The Hindu Business Line : FTA, worries and opportunities

IT WAS FAIRLY obvious that, as he flew into Bangkok last week, the Prime Minister, Dr Manmohan Singh, and his team were not entirely comfortable endorsing the India-Thailand free trade agreement the Vajpayee Government had committed the country to last October. The apprehension was not specific to the Thai deal, but to the concept itself. Would a bilateral free trade agreement be hijacked by a third country? Would Thailand be used as an entrepot by Chinese or Australian producers to swamp India, considering that Thailand has free trade agreements with these two countries? Dr Singh was not sure that his two-month-old Government had time to study the implications of the deal on the Indian economy. Nevertheless, he went along with the proposal, re-assured by Thailand that it would enforce strictly the rules of origin, which would mean third countries could not use it as a corridor to funnel goods at low or nil duties into India. In any case, only 82 goods, under the "early harvest scheme", are to benefit immediately from the deal that goes into effect from September 1. There will be time, therefore, to test everyone's fear hypotheses before the full list of goods is opened to free trade.

The Thai Prime Minister, Mr Thaksin Shinawatra's anxiety to put the deal through is understandable: There is no question that his country would benefit immensely from the arrangement. It is an export-driven economy, the trade volume being almost two-thirds the gross domestic product compared with one-fifth for India. His country has substantial excess capacity belonging largely to Japanese auto majors that can now find a more viable market in India. That is precisely India's apprehension. After years of self-doubt India's auto industry seems to have gained a measure of confidence; and multinational auto-makers are on the threshold of committing larger investments in the growing market. The worry is whether the investments will now go instead to Thailand if it turns out to be cheaper to make cars or components there and ship them to India.

Such worries are not novel. They have weighed on businessmen and governments ever since trade was born to delight consumers with greater choice and lower prices. To the credit of Indian business, the record will tell that it has met the challenges of a reduced tariff wall admirably. Customs duty collections as a percentage of imports have come down from over 50 per cent in 1990, to around 15 per cent in more recent times. The adaptive skills of domestic producers have been commendable so far; they augur well for the challenges that free trade will bring. Yet, the message for policy-makers is that the lowering of tariff walls must not be done too swiftly. The early harvest scheme with Thailand envisages bringing tariffs to zero after two years. Since the list of items was drawn up carefully with complementary rather than competitive goods, upheavals may be few But if such a pace were set for the other goods, it would leave some, if not many, domestic producers gasping. As a measure of further support, the Government must address with greater despatch the infrastructure issues that conspire to keep costs high for domestic producers and impair their competitiveness. That is important for the stakes have just got higher.

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