India: Trade treaty instead of ODA

Bastienne Joerchel, Alliance Sud

On the sidelines of the World Economic Forum in Davos in late January, Swiss Economy Minister Doris Leuthard officially announced the start of talks on a bilateral free trade agreement between India and the Efta. She sees India as a huge market of a billion consumers, and one that holds great opportunities for Swiss companies. As a matter of fact, India’s economy is growing rapidly (9 per cent in 2007), and is giving rise to all manner of interests. As the European Union (EU) is also negotiating with India, one of Switzerland's motives is to keep up with it in market access.

Unequal partners

The Indian Government is receptive to such overtures. It is keen to shake off the status of aid recipient and instead forge partnerships on an equal footing (see box). Yet whilst the advantages for the industrialised countries are obvious, they are much less clear-cut for a partner country in the South that is economically much weaker. In its 2007 Trade and Development Report, Unctad (United Nations Conference on Trade and Development) cautions the South against such alliances. A developing country «is often unable to derive the full benefits of the improved market access opportunities because of limited supply capacities and competitiveness, and because local firms are often unable to comply with restricitive rules of origin on goods destined for export to the developed-country partner» it states. «Preferences negotiated by one developing country with a developed partner may quickly be eroded if the same developed country also concludes FTAs with other developping countries.»

Four problem areas

This also applies to India, as shown by several recent studies , all of which conclude that trade liberalisation under bilateral agreements with rich countries bring only limited advantages. The four principal problem areas concerned are sectors in which Switzerland wants to aggressively pursue its interests.

• India's imports and exports are indeed growing thanks to market openings, but even so, the domestic market remains largely unaffected. Instead, fierce competition from foreign suppliers is weakening domestic industry and services. This is precisely where Switzerland is competitive. It hopes that a bilateral agreement will enable it to step up its sales of products like machine tools, electronics, pharmaceutical and agrochemical industries, as well as of banking and insurance services in India.

• Swiss companies are already very active. In 2006, exports to India grew 32.5 per cent over the previous year. Switzerland is the ninth biggest foreign investor. India could possibly benefit from some transfer of technology and expertise. But whether its manufacturing and service firms will be able to compete with giants such as ABB, Sulzer, Novartis, UBS or Crédit Suisse is quite another matter.

• Trade liberalisation is having only a minimal impact on the job situation. In recent years, India's economy has made giant strides particularly in the high-tech sector. This calls for highly qualified workers. The roughly 800 million Indians belonging to disadvantaged classes and living mainly from agriculture stand to gain precious little from this. Yet Efta countries will be most reluctant to make concessions precisely in agriculture, which is subject to another agreement altogether. And Switzerland in this sector will reject any market opening that goes beyond the scope of the WTO agreement.

• The reduction of industrial tariffs is causing government revenues to decline. Yet tariff revenues are a relatively important source of income for India. In 2004–05 they accounted for 11.4 per cent of all government revenue. If such income declines, the Indian Government must either cut spending or raise taxes. This means that one way or another it is the people who will foot the bill. Switzerland is insisting on tariff reductions on industrial goods. In compensation, it does not stand to suffer itself, since it already grants virtually duty-free access to Indian manufactures.

• The prescriptions and prohibitions of bilateral agreements are further limiting the economic policy space needed by developing country governments to be able to protect their infant industry. That policy space is also needed to guarantee that banks can continue to grant small loans, to assure the supply of affordable medicines for public health and to ensure that governments can react flexibly to external shocks such as financial crises. Switzerland's demands for stringent patent protection or the liberalisation of financial markets are curtailing that policy space.

Widespread poverty despite growth

India is currently witnessing an unprecedented economic boom. One part of the economy is growing fast and is highly integrated into the world economy. «India is no longer a developing country, but is becoming a world power,» said Swiss Foreign Minister Micheline Calmy-Rey last November in Delhi. Yet a large majority of the population still lives in grinding poverty. The number of people who must survive on two dollars a day has risen in recent years. From 694 million in 1987, the figure reached 863 million in 2004. Some 300 million have less than a dollar a day. Social inequalities have also grown worse. It is estimated that the economic growth is benefiting only a small elite of 5 per cent.

Wrong priorities

India is already running an enormous trade deficit. It is being exacerbated by new market openings, which are not addressing one principal social challenge, that of developing agriculture. This sector provides the vast majority of Indians with a livelihood, but is mired in crisis. Improving the sector will mean that production for the domestic market must be increased, infrastructure and educational opportunities expanded, and resources distributed more fairly. Again, this requires the Indian Government to have sufficient economic room for manoeuvre. It would be denying itself such room for manoeuvre by being forced into the straitjacket of complex and restrictive economic agreements.

Even if Switzerland reduces its development cooperation, that would be no reason to treat India as though it were a full economic equal. A coherent foreign policy should make allowance for the economic gap when structuring commercial and other relations. In other words, even in the future the guiding principle should be to reduce poverty in India rather than capture new markets for Swiss companies.

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From aid to partnership: SDC changes direction

Switzerland has invested over a billion francs in development cooperation with India over the past sixty years. Now that India is itself a donor country vis-à-vis its neighbours, it wants a new relationship. Accordingly, the SDC has developed a new programme for mutual cooperation in the three fields of energy and climate, science and technology, and governance.

«We are in a phase of reorientation», says Chantal Nicod, Deputy Director of the SDC's South Asia Division. «The new programme will start in 2010. Our goal is to accommodate India's wishes as well as meet the global challenges. At the same time we wish to ensure that the poorest population groups continue to be the main beneficiaries.»

The SDC officer seems unconcerned that this reorganisation of development cooperation for the poorest and the negotiation of a bilateral agreement could be mutually hampering: «India is no longer an SDC priority country, and by 2010 our budget will come down from about 30 to 7 million francs. That is not very much in the context of India». While this may be true for India, it is not so for smaller economically attractive countries, where such amounts could easily end up being misused as bribe money for the conclusion of bilateral agreements. 

Contact: Alliance Sud