Stop running after FTAs

Here’s a very puzzling and very worrying question: why is the Modi government all for free trade agreements (FTAs) and so dead set against Bilateral Investment Treaties (BITs)? It is unlikely that it does not understand the link between the two. So why?

I don’t know the answer but the outcome is there for all to see. India is running up huge trade deficits, especially with China and its share in global FDI is falling. The numbers are startling.

Thus in 2015 there were BITs with 74 countries. Today there are six left. The rest have been terminated. The government has never explained why.

Two years ago a research paper in the The Review of International Organisations found that Indian policies with respect to BITs had led to a “significant reduction” in inflows from countries without BITs compared to those with them.

The government and its defenders haven’t been able to prove to the contrary.

Indeed the deathly silence around this suggests that no one wants to annoy the government. Maybe the intrepid new leader of the Opposition will.

FTAs vs BITs

He must do so because, utterly mysteriously, the Modi government has been very energetically pursuing FTAs even though the experience shows that they don’t work to the country’s advantage. Indeed, they turn India into an economic colony like in the old days of British rule.

Thus India imports higher value added things and exports lower or zero value added stuff. The profits go to the exporting countries. It’s as simple as that. Yet the government bashes on regardless with its policies both in regard to BITs and FTAs.

If there has been a cogent government explanation to this irrational behaviour, I have not come across it. If you have, please send it. I doubt though that you will find one.

The point is this. Businesses exist primarily to make money. That means they like to minimise risk.

Importing things is a lower risk activity than making them here and India is a very risky place for large scale manufacturing except in small oligopolistic markets. There’s too much state induced risk for everyone else.

This is the main reason why FTAs are such a bad idea and why we are not as industrialised as we should be. It’s less risky to trade than make. We have become assemblers.

Foreign businesses are exactly like their Indian counterparts. They also like to avoid or minimise risk, especially when they invest abroad. That’s the reason why investment guarantees exist.

In the colonial world these guarantees of contract enforcement were provided by the military muscle of the colonising countries.

Today the world depends on civilian institutional muscle. We don’t have it in a credible way. Our institutions are too erratic. There’s too much inconsistency.

It’s incomprehensible why India is refusing to acknowledge this and at the same time fluttering its eyelashes at foreign companies to come and invest. But eyelashes, no matter how long, are not enough because potential investors are absolutely certain that the rules can and will change at any time, in any direction. This happens far too often.

Whimsical govts

The retrospective tax of 2011, and contract cancellations by new governments when Jagan Reddy became Chief Minister of Andhra Pradesh, are just two shining examples of capricious policies. Contractual obligations mean little to our governments.

And, of course, there’s the ever present extortion at all levels of all governments, not to mention self-defeating labour and land acquisition policies. Even Robert Curzon and Warren Hastings would have been shocked at how well we shake the pagoda tree.

Amazingly, and perhaps unconsciously, the Modi government has been mitigating risk for Indian businesses via the FTAs which allow them to avoid the risks of manufacturing in India by becoming traders.

Simultaneously, it has been increasing the risks of foreign companies who would manufacture here if their risks could be reduced as well. BITs are a good way of doing that. But the Modi government doesn’t think so.

This bizarre strategy raises the question: who is actually guiding trade and investment policies? I find it difficult to believe that the government’s own economists are unaware of the contradictions.

But if they are indeed aware, are they unwilling to point them out? Or if they are willing, are they overruled? Mr Modi is way too savvy not to understand all this. So who is forcing his hand? Your guess is as good as mine. But it’s necessary to ask who benefits.

To conclude, here’s what I think. Modi 3.0 must stop hankering after FTAs and start renewing BITs. And if it doesn’t want to do that, it must explain why.