultural products have not protected some of India’s domestic industries. For instance, very high tariffs for products like tea or coffee which are supposed to protect local industries from import threats under FTAs, have not limited imports nor protected yield, auction prices and domestic employment.
On the other hand, back-to-back droughts in a monsoon dependent agriculture, a lack of credit and proper crop insurance, unsustainable rural technology and rudimentary infrastructure have all contributed to a highly unproductive and fragmented agricultural sector. The struggles that farmers and landless rural workers face, like crop failure, high debts and poor earnings from lower produce prices, seem to be the result of mainly domestic inefficiencies and not trade liberalisation.
For instance, India’s inefficient distribution channels have led to high retail prices and price variations of 200% across regions. Similarly, the combined effect of strong national production priorities and imperfect policy adoption at the state levels have led to fragmented markets and distorted producer incentives. As a result, up to 68% of potential short-run agricultural profits in India are lost to inefficiency, predominately from farmer’s crop choice.
Domestic inefficiencies like this—and not increasing imports—thus seem to be the main cause of India’s current agrarian crisis.
As India tries to protect and develop its highly sensitive and relevant agricultural sector, it must first address its domestic inefficiencies. Blaming FTAs that do not make significant concessions on a highly protective agricultural trade policy for some of the current and potential challenges that farmers face, takes away the responsibility from underdeveloped infrastructure and policy decisions.
While India stands to face competitive challenges under RCEP and as resistance from civil society and some officials ramps up, a highly unproductive and underdeveloped agricultural sector and the precarious conditions under which many of the urban population lives, must remain a priority. After all, short term measures the “protect” the interest of farmers, will not solve India’s agrarian crisis.
***This Talking Trade post was written by Sebastian Cortes-Sanchez, Asian Trade Centre, Singapore***