Date: 24/08/2022

Relevance: GS-2: Groupings & Agreements Involving India and/or Affecting India's Interests; Effect of Policies & Politics of Countries on India's Interests.

Key Phrases: Generalized System of Preferences, EU’s withdrawal of GSP, Most Favored Nation.

Context:

• The European Union recently has decided to end duty benefits for 1,800 goods under the Generalized Tariff Preference Scheme.
• It has forced India to engage with the industry to assess the impact of this decision.

Background

• India's exports of plastics, stone, electrical machinery, articles of stones, articles of leather, and mechanical appliances worth $7.9 billion to the EU will no longer be eligible for low or zero-duty concessions from January 2023.
• In these four sectors, the EU is a major export destination for India and holds around 22.58% share of India's total exports.
• It will make Indian goods more expensive with exporters paying 6.5% duty for certain plastic products where the tariff is nil at present.
• This will severely impact our competitiveness as other GSP and GSP plus countries will continue to enjoy tariff concessions for these sectors
• The main issue now is to look into whether exporters will lose their market share and if there is a case for extending some support to such sectors.

Generalized System of Preferences

• Generalized System of Preferences (GSP) is an umbrella that comprises the bulk of preferential schemes granted by industrialized nations to developing countries.
• It involves reduced Most Favored Nations (MFN) Tariffs or duty-free entry of eligible products exported by beneficiary countries to the markets of donor countries.
• The idea of granting developing countries preferential tariff rates in the markets of industrialized countries was originally presented at the first UNCTAD conference in 1964. The GSP was adopted in New Delhi in 1968.
• There are currently 13 national GSP schemes notified to the UNCTAD secretariat including the US, Canada, Australia, New Zealand, Norway, and the UK.
• Under the scheme, the EU allows preferential access to identified products originating in certain developing countries, in its markets in the form of reduced or zero rates of customs duties.
• According to EU rules, GSP beneficiaries can lose preferences for specific product categories that are deemed to have become sufficiently competitive.
• Textiles, vehicles, chemicals, and some leather products were excluded from the EU GSP programme in 2014 after their exports crossed the specified threshold and haven't enjoyed preferential treatment since then.

Data and Statistics

• As per an analysis done by FIEO, out of the total 16,309 EU tariff lines (products), 46.6% are eligible for tariff concessions under GSP. Around 23% of the products have zero duty.
• Among states, Maharashtra, Gujarat and Tamil Nadu would be the most hit as their share in exports to the EU is almost 60%.
• The EU is India's third largest trading partner, accounting for €88 billion worth of trade in goods in 2021, or 10.8% of total Indian trade, after the USA (11.6%) and China (11.4%).
• The EU is the second-largest destination for Indian exports (14.9% of the total) after the USA (18.1%), while China only ranks fourth (5.8%).
• India is the EU’s 10th largest trading partner, accounting for 2.1% of EU total trade in goods in 2021, well behind China (16.2%), the USA (14.7%), or the UK (10%).
• Trade in goods between the EU and India increased by about 30% in the last decade.
• Trade in services between the EU and India reached €30.4 billion in 2020.

Affecting exports

• The government is taking heart from the fact that even after the withdrawal of the GSP scheme by the US for several Indian products in 2019, exports of most items actually increased and their market share was not adversely affected.
• One has to see if the same would happen in case of withdrawal by the EU.
• The Federation of Indian Export Organizations (FIEO) has already done a rough analysis of how the move could affect Indian producers and flagged the matter with the government.
• India exports machinery worth about $5.1 billion and plastic items worth about $1.7 billion to the EU annually.

FTA possibility

• Articles of leather (excluding footwear) and articles of stones — the other two categories set to lose GSP benefit - are not critical as exports there are not significant.
• In the first two product sectors, the government has to look into whether or not the industry is competitive enough to survive this kind of withdrawal. If not, then what could be done to help them?
• As India is negotiating a Free Trade Agreement (FTA) with the EU, there also exists a scope of getting preferential tariff benefits for the affected sectors through the trade pact.

Way Forward

• India is amongst the world’s fastest-growing large economies and is an important player in global economic governance.
• India is already an important trade and investment partner for the EU and could hold significant further potential.
• It represents a sizable and dynamic market, with an annual projected GDP growth rate of over 8% according to the IMF, which would make it the fastest-growing emerging economy.
• This shows the dependency of both India and the EU on each other and hence the issue in the economic domain

Source: The Hindu BL

Mains Question:

Q. The European Union recently has decided to end duty benefits for several goods under the Generalized Tariff Preference Scheme. What are the possible implications for India? [150 Words].