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India must rework its EU links

The UK's importance as India's trade partner had decreased steadily over the past decades.

In one of the most significant developments since the dawn of the new millennium, a majority of the electorate in the United Kingdom told their government they no longer wish to remain a part of the European Union. This wish, when implemented, will end the four-decade-old relationship the UK has had with the EU, that was based on terms different from those of all other 27 members on four counts. The UK didn’t accept the euro as its currency when it was adopted as the EU’s common currency, it was granted an opt-out clause under the Maastricht Treaty adopted for Europe’s integration in 1992, and later it opted out of the Schengen Agreement that removed all border controls between EU member states. The UK had two further opt-outs — from the “EU Charter of Fundamental Rights” and “area of freedom, security and justice”.

Despite having a special status, why did people in the UK vote in favour of leaving the EU? The answers are provided in the “Leave” campaign manifesto: the most potent of the planks the “Leave” campaign used against the UK’s continuation in the EU was that more than half of UK’s laws were made in Brussels and Strasbourg. Recapturing this “ceded space” and empowering Westminster to enact laws and regulations for its people, and also to do trade deals, was really the essence of the “Leave” campaigners. This is one aspect of the Brexit narrative that Brussels should be extremely wary about, for the sovereignty question had raised its head during the Greek crisis too less than two years ago. If Brussels is unable to prevent the spread of such sentiments by using the strengths of EU heavyweights, the Common Market project that began nearly six decades back can quickly become history. It is difficult to imagine the enormity of the uncertainties the global economy would have to bear should the unravelling of the EU ever happen.

But the sobering thought is that the UK’s divorce will not begin immediately, though voices have been raised from within Europe seeking an early initiation of the “Brexit” process. The UK will have to notify EU invoking Article 50 of the Lisbon Treaty and will then have to negotiate and strike an agreement setting out the arrangements for its withdrawal, and also the framework for its future relationship with EU. Thus, a period of two years may still be available before the UK formally leaves the EU. This period will be critical for the global community to work out its strategies to deal separately with the EU and UK in the years ahead. India has been engaged with the EU for the past decade to deepen bilateral economic relations. At the heart of the India-EU engagement is the Bilateral Trade and Investment Agreement (BTIA), which has been at a virtual standstill as differences between the two partners on critical issues continue to rankle. India will therefore have to engage in some strategic thinking on the terms of its future engagements with the EU.

In the wake of Brexit, the prospects for struggling economies in the EU look fairly dim. The British economy, too, will suffer the pangs of adjustment that may lower its growth prospects, so say the projections that have been made so far. These uncertainties will certainly affect the Indian economy given its trade links with Europe. Brexit happened at a most inopportune moment for India-EU relations. In the recent past, both partners were warming up once again to get BTIA on track and to work for its early conclusion. Both sides expected the agreement to improve market access opportunities since over the past decade India-EU trade has been declining. Until the middle of the previous decade, the EU was by far India’s largest trade partner. Nearly a quarter of India’s exports were absorbed by the 25-member EU in 2005, but a decade later, India was exporting less than 17 per cent of total exports to the 28-member EU.

On the import side, India imported nearly 17 per cent of total imports from the EU in 2005, which fell to just 11 per cent in 2015. This declining importance of the EU as a trade partner was due to the steady diversification of India’s exports, which corresponds with the considerable rise in Asia’s importance as India’s trade partner. With India’s engagement with Asia expected to go a few notches higher as a result of the proposed Regional Comprehensive Economic Partnership (RCEP), a mega-regional trade agreement that India is negotiating with 15 East Asian countries, the EU’s importance as a trade partner could decline further in relative terms. It can therefore be argued that the impending crisis in the Eurozone after Brexit would not adversely affect India’s trade by a big margin. The UK’s importance as India’s trade partner had decreased steadily over the past decades.

The share of India’s total exports to UK fell below 10 per cent in the late 1970s and by the turn of the millennium it had fallen below five per cent. After plunging to below three per cent in the wake of the post-2008 economic recession, there has been a slight recovery in later years. Although the EU’s importance as a market for Indian products has fallen, for a number of industries the EU continues to be a major destination. On top of this list are the textiles and clothing industries, which in 2015 exported a quarter of its total exports to EU member states. Within this broad sector, the dependence of the clothing sub-sector is much higher — currently, more than a third of its total exports are accounted for by the Eurozone. The exports of several other sectors, including automobiles and non-electrical machinery, have been rising in recent years, and these sectors could be hit by the uncertainties that the EU could experience shortly.

( Source : Columnist )
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