From UPSC perspective, the following things are important :
Prelims level : CAROTAR
Mains level : Paper 3- Make in India
It will be a good idea to look at the intent, reality, and other ramifications of India’s trade agreements, especially in regard to goods.
Why PTAs matters
- Amongst the existing Preferential Trade Agreements (PTAs), the most commonly used by exporters and importers, are the agreements with the ASEAN region, South Korea, Japan, and South Asian countries.
- It is noteworthy that India has significant trade deficits with three of the aforementioned regions.
- Another factor to note is that three of these regions have significant manufacturing capacity and investment in their own territories.
- Thus, India’s ongoing initiatives in trade agreements must consider whether such deals strengthen imports into India or incentivize investment.
- This is all the more important as the Centre has laid out schemes like Phased Manufacturing Programs (PMPs) and Production Linked Incentives (PLIs) to encourage investment in Make in India.
How existing trade agreements affect Phased Manufacturing Programs(PMP)
- How does it work? Under the PMP, calibrated reductions in customs duty rates on inputs and intermediate goods have been provided along with higher duty rates on finished products.
- However, considering that many of the finished products are covered by zero duty rates under existing trade agreements with some regions or countries, manufacturers with existing facilities in such countries may not have a compelling reason to move manufacturing to India.
- Similar benefits exist under other agreements and may inhibit the uptake of the PMPs by multinational manufacturing entities.
Production Linked Incentives and trade agreements
- Under PLIs, based on a threshold level of capital investment and incremental production, subsidies are to be given to approved applicants.
- Such schemes cover 15 product categories as of now.
- In some cases, the attraction of incentives could score over the benefits of importing goods under low or nil rates of duty under PTAs.
- The PLIs could become even more attractive if it is combined with certain pre-existing special governmental schemes that reduce costs and conserve cash flow.
- While the application window for most of the PLI schemes has closed, a few may be extended and depending on the success of current schemes, more could follow.
- Improving trade governance: PTAs are governed by written agreements between nation states or groups of nation states and domestic laws of the signatories.
- Contrary to a violation of a multilateral or plurilateral agreement entered into under the aegis of the WTO, enforcement mechanisms external to the parties, do not exist for PTAs.
- The committed benefits could be allowed or disallowed by customs rules (for example the CAROTAR in India) and customs officials, conditional upon certifications and validations.
- Mechanisms exist in the FTAs themselves to solve such matters, but in a situation where entities of different sizes and economic power attempt to resolve such issues, the resolutions may not be acceptable to all parties.
- Better governance mechanisms are needed.
It is expected that a holistic view, keeping in mind the government’s schemes on investment and trade governance, would inform future negotiations as well as a review of existing trade agreements of India.
Back2Basics: CAROTAR 2020
- CAROTAR 2020 (“Rules”) aims to add to the existing operational certification procedures which are prescribed under different trade agreements such as Free Trade Agreements (FTAs), Preferential Trade Agreement, Comprehensive Economic Cooperation Agreement and Comprehensive Economic Partnership Agreement.
- The Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020 (CAROTAR, 2020), was notified on 21st August 2020 by the Central Board of Indirect Taxes and Customs.