India reviewing Asean trade pact with an eye to boost domestic manufacturing

New Delhi: India has begun looking at several products where taxes on input items are higher compared to the finished goods as part of a comprehensive review of its trade pact with the 10-member Asean to correct several anomalies that have undermined domestic manufacturing.

Imbalances in import duties, rules of origin, and non-tariff barriers will come in for a closer look, people familiar with the details told ET. The commerce and industry ministry has asked the industry for inputs to identify products where an inverted duty structure is causing a disadvantage to local manufacturers.

The ongoing review of the pact, which came into effect in 2010, is slated to conclude next year.

“One round of physical negotiations has happened, and we have agreed on modalities of the overall review process of the pact. Both sides have different sets of expectations but at the end of it, we want deeper trade,” said an official.

India has rolled out several measures such as production-linked incentive (PLI) schemes, higher import tariffs, and import monitoring to encourage local manufacturing, but several trade agreements negotiated earlier are seen as stumbling blocks.

Data Being Collated
India’s trade deficit with Asean surged to $43.6 billion in FY23 from $25.8 billion in 2021-22 and $5 billion in 2010-11. New Delhi is concerned that third countries are routing their exports through Asean members to take advantage of duty benefits available under the agreement.

Officials said data is being collated on the inverted duty structure. One round of consultations with the industry has taken place on various issues.

“It is an offensive interest of India to correct the anomalies and gauge the challenges on duty, rules of origin and non-tariff issues. How much we will be able to correct, the contours of that would be decided,” the official added.

Certain ferro alloys, aluminium, copper pipes and tubes, textile staple fibres and some chemical preparations are the products where Indian industry faces a disadvantage due to inverted duty structure.

The 10 members of the Asean are Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

As per Ajay Sahai, director general of Federation of Indian Export Organisations, it is important to look at inverted duty structures in free-trade agreements, especially if the FTA sources account for a predominant share of the overall imports.

Under the pact, the two sides agreed to progressively eliminate duties on about 75% of goods and reduce tariffs on around 15% goods, but the 10 Asean countries made different tariff elimination commitments. While Singapore offered almost 100% tariff elimination, Vietnam committed to much less leading to a varied duty structure in the agreement.

Experts said that it was easier to correct such anomalies during annual budget exercises for imports under the Most Favoured Nation (MFN) principle.

“However, with the increase in FTAs, which typically remove import tariffs on most finished products, correcting this imbalance has become nearly impossible. The Asean India FTA is no exception. Tariffs are already zero on most industrial products,” said Ajay Srivastava, co-founder of economic think tank Global Trade Research Initiative.

At present, major raw materials may have to be imported from non-FTA countries at higher MFN duties, while the final product could be available for imports duty-free under an FTA.