Trade pact with Australia: It's take some, give some for India

The India-Australia Economic Cooperation and Trade Agreement (Ind-Aus ECTA) signed on Saturday, April 2, is expected to boost bilateral trade in goods and services from around $27 billion at present to $45-50 billion over the next five years and lead to large employment generation. 

The agreement was signed by Commerce and Industry Minister Piyush Goyal and Australian Minister for Trade, Tourism and Investment Dan Tehan in a virtual ceremony, in the presence of Prime Minister Narendra Modi and his Australian counterpart Scott Morrison.  “It is a historic day for our ties and is the first agreement India has entered with a large developed economy in a decade,” said an exuberant Goyal. Modi remarked: “The trade pact truly is a watershed moment for our relations.”

There are eight chapters in the agreement — Goods, Services, Rules of Origin, Sanitary and Phytosanitary Measures, Technical Barriers to Trade, Customs Procedure and Trade Facilitation, Legal and Institutional Issues and Movement of Natural Persons, and Trade Remedies.

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While the deal has been in the offing for months now, what surprised everyone was its scale. It calls for tariffs to be eliminated on over 85 per cent of Australian goods exported to India immediately; over the next decade, this will rise to 91 per cent. A whopping 96 per cent of Indian goods imports will now enter Australia duty-free. This has got to provide a boost for labour-intensive sectors in India. Among the surprises is the deal to liberalise visa norms for students and professionals, including a quota for Indian chefs and yoga teachers.

First big trade deal in a decade

It is the first big trade agreement that India has signed with a major developed country in over a decade. In February, India signed an FTA (free trade agreement) with the UAE and is currently working on FTAs with Israel, Canada, UK and the EU.

The agreement provides zero-duty access to 96 per cent of India’s exports to Australia, including shipments from sectors such as engineering goods, gems and jewellery, textiles, apparel and leather. This covers many products which currently attract 4-5 per cent customs duty in Australia. 

However, it’s not just India that’s making gains. The pact paves the way for Australian exporters to tap the vast Indian market with a consuming population of over a billion. This, in turn, begs the question — how welcoming would the domestic industry be of the influx of cheap imports from Australia? 

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Large employment generation

For India, the biggest attraction lies in the labour generation that the deal promises. The domestic MSME (Micro, Small and Medium Enterprises) sector has been hit hard by the COVID pandemic, and lakhs of jobs have been lost. 

The Australian trade pact covers  around 6,000 sectors inIndia, several of which are MSME and labour-intensive ones, such as textiles and apparel, agricultural and fish products, leather, footwear, furniture, sports goods, jewellery, machinery, electrical goods and railway wagons. This translates into a substantial number of jobs in India.

Goyal pointed out that employment generation of around 10 lakh over the next 5-7 years is expected. Since a vast chunk of the beneficiary industries are MSMEs, the employment opportunities are seen to be particularly good for women, migrant workers and rural youths.

Cheaper raw material

It is expected that since Australian exports to India are mostly in raw materials and intermediates, many industries in India will get cheaper raw materials, which will make them competitive — sectors such as steel, aluminium and textiles.

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Many Indian exports currently face a tariff disadvantage of 4-5 per cent in labour-intensive sectors relative to competitors — those with FTAs with Australia, such as China, Thailand, Vietnam. Removing this barrier could enhance merchandise exports significantly.

On the very first day of the implementation of the pact, over 6,000 tariff lines would be available for Indian exporters at zero duty. Australia trades in about 6,500 tariff lines, while India has over 11,500 tariff lines.

Agricultural products

The agricultural sectors across both the countries are seen as big beneficiaries of the deal. The fact that the two countries are on either side of the equator is a bonus. Australia is counterseasonal to India, so when production goes down on one side, it is bound to go up on the other. The pact will ensure there is adequate supply of agricultural produce for both markets, said experts.

The agreement will also allow for faster approval of Indian medicines by Australian regulators as they have agreed to use inspection reports and approvals from Canada and the EU in the evaluation process for India pharmaceuticals and manufacturing facilities.

Making the deal more attractive is the fact that it offers Indian STEM (Science, Technology, Engineering and Mathematics) graduates extended post-study work visas. Australia will also set up a programme to grant visas to young Indians looking to pursue working holidays in Australia.

What Australia gains from the deal

Under the deal, about 85 per cent of Australia’s exports will get zero-duty access to the Indian market, including coal, sheep meat and wool, and lower duty access on Australian wines, almonds, lentils, and certain fruits. The country is set to benefit from zero-duty access on coal; currently, coal accounts for about 74 per cent of Australia’s exports to India and attracts a duty of 2.5 per cent. 

With sheep meat tariffs of 30 per cent being eliminated on entry, it’s a big boost to Australian exports that already command nearly 20 per cent of India’s market. Australian sheep meat players expect to focus on premium cuts, and supply products to the Indian five-star catering and high-end retail segments.

India being Australia’s third largest importer of wool, close behind China and Italy, that nation’s wool industry has cause to rejoice. In the second half of 2021 alone, India purchased 8.2 million tonnes of Australian wool. The removal of the current 2.5 per cent tariff on wool imports will boost that industry further.

Australia has been looking to diversify its export markets away from China after the Asian superpower launched a collection of trade strikes on Australian products in retaliation for what it saw as a series of slights. The Indian market offers it a viable alternative.

Safeguards for sensitive sectors

India has put several goods in the exclusion category in which no duty concessions will be accorded, according to CNBC. Such goods include milk and other dairy products, toys, sunflowers, seed oil, walnuts, pistachio nuts, platinum, wheat, rice, bajra, apple, sugar, oil cake, gold, silver, chickpeas, jewellery, iron ore and most medical devices. 

The agreement will also have a safeguard mechanism that includes stricter rules of origin to prevent any routing of products from a third country; safeguard mechanism to deal with any unusual surge in imports; and similar norms for the steel sector.

Where friction could arise

Yet, the domestic players may, at some point, object to the cheap imports — of both goods and services — from Australia. For instance, under the deal, India will provide Australian entities with market access for single-brand retailing and franchising, apart from commitments regarding wholesale distribution services. Further, Australian internet services businesses will be given opportunities to expand their portfolio in India with a foreign equity limit of 74 per cent for commercial presence.

The ‘Trade in Services’ chapter of the agreement seeks to address red tape in the Indian regulatory system to help Australians, particularly MSMEs, provide professional services in India. How well the Centre and trade bodies address the concerns of domestic players will go a long way in ensuring the success of the bilateral deal.