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FTAs: who did the homework?

A K Bhattacharya | August 10, 2004

In the past few weeks, the commerce ministry has come under attack from the Prime Minister's Office. The apparent provocation has been the great speed at which the commerce ministry has finalised plans to enter into free trade area agreements with several countries in the world.

It all began with Sri Lanka, with which an FTA pact was concluded in 2003. Subsequently, similar FTA agreements have been proposed with Thailand, Singapore, Korea and even Japan.

The PMO's argument is simple. Before taking a major policy initiative, every ministry undertakes a lot of preparatory work, sets up a committee that examines the relevant aspects of the new policy and then seeks consultation with experts in the field.

The finance ministry, for instance, set up at least three committees in the past decade to revamp the direct and indirect tax regime. The company affairs department set up more than one committee to make recommendations for changes in company law.

Even the civil aviation ministry got expert committees to look into the need for changing the regulatory framework for the civil aviation sector.

What did the commerce ministry do before embarking on its policy to enter into FTA agreements with a host of countries? It was a major policy shift, coming as it did immediately after the failure of the World Trade Organisation talks at the fifth ministerial meeting at Cancun.

Did any expert committee examine how such bilateral agreements fitted into the overall multilateral trade framework that India's commitment to the WTO envisaged? Or was India trying to pursue both the bilateral FTA agreements and the multilateral trade regime under the WTO as parallel initiatives?

The PMO, at least, was not clear about what the commerce ministry's strategy could be. True, all these FTA initiatives were taken by the Vajpayee government. But surely, there must have been some background work done in the commerce ministry to justify the initiatives.

The PMO under Manmohan Singh sought such explanations from the commerce ministry, but drew a blank. Which is why none other than Prime Minister Manmohan Singh made no secret of his government's decision to take a close look at all the FTA pacts that had been proposed by the Vajpayee government.

That the Thai FTA pact still got the go-ahead through the conclusion of an "early harvest" list of items qualifying for staged import duty concessions merely reconfirmed that the Singh government was serious about its FTA review plan. Don't forget that it agreed to the "early harvest" list of items only after ensuring that the value addition norm was fixed at 40 per cent under the rules of origin covering such bilateral trade under the FTA pact.

All other countries waiting eagerly to sign FTA pacts with India would now take note of the 40 per cent value addition norm that has already become a precedent.

What went wrong with the commerce ministry, and why didn't they do some preparatory work on FTA agreements? If you raise this issue with senior commerce ministry officials, the answer you get is quite stunning. One explanation is that the commerce ministry was emasculated during the past couple of years.

Another view is that it was a case of institutional failure in which the ministry of external affairs took the initiatives and the commerce ministry was merely asked to sign on the dotted line.

These officials further point out that as long as Murasoli Maran was actively involved in the running of the commerce ministry, there was no way the MEA could interfere or influence trade policy initiatives.

Maran's was a powerful voice that the Vajpayee government could not afford to ignore. But once Maran was away because of his illness, there was a flux in the commerce ministry with frequent changes in its ministerial stewardship.

For some time, there was Arun Shourie, while some time later the baton was handed over to Arun Jaitley. But for both of them, the commerce ministry was an additional charge, though for Jaitley it later became more important.

The MEA, helped in no small measure by the Principal Secretary in the PMO, Brajesh Mishra, took advantage of the flux. Jaitley's appointment as the commerce minister restored some power to the ministry. But the script for all the acts of the ministry was still guided largely by Mishra and the MEA.

An important fallout of this flux was that many of commerce ministry's post-Cancun initiatives did not fully involve the stakeholders. For instance, the agriculture ministry felt ignored even while the commerce ministry was fighting the battle at Cancun over agriculture.

Things did not change even after Kamal Nath took charge of the commerce ministry. For instance, there was no senior official level representation on the prime minister's delegation that visited Bangkok, where a major step towards signing the FTA pact with Thailand was taken.

But the realisation that the commerce ministry should break free from the influence of the MEA and re-assert itself has begun to dawn on Kamal Nath and his officials. In the coming days, therefore, expect more initiatives from the commerce ministry that will take the MEA and even the PMO by surprise.

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