INDIA'S LOOK EAST ECONOMIC POLICY - JUST LOOKING, NOT

UNCLAS SECTION 01 OF 04 CALCUTTA 000464

SIPDIS

SENSITIVE
SIPDIS

DEPT PLS PASS USTR

E.O. 12958: N/A
TAGS: ECON ETRD EINV WTRO EIND IN NP BG
SUBJECT: INDIA'S LOOK EAST ECONOMIC POLICY - JUST LOOKING, NOT
BUYING

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1. (SBU) SUMMARY: India continues to adopt a contradictory
attitude in its trade relations with its Eastern neighbors,
claiming to seek more bilateral trade agreements but placing
severe limits and barriers to those agreements to make them
essentially meaningless. The opening on July 1 of Indo-China
border trade at Nathu La was seen as an important initiative by
India in strengthening regional trade as part of its much touted
"Look East Policy." Subsequent developments indicate a
continuing protectionist stance due to concerns over national
security and the potential dumping of goods from China. A
closer analysis of the trade relationship between India and its
other neighbors also shows that fear of direct external
competition continues to stifle India's "Look East Policy."
Ironically, while the GOI criticizes developed countries for
unfair trade practices against developing countries, India
itself conducts highly discriminatory trade policies with other
developing Asian countries. END SUMMARY.

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Trade through Nathu La Purely Symbolic
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2. (U) On July 1, the opening of the Himalayan Nathu La trade
crossing between India and China was heralded as a great leap
forward in the trade relations between these two Asian giants.
However contrary to the initial hype, India's restrictions on
the type and number of commodities, a lack of unified standards
for commodity inspection and quarantine, a limited trading time
as a result of the climactic conditions, and bad infrastructure
have ensured that the volume of trade through Nathu La remains
low. For example, the GOI has limited items for trade to goods
such as yak tail, yak milk and other esoteric products. The GOI
has also imposed stringent quarantine provisions on these
agricultural items. Currently, there are no provisions for
obtaining a quarantine clearance on the border, so the paper
work has to be done in Calcutta, compounding delays. The GOI
Commerce Ministry is examining alternatives to resolve the issue
but has not reached a decision.


3. (U) Other administrative delays abound, such as requiring
Nathu La traders to provide their income tax number (known as a
PAN number),during transactions. This requirement caused
long-holdups, as Sikkim residents were exempt from income tax
requirements and did not have PAN numbers. The GOI has now
removed this requirement for Sikkim resident traders. Trade is,
however, curtailed by restricting the maximum value of each
consignment to USD 555.


4. (SBU) In addition, the permitted trade list includes just 29
items for export and 15 items for import by India from China.
The Sikkim government has submitted an application to the GOI
urging it to expand the list, but the application remains
pending with the Commerce Ministry. The Sikkim government would
like to include, among other things, agricultural and
horticultural products, including orchids. It has also urged
the GOI to permit tourism sector operations through Nathu La.
The GOI has shown little interest in opening the crossing to
tourists. (Note: Contacts have told Post that during his
recent visit to Gangtok, the Chinese Ambassador indicated that
his government asked the GOI for an expansion of the trade list.
End Note.)


5. (SBU) India's development of infrastructure on its side of
the Nathu-La border lags behind China's. While international
media have touted the development of rail and road access to
Nathu-La on the Chinese side, the GOI and Sikkim government have
so far only just decided to upgrade the road network from
Siliguri (in West Bengal) to Nathu La. USD 111 million was
allotted to upgrade the road between Siliguri and Sikkim's
capital, Gangtok, so that it can support larger container
trucks. The Border Roads Organization (BRO),an agency under
the Ministry of Defense, builds and maintains this road. USD 44
million has been earmarked for upgrading the stretch between

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Gangtok and Nathu La. The work is projected to be completed by

2008. Assuming the road improvements happen, significant
India-China border trade through Nathu La cannot be expected
prior to 2009.


6. (SBU) Comment: India's historical distrust of China is a
contributing factor in its hesitation to compete with Chinese
products. The outcome of the 1962 Indo-China war and continued
fears of border disputes remain etched on the Indian psyche.
While the opening of the Nathu La border was portrayed as a
warming of relations between the two nations, India's real
achievement was China's final recognition of Sikkim as an Indian
state in 2003. End Comment.


