India-EFTA Trade Deal Set for Conclusion

Context:

India and the European Free Trade Association (EFTA) recently concluded the Trade and Economic Partnership Agreement (TEPA). Initially, India objected to including “data exclusivity” clauses, which would have hindered Indian pharmaceutical companies from manufacturing generic drugs. However, after negotiations, both parties agreed to exclude “sensitive” agricultural products and gold imports from the agreement, marking a significant development in bilateral trade relations.

Relevance:

GS II: International Relations

Dimensions of the Article:

1. European Free Trade Association (EFTA)
2. Economic Ties Between EFTA States and India
3. Trade and Economic Partnership Agreement (TEPA)

European Free Trade Association (EFTA)

Establishment and Objectives:

• EFTA is an intergovernmental organization created by the Stockholm Convention in 1960.
• The main objective of EFTA is to promote free trade and economic integration among its member countries within Europe and globally.

Membership and Free Trade Agreements:

• EFTA currently has four member countries: Iceland, Liechtenstein, Norway, and Switzerland.
• The EFTA member states have developed one of the largest networks of Free Trade Agreements (FTAs) that covers over 60 countries and territories, including the European Union (EU).

Customs Union and Governance Structure:

• Unlike the EU, EFTA is not a customs union, which means that each EFTA member state can set its own customs tariffs and negotiate foreign trade policies independently.
• The highest governing body of EFTA is the EFTA Council, which meets eight times a year at the ambassadorial level and twice a year at the ministerial level.
• The EFTA Secretariat is based in Geneva and assists the EFTA Council in managing the relationships between member states and negotiating and operating FTAs.
• The EFTA Surveillance Authority (ESA) monitors compliance with European Economic Area (EEA) rules in Iceland, Liechtenstein, and Norway.
• The EFTA Court, located in Luxembourg, has the authority to settle internal and external disputes related to the implementation, application, or interpretation of the EEA agreement.

Economic Ties Between EFTA States and India:

Steady Growth in Two-Decade Trade:

• Over the last two decades, economic relations between the EFTA States and India have witnessed consistent growth.

2022 Merchandise Trade Surpasses USD 6.1 Billion:

• In 2022, the total merchandise trade between EFTA States and India exceeded USD 6.1 billion.

Key Imports to EFTA States:

• The primary imports to the EFTA States included organic chemicals (27.5%), machinery (17.5%), and pharmaceutical products (11.4%).
  • Noteworthy FY23 Imports from Switzerland to India:
    • Gold: $12.6 billion
    • Machinery: $409 million
    • Pharmaceuticals: $309 million
    • Coking and Steam Coal: $380 million

Substantial Levels of Services Trade and FDI:

• Apart from merchandise trade, services trade and foreign direct investment (FDI) between EFTA States and India have also reached significant levels.

Trade and Economic Partnership Agreement (TEPA):

Investment Commitment:

• The India-EFTA TEPA involves a significant commitment from the European bloc, pledging $100 billion in investments over 15 years. Sectors targeted include pharma, food processing, engineering, and chemicals.

Source of Investment:

• The investment, a groundbreaking aspect of this FTA, is anticipated to come largely from provident funds in EFTA countries, including Norway’s $1.6-trillion sovereign wealth fund, the world’s largest pension fund.

Nature of Commitment:

• Despite its substantial size, the investment commitment may not be legally binding and falls under the category of “investment promotion.” Notably, it does not constitute a Bilateral Investment Treaty (BIT) similar to negotiations with the UK and the EU.

Benefits of TEPA:

For EFTA:

Reduction in Indian Tariffs:

• With historically high average tariffs in India (around 18%), the TEPA is expected to lead to increased imports of machinery, pharmaceuticals, and medical instruments. This reduction in Indian tariffs is particularly advantageous for EFTA countries.

Crucial Investment Commitment:

• The investment commitment becomes crucial for EFTA, given that India-EFTA trade, especially in goods, has been in favor of the European grouping. Elimination of duties could potentially widen India’s trade deficit, particularly with countries like Switzerland.

For India:

Attracting Investments and Market Access:

• India seeks to attract investments and gain improved market access for its service sector workforce through the TEPA.

Joint Ventures and Diversification:

• The agreement opens avenues for joint ventures in key sectors such as pharma (especially medical devices), chemicals, food processing, and engineering. India sees the TEPA as a means to diversify imports away from China, especially in critical medical imports where the country currently heavily depends on China.