Free Trade Agreements (FTAs) and its Geoeconomic Implications

The Indian economy is expected to develop at the greatest rate of all the world’s major countries this year, with a forecast 7% growth for the current year. Also, the geoeconomic and geopolitical variables that will sustain India’s consumption-driven development phenomenon and further stimulate investment and output will shape the country’s growth trajectory for the ensuing years.

RTAs are regional trade agreements.

A regional trade agreement (RTA) is a pact between two or more nations in a specific area that intends to lower or eliminate trade restrictions like tariffs and quotas to promote greater trade among the signatory nations.

RTAs might be in the form of free trade agreements, customs unions, common markets, or economic unions, among others.

What is Free Trade Agreement (FTA)?

FTA is a specific type of RTA that eliminates tariffs and other trade barriers on goods traded between the member countries.

FTAs may also include provisions on trade in services and investment, but they are primarily focused on reducing tariffs on goods.

India’s tryst with RTAs/ FTAs

From 2021, there has been a sudden spurt in signing bilateral trade agreements by India.

The India-Mauritius CECPA in 2021, India-UAE CEPA and Australia-India ECTA in 2022, are some examples.

Talks on these grounds with the UK and Canada are in advanced stages,

Serious intentions on inking FTAs with the EU and Israel have also been expressed.

Geoeconomic Implications

India-UAE Comprehensive Economic Partnership Agreement (CEPA):

Western QUAD: The India-UAE CEPA strengthens Indian commitment with I2U2 (i.e. Israel, India, UAE and the United States), also referred to as the western QUAD, a regional force convened in October 2021.

Access to the western neighbours: This agreement provides India an access to the western neighbours that can facilitate the process of negotiating trade agreements in the absence of China.

Advantage for India-GCC FTA: It puts India a step ahead towards having an India-GCC (Gulf Cooperation Council) FTA, thereby ameliorating its relations with the gulf nations.

Boost to economy: On the economic front, the trade pact is envisioned to almost double bilateral commodity trade by 2027, increase service trade and generate 10 lakh jobs in labour-intensive sectors.

The Australia-India Economic Cooperation and Trade Agreement (ECTA)

The Australia-India ECTA boosts Australia-India ties on various fronts, including geopolitical one.

Once a more comprehensive FTA, i.e. the CECA (Comprehensive Economic Cooperation Agreement) gets inked between the two nations, various other areas such as services, investments, government procurement and intellectual property will be covered.

Even within the QUAD, the strong relationship between Australia and India will help in creating an Australia-India niche.

How FTA’s will lead to Consumption-driven growth?

FTAs boosting consumption demand, this can happen through two avenues.

Increase consumption choice: The FTAs will enable cheaper imports of commodities and will increase the consumption choice.

Multiplier effect on domestic incomes: The second is that the direct multiplier effect of enhanced trade and increased employment will have its multiplier effect on domestic incomes.

Increase purchasing power: Both the forces combined together will increase the purchasing power of the consumers, and increase consumption demand.

Factors that put India at Competitive Advantage

India’s demographic dividend: India’s competitive advantage lies with its comparative demographic dividend over China. The under-30 population in India, being about 52 percent, compares favorably with around 40 percent for China, which is going to shrink faster over the next decade. The young population is expected to boost consumption, savings and investments, and will drive consumption-led-growth.

Low wage and thereby Cost-competitiveness: Second, as per 2019 estimates, the average Indian wage is 10% of that of China, thereby rendering relative cost-competitiveness to the products manufactured in India as compared to China. This is already enticing foreign investment.

National Infrastructure Pipeline: India’s massive emphasis on physical infrastructure through projects like the National Infrastructure Pipeline (NIP) for FY 2019-25 and transport sector growth will reduce the transaction costs of doing business.

Reforms in business environment: India has been working extensively to reform its business environment through effective policy practices be it through measures like Production Linked Incentive (PLI) scheme, or bringing about substantial changes in its tax regimes, liberalization of the Foreign Direct Investment (FDI) policies in manufacturing, etc.

Digital literacy: It entails digital literacy and English language skills. On both counts, the Indian youth is way ahead of China.

Food Security and Energy Crisis In The South Asian neighbourhood

Indeed, the conflict between Ukraine and Russia has caused a crisis in the energy markets in a number of countries in the Global South. Food security has become a top worry, particularly for the most vulnerable members of society, as a result of supply reductions by nations that export edible oil and an increase in fuel prices. Moreover, the COVID-19 spike in China has slowed down the world economy, particularly in BoB.

How is the neighbourhood of South Asia changing?

Sri Lanka and Pakistan are both experiencing severe economic difficulties; the former has experienced a complete economic collapse, while the latter is dealing with massive external loans, electricity shortages, and extremely high inflation.