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The Imbalance with Bangladesh
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7. (SBU) India's trade relationship with Bangladesh is also
instructive of how India treats its South Asian neighbors. The
trade imbalance between the two countries is sizeable.
According to the Bangladesh Deputy High Commissioner (BDHC) in
Calcutta, Bangladesh exports approximately USD 240 million to
India, while India exports nearly USD 2 billion to Bangladesh.
The BDHC noted that although overall exports to India have
increased year-on-year, a series of non-tariff barriers continue
to impede free trade into India. For example, cotton and silk
saris must be checked for potential skin irritants. This
process involves sending a sample of the material to Lucknow, a
process that delays the imports by about three weeks. Indian
law requires that a tax commissioner attest to imports coming
from Bangladesh, but the tax commissioner has his office in
Calcutta, not at the border. Some customs posts are unmanned.
Customs officials capriciously apply tariffs and duties on
goods, preventing uniformity. Like the Chinese experience with
Nathu-La, infrastructure is much less developed on Indian side
of the border as compared to the Bangladesh side. India's
restrictions on trade with Bangladesh have regional implications
as well. Bangladesh and Nepal had entered into an agreement
with India to permit transit of goods crossing a narrow strip of
land in India that divides the two countries. However, there is
little use of the route as Bangladeshi and Nepali trucks are not
permitted in India. Goods therefore must be unloaded at the
border and reloaded into new trucks just to travel the
approximately 30 kilometers across India.


8. (SBU) Comment: The BDHC felt that India had little incentive
to agree to a more liberalized trade regime with Bangladesh.
For its part, the GOB does not press its case too hard with the
GOI because it relies so heavily on Indian imports and because
it feels that the GOI can affect the market price of basic
foodstuffs. The BDHC cited as an example, the GOI stopping
exports of onions and sugar to Bangladesh three months ago,
ostensibly due to low domestic supply. This move was seen in
Bangladesh, though, as the GOI reminding Bangladesh as to who
controlled the market. End Comment.


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Stonewalling on Trade Pacts with Southeast Asia
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9. (U) India has signed Framework Agreements with Thailand,
ASEAN, Malaysia, Indonesia and Korea in hopes of achieving
Comprehensive Economic Cooperation Agreements (CECA) in line
with the CECA India signed with Singapore in 2005. The CECA, a
euphemism used by the GOI for a Free Trade Agreement to avoid
conflict with domestic anti-free trade lobbies, typically begins
with just liberalized trade in a limited range of products.


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10. (U) The Indo-Thai Framework Agreement signed in October
2003 involves an FTA in goods, services and investment. After
prolonged negotiations over rules of origin and a drawing up of
lists for phased, tariff-free trade, a scheme listing 82
products allowed for trade began September 1, 2004. Tariff
reduction was to be 50% for the first year, increased to 75% for
the next year, with free trade in effect from September 1, 2006.
Trade between the two nations is dominated by ten products.
India's exports to Thailand include fuel, oil, precious stones,
and electrical items, and in turn India imports chemicals,
agricultural products, precious stones, machinery, plastics,
spare parts, electronic items and auto components. The balance
of trade was weighted slightly in India's favor in 2004-2005,
but has since shifted in favor of Thailand in 2005-2006. Thai
exports to India have increased by 1.7% in the last six months.


11. (SBU) The Framework Agreement further called for widening
the free trade list, once the scheme got off ground. On April
12, Congress President Sonia Gandhi wrote to Prime Minister
Manmohan Singh advising the government to "very carefully
scrutinize" FTAs to protect farmers. A Thai Consul in Calcutta
informed Post that this led to a delay in further negotiations;
though, he hopes negotiations will be resumed after the
mid-October elections when the political situation stabilizes in
Thailand. Liberalizing trade in another 4,000-5,000 products
and expanding cooperation in services and investment are some of
the issues that will be discussed when talks resume. The deal
is supposed to be expanded by 2007, since the rules of origin
issues have been resolved and the primary focus would be to
lower the number of items on the sensitive list. Post contacts
note that Indian suppliers of agricultural products, small scale
industry products, chemicals and electronics, fearing
competition, have sought to block the GOI from opening these
sectors to trade.


