Despite several rounds of the negotiations which started in 2007, the proposed EU-India Bilateral Trade and Investment Agreement (BTIA) covering trade in merchandise, services and investment is far from concluded. The recent EU ban on the import of mangoes from India will further strain the bilateral commercial relationship, already troubled by a series of tax disputes involving European companies.

Given the subdued sentiment on foreign investment and trade, restoring activity to its normal level will be one of the top priorities of the Narendra Modi government. What is holding back the conclusion of the pact?

India’s interests

Considering the contribution of the sector to GDP (57 per cent), it is natural that India would seek improved market access in services. India’s offensive interests lie in Mode 1 that covers ITES/BPO/KPO and Mode 4 that covers movement of skilled professionals such as software engineers. A recent RBI survey on computer software and information technology enabled services export shows that Europe’s share in India’s software export declined from 27 per cent in FY08 to 20 per cent in FY13. The share of Mode 4 services in overall software service exports declined from 25 per cent in FY08 to 14 per cent in FY13.

Improved market access in Mode 4 will allow skilled professionals such as software engineers to temporarily reside and work in EU countries. The barriers to Mode 4 include work permits, wage parity conditions, visa formalities and non-recognition of professional qualifications.

India also seeks data secure status from EU as the high cost of compliance with existing data protection laws and procedures renders many of its service providers uncompetitive.

EU’s thrust areas

The EU’s demand in India’s Mode 3 services includes further liberalisation in FDI in multi-brand retail and insurance and presently closed sectors such as accountancy and legal services. European banks have been eyeing India’s relatively undertapped banking space. However, the surrender of banking licences by Goldman Sachs, Morgan Stanley and UBS shows that the burden of priority sector lending and financial inclusion has discouraged foreign banks.

India’s IPR regime is another impediment. India fears that any commitment over and above WTO’s intellectual property right rules will undermine India’s capacity to produce generic formulations. Further, data exclusivity protection measures (that allows pharmaceutical companies to exclusively retain rights to their test results for a certain time period) would delay the supply of generic medicines. That explains India’s opposition to the proposal. European pharmaceutical companies are wary of India’s patents law which prevents evergreening, which allows companies to renew patents on old drugs by making incremental changes.

Duties and tariffs

India has reduced duties on parts and components but maintains 60 per cent import duties on fully-assembled cars. It is75 per cent in the case of cars with fob value above $40,000 and engine capacity 3000cc for petrol and 2500cc for diesel. This over-protectionism with respect to fully assembled cars remains the most contentious issue in the BTIA negotiation.

The EU also seeks deeper cuts in India’s tariffs on wines and spirits. They feel high effective duty and additional state-level taxes escalate the price of imported liquor in India. However duties on wines and spirits are a critical source of tax revenue for the Government.

Agricultural trade is highly distorted in both the EU and India. Even though average MFN (most favoured nation) import duties on agricultural commodities in EU (13 per cent) are much lower than in India (33 per cent), EU’s peak tariff rates on certain products such as dairy (650 per cent), fruits and vegetables (156 per cent), and sugar and confectionary (133 per cent) are more than those in India.

Again, the fishery and dairy sectors in the EU are highly subsidised. There is fear of EU dairy products flooding Indian markets after the FTA. India wants the EU to cut its agricultural subsidies while the EU has interests in India reducing its duties on dairy products, poultry, farm and fisheries. Thus, both India and the EU have strong defensive interests with respect to agriculture trade negotiations.

Reconciling differences

To be fair, EU does not have a single market for labour mobility. Regulations related to work permits and visas differ across members. There were efforts to harmonise the EU market through various directives but they have met with limited success. Moreover, EU’s continuing unemployment problems have reduced policy space for ceding ground on Mode 4.

India’s demand for greater market access in Mode 1 and 4 is dependent on its ability to meet EU’s demands in Mode 3. Lack of political will on FDI in retail and insurance or willingness to open its legal services for European law firms undermine India’s negotiating capacity on other critical issues.

Domestic car manufacturers fear that reduced duties on cars under the EU-India BTIA will impact their market share and flood India with European cars. Besides, European automakers will have no incentive to set up a local manufacturing base in India. This is debatable as almost all major European automakers have a manufacturing presence in India.

Can European carmakers compete in the Indian small car segment (comprising 80 per cent of India’s market) by producing in Europe? Studies show that it’s difficult to succeed in India without a strong dealer network and reliable after-sales service. Prohibitive duties on cars are unjustified when duties on non-car automobile segments have been substantially reduced. This also deprives consumers of choices.

Improving India’s investment climate is a better way to promote investment and job opportunities. Similarly, allowing exclusive rights to commercially exploit patents will incentivise R&D and bring in more FDI. Thus, going forward, India would need to strengthen its IPR regime.

A trade pact is about give and take. Failing to conclude the EU-India BTIA will be a lost opportunity when trade pacts such as the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership (that together account for two-third of world GDP and one-third of world imports) are moving global trade away from MFN routes to bilateral/regional routes. They are setting new trade rules that would be far more difficult to comply with. On the other hand, a badly negotiated trade pact can hurt India’s long-term trade interests. With the change of guard in New Delhi, are India’s trade negotiators ready for a tightrope walk?

The writers are corporate economists based in Mumbai. The views are personal.