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EU-India Relations – Facing similar challenges

By Frank-Jürgen Richter

BIZ@INDIA OECD Forum May – June 2012

EU and India share history and historical links and today they also face similar sets of challenges. The leaderships in both regions need to take some hard decisions to set their house in order, writes Frank-Jürgen Richter

Curiously India and the EU have suffered a similar history over the last 2000 years. Their kingdoms have been ransacked by armies of occupation, even the Romans captured the north India regions so supporting easier trading from distant UK through to India; religious strife was common place in both regions; and while around the coasts in the many ports local people met and mingled with a myriad of others the people in land hardly saw a foreign person during their lives. The more and more insular village people travelled little, with only a few herding their livestock to a local market bringing back news of the ‘wide world’. It is only in the recent past that the nations of Europe and the many regions of India have achieved peace.

Peace is important to maintain trade, prosperity and growth. As noted above, the Roman armies conquered ‘the world’ and, having conquered, they imposed a common set of rules and laws sub duing local customs and often mini-wars. The main effect of this control was the opening up of trade. Stability and consistency of rules and knowledge of trading partners and their needs are the bedrock of trade. Modern trade is dependent on standards applied through common software packages run by ports, shippers, and by the freight forwarders to ensure door-to-door tracing and tracking both for the physical product and for the payment of dues and taxes on the products with all transcripts being digitised and with the goods’ protection guaranteed by insurance clauses. Trade increases in line with national wealth, and there is a ‘chicken and egg’ situation for traders as ports and hinterland services have to be developed to allow largerships to berth and beloaded in a timely fashion. The services have to be considered, planned and implemented as part of a ‘trade agreement’ which take some time to beagreed.

Not with standing any private trade arrangements between parties in Europe and India their governments have held formal meetings to forge ‘relations’ from in the mid-1960s. Then in 1994 there was a Cooperation Agreement; in 2004 was the ‘Strategic Partners’ plan, which was upgraded by the ‘Acti on Plan’ of 2008. Now there is the EU’s Country Strategic Paper for India 2007 – 2013 having a focus on mutual aid on education, health, energy, environment and trade assistance as well as on joint anti-terrorism planning. But this succession of accords does not imply good progress. On the contrary, formal agreements have been slow to beagreed as India seemed quite reluctant to acknowledge the ‘EU’ preferring instead to forge bi-lateral deals with individual nations rather than a wide FTA (free trade agreement) as desired generally by the World Trade Organisation, and as hoped for in the Doha round of meetings, but which stalled. During the early months of 2012 the EU and India have failed to agree on their duty and tax levels – for instance, the Indian tariff on European car imports is about 10 times greater than the reverse EU barrier, and the EU views Indian software houses as potentially overwhelming the software workers of the EU.

Of course it was recognised that this agreement would create the world’s largest FTA with a population over 1.8 billion, more than a quarter of the world’s people. Even so, India has kept the EU at arm’slength over some five years of negotiation while trade mounts. In 2010 the EU goods exports to India were EUR34.7 billion, in reverse was EUR33.2 billion; services trade EU to India were EUR9.8 billion, in reverse EUR8.1 billion; and Foreign Direct Investment (FDI) from EU to India was EUR3.0 billion, and in reverse EUR0.6 billion. There are many political agenda behind the accords. In Europe we know that its internal accord rests on the people’s agreement within each of the 27 nations, and that many do not like the impression of rules from Brussels over their own national parliaments. The situation, in practice, maybe similar in India, as the enforcement of Indian laws set by the parliament in Delhi is not enjoyed by leaders in the regions, nor by the mass of people in these regions, but there are far more people in India swaying local as well as national opinion.