12. (U) Indo-ASEAN trade talks had also been stalled on the
ground of India's "sensitivity" to further lowering the number
of products on its exclusion list from its high of 1,414 items.
Negotiations took over a year just on items like toilet seats,
dolls and chewing gum. Though India agreed to reduce the
excluded items list to 850 products, Malaysia, the country
coordinator and the chair of the trade talks, was not satisfied.
Malaysian International Trade and industry Minister Datuk Seri
Rafidah Aziz observed that the negotiations had become
"difficult," since goods on the exclusion list accounted for 30%
of ASEAN's exports to India.


13. (U) Malaysia wants the list to contain no more than 60
items. Malaysia and Indonesia are especially interested in
market access for palm oil, which is included in India's
negative list. Earlier, India had agreed to allow import of the
commodity in limited amounts through tariff rate quotas.
Malaysia had refused to accept the offer. India has now
proposed to reduce the excluded items list to 560, while 294
items will continue to enjoy tariff protection for just five
additional years. India has agreed to reduce duties on palm oil
to 50%, refined palm oil to 60% and pepper and tea to 50% over a
ten year period. The future of India-ASEAN CECA talks now
depends on how ASEAN and in particular Malaysia reacts to
India's offer. The implementation of the Indo-ASEAN FTA has
already been delayed by over a year and both sides have dropped
a proposed "early harvest scheme" program for immediate tariff
cuts on specific products. The new deadline for the
implementation of the FTA is January 1, 2007 - which is unlikely
to happen. Malaysia too had called off its bilateral economic
cooperation negotiations with India until it felt India was
genuinely interested in trade liberalization.

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Domestic Interests Hamstring Further liberalization
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14. (U) In addition, Post's domestic industry contacts object
to implementation of tariff concessions under the regional trade
agreements (RTA). Indian industry complains that with products
such as chemicals, electronic and auto components, the RTAs have
resulted in finished products being imported at a lower duty
than the related raw material inputs used for domestic
manufacture. For example, the import duty on color televisions
is 6.25%, but the duty on color tubes is 12.5% and glass parts
is 15%. (Note: From September 1, color televisions from
Thailand are imported duty free. End Note.) Electric fans
receive a duty of 15%, while the import duty on the input, iron
alloy coil, is 20%. The import duty on transmission assembly at
15% is the same as the import duty on its raw materials like
bearing and rubber parts. Indian auto manufacturers have also
complained that the bilateral FTAs threaten their future
existence. The import duty on natural rubber, for instance, has
remained unchanged at 20%, while the import duty on tires is 15%
and even lower at 7.5% under the FTA with Sri Lanka. To correct
this anomaly, the Prime Minster's Office has formed a "Committee
on Inverted Duty Structure" under the chairmanship of Planning
Commission Member Anwarul Hoda.

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More Trade for Me - Not For You
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15. (SBU) Comment: While complaints about this inverted duty
structure may have dampened enthusiasm for FTAs/RTAs, the Doha
deadlock has led to greater GOI stress on bilateral and regional
trade agreements, including a renewed push for greater marker
access in Southeast Asian countries and its immediate
neighborhood. India sees good prospects in forging greater
economic ties with Southeast Asia, Latin America and South
Africa to bolster its growing foreign trade sector. Among these
regions, Southeast Asia is the most advantageous for India in
terms of cost-competitiveness.


16. (SBU) Comment Continued: However, recent experiences
indicate that in bilateral/regional trade pacts, GOI trade
negotiators tend to adopt an inherently inward-looking approach.
Tariffs on products of interest to India's trading partners
that might impact domestic producers are kept high, while
products with low trade prospects are given primacy in drawing
up free trade/"early harvest" lists. In addition, the
non-tariff barriers and customs regulations that affect much of
the trade in the northeast are a significant logistical barrier
to accessing the Indian market. This is evident in India's
restrictive trade agreements with its small neighbors like
Bangladesh and Nepal - countries with little potential to
disrupt the Indian domestic market. India's posturing in Geneva
as defender of the least developed countries is belied by the
meager terms it offers these same countries in trade
negotiations.
JARDINE