Free trade
Achieving the ambitious manufacturing and export targets will require India to sign free trade agreements with its key trading partners. Under Prime Minister Modi, prior hesitation in signing free trade agreements has been swept away, replaced with a policy of globalization and the pursuing of agreements with “like-minded nations with values of democracy, transparency and mutual growth.”1
In 2022, India signed a trade agreement with the United Arab Emirates (UAE) within 90 days of starting negotiations, as well as with Australia in the same year. It is currently in final stage negotiations with the United Kingdom and is seeking an agreement with the EU, Canada, the Gulf Cooperation Council (GCC) countries and Israel.
The latter is of particular importance as the proposed India-Middle East-EU trade corridor passes through the GCC countries and Israel. Without a free trade deal, the corridor will struggle to gain traction.
India’s goal in re-engaging with its trade partners is to seek new tariff free access for its pharmaceutical, electronic and technology services exports as well as easier access for Indian professionals. The latter is proving to be particularly sensitive in negotiations with the United Kingdom. In return, India is willing to lower tariffs on imports of autos and food, as well as offer more access to domestic financial services.
India-Middle East-Europe trade corridor
One of the most significant outcomes from India’s presidency of the G20, from an investment perspective, was the India-Middle East-Europe Economic Corridor (IMEC) memorandum of understanding.
The IMEC is a new route to Europe via the Middle East as opposed to existing routes via Pakistan, Iran and the Suez Canal for freight, energy and data. It is not a coincidence that India is pursuing free trade agreements with countries along the route: Saudi Arabia, Israel and the EU. An agreement with the UAE has already been reached.
India-Middle East-Europe Trade Corridor
As of September 2023
Source: Bernstein "India's response to China's belt and road initiative."
It is estimated travel times to Europe could be reduced by 40%2 if Saudi Arabia follows through with a high-speed rail line. Even without this transportation option, the distance to the EU’s closest port is reduced by 18% and avoids the risks of transportation via Pakistan, Afghanistan and Iran (which is sanctioned by the EU) and at lower cost than using the Suez Canal.3
The IMEC project consists of two corridors. An Eastern corridor that connects India with the Middle East and a Northern corridor that connects the Middle East with Europe. Port capacity exists in Israel, Dubai and India to facilitate the trade, while Saudi Arabia’s Vision 2030 program has the potential to provide the funding to build the railway link across the Arabian peninsula.
There are parallels with the China-Europe railway that crosses from the east coast of China to Germany, reducing the time taken to ship goods between the two countries by two thirds to 12 days.4 The route begins in Chongqing and was originally created to facilitate the export of electronics between China and Europe. This is precisely the area of manufacturing in which India, with its lower wage costs and PLI initiative, is trying to increase its market share.
Aside from goods, the corridor is also envisaged to include the export of energy, including green hydrogen, from the Middle East to India and Europe. There are plans to lay fiber optic cables alongside the energy pipeline to increase the resilience of communications between India and Europe. This will be a key part of capturing the benefits of the technology services exports component of the proposed free trade agreement between India and the EU.
Endnotes
- Source: Palit, A., “Decoding India’s revived Free Trade Agreement rush,” World Economic Forum, September 15, 2022
- Source: Bernstein, “India’s response to China’s Belt and Road Initiative,” September 14, 2023.
- Ibid.
- Source: Xinhua, “China-Europe freight train hub reports rising trips in H1,” July 23, 2021.
WHAT ARE THE RISKS?
All investments involve risks, including the possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio. Past performance does not guarantee future results.