Services key to EU-India free trade agreement

As part of a strategy to develop new markets for European firms, EU foreign ministers on 23 April took a major step towards launching talks on a free trade agreement (FTA) with India.

Meeting in Luxembourg, the ministers agreed to give the European Commission a mandate to begin negotiations with their Indian counterparts.

Launching talks with India is part of a broader EU strategy to secure trade agreements with Asia’s rapidly emerging markets. Deals are also planned with China, South Korea and the Association of South East Asian Nations - which includes the emerging economies of Vietnam, Thailand, Singapore and Malaysia.

According to European Commission estimates, the deal with India alone could boost EU exports by around €40 billion a year. That would raise EU gross domestic product by 0.13%.

So far, the volume of EU-India trade and investment has not matched India’s dramatic rise as an economic power - it boasts annual growth rates of 8.4%.

Today, India is the EU’s 13th largest trading partner, behind Malaysia and just ahead of Australia. According to the Commission’s most recent figures, annual trade in merchandise in 2004 was worth €191bn. EU investment in India was worth €1.1bn, around 1% of the EU’s foreign direct investment. India’s share of the EU’s total trade in services accounts for just 1.1%. By contrast Switzerland accounts for 12.6%.

While previous EU-India trade agreements have focused on reducing tariff barriers, firms in India and the EU are now calling for a new agreement, covering issues that touch upon the movement of services and people, as well as goods.

Although the EU appears unable to convince the World Trade Organization (WTO) as a whole to adopt rules on services and the so-called Singapore issues - investment, public procurement, competition - it may be more successful with India.

There is confidence that the government of Prime Minister Manmohan Singh, who initiated many of India’s economic reforms when he was finance minister in 1991-96, will be amenable to further opening of markets in key sectors.

But there are formidable hurdles. The EU is demanding greater access to India’s cosseted banking sector. Although foreign firms can now own up to 49% of banks, up from a previous cap of 10%, the EU would like to see reform of the Indian banking market go further. The increased presence of Indian banks abroad such as the Bank of Baroda and ICICI is putting pressure on the Indian government to open up the sector.

The two sides also continue to clash over trade in alcoholic drinks. India has demanded that its molasses-based spirits can be classified as whisky, while the EU has challenged India’s level of tariffs on wines and spirits.

On 24 April the WTO launched an investigation into India’s tariffs, which the EU claims are as high as 550% for whisky and more than 250% for wine.

But it is the services sector that is expected to form the backbone of the new trade agreement.

According to Ameet Nivsarkar, the head of research for Nasscom, an association of India’s major information technology?(IT) firms, the trade in services could be a key sector for growth in a new agreement.

But, he said, for the deal really to have a deep impact on trade and investment flows, it will have to cover areas which have not been touched upon in previous trade agreements between the EU and India.

"The first thing is to establish a blue card system," says Nivsarkar, referring to proposals floated in January by Franco Frattini, the European commissioner for justice, freedom and security. Although discussions are still in the early stages, the blue card system could mimic the US’ green card and allow easier access for skilled Indians and other nationals to the entire EU, rather than the system of nationally issued visas that is currently in place.

"The FTA should allow highly skilled workers access to the EU," says Nivsarkar. "The demographic of Europe is changing, a large proportion of the people are beyond working age. In India 500 million people are bellow the age of 30."

Behind the calls to make it easier for Indians to work in the EU is a shift in India’s own IT and services market.

India has become famous for being a magnet for outsourcing, hosting call centres and carrying out basic accounting functions, but increasingly its firms are operating more like consultancies, advising on how to increase productivity.

In 2007, India’s top five software firms expect to create 100,000 new jobs, many of them derived from ventures that merge service provision and consultancy.

"In the UK and the US, Indian IT services have increased the productivity of many firms, but it is not a one-way street," says Nivsarkar.

"We should reduce artificial restrictions which stifle growth not only in India but in the EU too. It should be possible for an Indian to go and spend a year at an EU firm. It would be mutually beneficial."

As part of a strategy to develop new markets for European firms, EU foreign ministers on 23 April took a major step towards launching talks on a free trade agreement (FTA) with India.