Progress in Europe in comparison to India seems to more effective. Let us consider transport again (as itis the carrier of trade, growth, and thus wealth). The European road and rail system once was mess – national systems had grown incrementally over many years with individual nations deciding not to provide interlinks to the next country to protect their own nation in times of war. That idea did not work in practice. The EU gradually formed the opinion that if it wished to proceed to the ‘EU Single Market’ (for the free exchange of goods, services and people) it needed to have an integrated road and rail system across the whole Union. It decided by the end of the 1980s on the construction of the multi-modal Trans-European Network for Transport (TEN-T). This plan also encompassed the ports of Europe as they was seen as multi-modal points of exchange to both short-sea shipping (so reducing load on the in land freight networks) and to oceanic shipping (increasing external trade). While TEN-T was beginning in Europe the same integration concept was being pressed by the EU in Central Asia, and with the help of the Asian Development Bank the concept was extended into eastern Asia. The TEN-T development was materially aided by EU structural fund supporting, in fact, transport, energy and telecoms and by the European Investment Bank (EIB). There was an integration of national as well as pan-Europe progress which allowed the Schengen Accord for the free passage of goods and people across national borders without hindrance and the inconvenience of halting for passport or other paper checks. One TEN-T report say the EU 27 comprises 5.0 million km of paved roads which is slightly more than the of Indian’s 4.42 million km total (which only comprises about 250,000 km of highways and paved roads). The Indian government was a slow to redevelop its roads (and railways), onlypressing ahead in the late 1990’s. In fact the Indian system still has too many unpaved roads supporting too much heavy traffic – thus the density of paved roads in India, while increasing, may be some 10 – 15 times lower than in the EU. The flow of vehicles on all roads is hampered by overcrowding, by too large a mix of users (from bullock carts to huge trucks) with most engaged in poor road manners like driving contra to the correct flow on dual carriageways that causes many avoidable deaths of man and beast.

Surely this hampers its economy? A 2009 report by Goldman Sachs suggests that India will need to invest US$1.7 trillion on its infrastructure projects by 2020 to meet its economic needs. This is a lot of cash in a country that has just suffered a downgrade by Standard & Poor’s to BBB- (negative outlook) that also implies a 1 in 3 chance of a further downgrade. However other rating agencies maintain their BBB- (stable) rating – but this is only one grade above junk bond rating (ie not advisable as an investment). While Europe carries grave concerns about its financial cohesion it still maintains a high rating overall. However S&P look gravely upon Europe saying it carries too many stresses and it is not moving fast enough to remove these difficulties – legislating for austerity is not a route to growth – but the banks and governments face many and conflicting demands. For instance, banks need to increase their lending to stimulate growth, but they are told also to increase their margin of cover by new Banking rules: it is a global problem affecting India as well. Recent agitation in several countries does not reduce the stresses according to the ratings agencies, though they may make the people happier in the short term by their voting away of reformist policies. But the people conflate their woes with the effects of globalization as well as the need for freer movement of goods, services and people – they fight against ‘everything’ while also wishing to benefit from the social welfare that has reached quite high levels over the past decades. One can’t enjoy ‘free’ gifts without working and returning taxes to the governments.

In India, over the first 50 years of its independence little drastic has occurred except perhaps for its explosion of population due to reducing mortality without a decrease in the birth rate. It chose early to be an independent nation so did not benefit from much inwards investment after the last world war as the big economic blocs sought economic colonialism. Therefore India funded its own growth from savings rejecting inwards investors. It invested well, but forgot to police its fund flows. As a result too little cash flows to the project targets – as little as 17 percent of funds according to some government spokespersons. And while local investors deplore its high and steady corruption there is a lack of government will to pursue anti-graft laws. Therefore inwards investment has been restricted by policy inactions-the desire to be independent and letting corruption run rife to the highest levels of government: its governance needs to become clear and transparent. If it could introduce these social reforms it would free cash and by enabling structural support for investors would increase growth through breaking its government paralysis. As it is, many point disparagingly to recent policy setbacks, such as a failed plan to open the retail market to foreign investment, as well reneging on proposed changes to India’s tax laws and to cleaning-up corruption scandals. In this globalized world we must be pluralistic and open to competition, but Indian negotiators fail to address these issues – as noted by the EU in its pursuit of wide accords and FTAs with India.

In Europe one cannot fail to notice the very different stances of member states – there is a strong north/south divide that affects social, public and management life and there is an east/west divide as each adjusts their historical norms to the needs of the whole: always the management of the EU looms over us. Yet the EU must also learn – it is late in coming to a firm stance on foreign policy for instance that India knew from its early days was to be one, not of isolation, but of independence. India has the benefit of being a single democratic country – yet it often behaves as though its regional governors were in fact independent presidents not beholden to the national government, and the latter seem unwilling at times to exert due control. Soon the EU, India and other nations must relinquish their soft ideals of “see the world in all its magnificent variation” and instead accept the hard facts of finance, that “… money does not grow on trees”. Each of us must nurture our specialties, growing our ‘trees and seeds’ for our mutual benefits – that means with good governance, transparency and ecologically correct.

Dr Frank-Jürgen Richter is founder and chairman of Horasis, a global business community. Horasis hosts the annual Global India Business Meeting, the 2012 edition will he held in Antwerp, Belgium, 24-25 June.