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UPSC Editorial Analysis

Investment Lessons from India-EFTA Trade Deals

GS Paper 2 - Bilateral, Regional & Global Grouping involving India

Context 

Recently, India and the European Free Trade Association (EFTA), which is made up of Iceland, Liechtenstein, Norway, and Switzerland, struck a historic trade agreement. A free trade agreement (FTA) lowers import and export duties between two or more countries. Goods and services can be purchased and sold across international borders under a free trade policy, with little to no restrictions on their exchange from the government in the form of tariffs, quotas, subsidies, or prohibitions.

About FTA

  • In order to promote the movement of products and services across borders, free trade agreements between two or more countries seek to lower or abolish trade barriers such as tariffs, quotas, and other limitations.
  • It can improve exports, draw in foreign investment, spur economic growth, open up job possibilities, expand market access for Indian goods and services, and improve competitiveness by exposing Indian businesses to global markets and technological advancements.
  • India is a party to several free trade agreements, such as the Comprehensive Economic Partnership Agreement (CEPA) between India and Japan, the Association of Southeast Asian Nations (ASEAN) Free Trade Area, the South Asian Free Trade Area (SAFTA), and free trade negotiations with the European Union. 
  • In the midst of India’s current parliamentary elections, negotiations for free trade agreements (FTAs) with nations like the United Kingdom and the European Union (EU) seem to have halted.

Highlights of the Trade Deal

  • India, which has always opposed the inclusion of matters like the environment and labor in trade deals, has agreed to include them. The comprehensive investment component seen in the India-EFTA FTA is absent from the other recent Indian FTAs. Issues with investment facilitation, not investment protection, are the main focus.
  • India has succeeded in getting the EFTA members to commit to raising FDI (foreign direct investment) to India to $50 billion within ten years of the FTA’s implementation, and an additional $50 billion over the next five years. 
  • The investment chapter’s Article 7.1(3)(b) indicates that the EFTA members “aim to” assist the creation of one million employment in India. These articles codify a duty of conduct, which is to strive honestly to achieve a goal regardless of the means or ultimate result.
  • Legally speaking, EFTA nations must sincerely endeavor to spend $100 billion and create one million jobs in India. In the ongoing negotiations with the UK, the EU, and other nations, it will serve as a pattern.

Need for India to Rebuild its FTA Policy

  • For Comprehensive Economic Treaties: India has strong bargaining leverage when trade and investment discussions are combined, enabling advantageous agreements to be reached. India can use it to leverage trade concessions for investment advancements and vice versa. In free trade agreements, this strategy strengthens India’s negotiating position. 
  • For Scope Expansion: To ensure foreign investors’ trust in investing in India, India should include provisions for their protection under international law, thereby expanding the scope of investment issues. It will assist India in creating a successful international law-based dispute resolution process for investment disputes. 
  • For addressing the drop in FDI Levels: To tackle the reduction in FDI: The policy ought to tackle the reduction in foreign direct investment in India by fostering trust among international investors by providing strong legal safeguards and processes for resolving disputes.

Investment lesson from the Deal

  • A thorough investment component is present in the India-EFTA FTA, but it is absent from more recent Indian FTAs with nations like Australia, the United Arab Emirates, and Mauritius.
  • The agreement codifies an obligation of conduct rather than an obligation of result, with measures requiring EFTA nations to make sincere efforts to increase FDI to India and assist job growth. 
  • Economic theory emphasizes how closely commerce and investment are related. Previous Indian free trade agreements (FTAs) combined investment protection with legally binding trade regulations; however, more recent FTAs separated trade law from investment law.
  • The India-EFTA free trade agreement (FTA 3.0 Approach) departs from the decoupling strategy used in other recent free trade agreements by emphasizing the integration of trade and investment discussions into a single comprehensive economic treaty.

Way Forward


When it comes to international trade and foreign investment regulations, India needs a clear free trade agreement (FTA). India anticipates more investment as well as trade from a specific nation. A few essential components of its free trade agreement (FTA) must be included are:

    • India ought to negotiate both investment and trade in a single, all-inclusive economic deal. 
    • It is not a smart idea to decouple investment from trade. India would have significant negotiation power to reach a win-win agreement if the two were combined. India may contend, for instance, that it must receive more trade concessions before it can give investment, or vice versa.
    • India must think about enlarging the purview of investment problems beyond simple facilitation to include adequate protection and a strong international law-based dispute resolution process. Confidence will increase if foreign investors are given enforceable legal protection under international law.
    • A comprehensive and well-defined free trade agreement (FTA) is essential to propel India’s economy into a more rapid growth track, as seen by the decline in foreign direct investment levels in the country.

Conclusion


The India-EFTA trade deal marks a significant shift in India’s approach to FTAs, underscoring the importance of integrating trade and investment negotiations. This holistic strategy not only promises enhanced FDI and job creation but also sets a precedent for future agreements. As India continues to forge its path in global trade, the lessons learned from this deal will be instrumental in shaping a robust FTA policy that balances trade benefits with investment protections, ultimately propelling the nation towards sustainable economic growth and development.


SOURCE: The Hindu

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