Study of Indo-Euro trade trends and future scope

Abstract

India is the world’s fourth largest economy in terms of Purchasing Power Parity. With an average GDP growth rate of about 6 % over the last decade, and a continued commitment to market oriented economic reforms since the 1991 crisis, the future of the Indian economy looks promising. However, India's half percentage point in global trade reflects a continued relatively high degree of protection. FDI inflows too linger at comparatively low levels, depriving India of extra impulses for growth and competitiveness on world markets. As the world economy becomes more and more integrated, the importance of international trade is only going to increase. In this context, India needs to pay special attention to its trade with the European Union. Accounting for 20 percent of world trade and contributing more than 25 percent of the world's GDP, the EU is the world's largest trading bloc, with nearly 25 countries in its fold. This large, single market offers a single set of rules for business and a very open economy, thereby providing distinct comparative trade advantages. Although it is India's single largest trading and investment partner, there is still a lot of scope for improvement in bilateral trade. Since their first bilateral summit in Lisbon in 2000, EU-India trade has increased significantly. In fact, this bilateral trade today comprises almost a quarter of India’s total trade. However, India still accounts for only 1.3 percent of total EU imports of goods, whereas China's share is 7.5 percent. In services, India's share is even lower at just 1 percent. These figures show the tremendous scope for improvement in EU-India trade relations, towards which both EU and India are putting concerted efforts. As far as FDI is concerned, the EU investors are mainly interested in telecommunication, insurance, banking and distribution. Further liberalization of the financial services sectors and effective implementation of telecom regulations are expected to expand the scope of EU investment in India. Major products of Indo-EU bilateral trade currently include agricultural products, energy, machinery, transport material, chemical products and textiles and clothing. A lot of hurdles currently exist in the expansion of bilateral trade and investment between India and EU. Issues such as use of trade defense instruments, sanitary and phytosanitary (SPS) related requirements, technical regulations, and other quantitative restrictions in the form of discriminatory duties and taxes levied on certain goods serve as irritants that must be addressed by both sides. Significant steps have been taken in this regard. EU and India have already signed an agreement on Scientific and Technological Cooperation. Textiles, another area of concern, is being resolved through a negotiated agreement under which India and EU could export more to each other's country for a mutually beneficial situation. Besides, India and EU are working on a customs cooperation and maritime transport agreement as well. Discussions are also on regarding S&D provisions and other crucial concepts in agriculture. FDI issues and concessions extended to Pakistan are some of the areas of dispute that EU and India have yet to resolve. India and EU both agree on market access issues. The EU is favourably looking at the idea that developing countries need not match each and every proposal on industrial tariffs. It is also in the process of elimination of export subsidies for products of interest to the Third World, a prospect that India stands to benefit from greatly. Launching its 6th Framework Program for Research (FP6), the EU has earmarked funds for India in all research areas. European partners have begun to realize that India has top-level scientists and research institutions, as well as a strong potential of innovative companies. The five-year (2002-06) country strategy for India seeks better collaboration with EU in science and technology, to help India unlock the full potential of its economy and induce better returns on its vast economic assets through regulatory reform, privatization and fiscal reform. It also seeks to facilitate the exchange of talented students, scholars and the collaboration of scientists from both sides, in areas such as IT and biotechnology and EU cutting edge manufacturing technologies.

This study makes an attempt to analyze the trade trends between Indian and Europe sinceIndia’s liberalization. It then delves into cases of Indian and European companies that have succeeded in each others’ turfs against all odds. The aim is to draw lessons from these cases and apply them on a larger scale in the Indo-Europe context. This study acquires special significance in the current scenario when both India and EU are trying to broaden the focus of their engagement. The recent trip of British PM and EU President, Tony Blair is especially important in this regards. Both India and the European Union have agreed to explore the possibility of a trade and investment agreement. But in the same vain, leaders from both sides have pointed to hurdles to expansion of bilateral trade and investment. It would be interesting and useful to analyze the current trade engagement between India & the EU and further look at the opportunities and the hurdles. There is a perception in Indian trade and industry circles that the European market is becoming increasingly difficult to penetrate. As tariff barriers disintegrate, non-tariff barriers suddenly come up. An attempt would be made to look whether there is some basis for these fears or if they are unfounded.

The EU, on its part wants more access to Indian markets and preferential treatment to European companies. This is another hurdle in the broadening of trade ties between India and the EU. An attempt would be made to analyze the shortcomings, if any in the Indian approach and to come up with concrete steps that India should take to benefit from this trade engagement.