Bangladesh: The IMF sanctioned a precautionary loan of US $4.7 billion to Bangladesh amidst the precarious macroeconomic situation in the country, with high inflation and volatility of the Bangladeshi Taka.

Myanmar: A post-coup Myanmar sees a shutdown of businesses and a massive spike in unemployment.

Nepal: Nepal, too, sees widening trade deficits and declining foreign exchange reserves.

How Russia-Ukraine war challenges Food security?

Russia-Ukraine war and the resulting food crisis: Ukraine and Russia play a significant role in the global food supply chains, further affecting low- and middle-income countries and vulnerable populations already grappling with hunger in the post-pandemic world.

Wheat suppliers: Since both countries exported more than one-third of the world’s wheat and barley, and about 70 percent of sunflower oil, governments around the world were severely hit as the war stopped exports of around 20 million tons of Ukrainian grain.

Agricultural commodities exports to Asia have dried up: An estimated 6 million tons of agricultural commodities were exported monthly to Asia, Africa, and the Middle East. As of June 2022, this number had dried up to a fifth of its original value.

Ripple effects on food prices and availability: According to the United Nations’ (UN) Food and Agriculture Organization (FAO), global food prices have risen by 20 percent. It further predicts a rise in the undernourished population to be between 7.6 to 13.1 million, because of the conflict situation and its ripple effects on food prices and availability.

Sri Lanka: A case of Food security crisis

The economic meltdown in Sri Lanka wreaked havoc on the food security of the local population.

For Sri Lanka, the sudden switch to organic farming in 2021 worsened its trade performance in the agricultural sector.

The island nation had to import sugar, rice, and various other commodities, including intermediate goods in which the economy had had a previous surplus.

By 2022, the tea industry, which was a major commodity of exchange, incurred losses of approximately US $425 million, further worsening the economy’s foreign exchange situation.

Energy crisis

Heavy on energy imports: The data analysis on energy imports shows that all the countries in Bay of Bengal Initiative for Multi-sectoral Technical and Economic Cooperation (BIMSTEC), especially India, Myanmar, and Bhutan, rely heavily on energy imports.

Fuel dependency makes the region highly vulnerable to external shocks: The trade dependency on fuel is a major curse for the region, making it highly vulnerable to exogenous macroeconomic shocks. The Russia-Ukraine conflict underscores the importance of nations having self-reliance regarding energy.

Absence of infrastructure and synchronisation in BIMSTEC Grid plan: Despite the BIMSTEC countries having developed a ‘Plan of Action for Energy Cooperation in BIMSTEC’ and also signed a MoU for the establishment of the BIMSTEC Grid Interconnection in August 2018, the absence of required infrastructure and adaptive power market, the lack of synchronisation of the grid system, the lack of financial policies, and other related issues have made progress in energy cooperation slow among the countries in the region.

Way ahead

Safeguard against food security crisis: It becomes imperative for regional groupings to set up safeguards against crises where their food security is affected by geopolitical events and domestic macroeconomic threats.

Food Bank for BIMSTEC: The idea of a food bank for the BIMSTEC countries modelled on the Association of Southeast Nations (ASEAN) Food Bank is a good start as it will aid in stabilising prices.

India urged to develop regional strategy and promoting millets: Recently, in November 2022, India hosted the second Agriculture Ministerial-level meeting of the BIMSTEC nations, where it urged the member countries to develop a regional strategy for transforming agriculture and promoting millets into the food systems.

Millets have potential to ameliorate food insecurity: Promotion and intra-regional trade of food items such as millets, where these countries have surplus production, can help ameliorate food insecurity to a large extent.

Self-reliance in energy: Overdependence on fuel will make the region more vulnerable and affect its financial stability. Therefore, developing a domestic energy market is critical for the region. This can be achieved by accelerating the green transition.

For instance: FDI from Japanese firms has constantly seen more impacts and spillovers in the Indian economy. If Japanese firms’ economies of scale and their potential in developing different green energy technologies could be fully utilised, it would reduce the regional dependence on China, which is currently the dominant player in the domain of solar energy.

SEBI approval to launch Social Stock Exchange

The Securities and Exchange Board of India (SEBI) has given the National Stock Exchange (NSE) its final clearance to establish a Social Stock Exchange (SSE) as a distinct division of the NSE.

A social stock exchange is what?

The Social Stock Exchange (SSE) is a platform that links investors seeking both financial and social gains with social entrepreneurs.

Social enterprises are businesses that put social impact before financial success.

SSE strives to increase knowledge about social investment opportunities while giving these groups access to capital markets.

Who can get listed for SSEs?

Any social enterprise, Non-Profit Organisation (NOPs) or For-Profit Social Enterprises (FPEs), that establishes its primacy of social intent can get registered or listed on the Social Stock Exchange segment.

Eligible NPOs can begin by registering on the SSE segment.

