Caught Between The Dragon And The Elephant

India’s trade diplomats will need some deft footwork to manage two trade partners—China and the US

Two large beasts cramp our geostrategic mindspace. One, China’s dragon refuses to vacate our imagination. The second one stirring about in the same space is expected to further cramp room for manoeuvrability. The current US administration, much like the Republican Party’s elephant symbol, is steamrollering global multilateral negotiations. Both these heavyweights present India with a difficult balancing act.

The first inkling of India’s expected high-wire act came from Chile last week when 11 members of the floundering Trans-Pacific Partnership (TPP), all founding nations barring the US, met to revive the plurilateral agreement. An added twist was China’s presence at the meeting.

It is expected that China will step into the US’ large shoes. America’s withdrawal from the TPP was seen as a parting kiss of death since its stewardship had kept negotiations alive. Having invested time, resources and political capital—especially on beyond-the-border issues like labour standards, environment rules and intellectual property laws—many developing countries are loath to let all that work go to waste.

These developments point to the likelihood of an alternative Asia-Pacific trade agreement, perhaps without the trademark TPP markers. Importantly, China was not part of the TPP, which was seen as an instrument and extension of the US’ strategic power. While it is still early to predict how it will all shape up, hopes are the new pact will be built on the back of Latin America’s four-country Pacific Alliance and South-East Asia’s Regional Comprehensive Economic Partnership (RCEP).

India is part of the RCEP trade and investment initiative being negotiated between 16 countries—10 countries from the Association of South-East Asian Nations (Singapore, Malaysia, Thailand, Indonesia, Cambodia, Vietnam, Laos, Myanmar, Brunei and the Philippines) and six others with which the regional grouping has a free trade agreement (India, China, Japan, South Korea, Australia and New Zealand). Many of these nations are also TPP members. The RCEP provides India an opportunity to stamp its strategic and economic presence across the Asia-Pacific. It also provides India an opportunity to bring multilateralism back to centre stage.

But here’s the thing. With China assuming leadership of the RCEP and the putative Asia-Pacific alliance, the world will be keenly watching the shape of the new trade and investment agreement, especially who gets to set standards and the nature of standards finalized. The TPP’s insistence on standardized labour, environment and intellectual property right (IPR) regulations (apart from a host of other issues) conflicted with notions of sovereignty.

The question now is: Will China impose similar standards?

While China has publicly endorsed World Trade Organization (WTO)-compatible trade agreements, will it cherrypick rules? India and China share an uneasy geostrategic relationship, especially in trade. India’s three-tiered tariff proposal for the RCEP has already met with disapproval and India’s push for inclusion of trade in services faces multiple headwinds.

In the other corner, the US’ browbeating at the recently concluded G20 meeting in Germany provides a glimpse of forthcoming challenges to the existing world trade order and globalization. During the drafting of the final communiqué, the US bullied all members to drop pro forma references to free trade and protectionism. Not surprisingly, all members complied, though they did grumble in private.

US President Donald Trump’s administration has repeatedly emphasized that it prefers bilateral agreements over multilateral compacts. The 2017 Trade Policy Agenda makes it official: “The overarching purpose of our trade policy…will be to expand trade in a way that is freer and fairer for all Americans…these goals can be best accomplished by focusing on bilateral negotiations rather than multilateral negotiations—and by renegotiating and revising trade agreements when our goals are not being met.”

India does not have a free trade agreement with the US and negotiations over a bilateral investment treaty between the two countries is stuck over, among other things, the investor-state dispute system. IPR laws are the other thorn in the relationship: India claims its IPR regime is compliant with the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights while the US insists on a WTO-plus framework. This has prompted the US to unilaterally include India in its “Priority Watch List” under Special 301.

The trade agenda outlines the future course of the bilateral: “Although existing Indian trade and regulatory policies have inhibited an even more robust trade and investment relationship, India’s economic growth and development could support significantly more US exports…In 2017, the United States will press India to make meaningful progress…on intellectual property rights, promoting investment in manufacturing, agriculture, and trade in goods and services.”

This, in short, is the dilemma. India’s geostrategic ambitions include RCEP membership but it will have to contend with China’s growing heft and increasing pressures to further reduce tariffs. India’s trade deficit with China is growing every year and shows no signs of reversing. On the other hand, India’s support for multilateralism will have to contend with the US’ insistence on bilateral treaties and a re-examination of all existing trade relations. Ironically, India enjoys a trade surplus with the US—in 2015, it touched $30 billion. India’s trade diplomats will need some deft footwork to manage these two trade partners and contradictions.

