EFTA treaty booster shot for India’s $100 billion FDI target

The India EFTA treaty is an important step for India
The EFTA treaty prioritises clean energy, medical devices, and precision machinery as India seeks to leverage the new partner's technological prowess in these key sectors.

India-EFTA treaty: As India advances towards its ambitious goals such as a $5 trillion economy and eyes the status of a developed nation by 2047, there is a heated debate on the role of foreign direct investment in achieving these goals. On March 10, 2024, India and the European Free Trade Association — comprising Iceland, Liechtenstein, Norway, and Switzerland — signed a Trade and Economic Partnership Agreement. This agreement, which concluded negotiations that began in 2008, broadly encompasses the liberalisation of trade in goods and services, as well as enhanced investment opportunities to spur job creation and economic growth.

India has set an ambitious target to attract at least $100 billion annually in FDI, which is 40% more than the average received over the last five years. Recent amendments to the Double Taxation Avoidance Agreement with Mauritius seek to curb tax evasion and avoidance. Tax benefits under the treaty will be disallowed if the primary purpose of any transaction or arrangement was to obtain those benefits. This led to foreign portfolio investors withdrawing Rs 8,000 crore from the Indian market on April 12, 2024.

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EFTA treaty – focus on economic integration, FDI

FDI into India fell by 22% in the fiscal year 2022-23 compared with the previous year, with a 13% decline in the first nine months of 2023-24. Since its establishment in 1960, EFTA has focused on free trade and economic integration, expanding its trade relationships with countries outside Europe after the 1990s. Presently, the EFTA states, with a combined population of about 13.6 million, have enacted or are awaiting ratification of 29 FTAs covering 40 partner countries worldwide.

Despite their relatively small size, the EFTA countries hold strategic importance in the global economy. Their advanced technological capabilities and high investment potential make them crucial partners in fostering economic growth and technological advancement in partner countries. This strategic alignment is particularly relevant for India, seeks to leverage EFTA’s capabilities in technology and innovation to boost its own sectors such as clean energy, medical devices, and precision machinery.

Under the investment promotion chapter of the EFTA agreement, the goals include:

  • EFTA states aim to increase FDI into India by $50 billion within the first 10 years post-agreement, followed by an additional $50 billion in the next five years.
  • EFTA states also plan to facilitate the creation of 1 million jobs in India over 15 years, driven by FDI inflows.
  • EFTA, with a cumulative GDP of $1.434 trillion, accounts for about 1.4% of the global economy. The average per capita income in these countries is significantly above the global average.

FDI inflows key to India’s growth plan

The influx of FDI from EFTA and other regions plays a role in India’s economic strategy. By facilitating technological transfer and enhancing job creation, FDI not only boosts immediate economic activity but also contributes to the sustainable development goals of the nation. These investments are crucial for India to build a modern infrastructure, improve its manufacturing capabilities, and elevate its position in the global economic hierarchy.

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India’s response to the changes in the global economy was to seek out and cultivate deeper trade relationships with regions like EFTA. This approach is part of a broader vision to diversify its economic partnerships and reduce dependency on any single market or region. Engaging with economically robust and technologically advanced EFTA countries allows India to access new markets for its exports and encourages the inflow of high-quality investments.

For India, key areas of FDI from the EFTA countries include medical devices, clean energy sources, and precision machinery. Under the FTA, EFTA countries have committed to invest $100 billion in India and create a million jobs over the next 15 years. However, for these investments to materialise, India must maintain a favorable investment climate. A sub-committee will review the capital flow status into India within five years of the agreement’s enactment.

The EFTA member countries, especially Switzerland, are not among India’s top investors, despite Switzerland’s considerable investment in India. Opportunities for further investment and collaboration exist in sectors like life sciences, pharma, and high-tech construction.

Norway, another significant EFTA economy, heavily relies on its oil and gas sectors but is noteworthy for generating almost 98% of its electricity from hydropower. EFTA countries could support India’s green growth targets, including achieving 50% renewable energy by 2030 and developing a roadmap for net-zero emissions by 2070. India can learn from Norway’s approach to producing aluminum using green energy, enhancing its own capacity to produce aluminum with a minimal carbon footprint.

Despite the India-EFTA trade agreement, Switzerland is advocating a new bilateral investment treaty with India, reflecting concerns over India’s revised model BIT. The contentious issues include a narrower definition of investment and limited rights for foreign investors, highlighting the perceived pro-state bias of India’s investment framework. These differences have slowed negotiations with Switzerland.

The government’s declared goal of attracting $100 billion annually in gross FDI targets sectors like electric vehicles, infrastructure, green energy, and electronics. However, a decline in FDI inflows over the last few years suggests challenges in positioning India as an attractive alternative to other manufacturing hubs like China, Vietnam, and Thailand. Addressing these challenges may require enhanced business-to-business (B2B) mechanisms, such as a CEO forum, to improve engagement and address issues in FDI inflows.

Ultimately, attracting FDI will depend not just on policy specific to investment but on broader business policies that are transparent, stable, and conducive to international business. Unlocking and integrating more of India’s regional economies into the global business value chain could be key to achieving and surpassing the annual FDI target of $100 billion.

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Krishna Kumar Sinha is an industrial policy and FDI expert based in New Delhi. His last assignment was as an industrial adviser in the department of industrial policy and promotion, DIPP, currently known as DPIIT, under the ministry of commerce and industry of the government of India.