After onboarding, NPOs can initiate the fund mobilization process by issuing instruments such as Zero Coupon Zero Principal (ZCZP) via a public issue or private placement.

Currently, the regulations have prescribed a minimum issue size of Rs 1 crore and a minimum application size for the subscription of Rs 2 lakhs for ZCZP issuance.

How will SSE work?

The SSE will be a separate segment on the NSE, where social enterprises can list their securities.

These securities will be available for trading to investors who are interested in social impact investing.

The SSE will also provide a range of services such as capacity building, impact measurement, and reporting to help social enterprises improve their operations and measure their social impact.

Benefits of SSE

For social enterprises, SSE will provide access to capital markets and help them raise funds for their social projects.

For investors, SSE will provide a platform to invest in social enterprises and contribute to social impact.

SSE will also create a transparent marketplace where investors can assess the social impact of their investments.

R&D Expenditure And The Perils of Inadequate Data

As compared to other major countries, India’s research and development (R&D) expenditure-to-GDP ratio of 0.7% is extremely low and falls well below the global average of 1.8%. The corporate sector’s underinvestment in R&D is the primary cause.

R&D spending in India

While the corporate sector contributes roughly two-thirds of gross domestic spending on research and development (GERD) in advanced countries, India only accounts for 37% of GERD. Yet, there is evidence that suggests India’s GERD numbers are exaggerated.

According to a 2022 infobrief from the National Science Foundation (NSF) of the United States, U.S.-based multinational corporations (MNCs) spent $9.8 billion (690.2 billion) in 2018 on R&D in India, up from $9.5 billion (649.7 billion) in 2017.

There are MNCs from other leading countries also spending on R&D in India.

But the latest Research and Development Statistics, published by the Department of Science and Technology (DST) in 2020, has provided an estimate of ₹60.9 billion R&D spending in 2017-18 by foreign MNCs, which is only about 10% of what U.S. firms have reported to have spent in India on R&D.

What is Gross Domestic Expenditure On R&D (GERD)?

Gross domestic spending on R&D is defined as the total expenditure (current and capital) on R&D carried out by all resident companies, research institutes, university and government laboratories, etc., in a country.

It includes R&D funded from abroad, but excludes domestic funds for R&D performed outside the domestic economy.

This indicator is measured in USD constant prices using 2015 base year and Purchasing Power Parities (PPPs) and as percentage of GDP.

It is often used as an indicator of a country’s level of innovation and technological progress.

Issues with the current system

NSTMIS compiles GERD data: The National Science and Technology Management Information System (NSTMIS) of the DST is the agency that compiles GERD statistics in India.

Challenge is to collect data from private sector: It is easier to gather the information on R&D by the government sector, the higher education sector and public sector enterprises. The challenge lies in collecting data from the private corporate sector.

There are two key factors that make the official R&D estimates grossly inadequate

The method used for identification of R&D performing firms does not capture all the R&D performing firms.

NSTIMS uses DSIR and Prowess to identify R&D units: A study found only 11% of 298 firms receiving foreign investment (2004-16) for R&D were registered with DSIR. Prowess covers only 3.5% of currently active registered enterprises in India. Leading enterprises in new technology areas may not be listed in both databases, such as SigTuple Technologies.

The DSIR list may not have many of the actual R&D performers for two reasons: Firms which consider government incentives as not attractive enough or that are sensitive about sharing critical information with the DSIR may not be inclined to register themselves with the DSIR. 2. It may be difficult for R&D firms in services such as software and R&D services to meet the requirement of having separate infrastructure for R&D to distinguish it from their usual business. In fact, many of the R&D performing enterprises in new technology areas may come under the services category.

The survey conducted by the NSTMIS is the key source of R&D statistics of India

Data from Secondary sources works only if firms disclose their R&D spending: If firms don’t respond to the survey, data is collected from secondary sources like annual reports and Prowess. Some firms don’t report R&D spending despite their technology activities, patents and innovators. They may not feel obliged to report accurately to Indian regulatory authorities.

For instance: A review of the documents submitted to the Ministry of Corporate Affairs (MCA) by some R&D-oriented firms shows that there are firms which do not report any spending on R&D in spite of their declarations that suggest that they are engaged in activities of technology development, adoption and adaptation.

What is to be done?

Short term measure: the NSTMIS should use the patents granted data, both in India and the U.S., in addition to its current method to identify R&D performing enterprises.

Mandatory disclosure: Annual R&D estimates can be prepared from mandatory disclosures that the enterprises are required to make to the MCA.

Technologies can be employed to ensure compliance and proper reporting: In order to ensure compliance and proper reporting, technologies can be used like in the case of revamped income-tax return forms where various sections are interlinked.

Spending data should be made an essential component of ESG: Additionally, proper disclosure of information to regulatory agencies, including R&D spending data, should be made an essential component of the environmental, social and governance (ESG) ranking of enterprises.