From UPSC perspective, the following things are important :
Prelims level : NA
Mains level : Free trade agreements and its advantages
- With a projected 7 per cent growth for the ongoing year, the Indian economy is set to register the highest growth rate across all the major economies of the world. Moreover, Indian growth story for the years to come will be shaped by the unfolding geoeconomic and geopolitical forces that will sustain its consumption-driven-growth phenomenon, further driving investment and production.
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What is Regional Trade Agreement (RTA)?
- RTA is a treaty between two or more countries in a particular region that aims to reduce or eliminate trade barriers, such as tariffs and quotas, to facilitate increased trade between the member countries.
- RTAs can take various forms, such as Free Trade Agreements, Customs Unions, Common Markets, and Economic Unions.
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.
- 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.
- Indo-Pacific Economic Framework for Prosperity (IPEF)
- The IPEF, an economic initiative driven by the Biden administration with a total of fifteen participating member nations, presents the massive potential to ink a regional trade agreement and create a trade bloc without China.
- If that happens, India, being a member, will definitely be a beneficiary.
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.
- Strong Indian Diplomacy: Indian diplomacy is also playing an important role with trade agreements being used as important instruments of diplomacy. This is true for the UAE, Australia, and the partnerships like QUAD (or even IPEF), and I2U2.
- No doubt, FTAs are emerging as important tools for economic diplomacy for India for deeper levels of engagement with friendly nations. At the same time, the FTAs are two-level games for India. At the international level, it has to negotiate with the concerned nation/s, while at the domestic level it has to negotiate with various contending constituencies. Yet, FTAs’ role as a growth driver through trade and investment cannot be ignored. In addition, with India becoming the most populous nation in the world, surpassing China in January 2023, it presents itself as the largest product and factor market to the global community.
Q. What are FTAs and RTAs? India is enhancing its FTAs and RTAs in recent times. Discuss how it will contribute to the growth of the economy.
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