The above article was published in Mint newspaper and can also be read here 

Arun Jaitley’s Shades-of-Green Budget

All said, a fog currently surrounds finance minister Arun Jaitley’s tax play on carbon credits

The West’s climate-change politics vilifies India for its pointed refusal to abandon coal as an energy source. This criticism continues unabated despite praise from multiple quarters for India’s Intended Nationally Determined Contributions (INDCs), submitted before the Paris climate summit in 2015. The INDCs commit to reduce the emissions intensity of India’s gross domestic product (GDP) by 33-35% from 2005 levels by 2030. Interestingly, the INDCs are voluntary, unlike past top-down climate governance mechanisms, such as the Kyoto Protocol.

India’s INDC moves are coming to life in myriad forms. Union finance minister Arun Jaitley has used the 2017-18 annual budget to incorporate some basic elements of a “Green Budget” as well as initiate India’s economic response to the West’s climate change politics. These policy initiatives include lighting up 7,000 railway stations across the country with solar power and halving basic customs duty (BCD) on liquefied natural gas—a relatively cleaner fuel compared to coal or oil—from 5% to 2.5%.
Green budgets deploy fiscal carrots and sticks to influence economic behaviour and improve the environment. Jaitley made a tentative start with his 2016-17 budget but without taking any of the long strides necessary to strengthen India’s commitment to sustainable development or place India firmly on the path to lower emissions. The measures in this year’s budget perhaps quicken the pace, but two decisions stand out for their curious configuration.

The first is a direct tax measure: a new section (115BBG) in the Income Tax Act makes income from the transfer of carbon credits taxable at a concessional 10% rate (plus applicable surcharge and cess). This income was earlier taxed at the normal rate. The directive would have been welcome had the timing not been mystifying. Critics have called the decision a delayed reaction, especially because carbon-credit markets are all but dead. The European Union’s emissions trading system (ETS) shut its doors in 2012; in addition, carbon credit prices have plummeted sharply, rendering the whole process of creation of carbon credits and subsequent trade unviable. But such criticism could also be hasty.

India is trying to create two domestic trading initiatives: Perform Achieve and Trade (or PAT) under the Bureau of Energy Efficiency and a Renewable Energy Certificate (REC) trading system. A third initiative has been launched in three states—Maharashtra, Tamil Nadu and Gujarat—for developing a pilot ETS programme to reduce particulate matter (such as sulphur dioxide) emissions. Only the PAT design, currently in pilot phase, comes anywhere close to an ETS.

The PAT mechanism has identified 11 industrial sectors accounting for 25% of GDP and 40% of India’s energy consumption: thermal power plants, cement, chlor-alkali, pulp and paper, petroleum refinery, power discoms, fertilizers, iron and steel, textile, aluminium and railways. PAT seeks to lower energy intensity in each of these industries through trade in energy savings certificates on designated power exchanges.

In the first phase, 478 companies from eight sectors were included in the programme and achieved an energy savings of 8.67 million tonnes of emissions (mtoe) against a target of 6.886 mtoe. In the second phase, 621 companies from all 11 sectors are being included in the scheme. Is Jaitley’s tax measure designed to provide greater acceptance of, or impart greater depth to, PAT? Did he use the term “carbon credit” interchangeably? This is a distinct possibility: Over the past few years, the number of ETS programmes has been rising across the world, trebling from 5 in 2012 to 17 now.

Throw into this mix China’s planned ETS going live in 2017—slated to become the world’s largest, and bound to change the nature of the game. China, South Korea and Japan are already exploring regional cooperation in carbon markets. Interestingly, India and China signed a bilateral agreement on climate change (goo.gl/BF3hke) in 2015. Both developments point to the possibility of enhanced regional cooperation, especially on a larger, plurilateral platform. But China needs to iron out some wrinkles: harmonizing cross-border compliance and enforcement regimes, improving liquidity, expanding the number of eligible sectors, fungible trading units, among others.

All said, a fog currently surrounds Jaitley’s tax play on carbon credits.

The second curious decision is ending the 5% BCD on the import of solar-tempered glass for the manufacture of solar cells/panels/modules. Simultaneously, and inexplicably, a 6% excise duty has been introduced, where none existed earlier, on domestic production of the same product, solar-tempered glass; it’s like expressing a preference for imports over domestic manufacture and thumbing one’s nose at the Make In India campaign. What adds to the mystery is that 5% BCD was imposed only last year, and in just one year the ministry has decided to backtrack.

There are only two plausible explanations. One, a domestic manufacturer favoured by the current political dispensation probably needs to import for a local photovoltaic fab facility, having already tied up with large importers. Alternatively, two-three large global tempered glass manufacturers have been able to impress upon the government the need to keep imports cheaper than domestic products.

Whatever the reasons, Jaitley needs to provide more clarity on these measures and what they intend to achieve.

The above article appeared in Mint newspaper on March 8, 2017, and can also be read here